--morgage bankruptcy reform will be part of the foreclosure prevention effort
--cram-down measure that is gaining momentum will alow judges to slash mortgage principal amount
--the measure will break the standoff between mortgagte servicers and investors since judges has the ultimate power to force a deal
--Lenders hate the measure because they have to absorb the losses.
--the measure might systematically solve the mortgage issue where moretgage owners has negative equity
By MICHAEL CORKERY
Mortgage lenders who wake up Thursday with a New Year's hangover are likely to face another headache soon: The effort to give bankruptcy judges the power to rewrite mortgages is gaining steam.
The banking industry hoped the mortgage "cram-down" measure died when Congress removed it from the $700 billion bailout bill that passed in October. But it has been gathering momentum in Democrat-controlled Washington, as evidence emerges that current voluntary foreclosure-prevention programs are falling short.
Associated Press
With efforts to stem home foreclosures stagnating, mortgage 'cram-down' efforts seem destined to re-emerge under the new Congress. Here, a foreclosed home for sale in Lakewood, Colo., in September.
The Many Models of Mortgage Modification
A number of different proposals have been floated to assist ailing borrowers and stop the flood of foreclosures. Here's a look.
In a cram-down, a judge modifies a loan, often reducing principal so a borrower can afford it. Lenders hate it because they have to absorb the loss. Bankruptcy judges currently have the ability to modify certain personal loans and even mortgages on vacation homes, but they can not cram-down mortgages on primary residences.
Even staunch opponents acknowledge that mortgage cram-downs for primary residences are likely to be as part of Congress's economic-stimulus package in early 2009. The National Association of Home Builders used to reject any bill with a cram-down provision outright. Now it is saying the measure is worth a look.
President-elect Barack Obama and his incoming administration aren't disclosing details of the much-awaited foreclosure-prevention plans, but during the campaign Mr. Obama called for closing the loophole that prevents bankruptcy judges from restructuring mortgages on primary residences. Lawrence Summers, a top economic adviser of Mr. Obama, publicly voiced support for bankruptcy reform before his appointment.
"To the extent that nothing else is working, bankruptcy cram-downs are becoming more likely," says Rod Dubitsky, head of asset-backed-securities research at Credit Suisse.
The latest embattled foreclosure-prevention program is Hope for Homeowners, which was approved by Congress last summer and supposed to help 400,000 homeowners. Only 357 people have signed up so far for the voluntary program. The Department of Housing and Urban Development, which is administering the program, acknowledges that it has been encumbered by high fees and narrow eligibility requirements.
Another government program, FHASecure, was intended to help 80,000 homeowners who had fallen behind on their payments after their adjustable interest rates reset. It has helped only 4,100 delinquent borrowers refinance since September 2007 and will stop taking new loan applications as of Wednesday.
Mortgage lenders also are modifying tens of thousands of loans without government help. But often this hasn't solved the problem. A report last week by the Office of the Comptroller of the Currency and the Office of Thrift Supervision found that nearly 37% of mortgages modified in the first quarter of 2008 were 60 days or more delinquent after six months.
"It is absolutely clear that voluntary modification is just not working," says Rep. Brad Miller, a North Carolina Democrat. "Every plan that Congress has passed, we do it and nothing happens."
Mr. Miller intends to introduce a mortgage bankruptcy-reform bill Monday, the first day of the new session. Illinois Democrat Richard Durbin plans to introduce a similar bill in the Senate.
Lenders warn that mortgage cram-downs will lead to higher interest rates and down payments, as banks seek to mitigate future losses from judicially imposed write-downs. They also are concerned that the reform measure would add to the losses they have already sustained from the housing crisis.
"Our members have modified 2.8 million loans," says Francis Creighton, chief lobbyist of the Mortgage Bankers Association, which opposes cram-downs. "Could we do better? We are trying to do better."
Proponents of bankruptcy reform say that previous modification efforts are falling short because they have focused on spreading out payment terms and forestalling delinquent payments. But that hasn't cured a big part of the problem: that one in six houses is now worth less than its mortgage. Only programs that reduce principal amounts are likely to restore equity to millions of homeowners, they say.
"You have to deal with the systematic problem of underwater mortgages or you are not going to stop foreclosures," says Harvard University economist Martin Feldstein, who has proposed his own plan to help homeowners with negative equity in their homes, which involves mortgage principal write-downs and replacing part of the original mortgage with a new, lower cost loan.
Proponents of bankruptcy reform also note that millions of troubled loans aren't being addressed by current modification programs because they were carved up and sold to investors as securities. Mortgage servicers have been reluctant to aggressively modify these loans because they have been unsure of their legal rights.
The mere threat of mortgage cram-downs could break the standoff between mortgage servicers and mortgage investors, which has slowed aggressive loan modifications. Investors may be more willing to go along with industry-driven modifications when facing the threat that a judge could ultimately order the amounts of loan principals reduced, forcing them to eat bigger losses.
"The servicers can argue we have to give this to the borrower otherwise they will get it in bankruptcy court," Mr. Dubitsky says.
Lenders argue that loans modified by bankruptcy judges often have high rates of default on the new payment plans. "We should be working on keeping people out of bankruptcy not pushing people into it,'' says Mr. Creighton of the Mortgage Bankers trade group
Bankruptcy reform is likely to be one of many proposals that Congress considers as part of comprehensive foreclosure-prevention effort. Another element is likely to be one that FDIC Chairman Sheila Bair has been proposing. Under her plan, the government and lenders would split the losses on modified loans that go into default.
Some economists are urging the new administration to go even further. Mark Zandi, chief economist at Moody's Economy.com, proposes that the government subsidize the bulk of principal write-downs to the tune of $100 billion, about four times as much as Ms. Bair's program.
—Nick Timiraos contributed to this article.
Write to Michael Corkery at michael.corkery@wsj.com
Wednesday, December 31, 2008
Tuesday, December 30, 2008
The Undeniable Shift to Keynes
--There is a worldwide shif to Keyness which holds that fiscal spending is essential to fill up the gap left by persistent lack in demand during recession even for capitalist economies.
--The resurgence of Keynes is a reversal of the orthodoxy that trumpets the virtue of free market approach and any efforts to use fiscal policy to manage economy is doomed to failure.
--Only Germany is sceptical that fiscal policy will work and blame US for saddling a generation with heavy debt.
--The consensus was set out in the communique that issued by the Group of 20 leading and emerging economies.
--But fislcal spending also used to prove ineffective to stimulate domestic demand to rapid effects
The undeniable shift to Keynes
By Chris Giles in London, Ralph Atkins in Frankfurt and,Krishna Guha in Washington
Published: December 30 2008 02:00 Last updated: December 30 2008 02:00
More than three decades have passed since Richard Nixon, the Republican US president, declared: "We are all Keynesians now."
The phrase rings truer today than at any time since, as governments seize on John Maynard Keynes's idea that fiscal stimulus - public spending and tax cuts - can help dig their economies out of recession.
The sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades, which held that efforts to use fiscal policy to manage the economy and mitigate downturns were doomed to failure. Now only Germany remains publicly sceptical that fiscal stimulus will work.
The new Keynesian consensus was set out in the communiqué issued by the Group of 20 leading industrialised and emerging economies in November, in which they vowed to "use fiscal measures to stimulate domestic demand to rapid effect" within a policy framework "conducive to fiscal sustainability".
The incoming administration of Barack Obama is preparing a two-year fiscal stimulus package with a reported price tag of $675bn-$775bn, which many Washington-based analysts believe could swell to $850bn (£580bn, €600bn) or even $1,000bn - between 5 per cent and 7 per cent of national income.
Gordon Brown, UK prime minister, told reporters in late December that if monetary policy was impaired - in large part because of problems within the financial system - "then governments have to use fiscal policy, and that has been seen in every country of the world".
Launching France's fiscal stimulus, President Nicolas Sarkozy said: "Our answer to this crisis is investment because it is the best way to support growth and save the jobs of today - and the only way to prepare for the jobs of tomorrow."
But not all policymakers have been so keen to jump on board what they see as a dangerous journey, not back to the theory Keynes laid out to combat a deep and protracted economic slump but to the failed fiscal fine-tuning of the 1970s, in which governments tried to maintain full employment at all times.
Germany has voiced the strongest principled objections to large-scale fiscal stimulus packages. Peer Steinbrück, the finance minister, has complained about the "crass Keynesianism" pursued by Mr Brown, accusing him of "tossing around billions" and saddling a generation with having to pay off British debt.
Jürgen Stark, an executive board member of the European Central Bank, who was previously vice-president of the Bundesbank, warned of a "substantial risk" of a repeat of the 1970s. "I really cannot see why discretionary fiscal policies, which have proven to be ineffective in the past, should work this time," he said.
Jean Claude Trichet, ECB president, has taken a cautious stance, arguing in a Financial Times interview for countries to allow their deficits to rise in line with the so-called automatic stabilisers - such as higher unemployment benefits and reduced tax revenues during a recession - but warning that the prospect of future tax rises could reduce consumer confidence. "One might lose more by loss of confidence than one might gain by additional spending," he said.
In the US, Lawrence Summers, the former Treasury Secretary now lined up to head Mr Obama's National Economic Council, said the fiscal stimulus will address the need to increase investment in energy, education, health and infrastructure as well as the need to stimulate the economy.
Laurence Boone, a Paris-based economist at Barclays Capital, argued that large European countries fall into two camps. In one are countries with highly indebted consumers where housing markets have made a big contribution to economic growth in recent years - namely the UK and Spain. Here, fiscal stimulus packages were larger and focused on supporting consumers and housing.
Elsewhere, especially Germany and France, stimulus plans were less ambitious and "are set to rely more heavily on public sector investment, especially in infrastructure, with little support to consumption", Ms Boone notes.
The contrasting rhetoric is more exaggerated than the reality of the differing positions. In gung-ho Britain and France, for example, the planned fiscal stimulus is no bigger than in reluctant Germany. And in all three countries, reduced tax revenues and higher welfare state payments will contribute the vast majority of prospective higher budget deficits, not the discretionary measures introduced in recent months.
The US stimulus package appears to dwarf the European efforts. But any fiscal stimulus has to be larger in the US to have a similar effect because more generous European social safety nets guarantee higher payments to the unemployed.
Mr Trichet argues that these "automatic stabilisers . . . have perhaps twice as much influence . . . as a percentage of GDP in the euro area as compared with the US".
But it is clear a worldwide shift towards Keynesian deficit financing has occurred this year. Partly this is the result of the credit crisis impeding the effectiveness of monetary policy, partly the fact that interest rates cannot be cut further in the US and Japan, and also partly because banks will not lend to many households and companies even if they want to borrow.
But the move towards using fiscal policy as a means of boosting advanced economies still has limits, recognised by all those who experienced the 1970s.
Unsustainable fiscal positions can destroy confidence. The US, which issues the dollar, the world's reserve currency, has more latitude than most. But even Mr Obama has been keen to stress his ambition to "get our mid-term and long-term budgets under control".
Smaller countries with fragile currencies, such as the UK, are even more vulnerable to the effects of the confidence of foreign investors. The UK government announced a five-year government austerity package to reduce deficits from 2011 at the same time as its stimulus in an attempt to provide evidence of its longer-term good intentions. Continental European economies are bound by the stability and growth pact, limiting both budgets and debt. But the deterioration of the outlook for the global economy has been so rapid that addressing the immediate problems has overtaken consideration of longer-term consequences.
This trend was first evident almost a year ago in January, when Dominique Strauss-Kahn, the managing director of the International Monetary Fund, stunned delegates at the World Economic Forum in Davos when he called for "a new fiscal policy [as] . . . an accurate way to answer the crisis".
On the podium with him was Mr Summers. He remarked: "This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face."
Mr Summers now argues that the outlook has deteriorated further. With the prospect of the economy remaining weak and unemployment high for a protracted period, he believes spending on projects that continue beyond 2009 is justified.
Critics said this was a convenient cover for spending programmes that the Democrats wanted anyway. However, many economists agreed with the argument. "The US economy needs not only a large package of fiscal stimulus in 2009 but one that provides substantial support beyond next year," said Ed McKelvey, an economist at Goldman Sachs.
Economic remedy in a time of misery
The essential idea of John Maynard Keynes's The General Theory of Employment, Interest and Money is that modern economies can suffer from a persistent lack of demand, consigning millions to what he argued is unnecessary unemployment and misery.
Although capitalist economies contain forces to restore full employment, these are weak and in some circumstances can take far too long to work. It is therefore better for governments to stimulate economies suffering from a lack of demand by stepping in with cheap money and deficit-financed tax cuts or public expenditure increases.
--The resurgence of Keynes is a reversal of the orthodoxy that trumpets the virtue of free market approach and any efforts to use fiscal policy to manage economy is doomed to failure.
--Only Germany is sceptical that fiscal policy will work and blame US for saddling a generation with heavy debt.
--The consensus was set out in the communique that issued by the Group of 20 leading and emerging economies.
--But fislcal spending also used to prove ineffective to stimulate domestic demand to rapid effects
The undeniable shift to Keynes
By Chris Giles in London, Ralph Atkins in Frankfurt and,Krishna Guha in Washington
Published: December 30 2008 02:00 Last updated: December 30 2008 02:00
More than three decades have passed since Richard Nixon, the Republican US president, declared: "We are all Keynesians now."
The phrase rings truer today than at any time since, as governments seize on John Maynard Keynes's idea that fiscal stimulus - public spending and tax cuts - can help dig their economies out of recession.
The sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades, which held that efforts to use fiscal policy to manage the economy and mitigate downturns were doomed to failure. Now only Germany remains publicly sceptical that fiscal stimulus will work.
The new Keynesian consensus was set out in the communiqué issued by the Group of 20 leading industrialised and emerging economies in November, in which they vowed to "use fiscal measures to stimulate domestic demand to rapid effect" within a policy framework "conducive to fiscal sustainability".
The incoming administration of Barack Obama is preparing a two-year fiscal stimulus package with a reported price tag of $675bn-$775bn, which many Washington-based analysts believe could swell to $850bn (£580bn, €600bn) or even $1,000bn - between 5 per cent and 7 per cent of national income.
Gordon Brown, UK prime minister, told reporters in late December that if monetary policy was impaired - in large part because of problems within the financial system - "then governments have to use fiscal policy, and that has been seen in every country of the world".
Launching France's fiscal stimulus, President Nicolas Sarkozy said: "Our answer to this crisis is investment because it is the best way to support growth and save the jobs of today - and the only way to prepare for the jobs of tomorrow."
But not all policymakers have been so keen to jump on board what they see as a dangerous journey, not back to the theory Keynes laid out to combat a deep and protracted economic slump but to the failed fiscal fine-tuning of the 1970s, in which governments tried to maintain full employment at all times.
Germany has voiced the strongest principled objections to large-scale fiscal stimulus packages. Peer Steinbrück, the finance minister, has complained about the "crass Keynesianism" pursued by Mr Brown, accusing him of "tossing around billions" and saddling a generation with having to pay off British debt.
Jürgen Stark, an executive board member of the European Central Bank, who was previously vice-president of the Bundesbank, warned of a "substantial risk" of a repeat of the 1970s. "I really cannot see why discretionary fiscal policies, which have proven to be ineffective in the past, should work this time," he said.
Jean Claude Trichet, ECB president, has taken a cautious stance, arguing in a Financial Times interview for countries to allow their deficits to rise in line with the so-called automatic stabilisers - such as higher unemployment benefits and reduced tax revenues during a recession - but warning that the prospect of future tax rises could reduce consumer confidence. "One might lose more by loss of confidence than one might gain by additional spending," he said.
In the US, Lawrence Summers, the former Treasury Secretary now lined up to head Mr Obama's National Economic Council, said the fiscal stimulus will address the need to increase investment in energy, education, health and infrastructure as well as the need to stimulate the economy.
Laurence Boone, a Paris-based economist at Barclays Capital, argued that large European countries fall into two camps. In one are countries with highly indebted consumers where housing markets have made a big contribution to economic growth in recent years - namely the UK and Spain. Here, fiscal stimulus packages were larger and focused on supporting consumers and housing.
Elsewhere, especially Germany and France, stimulus plans were less ambitious and "are set to rely more heavily on public sector investment, especially in infrastructure, with little support to consumption", Ms Boone notes.
The contrasting rhetoric is more exaggerated than the reality of the differing positions. In gung-ho Britain and France, for example, the planned fiscal stimulus is no bigger than in reluctant Germany. And in all three countries, reduced tax revenues and higher welfare state payments will contribute the vast majority of prospective higher budget deficits, not the discretionary measures introduced in recent months.
The US stimulus package appears to dwarf the European efforts. But any fiscal stimulus has to be larger in the US to have a similar effect because more generous European social safety nets guarantee higher payments to the unemployed.
Mr Trichet argues that these "automatic stabilisers . . . have perhaps twice as much influence . . . as a percentage of GDP in the euro area as compared with the US".
But it is clear a worldwide shift towards Keynesian deficit financing has occurred this year. Partly this is the result of the credit crisis impeding the effectiveness of monetary policy, partly the fact that interest rates cannot be cut further in the US and Japan, and also partly because banks will not lend to many households and companies even if they want to borrow.
But the move towards using fiscal policy as a means of boosting advanced economies still has limits, recognised by all those who experienced the 1970s.
Unsustainable fiscal positions can destroy confidence. The US, which issues the dollar, the world's reserve currency, has more latitude than most. But even Mr Obama has been keen to stress his ambition to "get our mid-term and long-term budgets under control".
Smaller countries with fragile currencies, such as the UK, are even more vulnerable to the effects of the confidence of foreign investors. The UK government announced a five-year government austerity package to reduce deficits from 2011 at the same time as its stimulus in an attempt to provide evidence of its longer-term good intentions. Continental European economies are bound by the stability and growth pact, limiting both budgets and debt. But the deterioration of the outlook for the global economy has been so rapid that addressing the immediate problems has overtaken consideration of longer-term consequences.
This trend was first evident almost a year ago in January, when Dominique Strauss-Kahn, the managing director of the International Monetary Fund, stunned delegates at the World Economic Forum in Davos when he called for "a new fiscal policy [as] . . . an accurate way to answer the crisis".
On the podium with him was Mr Summers. He remarked: "This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face."
Mr Summers now argues that the outlook has deteriorated further. With the prospect of the economy remaining weak and unemployment high for a protracted period, he believes spending on projects that continue beyond 2009 is justified.
Critics said this was a convenient cover for spending programmes that the Democrats wanted anyway. However, many economists agreed with the argument. "The US economy needs not only a large package of fiscal stimulus in 2009 but one that provides substantial support beyond next year," said Ed McKelvey, an economist at Goldman Sachs.
Economic remedy in a time of misery
The essential idea of John Maynard Keynes's The General Theory of Employment, Interest and Money is that modern economies can suffer from a persistent lack of demand, consigning millions to what he argued is unnecessary unemployment and misery.
Although capitalist economies contain forces to restore full employment, these are weak and in some circumstances can take far too long to work. It is therefore better for governments to stimulate economies suffering from a lack of demand by stepping in with cheap money and deficit-financed tax cuts or public expenditure increases.
Immelt Fights to Keep GE’s AAA as Cost of Cut Surges
Dec. 30 (Bloomberg) -- General Electric Co. Chief Executive Officer Jeffrey Immelt has good reason to fight for GE’s AAA credit rating. It’s never been more expensive for a company to lose the top ranking.
The gap between bonds rated AAA and those three steps lower, at AA-, averaged a record 112 basis points in December as the credit crunch deepened, according to Merrill Lynch & Co. data. Before credit markets began unraveling 16 months ago, the difference averaged about 6 basis points. A basis point is 0.01 percentage point.
GE and Toyota Motor Corp. had the outlook for their bonds lowered to negative by Standard & Poor’s this month. The number of non-financial AAA companies in the U.S. dwindled to 6 from more than 60 in the early 1980s, according to S&P. The loss of the highest ranking mattered less when the interest penalty was lower. In the current crisis, a downgrade may result in tens of millions of dollars in extra annual borrowing costs.
“People look to Aaa companies as one level removed from the safety of the U.S. government,” said Benjamin Garber, an economist at Moody’s Analytics in New York. “There is a very high premium on the best-rated issuers.”
In Europe, the spread between bonds rated AAA and AA- is 127 basis points, compared with 17 basis points in June 2007, before the onset of the credit crunch, Merrill Lynch data show.
Seeking Safety
The cost of a downgrade jumped because investors have fled stocks, mortgage securities and high-yield, high-risk corporate bonds after more than $1 trillion in bank writedowns and credit losses since January 2007 and the failure of Lehman Brothers Holdings Inc. in September. The highest-ranked company debt and Treasury securities have benefited most because they are considered the least risky.
Fairfield, Connecticut-based GE has held S&P’s top rating since 1956, longer than any other company. An extra percentage point in interest would have cost $233 million more in annual payments on the $23.3 billion GE Capital Corp. raised in the U.S. bond market in this year’s first half, according to data compiled by Bloomberg.
A downgrade is already factored into the prices of GE’s bonds and derivatives, according to Moody’s Market Implied Ratings service. GE’s bonds are trading as if the company were ranked five levels lower at A2, according to Moody’s.
S&P gives an AAA stamp to Automatic Data Processing Inc., Exxon Mobil Corp., GE, Johnson & Johnson, Microsoft Corp. and Pfizer Inc. The McGraw-Hill Cos. unit considers Berkshire Hathaway Inc. a financial company and also rates it AAA. Moody’s Investors Service confers its equivalent Aaa on all those companies except Pfizer, which lost the designation in December 2006 following the failure of its cholesterol pill, torcetrapib.
Best Returns
Toyota is the only non-financial, non-government borrower outside the U.S. with an AAA ranking from either Moody’s or S&P, according to the ratings companies.
Moody’s, S&P and Fitch Ratings also issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis, more than three-quarters of which were later downgraded.
The only corporate rating category to give bondholders a profit this year was top-ranked debt, Merrill data show. AAA corporate bonds in the U.S. returned 4.8 percent, compared with losses of 6.7 percent for all investment-grade debt. Treasuries gained 14 percent, while the S&P 500 Index declined 41 percent.
‘Very, Very Few’
Investors may have fewer opportunities to invest in top- rated bonds as the number of qualified issuers dwindles, according to Craig Hutson, a Chicago-based senior analyst at bond research firm Gimme Credit LLC.
“Longer term, there are going to be very, very few companies that will have a triple-A,” he said.
About 0.2 percent of bonds worldwide with an Aaa rating default within 10 years, based on a Moody’s analysis of securities from 1983 to 2007. That compares with 0.5 percent of those ranked Aa2 and 1.7 percent of all investment-grade debt. Almost 32 percent of high-yield bonds defaulted within a decade, the analysis showed.
Moody’s founder John Moody defined Aaa bonds in part as debt “of the highest class, both as regards security and general convertibility,” according to Moody’s Analyses of Railroad Investments in April 1909.
The ratings company’s current official definition of Aaa is debt “judged to be of the highest quality, with minimal credit risk.”
Falling Numbers
The number of AAA issuers represents less than 0.3 percent of all 2,276 rated non-financial companies, down from 5 percent in the early 1980s, S&P analysts Diane Vazza and Jacinto Torres said in a Dec. 23 report.
“The overarching reasons for the shrinking of this elite group over the years have been investors’ increased tolerance for risk and the shift of companies from adopting historically conservative financial policies to placing greater emphasis on shareholder returns,” they wrote.
United Parcel Service Inc. was the last U.S. borrower to lose its AAA. Moody’s downgraded UPS two levels to Aa2 in December 2007, citing additional debt the world’s largest package-delivery company took on to exit a pension fund. S&P reduced UPS three levels to AA- the following month because of a share repurchase plan.
“It has made very little difference,” said Norman Black, a spokesman for Atlanta-based UPS. “We changed the financial structure of the company precisely because it had become clear to us the AAA standard was not going to result in a big decrease in borrowing costs.”
Coca-Cola
Former Coca-Cola Co. CEO Roberto Goizueta gave up an AAA classification to finance hundreds of millions of dollars of investments in bottlers. The Atlanta-based company’s long-term debt-to-capital ratio surged from 5.48 percent at the end of 1981 to 26 percent in 1986, when ratings companies downgraded the soft-drink maker. It’s now labeled A+ by S&P and Aa3 by Moody’s.
The loss of an AAA may be more costly for GE, whose financing arm relies on access to public markets. GE Capital would be rated A+, or four grades lower than its current AAA, without the support of its parent company, S&P said.
As part of GE’s plan to maintain its AAA, Immelt is shrinking GE Capital to less than 40 percent of total profit next year, from about half in 2007. On Dec. 2, the company said it plans to issue about $45 billion in long-term debt in 2009, less than the $66 billion it has maturing, and to reduce commercial paper to $50 billion, below the $75 billion it said previously.
AAA ‘Philosophy’
“I want to make it clear: The AAA is a philosophy of how you run the company,” Immelt said at an investor meeting on Dec. 16. “I think the AAA’s important.”
S&P cut the outlooks for GE and the financing unit to negative on Dec. 18 as the recession deepened. GE has a 1-in-3 chance of losing its top grade within two years, S&P said.
Since the reduction, GE’s 5.25 percent notes due in 2017 rose 1.3 cents to 101.3 cents on the dollar to yield 5.06 percent, according to Trace, the Financial Industry Regulatory Authority’s bond-pricing service. The spread over Treasuries has narrowed 22 basis points. The average AAA bond difference declined 24 basis points in the same period, Merrill data show.
GE, the world’s biggest maker of turbines for power plants and jet engines, has raised about $12.5 billion globally in sales of bonds guaranteed by the Federal Deposit Insurance Corp. That’s allowed the company to “prefund” some of the $45 billion of GE Capital debt it plans to refinance next year at some of the lowest rates it has paid since 2002.
Toyota’s Outlook
Toyota, Japan’s biggest automaker, had its credit rating outlook lowered to negative from stable by both S&P and Moody’s this month as the recession cripples demand for cars worldwide.
Toyota lost its AAA at Fitch on Nov. 26, when the New York- based ratings company cut the carmaker two levels to AA, citing the “ongoing turmoil in the global automotive sector.”
The Toyota City, Japan-based automaker “will make efforts to have our outlook raised to stable again even under this external environment,” said Hideaki Homma, a company spokesman.
“They’re going to suffer like every other automaker in the world,” said Hutson, who expects Toyota to eventually lose its top rating at Moody’s and S&P as well.
To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net
The gap between bonds rated AAA and those three steps lower, at AA-, averaged a record 112 basis points in December as the credit crunch deepened, according to Merrill Lynch & Co. data. Before credit markets began unraveling 16 months ago, the difference averaged about 6 basis points. A basis point is 0.01 percentage point.
GE and Toyota Motor Corp. had the outlook for their bonds lowered to negative by Standard & Poor’s this month. The number of non-financial AAA companies in the U.S. dwindled to 6 from more than 60 in the early 1980s, according to S&P. The loss of the highest ranking mattered less when the interest penalty was lower. In the current crisis, a downgrade may result in tens of millions of dollars in extra annual borrowing costs.
“People look to Aaa companies as one level removed from the safety of the U.S. government,” said Benjamin Garber, an economist at Moody’s Analytics in New York. “There is a very high premium on the best-rated issuers.”
In Europe, the spread between bonds rated AAA and AA- is 127 basis points, compared with 17 basis points in June 2007, before the onset of the credit crunch, Merrill Lynch data show.
Seeking Safety
The cost of a downgrade jumped because investors have fled stocks, mortgage securities and high-yield, high-risk corporate bonds after more than $1 trillion in bank writedowns and credit losses since January 2007 and the failure of Lehman Brothers Holdings Inc. in September. The highest-ranked company debt and Treasury securities have benefited most because they are considered the least risky.
Fairfield, Connecticut-based GE has held S&P’s top rating since 1956, longer than any other company. An extra percentage point in interest would have cost $233 million more in annual payments on the $23.3 billion GE Capital Corp. raised in the U.S. bond market in this year’s first half, according to data compiled by Bloomberg.
A downgrade is already factored into the prices of GE’s bonds and derivatives, according to Moody’s Market Implied Ratings service. GE’s bonds are trading as if the company were ranked five levels lower at A2, according to Moody’s.
S&P gives an AAA stamp to Automatic Data Processing Inc., Exxon Mobil Corp., GE, Johnson & Johnson, Microsoft Corp. and Pfizer Inc. The McGraw-Hill Cos. unit considers Berkshire Hathaway Inc. a financial company and also rates it AAA. Moody’s Investors Service confers its equivalent Aaa on all those companies except Pfizer, which lost the designation in December 2006 following the failure of its cholesterol pill, torcetrapib.
Best Returns
Toyota is the only non-financial, non-government borrower outside the U.S. with an AAA ranking from either Moody’s or S&P, according to the ratings companies.
Moody’s, S&P and Fitch Ratings also issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis, more than three-quarters of which were later downgraded.
The only corporate rating category to give bondholders a profit this year was top-ranked debt, Merrill data show. AAA corporate bonds in the U.S. returned 4.8 percent, compared with losses of 6.7 percent for all investment-grade debt. Treasuries gained 14 percent, while the S&P 500 Index declined 41 percent.
‘Very, Very Few’
Investors may have fewer opportunities to invest in top- rated bonds as the number of qualified issuers dwindles, according to Craig Hutson, a Chicago-based senior analyst at bond research firm Gimme Credit LLC.
“Longer term, there are going to be very, very few companies that will have a triple-A,” he said.
About 0.2 percent of bonds worldwide with an Aaa rating default within 10 years, based on a Moody’s analysis of securities from 1983 to 2007. That compares with 0.5 percent of those ranked Aa2 and 1.7 percent of all investment-grade debt. Almost 32 percent of high-yield bonds defaulted within a decade, the analysis showed.
Moody’s founder John Moody defined Aaa bonds in part as debt “of the highest class, both as regards security and general convertibility,” according to Moody’s Analyses of Railroad Investments in April 1909.
The ratings company’s current official definition of Aaa is debt “judged to be of the highest quality, with minimal credit risk.”
Falling Numbers
The number of AAA issuers represents less than 0.3 percent of all 2,276 rated non-financial companies, down from 5 percent in the early 1980s, S&P analysts Diane Vazza and Jacinto Torres said in a Dec. 23 report.
“The overarching reasons for the shrinking of this elite group over the years have been investors’ increased tolerance for risk and the shift of companies from adopting historically conservative financial policies to placing greater emphasis on shareholder returns,” they wrote.
United Parcel Service Inc. was the last U.S. borrower to lose its AAA. Moody’s downgraded UPS two levels to Aa2 in December 2007, citing additional debt the world’s largest package-delivery company took on to exit a pension fund. S&P reduced UPS three levels to AA- the following month because of a share repurchase plan.
“It has made very little difference,” said Norman Black, a spokesman for Atlanta-based UPS. “We changed the financial structure of the company precisely because it had become clear to us the AAA standard was not going to result in a big decrease in borrowing costs.”
Coca-Cola
Former Coca-Cola Co. CEO Roberto Goizueta gave up an AAA classification to finance hundreds of millions of dollars of investments in bottlers. The Atlanta-based company’s long-term debt-to-capital ratio surged from 5.48 percent at the end of 1981 to 26 percent in 1986, when ratings companies downgraded the soft-drink maker. It’s now labeled A+ by S&P and Aa3 by Moody’s.
The loss of an AAA may be more costly for GE, whose financing arm relies on access to public markets. GE Capital would be rated A+, or four grades lower than its current AAA, without the support of its parent company, S&P said.
As part of GE’s plan to maintain its AAA, Immelt is shrinking GE Capital to less than 40 percent of total profit next year, from about half in 2007. On Dec. 2, the company said it plans to issue about $45 billion in long-term debt in 2009, less than the $66 billion it has maturing, and to reduce commercial paper to $50 billion, below the $75 billion it said previously.
AAA ‘Philosophy’
“I want to make it clear: The AAA is a philosophy of how you run the company,” Immelt said at an investor meeting on Dec. 16. “I think the AAA’s important.”
S&P cut the outlooks for GE and the financing unit to negative on Dec. 18 as the recession deepened. GE has a 1-in-3 chance of losing its top grade within two years, S&P said.
Since the reduction, GE’s 5.25 percent notes due in 2017 rose 1.3 cents to 101.3 cents on the dollar to yield 5.06 percent, according to Trace, the Financial Industry Regulatory Authority’s bond-pricing service. The spread over Treasuries has narrowed 22 basis points. The average AAA bond difference declined 24 basis points in the same period, Merrill data show.
GE, the world’s biggest maker of turbines for power plants and jet engines, has raised about $12.5 billion globally in sales of bonds guaranteed by the Federal Deposit Insurance Corp. That’s allowed the company to “prefund” some of the $45 billion of GE Capital debt it plans to refinance next year at some of the lowest rates it has paid since 2002.
Toyota’s Outlook
Toyota, Japan’s biggest automaker, had its credit rating outlook lowered to negative from stable by both S&P and Moody’s this month as the recession cripples demand for cars worldwide.
Toyota lost its AAA at Fitch on Nov. 26, when the New York- based ratings company cut the carmaker two levels to AA, citing the “ongoing turmoil in the global automotive sector.”
The Toyota City, Japan-based automaker “will make efforts to have our outlook raised to stable again even under this external environment,” said Hideaki Homma, a company spokesman.
“They’re going to suffer like every other automaker in the world,” said Hutson, who expects Toyota to eventually lose its top rating at Moody’s and S&P as well.
To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net
GMAC to Get $6 Billion Aid Deal
--Fed invested $5 bil prf equity and $1 bil loan to stablized GMAC as its second part to support auto industry
--GMAC hleped financed 80% of purchase of GM cars by dealers and its restricted lending resulted in 45% sales plunge in Oct.
--The bailout for GMAC helped to ease auto issues and home mortgage strain.
--The bailout is conditional that GMAC has to raise $30 bil by debt-equity swaping 75% of debt issued.
By DAMIAN PALETTA and JOHN D. STOLL
WASHINGTON -- The federal government Monday deepened its involvement in the U.S. automotive industry by committing $6 billion to stabilize GMAC LLC, a financing company vital to the future of struggling car maker General Motors Corp.
In a sign the government's role in the industry could become open-ended, the Treasury Department said Monday it had set up a separate program within the Troubled Asset Relief Program, a fund originally designed to help banks, to make investments directed at the auto industry. A Treasury official said the new program didn't have a specific dollar limit.
The Treasury purchased $5 billion in senior preferred equity in GMAC and offered a new $1 billion loan to GM so the auto maker could participate in a rights offering at GMAC. That loan comes in addition to the recent $17.4 billion emergency plan to rescue GM and Chrysler LLC.
The move represents the second tranche of government aid that redounds to the benefit of giant private-equity firm Cerberus Capital Management, which owns Chrysler and, until these recent moves, a majority stake in GMAC. John Snow, a top player at Cerberus, was the Bush administration's Treasury secretary before Henry Paulson.
In bailing out GMAC, Treasury officials aren't just stabilizing an auto-finance company but a major player in the housing market's boom and bust. GMAC played a big role in pushing riskier adjustable-rate mortgages. The collapse of the housing market put additional strain on GMAC.
The difficulties of GMAC and Chrysler's financing arm, Chrysler Financial, are a big reason GM and Chrysler have suffered steep drops in auto sales and fallen into financial trouble in the past few months, said Michael J. Jackson, chief executive of AutoNation Inc., the country's largest chain of auto dealerships, in a recent interview. Both financing companies have been restricting credit as their own finances worsened. "Consumer credit is the jet fuel of the auto business," Mr. Jackson said. "The majority of consumers can't buy a car without getting a loan."
GMAC finances about 80% the wholesale purchases of GM's cars by dealers world-wide. It has traditionally been the largest source of financing for the actual buyers of those vehicles once they reached the showroom.
The car company said last month that a 45% sales skid for October was fueled by GMAC's restricted lending, which cost GM anywhere from 45,000 to 60,000 sales in the month. About 25% of GM vehicle sales were financed through GMAC last month, down from more than 40% a year ago.
The move by Treasury is the second part of a two-step rescue by the government of GMAC. Last week, the Federal Reserve approved the finance company's application to become a bank-holding company, a move sought by other companies, too, to take advantage of new government programs aimed at stabilizing banks.
The Fed's approval was conditional on GMAC raising new capital, which the company tried to do through a debt-equity swap that expired Friday. The company's goal was to raise $30 billion by converting 75% of its issued debt into preferred-stock holdings. Last week, less than 60% of bondholders had signed on and the offering had been extended four times. At the same time as the Treasury announcement Monday, GMAC said it had raised enough capital to satisfy the Fed's conditions. It wasn't clear whether the government's intervention prompted or followed GMAC's meeting the capital requirement.
Cerberus bought 51% of GMAC in 2006. GM has a 49% stake in GMAC. As a result of the Fed's move, Cerberus must reduce its interest to a maximum of 14.9% in voting shares and 33% in total equity. It will do this by distributing its positions in GMAC directly to Cerberus investors. GM will transfer part of its stake in GMAC to a trust whose trustee will be approved by the Treasury.
Treasury has now spent virtually all the first half of a $700 billion financial-market rescue package Congress approved in early October. Treasury Secretary Paulson said two weeks ago that the first half of the bailout fund was essentially spent and that Congress would soon need to release the second installment.
The Treasury official who briefed reporters on the plan Monday wouldn't break down how all of the money had been allocated, but said "from a short-term cash-flow basis" the department hasn't exceeded the first $350 billion installment. It is "not fair to say we've overcommitted the 350" billion, he said.
Treasury officials briefed members of President-elect Barack Obama's transition team on the new plan, a Treasury spokeswoman said.
Treasury said GMAC would pay an 8% dividend as part of the $5 billion investment, which the government said was "part of a broader program to assist the domestic automotive industry in becoming financially viable." Treasury will receive warrants from GMAC, which will be additional preferred equity equal to 5% of the preferred-stock purchase that will pay a 9% dividend if exercised.
Treasury's investment doesn't carry any direct requirement to lend any of the money. A similar lack of conditions for funds loaned to banks has been a source of criticism, especially among congressional Democrats who charge as a result that the bailout isn't working. As part of the deal, GMAC agreed to limit compensation on its top 25 executives including a ban on severance packages for the top five employees. The limits won't apply to executives at Cerberus.
Cerberus spokesman Peter Duda said the firm had no comment on Treasury's investment. GM officials couldn't be reached.
GMAC said in a statement that becoming a bank-holding company improved its ability to make consumer and business loans. "In particular, the company intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles," the company said.
As a federally chartered bank, GMAC can have its debt temporarily guaranteed by the Federal Deposit Insurance Corp. GMAC also could get access to the Fed's discount window for inexpensive, short-term emergency loans.
—Neal Boudette and Sharon Terlep contributed to this article.
Write to Damian Paletta at damian.paletta@wsj.com and John D. Stoll at john.stoll@wsj.com
--GMAC hleped financed 80% of purchase of GM cars by dealers and its restricted lending resulted in 45% sales plunge in Oct.
--The bailout for GMAC helped to ease auto issues and home mortgage strain.
--The bailout is conditional that GMAC has to raise $30 bil by debt-equity swaping 75% of debt issued.
By DAMIAN PALETTA and JOHN D. STOLL
WASHINGTON -- The federal government Monday deepened its involvement in the U.S. automotive industry by committing $6 billion to stabilize GMAC LLC, a financing company vital to the future of struggling car maker General Motors Corp.
In a sign the government's role in the industry could become open-ended, the Treasury Department said Monday it had set up a separate program within the Troubled Asset Relief Program, a fund originally designed to help banks, to make investments directed at the auto industry. A Treasury official said the new program didn't have a specific dollar limit.
The Treasury purchased $5 billion in senior preferred equity in GMAC and offered a new $1 billion loan to GM so the auto maker could participate in a rights offering at GMAC. That loan comes in addition to the recent $17.4 billion emergency plan to rescue GM and Chrysler LLC.
The move represents the second tranche of government aid that redounds to the benefit of giant private-equity firm Cerberus Capital Management, which owns Chrysler and, until these recent moves, a majority stake in GMAC. John Snow, a top player at Cerberus, was the Bush administration's Treasury secretary before Henry Paulson.
In bailing out GMAC, Treasury officials aren't just stabilizing an auto-finance company but a major player in the housing market's boom and bust. GMAC played a big role in pushing riskier adjustable-rate mortgages. The collapse of the housing market put additional strain on GMAC.
The difficulties of GMAC and Chrysler's financing arm, Chrysler Financial, are a big reason GM and Chrysler have suffered steep drops in auto sales and fallen into financial trouble in the past few months, said Michael J. Jackson, chief executive of AutoNation Inc., the country's largest chain of auto dealerships, in a recent interview. Both financing companies have been restricting credit as their own finances worsened. "Consumer credit is the jet fuel of the auto business," Mr. Jackson said. "The majority of consumers can't buy a car without getting a loan."
GMAC finances about 80% the wholesale purchases of GM's cars by dealers world-wide. It has traditionally been the largest source of financing for the actual buyers of those vehicles once they reached the showroom.
The car company said last month that a 45% sales skid for October was fueled by GMAC's restricted lending, which cost GM anywhere from 45,000 to 60,000 sales in the month. About 25% of GM vehicle sales were financed through GMAC last month, down from more than 40% a year ago.
The move by Treasury is the second part of a two-step rescue by the government of GMAC. Last week, the Federal Reserve approved the finance company's application to become a bank-holding company, a move sought by other companies, too, to take advantage of new government programs aimed at stabilizing banks.
The Fed's approval was conditional on GMAC raising new capital, which the company tried to do through a debt-equity swap that expired Friday. The company's goal was to raise $30 billion by converting 75% of its issued debt into preferred-stock holdings. Last week, less than 60% of bondholders had signed on and the offering had been extended four times. At the same time as the Treasury announcement Monday, GMAC said it had raised enough capital to satisfy the Fed's conditions. It wasn't clear whether the government's intervention prompted or followed GMAC's meeting the capital requirement.
Cerberus bought 51% of GMAC in 2006. GM has a 49% stake in GMAC. As a result of the Fed's move, Cerberus must reduce its interest to a maximum of 14.9% in voting shares and 33% in total equity. It will do this by distributing its positions in GMAC directly to Cerberus investors. GM will transfer part of its stake in GMAC to a trust whose trustee will be approved by the Treasury.
Treasury has now spent virtually all the first half of a $700 billion financial-market rescue package Congress approved in early October. Treasury Secretary Paulson said two weeks ago that the first half of the bailout fund was essentially spent and that Congress would soon need to release the second installment.
The Treasury official who briefed reporters on the plan Monday wouldn't break down how all of the money had been allocated, but said "from a short-term cash-flow basis" the department hasn't exceeded the first $350 billion installment. It is "not fair to say we've overcommitted the 350" billion, he said.
Treasury officials briefed members of President-elect Barack Obama's transition team on the new plan, a Treasury spokeswoman said.
Treasury said GMAC would pay an 8% dividend as part of the $5 billion investment, which the government said was "part of a broader program to assist the domestic automotive industry in becoming financially viable." Treasury will receive warrants from GMAC, which will be additional preferred equity equal to 5% of the preferred-stock purchase that will pay a 9% dividend if exercised.
Treasury's investment doesn't carry any direct requirement to lend any of the money. A similar lack of conditions for funds loaned to banks has been a source of criticism, especially among congressional Democrats who charge as a result that the bailout isn't working. As part of the deal, GMAC agreed to limit compensation on its top 25 executives including a ban on severance packages for the top five employees. The limits won't apply to executives at Cerberus.
Cerberus spokesman Peter Duda said the firm had no comment on Treasury's investment. GM officials couldn't be reached.
GMAC said in a statement that becoming a bank-holding company improved its ability to make consumer and business loans. "In particular, the company intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles," the company said.
As a federally chartered bank, GMAC can have its debt temporarily guaranteed by the Federal Deposit Insurance Corp. GMAC also could get access to the Fed's discount window for inexpensive, short-term emergency loans.
—Neal Boudette and Sharon Terlep contributed to this article.
Write to Damian Paletta at damian.paletta@wsj.com and John D. Stoll at john.stoll@wsj.com
Hard lessons on confidence
--No decoupling
--US consumers had been irrational, now are being forced be to rational
--US dollar remain the reserve currency
--big government is not over yet
--Confidence is a fragile commodity, hard to earn and easy to lose
Insight: Hard lessons on confidence
By Joseph Quinlan
Published: December 29 2008 16:03 Last updated: December 29 2008 16:03
This year has dished out a number of painful lessons for investors. Here is a sample of what we have learnt:
Lesson 1: Like it or not, we’re all connected. Amid the global market meltdown in 2008, one thing has become clear: the debate about global decoupling is over – and the “decouplers” lost.
There was a great deal of chatter this year about various parts of the world being immune to a US recession. The “decouplers” were emboldened by robust growth prospects in emerging markets, and by the expectation that Europe could hold its own in the face of a US downturn. Reality, however, has been different. Heading into 2009, the global economy is in recession. The lesson is that in a globalised economy characterised by rising cross-border flows of goods, services and capital, everyone – more or less – sinks or swims together.
Lesson 2: The US consumer is rational after all. The US consumer has long been considered one of the most indestructible forces on earth. For many US households, living beyond one’s means has been standard, supported by rising home prices, bulging credit card debt and minuscule savings. The bursting of the dotcom bubble, 9/11, soaring petroleum prices – none of these forces could slow the pace of consumer spending and the myth was perpetuated that nothing could keep American consumers from the shopping malls at weekends.
The US consumer, however, is more of a rational beast after all. The consumer is in retreat owing to falling home values, shrinking retirement accounts and the prospects of rising joblessness. The good news is it’s high time for overleveraged Americans to take a break. But the bad news is that until an alternative source of demand emerges, a frugal US consumer spells trouble for many export-driven countries.
Lesson 3: The US dollar is hardly a banana republic currency. It was not that long ago that many were writing it off. The greenback was toast, with many in the Middle East and Russia hoping to be paid in euros. The debt-laden US was a spent force, so went the verdict, with the falling dollar the emblem of US decline.
Yet, not for the first time, the demise of the dollar has been greatly exaggerated. As the global credit crisis has spread, the attendant flight to quality has triggered a surge in demand for dollar-denominated assets. Despite Wall Street’s being at the centre of the world financial crisis, the dollar has risen this year against the pound, many emerging market currencies – and even the euro. The buck’s strength underscores the safe haven status of the dollar in times of turmoil. The simple truth is this: by design and default, the US dollar remains the world’s currency of choice.
Lesson 4: Big government is far from dead. All talk about the “death of capitalism” is just that: talk. But there is little doubt the role of government – in the US and abroad – is set to become larger. The “commanding heights” of the economy are shifting away from the tenets of privatisation, deregulation and free markets and towards more public sector regulation and ownership.
Just how big a role the public sector will play in the future remains unclear. It is this uncertainty that has investors on edge. To be fair, government participation is part of the solution to what ails the global economy. The global credit crisis would be even more severe without massive aid from the public sector. That is the good news. The bad news: big government could increase the cost of doing business and undermine the entrepreneurial spirit of many economies.
Lesson 5: Confidence is a fragile commodity. The most valuable lesson of 2008 lies with just how precious a commodity it really is. Confidence is hard to earn, easy to lose. Once it is shattered, putting the pieces back together takes a great deal of time and trust.
It is the lack of confidence in the global financial system that has driven the global economy into recession and brought the global financial markets to their knees. At present, banks still aren’t fully confident about lending to one another or to qualified borrowers. There is still too much mistrust hanging over the global financial system. Not until confidence is restored will the global economy find its footing and the world financial markets find a bottom.
--US consumers had been irrational, now are being forced be to rational
--US dollar remain the reserve currency
--big government is not over yet
--Confidence is a fragile commodity, hard to earn and easy to lose
Insight: Hard lessons on confidence
By Joseph Quinlan
Published: December 29 2008 16:03 Last updated: December 29 2008 16:03
This year has dished out a number of painful lessons for investors. Here is a sample of what we have learnt:
Lesson 1: Like it or not, we’re all connected. Amid the global market meltdown in 2008, one thing has become clear: the debate about global decoupling is over – and the “decouplers” lost.
There was a great deal of chatter this year about various parts of the world being immune to a US recession. The “decouplers” were emboldened by robust growth prospects in emerging markets, and by the expectation that Europe could hold its own in the face of a US downturn. Reality, however, has been different. Heading into 2009, the global economy is in recession. The lesson is that in a globalised economy characterised by rising cross-border flows of goods, services and capital, everyone – more or less – sinks or swims together.
Lesson 2: The US consumer is rational after all. The US consumer has long been considered one of the most indestructible forces on earth. For many US households, living beyond one’s means has been standard, supported by rising home prices, bulging credit card debt and minuscule savings. The bursting of the dotcom bubble, 9/11, soaring petroleum prices – none of these forces could slow the pace of consumer spending and the myth was perpetuated that nothing could keep American consumers from the shopping malls at weekends.
The US consumer, however, is more of a rational beast after all. The consumer is in retreat owing to falling home values, shrinking retirement accounts and the prospects of rising joblessness. The good news is it’s high time for overleveraged Americans to take a break. But the bad news is that until an alternative source of demand emerges, a frugal US consumer spells trouble for many export-driven countries.
Lesson 3: The US dollar is hardly a banana republic currency. It was not that long ago that many were writing it off. The greenback was toast, with many in the Middle East and Russia hoping to be paid in euros. The debt-laden US was a spent force, so went the verdict, with the falling dollar the emblem of US decline.
Yet, not for the first time, the demise of the dollar has been greatly exaggerated. As the global credit crisis has spread, the attendant flight to quality has triggered a surge in demand for dollar-denominated assets. Despite Wall Street’s being at the centre of the world financial crisis, the dollar has risen this year against the pound, many emerging market currencies – and even the euro. The buck’s strength underscores the safe haven status of the dollar in times of turmoil. The simple truth is this: by design and default, the US dollar remains the world’s currency of choice.
Lesson 4: Big government is far from dead. All talk about the “death of capitalism” is just that: talk. But there is little doubt the role of government – in the US and abroad – is set to become larger. The “commanding heights” of the economy are shifting away from the tenets of privatisation, deregulation and free markets and towards more public sector regulation and ownership.
Just how big a role the public sector will play in the future remains unclear. It is this uncertainty that has investors on edge. To be fair, government participation is part of the solution to what ails the global economy. The global credit crisis would be even more severe without massive aid from the public sector. That is the good news. The bad news: big government could increase the cost of doing business and undermine the entrepreneurial spirit of many economies.
Lesson 5: Confidence is a fragile commodity. The most valuable lesson of 2008 lies with just how precious a commodity it really is. Confidence is hard to earn, easy to lose. Once it is shattered, putting the pieces back together takes a great deal of time and trust.
It is the lack of confidence in the global financial system that has driven the global economy into recession and brought the global financial markets to their knees. At present, banks still aren’t fully confident about lending to one another or to qualified borrowers. There is still too much mistrust hanging over the global financial system. Not until confidence is restored will the global economy find its footing and the world financial markets find a bottom.
Monday, December 29, 2008
美联储降息未降低香港融资成本
香港总需要密切注意美国的降息行动，因为港元钉住美元的联系汇率制度意味着香港货币当局必须追随美国联邦储备委员会(Federal Reserve, 简称Fed)的货币政策。每当贝南克(Ben Bernanke)降息调整他的利率杠杆时，流向香港的低息资金就会又一次为资本市场注入一针强心剂
但是，Fed降息使低息资金流向香港的作用似乎正在减小。在Fed这次降息之后，房地产买家等贷款人将无法获得低成本的资金，因香港的银行反而上调了贷款利率并紧缩信贷。
虽然香港金融管理局(Hong Kong Monetary Authority)上周已追随Fed降息100个基点，使隔夜贴现窗口利率降至0.5%，香港的主要银行却未对利率作出相应调整。
汇丰银行(HSBC)和渣打银行(Standard Chartered)都没有调整最优惠贷款利率。它们表示没有降息空间。
和央行不同，这些商业银行在决定利率政策时需要面对现实的业务问题。从银行业的基本原理来说，它们把存款人的钱贷出去，需要在收回时赚取利润。
面对已经接近于零的存款利率和不断加大的坏帐风险，银行能否保持盈利成为一个令人担心的问题。其实自9月份以来，香港实际住房抵押贷款利率一直在上升，因为各家银行都在控制信用风险。房地产专家指出，住房抵押贷款利率已从最优惠贷款利率下浮3个百分点升至最优惠贷款利率下浮1个百分点。
房地产咨询公司美联集团(Midland Realty)预测，住房抵押贷款利率低于最优惠贷款利率的所谓“负利率”现象在持续8年后料将于明年终结。他们预测，2009年房地产价格将再跌10%，因为房地产贷款将出现萎缩。
再退一步，银行还必须认真考虑吸引储户的问题。如果利率过低，储户的存款积 性就会降低。
也许这是一个巧合。上周香港金管局降息数小时内，笔者就收到一条短信息，说只要在花旗银行(Citibank)开一个帐户就能享受现金奖励和2.5%的利息。
存款的减少可能会危及银行的资本充足率。值得注意的是，汇丰银行上周股价大跌，因为分析师认为该行将不得不寻求新的融资，或减少派息，甚至两者兼而有之。
当银行资金来源吃紧，无论Fed是否降息，获得银行贷款都将变得更加困难。这意味着实体经济的各个部门都必须提高资金的利用效率。营运资金和现金流管理今年料将成为公司年报大书特书的内容。无论是存货管理还是压低供应商成本，提高资金效率将成为重要目标。
存款利率降至历史低点的另一个结果是使人们不愿意再谨慎的存钱。把闲钱存在银行获取微不足道的利息还不如拿出来做其他事情。就香港而言，赌博似乎是一个选择。
虽然经济滑坡，香港赌马场的营业额上周却达到了6年高点，在沙田国泰航空杯上下注的资金超过了10亿港元。
如果基金经理继续拿着现金等待金融危机结束，那他们也会遇到麻烦。客户可能会质疑，与其让基金持有现金还不如自己持有，还可以节省管理费。
值得注意的是，尽管坏消息一路传来，但自10月份跌至低点以来香港恒生指数现已反弹近40%。Citi Research数据显示，虽然大多数亚洲基金都不断面临赎回，香港基金却已连续两周出现资金流入；本月迄今为止，中国已成为亚洲地区表现最好的市场（以人民币计算）。
也许低利率正在使股市低收益率的相对吸引力上升。基金要准备2008年业绩报告，所以股市走高也可能有粉饰帐面的因素。
但这种资金流入对市场的推动作用可能仅此而已。公司信贷危机和股票估值明年或将发生冲突，如果上市公司像人们预期的那样减少股息的话。从现在的经济情况来看，总需要有些牺牲，那很可能将是股息。
在香港本地，一些公司已承诺不会通过裁员削减成本，很多公司已签署协议，承诺1年之内不会裁员。据说已有100家公司参加了这一计划，覆盖员工人数为5万人。
市场将更加关注2009年，上市公司业绩和资产负债表将受到审视。由于信贷料将继续吃紧，估计会有更多的公司和汇丰银行一样因增资问题而受到关注。
Craig Stephen
但是，Fed降息使低息资金流向香港的作用似乎正在减小。在Fed这次降息之后，房地产买家等贷款人将无法获得低成本的资金，因香港的银行反而上调了贷款利率并紧缩信贷。
虽然香港金融管理局(Hong Kong Monetary Authority)上周已追随Fed降息100个基点，使隔夜贴现窗口利率降至0.5%，香港的主要银行却未对利率作出相应调整。
汇丰银行(HSBC)和渣打银行(Standard Chartered)都没有调整最优惠贷款利率。它们表示没有降息空间。
和央行不同，这些商业银行在决定利率政策时需要面对现实的业务问题。从银行业的基本原理来说，它们把存款人的钱贷出去，需要在收回时赚取利润。
面对已经接近于零的存款利率和不断加大的坏帐风险，银行能否保持盈利成为一个令人担心的问题。其实自9月份以来，香港实际住房抵押贷款利率一直在上升，因为各家银行都在控制信用风险。房地产专家指出，住房抵押贷款利率已从最优惠贷款利率下浮3个百分点升至最优惠贷款利率下浮1个百分点。
房地产咨询公司美联集团(Midland Realty)预测，住房抵押贷款利率低于最优惠贷款利率的所谓“负利率”现象在持续8年后料将于明年终结。他们预测，2009年房地产价格将再跌10%，因为房地产贷款将出现萎缩。
再退一步，银行还必须认真考虑吸引储户的问题。如果利率过低，储户的存款积 性就会降低。
也许这是一个巧合。上周香港金管局降息数小时内，笔者就收到一条短信息，说只要在花旗银行(Citibank)开一个帐户就能享受现金奖励和2.5%的利息。
存款的减少可能会危及银行的资本充足率。值得注意的是，汇丰银行上周股价大跌，因为分析师认为该行将不得不寻求新的融资，或减少派息，甚至两者兼而有之。
当银行资金来源吃紧，无论Fed是否降息，获得银行贷款都将变得更加困难。这意味着实体经济的各个部门都必须提高资金的利用效率。营运资金和现金流管理今年料将成为公司年报大书特书的内容。无论是存货管理还是压低供应商成本，提高资金效率将成为重要目标。
存款利率降至历史低点的另一个结果是使人们不愿意再谨慎的存钱。把闲钱存在银行获取微不足道的利息还不如拿出来做其他事情。就香港而言，赌博似乎是一个选择。
虽然经济滑坡，香港赌马场的营业额上周却达到了6年高点，在沙田国泰航空杯上下注的资金超过了10亿港元。
如果基金经理继续拿着现金等待金融危机结束，那他们也会遇到麻烦。客户可能会质疑，与其让基金持有现金还不如自己持有，还可以节省管理费。
值得注意的是，尽管坏消息一路传来，但自10月份跌至低点以来香港恒生指数现已反弹近40%。Citi Research数据显示，虽然大多数亚洲基金都不断面临赎回，香港基金却已连续两周出现资金流入；本月迄今为止，中国已成为亚洲地区表现最好的市场（以人民币计算）。
也许低利率正在使股市低收益率的相对吸引力上升。基金要准备2008年业绩报告，所以股市走高也可能有粉饰帐面的因素。
但这种资金流入对市场的推动作用可能仅此而已。公司信贷危机和股票估值明年或将发生冲突，如果上市公司像人们预期的那样减少股息的话。从现在的经济情况来看，总需要有些牺牲，那很可能将是股息。
在香港本地，一些公司已承诺不会通过裁员削减成本，很多公司已签署协议，承诺1年之内不会裁员。据说已有100家公司参加了这一计划，覆盖员工人数为5万人。
市场将更加关注2009年，上市公司业绩和资产负债表将受到审视。由于信贷料将继续吃紧，估计会有更多的公司和汇丰银行一样因增资问题而受到关注。
Craig Stephen
World Economy in 2009: Three priorities for recovery
--It is difficult to predict whether policymakers will prevent the recession turning into depression and lay the foundation for sustainable recovery
--avoid deflation. this is important
--shrink (?) / regulate (is better) the financial sector
--global policy coordination, for instance not protectionishm. It is hard.
World Economy in 2009: Three priorities for recovery
By Wolfgang Münchau
Published: December 28 2008 18:01 Last updated: December 28 2008 18:01
It is easy and difficult at the same time to predict the economy in 2009. It is easy to predict it will be an awful year for the US, Europe and large parts of Asia. The industrialised world will be in a deep synchronised recession. Global gross domestic product will probably contract also for the first time since the 1930s. There is not a great deal we can do to prevent this.
The difficult part of the forecast is to predict whether policymakers will succeed in preventing the recession turning into a depression and lay the foundations for a sustainable recovery in 2010. What I can predict with near certainty is that policy will matter a great deal next year.
We know that the current driving force behind this downturn is “deleveraging”. Overindebted households and undercapitalised banks are adjusting their balance sheets, building up savings in the first case and restricting lending in the latter. There is no chance of a sustained economic recovery until that process is almost complete.
We are still some way from that point. For example, on my calculations it will take a total peak-to-trough decline in real US house prices of some 40-50 per cent to get back towards long-term price trends and for price-rent ratios to return to more sustainable levels. We are about half-way through this process. The good news is that most of the nominal adjustment will have taken place by the end of 2009 or early 2010.
I am a lot less optimistic about the financial sector. While it is also reducing its leverage, it will not achieve a sustainable position quickly without a lot more government capital. But this would require deep restructuring and would take time.
On the basis of this admittedly brief sketch, I arrive at three policy priorities for 2009. The first is for central banks to avoid deflation. If ever there has been a need for a central bank to target price stability, it is now. I mean this in the European sense of the term, meaning a small but distinctly positive rate of inflation, say 2 or 3 per cent annually. I assume that central banks will succeed in this endeavour, given the full power of policies deployed. I worry, though, that the US will try to raise inflation afterwards, which would reduce the real level of US debt but create massive distortions in exchange rates and financial flows and produce another global financial and economic crisis.
The second priority is to shrink the financial sector. A disorderly collapse would be catastrophic, but it is neither desirable, nor possible, to maintain the financial sector at its current excessive size. Take the market for credit default swaps, an unregulated $50,000-$60,000bn casino that serves no economic purpose except to enrich its participants at massive risk to global financial stability. I would be in favour, as a matter of principle, of regulating any financial activity on the basis of its economic purpose. Since a CDS constitutes insurance from an economic point of view, we should treat it as such and subject it to insurance regulation (which would kill it of course).
In particular, we should try to avoid the temptation to regulate too much in detail. This is a game regulators will lose. The financial sector is good at deploying existing instruments, and creating new ones, to circumvent any inflexible rule set. We should instead focus on breaking up too-large-to-fail banks and reducing the size of the financial sector in relation to a country’s GDP. In particular, we should not try to guarantee the obligations of a banking sector several times the size of our economies.
Third, and perhaps most important, we need to co-ordinate the policy response at global level, since this is a global crisis with many global spillovers. What I would like to hear from US President-elect Barack Obama’s economic team is not a narrow-minded discussion about whether the stimulus will be $700bn or $850bn, or which programmes it will be spent on. What I want to know is how they intend to co-opt the Europeans and the Chinese into a joint strategy.
What national governments should not do is blow even more money on infrastructure investments and on education. Whatever problem this is supposed to solve, it is a different problem from the one we need to solve right now.
Nor do I see any real policy co-ordination, in which governments commit to policies they would otherwise not have considered. At present, in Europe at least, the co-ordination process works the other way round. Each government decides unilaterally what it wants to do. And then, at European Union level, they dress it up as policy co-ordination.
It is not difficult to construct a plausible scenario of an economic catastrophe. Pick some of the following and you could end up with a depression that beats every modern record: a rise in global protectionism; competitive currency devaluations; a sterling crisis; social unrest in China, leading to political instability; a well-timed terrorist attack; continued refusal by eurozone leaders to co-ordinate; a payment default by a large sovereign in the eurozone; an acute emerging market crisis; continued lack of synchronisation of monetary policies, or a collapse of the CDS market. Obviously, the insolvency of a large global bank or the annihilation of the hedge fund industry would not go unnoticed either.
Alternatively, we can try to keep the lid on the 2009 recession and lay the foundations for a sustainable but unspectacular recovery. This would be the best outcome. But for that we would have to recognise that the global economy is more than the sum of its parts. It implies that policymakers will have to smarten up, work together and start thinking outside the box. The trouble is this is not what they usually do.
--avoid deflation. this is important
--shrink (?) / regulate (is better) the financial sector
--global policy coordination, for instance not protectionishm. It is hard.
World Economy in 2009: Three priorities for recovery
By Wolfgang Münchau
Published: December 28 2008 18:01 Last updated: December 28 2008 18:01
It is easy and difficult at the same time to predict the economy in 2009. It is easy to predict it will be an awful year for the US, Europe and large parts of Asia. The industrialised world will be in a deep synchronised recession. Global gross domestic product will probably contract also for the first time since the 1930s. There is not a great deal we can do to prevent this.
The difficult part of the forecast is to predict whether policymakers will succeed in preventing the recession turning into a depression and lay the foundations for a sustainable recovery in 2010. What I can predict with near certainty is that policy will matter a great deal next year.
We know that the current driving force behind this downturn is “deleveraging”. Overindebted households and undercapitalised banks are adjusting their balance sheets, building up savings in the first case and restricting lending in the latter. There is no chance of a sustained economic recovery until that process is almost complete.
We are still some way from that point. For example, on my calculations it will take a total peak-to-trough decline in real US house prices of some 40-50 per cent to get back towards long-term price trends and for price-rent ratios to return to more sustainable levels. We are about half-way through this process. The good news is that most of the nominal adjustment will have taken place by the end of 2009 or early 2010.
I am a lot less optimistic about the financial sector. While it is also reducing its leverage, it will not achieve a sustainable position quickly without a lot more government capital. But this would require deep restructuring and would take time.
On the basis of this admittedly brief sketch, I arrive at three policy priorities for 2009. The first is for central banks to avoid deflation. If ever there has been a need for a central bank to target price stability, it is now. I mean this in the European sense of the term, meaning a small but distinctly positive rate of inflation, say 2 or 3 per cent annually. I assume that central banks will succeed in this endeavour, given the full power of policies deployed. I worry, though, that the US will try to raise inflation afterwards, which would reduce the real level of US debt but create massive distortions in exchange rates and financial flows and produce another global financial and economic crisis.
The second priority is to shrink the financial sector. A disorderly collapse would be catastrophic, but it is neither desirable, nor possible, to maintain the financial sector at its current excessive size. Take the market for credit default swaps, an unregulated $50,000-$60,000bn casino that serves no economic purpose except to enrich its participants at massive risk to global financial stability. I would be in favour, as a matter of principle, of regulating any financial activity on the basis of its economic purpose. Since a CDS constitutes insurance from an economic point of view, we should treat it as such and subject it to insurance regulation (which would kill it of course).
In particular, we should try to avoid the temptation to regulate too much in detail. This is a game regulators will lose. The financial sector is good at deploying existing instruments, and creating new ones, to circumvent any inflexible rule set. We should instead focus on breaking up too-large-to-fail banks and reducing the size of the financial sector in relation to a country’s GDP. In particular, we should not try to guarantee the obligations of a banking sector several times the size of our economies.
Third, and perhaps most important, we need to co-ordinate the policy response at global level, since this is a global crisis with many global spillovers. What I would like to hear from US President-elect Barack Obama’s economic team is not a narrow-minded discussion about whether the stimulus will be $700bn or $850bn, or which programmes it will be spent on. What I want to know is how they intend to co-opt the Europeans and the Chinese into a joint strategy.
What national governments should not do is blow even more money on infrastructure investments and on education. Whatever problem this is supposed to solve, it is a different problem from the one we need to solve right now.
Nor do I see any real policy co-ordination, in which governments commit to policies they would otherwise not have considered. At present, in Europe at least, the co-ordination process works the other way round. Each government decides unilaterally what it wants to do. And then, at European Union level, they dress it up as policy co-ordination.
It is not difficult to construct a plausible scenario of an economic catastrophe. Pick some of the following and you could end up with a depression that beats every modern record: a rise in global protectionism; competitive currency devaluations; a sterling crisis; social unrest in China, leading to political instability; a well-timed terrorist attack; continued refusal by eurozone leaders to co-ordinate; a payment default by a large sovereign in the eurozone; an acute emerging market crisis; continued lack of synchronisation of monetary policies, or a collapse of the CDS market. Obviously, the insolvency of a large global bank or the annihilation of the hedge fund industry would not go unnoticed either.
Alternatively, we can try to keep the lid on the 2009 recession and lay the foundations for a sustainable but unspectacular recovery. This would be the best outcome. But for that we would have to recognise that the global economy is more than the sum of its parts. It implies that policymakers will have to smarten up, work together and start thinking outside the box. The trouble is this is not what they usually do.
Dow's Plan for Growth Threatened by Scuttled Kuwait Deal
--Kuwait scuttled a multi-billion dollar JV deal with Dow C amid fears that plunging oil price make the deal unatractive
--the JV would have provided Dow with the access to low cost natural gas and money to close an aquisition deal
--the decision by Kuwait might call off Dow's the acquisition deal for Rohm & Hass Co
By JEFFREY BALL and CHIP CUMMINS
Kuwait scuttled a multibillion-dollar joint-venture deal with Dow Chemical Co. that was set to take effect Thursday, potentially complicating the chemical giant's efforts to complete a huge acquisition.
Dow said Kuwaiti officials informed the company on Sunday that the Persian Gulf country is scrapping a deal under which a state-owned petroleum company was to pay Dow $7.5 billion for a 50% stake in several chemical plants. Dow intended to use that money to help finance its $15.3 billion purchase of Rohm & Haas Co., which makes coatings and electronic materials.
The decision by Kuwait's top petroleum-policy council to bail out amid fears that plunging oil prices had made the deal less attractive came less than a week before the deal was to become effective. Both Dow and the Kuwaiti company, Petrochemical Industries Co., or PIC, were also planning to collect $1.5 billion apiece from the joint venture, known as K-Dow Petrochemicals.
Analysts have said for some time that if the Kuwait deal was canceled, it would call into question the Rohm & Haas acquisition, which is slated to close in early 2009. But Rohm & Haas said in a statement Sunday that a deal between Dow and Kuwait "is not a closing condition" for Dow's acquisition of the company. It said Rohm & Haas "continues to work diligently towards completing the proposed transaction with Dow in early 2009."
In a conference call with analysts in October, Dow said it intended to tap various sources of funding to complete the deal, including a $13 billion bridge loan, $4 billion from other investors, and proceeds from the Kuwait joint venture.
Dow, based in Midland, Mich., said in a statement that it is "extremely disappointed" with Kuwait's decision and is "evaluating its options" under the agreement it had with PIC, a subsidiary of Kuwait Petroleum. A Dow spokeswoman declined to comment on how the Kuwaiti decision might affect the planned Rohm & Haas acquisition.
The unraveling of the joint venture is the latest sign of how roller-coaster energy prices are whipsawing the global economy.
Dow announced the Kuwaiti joint venture about a year ago. At that time, soaring energy prices were forcing the company to search farther afield for affordable supplies of natural gas, which Dow consumes in huge quantities to make its chemicals. The joint venture would have helped provide Dow access to low-cost natural gas.
But energy prices have cratered since then, leading countries such as Kuwait, with vast stores of oil and natural gas, to reconsider whether now is the best time to be undertaking big deals.
Kuwait's decision is a setback to Dow, which saw the joint-venture deal as crucial to improving the company's long-term profitability. For years, Dow Chief Executive Andrew Liveris has been trying to reposition the company, moving it away from producing low-margin commodity chemicals and into the higher-margin specialty chemicals business.
Kuwait's state news agency, Kuna, reported Sunday that the sheikdom's top petroleum-policy council decided to cancel the deal. According to Kuna, Kuwait's Deputy Prime Minister Faisal Al-Hajji Bukhadour said the project was a casualty of the "current dramatic changes in the global economy coupled with the recent unprecedented slide of the oil prices."
Earlier this month, Dow renegotiated the deal and agreed to accept a total of $9 billion, including the money it was to get from K-Dow, about $500 million less than it originally planned. Mr. Liveris said that the reduced price reflected the turmoil in the chemical industry, as the global economic slowdown slashed demand for chemical products.
One week later, Dow announced major cutbacks amid the weak economy. Mr. Liveris said the cutbacks were intended partly to preserve Dow's ability to execute the Rohm & Haas acquisition. He said the company was "looking at every possible mechanism" to protect that deal.
Global deal making has generated problems before. In April 2007, Dow fired two top executives, accusing them of plotting to sell the company without authorization. The two had talked to investors in Oman, among others, about arranging a buyout, according to people familiar with the matter.
--the JV would have provided Dow with the access to low cost natural gas and money to close an aquisition deal
--the decision by Kuwait might call off Dow's the acquisition deal for Rohm & Hass Co
By JEFFREY BALL and CHIP CUMMINS
Kuwait scuttled a multibillion-dollar joint-venture deal with Dow Chemical Co. that was set to take effect Thursday, potentially complicating the chemical giant's efforts to complete a huge acquisition.
Dow said Kuwaiti officials informed the company on Sunday that the Persian Gulf country is scrapping a deal under which a state-owned petroleum company was to pay Dow $7.5 billion for a 50% stake in several chemical plants. Dow intended to use that money to help finance its $15.3 billion purchase of Rohm & Haas Co., which makes coatings and electronic materials.
The decision by Kuwait's top petroleum-policy council to bail out amid fears that plunging oil prices had made the deal less attractive came less than a week before the deal was to become effective. Both Dow and the Kuwaiti company, Petrochemical Industries Co., or PIC, were also planning to collect $1.5 billion apiece from the joint venture, known as K-Dow Petrochemicals.
Analysts have said for some time that if the Kuwait deal was canceled, it would call into question the Rohm & Haas acquisition, which is slated to close in early 2009. But Rohm & Haas said in a statement Sunday that a deal between Dow and Kuwait "is not a closing condition" for Dow's acquisition of the company. It said Rohm & Haas "continues to work diligently towards completing the proposed transaction with Dow in early 2009."
In a conference call with analysts in October, Dow said it intended to tap various sources of funding to complete the deal, including a $13 billion bridge loan, $4 billion from other investors, and proceeds from the Kuwait joint venture.
Dow, based in Midland, Mich., said in a statement that it is "extremely disappointed" with Kuwait's decision and is "evaluating its options" under the agreement it had with PIC, a subsidiary of Kuwait Petroleum. A Dow spokeswoman declined to comment on how the Kuwaiti decision might affect the planned Rohm & Haas acquisition.
The unraveling of the joint venture is the latest sign of how roller-coaster energy prices are whipsawing the global economy.
Dow announced the Kuwaiti joint venture about a year ago. At that time, soaring energy prices were forcing the company to search farther afield for affordable supplies of natural gas, which Dow consumes in huge quantities to make its chemicals. The joint venture would have helped provide Dow access to low-cost natural gas.
But energy prices have cratered since then, leading countries such as Kuwait, with vast stores of oil and natural gas, to reconsider whether now is the best time to be undertaking big deals.
Kuwait's decision is a setback to Dow, which saw the joint-venture deal as crucial to improving the company's long-term profitability. For years, Dow Chief Executive Andrew Liveris has been trying to reposition the company, moving it away from producing low-margin commodity chemicals and into the higher-margin specialty chemicals business.
Kuwait's state news agency, Kuna, reported Sunday that the sheikdom's top petroleum-policy council decided to cancel the deal. According to Kuna, Kuwait's Deputy Prime Minister Faisal Al-Hajji Bukhadour said the project was a casualty of the "current dramatic changes in the global economy coupled with the recent unprecedented slide of the oil prices."
Earlier this month, Dow renegotiated the deal and agreed to accept a total of $9 billion, including the money it was to get from K-Dow, about $500 million less than it originally planned. Mr. Liveris said that the reduced price reflected the turmoil in the chemical industry, as the global economic slowdown slashed demand for chemical products.
One week later, Dow announced major cutbacks amid the weak economy. Mr. Liveris said the cutbacks were intended partly to preserve Dow's ability to execute the Rohm & Haas acquisition. He said the company was "looking at every possible mechanism" to protect that deal.
Global deal making has generated problems before. In April 2007, Dow fired two top executives, accusing them of plotting to sell the company without authorization. The two had talked to investors in Oman, among others, about arranging a buyout, according to people familiar with the matter.
Discounts Not Enough to Revive Online Retail Sales
--online spending still held up, down 2% compared to 5.5% to 8% for retail as a whole.
--online sales were fueld by discounters that aren't likely to continue.
Online sales held up better than the rest of the retail market during the dismal holiday period, but the season is still likely to go down as one of the worst on record for the traditionally booming e-commerce sector.
While online spending was down just 2% from Nov. 1 through Christmas Eve compared with a drop of 5.5% to 8% for retail as a whole, e-commerce strength wasn't widespread. Instead, it was clustered around several big-name Web sites such as Amazon.com Inc., Apple Inc. and Wal-Mart Stores Inc. Online sales were also fueled by discounts that aren't likely to continue.
Overall, in a sector where sales have historically increased 20% annually, this is the first holiday season where online sales haven't grown. E-commerce sales were "not amazing by any stretch," says John Aiken, managing director and head of equity research for Majestic Research.
Many traditionally strong ecommerce sites also ended up losing visitors in what is typically their busiest period. Internet auction site eBay Inc.'s traffic dropped 16% between early November and mid-December, while Best Buy Co.'s site experienced a 17% decline in visitor traffic, according to comScore Inc., which tracks Internet activity. The number of visitors to e-commerce Web sites during the period grew less than 1%, compared with growth of about 5% typically.
A spokeswoman for eBay declined to comment. Best Buy didn't return a call for comment.
What few winners there were online relied heavily on discounts and special promotions such as limited-time deals and targeted email offers to repeat customers this year, say analysts. Discounts were particularly heavy in areas like consumer electronics, where consumers downgraded to cheaper models of items like flat-screen televisions, says Mr. Aiken.
"Consumers are hyper-price sensitive in this environment," he says, adding it isn't clear whether they will keep spending as the promotions taper off into next year. Mr. Aiken predicts that retailers will scale back their promotions after flushing out their fourth-quarter inventory and will instead become more cautious about stocking up on first-quarter inventory.
Those that played the discount and promotions game won big during the season. Amazon.com, for one, on Friday said sales for the holiday season were its "best ever" due in part to promotions. The tactic helped boost the number of visitors to the site between early November and mid-December by 6%, according to comScore.
"We were heads-down focused on providing customers low prices this year," says Craig Berman, a spokesman for Amazon. He declined to comment on how much sales grew or whether there was a corresponding jump in profit pending the Seattle company's quarterly earnings in January.
Peter Cobb, co-founder of eBags, says the Denver, Colo.-based company also rolled out shipping promotions and deeply discounted "Web busters" to buoy sales this season. Despite a strong increase in overall traffic, holiday sales for the online bag retailer were flat from last year as the size of the average order declined, he says. Mr. Cobb described the trend as "OK given all that is going on in the financial markets."
"The level of discounting we've seen is dramatic," says Andrew Lipsman, director of industry analysis at comScore. And with good reason: "We have seen spending roller coasters depending on whether there was discounting or not."
For example, online sales in mid-November were down from 2007 but shot up 15% on Cyber Monday -- the first work day after Thanksgiving -- thanks in part to promotions for free shipping and substantial price cuts. Sales in the two full weeks preceding Christmas were also down from last year before spiking again the weekend before the holiday thanks to another wave of promotions, says comScore.
Some online retailers are expected to continue slashing their prices next year to offset concerns that spending will dry up after the holidays. Target Corp., for example, is currently offering up to 75% off online on toys like a lifesize stuffed puppy and ping-pong tables and is offering free shipping on more than 30,000 items.
The continued discounting push online comes as the number of visitors to Target's Web site between early November and mid-December fell 9% from last year, according to comScore.
A Target spokeswoman says the Minneapolis company won't discuss holiday sales or other results until early January.
Doug Anmuth, an Internet analyst at Barclays Capital, says continued discounting is likely to cut into online retailers' profit margins, accelerating the squeeze they are already enduring as e-commerce matures and competition increases.
Apart from strong visitor growth at Amazon.com, Apple's Web site experienced an 8% increase in visitor traffic and Wal-Mart's Web site saw a 10% spike in traffic, according to comScore.
ComScore's Mr. Lipsman says each of the sites is known for separating themselves from the field -- Amazon by offering some of the widest variety of goods, while Apple provides innovative products and Wal-Mart offers some of the lowest prices.
An Apple spokeswoman declined to comment. A Wal-Mart spokeswoman says the company will release holiday sales figures in early January.
Another Web site that saw a big increase in visitors was American Greetings Corp., which lets people send free online cards, among other services.
In a year when consumers opted to spend less on gifts, the site saw a 47% spike in visitors according to comScore.
An American Greetings spokesman declined to speculate on the reason for the increase.
—Bobby White contributed to this article.
--online sales were fueld by discounters that aren't likely to continue.
Online sales held up better than the rest of the retail market during the dismal holiday period, but the season is still likely to go down as one of the worst on record for the traditionally booming e-commerce sector.
While online spending was down just 2% from Nov. 1 through Christmas Eve compared with a drop of 5.5% to 8% for retail as a whole, e-commerce strength wasn't widespread. Instead, it was clustered around several big-name Web sites such as Amazon.com Inc., Apple Inc. and Wal-Mart Stores Inc. Online sales were also fueled by discounts that aren't likely to continue.
Overall, in a sector where sales have historically increased 20% annually, this is the first holiday season where online sales haven't grown. E-commerce sales were "not amazing by any stretch," says John Aiken, managing director and head of equity research for Majestic Research.
Many traditionally strong ecommerce sites also ended up losing visitors in what is typically their busiest period. Internet auction site eBay Inc.'s traffic dropped 16% between early November and mid-December, while Best Buy Co.'s site experienced a 17% decline in visitor traffic, according to comScore Inc., which tracks Internet activity. The number of visitors to e-commerce Web sites during the period grew less than 1%, compared with growth of about 5% typically.
A spokeswoman for eBay declined to comment. Best Buy didn't return a call for comment.
What few winners there were online relied heavily on discounts and special promotions such as limited-time deals and targeted email offers to repeat customers this year, say analysts. Discounts were particularly heavy in areas like consumer electronics, where consumers downgraded to cheaper models of items like flat-screen televisions, says Mr. Aiken.
"Consumers are hyper-price sensitive in this environment," he says, adding it isn't clear whether they will keep spending as the promotions taper off into next year. Mr. Aiken predicts that retailers will scale back their promotions after flushing out their fourth-quarter inventory and will instead become more cautious about stocking up on first-quarter inventory.
Those that played the discount and promotions game won big during the season. Amazon.com, for one, on Friday said sales for the holiday season were its "best ever" due in part to promotions. The tactic helped boost the number of visitors to the site between early November and mid-December by 6%, according to comScore.
"We were heads-down focused on providing customers low prices this year," says Craig Berman, a spokesman for Amazon. He declined to comment on how much sales grew or whether there was a corresponding jump in profit pending the Seattle company's quarterly earnings in January.
Peter Cobb, co-founder of eBags, says the Denver, Colo.-based company also rolled out shipping promotions and deeply discounted "Web busters" to buoy sales this season. Despite a strong increase in overall traffic, holiday sales for the online bag retailer were flat from last year as the size of the average order declined, he says. Mr. Cobb described the trend as "OK given all that is going on in the financial markets."
"The level of discounting we've seen is dramatic," says Andrew Lipsman, director of industry analysis at comScore. And with good reason: "We have seen spending roller coasters depending on whether there was discounting or not."
For example, online sales in mid-November were down from 2007 but shot up 15% on Cyber Monday -- the first work day after Thanksgiving -- thanks in part to promotions for free shipping and substantial price cuts. Sales in the two full weeks preceding Christmas were also down from last year before spiking again the weekend before the holiday thanks to another wave of promotions, says comScore.
Some online retailers are expected to continue slashing their prices next year to offset concerns that spending will dry up after the holidays. Target Corp., for example, is currently offering up to 75% off online on toys like a lifesize stuffed puppy and ping-pong tables and is offering free shipping on more than 30,000 items.
The continued discounting push online comes as the number of visitors to Target's Web site between early November and mid-December fell 9% from last year, according to comScore.
A Target spokeswoman says the Minneapolis company won't discuss holiday sales or other results until early January.
Doug Anmuth, an Internet analyst at Barclays Capital, says continued discounting is likely to cut into online retailers' profit margins, accelerating the squeeze they are already enduring as e-commerce matures and competition increases.
Apart from strong visitor growth at Amazon.com, Apple's Web site experienced an 8% increase in visitor traffic and Wal-Mart's Web site saw a 10% spike in traffic, according to comScore.
ComScore's Mr. Lipsman says each of the sites is known for separating themselves from the field -- Amazon by offering some of the widest variety of goods, while Apple provides innovative products and Wal-Mart offers some of the lowest prices.
An Apple spokeswoman declined to comment. A Wal-Mart spokeswoman says the company will release holiday sales figures in early January.
Another Web site that saw a big increase in visitors was American Greetings Corp., which lets people send free online cards, among other services.
In a year when consumers opted to spend less on gifts, the site saw a 47% spike in visitors according to comScore.
An American Greetings spokesman declined to speculate on the reason for the increase.
—Bobby White contributed to this article.
Sunday, December 28, 2008
Jones Apparel Cuts Credit Line
Jones Apparel Group Inc. on Friday cut back its revolving credit facilities to $600 million from $1.25 billion to reflect its current financing needs.
The stock through Wednesday was down 76% this year amid the slowdown in consumer spending, in particular for women's apparel firms like Jones.
Jones reduced its $750 million credit line maturing in May 2010 to $600 million and terminated its $500 million line that was due to expire in June. The company didn't have any cash borrowings outstanding on the lines.
Chief Financial Officer John T. McClain said Jones believed it was prudent to amend the credit facilities to allow "financial flexibility in the current uncertain economic environment." He added the company had a "significant" amount of cash on hand.
The agreements were also amended to "provide Jones with greater flexibility," the company said without giving details. Fees and interest rates were increased to current market rates.
Jones, along with other retailers and apparel makers, has been hurt by sharp drops in consumer confidence amid the global recession. Consumers have been cutting back their discretionary spending as they look to save money any way they can.
The company's third-quarter net income tumbled 93% as sales fell amid its exit from moderate sportswear lines, the repositioning of its l.e.i brand and last year's sale of Barney's hurt results. Jones saw same-store sales rise at its retail outlets but decline rapidly at wholesale stores as department stores continue to suffer.
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CREDIT FACILITIES - Company 10Q, Q3 2008 (Oct)
Prior to June 6, 2008, we had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.75 billion under Senior Credit Facilities. These facilities, consisting of a $1.0 billion five-year revolving credit facility expiring in June 2009 and a $750.0 million five-year revolving credit facility expiring in June 2010, could be used for letters of credit or cash borrowings .
On June 6, 2008, we amended these facilities. The terms and conditions of the credit facilities remain substantially unchanged, except for modification of the pricing provisions and certain covenants and reduction of the aggregate commitment under the $1.0 billion facility to $500.0 million.
At October 4, 2008, $195.7 million of letters of credit were outstanding under the credit facility that expires in June 2009 and no amounts were outstanding under the credit facility that expires in June 2010. Borrowings under the Senior Credit Facilities may also be used for working capital and other general corporate purposes, including permitted acquisitions and stock repurchases. The amended Senior Credit Facilities are unsecured and require us to satisfy a minimum Interest Coverage Ratio, a maximum Covenant Debt to EBITDA Ratio and a minimum Asset Coverage Ratio (each as defined in the Restated Credit Agreements), and contain covenants limiting our ability to (1) incur debt and guaranty obligations, (2) incur liens, (3) make loans, advances, investments and acquisitions, (4) merge or liquidate, (5) sell or transfer assets, (6) pay dividends, repurchase shares, or make distributions to stockholders, and (7) engage in transactions with affiliates. At October 4, 2008, we were in compliance with all of our covenants.
At October 4, 2008, we also had uncommitted unsecured lines of credit available for up to $106.6 million of letters of credit, under which an aggregate of $21.5 million was outstanding. At October 4, 2008, we also had a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million of letters of credit were outstanding.
The stock through Wednesday was down 76% this year amid the slowdown in consumer spending, in particular for women's apparel firms like Jones.
Jones reduced its $750 million credit line maturing in May 2010 to $600 million and terminated its $500 million line that was due to expire in June. The company didn't have any cash borrowings outstanding on the lines.
Chief Financial Officer John T. McClain said Jones believed it was prudent to amend the credit facilities to allow "financial flexibility in the current uncertain economic environment." He added the company had a "significant" amount of cash on hand.
The agreements were also amended to "provide Jones with greater flexibility," the company said without giving details. Fees and interest rates were increased to current market rates.
Jones, along with other retailers and apparel makers, has been hurt by sharp drops in consumer confidence amid the global recession. Consumers have been cutting back their discretionary spending as they look to save money any way they can.
The company's third-quarter net income tumbled 93% as sales fell amid its exit from moderate sportswear lines, the repositioning of its l.e.i brand and last year's sale of Barney's hurt results. Jones saw same-store sales rise at its retail outlets but decline rapidly at wholesale stores as department stores continue to suffer.
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CREDIT FACILITIES - Company 10Q, Q3 2008 (Oct)
Prior to June 6, 2008, we had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.75 billion under Senior Credit Facilities. These facilities, consisting of a $1.0 billion five-year revolving credit facility expiring in June 2009 and a $750.0 million five-year revolving credit facility expiring in June 2010, could be used for letters of credit or cash borrowings .
On June 6, 2008, we amended these facilities. The terms and conditions of the credit facilities remain substantially unchanged, except for modification of the pricing provisions and certain covenants and reduction of the aggregate commitment under the $1.0 billion facility to $500.0 million.
At October 4, 2008, $195.7 million of letters of credit were outstanding under the credit facility that expires in June 2009 and no amounts were outstanding under the credit facility that expires in June 2010. Borrowings under the Senior Credit Facilities may also be used for working capital and other general corporate purposes, including permitted acquisitions and stock repurchases. The amended Senior Credit Facilities are unsecured and require us to satisfy a minimum Interest Coverage Ratio, a maximum Covenant Debt to EBITDA Ratio and a minimum Asset Coverage Ratio (each as defined in the Restated Credit Agreements), and contain covenants limiting our ability to (1) incur debt and guaranty obligations, (2) incur liens, (3) make loans, advances, investments and acquisitions, (4) merge or liquidate, (5) sell or transfer assets, (6) pay dividends, repurchase shares, or make distributions to stockholders, and (7) engage in transactions with affiliates. At October 4, 2008, we were in compliance with all of our covenants.
At October 4, 2008, we also had uncommitted unsecured lines of credit available for up to $106.6 million of letters of credit, under which an aggregate of $21.5 million was outstanding. At October 4, 2008, we also had a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million of letters of credit were outstanding.
GMAC's Bonds Get a Bank Boost
--GMAC got the nod from Fed to become a bank-holding company
--Its bonds, especially short term, gained significantly. Long term bond and CDS remained in distressed level
--Fed's move complement its support financial auto markers
By ANUSHA SHRIVAASTAVA and ROMY VARGHESE
GMAC's bonds gained Friday, buoyed by the Federal Reserve's Christmas Eve approval of the auto-financing company's application to become a bank-holding company.
GMAC got the nod even as the result of the lender's capital-raising plans, a key element in its transformation to a bank, remains uncertain. GMAC has extended the deadline several times for the note exchange and cash tender offers aimed at restructuring $38 billion in debt. The offers were due to expire Friday at 11:59 p.m. Eastern time.
Gains in GMAC bonds were focused mainly on the short end, while longer-dated bonds and credit-protection costs, though improved, remain in distressed territory. That is a sign that, even with government backing, investors are still cautious on the lender's longer-term outlook.
The Fed moves also complement support for the U.S. auto makers, with GMAC the primary source of loans for buyers of GM cars. "Why bail out the auto makers if you're going to let the biggest source of lending go under?" said Carl Kaufman, portfolio manager of the Osterweis Strategic Income Fund in San Francisco. Becoming a bank-holding company "certainly takes the pressure off them," Mr. Kaufman said of GMAC. But, "we still haven't answered all the questions."
GMAC's 5.625% notes due May 15, 2009, were quoted at 94 cents on the dollar, 27 cents better on the day Friday, on seven trades, according to MarketAxess, an online trading platform. The only active issue on the long end, an 8% note due November 2031, jumped 15.25 cents to 44 cents.
Investors' pessimism is also seen in GMAC's credit-default swaps. On Friday, the cost of protecting $10 million of GMAC debt for five years was at $2.55 million in up-front payments and a $500,000 annual premium. On Wednesday, ahead of the Fed's approval, investors had to pay about $4.3 million in upfront fees on top of the $500,000 annual premium.
The swaps levels also reflect the challenges facing GMAC, owned by General Motors Corp. and private-equity group Cerberus Capital Management, even though it now has access to stable funding sources. As a bank-holding company, GMAC is eligible for government money under the Treasury's Troubled Asset Relief Program and can borrow short-term funds at the Federal Reserve's discount window, where the rate currently stands at 0.5%.
The Fed's actions take some of the pressure of the debt exchange, which had struggled to attract sufficient investor interest. "With the primary regulator on board, the capital-raise machinations seem almost a moot point," wrote CreditSights analysts in a note.
The Fed has set conditions in its approval of the bank status, such as restricting the stakes of GM and Cerberus and preventing any investor from controlling 5% or more of the voting shares or 7.5% of the total equity of GMAC.
"Becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and businesses, including auto dealers," GMAC spokeswoman Gina Proia said late Wednesday. "As a bank-holding company, GMAC will be competitively positioned to serve our customers by having improved access to funding."
--Its bonds, especially short term, gained significantly. Long term bond and CDS remained in distressed level
--Fed's move complement its support financial auto markers
By ANUSHA SHRIVAASTAVA and ROMY VARGHESE
GMAC's bonds gained Friday, buoyed by the Federal Reserve's Christmas Eve approval of the auto-financing company's application to become a bank-holding company.
GMAC got the nod even as the result of the lender's capital-raising plans, a key element in its transformation to a bank, remains uncertain. GMAC has extended the deadline several times for the note exchange and cash tender offers aimed at restructuring $38 billion in debt. The offers were due to expire Friday at 11:59 p.m. Eastern time.
Gains in GMAC bonds were focused mainly on the short end, while longer-dated bonds and credit-protection costs, though improved, remain in distressed territory. That is a sign that, even with government backing, investors are still cautious on the lender's longer-term outlook.
The Fed moves also complement support for the U.S. auto makers, with GMAC the primary source of loans for buyers of GM cars. "Why bail out the auto makers if you're going to let the biggest source of lending go under?" said Carl Kaufman, portfolio manager of the Osterweis Strategic Income Fund in San Francisco. Becoming a bank-holding company "certainly takes the pressure off them," Mr. Kaufman said of GMAC. But, "we still haven't answered all the questions."
GMAC's 5.625% notes due May 15, 2009, were quoted at 94 cents on the dollar, 27 cents better on the day Friday, on seven trades, according to MarketAxess, an online trading platform. The only active issue on the long end, an 8% note due November 2031, jumped 15.25 cents to 44 cents.
Investors' pessimism is also seen in GMAC's credit-default swaps. On Friday, the cost of protecting $10 million of GMAC debt for five years was at $2.55 million in up-front payments and a $500,000 annual premium. On Wednesday, ahead of the Fed's approval, investors had to pay about $4.3 million in upfront fees on top of the $500,000 annual premium.
The swaps levels also reflect the challenges facing GMAC, owned by General Motors Corp. and private-equity group Cerberus Capital Management, even though it now has access to stable funding sources. As a bank-holding company, GMAC is eligible for government money under the Treasury's Troubled Asset Relief Program and can borrow short-term funds at the Federal Reserve's discount window, where the rate currently stands at 0.5%.
The Fed's actions take some of the pressure of the debt exchange, which had struggled to attract sufficient investor interest. "With the primary regulator on board, the capital-raise machinations seem almost a moot point," wrote CreditSights analysts in a note.
The Fed has set conditions in its approval of the bank status, such as restricting the stakes of GM and Cerberus and preventing any investor from controlling 5% or more of the voting shares or 7.5% of the total equity of GMAC.
"Becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and businesses, including auto dealers," GMAC spokeswoman Gina Proia said late Wednesday. "As a bank-holding company, GMAC will be competitively positioned to serve our customers by having improved access to funding."
Continental Rift
SINCE 1904, when Prince Piero Conti managed to get a light bulb to flicker in an Italian lava field, geothermal power has depended on volcanic heat. The earth’s crust needs to be thin, with high temperatures just below the surface. Cold water is pumped down a deep borehole and returns superheated to spin a turbine. To power its tiny and now spluttering economy, Iceland has already made use of what scientists call volcanism. Fiery bits of the Philippines also run on geothermal power.
So what about Africa? The continent’s lack of electricity is a big deterrent to foreign investors, as demand for power grows by 8% a year. Some experts think the Rift Valley, which stretches from the northern end of the Red Sea down to Mozambique, is ideal for generating geothermal power.
This has many advantages. Geothermal power runs whatever the weather, making it ideal for providing the base power station of a national grid. It emits negligible carbon compared with fossil-fuel stations. Best of all, it offers indigenous power cheaply: east Africa sorely lacks west Africa’s oil or the potential for solar power in the Sahel, Africa’s wide belt just south of the Sahara desert. The United Nations Environment Programme, which has its world headquarters in Kenya’s capital, Nairobi, thinks the geothermal potential of the Rift Valley is 14,000MW, yet only 200MW is currently captured. Aficionados of geothermal power say it could provide 10-25% of the region’s energy by 2030.
But the technology has snags. It would create few jobs, a fact that turns off many African politicians, who tend to like national projects to be labour-intensive. It disrupts pastoralists herding their cattle and can leak radon and other gases. Its start-up costs are as high as drilling for oil, and may be higher than for coal power stations. So the World Bank has set up a geothermal fund to underwrite exploration in east Africa. If the Kyoto treaty on carbon emissions is rewritten, Africa may get cheap loans and know-how to help install more geothermal power stations.
Some 18 geothermal sites in the Ethiopian part of the Rift Valley and in the Danakil depression on the border with Eritrea and Djibouti have been identified. The Ethiopians hope for 440MW of geothermal power against their present energy capacity of 790MW. Geothermal could be an alternative to hydroelectric dams, which provide most of the region’s power but are vulnerable to drought. Djibouti has signed a deal with Iceland to build a geothermal plant near the Dantean furnace of Lake Assal, the continent’s lowest point. The project will also capture steam for use as water in the parched country.
Kenya is Africa’s geothermal pioneer. Its Olkaria station outside Naivasha already produces 158MW. The government says it wants to raise its geothermal capacity to 576MW within a decade. That could make a big difference. Kenya already uses up all its 1,200MW capacity and is compensating for frequent power cuts by installing temporary diesel generators.
So what about Africa? The continent’s lack of electricity is a big deterrent to foreign investors, as demand for power grows by 8% a year. Some experts think the Rift Valley, which stretches from the northern end of the Red Sea down to Mozambique, is ideal for generating geothermal power.
This has many advantages. Geothermal power runs whatever the weather, making it ideal for providing the base power station of a national grid. It emits negligible carbon compared with fossil-fuel stations. Best of all, it offers indigenous power cheaply: east Africa sorely lacks west Africa’s oil or the potential for solar power in the Sahel, Africa’s wide belt just south of the Sahara desert. The United Nations Environment Programme, which has its world headquarters in Kenya’s capital, Nairobi, thinks the geothermal potential of the Rift Valley is 14,000MW, yet only 200MW is currently captured. Aficionados of geothermal power say it could provide 10-25% of the region’s energy by 2030.
But the technology has snags. It would create few jobs, a fact that turns off many African politicians, who tend to like national projects to be labour-intensive. It disrupts pastoralists herding their cattle and can leak radon and other gases. Its start-up costs are as high as drilling for oil, and may be higher than for coal power stations. So the World Bank has set up a geothermal fund to underwrite exploration in east Africa. If the Kyoto treaty on carbon emissions is rewritten, Africa may get cheap loans and know-how to help install more geothermal power stations.
Some 18 geothermal sites in the Ethiopian part of the Rift Valley and in the Danakil depression on the border with Eritrea and Djibouti have been identified. The Ethiopians hope for 440MW of geothermal power against their present energy capacity of 790MW. Geothermal could be an alternative to hydroelectric dams, which provide most of the region’s power but are vulnerable to drought. Djibouti has signed a deal with Iceland to build a geothermal plant near the Dantean furnace of Lake Assal, the continent’s lowest point. The project will also capture steam for use as water in the parched country.
Kenya is Africa’s geothermal pioneer. Its Olkaria station outside Naivasha already produces 158MW. The government says it wants to raise its geothermal capacity to 576MW within a decade. That could make a big difference. Kenya already uses up all its 1,200MW capacity and is compensating for frequent power cuts by installing temporary diesel generators.
Saturday, December 27, 2008
如日西斜、经济低迷、两战一恐、热冷亮暗
《中国评论》月刊12月号发表旅美教授谭中的文章“奥巴马时代的国际局势和中美关系发展”。作者以“如日西斜、经济低迷、两战一恐、热冷亮暗”这十六个字来形容美国新总统奥巴马面临的总形势以及他可能采取的对策。而中国也可以用“经贸互动、和谐利导、自顾顾他、人权应对”来应对奥巴马新政权。
作者认为，应该对奥巴马新政权采取欢迎态度，当然也不能掉以轻心，要警惕他作为“先天不足”的总统，处处对避嫌疑最为敏感，特别是在内政外交上遭到挫折的时候，有可能铤而走险。文章内容如下：
美国开始走下坡路
我用16个字“如日西斜、经济低迷、两战一恐、热冷亮暗”来形容美国新总统 奥巴马面临的总形势以及他可能采取的对策。 “如日西斜”是指美国已经越过她在国际形势发展的单极独霸“如日中天”顶点而随着抛物线的弧形下降。“经济低迷”是形容美国将会在一两年内、甚至更长的期间市场疲软、金融紧张、失业剧增而影响到全球的经济稳定与繁荣。“两战一恐”指的是美国一方面继续处于伊斯兰反美“圣战”恐怖的严重威胁之下，另一方面又背着军队在伊拉克和阿富汗两大战场消耗实力的沉重包袱而想找到退路。“热冷亮暗”是说国际局势既有热点、也有冷点，既有亮点、也有暗点，后冷战时期仍然有冷战因素干扰。
美国 单极独霸的“如日中天”地位已经呈现 “如日西斜”的大动向，肯定是无法扭转了。也正是这一无法扭转的势头而使得一年多来美国各种政治力量都无法阻挡“黑旋风” 奥巴马冲向白宫的进程。换句话说， 我们应该认识美国的式微和奥巴马的凸显之间的辩证关系：
（一）这次奥巴马胜选主要是对布什八年执政江河日下的反弹，特别是最近发生的“金融海啸”，使得美国人心思变，奥巴马手执“变”的魔杖而水到渠成。
（二）奥巴马是以民主党领袖的身份进入白宫的，是美国政治共和、民主两党轮流坐桩的例行发展，奥巴马代表的是哈佛大学、是芝加哥政派、是美国传统的上层士绅风度；他是黑白混血，他的皮肤颜色只是巧合，并不代表美国社会政治斗争的种族盛衰消长。
（三）这次奥巴马的亮相和过去黑人领袖主动出来竞选总统有性质上的区别，是民主党中反对克林顿家族的统一战线势力有意识地把他这样一个皮肤黑色的政客捧出来变成希拉莉．克林顿重返白宫的拦路虎。这是一个精心策划的、既击退“布什——克林顿——布什——克林顿家族统治循环”，又防止任何共和党领袖出面延续布什败政的一箭双雕的阳谋， 奥巴马是这一阳谋的有效工具 。这样来看，奥巴马所代表的主要是美国内部政治的变数。
另一方面也要看到，奥巴马的凸 显 并不是孤立的、只限于美国内部的变化现象，奥巴马的上台和美国单极独霸的如日西斜是同一个发展动态，后者是因，前者是果。如果美国不是每况愈下，白宫是容不了黑皮肤的主子的。奥巴马入主白宫就是要为美国挽狂澜于既倒、扶大厦于将倾。换句话说，奥巴马执政是美国衰落的表现而不是她强盛的象征。奥巴马是美国政治史上的救火员，究竟是他能够把火扑灭，还是他被火烧得遍体鳞伤，那就不得而知了。
奥巴马能不能解决、以及如何解决美国“经济低迷”的问题是普遍关心的。去年出版了《休克主义：灾难资本主义的兴起》The Shock Doctrine: The Rise of Disaster Capitalism新书的加拿大籍著名激进经济学报人克莲Naomi Klein 从全球经济发展的总形势来看，认为以福里德曼Milton Friedman 为始祖的“芝加哥经济学派”所提倡的“market fundamentalism/ 市场原教旨主义”（即“free-market fundamentalism/ 自由市场原教旨主义 ”）以及由此兴起的“ Washington Consensus/ 华盛顿共识”（即由华盛顿操纵的世界银行与国际货币基金组织到发生经济危机的国家去推行“ shock therapy/ 休克疗法”，把企业私有化，削弱政府对市场与企业的控制等），已经走到“灾难资本”的绝境。 奥巴马不会有任何锦囊妙计，何况他的智囊团中就有“芝加哥经济学派” 坐镇。
当前美国经济的一大难题是：通用、福特和克莱斯勒三大美国汽车公司都有面临倒闭的危险，要求政府财政支援。这三家公司如果倒了，不但有三百万工人（等于芝加哥全市人口）失业，更会产生严重的“骨牌效应”，造成全国各行各业大失业。 现在“跛足鸭”国会的民主党人正设法动用政府（即纳税人交的）资金来帮助这些“白象”（财经累赘）企业苟延残喘，共和党人持反对态度。明年 一月奥巴马上台后就会左右为难。他如果让这些落后老厂自生自灭，必然会受到基本选民的咒骂；如果他拿纳税人的钱去帮它们苟延残喘，从长远来看不利于美国进步，和他自己提倡的“变”会背道而驰。
更深层次来看，在此危机时刻，奥巴马如何振兴美国在全球经济发展中的领先地位是最最关键的。共和党 人一直认为：小政府、大社会是美国的补品，政府少干涉经济，让资本家掌舵发展生产，美国才会有救。许多人认为，布什政权的错误就在把政府扩充得太大，手伸得太长，政府赤字无法弥补，才使泡沫经济破产。如果从这一思想逻辑出发，奥巴马和其他民主党领袖都主张加大政府的干涉力度，必然会增加开支、增加税收，资本家会抱怨，小资本家将无法生存。
也有人看法比较乐观。 今年诺贝尔经济学奖金获得者克鲁格曼Paul Krugman 在他《纽约时报》11月7日的专栏中形容 奥巴马当选是“进步政治哲学”的胜利，认为一个新的“新政”（指小罗斯福总统在1933至1936年间美国政府大力花钱“以工代赈”、使广大失业者生活无忧而度过资本主义世界“大萧条”的经济危机） 即将展开。估计这将会是牵动全局的一场经济、政治与社会的大运作，也有可能从根本上改变美国资本主义体制。 可是今天美国的经济问题比1930年代不知要复杂多少倍。 再有， 罗斯福“新政”的指导思想是“凯恩斯经济学”，现在早已过时。当时的经济学界是“凯恩斯经济学”统治，现在各种经济学理论太多，美国有数十位诺贝尔经济学奖和其他奖的获得者，却没有一个统一的、鹤立鸡群的经济理论。除非奥巴马在新政中创造出一个来，成为美国的万应灵丹。
奥巴马如何打国际牌
奥巴马执政必须尽最大的努力来应付 “两战一恐”，一方面尽快结束战争、减轻包袱；另一方面又要避免长敌人志气、灭自己威风而使得美国更安全、更不容易遭到以“基地”组织为首的伊斯兰反美“圣战”恐怖的暗算。奥巴马新政权如何解决“ 两战一恐”的疙瘩也是像经济问题一样复杂的难题。在“两战”问题上，奥巴马和他的阵营是主张尽早从伊拉克撤军而加大阿富汗战场的力度、对“基地”的残余势力穷追不舍的。不过，2007年初皮特勒奥斯 David Petraeus 将军担任伊拉克前线总指挥、实行“加油”计划以后，把日益恶化的战局扭转，已经出现使伊拉克局势逐渐稳定而伊战圆满画上句号的可能性，这就使得奥巴马一贯反对伊战的立场失去威力，奥巴马也被迫在竞选中把强烈主张早日撤军的呼吁降低声调。现在奥巴马已经当选总统，更没有必要玩伊拉克撤军这张牌，很可能是顺着布什政权的安排逐渐让国际力量与伊拉克本国的各种势力相互作用来实现和平。
奥巴马上台以后肯定会加大在军事、政治、经济上对阿富汗以及邻国巴基斯坦的关注与投入。在竞选期间，奥巴马不止一次地强调只要能抓获或击毙“基地”首领奥萨马．本拉登与其领导核心，他会不顾巴基斯坦的反对而到巴国领土上去进行军事运作，曾经引起巴国民意的强烈反应。奥巴马这一“鹰”性主张倒是先被布什政权接受，在穆沙拉夫下台以后，美国已经多次向巴国领土上的可疑目标进行袭击。在这种形势发展下，巴基斯坦“塔利班化”的危险加剧。当然，在伊拉克成功分化“抗美”势力的 皮特勒奥斯将军现在已经升任美国中区总司令并且开始把伊拉克的成功经验应用到阿富汗——巴基斯坦前线上来，估计会受到 奥巴马新政府的支持。奥巴马要解决“ 两战一恐”的疙瘩，必然会把军事、政治、经济运作的重心转移到阿富汗——巴基斯坦前线。
关于“热冷亮暗”， 奥巴马政权必须高智商地理顺布什政权造成的世界 “热冷亮暗”的混乱，要把国际的热点变冷、防止冷点变热，更要把死角上的暗点点亮。 奥巴马从布什政权接过来的国际局势是：伊朗问题既是热点又是暗点，本来既是热点又是暗点的朝鲜问题却逐渐冷却而有可能变成亮点，另外一个突出的问题是普京统治下的俄罗斯似乎正在摩拳擦掌要与华盛顿玩“ hard ball ”（强硬手段）。普京宣称20世纪的最大灾难是苏联解体，更显出他有恢复俄国超强地位的决心。这对奥巴马新政权是否形成一种挑战，奥巴马将如何应对也都是现在难以预测的。
对华政策将会顺势而为
奥巴马新政权的对华政策现在也很难说得准。奥巴马执政后的中美关系发展是很大的未知数。应该从三个角度来看问题 ：第一，自从尼克森改善美中关系以来，40多年形成了不以人事变动而转移的稳步前进的旋律，奥巴马政见比他的前任开明，估计不会逆水行舟。
第二，人们说，如果不是“911”使得美国把打恐当作战略的重中之重，后冷战时期中容不得对手坐大的美国是不会让中国这么轻快地向强国方向跃进的。这是一种 “攻击性现实主义”的逻辑，诠释布什政权的对华政策可能适合。看样子奥巴马新政府中克林顿时期的国际关系智囊将占优势，将会以“自由主义”指导思想代替“现实主义”思想。
第三，奥巴马的当务之急是要恢复美国经济，在这一点上，即使他不靠中国援助，也不敢把已经相互依靠很紧的美中经贸互联通拆散。换句话说，经贸关系仍将是中美关系的稳定剂。
11月初奥巴马和胡锦涛通了电话，感谢胡锦涛祝贺他当选。他在电话中说，中国是一个伟大的国家，中国的发展和成功符合美国利益。在当今国际舞台上，美中关系是至关重要的关系，发展美中合作不仅有利于两国，也有利于世界。美中关系面临很多发展机遇，希望双方加强合作，推动美中关系取得更大发展，造福两国人民。美方希望同中方加强在安全、气候变化、地区热点等问题上的磋商和协调，推动问题的解决 。
我们知道，奥巴马在外交关系上是很外行的，对中国也缺乏瞭解。上面这番话当然是智囊团告诉他应该怎么说的。其中“中国是一个伟大的国家”也许是他自己的口气。奥巴马是个思想开明的人，对美国的看法，可能不会像布什那样夜郎自大。但是也要看到，奥巴马由于是黑皮肤、是肯尼亚人的后代、名字听起来很不“美国”（常常有人把“奥巴马”和恐怖分子领袖“奥萨马”混淆），因此有很多先天的缺陷。他在内政方面会十分小心谨慎，但他在迎合“大美国沙文主义”思想方面却会大胆泼辣的。 他在竞选中，动不动就拿“中国”当作抨击共和党的代罪羔羊，大概是迎合美国失业工人对中国的埋怨情绪。
奥巴马时代中国的对策
针对这一情况，中国怎么来应对奥巴马新政权，我认为也可以用16个字“经贸互动、和谐利导、自顾顾他、人权应对”。“经贸互动”：——前面说过，经贸关系是中美关系的稳定剂，中国应该牢牢掌握这一点。有三个方面值得注意发展与进行调整 ：
第一方面是继续两国之间相辅相成、双赢双利的关系，在相当长一个时期内维持中国供应美国日常消费品以及美国供应中国高科技产品的双向贸易，中国要严格控制产品质量，增加透明度，也不要过早地在汽车与飞机行业开展中美竞争。
第二方面是大力扩大中国国内市场，尽快把生产与消费关系中的“自给自足”架势建立起来，中美贸易顺差中赢得的外汇应该多投到国内生产建设上，当然也应该继续鼓励外资，特别是美资来帮助中国搞活经济，增加就业机会。
第三方面是提高中国商业道德、管理水准、劳工生活福利条件，使中国经济运作逐渐提高到发达国家的品德与风度；停止这些年来“拼命三郎”式的不按照规律，不从长远角度计算“ cost and benefit/代价与利益”的发展作风。
“和谐利导”：——前面谈到的美国生性容不了“匹敌”，中国越是强大越是会引起美国惧怕，这是中国对美战略中必须注意、不能麻痹大意的。中国领导人提倡“和谐世界”应该不是说说而已，如果要付诸实施，就应该先从中美关系做起。在这一点上，倾向于“自由主义”的美国新总统 奥巴马应该比倾向于“攻击性现实主义”的布什总统更好对付。 中国领导人应该加强与奥巴马政权的核心人物接触，多些高层互访。奥巴马是个爱出风头的人物，多请他到中国来讲演。奥巴马还有一些华裔亲戚，应该打好统战关系。所谓“团结——斗争——团结”，“有理、有利、有节”，应该高智商地运用，避免针锋相对。人都是爱名誉、爱面子的，中国在宣传上要避免人身攻击。既然奥巴马思“变”，中国就可以顺水推舟去促“变”，使美国政治、外交变到和谐的方向上来。在这一点上，奥巴马和布什是两个极端的类型。布什的虚荣心不强，凡事从实际利益出发。奥巴马虚荣心强，喜欢把大道理挂在口上，可以投其所好，切忌使人恼羞成怒。
“自顾顾他 ” ：——四分之一世纪来，中国改革开放，把自己投入国际经济大循环中，找到了毛泽东时代所找不到的“致富之道”，这是一个聪明的办法。 可是，这样做也有过犹不及的弊病，也就是搭上了美国彩车（英文叫“ bandwagon ”），是一种寄人篱下、从别人那儿分点残羹剩饭的国际行为；不但不符合中国的民族自豪、自信精神，也对中国发展的长远利益有损。因此我认为应该强调“自顾”，特别是在当今世界经济危机的时刻，更应该把中国自己的尊严与基本利益摆在首位，然后再“顾他”。当然，采取这一战略，不必大肆张扬，多韬光养晦，少出“洋风头”，少到国际舞台上去“夸大国”。
“人权应对 ”：——要注意奥巴马与民主党人不但主掌白宫，而且在国会众、参两院加大了优势，几乎到了完全控制的程度。民主党人在“人权”问题上嘴巴大、手伸得长，这一点和布什时期不同，对中国会形成精神压力。奥巴马是提倡人权的，还有众议院议长佩洛茜，更是人权加反华。她在布什时代无法嚣张，在奥巴马时代就不同了。其实美国人权议论也不是那么可怕的。俗话说，“只叫不咬”。再有，中国有很多地方，主要是地方政府腐败，又对人民的抱怨与抗议进行打压，掩盖不住传到美国就变成“人权”问题了。解决这种“人权”问题釜底抽薪的办法是不隐瞒、不护短，政府和社会大力伸张正义，把腐败官员揭发、处分。中国没有“民愤”，美国也闹不出“人权”来。
前面已经谈到： 奥巴马入主白宫主要是美国国内发展出来的“挽狂澜于既倒、扶大厦于将倾”的补救办法，奥巴马执政是美国衰落的表现而不是她强盛的象征。总的来说，我们应该对奥巴马新政权采取欢迎态度，当然也不能掉以轻心，要警惕他作为“先天不足”的总统，像“凯撒大帝的妻子”那样，处处对避嫌疑最为敏感，处处要显示他“爱国”、顺从“主流”，特别是在内政外交上遭到挫折的时候，有可能铤而走险 。
从研究美国的角度来看，“黑”总统能进白宫，也说明美国是一个非常能动的国家，正像奥巴马所说：“在美国任何（奇迹）都可能发生”。有人已经道出美国社会结构发生根本变化，白人统治“ 流水落花春去也” ，这是很肤浅、不瞭解美国、没有经过深思熟虑的过早结论。我认为奥巴马是个“未知数”，和过去小布什那样的“ 已知妖魔 ”有很大的区别。奥巴马可能会是空前未有的好总统，也可能会是美国政治的灾难性的尝试。 如果是后者的话，这“黑”总统进白宫就会只是昙花一现，以后永远也不会再发生的。
作者认为，应该对奥巴马新政权采取欢迎态度，当然也不能掉以轻心，要警惕他作为“先天不足”的总统，处处对避嫌疑最为敏感，特别是在内政外交上遭到挫折的时候，有可能铤而走险。文章内容如下：
美国开始走下坡路
我用16个字“如日西斜、经济低迷、两战一恐、热冷亮暗”来形容美国新总统 奥巴马面临的总形势以及他可能采取的对策。 “如日西斜”是指美国已经越过她在国际形势发展的单极独霸“如日中天”顶点而随着抛物线的弧形下降。“经济低迷”是形容美国将会在一两年内、甚至更长的期间市场疲软、金融紧张、失业剧增而影响到全球的经济稳定与繁荣。“两战一恐”指的是美国一方面继续处于伊斯兰反美“圣战”恐怖的严重威胁之下，另一方面又背着军队在伊拉克和阿富汗两大战场消耗实力的沉重包袱而想找到退路。“热冷亮暗”是说国际局势既有热点、也有冷点，既有亮点、也有暗点，后冷战时期仍然有冷战因素干扰。
美国 单极独霸的“如日中天”地位已经呈现 “如日西斜”的大动向，肯定是无法扭转了。也正是这一无法扭转的势头而使得一年多来美国各种政治力量都无法阻挡“黑旋风” 奥巴马冲向白宫的进程。换句话说， 我们应该认识美国的式微和奥巴马的凸显之间的辩证关系：
（一）这次奥巴马胜选主要是对布什八年执政江河日下的反弹，特别是最近发生的“金融海啸”，使得美国人心思变，奥巴马手执“变”的魔杖而水到渠成。
（二）奥巴马是以民主党领袖的身份进入白宫的，是美国政治共和、民主两党轮流坐桩的例行发展，奥巴马代表的是哈佛大学、是芝加哥政派、是美国传统的上层士绅风度；他是黑白混血，他的皮肤颜色只是巧合，并不代表美国社会政治斗争的种族盛衰消长。
（三）这次奥巴马的亮相和过去黑人领袖主动出来竞选总统有性质上的区别，是民主党中反对克林顿家族的统一战线势力有意识地把他这样一个皮肤黑色的政客捧出来变成希拉莉．克林顿重返白宫的拦路虎。这是一个精心策划的、既击退“布什——克林顿——布什——克林顿家族统治循环”，又防止任何共和党领袖出面延续布什败政的一箭双雕的阳谋， 奥巴马是这一阳谋的有效工具 。这样来看，奥巴马所代表的主要是美国内部政治的变数。
另一方面也要看到，奥巴马的凸 显 并不是孤立的、只限于美国内部的变化现象，奥巴马的上台和美国单极独霸的如日西斜是同一个发展动态，后者是因，前者是果。如果美国不是每况愈下，白宫是容不了黑皮肤的主子的。奥巴马入主白宫就是要为美国挽狂澜于既倒、扶大厦于将倾。换句话说，奥巴马执政是美国衰落的表现而不是她强盛的象征。奥巴马是美国政治史上的救火员，究竟是他能够把火扑灭，还是他被火烧得遍体鳞伤，那就不得而知了。
奥巴马能不能解决、以及如何解决美国“经济低迷”的问题是普遍关心的。去年出版了《休克主义：灾难资本主义的兴起》The Shock Doctrine: The Rise of Disaster Capitalism新书的加拿大籍著名激进经济学报人克莲Naomi Klein 从全球经济发展的总形势来看，认为以福里德曼Milton Friedman 为始祖的“芝加哥经济学派”所提倡的“market fundamentalism/ 市场原教旨主义”（即“free-market fundamentalism/ 自由市场原教旨主义 ”）以及由此兴起的“ Washington Consensus/ 华盛顿共识”（即由华盛顿操纵的世界银行与国际货币基金组织到发生经济危机的国家去推行“ shock therapy/ 休克疗法”，把企业私有化，削弱政府对市场与企业的控制等），已经走到“灾难资本”的绝境。 奥巴马不会有任何锦囊妙计，何况他的智囊团中就有“芝加哥经济学派” 坐镇。
当前美国经济的一大难题是：通用、福特和克莱斯勒三大美国汽车公司都有面临倒闭的危险，要求政府财政支援。这三家公司如果倒了，不但有三百万工人（等于芝加哥全市人口）失业，更会产生严重的“骨牌效应”，造成全国各行各业大失业。 现在“跛足鸭”国会的民主党人正设法动用政府（即纳税人交的）资金来帮助这些“白象”（财经累赘）企业苟延残喘，共和党人持反对态度。明年 一月奥巴马上台后就会左右为难。他如果让这些落后老厂自生自灭，必然会受到基本选民的咒骂；如果他拿纳税人的钱去帮它们苟延残喘，从长远来看不利于美国进步，和他自己提倡的“变”会背道而驰。
更深层次来看，在此危机时刻，奥巴马如何振兴美国在全球经济发展中的领先地位是最最关键的。共和党 人一直认为：小政府、大社会是美国的补品，政府少干涉经济，让资本家掌舵发展生产，美国才会有救。许多人认为，布什政权的错误就在把政府扩充得太大，手伸得太长，政府赤字无法弥补，才使泡沫经济破产。如果从这一思想逻辑出发，奥巴马和其他民主党领袖都主张加大政府的干涉力度，必然会增加开支、增加税收，资本家会抱怨，小资本家将无法生存。
也有人看法比较乐观。 今年诺贝尔经济学奖金获得者克鲁格曼Paul Krugman 在他《纽约时报》11月7日的专栏中形容 奥巴马当选是“进步政治哲学”的胜利，认为一个新的“新政”（指小罗斯福总统在1933至1936年间美国政府大力花钱“以工代赈”、使广大失业者生活无忧而度过资本主义世界“大萧条”的经济危机） 即将展开。估计这将会是牵动全局的一场经济、政治与社会的大运作，也有可能从根本上改变美国资本主义体制。 可是今天美国的经济问题比1930年代不知要复杂多少倍。 再有， 罗斯福“新政”的指导思想是“凯恩斯经济学”，现在早已过时。当时的经济学界是“凯恩斯经济学”统治，现在各种经济学理论太多，美国有数十位诺贝尔经济学奖和其他奖的获得者，却没有一个统一的、鹤立鸡群的经济理论。除非奥巴马在新政中创造出一个来，成为美国的万应灵丹。
奥巴马如何打国际牌
奥巴马执政必须尽最大的努力来应付 “两战一恐”，一方面尽快结束战争、减轻包袱；另一方面又要避免长敌人志气、灭自己威风而使得美国更安全、更不容易遭到以“基地”组织为首的伊斯兰反美“圣战”恐怖的暗算。奥巴马新政权如何解决“ 两战一恐”的疙瘩也是像经济问题一样复杂的难题。在“两战”问题上，奥巴马和他的阵营是主张尽早从伊拉克撤军而加大阿富汗战场的力度、对“基地”的残余势力穷追不舍的。不过，2007年初皮特勒奥斯 David Petraeus 将军担任伊拉克前线总指挥、实行“加油”计划以后，把日益恶化的战局扭转，已经出现使伊拉克局势逐渐稳定而伊战圆满画上句号的可能性，这就使得奥巴马一贯反对伊战的立场失去威力，奥巴马也被迫在竞选中把强烈主张早日撤军的呼吁降低声调。现在奥巴马已经当选总统，更没有必要玩伊拉克撤军这张牌，很可能是顺着布什政权的安排逐渐让国际力量与伊拉克本国的各种势力相互作用来实现和平。
奥巴马上台以后肯定会加大在军事、政治、经济上对阿富汗以及邻国巴基斯坦的关注与投入。在竞选期间，奥巴马不止一次地强调只要能抓获或击毙“基地”首领奥萨马．本拉登与其领导核心，他会不顾巴基斯坦的反对而到巴国领土上去进行军事运作，曾经引起巴国民意的强烈反应。奥巴马这一“鹰”性主张倒是先被布什政权接受，在穆沙拉夫下台以后，美国已经多次向巴国领土上的可疑目标进行袭击。在这种形势发展下，巴基斯坦“塔利班化”的危险加剧。当然，在伊拉克成功分化“抗美”势力的 皮特勒奥斯将军现在已经升任美国中区总司令并且开始把伊拉克的成功经验应用到阿富汗——巴基斯坦前线上来，估计会受到 奥巴马新政府的支持。奥巴马要解决“ 两战一恐”的疙瘩，必然会把军事、政治、经济运作的重心转移到阿富汗——巴基斯坦前线。
关于“热冷亮暗”， 奥巴马政权必须高智商地理顺布什政权造成的世界 “热冷亮暗”的混乱，要把国际的热点变冷、防止冷点变热，更要把死角上的暗点点亮。 奥巴马从布什政权接过来的国际局势是：伊朗问题既是热点又是暗点，本来既是热点又是暗点的朝鲜问题却逐渐冷却而有可能变成亮点，另外一个突出的问题是普京统治下的俄罗斯似乎正在摩拳擦掌要与华盛顿玩“ hard ball ”（强硬手段）。普京宣称20世纪的最大灾难是苏联解体，更显出他有恢复俄国超强地位的决心。这对奥巴马新政权是否形成一种挑战，奥巴马将如何应对也都是现在难以预测的。
对华政策将会顺势而为
奥巴马新政权的对华政策现在也很难说得准。奥巴马执政后的中美关系发展是很大的未知数。应该从三个角度来看问题 ：第一，自从尼克森改善美中关系以来，40多年形成了不以人事变动而转移的稳步前进的旋律，奥巴马政见比他的前任开明，估计不会逆水行舟。
第二，人们说，如果不是“911”使得美国把打恐当作战略的重中之重，后冷战时期中容不得对手坐大的美国是不会让中国这么轻快地向强国方向跃进的。这是一种 “攻击性现实主义”的逻辑，诠释布什政权的对华政策可能适合。看样子奥巴马新政府中克林顿时期的国际关系智囊将占优势，将会以“自由主义”指导思想代替“现实主义”思想。
第三，奥巴马的当务之急是要恢复美国经济，在这一点上，即使他不靠中国援助，也不敢把已经相互依靠很紧的美中经贸互联通拆散。换句话说，经贸关系仍将是中美关系的稳定剂。
11月初奥巴马和胡锦涛通了电话，感谢胡锦涛祝贺他当选。他在电话中说，中国是一个伟大的国家，中国的发展和成功符合美国利益。在当今国际舞台上，美中关系是至关重要的关系，发展美中合作不仅有利于两国，也有利于世界。美中关系面临很多发展机遇，希望双方加强合作，推动美中关系取得更大发展，造福两国人民。美方希望同中方加强在安全、气候变化、地区热点等问题上的磋商和协调，推动问题的解决 。
我们知道，奥巴马在外交关系上是很外行的，对中国也缺乏瞭解。上面这番话当然是智囊团告诉他应该怎么说的。其中“中国是一个伟大的国家”也许是他自己的口气。奥巴马是个思想开明的人，对美国的看法，可能不会像布什那样夜郎自大。但是也要看到，奥巴马由于是黑皮肤、是肯尼亚人的后代、名字听起来很不“美国”（常常有人把“奥巴马”和恐怖分子领袖“奥萨马”混淆），因此有很多先天的缺陷。他在内政方面会十分小心谨慎，但他在迎合“大美国沙文主义”思想方面却会大胆泼辣的。 他在竞选中，动不动就拿“中国”当作抨击共和党的代罪羔羊，大概是迎合美国失业工人对中国的埋怨情绪。
奥巴马时代中国的对策
针对这一情况，中国怎么来应对奥巴马新政权，我认为也可以用16个字“经贸互动、和谐利导、自顾顾他、人权应对”。“经贸互动”：——前面说过，经贸关系是中美关系的稳定剂，中国应该牢牢掌握这一点。有三个方面值得注意发展与进行调整 ：
第一方面是继续两国之间相辅相成、双赢双利的关系，在相当长一个时期内维持中国供应美国日常消费品以及美国供应中国高科技产品的双向贸易，中国要严格控制产品质量，增加透明度，也不要过早地在汽车与飞机行业开展中美竞争。
第二方面是大力扩大中国国内市场，尽快把生产与消费关系中的“自给自足”架势建立起来，中美贸易顺差中赢得的外汇应该多投到国内生产建设上，当然也应该继续鼓励外资，特别是美资来帮助中国搞活经济，增加就业机会。
第三方面是提高中国商业道德、管理水准、劳工生活福利条件，使中国经济运作逐渐提高到发达国家的品德与风度；停止这些年来“拼命三郎”式的不按照规律，不从长远角度计算“ cost and benefit/代价与利益”的发展作风。
“和谐利导”：——前面谈到的美国生性容不了“匹敌”，中国越是强大越是会引起美国惧怕，这是中国对美战略中必须注意、不能麻痹大意的。中国领导人提倡“和谐世界”应该不是说说而已，如果要付诸实施，就应该先从中美关系做起。在这一点上，倾向于“自由主义”的美国新总统 奥巴马应该比倾向于“攻击性现实主义”的布什总统更好对付。 中国领导人应该加强与奥巴马政权的核心人物接触，多些高层互访。奥巴马是个爱出风头的人物，多请他到中国来讲演。奥巴马还有一些华裔亲戚，应该打好统战关系。所谓“团结——斗争——团结”，“有理、有利、有节”，应该高智商地运用，避免针锋相对。人都是爱名誉、爱面子的，中国在宣传上要避免人身攻击。既然奥巴马思“变”，中国就可以顺水推舟去促“变”，使美国政治、外交变到和谐的方向上来。在这一点上，奥巴马和布什是两个极端的类型。布什的虚荣心不强，凡事从实际利益出发。奥巴马虚荣心强，喜欢把大道理挂在口上，可以投其所好，切忌使人恼羞成怒。
“自顾顾他 ” ：——四分之一世纪来，中国改革开放，把自己投入国际经济大循环中，找到了毛泽东时代所找不到的“致富之道”，这是一个聪明的办法。 可是，这样做也有过犹不及的弊病，也就是搭上了美国彩车（英文叫“ bandwagon ”），是一种寄人篱下、从别人那儿分点残羹剩饭的国际行为；不但不符合中国的民族自豪、自信精神，也对中国发展的长远利益有损。因此我认为应该强调“自顾”，特别是在当今世界经济危机的时刻，更应该把中国自己的尊严与基本利益摆在首位，然后再“顾他”。当然，采取这一战略，不必大肆张扬，多韬光养晦，少出“洋风头”，少到国际舞台上去“夸大国”。
“人权应对 ”：——要注意奥巴马与民主党人不但主掌白宫，而且在国会众、参两院加大了优势，几乎到了完全控制的程度。民主党人在“人权”问题上嘴巴大、手伸得长，这一点和布什时期不同，对中国会形成精神压力。奥巴马是提倡人权的，还有众议院议长佩洛茜，更是人权加反华。她在布什时代无法嚣张，在奥巴马时代就不同了。其实美国人权议论也不是那么可怕的。俗话说，“只叫不咬”。再有，中国有很多地方，主要是地方政府腐败，又对人民的抱怨与抗议进行打压，掩盖不住传到美国就变成“人权”问题了。解决这种“人权”问题釜底抽薪的办法是不隐瞒、不护短，政府和社会大力伸张正义，把腐败官员揭发、处分。中国没有“民愤”，美国也闹不出“人权”来。
前面已经谈到： 奥巴马入主白宫主要是美国国内发展出来的“挽狂澜于既倒、扶大厦于将倾”的补救办法，奥巴马执政是美国衰落的表现而不是她强盛的象征。总的来说，我们应该对奥巴马新政权采取欢迎态度，当然也不能掉以轻心，要警惕他作为“先天不足”的总统，像“凯撒大帝的妻子”那样，处处对避嫌疑最为敏感，处处要显示他“爱国”、顺从“主流”，特别是在内政外交上遭到挫折的时候，有可能铤而走险 。
从研究美国的角度来看，“黑”总统能进白宫，也说明美国是一个非常能动的国家，正像奥巴马所说：“在美国任何（奇迹）都可能发生”。有人已经道出美国社会结构发生根本变化，白人统治“ 流水落花春去也” ，这是很肤浅、不瞭解美国、没有经过深思熟虑的过早结论。我认为奥巴马是个“未知数”，和过去小布什那样的“ 已知妖魔 ”有很大的区别。奥巴马可能会是空前未有的好总统，也可能会是美国政治的灾难性的尝试。 如果是后者的话，这“黑”总统进白宫就会只是昙花一现，以后永远也不会再发生的。
Friday, December 26, 2008
China in 2009 - Year of the ox
--a storm is brewing: eco growth is faltering; the new middle class, a pillar of the party's support, is plunging into despondency
--two uncertainties hang over China: one is the resilience of political strucure to stress; the other is how consumers will respond to crisis;
--history suggests that periods of social turbulences are often accompanied by tension with the West.
Dec 22nd 2008
From Economist.com
Economic woes and key anniversaries portend trouble
FOR China’s leaders, a perfect storm is brewing. Economic growth, which has helped keep the Communist Party in power, is faltering. The new middle class, hitherto a pillar of the party’s support, is plunging into despondency. The coming months are studded with politically sensitive anniversaries that will focus disaffected minds on the party’s shortcomings. Having endured a year of natural disasters, riots and the organisational nightmare of hosting the Olympics, the party sees little salve ahead.
Of all the huge uncertainties that plague attempts to predict the progress of the global financial crisis, two in particular hang over China. One is the resilience of its political structure to stress of this kind. During the last several years of economic health, it has been hard to imagine anything that could dislodge the party. David Shambaugh of George Washington University, in a book published this year entitled “China’s Communist Party: Atrophy and Adaptation”, said the party had its problems and challenges, “but none present the real possibility of systemic collapse”.
AP
A better year behind than ahead?Those challenges, however, are now mounting rapidly. The head of the IMF, Dominique Strauss-Kahn, has predicted GDP growth could fall to as low as 5-6% next year, half the rate of 2007 and far lower than anyone would have thought possible just a few months ago.
The other big uncertainty is how Chinese consumers will respond to the crisis. Chinese journalists say the state-controlled media were at first instructed to avoid stories even suggesting China might be affected. Then as the impact became increasingly obvious, with exports in November falling 2.2% year-on-year (the first such drop in seven years) and growing reports of factory closures and worker unrest, the orders changed. Now the media can acknowledge the impact, but are not to play it up. Keeping the middle class happy and willing to spend is as vital now in China as it is in any economy. But given China’s rudimentary social-security system and strong tendency to save even at the best of times, this could be particularly difficult.
Among the most challenging periods for the leadership in 2009 will be a number of dates already ringed in their calendars. The Chinese new year on January 26th—but effectively spanning several days on either side of that date—is one of them. Migrant workers with nothing to do as their labour-intensive factories making products for Western markets turn idle are already beginning to drift back to their villages for the holiday. Growing numbers will find their pockets empty as cash-starved employers hold back wages. Some will likely stage angry protests. After the festival, millions will return to the cities and many will find no jobs waiting. Frustrations will mount.
Early March will see attention focused on opposite ends of the country: Tibet and Beijing. The resentment that exploded in Lhasa on March 14th 2008 and spread rapidly across the vast Himalayan plateau has by no means subsided. March 10th 2009 is the fiftieth anniversary of the Tibetan uprising that prompted the Dalai Lama to flee to India.
The significance of this date will make this period even more potentially unstable in 2009 than it was in 2008. The authorities will maintain intense security across Tibet and neighbouring areas. Any miscalculation could readily produce the same kind of disapproving Western reaction and Chinese nationalist counter-reaction that for a while this year cast a dark shadow over China’s diplomacy.
Also in March, China’s parliament will hold its annual session in Beijing. These two-week events are normally rubber-stamp affairs, but this year economic woes are likely to fuel lively debate inside and outside the meeting rooms of the Great Hall of the People.
Then comes June 4th, the 20th anniversary of the bloody suppression of the Tiananmen Square protests. Many younger Chinese express indifference to this episode, but older activists will still try to commemorate it. An inkling of their organisational ability was given this month with the release of Charter 08, a document signed by some 300 intellectuals calling for sweeping political reform.
July 22nd is the 10th anniversary of the banning of Falun Gong, a quasi-Buddhist sect. The government has crushed Falun Gong with more persistent and ruthless determination even than political opposition movements (before 1999 Falun Gong had no discernible political views, but its members abroad are now virulently anti-party). The clampdown makes it extremely difficult to gauge the sect’s continuing support in China, but the anniversary will be a test of it.
The authorities will try to put on a celebratory face for the 60th anniversary on October 1st of the communist nation’s founding. It might even stage a military parade through central Beijing (as it did for the 50th and 35th anniversaries). If so, expect more repression, particularly of Tibetans and Muslim Uighurs from the far west of China, whom the authorities see as the most likely groups to try to spoil the party.
Optimists see some hope for the government amid this relentless series of potential flashpoints. It will be spending massively on infrastructure projects, and cutting taxes and interest rates to keep growth up. The World Bank’s president, Robert Zoellick, says China’s response to the Asian financial crisis in 1998 “built the basis for future growth”. It spent lavishly on infrastructure (particularly expressways) and weathered the crisis without any regime-threatening instability (although the middle class was then far smaller).
This time, says Mr Zoellick, China’s stimulus package also features measures to encourage consumers, including more spending on social services. The World Bank’s prediction is for 7.5% growth. Several others say it could be around 8%—the level that officials often say is needed to keep employment stable.
But if the optimists are wrong, China could be in for a bumpy ride. History suggests that periods of social turbulence in China are often accompanied by tensions with the West. Trade friction could exacerbate such problems if countries engage in tit-for-tat protectionism in misguided efforts to protect their industries. Chinese officials repeatedly stress the need to keep markets open, but some officials might still be tempted to devalue the currency in the hope of boosting exports (America wants China’s currency to move in the opposite direction). China’s President Hu Jintao and the prime minister Wen Jiabao are experiencing their most trying times since they came to power more than five years ago. More than ever, stability will be their top priority.
--two uncertainties hang over China: one is the resilience of political strucure to stress; the other is how consumers will respond to crisis;
--history suggests that periods of social turbulences are often accompanied by tension with the West.
Dec 22nd 2008
From Economist.com
Economic woes and key anniversaries portend trouble
FOR China’s leaders, a perfect storm is brewing. Economic growth, which has helped keep the Communist Party in power, is faltering. The new middle class, hitherto a pillar of the party’s support, is plunging into despondency. The coming months are studded with politically sensitive anniversaries that will focus disaffected minds on the party’s shortcomings. Having endured a year of natural disasters, riots and the organisational nightmare of hosting the Olympics, the party sees little salve ahead.
Of all the huge uncertainties that plague attempts to predict the progress of the global financial crisis, two in particular hang over China. One is the resilience of its political structure to stress of this kind. During the last several years of economic health, it has been hard to imagine anything that could dislodge the party. David Shambaugh of George Washington University, in a book published this year entitled “China’s Communist Party: Atrophy and Adaptation”, said the party had its problems and challenges, “but none present the real possibility of systemic collapse”.
AP
A better year behind than ahead?Those challenges, however, are now mounting rapidly. The head of the IMF, Dominique Strauss-Kahn, has predicted GDP growth could fall to as low as 5-6% next year, half the rate of 2007 and far lower than anyone would have thought possible just a few months ago.
The other big uncertainty is how Chinese consumers will respond to the crisis. Chinese journalists say the state-controlled media were at first instructed to avoid stories even suggesting China might be affected. Then as the impact became increasingly obvious, with exports in November falling 2.2% year-on-year (the first such drop in seven years) and growing reports of factory closures and worker unrest, the orders changed. Now the media can acknowledge the impact, but are not to play it up. Keeping the middle class happy and willing to spend is as vital now in China as it is in any economy. But given China’s rudimentary social-security system and strong tendency to save even at the best of times, this could be particularly difficult.
Among the most challenging periods for the leadership in 2009 will be a number of dates already ringed in their calendars. The Chinese new year on January 26th—but effectively spanning several days on either side of that date—is one of them. Migrant workers with nothing to do as their labour-intensive factories making products for Western markets turn idle are already beginning to drift back to their villages for the holiday. Growing numbers will find their pockets empty as cash-starved employers hold back wages. Some will likely stage angry protests. After the festival, millions will return to the cities and many will find no jobs waiting. Frustrations will mount.
Early March will see attention focused on opposite ends of the country: Tibet and Beijing. The resentment that exploded in Lhasa on March 14th 2008 and spread rapidly across the vast Himalayan plateau has by no means subsided. March 10th 2009 is the fiftieth anniversary of the Tibetan uprising that prompted the Dalai Lama to flee to India.
The significance of this date will make this period even more potentially unstable in 2009 than it was in 2008. The authorities will maintain intense security across Tibet and neighbouring areas. Any miscalculation could readily produce the same kind of disapproving Western reaction and Chinese nationalist counter-reaction that for a while this year cast a dark shadow over China’s diplomacy.
Also in March, China’s parliament will hold its annual session in Beijing. These two-week events are normally rubber-stamp affairs, but this year economic woes are likely to fuel lively debate inside and outside the meeting rooms of the Great Hall of the People.
Then comes June 4th, the 20th anniversary of the bloody suppression of the Tiananmen Square protests. Many younger Chinese express indifference to this episode, but older activists will still try to commemorate it. An inkling of their organisational ability was given this month with the release of Charter 08, a document signed by some 300 intellectuals calling for sweeping political reform.
July 22nd is the 10th anniversary of the banning of Falun Gong, a quasi-Buddhist sect. The government has crushed Falun Gong with more persistent and ruthless determination even than political opposition movements (before 1999 Falun Gong had no discernible political views, but its members abroad are now virulently anti-party). The clampdown makes it extremely difficult to gauge the sect’s continuing support in China, but the anniversary will be a test of it.
The authorities will try to put on a celebratory face for the 60th anniversary on October 1st of the communist nation’s founding. It might even stage a military parade through central Beijing (as it did for the 50th and 35th anniversaries). If so, expect more repression, particularly of Tibetans and Muslim Uighurs from the far west of China, whom the authorities see as the most likely groups to try to spoil the party.
Optimists see some hope for the government amid this relentless series of potential flashpoints. It will be spending massively on infrastructure projects, and cutting taxes and interest rates to keep growth up. The World Bank’s president, Robert Zoellick, says China’s response to the Asian financial crisis in 1998 “built the basis for future growth”. It spent lavishly on infrastructure (particularly expressways) and weathered the crisis without any regime-threatening instability (although the middle class was then far smaller).
This time, says Mr Zoellick, China’s stimulus package also features measures to encourage consumers, including more spending on social services. The World Bank’s prediction is for 7.5% growth. Several others say it could be around 8%—the level that officials often say is needed to keep employment stable.
But if the optimists are wrong, China could be in for a bumpy ride. History suggests that periods of social turbulence in China are often accompanied by tensions with the West. Trade friction could exacerbate such problems if countries engage in tit-for-tat protectionism in misguided efforts to protect their industries. Chinese officials repeatedly stress the need to keep markets open, but some officials might still be tempted to devalue the currency in the hope of boosting exports (America wants China’s currency to move in the opposite direction). China’s President Hu Jintao and the prime minister Wen Jiabao are experiencing their most trying times since they came to power more than five years ago. More than ever, stability will be their top priority.
Thursday, December 25, 2008
Nouriel roubini's view in 2009
The following is an edited transcript from a video interview with Nouriel Roubini, by Aline van Duyn .
FT: What's in store for 2009?
NR: It is going to be a year of economic stagnation and recession for most of the global economy with deflationary pressures . . . I expect a global recession and a severe one.
FT: So you think next year will probably be the worst year?
NR: Yes. I see a recession throughout 2009 . . . and maybe there will be return to positive economic growth by 2010.
FT: What other policy actions do you think need to be taken?
NR: Well, part of the answer is the degree of these policy actions. For example, in the US monetary policy right now is very aggressive . . . I believe the ECB is behind the curve . . . But also on top of everything else I think that we have to recapitalise financial institutions much faster, more aggressively in the US. We also need a plan to reduce the debt burden of households that are now distressed and bankrupt.
FT: So it is going to cost the taxpayer a lot more?
NR: The fiscal deficit in the US is going to be huge; at least $1,000bn in 2010; another $1,000bn in 2011.
FT: Is there a risk that the capitalist system doesn't recover from this shock?
NR: We are going to avoid the Great Depression and a severe recession even if there is a risk of protracted slow economic growth. So I don't think this is the end of capitalism, of market economies, but it suggests that really there are significant market failures, that markets don't self-regulate each other.
FT: Are you advising the future Obama administration?
NR: I am not directly advising the administration. I am, of course, in touch with a number of members in the economic team.
FT: What could be the next shoe to drop?
NR: There are many of them. I think the process of deleveraging is going to continue. You could have a thousand, if not more, hedge funds going bust all at the same time.
Another source of stress is emerging market economies. There are about a dozen of them that are on the verge of a potential financial crisis: Latvia, Estonia, Lithuania, Hungary, Bulgaria, Romania, Turkey, Ukraine in emerging Europe . . . Pakistan, Indonesia or [South] Korea in Asia. Places like Ecuador that just defaulted. Argentina and Venezuela in Latin America. Some of these countries could get in trouble and there could be contagious effects to other financial markets in other emerging markets. This credit loss is going to spread from mortgages to commercial real estate, to credit cards, to auto loans, to leverage loans, to industrial and commercial loans . . . There are many sources of financial stress.
FT: What is your outlook for the dollar?
NR: There are different forces. In recent months the dollar was strengthening, partly because there was this flight to safety.
Of course, also the bleak economic outlook in Japan and Europe implied the relative interest rates are becoming less bearish for the dollar, but looking ahead I see a dollar weakness. I see dollar weakness because effectively the Fed is easing money like crazy.
FT: What is the outlook for markets?
NR: I see another 15 to 20 per cent downside risk for US and global equities because in the next few months macro news and earnings news is going to be much worse than expected . . . I don't see this as being the bottom of the market. There is a bear market rally but, like the previous ones, it is going to fizzle out.
So I am concerned about equities, I am concerned about credit, I am concerned about commodities falling another 15-20 per cent given a severe recession. I am still concerned about emerging market asset classes. I think that cash and cash-like instruments such as safe government bonds are still the safer bet for the next few months.
Down the line towards the end of 2009, if we see the light at the end of the tunnel of economic recovery - if and when we see it - maybe it is time to go back into risky assets, but not in the short term.
Mr Roubini is professor of economics at Stern School of Business at NYU and chairman of RGE Monitor.
FT: What's in store for 2009?
NR: It is going to be a year of economic stagnation and recession for most of the global economy with deflationary pressures . . . I expect a global recession and a severe one.
FT: So you think next year will probably be the worst year?
NR: Yes. I see a recession throughout 2009 . . . and maybe there will be return to positive economic growth by 2010.
FT: What other policy actions do you think need to be taken?
NR: Well, part of the answer is the degree of these policy actions. For example, in the US monetary policy right now is very aggressive . . . I believe the ECB is behind the curve . . . But also on top of everything else I think that we have to recapitalise financial institutions much faster, more aggressively in the US. We also need a plan to reduce the debt burden of households that are now distressed and bankrupt.
FT: So it is going to cost the taxpayer a lot more?
NR: The fiscal deficit in the US is going to be huge; at least $1,000bn in 2010; another $1,000bn in 2011.
FT: Is there a risk that the capitalist system doesn't recover from this shock?
NR: We are going to avoid the Great Depression and a severe recession even if there is a risk of protracted slow economic growth. So I don't think this is the end of capitalism, of market economies, but it suggests that really there are significant market failures, that markets don't self-regulate each other.
FT: Are you advising the future Obama administration?
NR: I am not directly advising the administration. I am, of course, in touch with a number of members in the economic team.
FT: What could be the next shoe to drop?
NR: There are many of them. I think the process of deleveraging is going to continue. You could have a thousand, if not more, hedge funds going bust all at the same time.
Another source of stress is emerging market economies. There are about a dozen of them that are on the verge of a potential financial crisis: Latvia, Estonia, Lithuania, Hungary, Bulgaria, Romania, Turkey, Ukraine in emerging Europe . . . Pakistan, Indonesia or [South] Korea in Asia. Places like Ecuador that just defaulted. Argentina and Venezuela in Latin America. Some of these countries could get in trouble and there could be contagious effects to other financial markets in other emerging markets. This credit loss is going to spread from mortgages to commercial real estate, to credit cards, to auto loans, to leverage loans, to industrial and commercial loans . . . There are many sources of financial stress.
FT: What is your outlook for the dollar?
NR: There are different forces. In recent months the dollar was strengthening, partly because there was this flight to safety.
Of course, also the bleak economic outlook in Japan and Europe implied the relative interest rates are becoming less bearish for the dollar, but looking ahead I see a dollar weakness. I see dollar weakness because effectively the Fed is easing money like crazy.
FT: What is the outlook for markets?
NR: I see another 15 to 20 per cent downside risk for US and global equities because in the next few months macro news and earnings news is going to be much worse than expected . . . I don't see this as being the bottom of the market. There is a bear market rally but, like the previous ones, it is going to fizzle out.
So I am concerned about equities, I am concerned about credit, I am concerned about commodities falling another 15-20 per cent given a severe recession. I am still concerned about emerging market asset classes. I think that cash and cash-like instruments such as safe government bonds are still the safer bet for the next few months.
Down the line towards the end of 2009, if we see the light at the end of the tunnel of economic recovery - if and when we see it - maybe it is time to go back into risky assets, but not in the short term.
Mr Roubini is professor of economics at Stern School of Business at NYU and chairman of RGE Monitor.
Wednesday, December 24, 2008
Structural Flaws in Financial Markets
Banking and finance have flaws that arise from time to time:
Dangerous Lending Practices: An untenable situation may exist when: short-term loans are continously rolled-over for long-term needs; too many loans are denominated in foreign currency; lending requirements are relaxed to boost profits; loans are supported by shaky collateral, like equities; or the supply of loan funds comes from abroad, subject to sudden curtailment.
Over-valued Assets: When securities or assets that are important to the well-being of the financial system become over-valued — priced higher than justified by a commonsense appraisal of intrinsic worth — a sudden readjustment may occur, wiping out collateral and roiling financial markets.
Overly-Complex, Non-transparent, Poorly Understood Systems: Whenever systems become too complex to understand or to adequately control, a danger exists.
An example would be Soviet Russia which became dependent on centralized micro-management of an entire economy.
Hedge funds, such as Long Term Capital Management show weaknesses of non-transparency and complexity.
In the financial derivatives market, major banks act as insurers of derivative contracts, without adequate accounting or transparency.
Overly-Rigid, Highly-Regulated Systems: Sometimes systems are entirely dependent upon the government maintaining and adjusting rules that are needed for continued operability.
An example would be the Savings and Loan system in the United States that was predicated upon the government controlling interest rates among competitors. With the advent of money market funds, the government lost the ability to maintain these controls and the system failed.
The Brazilian Miracle ended with relaxation of economic discipline and increased government corruption.
Another example would be the tightly-controlled foreign exchange system that served Brazil well during the "economic miracle" of the 1960s and 1970s. When the government changed in 1980, giving rise to a corrupt democratic system, the strict rules and essential discipline could no longer be maintained and the economy collapsed, opening a decade of economic crisis.
A safe system is one in which every reasonable test of what might go wrong has an adequate response.
Dangerous Lending Practices: An untenable situation may exist when: short-term loans are continously rolled-over for long-term needs; too many loans are denominated in foreign currency; lending requirements are relaxed to boost profits; loans are supported by shaky collateral, like equities; or the supply of loan funds comes from abroad, subject to sudden curtailment.
Over-valued Assets: When securities or assets that are important to the well-being of the financial system become over-valued — priced higher than justified by a commonsense appraisal of intrinsic worth — a sudden readjustment may occur, wiping out collateral and roiling financial markets.
Overly-Complex, Non-transparent, Poorly Understood Systems: Whenever systems become too complex to understand or to adequately control, a danger exists.
An example would be Soviet Russia which became dependent on centralized micro-management of an entire economy.
Hedge funds, such as Long Term Capital Management show weaknesses of non-transparency and complexity.
In the financial derivatives market, major banks act as insurers of derivative contracts, without adequate accounting or transparency.
Overly-Rigid, Highly-Regulated Systems: Sometimes systems are entirely dependent upon the government maintaining and adjusting rules that are needed for continued operability.
An example would be the Savings and Loan system in the United States that was predicated upon the government controlling interest rates among competitors. With the advent of money market funds, the government lost the ability to maintain these controls and the system failed.
The Brazilian Miracle ended with relaxation of economic discipline and increased government corruption.
Another example would be the tightly-controlled foreign exchange system that served Brazil well during the "economic miracle" of the 1960s and 1970s. When the government changed in 1980, giving rise to a corrupt democratic system, the strict rules and essential discipline could no longer be maintained and the economy collapsed, opening a decade of economic crisis.
A safe system is one in which every reasonable test of what might go wrong has an adequate response.
The Collapse of the Indonesian Economy (1997)
In Indonesia, statistics published by the central bank (Bank Indonesia) showed clearly in 1997 that the banking system had an over-hanging dollar debt that would balloon out of control and throw the country into insolvency if the Rupiah were to decline sharply against the dollar.
A pattern of using short-term dollar loans for long-term capital needs had been apparent for a decade as foreign banks aggressively sought to improve current earnings by putting loans to Indonesian businesses on their books.
In many cases, borrowers had no connection with the export market nor any means of earning dollars to repay dollar debt.
Many Indonesian businesses had come to depend upon renewal of dollar loans to stay in business.
This dollar liability was largely unhedged.
Bad advice from the World Bank and IMF contributed to the Asian crisis.Top officials should have understood the absolute need to defend the Rupiah against devaluation at all costs because devaluation of the Rupiah would automatically increase the debt of Indonesian companies, making hundreds of large Indonesia companies and banks insolvent.
Unfortunately, neither the Minister of Finance, the governor of Bank Indonesia, the officials at the International Monetary Fund, or the World Bank, or the U.S. Treasury, or most international private bankers, seemed to be aware of this easily understood but extremely perilous situation.
On August 14, 1997, Sudradjad Djiwandono, the governor of Bank Indonesia, announced to a conference of almost one thousand bankers and businessmen in Jakarta that the government would allow the Rupiah to float against the dollar.
This policy was supported by the IMF and was seen as a way to avoid squandering currency reserves in a futile attempt to tie the Rupiah to the dollar.
The Indonesian crisis could have been avoided in economists had understood the fatal weaknesses in the system.
Some in the audience understood what this really meant, but most did not.
The Rupiah continued to weaken, but only slowly at first, for relatively few grasped the seriousness of the situation.
By the time the dollar-debt problem was generally known, it was too late — the Rupiah had fallen precipitously and the economy had spun out of control.
Events had been triggered that were to lead to the fall of the thirty-year Soeharto government; riots, rape, mayhem, and death; unemployment, increased poverty, and interruption of the education of children; multi-billion dollar losses, and one of the worst depressions of the 20th century.
The debt crisis of 1997 brought hard times to millions of Indonesians.All of this could have been avoided if economists and central bankers had understood the simple but fatal weaknesses in the system and had had the commonsense and gumption to take rapid, drastic measures in time to save Indonesian banks and industry.
An excellent account of the Asian financial crisis is in Paul Blustein's 'The Chastening'.
Further backgound on Indonesia can be found in Theodore Friend's 'Indonesian Destinies' and M.C. Ricklef's, 'A History of Modern Indonesia.'
source: http://www.capital-flow-analysis.com/investment-tutorial/lesson_26.html
A pattern of using short-term dollar loans for long-term capital needs had been apparent for a decade as foreign banks aggressively sought to improve current earnings by putting loans to Indonesian businesses on their books.
In many cases, borrowers had no connection with the export market nor any means of earning dollars to repay dollar debt.
Many Indonesian businesses had come to depend upon renewal of dollar loans to stay in business.
This dollar liability was largely unhedged.
Bad advice from the World Bank and IMF contributed to the Asian crisis.Top officials should have understood the absolute need to defend the Rupiah against devaluation at all costs because devaluation of the Rupiah would automatically increase the debt of Indonesian companies, making hundreds of large Indonesia companies and banks insolvent.
Unfortunately, neither the Minister of Finance, the governor of Bank Indonesia, the officials at the International Monetary Fund, or the World Bank, or the U.S. Treasury, or most international private bankers, seemed to be aware of this easily understood but extremely perilous situation.
On August 14, 1997, Sudradjad Djiwandono, the governor of Bank Indonesia, announced to a conference of almost one thousand bankers and businessmen in Jakarta that the government would allow the Rupiah to float against the dollar.
This policy was supported by the IMF and was seen as a way to avoid squandering currency reserves in a futile attempt to tie the Rupiah to the dollar.
The Indonesian crisis could have been avoided in economists had understood the fatal weaknesses in the system.
Some in the audience understood what this really meant, but most did not.
The Rupiah continued to weaken, but only slowly at first, for relatively few grasped the seriousness of the situation.
By the time the dollar-debt problem was generally known, it was too late — the Rupiah had fallen precipitously and the economy had spun out of control.
Events had been triggered that were to lead to the fall of the thirty-year Soeharto government; riots, rape, mayhem, and death; unemployment, increased poverty, and interruption of the education of children; multi-billion dollar losses, and one of the worst depressions of the 20th century.
The debt crisis of 1997 brought hard times to millions of Indonesians.All of this could have been avoided if economists and central bankers had understood the simple but fatal weaknesses in the system and had had the commonsense and gumption to take rapid, drastic measures in time to save Indonesian banks and industry.
An excellent account of the Asian financial crisis is in Paul Blustein's 'The Chastening'.
Further backgound on Indonesia can be found in Theodore Friend's 'Indonesian Destinies' and M.C. Ricklef's, 'A History of Modern Indonesia.'
source: http://www.capital-flow-analysis.com/investment-tutorial/lesson_26.html
Generalized Institutional Failure
History provides many examples of generalized institutional failure.
To mention a few:
The reversal of progress of British imperialism and 19th century globalization as the result of extraordinary costs of World War I;
The collapse of the U.S. savings and loan industry as a result of deregulation of interest rates;
The collapse of the Brazilian economy in the 1980s and the end of the 'Brazilian Miracle' as a result of abandonment of foreign exchange control discipline;
The prolonged U.S. Depression of the 1930s as a result of extraordinarily high taxes and tariffs, and government attacks on private property and capitalism.
The institutional collapses of which we speak are not the fluctuations of business cycles, nor failures of single institutions, such as Barings or Enron, but rather massive shifts effecting millions of people, based on fundamental flaws in the system.
To mention a few:
The reversal of progress of British imperialism and 19th century globalization as the result of extraordinary costs of World War I;
The collapse of the U.S. savings and loan industry as a result of deregulation of interest rates;
The collapse of the Brazilian economy in the 1980s and the end of the 'Brazilian Miracle' as a result of abandonment of foreign exchange control discipline;
The prolonged U.S. Depression of the 1930s as a result of extraordinarily high taxes and tariffs, and government attacks on private property and capitalism.
The institutional collapses of which we speak are not the fluctuations of business cycles, nor failures of single institutions, such as Barings or Enron, but rather massive shifts effecting millions of people, based on fundamental flaws in the system.
Tuesday, December 23, 2008
A BlackRock HY fund may be headed for Default
By Pierre Paulden
Dec. 23 (Bloomberg) -- A BlackRock Inc. fund that invests in
high-yield, high-risk loans may be headed for an event of default
after debt prices tumbled, according to Moody’s Investors
Service.
Moody’s cut ratings on portions of BlackRock Senior Income
Series III collateralized loan obligation, citing “deterioration
in the market value of the underlying collateral pool.” The
transaction “may experience an event of default,” that would
force New York-based BlackRock to sell loans to repay the notes,
Moody’s said in a statement today.
Loan prices have dropped 29 cents on the dollar this year to
65.8 cents, according to Standard & Poor’s LCD, as banks and
asset managers have been forced to sell holdings because of
clauses in borrowing agreements that require them to raise money
when prices drop below a set level. BlackRock asked investors,
including the Oregon state pension fund, to commit more equity in
October to a separate $3 billion fund after loan prices dropped.
The BlackRock Senior Income Series III fund is a market
value collateralized loan obligation that was raised in September
2006, according to Moody’s. A CLO is a type of collateralized
debt obligation, an instrument that packages pools of debt and
splits it into pieces with various ratings. These ratings are
derived from the prices of the underlying loans.
Moody’s graded $257.2 million of notes in September 2006,
including a $217.1 million portion rated AAA. There is an unrated
$52 million tranche that is repaid after other noteholders.
Loan Values
In September 2006, the Missouri State Employees Retirement
System bought half of the so-called equity tranche of the
BlackRock Senior Income Series 2006 CLO, Jim Mullen, the fixed-
income director of the Missouri fund, told Bloomberg in 2007
Brian Beades, a spokesman for BlackRock, declined to comment
today. Chris Rackers, manager of investment policy and
communication for the Missouri pension plan, didn’t immediately
provide a response.
Mullen told Bloomberg in 2007 that the investment would pay
off because Missouri had entered the market early. The investment
didn’t require board approval and instead he relied on the fund’s
12-year relationship with BlackRock, he said. Mullen didn’t
return a call for comment today.
So-called leveraged loan prices were above face value in
2006 until problems with subprime mortgage securities caused
investors to flee from all but the safest securities, triggering
writedowns and losses globally in excess of $1 trillion.
Moody’s downgraded $9.9 million of notes of the BlackRock
fund one level to Ca, the second-lowest junk rating, according to
the statement. The New York-based ratings company also downgraded
$21.7 million of notes to one notch to C. The AAA portion is now
graded B1, four levels below investment-grade, Moody’s said.
PNC Financial Services Group Inc., the Pittsburgh-based bank
that owns more than a third of BlackRock, arranged the majority
of the safest part of the CLO, according to Bloomberg data. A PNC
spokesman, Fred Solomon, said the bank has “minimal exposure.”
The CLO paid down some of the top-rated bonds as loan prices
fell, a process known as deleveraging, he said.
Dec. 23 (Bloomberg) -- A BlackRock Inc. fund that invests in
high-yield, high-risk loans may be headed for an event of default
after debt prices tumbled, according to Moody’s Investors
Service.
Moody’s cut ratings on portions of BlackRock Senior Income
Series III collateralized loan obligation, citing “deterioration
in the market value of the underlying collateral pool.” The
transaction “may experience an event of default,” that would
force New York-based BlackRock to sell loans to repay the notes,
Moody’s said in a statement today.
Loan prices have dropped 29 cents on the dollar this year to
65.8 cents, according to Standard & Poor’s LCD, as banks and
asset managers have been forced to sell holdings because of
clauses in borrowing agreements that require them to raise money
when prices drop below a set level. BlackRock asked investors,
including the Oregon state pension fund, to commit more equity in
October to a separate $3 billion fund after loan prices dropped.
The BlackRock Senior Income Series III fund is a market
value collateralized loan obligation that was raised in September
2006, according to Moody’s. A CLO is a type of collateralized
debt obligation, an instrument that packages pools of debt and
splits it into pieces with various ratings. These ratings are
derived from the prices of the underlying loans.
Moody’s graded $257.2 million of notes in September 2006,
including a $217.1 million portion rated AAA. There is an unrated
$52 million tranche that is repaid after other noteholders.
Loan Values
In September 2006, the Missouri State Employees Retirement
System bought half of the so-called equity tranche of the
BlackRock Senior Income Series 2006 CLO, Jim Mullen, the fixed-
income director of the Missouri fund, told Bloomberg in 2007
Brian Beades, a spokesman for BlackRock, declined to comment
today. Chris Rackers, manager of investment policy and
communication for the Missouri pension plan, didn’t immediately
provide a response.
Mullen told Bloomberg in 2007 that the investment would pay
off because Missouri had entered the market early. The investment
didn’t require board approval and instead he relied on the fund’s
12-year relationship with BlackRock, he said. Mullen didn’t
return a call for comment today.
So-called leveraged loan prices were above face value in
2006 until problems with subprime mortgage securities caused
investors to flee from all but the safest securities, triggering
writedowns and losses globally in excess of $1 trillion.
Moody’s downgraded $9.9 million of notes of the BlackRock
fund one level to Ca, the second-lowest junk rating, according to
the statement. The New York-based ratings company also downgraded
$21.7 million of notes to one notch to C. The AAA portion is now
graded B1, four levels below investment-grade, Moody’s said.
PNC Financial Services Group Inc., the Pittsburgh-based bank
that owns more than a third of BlackRock, arranged the majority
of the safest part of the CLO, according to Bloomberg data. A PNC
spokesman, Fred Solomon, said the bank has “minimal exposure.”
The CLO paid down some of the top-rated bonds as loan prices
fell, a process known as deleveraging, he said.
U.S. Woes Open Door for China
--US face the risk of be overtaken by China as the role model in economy and politics.
--the meltdown in financial markets damanaged its economy and also tarnished it reputation and threatens its ability to extert infuluence around the global.
--To the extent Chain suffer less overall, its relative strength will increase compared to US
--more devloping countries will look to China's controled capitalism instead of US's unfettered capitalism.
--The implication is more manapulation of tade and currency, prolonging US and global recession
--The solution is to convince China to inlcude China into the international economic system used to be dominated by developed countries. Give China a large share in IMF.
The new edition of Foreign Affairs magazine has a pair of articles about the global financial mess that carry these disturbing headlines: "A Weakening of the West," reads one, and "The Rise of the Chinese Model" the other.
Those two pieces frame a serious but little-discussed strategic problem for President-elect Barack Obama. The meltdown in financial markets hasn't simply damaged the American economy. It also has tarnished the U.S. economic model, and threatens to reduce Washington's ability to exert influence around the globe.
The "Anglo-Saxon brand of market-based capitalism" is under a cloud, Roger Altman, former U.S. deputy Treasury secretary and now chairman of Evercore Partners, writes in one of the Foreign Affairs pieces. "The U.S. financial system is seen as having failed." That can't be good for America's moral authority.
Conversely, China stands to benefit from the mess in a couple of ways. In practical terms, because its financial system is far less exposed to the debt problems now ravaging the West, China simply will suffer less real economic damage.
Sure, China will endure short-term hits from the decline in consumer demand for the goods its factories churn out. But to the extent it suffers less damage overall, its relative strength will grow. Having accumulated massive piles of foreign-exchange reserves, for example, China now can use that cash to make strategic investments that an economically flattened West simply can't. It will be better able to give aid to struggling nations, thereby winning friends there, and can keep up its pattern of investing directly in commodities and natural resources around the globe.
At the same time it reaps practical benefits, China has an opening to expand its political sway. As developing nations watch the convulsions in world financial markets, they may well decide that China's model of a kind of centrally controlled capitalism is more attractive than the American model of unfettered capitalism. The danger is that the developing world starts to look to China for economic lessons, rather than to the West.
Put it all together, and "I think it will mean greater influence for China," says Harold James, professor of history and international affairs at Princeton University and the author of the second Foreign Affairs article.
These strategic risks will land directly in the lap of the new Obama team as it takes over next month. There are ways to minimize the damage to America's interests, but they will require avoiding the temptation to turn inward -- and, ironically, will require working more closely with China even while competing with it for global influence.
The hardest part of the problem may be the intangible part -- the tarnish on the American economic model. Starting with Ronald Reagan's promotion of America as the "shining city on the hill," to the collapse of the Berlin Wall and communism, through America's rescue of Latin America in the 1990s debt crisis and on to the stock-market boom of recent years, the U.S. was leading a world-wide movement toward free markets, open trade and light government regulation of the economy.
The spread of that model expanded American influence -- political as well as economic -- in places such as Central Europe and East Asia. More than that, it benefited the American economy by allowing for free movement of goods and capital.
The danger now is that developing nations could turn instead to the Chinese model of government, with managed mercantilism as the favored approach. While that approach has worked for China, it also has produced global trade and currency imbalances that have made matters worse.
Moreover, to the extent that developing countries might try to mimic China's manipulation of trade rules and currency values to protect their own markets, that would only prolong today's global slump and delay America's recovery.
Faced with these risks, the Obama team has some advantages, of course. It should find it easier to execute a sustained policy of economic stimulus than will leaders in Western Europe, who are hobbled by the continent's fractured political system. And the mere arrival of a new president is an opportunity to re-establish American influence.
Yet that alone can't eliminate strategic risks. Precisely because China is the main potential beneficiary of any American decline, limiting the damage likely will require convincing China that it will benefit more from a broad global recovery than from taking advantage of the West's short-term problems.
Mr. James suggests that may mean trying to bring China more directly into an international economic system long dominated by the West. The Group of Seven industrialized nations would make a lot more sense as the place to discuss the world's economic woes if the group were expanded to include China, for instance.
China also could be made a bigger participant in the International Monetary Fund, which would be a way to use Chinese surpluses to advance economic recovery in a way that benefits all, not just the Chinese.
The biggest trick for the Obama team, though, will be to resist Americans' natural urge on the home front to turn inward at a time like this, becoming more protectionist and isolationist. That course likely would only worsen the consequences of the global problem -- and leave the field more open for China.
--the meltdown in financial markets damanaged its economy and also tarnished it reputation and threatens its ability to extert infuluence around the global.
--To the extent Chain suffer less overall, its relative strength will increase compared to US
--more devloping countries will look to China's controled capitalism instead of US's unfettered capitalism.
--The implication is more manapulation of tade and currency, prolonging US and global recession
--The solution is to convince China to inlcude China into the international economic system used to be dominated by developed countries. Give China a large share in IMF.
The new edition of Foreign Affairs magazine has a pair of articles about the global financial mess that carry these disturbing headlines: "A Weakening of the West," reads one, and "The Rise of the Chinese Model" the other.
Those two pieces frame a serious but little-discussed strategic problem for President-elect Barack Obama. The meltdown in financial markets hasn't simply damaged the American economy. It also has tarnished the U.S. economic model, and threatens to reduce Washington's ability to exert influence around the globe.
The "Anglo-Saxon brand of market-based capitalism" is under a cloud, Roger Altman, former U.S. deputy Treasury secretary and now chairman of Evercore Partners, writes in one of the Foreign Affairs pieces. "The U.S. financial system is seen as having failed." That can't be good for America's moral authority.
Conversely, China stands to benefit from the mess in a couple of ways. In practical terms, because its financial system is far less exposed to the debt problems now ravaging the West, China simply will suffer less real economic damage.
Sure, China will endure short-term hits from the decline in consumer demand for the goods its factories churn out. But to the extent it suffers less damage overall, its relative strength will grow. Having accumulated massive piles of foreign-exchange reserves, for example, China now can use that cash to make strategic investments that an economically flattened West simply can't. It will be better able to give aid to struggling nations, thereby winning friends there, and can keep up its pattern of investing directly in commodities and natural resources around the globe.
At the same time it reaps practical benefits, China has an opening to expand its political sway. As developing nations watch the convulsions in world financial markets, they may well decide that China's model of a kind of centrally controlled capitalism is more attractive than the American model of unfettered capitalism. The danger is that the developing world starts to look to China for economic lessons, rather than to the West.
Put it all together, and "I think it will mean greater influence for China," says Harold James, professor of history and international affairs at Princeton University and the author of the second Foreign Affairs article.
These strategic risks will land directly in the lap of the new Obama team as it takes over next month. There are ways to minimize the damage to America's interests, but they will require avoiding the temptation to turn inward -- and, ironically, will require working more closely with China even while competing with it for global influence.
The hardest part of the problem may be the intangible part -- the tarnish on the American economic model. Starting with Ronald Reagan's promotion of America as the "shining city on the hill," to the collapse of the Berlin Wall and communism, through America's rescue of Latin America in the 1990s debt crisis and on to the stock-market boom of recent years, the U.S. was leading a world-wide movement toward free markets, open trade and light government regulation of the economy.
The spread of that model expanded American influence -- political as well as economic -- in places such as Central Europe and East Asia. More than that, it benefited the American economy by allowing for free movement of goods and capital.
The danger now is that developing nations could turn instead to the Chinese model of government, with managed mercantilism as the favored approach. While that approach has worked for China, it also has produced global trade and currency imbalances that have made matters worse.
Moreover, to the extent that developing countries might try to mimic China's manipulation of trade rules and currency values to protect their own markets, that would only prolong today's global slump and delay America's recovery.
Faced with these risks, the Obama team has some advantages, of course. It should find it easier to execute a sustained policy of economic stimulus than will leaders in Western Europe, who are hobbled by the continent's fractured political system. And the mere arrival of a new president is an opportunity to re-establish American influence.
Yet that alone can't eliminate strategic risks. Precisely because China is the main potential beneficiary of any American decline, limiting the damage likely will require convincing China that it will benefit more from a broad global recovery than from taking advantage of the West's short-term problems.
Mr. James suggests that may mean trying to bring China more directly into an international economic system long dominated by the West. The Group of Seven industrialized nations would make a lot more sense as the place to discuss the world's economic woes if the group were expanded to include China, for instance.
China also could be made a bigger participant in the International Monetary Fund, which would be a way to use Chinese surpluses to advance economic recovery in a way that benefits all, not just the Chinese.
The biggest trick for the Obama team, though, will be to resist Americans' natural urge on the home front to turn inward at a time like this, becoming more protectionist and isolationist. That course likely would only worsen the consequences of the global problem -- and leave the field more open for China.
Monday, December 22, 2008
China Trims Rates Again
--1y lending rate 27 basis point to 5.31%
--deposit rate to 2.25%
--share of deposit 15.5%
China's central bank unveiled its fifth interest-rate cut in just over three months as authorities continue efforts to spur the financial system to complement big government-spending plans.
The People's Bank of China said Monday that the benchmark one-year lending rate would be cut by its usual margin of 0.27 percentage point to 5.31%. The rate was 7.47% when the central bank began slashing rates in mid-September. The central bank also cut the deposit rate by the same amount to 2.25%. In addition, to free up cash so that banks actually lend at the new, lower rate, the central bank cut the share of total deposits that banks must keep on reserve with it by half a percentage point to 15.5%.
Beijing has pledged to use all available means to ensure its financial system is ready to bankroll businesses, individuals and government-backed projects to cushion the massive economy during its most significant shock in a decade.
Monday's cut was widely expected, although it was smaller than some analysts predicted, and economists think more such moves are in store. The 'market may be disappointed by the small scale of China rate cuts,' said Stephen Green, chief China economist at Standard Chartered Bank. But Chinese officials 'want to save some ammunition up for next year,' he said.
Interest rates in China don't have the same direct economic impact they generally do in more developed economies as lending decisions sometimes reflect political and other considerations that aren't much influenced by the cost of credit.
Yet, the lower rates will reduce costs to the Ministry of Finance and government agencies seeking to tap China's $6.85 trillion in bank deposits as they sell bonds in local debt markets. The government needs to raise funds to pay for a $586 billion stimulus package of infrastructure investment and other spending to support the economy.
Separately on Monday, local media cited a Chinese official as saying that the country's foreign-exchange reserves have declined somewhat since September, in what would mark a surprising reversal for a big indicator of China's financial muscle.
China's foreign-exchange reserves 'have already fallen for the first time since December 2003,' said Cai Qiusheng, a department director at the State Administration of Foreign Exchange, according a transcript of comments he made at a weekend forum on foreign trade. The transcript was published on the Chinese Web portal Sina.com. 'Calculated on a month-to-month basis, their highest level was over $1.9 trillion, but they are now definitely lower than that figure,' the transcript quoted Mr. Cai as saying.
China normally publishes the size of its reserves after the end of each quarter. Mr. Cai didn't specify the period during which the reserves fell, according to the transcript. A spokesman for SAFE, the arm of China's central bank that manages the reserves, couldn't confirm Mr. Cai's comments. Mr. Cai, who holds a midlevel position at SAFE, isn't well known outside the agency.
China's foreign-exchange stockpile has ballooned every year since the late 1990s, apart from temporary reversals. The growth has been especially fast in recent years as Chinese exporters brought home money earned overseas and as foreign investors funded projects in the country. The central bank buys those incoming dollars, exchanging them for Chinese yuan.
In October, the central bank said reserves had grown $377.3 billion in the first three quarters of the year to $1.91 trillion -- a record for any country. They were expected to top $2 trillion soon.
While a recent slowdown in China's exports underscores how the nation hasn't sidestepped global economic turmoil, its trade surplus -- a big factor propelling the reserves buildup -- remained high at just over $75 billion for October and November.
Given how reserves are accumulated, any fall may mostly reflect temporary factors, such as an adjustment in how Chinese companies manage their money. A sustained fall in China's dollar holdings would be more worrying, raising doubts about its attractiveness for investment and ability to stay the biggest foreign holder of U.S. Treasury bonds, the main asset in which China has put reserves.
The 2003 fall in reserves referred to by Mr. Cai mostly reflected an injection by SAFE of $45 billion of reserves into two of the biggest banks as part of a government strategy to reduce their bad-debt levels.
James T. Areddy
--deposit rate to 2.25%
--share of deposit 15.5%
China's central bank unveiled its fifth interest-rate cut in just over three months as authorities continue efforts to spur the financial system to complement big government-spending plans.
The People's Bank of China said Monday that the benchmark one-year lending rate would be cut by its usual margin of 0.27 percentage point to 5.31%. The rate was 7.47% when the central bank began slashing rates in mid-September. The central bank also cut the deposit rate by the same amount to 2.25%. In addition, to free up cash so that banks actually lend at the new, lower rate, the central bank cut the share of total deposits that banks must keep on reserve with it by half a percentage point to 15.5%.
Beijing has pledged to use all available means to ensure its financial system is ready to bankroll businesses, individuals and government-backed projects to cushion the massive economy during its most significant shock in a decade.
Monday's cut was widely expected, although it was smaller than some analysts predicted, and economists think more such moves are in store. The 'market may be disappointed by the small scale of China rate cuts,' said Stephen Green, chief China economist at Standard Chartered Bank. But Chinese officials 'want to save some ammunition up for next year,' he said.
Interest rates in China don't have the same direct economic impact they generally do in more developed economies as lending decisions sometimes reflect political and other considerations that aren't much influenced by the cost of credit.
Yet, the lower rates will reduce costs to the Ministry of Finance and government agencies seeking to tap China's $6.85 trillion in bank deposits as they sell bonds in local debt markets. The government needs to raise funds to pay for a $586 billion stimulus package of infrastructure investment and other spending to support the economy.
Separately on Monday, local media cited a Chinese official as saying that the country's foreign-exchange reserves have declined somewhat since September, in what would mark a surprising reversal for a big indicator of China's financial muscle.
China's foreign-exchange reserves 'have already fallen for the first time since December 2003,' said Cai Qiusheng, a department director at the State Administration of Foreign Exchange, according a transcript of comments he made at a weekend forum on foreign trade. The transcript was published on the Chinese Web portal Sina.com. 'Calculated on a month-to-month basis, their highest level was over $1.9 trillion, but they are now definitely lower than that figure,' the transcript quoted Mr. Cai as saying.
China normally publishes the size of its reserves after the end of each quarter. Mr. Cai didn't specify the period during which the reserves fell, according to the transcript. A spokesman for SAFE, the arm of China's central bank that manages the reserves, couldn't confirm Mr. Cai's comments. Mr. Cai, who holds a midlevel position at SAFE, isn't well known outside the agency.
China's foreign-exchange stockpile has ballooned every year since the late 1990s, apart from temporary reversals. The growth has been especially fast in recent years as Chinese exporters brought home money earned overseas and as foreign investors funded projects in the country. The central bank buys those incoming dollars, exchanging them for Chinese yuan.
In October, the central bank said reserves had grown $377.3 billion in the first three quarters of the year to $1.91 trillion -- a record for any country. They were expected to top $2 trillion soon.
While a recent slowdown in China's exports underscores how the nation hasn't sidestepped global economic turmoil, its trade surplus -- a big factor propelling the reserves buildup -- remained high at just over $75 billion for October and November.
Given how reserves are accumulated, any fall may mostly reflect temporary factors, such as an adjustment in how Chinese companies manage their money. A sustained fall in China's dollar holdings would be more worrying, raising doubts about its attractiveness for investment and ability to stay the biggest foreign holder of U.S. Treasury bonds, the main asset in which China has put reserves.
The 2003 fall in reserves referred to by Mr. Cai mostly reflected an injection by SAFE of $45 billion of reserves into two of the biggest banks as part of a government strategy to reduce their bad-debt levels.
James T. Areddy
FASB Reviews Valuation Method
By LESLIE SCISM and DAVID REILLY
Accounting watchdogs are fast-tracking an effort to provide a small dose of "mark-to-market" relief for financial firms, as banks and life insurers continue grappling with deteriorating investment holdings.
The Financial Accounting Standards Board last week began steps to loosen a rule regarding when financial firms must book losses on a narrowly defined subset of lower-rated mortgage-backed securities, commercial-backed securities and certain other structured securities.
Late Friday, FASB asked for public comment on the proposal, a sign that it is under serious consideration.
For those financial firms that hold the relatively small group of securities at issue, managements and their auditors would have more leeway to put off a potential write-down that would clip net income. That could help bolster their regulatory capital.
Mark-to-market issues have taken center stage lately as life insurers designate swelling numbers of securities as "temporary impairments." They quarantine these "unrealized" losses in a special bucket within shareholder's equity called "other comprehensive income." Gains and losses in that bucket often aren't included in how regulators in the financial sector measure capital.
Eventually, though, if the losses don't reverse, a firm has to recognize them as "other than temporary." In that case, the loss runs through net income, a move that grabs investor attention and can affect measures of regulatory capital.
The numbers have gotten so huge -- $27 billion at giant insurer MetLife Inc. in late November -- that many investors are worried insurers are failing to recognize reality. And a battle could erupt at year end as auditors potentially demand write-downs of at least some of the securities.
The possible rule revision falls far short of what banking and insurance executives were seeking because they wanted relief that would give them greater leeway in valuing a wider range of securities. But it illustrates how aggressive they have become in trying to stave off paper losses. Analysts are still trying to figure out which companies might own the particular securities at issue.
FASB staff's proposed easing pertains to certain structured securities that were rated lower than double-A at the time of origination. Most pieces of a securitization are more highly rated when created, many at triple-A.
The rub is that there isn't a clear rule on when losses have to be recognized on any type of debt security. Many banks and insurers continue to maintain, even after some securities have shown market losses for more than a year, that they will eventually be money good. The insurers add that they match investments with policy obligations, and they have cash hoards to ensure they won't be forced sellers.
At MetLife, the nation's biggest life insurer by assets, unrealized losses more than doubled between Sept. 30 and late November, the company told analysts Dec. 8. The company says the "temporarily impaired" securities all are performing well and are overwhelmingly highly rated. It attributed many securities' declines to "supply/demand imbalances" as "deleveraging" continues in much of the financial world. The company expects $200 million to $300 million in realized losses for the fourth quarter.
The FASB staff said the goal is to make the rule more consistent with a broader impairment standard that permits "the use of reasonable management judgment" of the probability of collecting all amounts due. Its change isn't assured; some board members at last Monday's meeting expressed serious reservations about the move. Year-end conversations between auditors and insurance executives likely "will be substantial and somewhat heated," says Andrew Edelsberg, an analyst with ratings firm A.M. Best Co.
"At the end of the day, you have to have a methodology that makes sense and that will be ratified by your audit committee and your outside auditors," adds Rosemarie Mirabella, another analyst at Best.
Accounting watchdogs are fast-tracking an effort to provide a small dose of "mark-to-market" relief for financial firms, as banks and life insurers continue grappling with deteriorating investment holdings.
The Financial Accounting Standards Board last week began steps to loosen a rule regarding when financial firms must book losses on a narrowly defined subset of lower-rated mortgage-backed securities, commercial-backed securities and certain other structured securities.
Late Friday, FASB asked for public comment on the proposal, a sign that it is under serious consideration.
For those financial firms that hold the relatively small group of securities at issue, managements and their auditors would have more leeway to put off a potential write-down that would clip net income. That could help bolster their regulatory capital.
Mark-to-market issues have taken center stage lately as life insurers designate swelling numbers of securities as "temporary impairments." They quarantine these "unrealized" losses in a special bucket within shareholder's equity called "other comprehensive income." Gains and losses in that bucket often aren't included in how regulators in the financial sector measure capital.
Eventually, though, if the losses don't reverse, a firm has to recognize them as "other than temporary." In that case, the loss runs through net income, a move that grabs investor attention and can affect measures of regulatory capital.
The numbers have gotten so huge -- $27 billion at giant insurer MetLife Inc. in late November -- that many investors are worried insurers are failing to recognize reality. And a battle could erupt at year end as auditors potentially demand write-downs of at least some of the securities.
The possible rule revision falls far short of what banking and insurance executives were seeking because they wanted relief that would give them greater leeway in valuing a wider range of securities. But it illustrates how aggressive they have become in trying to stave off paper losses. Analysts are still trying to figure out which companies might own the particular securities at issue.
FASB staff's proposed easing pertains to certain structured securities that were rated lower than double-A at the time of origination. Most pieces of a securitization are more highly rated when created, many at triple-A.
The rub is that there isn't a clear rule on when losses have to be recognized on any type of debt security. Many banks and insurers continue to maintain, even after some securities have shown market losses for more than a year, that they will eventually be money good. The insurers add that they match investments with policy obligations, and they have cash hoards to ensure they won't be forced sellers.
At MetLife, the nation's biggest life insurer by assets, unrealized losses more than doubled between Sept. 30 and late November, the company told analysts Dec. 8. The company says the "temporarily impaired" securities all are performing well and are overwhelmingly highly rated. It attributed many securities' declines to "supply/demand imbalances" as "deleveraging" continues in much of the financial world. The company expects $200 million to $300 million in realized losses for the fourth quarter.
The FASB staff said the goal is to make the rule more consistent with a broader impairment standard that permits "the use of reasonable management judgment" of the probability of collecting all amounts due. Its change isn't assured; some board members at last Monday's meeting expressed serious reservations about the move. Year-end conversations between auditors and insurance executives likely "will be substantial and somewhat heated," says Andrew Edelsberg, an analyst with ratings firm A.M. Best Co.
"At the end of the day, you have to have a methodology that makes sense and that will be ratified by your audit committee and your outside auditors," adds Rosemarie Mirabella, another analyst at Best.
US vs China GDP vs Population
In 2001, the United States had only 4.6% of the world population, but had 21.4% of world GDP and 13.6% of world exports.
China had 21.0% of the world population, 12.1% of world GDP, and 4.0% of world exports.
However, developing nations are growing twice as fast as the developed countries, including the United States.
In 2001, these developing nations accounted for only thirty seven percent of world output, but seventy-eight percent of world population.
China had 21.0% of the world population, 12.1% of world GDP, and 4.0% of world exports.
However, developing nations are growing twice as fast as the developed countries, including the United States.
In 2001, these developing nations accounted for only thirty seven percent of world output, but seventy-eight percent of world population.
The Almighty US Dollar
The American Advantage: The Right To Print Dollars
The American advantage is that the U.S. debt is almost entirely in dollars, not foreign currency.
That Americans owe dollars to Japanese is no worse than New Yorkers owing dollars to Floridians.
America's windfall of having the world reserve currency feeds the uninhibited spending of Baby Boomers, living high on foreign savings and free from the restraints of gold.
The graph shows how the U.S. trade deficit increased after cutting the last tie to gold in 1971.
Without a periodic reckoning of accounts with other central banks, the U.S. government was able to inflate the dollar, allowing Americans to buy abroad without restraint, with the savings from the rest of the world flowing in to cover the deficit.
As long as foreigners were willing to finance trade, why should Americans worry?
A country that borrows in its own currency need only repay on its own terms
The advantage of a country that borrows from other countries in its own currency is that the debt need only be repaid on the debtor's terms.
For example, if the Japanese decide they no longer want to hold U.S. Treasury bonds, preferring debt in Euros, they cannot demand payment in Euros from the U.S. Treasury.
When Treasury bonds come due, the U.S. government will pay Japanese investors by crediting dollars in a U.S. bank.
The Japanese investor may sell these dollars and buy Euros, but the dollars stay in a U.S. bank.
The bank will invest these deposits and may buy U.S. Treasury bonds if rates rise as foreigners switch to Euro bonds.
When assets are contractually named in the currency of the debtor, it is not easy to convince the debtor to switch to another currency (although creditors may swap currencies among themselves).
A German may sell a U.S. dollar bond, but the obligation will continue to be in dollars – not the currency of the buyer.
Macro-economists sometimes forget this essential micro-economic truth.
Fuzzy Statistics, Cloudy Thinking
Most statistics on international trade do not clearly identify the currency of the transactions, clouding a key element needed to understand currency risks.
Because the American trade deficit and most U.S. foreign debt is denominated in dollars, this debt can only be settled when the rest of the world spends money in the United States for American goods or services.
The dollar trade deficit is unemployment insurance for future American generations
In this sense, the trade deficit and corresponding debt is unemployment insurance for future American generations.
As long as the U.S. dollar is the international currency, Americans have a free pass to spend more than they produce.
Most exporters will not sell goods in exchange for the currency of the importer.
A Brazilian coffee exporter doesn't want to receive Argentine Pesos or Thai Bhats. An Indonesian seller of shrimp isn't interested in receiving Botswanian Pula, Cambodian Riel, Croatian Kuna, Eritrean Nakfa, Georgian Lari, or Kazakhstan Tenge.
However, both Brazilian and Indonesian exporters will gladly receive U.S. dollars in payment, even over their own currencies.
Because the rest of the world has been eager to accumulate dollars, there has been a tendency for competitive devaluation of currencies against the dollar, making foreign goods appear to be ever-cheaper to Americans.
Frittering Away Technological Advantage
In selling manufactured goods to Americans, offshore factories have competitive advantages that go beyond price.
Even when the technology comes from the United States, international producers can easily acquire this know-how, through licensing or joint-ventures, or by hiring consultants, engineers, or industrial spies and reverse engineering.
Foreign engineers teach on U.S. campuses and work in the laboratories and production lines of the most sophisticated technological companies in Silicon Valley, often with special visas provided by an obliging State Department.
Americans are not shy about transferring technology abroad to produce goods in a more business friendly environment.
Curious and ambitious young people in Asia with a technological bent can acquire tens of thousands of dollars of advanced (but bootleg) software for a few dollars in the local bazaar and supplement these tools with a world of knowledge available on the Internet.
Excessive regulation, taxes, legal perils, high labor costs, unionization and strikes, falling educational standards, and government backing of free trade and globalization, have led to a steady, relentless decline in the percentage of Americans engaged in manufacturing.
The above graph shows that from a high of thirty-five percent in 1953, the percentage of Americans working in factories had fallen to fourteen percent by 1999. By 1990, more Americans were employed by the government than in manufacturing.
If current trends persist, the U.S. will no longer be an industrial power by 2050
If these trends continue, less than seven percent of Americans will work in factories by 2050 and the United States will no longer be an industrial power.
The United States is self-sufficient in food, water, housing, medical and legal services, and transportation.
However, the country is not self-sufficient in many critical raw materials, manufactured goods, and petroleum.
As deindustrialization continues, the rest of the world will become less willing to grant Americans the benefits of the dollar franchise.
As Americans produce fewer goods to exchange in the international market, the dollar will weaken and eventually fall.
For Better or For Worse: A Service Economy
Some of the decline in industrial workers has been due to increased productivity.
However, to put deindustrialization in perspective, we need to look back to the movement of agricultural workers from fields to factories in the nineteenth century.
This was associated with real productivity gains.
Farm output increased so much that now only three percent of the work force grows food for the entire country with a surplus for export.
This has not been the case with deindustrialization.
Manufacturing employment has fallen because the factories have gone overseas.
Americans must now import what used to be produced domestically.
As industrial jobs have disappeared, the nature of the United States has changed.
The above table shows that employment in capital intensive activities (manufacturing, mining, transportation, and utilities) have declined from 44.6% of the work force in 1950 to only 20.0% in 1999.
On the other hand, activities that require less fixed capital (services, trade, finance, insurance, and real estate) have become the new center of economic activity, employing 59.4% of Americans in 1999, as compared with 36.8% in 1950.
Steady Demand for Government Jobs
In the last half of the twentieth century, an average of only sixty-five thousand industrial jobs were created each year, compared to a yearly increase of two hundred eighty-eight thousand government jobs and one million three hundred forty eight thousand new jobs in services, trade, finance, and insurance.
The chart shows that variation in demand for industrial jobs fluctuated wildly in the last half-century, while government hiring was steady.
In twenty of the last fifty years, the number of industrial jobs fell. Government positions dropped only in two of the early Reagan years.
Observing the instability of factory employment and the long-term increase in government opportunities, the young now see that government offers a more stable career.
Government jobs, like diamonds, are forever
It seems that government jobs, like diamonds, are forever.
To those managing cash flows for the Democrat Party and labor unions, the growth of government is a positive sign.
Deindustrialization reduces employment volatility because of less strikes in good times and fewer layoffs in poor years.
No one longs for the periodic financial panics of the nineteenth century.
Fewer factories also mean less pollution, which makes environmentalists happy.
Congress Examines the Trade Deficit
In 1998, Congress established a commission to review the trade deficit, saying,
“The United States is once again at a critical juncture in trade policy development. The nature of the United States trade deficit and its causes and consequences must be analyzed and documented.”
In 2002, the Trade Deficit Review Commission reported its understanding of the causes of the deficit along partisan lines (cited from the report):
Republican Explanation: “U.S. and foreign macro-economic performance primarily cause trade and current account deficits. In the 1990s, the relative strength of the U.S. economy led to substantially increased imports, while the relative weakness of many of our trading partners led to much slower growth in exports. Republicans see the trade deficit as a sign of relative economic strength
The long-standing tendency for U.S. imports to grow faster than U.S. income adds to this faster growth in imports compared to exports. Trade barriers are objectionable, but not because they are a major cause of trade deficits. International capital flows are also a consequence of the relative strength of the U.S. economy.
With a higher rate of return on investments here than in other countries, the United States is an attractive target for investment. This brings substantial benefits to the United States.
In particular, since total saving in the United States is less than total investment, capital inflows help to finance investment that otherwise could not occur. Furthermore, the large net capital inflows have been keeping the dollar stronger than it would be otherwise. The strong dollar makes U.S. exports less price competitive and U.S. imports more attractive, contributing to the trade deficit.”
Democrat Explanation: “The U.S.' large and growing trade and current account deficits are caused by a number of long- and short-term factors. Key long-term factors include :
• Unequal relationships with America's major trading partners. The U.S. market is more open to imports than any other country in the world. High non-tariff barriers to trade in foreign markets are an important cause of this problem.
These include quotas, private trading arrangements (such as the Japanese keiretsu groups) and other restrictions that reduce U.S. exports (i.e., restricted access to foreign exchange) to China and many other countries.
• Predatory practices, such as dumping, that have increased U.S. imports.
The Democrats blame the trade deficit on weak labor and environmental laws in other countries
• Foreign government subsidies to foreign companies for research, development, and production that have not been effectively challenged or countered by the U.S. government.
• Multinational corporations driving globalization. U.S. firms have been world leaders in eliminating jobs at home and moving production technology and production offshore.
• The loss of competitiveness of U.S. firms on the one hand, with developing countries that depress workers' rights, environmental standards, and workers' wages so as to lower costs and unfairly compete for larger shares of the U.S. market, and, on the other hand, with those from Europe and Japan because they often have higher levels of productivity growth than the United States.
• The failure of other nations, especially in developing countries, to enforce their labor and environmental laws and observe internationally recognized labor standards.
• Low rates of saving in the United States, which have also contributed to trade and current account problems.
Short-term factors have also contributed to the recent growth of the trade deficit.
These include: ( 1) higher oil prices, ( 2) the twenty-three percent increase in the value of the dollar since 1995 that has made imports cheaper and the price of our exports more expensive to foreign buyers, and ( 3) slow economic growth in other countries.
The U.S. manufacturing sector accounts for most of our trade deficit. Manufacturing industries will have to expand significantly if the United States is going to respond effectively to trade deficits and globalization.
To do this, the United States will need new trade and development policies that will help rebuild manufacturing and reduce unfair barriers to trade around the world.
We also need new tools to encourage U.S. multinationals to maintain jobs, technology, and production here in the United States.”
Neither Party Knows What To Do
Neither Republicans nor Democrats acknowledged that the trade deficit was linked to the supremacy of the dollar as the international medium of exchange.
Economists of both parties sometimes failed to tie deficits to the lack of monetary controls after the gold standard was abandoned in 1971.
The Republicans' optimistic view was that trade deficits were the natural result of superior investment markets in the United States and a strong U.S. economy.
Republicans were content to put on a smiley face, claiming that everything was fine.
However, the Republicans were mistaken in saying that the trade deficit was financed by foreign “investment”, which would imply capital or equity.
Most foreign holdings of dollar assets are in the form of dollar debt – U.S. Treasury bonds, bank deposits, CDs, and corporate bonds.
Most foreign holdings of dollar assets are in the form of dollar debt
The incentive was not investment yield, but the strength of the dollar and the safety of the principal.
The Democrats correctly pointed to the lack of competitiveness of U.S. factories that faced foreign producers that benefited from lower labor costs, fewer environmental restrictions, easier labor rules, and business-friendly governments that enticed U.S. industries abroad.
However, the Democrats blamed foreign governments for not following the U.S. example of bureaucratic meddling and hostility towards business, rather than admit that it was the Democrat's own destructive policies that were driving U.S. manufacturing jobs offshore.
The report of the commission showed that neither the Democrats nor Republicans had any idea of how the trade deficit might be stopped or how deindustrialization could be reversed.
The political postures of the parties precluded any solution.
Democrats could not reverse positions on minimum wages and unionization, nor could they turn against supporters that were environmentalists, tort lawyers, and defenders of consumers' rights.
To avoid attacks by Democrats, Republicans did not want to be tagged as favorable to business, nor did they favor industrial policy, since this would offend party factions that oppose government intervention in any form.
http://www.capital-flow-analysis.com/investment-tutorial/lesson_19b.html
The American advantage is that the U.S. debt is almost entirely in dollars, not foreign currency.
That Americans owe dollars to Japanese is no worse than New Yorkers owing dollars to Floridians.
America's windfall of having the world reserve currency feeds the uninhibited spending of Baby Boomers, living high on foreign savings and free from the restraints of gold.
The graph shows how the U.S. trade deficit increased after cutting the last tie to gold in 1971.
Without a periodic reckoning of accounts with other central banks, the U.S. government was able to inflate the dollar, allowing Americans to buy abroad without restraint, with the savings from the rest of the world flowing in to cover the deficit.
As long as foreigners were willing to finance trade, why should Americans worry?
A country that borrows in its own currency need only repay on its own terms
The advantage of a country that borrows from other countries in its own currency is that the debt need only be repaid on the debtor's terms.
For example, if the Japanese decide they no longer want to hold U.S. Treasury bonds, preferring debt in Euros, they cannot demand payment in Euros from the U.S. Treasury.
When Treasury bonds come due, the U.S. government will pay Japanese investors by crediting dollars in a U.S. bank.
The Japanese investor may sell these dollars and buy Euros, but the dollars stay in a U.S. bank.
The bank will invest these deposits and may buy U.S. Treasury bonds if rates rise as foreigners switch to Euro bonds.
When assets are contractually named in the currency of the debtor, it is not easy to convince the debtor to switch to another currency (although creditors may swap currencies among themselves).
A German may sell a U.S. dollar bond, but the obligation will continue to be in dollars – not the currency of the buyer.
Macro-economists sometimes forget this essential micro-economic truth.
Fuzzy Statistics, Cloudy Thinking
Most statistics on international trade do not clearly identify the currency of the transactions, clouding a key element needed to understand currency risks.
Because the American trade deficit and most U.S. foreign debt is denominated in dollars, this debt can only be settled when the rest of the world spends money in the United States for American goods or services.
The dollar trade deficit is unemployment insurance for future American generations
In this sense, the trade deficit and corresponding debt is unemployment insurance for future American generations.
As long as the U.S. dollar is the international currency, Americans have a free pass to spend more than they produce.
Most exporters will not sell goods in exchange for the currency of the importer.
A Brazilian coffee exporter doesn't want to receive Argentine Pesos or Thai Bhats. An Indonesian seller of shrimp isn't interested in receiving Botswanian Pula, Cambodian Riel, Croatian Kuna, Eritrean Nakfa, Georgian Lari, or Kazakhstan Tenge.
However, both Brazilian and Indonesian exporters will gladly receive U.S. dollars in payment, even over their own currencies.
Because the rest of the world has been eager to accumulate dollars, there has been a tendency for competitive devaluation of currencies against the dollar, making foreign goods appear to be ever-cheaper to Americans.
Frittering Away Technological Advantage
In selling manufactured goods to Americans, offshore factories have competitive advantages that go beyond price.
Even when the technology comes from the United States, international producers can easily acquire this know-how, through licensing or joint-ventures, or by hiring consultants, engineers, or industrial spies and reverse engineering.
Foreign engineers teach on U.S. campuses and work in the laboratories and production lines of the most sophisticated technological companies in Silicon Valley, often with special visas provided by an obliging State Department.
Americans are not shy about transferring technology abroad to produce goods in a more business friendly environment.
Curious and ambitious young people in Asia with a technological bent can acquire tens of thousands of dollars of advanced (but bootleg) software for a few dollars in the local bazaar and supplement these tools with a world of knowledge available on the Internet.
Excessive regulation, taxes, legal perils, high labor costs, unionization and strikes, falling educational standards, and government backing of free trade and globalization, have led to a steady, relentless decline in the percentage of Americans engaged in manufacturing.
The above graph shows that from a high of thirty-five percent in 1953, the percentage of Americans working in factories had fallen to fourteen percent by 1999. By 1990, more Americans were employed by the government than in manufacturing.
If current trends persist, the U.S. will no longer be an industrial power by 2050
If these trends continue, less than seven percent of Americans will work in factories by 2050 and the United States will no longer be an industrial power.
The United States is self-sufficient in food, water, housing, medical and legal services, and transportation.
However, the country is not self-sufficient in many critical raw materials, manufactured goods, and petroleum.
As deindustrialization continues, the rest of the world will become less willing to grant Americans the benefits of the dollar franchise.
As Americans produce fewer goods to exchange in the international market, the dollar will weaken and eventually fall.
For Better or For Worse: A Service Economy
Some of the decline in industrial workers has been due to increased productivity.
However, to put deindustrialization in perspective, we need to look back to the movement of agricultural workers from fields to factories in the nineteenth century.
This was associated with real productivity gains.
Farm output increased so much that now only three percent of the work force grows food for the entire country with a surplus for export.
This has not been the case with deindustrialization.
Manufacturing employment has fallen because the factories have gone overseas.
Americans must now import what used to be produced domestically.
As industrial jobs have disappeared, the nature of the United States has changed.
The above table shows that employment in capital intensive activities (manufacturing, mining, transportation, and utilities) have declined from 44.6% of the work force in 1950 to only 20.0% in 1999.
On the other hand, activities that require less fixed capital (services, trade, finance, insurance, and real estate) have become the new center of economic activity, employing 59.4% of Americans in 1999, as compared with 36.8% in 1950.
Steady Demand for Government Jobs
In the last half of the twentieth century, an average of only sixty-five thousand industrial jobs were created each year, compared to a yearly increase of two hundred eighty-eight thousand government jobs and one million three hundred forty eight thousand new jobs in services, trade, finance, and insurance.
The chart shows that variation in demand for industrial jobs fluctuated wildly in the last half-century, while government hiring was steady.
In twenty of the last fifty years, the number of industrial jobs fell. Government positions dropped only in two of the early Reagan years.
Observing the instability of factory employment and the long-term increase in government opportunities, the young now see that government offers a more stable career.
Government jobs, like diamonds, are forever
It seems that government jobs, like diamonds, are forever.
To those managing cash flows for the Democrat Party and labor unions, the growth of government is a positive sign.
Deindustrialization reduces employment volatility because of less strikes in good times and fewer layoffs in poor years.
No one longs for the periodic financial panics of the nineteenth century.
Fewer factories also mean less pollution, which makes environmentalists happy.
Congress Examines the Trade Deficit
In 1998, Congress established a commission to review the trade deficit, saying,
“The United States is once again at a critical juncture in trade policy development. The nature of the United States trade deficit and its causes and consequences must be analyzed and documented.”
In 2002, the Trade Deficit Review Commission reported its understanding of the causes of the deficit along partisan lines (cited from the report):
Republican Explanation: “U.S. and foreign macro-economic performance primarily cause trade and current account deficits. In the 1990s, the relative strength of the U.S. economy led to substantially increased imports, while the relative weakness of many of our trading partners led to much slower growth in exports. Republicans see the trade deficit as a sign of relative economic strength
The long-standing tendency for U.S. imports to grow faster than U.S. income adds to this faster growth in imports compared to exports. Trade barriers are objectionable, but not because they are a major cause of trade deficits. International capital flows are also a consequence of the relative strength of the U.S. economy.
With a higher rate of return on investments here than in other countries, the United States is an attractive target for investment. This brings substantial benefits to the United States.
In particular, since total saving in the United States is less than total investment, capital inflows help to finance investment that otherwise could not occur. Furthermore, the large net capital inflows have been keeping the dollar stronger than it would be otherwise. The strong dollar makes U.S. exports less price competitive and U.S. imports more attractive, contributing to the trade deficit.”
Democrat Explanation: “The U.S.' large and growing trade and current account deficits are caused by a number of long- and short-term factors. Key long-term factors include :
• Unequal relationships with America's major trading partners. The U.S. market is more open to imports than any other country in the world. High non-tariff barriers to trade in foreign markets are an important cause of this problem.
These include quotas, private trading arrangements (such as the Japanese keiretsu groups) and other restrictions that reduce U.S. exports (i.e., restricted access to foreign exchange) to China and many other countries.
• Predatory practices, such as dumping, that have increased U.S. imports.
The Democrats blame the trade deficit on weak labor and environmental laws in other countries
• Foreign government subsidies to foreign companies for research, development, and production that have not been effectively challenged or countered by the U.S. government.
• Multinational corporations driving globalization. U.S. firms have been world leaders in eliminating jobs at home and moving production technology and production offshore.
• The loss of competitiveness of U.S. firms on the one hand, with developing countries that depress workers' rights, environmental standards, and workers' wages so as to lower costs and unfairly compete for larger shares of the U.S. market, and, on the other hand, with those from Europe and Japan because they often have higher levels of productivity growth than the United States.
• The failure of other nations, especially in developing countries, to enforce their labor and environmental laws and observe internationally recognized labor standards.
• Low rates of saving in the United States, which have also contributed to trade and current account problems.
Short-term factors have also contributed to the recent growth of the trade deficit.
These include: ( 1) higher oil prices, ( 2) the twenty-three percent increase in the value of the dollar since 1995 that has made imports cheaper and the price of our exports more expensive to foreign buyers, and ( 3) slow economic growth in other countries.
The U.S. manufacturing sector accounts for most of our trade deficit. Manufacturing industries will have to expand significantly if the United States is going to respond effectively to trade deficits and globalization.
To do this, the United States will need new trade and development policies that will help rebuild manufacturing and reduce unfair barriers to trade around the world.
We also need new tools to encourage U.S. multinationals to maintain jobs, technology, and production here in the United States.”
Neither Party Knows What To Do
Neither Republicans nor Democrats acknowledged that the trade deficit was linked to the supremacy of the dollar as the international medium of exchange.
Economists of both parties sometimes failed to tie deficits to the lack of monetary controls after the gold standard was abandoned in 1971.
The Republicans' optimistic view was that trade deficits were the natural result of superior investment markets in the United States and a strong U.S. economy.
Republicans were content to put on a smiley face, claiming that everything was fine.
However, the Republicans were mistaken in saying that the trade deficit was financed by foreign “investment”, which would imply capital or equity.
Most foreign holdings of dollar assets are in the form of dollar debt – U.S. Treasury bonds, bank deposits, CDs, and corporate bonds.
Most foreign holdings of dollar assets are in the form of dollar debt
The incentive was not investment yield, but the strength of the dollar and the safety of the principal.
The Democrats correctly pointed to the lack of competitiveness of U.S. factories that faced foreign producers that benefited from lower labor costs, fewer environmental restrictions, easier labor rules, and business-friendly governments that enticed U.S. industries abroad.
However, the Democrats blamed foreign governments for not following the U.S. example of bureaucratic meddling and hostility towards business, rather than admit that it was the Democrat's own destructive policies that were driving U.S. manufacturing jobs offshore.
The report of the commission showed that neither the Democrats nor Republicans had any idea of how the trade deficit might be stopped or how deindustrialization could be reversed.
The political postures of the parties precluded any solution.
Democrats could not reverse positions on minimum wages and unionization, nor could they turn against supporters that were environmentalists, tort lawyers, and defenders of consumers' rights.
To avoid attacks by Democrats, Republicans did not want to be tagged as favorable to business, nor did they favor industrial policy, since this would offend party factions that oppose government intervention in any form.
http://www.capital-flow-analysis.com/investment-tutorial/lesson_19b.html
Why the Dollar is King
Over the last fifty years, multinational corporations have sought to boost profits by selling excess capacity from thousands of factories to a world market.
By the millennium, trade barriers had been lowered, many countries had joined the World Trade Organization, and globalization had become the watchword.
International trade involves the exchange of two commodities – the goods or services that are for sale and the currency that is offered in return.
When an Indonesian coffee exporter sells to a buyer in India, the contract will probably call for payment in U.S. dollars. There are reasons for this:
Exchange Risk: The Indonesian Rupiah, even before the crisis of 1997, steadily lost value against the U.S. dollar because of higher internal inflation in Indonesia.
Universal Tender: The Indonesian exporter can use dollars to buy goods in almost any other country. This would not be the case if the deal was made in Indian Rupee or Indonesian Rupiah.
Taxation: The government of Indonesia, like all governments, wants to be able to seize assets of its citizens through taxation.
Although the exporter may have to convert some dollars received into Rupiah to pay local wages and material costs, the profits may be kept abroad in dollar bank accounts, perhaps in the Cayman Islands.
By manipulating invoices, using offshore distributors, and other tricks, the exporter can keep some profits out of the country and beyond the grasp of local tax collectors
Repayment of Foreign Loans: International banks lend to Indonesian companies and these loans are often denominated in dollars. If the Indonesian exporter were to transact in Rupiah or Rupee, he would not obtain the dollars needed to pay foreign bankers.
International commodity markets, from oil to coffee, are generally organized to trade in U.S. dollars.
The same is true for non-commodity goods and services. Part of the profits from international trade accumulates in dollar bank accounts held by non-Americans.
These dollar bank accounts are often outside the United States and beyond the control of the U.S. Federal Reserve Bank.
http://www.capital-flow-analysis.com/investment-tutorial/lesson_19.html
By the millennium, trade barriers had been lowered, many countries had joined the World Trade Organization, and globalization had become the watchword.
International trade involves the exchange of two commodities – the goods or services that are for sale and the currency that is offered in return.
When an Indonesian coffee exporter sells to a buyer in India, the contract will probably call for payment in U.S. dollars. There are reasons for this:
Exchange Risk: The Indonesian Rupiah, even before the crisis of 1997, steadily lost value against the U.S. dollar because of higher internal inflation in Indonesia.
Universal Tender: The Indonesian exporter can use dollars to buy goods in almost any other country. This would not be the case if the deal was made in Indian Rupee or Indonesian Rupiah.
Taxation: The government of Indonesia, like all governments, wants to be able to seize assets of its citizens through taxation.
Although the exporter may have to convert some dollars received into Rupiah to pay local wages and material costs, the profits may be kept abroad in dollar bank accounts, perhaps in the Cayman Islands.
By manipulating invoices, using offshore distributors, and other tricks, the exporter can keep some profits out of the country and beyond the grasp of local tax collectors
Repayment of Foreign Loans: International banks lend to Indonesian companies and these loans are often denominated in dollars. If the Indonesian exporter were to transact in Rupiah or Rupee, he would not obtain the dollars needed to pay foreign bankers.
International commodity markets, from oil to coffee, are generally organized to trade in U.S. dollars.
The same is true for non-commodity goods and services. Part of the profits from international trade accumulates in dollar bank accounts held by non-Americans.
These dollar bank accounts are often outside the United States and beyond the control of the U.S. Federal Reserve Bank.
http://www.capital-flow-analysis.com/investment-tutorial/lesson_19.html
Debt Recovery Prospects Darken
--default recovery might be less than usual.
--Higher use of senior loans pushed other creditors further down the pecking order in restrcuturing
--Lack of DIP (debt in possession) reduced the attraction for restructuring since the path to outright liquidation is shorter.
By LIAM DENNING
Bankrupt debtors used to be thrown in jail. Do that now, and America's prison system would collapse.
Rather than seek incarceration, today's creditors are focusing on extracting better recovery rates: the amount they get back on defaulted debt. Unfortunately, excessive leniency during the boom years means not only having to deal with more defaults, but also getting very little back when that happens.
Professor Ed Altman of New York University's Stern School of Business expects 11% to 11.5% of U.S. high-yield bonds outstanding at the end of the third quarter to default within a year. His proprietary model suggests average recovery, given that default rate, of about 27 cents on the dollar.
There is an established inverse relationship between default rates and recovery rates. Defaults tend to rise during economic slowdowns, which is also when asset prices drop. With the current recession drawing comparisons with the dark days of the early 1980s, and the S&P 500 down 45% since October 2007's peak, creditors can bank on a lot of collateral damage.
Loose covenants and the use of payment-in-kind "toggles" exacerbate the problem. Giving creditors more breathing room helps avoid default, but also allows terminal cases to simply burn through more assets, leaving less to recover when the day of reckoning finally dawns.
PIK-toggles, meanwhile, amount to extending more credit to a borrower even as ability to pay visibly deteriorates. Thankfully, issuance was small in the grand scheme of things.
There are two bigger problems for creditors to contend with. One is the higher use recently of senior loans, fueled by demand for collateralized loan obligations.
The proportion of U.S. speculative grade issuers with only outstanding loans and no bonds rated by Moody's Investors Service leapt from about a fifth at the start of the decade to 59% by June 2008.
More use of loans pushes other creditors further down the pecking order in a restructuring, leaving them with less. But it also means that, with more lenders holding senior claims, they are also unlikely to be made whole.
The second problem is scarce debtor-in-possession and exit financing: the credit extended to bankrupt firms to help them restructure and emerge from Chapter 11.
Traditional financiers have withdrawn or, seeing rich yields in distressed bond markets, can divert their resources there. Without that support, banks will have a tough time syndicating DIP loans.
In effect, this reduces the attraction of filing for bankruptcy protection, since the path to outright liquidation is much shorter. Little wonder that 2008's amount of U.S. distressed bond exchanges -- in effect, debt restructurings done out of court -- is bigger than every year since 1984 combined, according to Professor Altman.
Expect more. Unless DIP financing frees up soon, however, creditors could end up taking savage haircuts as assets are offloaded in fire-sales, and restructuring efforts risk seizing up, delaying recovery for everybody.
--Higher use of senior loans pushed other creditors further down the pecking order in restrcuturing
--Lack of DIP (debt in possession) reduced the attraction for restructuring since the path to outright liquidation is shorter.
By LIAM DENNING
Bankrupt debtors used to be thrown in jail. Do that now, and America's prison system would collapse.
Rather than seek incarceration, today's creditors are focusing on extracting better recovery rates: the amount they get back on defaulted debt. Unfortunately, excessive leniency during the boom years means not only having to deal with more defaults, but also getting very little back when that happens.
Professor Ed Altman of New York University's Stern School of Business expects 11% to 11.5% of U.S. high-yield bonds outstanding at the end of the third quarter to default within a year. His proprietary model suggests average recovery, given that default rate, of about 27 cents on the dollar.
There is an established inverse relationship between default rates and recovery rates. Defaults tend to rise during economic slowdowns, which is also when asset prices drop. With the current recession drawing comparisons with the dark days of the early 1980s, and the S&P 500 down 45% since October 2007's peak, creditors can bank on a lot of collateral damage.
Loose covenants and the use of payment-in-kind "toggles" exacerbate the problem. Giving creditors more breathing room helps avoid default, but also allows terminal cases to simply burn through more assets, leaving less to recover when the day of reckoning finally dawns.
PIK-toggles, meanwhile, amount to extending more credit to a borrower even as ability to pay visibly deteriorates. Thankfully, issuance was small in the grand scheme of things.
There are two bigger problems for creditors to contend with. One is the higher use recently of senior loans, fueled by demand for collateralized loan obligations.
The proportion of U.S. speculative grade issuers with only outstanding loans and no bonds rated by Moody's Investors Service leapt from about a fifth at the start of the decade to 59% by June 2008.
More use of loans pushes other creditors further down the pecking order in a restructuring, leaving them with less. But it also means that, with more lenders holding senior claims, they are also unlikely to be made whole.
The second problem is scarce debtor-in-possession and exit financing: the credit extended to bankrupt firms to help them restructure and emerge from Chapter 11.
Traditional financiers have withdrawn or, seeing rich yields in distressed bond markets, can divert their resources there. Without that support, banks will have a tough time syndicating DIP loans.
In effect, this reduces the attraction of filing for bankruptcy protection, since the path to outright liquidation is much shorter. Little wonder that 2008's amount of U.S. distressed bond exchanges -- in effect, debt restructurings done out of court -- is bigger than every year since 1984 combined, according to Professor Altman.
Expect more. Unless DIP financing frees up soon, however, creditors could end up taking savage haircuts as assets are offloaded in fire-sales, and restructuring efforts risk seizing up, delaying recovery for everybody.
Saturday, December 20, 2008
Five ways to start the world economic recovery
--After the Minsky Moment, the capitulation of economic activities has been rapid and severe. The outlook is as dark as doomsayers asset. The only thing that stands between today's dire economic prospects and the lost decade similar to Japan's in the 1990s is the competence and authority of macro-economic policy.
--Conventional monetary policy + unorthdox moentary policy (quantitative easing) are necessary to lower funding cost
--Fiscal policy needs to be deployed to contain the depth of recession and the impact on jobs and income.
--Government must continue to prop up banks and companie to sustain credit flowing via diect lending, debt restructuring,
--economic agents need effective leadership and have confidence in public authorities
By George Magnus
Published: December 18 2008 19:27 Last updated: December 18 2008 19:27
After the Minsky Moment – where euphoria tips into crisis, named after Hyman Minsky – the capitulation of economic activity has been rapid and severe. The outlook is as dark as the doomsayers assert. The only thing that stands between today’s dire economic prospects and a lost decade similar to Japan’s in the 1990s is the competence and authority of macroeconomic policy. We have a long way to go, but for five reasons, even doomsayers can start to feel the force, so to speak.
First, governments have already acted decisively to preserve the integrity of the formal banking system, while the so-called shadow banking system is collapsing. Over $8,000bn (€5,650bn, £5,150bn) of programmes to stem the collapse in credit and housing have been announced but it is too soon to declare victory. To strengthen banks in the recession and sustain lending, European banks will need a further $100bn-$150bn of capital, while US banks, including regional banks, should quickly be allocated most of the unspent Tarp money of $350bn.
Second, governments must continue to facilitate the enormous task of sustaining credit flows and restructuring debt. Bankruptcies are inevitable but additional direct lending programmes, asset purchases and government guarantees are needed to keep liquidity flowing to good corporate and residential borrowers, especially while bank balance sheets are constrained by the need to soak up bad assets that were previously held off-balance sheet. Equity-for-debt swaps will be required for companies with excessive debt.
Third, the full force of fiscal policy needs to be deployed to contain the depth of the recession and credit losses and the impact on jobs and incomes. British, German and French programmes amount to a little over 1 per cent of their gross domestic product, but much of what is being proposed in the eurozone constitutes window-dressing, while the effectiveness of the UK’s value added tax cut is being lost in the sea of retailer discounting. European nations, including Germany, will need to do more in 2009 as the recession deepens.
The forthcoming US programme, expected to be about $600-$700bn (or about 4 per cent of GDP), will compensate for much of the private sector’s withdrawal of spending and borrowing. President-elect Barack Obama intends to create or save 2.5m jobs by the end of 2010 and advocates the nurturing of technology, green and alternative energy projects, as well as healthcare and education initiatives. The effects of such programmes may not be felt until 2010-11, but this is no reason not to implement them.
Fourth, as a period of (hopefully short-lived) deflation looms, we are about to see if the expected potency of monetary policy – in the form of quantitative easing – is a myth. It did not really work in Japan because it was a decade late and was also inadequately pursued. The Federal Reserve has now promised to keep the policy rate at 0.0-0.25 per cent “for some time”, and said it would use its balance sheet “further” to support credit markets and economic activity. Its assets have already grown nearly threefold to $2,200bn since the Lehman failure, and will be over $3,000bn by the end of the year. As European rates tumble towards 0–1 per cent, other central banks will find they also have to adopt unorthodox forms of monetary policy.
Quantitative easing helps to keep short-term rates near zero and could peg longer-term rates too. The Fed, for example, will buy not only securitised assets but also Treasuries in an attempt to lower credit spreads, the cost of capital and all private borrowing rates. It could eventually buy other private assets, including equities. Ultimately, the Fed could purchase Treasuries directly from the government. Public debt would not rise and concerns about future tax burdens would be negated. The new concern would be higher inflation, but this is a convoluted argument and for another day.
Fifth, when trust has been shattered, economic agents need effective leadership and want confidence in public authorities. We cannot plug these into an economic model, but they matter a lot. Expectations about Mr Obama, his macro-economics team, and the Fed mitigating and then reversing our economic predicament, may have become excessive, but why not? The Fed and Mr Obama possess both competence and authority, and seem prepared to embrace the holistic approach, described here, to address this destructive deleveraging recession.
The writer is senior economic adviser, UBS Investment Bank, and author of The Age of Aging (October 2008)
--Conventional monetary policy + unorthdox moentary policy (quantitative easing) are necessary to lower funding cost
--Fiscal policy needs to be deployed to contain the depth of recession and the impact on jobs and income.
--Government must continue to prop up banks and companie to sustain credit flowing via diect lending, debt restructuring,
--economic agents need effective leadership and have confidence in public authorities
By George Magnus
Published: December 18 2008 19:27 Last updated: December 18 2008 19:27
After the Minsky Moment – where euphoria tips into crisis, named after Hyman Minsky – the capitulation of economic activity has been rapid and severe. The outlook is as dark as the doomsayers assert. The only thing that stands between today’s dire economic prospects and a lost decade similar to Japan’s in the 1990s is the competence and authority of macroeconomic policy. We have a long way to go, but for five reasons, even doomsayers can start to feel the force, so to speak.
First, governments have already acted decisively to preserve the integrity of the formal banking system, while the so-called shadow banking system is collapsing. Over $8,000bn (€5,650bn, £5,150bn) of programmes to stem the collapse in credit and housing have been announced but it is too soon to declare victory. To strengthen banks in the recession and sustain lending, European banks will need a further $100bn-$150bn of capital, while US banks, including regional banks, should quickly be allocated most of the unspent Tarp money of $350bn.
Second, governments must continue to facilitate the enormous task of sustaining credit flows and restructuring debt. Bankruptcies are inevitable but additional direct lending programmes, asset purchases and government guarantees are needed to keep liquidity flowing to good corporate and residential borrowers, especially while bank balance sheets are constrained by the need to soak up bad assets that were previously held off-balance sheet. Equity-for-debt swaps will be required for companies with excessive debt.
Third, the full force of fiscal policy needs to be deployed to contain the depth of the recession and credit losses and the impact on jobs and incomes. British, German and French programmes amount to a little over 1 per cent of their gross domestic product, but much of what is being proposed in the eurozone constitutes window-dressing, while the effectiveness of the UK’s value added tax cut is being lost in the sea of retailer discounting. European nations, including Germany, will need to do more in 2009 as the recession deepens.
The forthcoming US programme, expected to be about $600-$700bn (or about 4 per cent of GDP), will compensate for much of the private sector’s withdrawal of spending and borrowing. President-elect Barack Obama intends to create or save 2.5m jobs by the end of 2010 and advocates the nurturing of technology, green and alternative energy projects, as well as healthcare and education initiatives. The effects of such programmes may not be felt until 2010-11, but this is no reason not to implement them.
Fourth, as a period of (hopefully short-lived) deflation looms, we are about to see if the expected potency of monetary policy – in the form of quantitative easing – is a myth. It did not really work in Japan because it was a decade late and was also inadequately pursued. The Federal Reserve has now promised to keep the policy rate at 0.0-0.25 per cent “for some time”, and said it would use its balance sheet “further” to support credit markets and economic activity. Its assets have already grown nearly threefold to $2,200bn since the Lehman failure, and will be over $3,000bn by the end of the year. As European rates tumble towards 0–1 per cent, other central banks will find they also have to adopt unorthodox forms of monetary policy.
Quantitative easing helps to keep short-term rates near zero and could peg longer-term rates too. The Fed, for example, will buy not only securitised assets but also Treasuries in an attempt to lower credit spreads, the cost of capital and all private borrowing rates. It could eventually buy other private assets, including equities. Ultimately, the Fed could purchase Treasuries directly from the government. Public debt would not rise and concerns about future tax burdens would be negated. The new concern would be higher inflation, but this is a convoluted argument and for another day.
Fifth, when trust has been shattered, economic agents need effective leadership and want confidence in public authorities. We cannot plug these into an economic model, but they matter a lot. Expectations about Mr Obama, his macro-economics team, and the Fed mitigating and then reversing our economic predicament, may have become excessive, but why not? The Fed and Mr Obama possess both competence and authority, and seem prepared to embrace the holistic approach, described here, to address this destructive deleveraging recession.
The writer is senior economic adviser, UBS Investment Bank, and author of The Age of Aging (October 2008)
Friday, December 19, 2008
Awaiting the return of the repo market
--Two sources of short term funding market, interbank deposit and repo, have been in a disarray
--Fed's liquidity programs, bond guarantee, rate cuts have ease the strains of these two markets. But the levels of the two markets remain elevated.
--The lower fed rates might trigger the repo fails, which will disrupt interest rate swaps market.
Awaiting the return of the repo market
By Michael Mackenzie
Published: December 16 2008 22:36 Last updated: December 16 2008 22:36
The collapse of investment banks this year highlighted the pivotal roles played by two critical sources of short-term funding that had long been taken for granted: the interbank deposit market and the government repurchase or “repo” market.
Already stunned by the near-failure and rescue of Bear Stearns in March, investors abruptly exited short-term markets after the collapse of Lehman Brothers in September and the investment bank financing model came to a standstill.
Lending in the interbank deposit market dried up, as money market funds shied away from providing banks with short-term loans after Lehman’s bankruptcy wiped out billions of dollars of its debt. Funds also pulled away from the commercial paper market, an important source of funding for companies.
That breakdown prompted the Federal Reserve to step in: since the end of October the central bank has purchased more than $313bn in commercial paper alone.
Series: Markets in crisis
US public finance arena wilts under pressure
The Fed has also implemented a number of liquidity programmes designed to help banks access funds rather than rely on the private interbank market.
“The Fed is providing the market with a crutch into year-end,” says George Goncalves, strategist at Morgan Stanley.
Mr Goncalves fully expects liquidity programmes to remain in place during 2009 and believes that forming an exit strategy from supporting the financial system will pose a challenge for central banks. The freeze in lending was best tracked by watching a surge in floating money market rates.
At the daily fixing in London, the three-month dollar London Interbank Offered Rate rose to a peak of 4.82 per cent in October.
Since then the Fed’s provision of liquidity and aggressive rate cuts has helped ease some of the strain in Libor. On Wednesday, Libor is expected to set at 1.65 per cent. Strong demand for recently issued bank debt that is backed by the Federal Deposit Insurance Corp has also helped ease funding strains.
However, Libor still remains elevated when compared with Fed funds, which now trades in a range between zero per cent and 0.25 per cent.
With official overnight interest rates so low, problems remain for the other important source of bank funding. Fear of lending securities in exchange for a short-term cash loan dominated the repurchase market.
Over the past decade, many banks became dependent on repo, whereby they lend out assets such as Treasuries, mortgages and other bonds in return for cash.
This type of financing helped bring down Bear as investors lost confidence over lending cash in return for Bear pledging mortgages as collateral.
Lehman’s bankruptcy left investors questioning the creditworthiness of all banks and the repo market hit the wall.
While lending for overnight continues, term repo – anything with a lifespan of more than one day – remains impaired.
“Repo will find its way back into the market as an important tool for financing and liquidity,” says Art Certosimo, executive vice-president at Bank of New York Mellon.
“Right now we are still in fear mode, but as capital markets start to [return to] some normalcy again, institutions will start taking risk for reasonable reward.”
The breakdown in the repo market also unsettled the trading of interest rate swaps as dealers often hedge the derivative with government paper.
The cost of financing that note in the repo market helps influence where swaps trade relative to a Treasury yield.
That came as heightened volatility in daily Libor settings made it extremely difficult to trade a swap, which involves exchanging two cash flows.
One flow is a fixed rate that is priced off Treasury yields, while the floating rate references three-month Libor. The problems in the repo market peaked in October when failed trades rose to a record.
A repo “fail” occurs when a security that was previously borrowed is not returned on time.
Given the entrenched links between dealers and investors, once a security fails, it can ripple along a long chain and shut down the repo market, which ended up happening in the aftermath of the Lehman bankruptcy.
Although repo fails have been cleaned up, the repo market faces renewed problems as the Fed’s infusion of liquidity has lowered the effective funds rate to nearly zero per cent.
This type of interest rate environment negates the profit from lending out a Treasury security in exchange for a short-term cash loan.
Michael Cloherty, strategist at Banc of America Securities says: “With rates this low, there is little incentive for securities holders to lend their supply and we are likely to see fails start rising again.”
Early in January the repo market will likely implement some new rules that were recently proposed by the Treasury Market Practices Group.
The new recommendations have been endorsed by the Fed. The primary goal is to alleviate repo fails by introducing a penalty rate for dealing with failed securities. That will enable a security to trade at a negative level capped at 3 per cent below the current target funds rate.
As the repo market struggles to adjust to a new regime of low and negative interest rates, and investors wait for signs that money market funds have started trusting banks again, there is no certainty that the worst is past.
“The wild card is another shock to the system. However, central banks are providing plenty of support for the financial system,” says Mr Certosimo.
This article is the first in a series
--Fed's liquidity programs, bond guarantee, rate cuts have ease the strains of these two markets. But the levels of the two markets remain elevated.
--The lower fed rates might trigger the repo fails, which will disrupt interest rate swaps market.
Awaiting the return of the repo market
By Michael Mackenzie
Published: December 16 2008 22:36 Last updated: December 16 2008 22:36
The collapse of investment banks this year highlighted the pivotal roles played by two critical sources of short-term funding that had long been taken for granted: the interbank deposit market and the government repurchase or “repo” market.
Already stunned by the near-failure and rescue of Bear Stearns in March, investors abruptly exited short-term markets after the collapse of Lehman Brothers in September and the investment bank financing model came to a standstill.
Lending in the interbank deposit market dried up, as money market funds shied away from providing banks with short-term loans after Lehman’s bankruptcy wiped out billions of dollars of its debt. Funds also pulled away from the commercial paper market, an important source of funding for companies.
That breakdown prompted the Federal Reserve to step in: since the end of October the central bank has purchased more than $313bn in commercial paper alone.
Series: Markets in crisis
US public finance arena wilts under pressure
The Fed has also implemented a number of liquidity programmes designed to help banks access funds rather than rely on the private interbank market.
“The Fed is providing the market with a crutch into year-end,” says George Goncalves, strategist at Morgan Stanley.
Mr Goncalves fully expects liquidity programmes to remain in place during 2009 and believes that forming an exit strategy from supporting the financial system will pose a challenge for central banks. The freeze in lending was best tracked by watching a surge in floating money market rates.
At the daily fixing in London, the three-month dollar London Interbank Offered Rate rose to a peak of 4.82 per cent in October.
Since then the Fed’s provision of liquidity and aggressive rate cuts has helped ease some of the strain in Libor. On Wednesday, Libor is expected to set at 1.65 per cent. Strong demand for recently issued bank debt that is backed by the Federal Deposit Insurance Corp has also helped ease funding strains.
However, Libor still remains elevated when compared with Fed funds, which now trades in a range between zero per cent and 0.25 per cent.
With official overnight interest rates so low, problems remain for the other important source of bank funding. Fear of lending securities in exchange for a short-term cash loan dominated the repurchase market.
Over the past decade, many banks became dependent on repo, whereby they lend out assets such as Treasuries, mortgages and other bonds in return for cash.
This type of financing helped bring down Bear as investors lost confidence over lending cash in return for Bear pledging mortgages as collateral.
Lehman’s bankruptcy left investors questioning the creditworthiness of all banks and the repo market hit the wall.
While lending for overnight continues, term repo – anything with a lifespan of more than one day – remains impaired.
“Repo will find its way back into the market as an important tool for financing and liquidity,” says Art Certosimo, executive vice-president at Bank of New York Mellon.
“Right now we are still in fear mode, but as capital markets start to [return to] some normalcy again, institutions will start taking risk for reasonable reward.”
The breakdown in the repo market also unsettled the trading of interest rate swaps as dealers often hedge the derivative with government paper.
The cost of financing that note in the repo market helps influence where swaps trade relative to a Treasury yield.
That came as heightened volatility in daily Libor settings made it extremely difficult to trade a swap, which involves exchanging two cash flows.
One flow is a fixed rate that is priced off Treasury yields, while the floating rate references three-month Libor. The problems in the repo market peaked in October when failed trades rose to a record.
A repo “fail” occurs when a security that was previously borrowed is not returned on time.
Given the entrenched links between dealers and investors, once a security fails, it can ripple along a long chain and shut down the repo market, which ended up happening in the aftermath of the Lehman bankruptcy.
Although repo fails have been cleaned up, the repo market faces renewed problems as the Fed’s infusion of liquidity has lowered the effective funds rate to nearly zero per cent.
This type of interest rate environment negates the profit from lending out a Treasury security in exchange for a short-term cash loan.
Michael Cloherty, strategist at Banc of America Securities says: “With rates this low, there is little incentive for securities holders to lend their supply and we are likely to see fails start rising again.”
Early in January the repo market will likely implement some new rules that were recently proposed by the Treasury Market Practices Group.
The new recommendations have been endorsed by the Fed. The primary goal is to alleviate repo fails by introducing a penalty rate for dealing with failed securities. That will enable a security to trade at a negative level capped at 3 per cent below the current target funds rate.
As the repo market struggles to adjust to a new regime of low and negative interest rates, and investors wait for signs that money market funds have started trusting banks again, there is no certainty that the worst is past.
“The wild card is another shock to the system. However, central banks are providing plenty of support for the financial system,” says Mr Certosimo.
This article is the first in a series
US public finance arena sags beneath the headwinds
--2.6 tril muni credit market broke down, especially the 330 bil ARS component.
--Credit derivatives priced higher risk of default for thos de facto AAA 50k issuers than IG corp issuers.
--a backlog of more than 100 bil in postponed issuance is spilling into 2009.
--Fed has to step in, impling the federalism and local autonomy
US public finance arena sags beneath the headwinds
By Nicole Bullock in New York
Published: December 19 2008 02:00 Last updated: December 19 2008 02:00
In the span of one gut-wrenching month this year, Frank Hoadley saw his interest costs triple to as much as 15 per cent.
Mr Hoadley, the capital finance director for the state of Wisconsin, was not alone. State and local finance departments across the US were hit with an abrupt spike in borrowing rates as the so-called auction-rate securities market, a $330bn component of the municipal bond market, collapsed in February.
It was the opening shot in a year when the public finance market, a $2,600bn arena where state and local entities raise money for everything from roads and bridges to schools and airports, broke down completely. "Every day you told yourself: this is as bad as it gets," Mr Hoadley says, "and the next day it got worse. And, that continues today. New surprises keep popping out of the woodwork."
Traditionally, municipal bonds were a dusty, drab corner of the financial markets. Returns were fairly predictable and the investor base was mostly individual US savers. The 50,000 odd issuers, though ranging from the local fire department to the state of New York, were homogenised through the widespread use of insurance, which gave much of the market a de facto AAA rating.
As 2008 would demonstrate, municipals became as mired in the excesses of the boom years as the rest of the credit markets, if not more. "A few years ago, there was a lot of complacency in our market," says Mark Sommer, a portfolio manager at Fidelity Investments. "All that has evaporated."
With a loss of 7.6 per cent, munis are on track for their worst year ever, according to Merrill Lynch. Auction-rate securities, which had been a source of cheap funding for many issuers, have disappeared. Long-term borrowing costs even for top-rated, AAA municipalities have risen to nearly 6 per cent, an eight-year high, and a backlog of more than $100bn in postponed bond sales is spilling into 2009.
It is hard to find a corner of the credit market that is not in disarray. What makes munis unique is that they are one of the main sources of financing for essential public services throughout the US. That financing is now much more expensive or not available at all.
"Without access to long-term capital on their own, state and local governments would need to rely on the federal government for funding, and that has all kinds of implications for federalism and local autonomy," says Matt Fabian, managing director of Municipal Market Advisors. The trouble began when it emerged that big muni bond insurers, such as MBIA and Ambac, had also written similar policies on risky mortgage debt. When the mortgage market cracked, so did the so-called monolines, prompting a massive repricing of muni debt to the issuers' underlying ratings. It also upset financing arrangements like auction rate securities.
"It was the perfect storm of a lot of seemingly independent events being very related," says Lynnette Hotchkiss, executive director of the Municipal Securities Rulemaking Board, the industry trade group.
At the same time, hedge funds, a source of new demand in recent years, became sellers, unleashing huge supply on an already bruised market. The final blow came with the bankruptcy of Lehman Brothers, which drained liquidity from the whole financial system.
Lured by the high relative yields, retail investors have stepped in, but they lack the deep pockets to absorb rising issuance.
"This is a market that we have not seen in munis for 10 years," says Philip Fischer, municipal strategist at Merrill Lynch. "We are happy to work with retail clients, but we need more buyers."
The market is expected to remain under pressure in 2009. With the US in a recession, states and local governments are facing growing budget deficits. The US government appears to favour stimulus for state and local economies over direct aid and the credit derivatives market is pricing in a greater risk of default than for high-grade corporate bonds.
"There are a lot of headwinds," Mr Sommer of Fidelity says. "Muni bond prices are reflecting investors' skittishness, scepticism and fear about how this will play out."
This article is the second in a series
--Credit derivatives priced higher risk of default for thos de facto AAA 50k issuers than IG corp issuers.
--a backlog of more than 100 bil in postponed issuance is spilling into 2009.
--Fed has to step in, impling the federalism and local autonomy
US public finance arena sags beneath the headwinds
By Nicole Bullock in New York
Published: December 19 2008 02:00 Last updated: December 19 2008 02:00
In the span of one gut-wrenching month this year, Frank Hoadley saw his interest costs triple to as much as 15 per cent.
Mr Hoadley, the capital finance director for the state of Wisconsin, was not alone. State and local finance departments across the US were hit with an abrupt spike in borrowing rates as the so-called auction-rate securities market, a $330bn component of the municipal bond market, collapsed in February.
It was the opening shot in a year when the public finance market, a $2,600bn arena where state and local entities raise money for everything from roads and bridges to schools and airports, broke down completely. "Every day you told yourself: this is as bad as it gets," Mr Hoadley says, "and the next day it got worse. And, that continues today. New surprises keep popping out of the woodwork."
Traditionally, municipal bonds were a dusty, drab corner of the financial markets. Returns were fairly predictable and the investor base was mostly individual US savers. The 50,000 odd issuers, though ranging from the local fire department to the state of New York, were homogenised through the widespread use of insurance, which gave much of the market a de facto AAA rating.
As 2008 would demonstrate, municipals became as mired in the excesses of the boom years as the rest of the credit markets, if not more. "A few years ago, there was a lot of complacency in our market," says Mark Sommer, a portfolio manager at Fidelity Investments. "All that has evaporated."
With a loss of 7.6 per cent, munis are on track for their worst year ever, according to Merrill Lynch. Auction-rate securities, which had been a source of cheap funding for many issuers, have disappeared. Long-term borrowing costs even for top-rated, AAA municipalities have risen to nearly 6 per cent, an eight-year high, and a backlog of more than $100bn in postponed bond sales is spilling into 2009.
It is hard to find a corner of the credit market that is not in disarray. What makes munis unique is that they are one of the main sources of financing for essential public services throughout the US. That financing is now much more expensive or not available at all.
"Without access to long-term capital on their own, state and local governments would need to rely on the federal government for funding, and that has all kinds of implications for federalism and local autonomy," says Matt Fabian, managing director of Municipal Market Advisors. The trouble began when it emerged that big muni bond insurers, such as MBIA and Ambac, had also written similar policies on risky mortgage debt. When the mortgage market cracked, so did the so-called monolines, prompting a massive repricing of muni debt to the issuers' underlying ratings. It also upset financing arrangements like auction rate securities.
"It was the perfect storm of a lot of seemingly independent events being very related," says Lynnette Hotchkiss, executive director of the Municipal Securities Rulemaking Board, the industry trade group.
At the same time, hedge funds, a source of new demand in recent years, became sellers, unleashing huge supply on an already bruised market. The final blow came with the bankruptcy of Lehman Brothers, which drained liquidity from the whole financial system.
Lured by the high relative yields, retail investors have stepped in, but they lack the deep pockets to absorb rising issuance.
"This is a market that we have not seen in munis for 10 years," says Philip Fischer, municipal strategist at Merrill Lynch. "We are happy to work with retail clients, but we need more buyers."
The market is expected to remain under pressure in 2009. With the US in a recession, states and local governments are facing growing budget deficits. The US government appears to favour stimulus for state and local economies over direct aid and the credit derivatives market is pricing in a greater risk of default than for high-grade corporate bonds.
"There are a lot of headwinds," Mr Sommer of Fidelity says. "Muni bond prices are reflecting investors' skittishness, scepticism and fear about how this will play out."
This article is the second in a series
Thursday, December 18, 2008
Banks need more capital
--$250 bil more capital is needed into prop up Bank's balance sheet
--Private capital market have to finally replace the temporarty state capital market provided by Fed
--the source of private capital market is gobal equity market
--the return of confidence and stablization of home prices will help restore the equity market, which will in turn help replenish balance sheet, easing bond credit strain, and retore banks asset values.
In a guest article, Alan Greenspan says banks will need much thicker capital cushions than they had before the bust
Greenspan Associates
Alan Greenspan was the chairman of the Federal Reserve Board from 1987 to 2006. He is now president of Greenspan Associates
GLOBAL financial intermediation is broken. That intricate and interdependent system directing the world’s saving into productive capital investment was severely weakened in August 2007. The disclosure that highly leveraged financial institutions were holding toxic securitised American subprime mortgages shocked market participants. For a year, banks struggled to respond to investor demands for larger capital cushions. But the effort fell short and in the wake of the Lehman Brothers default on September 15th 2008, the system cracked. Banks, fearful of their own solvency, all but stopped lending. Issuance of corporate bonds, commercial paper and a wide variety of other financial products largely ceased. Credit-financed economic activity was brought to a virtual standstill. The world faced a major financial crisis.
For decades, holders of the liabilities of banks in the United States had felt secure with the protection of a modest equity-capital cushion, allowing banks to lend freely. As recently as the summer of 2006, with average book capital at 10%, a federal agency noted that “more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.”
Today, fearful investors clearly require a far larger capital cushion to lend, unsecured, to any financial intermediary. When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily (see chart). It is not a stretch to infer that these heightened levels will be the basis of a new regulatory system.
The three-month LIBOR/Overnight Index Swap (OIS) spread, a measure of market perceptions of potential bank insolvency and thus of extra capital needs, rose from a long-standing ten basis points in the summer of 2007 to 90 points by that autumn. Though elevated, the LIBOR/OIS spread appeared range-bound for about a year up to mid-September 2008. The Lehman default, however, drove LIBOR/OIS up markedly. It reached a riveting 364 basis points on October 10th.
The passage by Congress of the $700 billion Troubled Assets Relief Programme (TARP) on October 3rd eased, but did not erase, the post-Lehman surge in LIBOR/OIS. The spread apparently stalled in mid-November and remains worryingly high.
How much extra capital, both private and sovereign, will investors require of banks and other intermediaries to conclude that they are not at significant risk in holding financial institutions’ deposits or debt, a precondition to solving the crisis?
The insertion, last month, of $250 billion of equity into American banks through TARP (a two-percentage-point addition to capital-asset ratios) halved the post-Lehman surge of the LIBOR/OIS spread. Assuming modest further write-offs, simple linear extrapolation would suggest that another $250 billion would bring the spread back to near its pre-crisis norm. This arithmetic would imply that investors now require 14% capital rather than the 10% of mid-2006. Such linear calculations, of course, can only be very rough approximations. But recent data do suggest that, while helpful, the Treasury’s $250 billion goes only partway towards the levels required to support renewed lending.
Government credit has in effect acted as counterparty to a large segment of the financial intermediary system. But for reasons that go beyond the scope of this note, I strongly believe that the use of government credit must be temporary. What, then, will be the source of the new private capital that allows sovereign lending to be withdrawn? Eventually, the most credible source is a partial restoration of the $30 trillion of global stockmarket value wiped out this year, which would enable banks to raise the needed equity. Markets are being suppressed by a degree of fear not experienced since the early 20th century (1907 and 1932 come to mind). Human nature being what it is, we can count on a market reversal, hopefully, within six months to a year.
Though capital gains cannot finance physical investment, they can replenish balance-sheets. This can best be seen in the context of the consolidated balance-sheet of the world economy. All debt and derivative claims are offset in global accounting consolidation, but capital is not. This leaves the market value of the world’s real physical and intellectual assets reflected as capital. Obviously, higher global stock prices will enlarge the pool of equity that can facilitate the recapitalisation of financial institutions. Lower stock prices can impede the process. A higher level of equity, of course, makes it easier to issue debt.
Another critical price for the return of global financial stability is that of American homes. Those prices are likely to stabilise next year and with them the levels of home equity—the ultimate collateral for global holdings of American mortgage-backed securities, some toxic. Home-price stabilisation will help clarify the market value of financial institutions’ assets and therefore more closely equate the size of their book capital with the realities of market pricing. That should help stabilise their stock prices. The eventual partial recovery of global equities, as fear inevitably dissipates, should do the rest. Temporary public capital injections into banks would facilitate this process and arguably provide far more benefit per dollar than conventional fiscal stimulus.
Even before the market linkages among banks, other financial institutions and non-financial businesses are fully re-established, we will need to start unwinding the massive sovereign credit and guarantees put in place during the crisis, now estimated at $7 trillion. The economics of such a course are fairly clear. The politics of draining off that much credit support in a timely way is quite another matter.
--Private capital market have to finally replace the temporarty state capital market provided by Fed
--the source of private capital market is gobal equity market
--the return of confidence and stablization of home prices will help restore the equity market, which will in turn help replenish balance sheet, easing bond credit strain, and retore banks asset values.
In a guest article, Alan Greenspan says banks will need much thicker capital cushions than they had before the bust
Greenspan Associates
Alan Greenspan was the chairman of the Federal Reserve Board from 1987 to 2006. He is now president of Greenspan Associates
GLOBAL financial intermediation is broken. That intricate and interdependent system directing the world’s saving into productive capital investment was severely weakened in August 2007. The disclosure that highly leveraged financial institutions were holding toxic securitised American subprime mortgages shocked market participants. For a year, banks struggled to respond to investor demands for larger capital cushions. But the effort fell short and in the wake of the Lehman Brothers default on September 15th 2008, the system cracked. Banks, fearful of their own solvency, all but stopped lending. Issuance of corporate bonds, commercial paper and a wide variety of other financial products largely ceased. Credit-financed economic activity was brought to a virtual standstill. The world faced a major financial crisis.
For decades, holders of the liabilities of banks in the United States had felt secure with the protection of a modest equity-capital cushion, allowing banks to lend freely. As recently as the summer of 2006, with average book capital at 10%, a federal agency noted that “more than 99% of all insured institutions met or exceeded the requirements of the highest regulatory capital standards.”
Today, fearful investors clearly require a far larger capital cushion to lend, unsecured, to any financial intermediary. When bank book capital finally adjusts to current market imperatives, it may well reach its highest levels in 75 years, at least temporarily (see chart). It is not a stretch to infer that these heightened levels will be the basis of a new regulatory system.
The three-month LIBOR/Overnight Index Swap (OIS) spread, a measure of market perceptions of potential bank insolvency and thus of extra capital needs, rose from a long-standing ten basis points in the summer of 2007 to 90 points by that autumn. Though elevated, the LIBOR/OIS spread appeared range-bound for about a year up to mid-September 2008. The Lehman default, however, drove LIBOR/OIS up markedly. It reached a riveting 364 basis points on October 10th.
The passage by Congress of the $700 billion Troubled Assets Relief Programme (TARP) on October 3rd eased, but did not erase, the post-Lehman surge in LIBOR/OIS. The spread apparently stalled in mid-November and remains worryingly high.
How much extra capital, both private and sovereign, will investors require of banks and other intermediaries to conclude that they are not at significant risk in holding financial institutions’ deposits or debt, a precondition to solving the crisis?
The insertion, last month, of $250 billion of equity into American banks through TARP (a two-percentage-point addition to capital-asset ratios) halved the post-Lehman surge of the LIBOR/OIS spread. Assuming modest further write-offs, simple linear extrapolation would suggest that another $250 billion would bring the spread back to near its pre-crisis norm. This arithmetic would imply that investors now require 14% capital rather than the 10% of mid-2006. Such linear calculations, of course, can only be very rough approximations. But recent data do suggest that, while helpful, the Treasury’s $250 billion goes only partway towards the levels required to support renewed lending.
Government credit has in effect acted as counterparty to a large segment of the financial intermediary system. But for reasons that go beyond the scope of this note, I strongly believe that the use of government credit must be temporary. What, then, will be the source of the new private capital that allows sovereign lending to be withdrawn? Eventually, the most credible source is a partial restoration of the $30 trillion of global stockmarket value wiped out this year, which would enable banks to raise the needed equity. Markets are being suppressed by a degree of fear not experienced since the early 20th century (1907 and 1932 come to mind). Human nature being what it is, we can count on a market reversal, hopefully, within six months to a year.
Though capital gains cannot finance physical investment, they can replenish balance-sheets. This can best be seen in the context of the consolidated balance-sheet of the world economy. All debt and derivative claims are offset in global accounting consolidation, but capital is not. This leaves the market value of the world’s real physical and intellectual assets reflected as capital. Obviously, higher global stock prices will enlarge the pool of equity that can facilitate the recapitalisation of financial institutions. Lower stock prices can impede the process. A higher level of equity, of course, makes it easier to issue debt.
Another critical price for the return of global financial stability is that of American homes. Those prices are likely to stabilise next year and with them the levels of home equity—the ultimate collateral for global holdings of American mortgage-backed securities, some toxic. Home-price stabilisation will help clarify the market value of financial institutions’ assets and therefore more closely equate the size of their book capital with the realities of market pricing. That should help stabilise their stock prices. The eventual partial recovery of global equities, as fear inevitably dissipates, should do the rest. Temporary public capital injections into banks would facilitate this process and arguably provide far more benefit per dollar than conventional fiscal stimulus.
Even before the market linkages among banks, other financial institutions and non-financial businesses are fully re-established, we will need to start unwinding the massive sovereign credit and guarantees put in place during the crisis, now estimated at $7 trillion. The economics of such a course are fairly clear. The politics of draining off that much credit support in a timely way is quite another matter.
Fare well, free trade
With the global economy facing its worst recession in decades, protectionism is a growing risk
Illustration by David SimondsTHIS Christmas the world economy offers few reasons for good cheer. As credit contracts and asset prices plunge, demand across the globe is shrivelling. Rich countries collectively face the severest recession since the second world war: this week’s cut in the target for the federal funds rate to between zero and 0.25% (see article) shows how fearful America’s policymakers are. And conditions are deteriorating fast too in emerging economies, which have been whacked by tumbling exports and the drying-up of foreign finance.
This news is bad enough in itself; but it also poses the biggest threat to open markets in the modern era of globalisation. For the first time in more than a generation, two of the engines of global integration—trade and capital flows—are simultaneously shifting into reverse. The World Bank says that net private capital flows to emerging economies in 2009 are likely to be only half the record $1 trillion of 2007, while global trade volumes will shrink for the first time since 1982 (see article).
This twin shift will force wrenching adjustments. Countries that have relied on exports to drive growth, from China to Germany, will slump unless they can boost domestic demand quickly. The flight of private capital means emerging economies with current-account deficits face a drought of financing as well as export earnings. There is a risk that in their discomfort governments turn to an old, but false, friend: protectionism. Integration has less appeal when pain rather than prosperity is ricocheting across borders. It will be tempting to prop up domestic jobs and incomes by diverting demand from abroad with export subsidies, tariffs and cheaper currencies.
The lessons of history, though, are clear. The economic isolationism of the 1930s, epitomised by America’s Smoot-Hawley tariff (see article), cruelly intensified the Depression. To be sure, the World Trade Organisation (WTO) and its multilateral trading rules are a bulwark against protection on that scale. But today’s globalised economy, with far-flung supply chains and just-in-time delivery, could be disrupted by policies much less dramatic than the Smoot-Hawley act. A modest shift away from openness—well within the WTO’s rules—would be enough to turn the recession of 2009 much nastier. Incremental protection of that sort is, alas, all too plausible.
Fair-weather free-traders
In many countries politicians’ fealty to open markets is already more rhetorical than real. In November the leaders of the G20 group of big rich and emerging economies promised to eschew any new trade barriers for a year and to work hard for agreement on the Doha round of trade talks by the end of December. Within days, two of the G20 countries, Russia and India, raised tariffs on cars and steel respectively. And the year is ending with no Doha breakthrough in sight.
As economies weaken, popular scepticism of open markets will surely grow. Among rich countries, that danger is greatest in America, where grumbles were heard long before recession set in. The new Congress, with bigger Democratic majorities, has a decidedly less trade-friendly hue. Barack Obama’s campaign rhetoric left an impression of a man in two minds about trade, which he has since done nothing to dispel.
Now that their exports are faltering, emerging economies too may become less keen on trade. The WTO’s rules allow them plenty of scope: after two decades of unilateral tariff-cutting most of their tariffs are well below their “bound” rates, the ceilings agreed in the trade club. On average they could triple their import levies without breaking the rules.
Handouts to the ready
Politicians from Washington to Beijing are being pressed to help troubled industries, regardless of the consequences for trade. A bail-out of Detroit’s carmakers, whatever its final extent, will be a discriminatory subsidy. As China’s exporters go bust by the thousand, industries from textiles to steel have been promised handouts and rebates. Subsidies will beget more subsidies: Nicolas Sarkozy, France’s president, says that Europe will turn into an “industrial wasteland” if it too does not prop up its manufacturers. They will also invite retaliation. With China’s bilateral trade surplus at a record high even as America’s economy slumps, Congress will not take kindly to Beijing’s bolstering of its exporters.
Exchange-rate movements could also prompt protectionist responses. Chinese officials have said publicly that they will not push down the yuan, and their currency has risen in trade-weighted terms. However, it did slip against the dollar in late November. Viewed from America, China still seems to be following a cheap-yuan policy. A Sino-American trade spat is all too plausible.
Add all this together and it is hard for a free-trader not to worry. So what is to be done? The first requirement is political leadership, especially from America and China. At a minimum, both must avoid beggar-thy-neighbour policies. Second, a conclusion of the Doha round would help. A deal would reduce the risk of broader backsliding by cutting many countries’ bound tariffs—and it would establish Mr Obama’s multilateral credentials. Third—Doha deal or not—is greater transparency. A good recent idea is that the WTO publicise any new barriers, whether or not they are allowed by its rules.
The best insurance against protectionism, however, is macroeconomic stimulus. Boosting demand at home will reduce the temptation to divert it from abroad. By historical standards policymakers are acting aggressively, as the Federal Reserve did this week. But the effort is unevenly, and poorly, distributed. Emerging economies from which capital is fleeing have little room to boost spending. Some creditor countries (notably Germany) are holding back on fiscal stimulus, while the world’s biggest borrower (America) is acting the most boldly. A bigger push to boost domestic demand in creditor countries coupled with more help, through the IMF, to cushion cash-strapped emerging economies would ease the world economy’s adjustment and brighten the prospects for free trade. In the 1930s protectionism flourished largely because of macroeconomic failures. That must not happen this time.
Illustration by David SimondsTHIS Christmas the world economy offers few reasons for good cheer. As credit contracts and asset prices plunge, demand across the globe is shrivelling. Rich countries collectively face the severest recession since the second world war: this week’s cut in the target for the federal funds rate to between zero and 0.25% (see article) shows how fearful America’s policymakers are. And conditions are deteriorating fast too in emerging economies, which have been whacked by tumbling exports and the drying-up of foreign finance.
This news is bad enough in itself; but it also poses the biggest threat to open markets in the modern era of globalisation. For the first time in more than a generation, two of the engines of global integration—trade and capital flows—are simultaneously shifting into reverse. The World Bank says that net private capital flows to emerging economies in 2009 are likely to be only half the record $1 trillion of 2007, while global trade volumes will shrink for the first time since 1982 (see article).
This twin shift will force wrenching adjustments. Countries that have relied on exports to drive growth, from China to Germany, will slump unless they can boost domestic demand quickly. The flight of private capital means emerging economies with current-account deficits face a drought of financing as well as export earnings. There is a risk that in their discomfort governments turn to an old, but false, friend: protectionism. Integration has less appeal when pain rather than prosperity is ricocheting across borders. It will be tempting to prop up domestic jobs and incomes by diverting demand from abroad with export subsidies, tariffs and cheaper currencies.
The lessons of history, though, are clear. The economic isolationism of the 1930s, epitomised by America’s Smoot-Hawley tariff (see article), cruelly intensified the Depression. To be sure, the World Trade Organisation (WTO) and its multilateral trading rules are a bulwark against protection on that scale. But today’s globalised economy, with far-flung supply chains and just-in-time delivery, could be disrupted by policies much less dramatic than the Smoot-Hawley act. A modest shift away from openness—well within the WTO’s rules—would be enough to turn the recession of 2009 much nastier. Incremental protection of that sort is, alas, all too plausible.
Fair-weather free-traders
In many countries politicians’ fealty to open markets is already more rhetorical than real. In November the leaders of the G20 group of big rich and emerging economies promised to eschew any new trade barriers for a year and to work hard for agreement on the Doha round of trade talks by the end of December. Within days, two of the G20 countries, Russia and India, raised tariffs on cars and steel respectively. And the year is ending with no Doha breakthrough in sight.
As economies weaken, popular scepticism of open markets will surely grow. Among rich countries, that danger is greatest in America, where grumbles were heard long before recession set in. The new Congress, with bigger Democratic majorities, has a decidedly less trade-friendly hue. Barack Obama’s campaign rhetoric left an impression of a man in two minds about trade, which he has since done nothing to dispel.
Now that their exports are faltering, emerging economies too may become less keen on trade. The WTO’s rules allow them plenty of scope: after two decades of unilateral tariff-cutting most of their tariffs are well below their “bound” rates, the ceilings agreed in the trade club. On average they could triple their import levies without breaking the rules.
Handouts to the ready
Politicians from Washington to Beijing are being pressed to help troubled industries, regardless of the consequences for trade. A bail-out of Detroit’s carmakers, whatever its final extent, will be a discriminatory subsidy. As China’s exporters go bust by the thousand, industries from textiles to steel have been promised handouts and rebates. Subsidies will beget more subsidies: Nicolas Sarkozy, France’s president, says that Europe will turn into an “industrial wasteland” if it too does not prop up its manufacturers. They will also invite retaliation. With China’s bilateral trade surplus at a record high even as America’s economy slumps, Congress will not take kindly to Beijing’s bolstering of its exporters.
Exchange-rate movements could also prompt protectionist responses. Chinese officials have said publicly that they will not push down the yuan, and their currency has risen in trade-weighted terms. However, it did slip against the dollar in late November. Viewed from America, China still seems to be following a cheap-yuan policy. A Sino-American trade spat is all too plausible.
Add all this together and it is hard for a free-trader not to worry. So what is to be done? The first requirement is political leadership, especially from America and China. At a minimum, both must avoid beggar-thy-neighbour policies. Second, a conclusion of the Doha round would help. A deal would reduce the risk of broader backsliding by cutting many countries’ bound tariffs—and it would establish Mr Obama’s multilateral credentials. Third—Doha deal or not—is greater transparency. A good recent idea is that the WTO publicise any new barriers, whether or not they are allowed by its rules.
The best insurance against protectionism, however, is macroeconomic stimulus. Boosting demand at home will reduce the temptation to divert it from abroad. By historical standards policymakers are acting aggressively, as the Federal Reserve did this week. But the effort is unevenly, and poorly, distributed. Emerging economies from which capital is fleeing have little room to boost spending. Some creditor countries (notably Germany) are holding back on fiscal stimulus, while the world’s biggest borrower (America) is acting the most boldly. A bigger push to boost domestic demand in creditor countries coupled with more help, through the IMF, to cushion cash-strapped emerging economies would ease the world economy’s adjustment and brighten the prospects for free trade. In the 1930s protectionism flourished largely because of macroeconomic failures. That must not happen this time.
Deutsche's strategic debt move may haunt banks
Deutsche's strategic debt move may haunt banks
By Paul J Davies in London
Published: December 18 2008 02:00 Last updated: December 18 2008 02:00
Deutsche Bank jolted bond and equity investors yesterday when it became the first big bank to say it would not repay €1bn ($1.4bn) of a particular kind of bond as expected in January.
The move raised fears about Deutsche's capital strength and signalled a much higher likelihood that other banks would follow the example in not repaying so-called hybrid-capital bonds.
This could be highly damaging to the market for hybrid-capital deals, which occupy a kind of grey area between debt and equity. They have been hugely important in squeezing extra funding into bank balance sheets - and in propping them up since the financial crisis exploded.
More than $800bn of such bonds have been issued globally this decade, according to Dealogic, hitting a peak of $175bn in 2007. Most of the issuance has come from banks. Their importance in supporting bank balance sheets during the crisis is shown in the $137bn of deals in the past year. The bonds are typically repaid at the first opportunity after an initial period when redemptions are not allowed. If an issuer does not redeem then, they must pay a higher penalty coupon rate.
Deutsche Bank decided it was more cost effective to pay this penalty rate than to replace the funding in current conditions, which have made financing more expensive. When banks decide not to redeem the bonds at the earliest opportunity, the market value of the instruments falls, hurting investors. Analysts and bankers said this would turn investors off buying these deals in the future - further harming banks' ability to raise new money at a time when many need it most.
"Deutsche Bank is running the risk that this may be seen as more symptomatic of capital and funding pressures which the institution may be facing," said Roberto Henriques, credit analyst at JPMorgan.
Another Frankfurt-based analyst added: "[This decision] is being seen more as an indicator that Deutsche's situation with its capital and losses could be worse than expected."
Yesterday, the bank's shares were down 7 per cent to €26.04, while the bonds in question dropped by up to 10 per cent to be worth less than 90 per cent of their original value, according to traders. The €1bn bond, which is part of Deutsche's tier two capital, an important, but not core, element of its balance sheet, has its first call date in midJanuary.
Hybrid bank debt was always about a nod and a wink - regulators and agencies saw it as capital, investors saw it as debt. But in the coming year a lot of those implicit understandings are going to be broken.
They were sold as so-called tier one and tier two bank capital that, along with equity, is meant to support bank funding and absorb losses. But the market was always underpinned by the assumption among investors that they would be repaid at the earliest opportunity and so they were priced more like debt than capital. Now many think the entire market might have no future.
Gerry Rawcliffe, group credit officer for banks at Fitch Ratings, sums up the problem. "On the one hand, banks need to repay these deals at their call dates to keep investors happy and to keep the market open, but on the other hand if they are all called during the worst banking crisis in living memory then they are arguably not capital and they should not be treated as such by regulators."
More than €33bn worth of such bonds are due to be called in Europe alone over the next 12 months, according to analysts at JPMorgan, including about €2bn from Deutsche Bank.
There is widespread suspicion that the reasons given by Deutsche for its decision might only be half the story.
Not repaying the bond means that Deutsche must pay a higher penalty coupon. In this case that increase, or step-up, amounts to only about 16 basis points to a total of a little over 4 per cent on current interbank rates. Deutsche said in a regulatory announcement that this was cheaper than would be the coupon on a new deal.
But many say this is not the point. The decision is likely to be economically beneficial only in the short-term, analysts say, as it is likely to make similar instruments and other senior debt more expensive in future.
"Until recently it was widely assumed that major banks would call these bonds to maintain future access to the market, even if it didn't work economically," said Hans Peter Lorenzen at Citigroup.
By Paul J Davies in London
Published: December 18 2008 02:00 Last updated: December 18 2008 02:00
Deutsche Bank jolted bond and equity investors yesterday when it became the first big bank to say it would not repay €1bn ($1.4bn) of a particular kind of bond as expected in January.
The move raised fears about Deutsche's capital strength and signalled a much higher likelihood that other banks would follow the example in not repaying so-called hybrid-capital bonds.
This could be highly damaging to the market for hybrid-capital deals, which occupy a kind of grey area between debt and equity. They have been hugely important in squeezing extra funding into bank balance sheets - and in propping them up since the financial crisis exploded.
More than $800bn of such bonds have been issued globally this decade, according to Dealogic, hitting a peak of $175bn in 2007. Most of the issuance has come from banks. Their importance in supporting bank balance sheets during the crisis is shown in the $137bn of deals in the past year. The bonds are typically repaid at the first opportunity after an initial period when redemptions are not allowed. If an issuer does not redeem then, they must pay a higher penalty coupon rate.
Deutsche Bank decided it was more cost effective to pay this penalty rate than to replace the funding in current conditions, which have made financing more expensive. When banks decide not to redeem the bonds at the earliest opportunity, the market value of the instruments falls, hurting investors. Analysts and bankers said this would turn investors off buying these deals in the future - further harming banks' ability to raise new money at a time when many need it most.
"Deutsche Bank is running the risk that this may be seen as more symptomatic of capital and funding pressures which the institution may be facing," said Roberto Henriques, credit analyst at JPMorgan.
Another Frankfurt-based analyst added: "[This decision] is being seen more as an indicator that Deutsche's situation with its capital and losses could be worse than expected."
Yesterday, the bank's shares were down 7 per cent to €26.04, while the bonds in question dropped by up to 10 per cent to be worth less than 90 per cent of their original value, according to traders. The €1bn bond, which is part of Deutsche's tier two capital, an important, but not core, element of its balance sheet, has its first call date in midJanuary.
Hybrid bank debt was always about a nod and a wink - regulators and agencies saw it as capital, investors saw it as debt. But in the coming year a lot of those implicit understandings are going to be broken.
They were sold as so-called tier one and tier two bank capital that, along with equity, is meant to support bank funding and absorb losses. But the market was always underpinned by the assumption among investors that they would be repaid at the earliest opportunity and so they were priced more like debt than capital. Now many think the entire market might have no future.
Gerry Rawcliffe, group credit officer for banks at Fitch Ratings, sums up the problem. "On the one hand, banks need to repay these deals at their call dates to keep investors happy and to keep the market open, but on the other hand if they are all called during the worst banking crisis in living memory then they are arguably not capital and they should not be treated as such by regulators."
More than €33bn worth of such bonds are due to be called in Europe alone over the next 12 months, according to analysts at JPMorgan, including about €2bn from Deutsche Bank.
There is widespread suspicion that the reasons given by Deutsche for its decision might only be half the story.
Not repaying the bond means that Deutsche must pay a higher penalty coupon. In this case that increase, or step-up, amounts to only about 16 basis points to a total of a little over 4 per cent on current interbank rates. Deutsche said in a regulatory announcement that this was cheaper than would be the coupon on a new deal.
But many say this is not the point. The decision is likely to be economically beneficial only in the short-term, analysts say, as it is likely to make similar instruments and other senior debt more expensive in future.
"Until recently it was widely assumed that major banks would call these bonds to maintain future access to the market, even if it didn't work economically," said Hans Peter Lorenzen at Citigroup.
Insight: This isn’t the end of leveraged buy outs
By Joe Swanson
Published: December 17 2008 16:54 Last updated: December 17 2008 16:54
While the financial sector turbulence of the past 18 months appears to be abating, owners of the more than $250bn of European leveraged buy-outs (LBOs) are looking over their portfolios with increasing concern.
Bearish pundits, expecting a deep European recession, are predicting covenant breaches in as many as 50 per cent of outstanding European LBOs, placing the ownership of these assets in jeopardy.
In this climate, one would expect private equity firms to be in disarray with their own investors threatening to withdraw support following a crash in the trading value of their funds.
Appearances, however, can be deceptive. It is true that many of the assets purchased in the LBO boom were purchased at such high prices that the equity in most of these transactions will almost certainly never be recouped under current capital structures.
However, many sponsors are looking at how they can exploit the weakness in the financial sector to make right some of their losses by recapitalising their assets through a combination of new equity and debt write-off.
The key factor underlying the recapitalisation of impaired LBOs is the imbalance of liquidity between lenders and private equity funds. Since the summer of 2007, a series of structural changes has left the leveraged loan market in tatters. Banks, under pressure from new government owners, wary private shareholders and ardent regulators have drastically reduced their appetite for risk.
Managers of collateralised loan obligations, structured finance vehicles that purchase leveraged loans, have lost their funding sources and can’t participate in new transactions. And hedge funds have seen waves of redemptions limiting their ability to invest and forcing many into a defensive posture. With these three main pillars of the leveraged loan market in retreat, liquidity has evaporated and yields have more than doubled from pre-credit crunch levels.
On the other hand, and in spite of stories about investor revolts, many private equity groups appear to be liquidity-rich. Unlike many hedge funds whose investors have periodic redemption rights, most private equity funds are structured as medium-term investment vehicles where investors typically have no rights of early withdrawal and must provide additional funds.
Armed with this war chest, an increasing number of private equity groups began buying debt in portfolio companies earlier this year – to position themselves for a future restructuring or to improve their financial return.
As credit markets continue to deteriorate, many private equity groups are taking a fresh look at their portfolio companies with an eye to restoring value to their equity. Not content with opportunistically purchasing debt, sponsors are increasingly looking to enter into comprehensive restructuring negotiations with creditors.
While the rules of the game are still being written, the general approach being taken is to base the restructuring around the enterprise value that could be obtained by selling the company in the open market. Once this price is agreed, the equity holders propose that lenders write off all debt above the “fair-market” value of the company in exchange for an injection of equity used to stabilise the business and fund operations.
As with all trends, however, some groups will take things too far. Most successful restructurings of this type have shared one key point in common – the company being restructured had a liquidity crisis. To the extent creditors are not willing to provide “rescue funding”, the dynamic will certainly play to the favour of equity holders.
Trying to force lenders to accept a discount where the company has healthy operating cash flows or where lenders are prepared to provide financing is not a dynamic likely to lead to peaceful resolution. In such situations, sponsors must decide whether the opportunity is worth tarnishing their reputation if some of the lender group refuse to welcome the “rescuer”.
While the concept of “relationship” is being sorely tested in today’s market, there is likely to be a strong backlash if private equity firms are viewed as unfairly capitalising on the weakness of their lending partners.
The writer is co-head of European restructuring at Houlihan Lokey, an international investment bank
Published: December 17 2008 16:54 Last updated: December 17 2008 16:54
While the financial sector turbulence of the past 18 months appears to be abating, owners of the more than $250bn of European leveraged buy-outs (LBOs) are looking over their portfolios with increasing concern.
Bearish pundits, expecting a deep European recession, are predicting covenant breaches in as many as 50 per cent of outstanding European LBOs, placing the ownership of these assets in jeopardy.
In this climate, one would expect private equity firms to be in disarray with their own investors threatening to withdraw support following a crash in the trading value of their funds.
Appearances, however, can be deceptive. It is true that many of the assets purchased in the LBO boom were purchased at such high prices that the equity in most of these transactions will almost certainly never be recouped under current capital structures.
However, many sponsors are looking at how they can exploit the weakness in the financial sector to make right some of their losses by recapitalising their assets through a combination of new equity and debt write-off.
The key factor underlying the recapitalisation of impaired LBOs is the imbalance of liquidity between lenders and private equity funds. Since the summer of 2007, a series of structural changes has left the leveraged loan market in tatters. Banks, under pressure from new government owners, wary private shareholders and ardent regulators have drastically reduced their appetite for risk.
Managers of collateralised loan obligations, structured finance vehicles that purchase leveraged loans, have lost their funding sources and can’t participate in new transactions. And hedge funds have seen waves of redemptions limiting their ability to invest and forcing many into a defensive posture. With these three main pillars of the leveraged loan market in retreat, liquidity has evaporated and yields have more than doubled from pre-credit crunch levels.
On the other hand, and in spite of stories about investor revolts, many private equity groups appear to be liquidity-rich. Unlike many hedge funds whose investors have periodic redemption rights, most private equity funds are structured as medium-term investment vehicles where investors typically have no rights of early withdrawal and must provide additional funds.
Armed with this war chest, an increasing number of private equity groups began buying debt in portfolio companies earlier this year – to position themselves for a future restructuring or to improve their financial return.
As credit markets continue to deteriorate, many private equity groups are taking a fresh look at their portfolio companies with an eye to restoring value to their equity. Not content with opportunistically purchasing debt, sponsors are increasingly looking to enter into comprehensive restructuring negotiations with creditors.
While the rules of the game are still being written, the general approach being taken is to base the restructuring around the enterprise value that could be obtained by selling the company in the open market. Once this price is agreed, the equity holders propose that lenders write off all debt above the “fair-market” value of the company in exchange for an injection of equity used to stabilise the business and fund operations.
As with all trends, however, some groups will take things too far. Most successful restructurings of this type have shared one key point in common – the company being restructured had a liquidity crisis. To the extent creditors are not willing to provide “rescue funding”, the dynamic will certainly play to the favour of equity holders.
Trying to force lenders to accept a discount where the company has healthy operating cash flows or where lenders are prepared to provide financing is not a dynamic likely to lead to peaceful resolution. In such situations, sponsors must decide whether the opportunity is worth tarnishing their reputation if some of the lender group refuse to welcome the “rescuer”.
While the concept of “relationship” is being sorely tested in today’s market, there is likely to be a strong backlash if private equity firms are viewed as unfairly capitalising on the weakness of their lending partners.
The writer is co-head of European restructuring at Houlihan Lokey, an international investment bank
Wednesday, December 17, 2008
Ultra-low US rates undermine repo market
By Michael Mackenzie in New York
Published: December 16 2008 23:33 Last updated: December 16 2008 23:33
Extremely low short-term interest rates in the US are sharply eroding the functioning of the government repurchase or repo market, a foundation stone for the financial system and trading Treasury debt.
While the Federal Reserve reduced its benchmark interest rate from 1 per cent to a new range of zero to 0.25 per cent on Tuesday, short-term market rates have been trading at close to zero per cent in recent weeks. Driven by a flight to safety by investors and expectations of rate cuts, such conditions are creating problems in the repo market, where investors borrow Treasuries in return for short-term cash loans.
EDITOR’S CHOICE
Awaiting the return of the repo market - Dec-16
This activity allows traders to sell Treasuries without owning them in the first place, while owners of government debt can fund their portfolios by lending Treasuries.
When rates tumble to low levels, it reduces the economic incentive to lend securities. The reduction in liquidity in the $5,800bn Treasury market comes at a time when conditions have become strained as the calendar year draws to a close.
The problems also come as the US Treasury prepares to issue a massive amount of new government bonds for the current financial year.
“Low rates are having a corrosive effect on the repo market, which will impair liquidity in Treasuries,” said Michael Cloherty, strategist at Banc of America Securities. “We are getting close to a situation where structural damage caused by low interest rates outweighs any benefit from easier monetary policy.
“In a [financial] year where the Treasury is facing a net financing need of roughly $1,800bn, lower trading volume is a major concern.”
Problems in repo impair general trading across the Treasury market. A rise in so-called failed trades, where a borrowed security is not returned in a timely fashion, becomes a drain on the balance sheets of dealers. Low interest rates are also hampering the ability of dealers in financing positions by matching the different needs of clients, known as matching offsetting trades.
“The zero per cent interest rate environment is effectively eliminating the dealer matched-book business and crippling dealer intermediation in the repo market,” said Scott Skyrm, senior vice-president at Newedge, a repo broker dealer.
Published: December 16 2008 23:33 Last updated: December 16 2008 23:33
Extremely low short-term interest rates in the US are sharply eroding the functioning of the government repurchase or repo market, a foundation stone for the financial system and trading Treasury debt.
While the Federal Reserve reduced its benchmark interest rate from 1 per cent to a new range of zero to 0.25 per cent on Tuesday, short-term market rates have been trading at close to zero per cent in recent weeks. Driven by a flight to safety by investors and expectations of rate cuts, such conditions are creating problems in the repo market, where investors borrow Treasuries in return for short-term cash loans.
EDITOR’S CHOICE
Awaiting the return of the repo market - Dec-16
This activity allows traders to sell Treasuries without owning them in the first place, while owners of government debt can fund their portfolios by lending Treasuries.
When rates tumble to low levels, it reduces the economic incentive to lend securities. The reduction in liquidity in the $5,800bn Treasury market comes at a time when conditions have become strained as the calendar year draws to a close.
The problems also come as the US Treasury prepares to issue a massive amount of new government bonds for the current financial year.
“Low rates are having a corrosive effect on the repo market, which will impair liquidity in Treasuries,” said Michael Cloherty, strategist at Banc of America Securities. “We are getting close to a situation where structural damage caused by low interest rates outweighs any benefit from easier monetary policy.
“In a [financial] year where the Treasury is facing a net financing need of roughly $1,800bn, lower trading volume is a major concern.”
Problems in repo impair general trading across the Treasury market. A rise in so-called failed trades, where a borrowed security is not returned in a timely fashion, becomes a drain on the balance sheets of dealers. Low interest rates are also hampering the ability of dealers in financing positions by matching the different needs of clients, known as matching offsetting trades.
“The zero per cent interest rate environment is effectively eliminating the dealer matched-book business and crippling dealer intermediation in the repo market,” said Scott Skyrm, senior vice-president at Newedge, a repo broker dealer.
The ogre in the attic
Dec 11th 2008 ROME
From The Economist print edition
Fretful markets fear the worst
ITALY’S public debt, the world’s third-biggest, equivalent to over 104% of GDP, is not so much the elephant in the living room as the ogre in the attic. The fear has long been that it could escape and wreak havoc, not only in Italy but also across the entire euro area. On December 3rd came what some took to be an ominous rattling of the attic door.
It took the form of an answer by Silvio Berlusconi’s welfare minister, Maurizio Sacconi, to suggestions that he was at odds with the finance minister, Giulio Tremonti, over how much to spend on stimulus measures. Denying that there was any conflict, he said “I too am constrained by the public debt. And I too am worried by the risk of default.” Seemingly unaware of the possible effect of his words, he added: “There is something worse than recession, and that’s state bankruptcy: an improbable, but nevertheless possible, hypothesis.” If the Italian Treasury were unable to find buyers for Italian sovereign bonds, said Mr Sacconi, Italy could go the way of Argentina, which defaulted in 2001.
The sovereign-bond market has certainly become more testing for sellers of debt. Numerous countries, many with far better credit ratings than Italy, need to raise cash. But if the yield on Italy’s bonds goes up, the government may end up paying more in interest, and that increases the risk of the budget deficit getting out of hand. Were this to happen, it would further erode investors’ confidence, prompting them to demand still higher yields.
Amid the outcry that followed Mr Sacconi’s remarks, Mr Tremonti denied that there was any danger of default. But on the same day he himself confirmed that the risks had grown. He told a parliamentary committee that the “sole constraint” on government spending was no longer the European Union’s Maastricht rules that cap budget deficits, but the limits imposed by the markets. Indeed, fears have been expressed that the start of what financiers call “adverse debt dynamics” can already be discerned in a sharp widening of the spread (the difference in yields) between the ten-year German bund and its Italian equivalent. On December 5th this peaked at 144 basis points—up from a low of 38 basis points at the end of May (see chart).
Yet Brian Coulton of Fitch, a rating agency, points out that this reflects falling German yields (as investors seek ultra-safe havens) rather than rising Italian ones. “The current yield on Italy’s ten-year bonds is the same as it was at the end of 2007,” he notes. Since the launch of the euro, moreover, Italy’s debt managers have managed to extend the average term of its borrowing to almost seven years, locking in then-prevailing interest rates and ensuring that less of the outstanding debt is subject to abrupt rate increases.
Thanks in part to retrenchment under the previous centre-left government, Italy’s public finances are no longer in the parlous state they were in a few years ago. In the spring Mr Tremonti rammed through parliament a three-year spending plan that included deep cuts. That leaves two questions. One is whether he can make his cuts stick. The other is what will happen on the revenue side of the ledger. In a recession tax revenues can be expected to fall. But how much?
In part, the answer will depend on the sensitivity of the public accounts to changes in growth. Tax revenues soared under the centre-left. But as Mr Coulton points out, it is not clear how much of this increase was structural (the product of enduring improvements in tax collection) and how much cyclical (the result of a temporary upswing in the economy).
The other variable is the depth of the recession. Most forecasters believe that it will be shallower in Italy than in Britain (though deeper than in France or Germany). But Mr Berlusconi’s anti-recession measures have been distinctly modest (involving extra net spending of only some €6 billion). And the reason that he withdrew his pledges of more aid was that Mr Tremonti reminded him of the limitations imposed by Italy’s €1,575 billion of debt. The ogre is still there, even if for the time being it is safely chained.
From The Economist print edition
Fretful markets fear the worst
ITALY’S public debt, the world’s third-biggest, equivalent to over 104% of GDP, is not so much the elephant in the living room as the ogre in the attic. The fear has long been that it could escape and wreak havoc, not only in Italy but also across the entire euro area. On December 3rd came what some took to be an ominous rattling of the attic door.
It took the form of an answer by Silvio Berlusconi’s welfare minister, Maurizio Sacconi, to suggestions that he was at odds with the finance minister, Giulio Tremonti, over how much to spend on stimulus measures. Denying that there was any conflict, he said “I too am constrained by the public debt. And I too am worried by the risk of default.” Seemingly unaware of the possible effect of his words, he added: “There is something worse than recession, and that’s state bankruptcy: an improbable, but nevertheless possible, hypothesis.” If the Italian Treasury were unable to find buyers for Italian sovereign bonds, said Mr Sacconi, Italy could go the way of Argentina, which defaulted in 2001.
The sovereign-bond market has certainly become more testing for sellers of debt. Numerous countries, many with far better credit ratings than Italy, need to raise cash. But if the yield on Italy’s bonds goes up, the government may end up paying more in interest, and that increases the risk of the budget deficit getting out of hand. Were this to happen, it would further erode investors’ confidence, prompting them to demand still higher yields.
Amid the outcry that followed Mr Sacconi’s remarks, Mr Tremonti denied that there was any danger of default. But on the same day he himself confirmed that the risks had grown. He told a parliamentary committee that the “sole constraint” on government spending was no longer the European Union’s Maastricht rules that cap budget deficits, but the limits imposed by the markets. Indeed, fears have been expressed that the start of what financiers call “adverse debt dynamics” can already be discerned in a sharp widening of the spread (the difference in yields) between the ten-year German bund and its Italian equivalent. On December 5th this peaked at 144 basis points—up from a low of 38 basis points at the end of May (see chart).
Yet Brian Coulton of Fitch, a rating agency, points out that this reflects falling German yields (as investors seek ultra-safe havens) rather than rising Italian ones. “The current yield on Italy’s ten-year bonds is the same as it was at the end of 2007,” he notes. Since the launch of the euro, moreover, Italy’s debt managers have managed to extend the average term of its borrowing to almost seven years, locking in then-prevailing interest rates and ensuring that less of the outstanding debt is subject to abrupt rate increases.
Thanks in part to retrenchment under the previous centre-left government, Italy’s public finances are no longer in the parlous state they were in a few years ago. In the spring Mr Tremonti rammed through parliament a three-year spending plan that included deep cuts. That leaves two questions. One is whether he can make his cuts stick. The other is what will happen on the revenue side of the ledger. In a recession tax revenues can be expected to fall. But how much?
In part, the answer will depend on the sensitivity of the public accounts to changes in growth. Tax revenues soared under the centre-left. But as Mr Coulton points out, it is not clear how much of this increase was structural (the product of enduring improvements in tax collection) and how much cyclical (the result of a temporary upswing in the economy).
The other variable is the depth of the recession. Most forecasters believe that it will be shallower in Italy than in Britain (though deeper than in France or Germany). But Mr Berlusconi’s anti-recession measures have been distinctly modest (involving extra net spending of only some €6 billion). And the reason that he withdrew his pledges of more aid was that Mr Tremonti reminded him of the limitations imposed by Italy’s €1,575 billion of debt. The ogre is still there, even if for the time being it is safely chained.
The Fed fixes bayonets
--slash fed fund rate to a range between 0 and 25 bps
--keep the rate for some time
--use unconventional moentaary ammunition
--core inflation sunk to 2%
--encouraging sign: Fed BS stopped growing; less demand for short term bills
CENTRAL bankers ordinarily strive to be boring. But these are not ordinary times. On Tuesday December 16th the Federal Reserve abandoned any pretence of business as usual and promised an all-out assault on the recession and the credit crunch.
Following a two-day meeting the Fed’s policy panel, the Federal Open Market Committee (FOMC), announced three big measures: it has cut its target for the federal-funds rate to between zero and 0.25%, the lowest on record; it said that a weak economy would probably keep it there “for some time”; and having exhausted its conventional monetary ammunition, it promised a range of unconventional strategies, primarily purchases of mortgage-related securities and possibly Treasuries to push down long-term borrowing costs. Having run out of interest rate bullets, the Fed has now fixed bayonets.
Alone, any of these steps would be momentous. Taken together they represent a formidable display of monetary aggression. That said, there was less than first met the eye. Although the cut in the target for the federal-funds rate was larger than expected, it will have no measurable impact on the actual funds rate, which is charged on excess reserves lent overnight between banks. It had already fallen to around 0.1%, in anticipation of a target cut and because the banking system is awash with almost $800 billion of reserves. (The FOMC’s move to a range rather than point target for the funds rate reflects the difficulty it has had hitting that target.) The Fed had announced on November 24th that it would buy up to $100 billion of debt directly issued by Fannie Mae and Freddie Mac, the now-nationalised mortgage agencies, and $500 billion of their mortgage-backed securities (MBS). And in a speech on December 1st Ben Bernanke, the Fed chairman, had said that Treasury purchases were under consideration.
The Fed did not go much beyond any of that in its statement. However more important than specifics, and of greatest significance to the stockmarket which soared on the announcement, was the assurance of radicalism. “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” it said in its statement.
Whether it will be enough remains the biggest question. The Fed has succeeded in bringing previous recessions to an end by cutting short-term interest rates. But now having cut the funds rate as low as it can realistically go, that is in doubt. Its new, unconventional operations have been dubbed “quantitative easing” because their effect is felt through the Fed’s control over the quantity rather than the cost of credit. Through the creation and expansion of an array of lending programmes, the Fed’s balance has grown from below $900 billion to more than $2 trillion. Although such programmes have so far no doubt kept the interest rates that are charged to actual private borrowers lower than they otherwise would be, the effect has been difficult to detect, and certainly smaller than what the Treasury achieved through direct injections of public capital into banks.
In theory, purchases of longer-term securities could have more impact by pulling down longer-term interest rates. The 10-year Treasury yield, for example, is 2.3%, and the 30-year conventional mortgage-rate is around 5.5%. But whereas the Fed knows more or less just what it has to do to move short-term interest rates up or down, it is in uncharted territory on longer-term interest rates. Indeed, theory suggests that the purchases would have to be spectacularly large to affect such large, globally integrated markets.
A senior Fed official, briefing reporters after the FOMC meeting, rejected the notion that the Fed was trying explicitly to target lower long-term rates, and rather framed the Fed’s new actions as an extension of previous efforts at restoring liquidity and normal trading conditions. The official said that yields on Fannie’s and Freddie’s MBS, despite the explicit support of the Treasury, are much higher than Treasury yields because of a lack of liquidity. The Fed can narrow that spread, he said, by providing investors with the confidence that a committed buyer is in the market.
Although the Fed may yet buy longer-term Treasuries, the benefits are less clear: yields are already low, there is no lack of liquidity, and it is not clear that lowering them by another ten basis points would bring mortgage rates down by an equal amount. Thus for now it makes sense for the Fed to focus on those rates that most directly affect the economy.
The economy certainly needs it. On the morning of the Fed announcement the government reported that housing starts in America had plunged by 19% to an annualised level of 625,000 in November, from October, the lowest level on record. The only positive interpretation is that reduced construction should bring down inventories of unsold homes, although builders are now battling for sales with a wave of foreclosed properties.
Inflation has retreated at a surprising and, possibly, alarming rate. The consumer price index fell by 1.7% in November, from October, the largest fall on record, largely as a result of plunging petrol prices, dragging the overall inflation rate down to 1.1% from 5.5% in July. Excluding food and energy “core” prices were unchanged and the core inflation rate has sunk to 2%, from 2.5% in July. Much of the drop in core inflation is a byproduct of falling energy prices flowing through to airfares and other energy-intensive categories. But the trend is almost certainly lower as rising unemployment and slumping sales eat into wage and price power. The senior Fed official said that he does not think that outright deflation is a risk but the situation bore watching.
There are some glimmers of economic hope. The drop in petrol prices has delivered a sizable boost to household buying power, one reason why retail sales in November were not as weak as expected. Home sales have remained stable, helped by declines in mortgage rates. Shares have been range bound (though the range is wide) since mid October. On Tuesday shares of Goldman Sachs rallied by almost 10% as it reported an expected $2.12 billion fourth-quarter loss. Interbank loan rates have edged lower. The senior Fed official said that there has been little change recently in the Fed’s economic outlook: it expects continued contraction through the first quarter followed by a weak recovery.
One of the most encouraging signs, arguably, is that the Fed’s balance sheet has stopped growing in the past month, an indication that it has, for now, sated corporate and financial borrowers’ demands for short-term credit. Of the $150 billion of short-term loans that the Fed offered this week, banks bid for only $63 billion worth.
That pause is almost certainly temporary. In the coming months the Fed will inaugurate several big new lending programmes, including a facility for backing asset-backed securities and the purchases of MBS. Although the financial backdrop has, for now, stopped getting worse, the Fed is taking no chances.
--keep the rate for some time
--use unconventional moentaary ammunition
--core inflation sunk to 2%
--encouraging sign: Fed BS stopped growing; less demand for short term bills
CENTRAL bankers ordinarily strive to be boring. But these are not ordinary times. On Tuesday December 16th the Federal Reserve abandoned any pretence of business as usual and promised an all-out assault on the recession and the credit crunch.
Following a two-day meeting the Fed’s policy panel, the Federal Open Market Committee (FOMC), announced three big measures: it has cut its target for the federal-funds rate to between zero and 0.25%, the lowest on record; it said that a weak economy would probably keep it there “for some time”; and having exhausted its conventional monetary ammunition, it promised a range of unconventional strategies, primarily purchases of mortgage-related securities and possibly Treasuries to push down long-term borrowing costs. Having run out of interest rate bullets, the Fed has now fixed bayonets.
Alone, any of these steps would be momentous. Taken together they represent a formidable display of monetary aggression. That said, there was less than first met the eye. Although the cut in the target for the federal-funds rate was larger than expected, it will have no measurable impact on the actual funds rate, which is charged on excess reserves lent overnight between banks. It had already fallen to around 0.1%, in anticipation of a target cut and because the banking system is awash with almost $800 billion of reserves. (The FOMC’s move to a range rather than point target for the funds rate reflects the difficulty it has had hitting that target.) The Fed had announced on November 24th that it would buy up to $100 billion of debt directly issued by Fannie Mae and Freddie Mac, the now-nationalised mortgage agencies, and $500 billion of their mortgage-backed securities (MBS). And in a speech on December 1st Ben Bernanke, the Fed chairman, had said that Treasury purchases were under consideration.
The Fed did not go much beyond any of that in its statement. However more important than specifics, and of greatest significance to the stockmarket which soared on the announcement, was the assurance of radicalism. “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” it said in its statement.
Whether it will be enough remains the biggest question. The Fed has succeeded in bringing previous recessions to an end by cutting short-term interest rates. But now having cut the funds rate as low as it can realistically go, that is in doubt. Its new, unconventional operations have been dubbed “quantitative easing” because their effect is felt through the Fed’s control over the quantity rather than the cost of credit. Through the creation and expansion of an array of lending programmes, the Fed’s balance has grown from below $900 billion to more than $2 trillion. Although such programmes have so far no doubt kept the interest rates that are charged to actual private borrowers lower than they otherwise would be, the effect has been difficult to detect, and certainly smaller than what the Treasury achieved through direct injections of public capital into banks.
In theory, purchases of longer-term securities could have more impact by pulling down longer-term interest rates. The 10-year Treasury yield, for example, is 2.3%, and the 30-year conventional mortgage-rate is around 5.5%. But whereas the Fed knows more or less just what it has to do to move short-term interest rates up or down, it is in uncharted territory on longer-term interest rates. Indeed, theory suggests that the purchases would have to be spectacularly large to affect such large, globally integrated markets.
A senior Fed official, briefing reporters after the FOMC meeting, rejected the notion that the Fed was trying explicitly to target lower long-term rates, and rather framed the Fed’s new actions as an extension of previous efforts at restoring liquidity and normal trading conditions. The official said that yields on Fannie’s and Freddie’s MBS, despite the explicit support of the Treasury, are much higher than Treasury yields because of a lack of liquidity. The Fed can narrow that spread, he said, by providing investors with the confidence that a committed buyer is in the market.
Although the Fed may yet buy longer-term Treasuries, the benefits are less clear: yields are already low, there is no lack of liquidity, and it is not clear that lowering them by another ten basis points would bring mortgage rates down by an equal amount. Thus for now it makes sense for the Fed to focus on those rates that most directly affect the economy.
The economy certainly needs it. On the morning of the Fed announcement the government reported that housing starts in America had plunged by 19% to an annualised level of 625,000 in November, from October, the lowest level on record. The only positive interpretation is that reduced construction should bring down inventories of unsold homes, although builders are now battling for sales with a wave of foreclosed properties.
Inflation has retreated at a surprising and, possibly, alarming rate. The consumer price index fell by 1.7% in November, from October, the largest fall on record, largely as a result of plunging petrol prices, dragging the overall inflation rate down to 1.1% from 5.5% in July. Excluding food and energy “core” prices were unchanged and the core inflation rate has sunk to 2%, from 2.5% in July. Much of the drop in core inflation is a byproduct of falling energy prices flowing through to airfares and other energy-intensive categories. But the trend is almost certainly lower as rising unemployment and slumping sales eat into wage and price power. The senior Fed official said that he does not think that outright deflation is a risk but the situation bore watching.
There are some glimmers of economic hope. The drop in petrol prices has delivered a sizable boost to household buying power, one reason why retail sales in November were not as weak as expected. Home sales have remained stable, helped by declines in mortgage rates. Shares have been range bound (though the range is wide) since mid October. On Tuesday shares of Goldman Sachs rallied by almost 10% as it reported an expected $2.12 billion fourth-quarter loss. Interbank loan rates have edged lower. The senior Fed official said that there has been little change recently in the Fed’s economic outlook: it expects continued contraction through the first quarter followed by a weak recovery.
One of the most encouraging signs, arguably, is that the Fed’s balance sheet has stopped growing in the past month, an indication that it has, for now, sated corporate and financial borrowers’ demands for short-term credit. Of the $150 billion of short-term loans that the Fed offered this week, banks bid for only $63 billion worth.
That pause is almost certainly temporary. In the coming months the Fed will inaugurate several big new lending programmes, including a facility for backing asset-backed securities and the purchases of MBS. Although the financial backdrop has, for now, stopped getting worse, the Fed is taking no chances.
Deere Gets Backing in $2 Billion Debt Offer
The Federal Deposit Insurance Corp. backstopped $2 billion of debt issued by farm-equipment maker Deere & Co. on Tuesday, a tangible sign of the government's unprecedented push into the private markets.
The offering, which is guaranteed by the FDIC's Temporary Liquidity Guarantee Program allowed Deere's credit arm to pay under 3% interest on its borrowing. That saved the firm tens of millions of dollars, compared with over 5% yields on some of its current, non-FDIC-backed debt, according to MarketAxess. The credit unit helps finance farmers' purchases of tractors and other machines.
The deal comes as the Federal Reserve threw all of its weight behind its efforts to spur the economy and stem a deflationary spiral. The central bank moved interest rates to near 0% and pledged to use "all available tools" to combat a deepening recession. The step sent investors further into the safety of Treasury bonds. The 10-year Treasury rose in price by 1 19/32 points,or $15.94 per $1,000 invested, to yield 2.4%. T-bills that mature in one month remain at yields close to zero.
View Full Image
Bloomberg News/Landov
BOND BUILDING: A line of John Deere utility tractors and equipment on sale in Cuba City, Wis.
"We are an eligible U.S. savings-and-loan holding company and, therefore an eligible entity and a participant under the TLG program by virtue of not electing to opt out of the TLG program," Deere said in its bond prospectus.
Thus far, Deere is an unusual entrant to this program, though General Electric Capital Corp., which also finances commercial-lending operations, and American Express Co., which funds consumer credit, also have used the program to access funds. Most of the borrowers have been large banks like Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and Bank of America among others.
But companies such as Deere -- which maintain small, industrial banks used to finance consumer purchases -- will increasingly tap FDIC-backed markets. Over time that will makes the U.S. government a guarantor of debt used to make loans for everything from tractors and cars to credit cards and construction projects.
Absent FDIC-backing, credit markets remain mostly closed. They are extremely expensive for even the highest-quality borrowers, with bonds pricing at more than 7% interest. Investors also are flocking to this new FDIC insured debt market where they can buy bonds with guarantees as good as Treasurys but at three times the yields.
By comparison, the three-year Treasury bond ended Tuesday at 0.9%. Credit-rating companies rate all FDIC-backed debt triple-A, the highest credit ratings available.
Over $67.9 billion of the bonds backed by the FDIC have been sold since Goldman Sachs was first with a $5 billion offering Nov. 25. Issuers have until June 30, 2009 to sell the debt, which must mature in three years or less.
The offering, which is guaranteed by the FDIC's Temporary Liquidity Guarantee Program allowed Deere's credit arm to pay under 3% interest on its borrowing. That saved the firm tens of millions of dollars, compared with over 5% yields on some of its current, non-FDIC-backed debt, according to MarketAxess. The credit unit helps finance farmers' purchases of tractors and other machines.
The deal comes as the Federal Reserve threw all of its weight behind its efforts to spur the economy and stem a deflationary spiral. The central bank moved interest rates to near 0% and pledged to use "all available tools" to combat a deepening recession. The step sent investors further into the safety of Treasury bonds. The 10-year Treasury rose in price by 1 19/32 points,or $15.94 per $1,000 invested, to yield 2.4%. T-bills that mature in one month remain at yields close to zero.
View Full Image
Bloomberg News/Landov
BOND BUILDING: A line of John Deere utility tractors and equipment on sale in Cuba City, Wis.
"We are an eligible U.S. savings-and-loan holding company and, therefore an eligible entity and a participant under the TLG program by virtue of not electing to opt out of the TLG program," Deere said in its bond prospectus.
Thus far, Deere is an unusual entrant to this program, though General Electric Capital Corp., which also finances commercial-lending operations, and American Express Co., which funds consumer credit, also have used the program to access funds. Most of the borrowers have been large banks like Goldman Sachs Group Inc., Morgan Stanley, Citigroup Inc. and Bank of America among others.
But companies such as Deere -- which maintain small, industrial banks used to finance consumer purchases -- will increasingly tap FDIC-backed markets. Over time that will makes the U.S. government a guarantor of debt used to make loans for everything from tractors and cars to credit cards and construction projects.
Absent FDIC-backing, credit markets remain mostly closed. They are extremely expensive for even the highest-quality borrowers, with bonds pricing at more than 7% interest. Investors also are flocking to this new FDIC insured debt market where they can buy bonds with guarantees as good as Treasurys but at three times the yields.
By comparison, the three-year Treasury bond ended Tuesday at 0.9%. Credit-rating companies rate all FDIC-backed debt triple-A, the highest credit ratings available.
Over $67.9 billion of the bonds backed by the FDIC have been sold since Goldman Sachs was first with a $5 billion offering Nov. 25. Issuers have until June 30, 2009 to sell the debt, which must mature in three years or less.
Tuesday, December 16, 2008
Ecuador defaults on bonds despite sufficient reserves
By Naomi Mapstone in Lima and David Oakley in London
Published: December 16 2008 02:00 Last updated: December 16 2008 02:00
Ecuador has become the second country to default on its bonds since the credit crisis in spite of having sufficient funds to meet its interest payments.
The decision of Rafael Correa, Ecuador's radical leftist president, could return to haunt the country and others in the region as investors subsequently demand higher yields to buy their bonds.
Ecuador's bonds fell sharply after the decision to default on $3.86bn of foreign debt on Friday, with its main benchmark bond yield jumping more than 100 basis points since Friday to trade at about 60 per cent.
However, neighbouring countries saw their debt prices hold up relatively well, with Argentine and Venezuelan debt yields rising only slightly. Analysts believe Mr Correa is taking a gamble on refusing to pay the $30.6m coupon payment on the country's Global 2012 bond in spite of having reserves of $6bn available to meet the bill. He joined Seychelles to be the only countries to default on their bonds since August last year, when the credit crisis blew up, because he said the country's bonds were "illegal", saying the debt was contracted illegally by a previous administration.
He wants to restructure the bonds, reducing their value and the country's debt payments. However, analysts warn that this could prove problematic as it could frighten off investors.
Although Ecuador attracts only investors willing to take big risks in exchange for high yields, even the most risk-hungry funds may think twice now. The country's credit default swap prices, a form of insurance against debt defaults, are trading at more than 4,000 basis points, one of the highest sovereign prices in the world.
Fears have also mounted in recent months that Argentina will struggle to meet its 2009 debt servicing payments of $21bn, but economists believe it will avoid defaulting, especially given that the state went so far as to nationalise private pension funds to meet its obligations.
"I'm less concerned about contagion and more concerned about the overall impact on the asset class," said one bondholder. "Ecuador has probably cost all Latin American countries tens of millions of dollars in borrowing costs. Not everybody has the ability to distinguish between these countries in real detail."
Patrick Esteruelas, Latin America analyst for Eurasia Group, said the chances of contagion were limited, and would increase only if Ecuador got away with a wilful default and restructuring.
Ecuador has defaulted on its debt three times in the past 14 years, and Mr Esteruelas said many of its bonds were now likely in the hands of vulture funds or specialists in distressed debt who favoured a protracted court battle over any proposal for a bond swap at lower interest rates or with a longer grace period.
To entice investors to restructure, Ecuador would likely have to offer a significant cash sweetener - as much as $1bn to restructure 70 per cent of its debt - it could ill afford at a time of falling oil prices, he said.
"Given Ecuador's poor economic direction and the extremely questionable willingness to pay . . very few investors, if any, are going to be willing to hold any bonds right now," he said.
Published: December 16 2008 02:00 Last updated: December 16 2008 02:00
Ecuador has become the second country to default on its bonds since the credit crisis in spite of having sufficient funds to meet its interest payments.
The decision of Rafael Correa, Ecuador's radical leftist president, could return to haunt the country and others in the region as investors subsequently demand higher yields to buy their bonds.
Ecuador's bonds fell sharply after the decision to default on $3.86bn of foreign debt on Friday, with its main benchmark bond yield jumping more than 100 basis points since Friday to trade at about 60 per cent.
However, neighbouring countries saw their debt prices hold up relatively well, with Argentine and Venezuelan debt yields rising only slightly. Analysts believe Mr Correa is taking a gamble on refusing to pay the $30.6m coupon payment on the country's Global 2012 bond in spite of having reserves of $6bn available to meet the bill. He joined Seychelles to be the only countries to default on their bonds since August last year, when the credit crisis blew up, because he said the country's bonds were "illegal", saying the debt was contracted illegally by a previous administration.
He wants to restructure the bonds, reducing their value and the country's debt payments. However, analysts warn that this could prove problematic as it could frighten off investors.
Although Ecuador attracts only investors willing to take big risks in exchange for high yields, even the most risk-hungry funds may think twice now. The country's credit default swap prices, a form of insurance against debt defaults, are trading at more than 4,000 basis points, one of the highest sovereign prices in the world.
Fears have also mounted in recent months that Argentina will struggle to meet its 2009 debt servicing payments of $21bn, but economists believe it will avoid defaulting, especially given that the state went so far as to nationalise private pension funds to meet its obligations.
"I'm less concerned about contagion and more concerned about the overall impact on the asset class," said one bondholder. "Ecuador has probably cost all Latin American countries tens of millions of dollars in borrowing costs. Not everybody has the ability to distinguish between these countries in real detail."
Patrick Esteruelas, Latin America analyst for Eurasia Group, said the chances of contagion were limited, and would increase only if Ecuador got away with a wilful default and restructuring.
Ecuador has defaulted on its debt three times in the past 14 years, and Mr Esteruelas said many of its bonds were now likely in the hands of vulture funds or specialists in distressed debt who favoured a protracted court battle over any proposal for a bond swap at lower interest rates or with a longer grace period.
To entice investors to restructure, Ecuador would likely have to offer a significant cash sweetener - as much as $1bn to restructure 70 per cent of its debt - it could ill afford at a time of falling oil prices, he said.
"Given Ecuador's poor economic direction and the extremely questionable willingness to pay . . very few investors, if any, are going to be willing to hold any bonds right now," he said.
Recession is time to leave high-yield bonds alone
Recession is time to leave high-yield bonds alone
Published: December 16 2008 02:00 Last updated: December 16 2008 02:00
Credit markets are in turmoil. The spread of investment-grade debt over US Treasuries is five times the 10-year average and at the widest level since 1933. As a result, investment-grade bonds may offer the opportunity of a lifetime. At the same time, emerging debt has never been as expensive in comparison.
The credit bubble has its roots in the monetary policy stance of the world's central banks immediately after the last US recession in 2001. Since then US interest rates have, on average, been held below the level of inflation. Such low real interest rates, at a time of economic prosperity, allowed enormous issuance of debt by countries and corporations, on terms that caused experienced credit investors to raise their eyebrows.
Such a loose monetary policy inevitably leads to problems and in recent months several countries have either defaulted or are on the brink of default. In 2006, Pakistan issued a 30-year bond at a spread over US Treasuries of just 300 basis points. That is a very low level for a country with such poor economic fundamentals and a history of political instability. While Pakistan has not yet defaulted, their bonds trade at about 40 cents on the dollar, suggesting that default is imminent. Other countries have defaulted, though. The Seychelles defaulted in August and over the weekend Rafael Correa, Ecuador's president, said his nation intended to default on its foreign debt.
Deleveraging on a massive scale has discouraged many investors from taking positions in credit markets, which in turn raises market volatility. With volatility comes an increased number of anomalies. For instance, over the past few years Russia (rated BBB) has been running large current account surpluses and paying down debt. In contrast, Turkey has been running large deficits and has substantially more government debt as a percentage of gross domestic product. However, 20-year Turkish dollar bonds yield a little over 8 per cent, whereas Russian sovereign debt yields more than 11 per cent.
But why own Russian sovereign bonds when there are higher-rated (single A) corporate bond issues yielding more than 12.5 per cent? In fact in our portfolio, we hold investment-grade debt with yields in excess of 25 per cent and lower-rated paper that yields in excess of 40 per cent. The point is credit risk is relative and there is no need to hold riskier credits yielding 8 per cent or even junk bonds yielding 22 per cent when you can achieve a similar, or even a higher, yield from investment-grade credits.
Emerging market debt spreads have yet to adjust fully to the realities of weaker global growth, falling commodity prices and higher defaults. Historically, emerging market debt has traded on similar spreads to high yield as both have similar underlying credit quality. However, currently spreads on high-yield are about 1,400bp wider than emerging market spreads.
In spite of the hype in recent years, many emerging market countries have weak economic fundamentals with several countries, including Ukraine, Hungary and Pakistan, needing to request support from the IMF. At current spreads investors are not being sufficiently compensated for the risks in many of these countries.
So where are credit spreads heading in the coming months? This recession will be the 11th since the second world war and, in all previous instances, credit spreads have ended the recession at wider levels than at the start. This suggests further pressure in the near term.
Our multifactor credit models, which have worked very well in recent times, also suggest wider spreads. The time to buy high-yield credit will not be until the recession has ended. Indeed, a simple strategy of buying high-grade and government bonds during recessions, and high-yield at other times, would have substantially outperformed all fixed-income sectors over the past 20 years.
Lastly, high-yield spreads are above 2,000bp and still widening. This provides a warning of how much emerging market spreads might widen, particularly the subinvestment-grade issuers. We think Turkey is very expensive and therefore vulnerable: and we all know what happens to Turkeys at Christmas.
The writer is co-manager of the Stratton Street Asian Bond Fund, a fixed income hedge fund.
Published: December 16 2008 02:00 Last updated: December 16 2008 02:00
Credit markets are in turmoil. The spread of investment-grade debt over US Treasuries is five times the 10-year average and at the widest level since 1933. As a result, investment-grade bonds may offer the opportunity of a lifetime. At the same time, emerging debt has never been as expensive in comparison.
The credit bubble has its roots in the monetary policy stance of the world's central banks immediately after the last US recession in 2001. Since then US interest rates have, on average, been held below the level of inflation. Such low real interest rates, at a time of economic prosperity, allowed enormous issuance of debt by countries and corporations, on terms that caused experienced credit investors to raise their eyebrows.
Such a loose monetary policy inevitably leads to problems and in recent months several countries have either defaulted or are on the brink of default. In 2006, Pakistan issued a 30-year bond at a spread over US Treasuries of just 300 basis points. That is a very low level for a country with such poor economic fundamentals and a history of political instability. While Pakistan has not yet defaulted, their bonds trade at about 40 cents on the dollar, suggesting that default is imminent. Other countries have defaulted, though. The Seychelles defaulted in August and over the weekend Rafael Correa, Ecuador's president, said his nation intended to default on its foreign debt.
Deleveraging on a massive scale has discouraged many investors from taking positions in credit markets, which in turn raises market volatility. With volatility comes an increased number of anomalies. For instance, over the past few years Russia (rated BBB) has been running large current account surpluses and paying down debt. In contrast, Turkey has been running large deficits and has substantially more government debt as a percentage of gross domestic product. However, 20-year Turkish dollar bonds yield a little over 8 per cent, whereas Russian sovereign debt yields more than 11 per cent.
But why own Russian sovereign bonds when there are higher-rated (single A) corporate bond issues yielding more than 12.5 per cent? In fact in our portfolio, we hold investment-grade debt with yields in excess of 25 per cent and lower-rated paper that yields in excess of 40 per cent. The point is credit risk is relative and there is no need to hold riskier credits yielding 8 per cent or even junk bonds yielding 22 per cent when you can achieve a similar, or even a higher, yield from investment-grade credits.
Emerging market debt spreads have yet to adjust fully to the realities of weaker global growth, falling commodity prices and higher defaults. Historically, emerging market debt has traded on similar spreads to high yield as both have similar underlying credit quality. However, currently spreads on high-yield are about 1,400bp wider than emerging market spreads.
In spite of the hype in recent years, many emerging market countries have weak economic fundamentals with several countries, including Ukraine, Hungary and Pakistan, needing to request support from the IMF. At current spreads investors are not being sufficiently compensated for the risks in many of these countries.
So where are credit spreads heading in the coming months? This recession will be the 11th since the second world war and, in all previous instances, credit spreads have ended the recession at wider levels than at the start. This suggests further pressure in the near term.
Our multifactor credit models, which have worked very well in recent times, also suggest wider spreads. The time to buy high-yield credit will not be until the recession has ended. Indeed, a simple strategy of buying high-grade and government bonds during recessions, and high-yield at other times, would have substantially outperformed all fixed-income sectors over the past 20 years.
Lastly, high-yield spreads are above 2,000bp and still widening. This provides a warning of how much emerging market spreads might widen, particularly the subinvestment-grade issuers. We think Turkey is very expensive and therefore vulnerable: and we all know what happens to Turkeys at Christmas.
The writer is co-manager of the Stratton Street Asian Bond Fund, a fixed income hedge fund.
Car Buyers May Be Less Skittish About Chapter 11
--New research sponsored by ML suggested that buyers are less skittish about buying a vehicle from an auto cmpany filed for chapter 11 if government in involved
--the notion that care buyers will be cautious about Chapter 11 has been at the heart of Wagoner's appeal for help
--Chapter 11 will spiral into chapter 7 as auto maker will be branded as insolvent by buyers
--Senate voted down the bailout plan last week. Concerned about riplle effect, Governm has been working on bridge loans.
By JOHN D. STOLL
A pair of new surveys suggests consumers aren't likely to be as cautious about buying a vehicle from an auto maker that has filed for bankruptcy-court protection as originally thought, as long as the U.S. government is willing to play a role in the Chapter 11 process.
One study, conducted by Merrill Lynch & Co. for its clients, concluded that a "large majority of consumers would consider buying or leasing their next vehicle from an auto maker that is backed by U.S. government funding and may emerge as a strong company, following a restructuring through the bankruptcy process."
The Wall Street Journal reviewed a copy of the survey, which won't be released publicly.
A separate survey of 9,700 domestic car owners, completed Sunday by CNW Research, suggested 48% of buyers would be willing to consider a product sold by an auto maker in bankruptcy court, as long as the government was involved in the process, the firm's president, Art Spinella, said Tuesday.
CNW had been the source of an earlier study whose conclusions raised concerns about the impact of a bankruptcy filing on a car company. That survey found buyers would stay away and the company's revenue would plunge. But Mr. Spinella said in an interview that people would feel much better about a Chapter 11 auto maker's chances "as long as there are loan guarantees by the government."
The results contradict much of what executives at U.S. auto makers and the United Auto Workers have been arguing concerning the impact a bankruptcy filing would have on one or more of the auto makers. General Motors Corp. Chief Executive Rick Wagoner has said a filing under Chapter 11 of the U.S. Bankruptcy Code would quickly spiral into Chapter 7 liquidation because an auto maker would be branded as insolvent by buyers, even though many companies simply use Chapter 11 as a vehicle to restructure.
Merrill Lynch's consumer-research service, Primary Source, conducted the firm's survey among 507 respondents. Merrill Lynch auto analyst John Murphy, writing to clients in a report accompanying the poll results, said the firm believes the results "will come as a surprise to many."
After seeing the results of earlier studies suggesting people would shun an auto maker in Chapter 11, Merrill Lynch decided to conduct its own research that made it clear to survey participants that a company could continue to operate while restructuring in bankruptcy court. The firm also made it clear the government would provide financing during the Chapter 11 filing and likely guarantee vehicle warranties.
In recent weeks, the chief executives of GM , Ford Motor Co. and Chrysler LLC, as well as the head of the United Auto Workers union, have told congressional leaders and the Bush administration that the vast majority of potential buyers would refuse to buy vehicles from an auto maker in bankruptcy court, fearing the company wouldn't exist long enough to honor warranties or provide needed service and parts.
"We've seen studies that have shown that," Ford Chief Executive Alan Mulally told reporters Tuesday. "Sales would fall off really fast if one of the companies went into bankruptcy."
After reporting dismal results for November auto sales, GM Marketing Chief Mark LaNeve said many buyers crossed the auto maker's cars and trucks off their shopping lists because of increasing reports about the company's fragile financial status, and the potential of a bankruptcy filing.
The Big Three auto makers asked Congress for $34 billion in emergency loans but were blocked mainly by Republican senators. President George W. Bush is now deciding whether to use the Treasury Department's fund for troubled financial institutions to extend help to GM and Chrysler. Ford has said it doesn't need financial help right now.
GM alone needs $4 billion by Dec. 31 to stay afloat. Mr. Mulally has been an advocate for the lifeline because he has said that a GM or Chrysler bankruptcy filing would lead to a collapse of the U.S. supply base and dealer body, therefore putting Ford at risk of collapsing.
The Senate last week voted down a bailout of the Detroit auto makers after intense hearings and debates on the matter. But the Bush administration, concerned at the potential negative ripple effect a failure in Detroit would have on the overall economy, is considering extending short-term loans to GM and Chrysler that would get them through at least the first quarter of 2009. At that point, a so-called auto czar, appointed by the White House, could force at least one of the auto makers to seek a restructuring in bankruptcy court.
As GM and Chrysler continued discussions with Bush administration officials Tuesday, negotiators kept the potential of an eventual bankruptcy filing on the table, according to people familiar with the matter. The bankruptcy filing, which would assist GM's attempt to reduce about $30 billion of its debt and restructure contracts with unions, dealers and suppliers, could be one of the strings attached to obtaining federal aid, these people said.
The notion that people won't buy cars from an auto maker in bankruptcy court has been at the heart of Mr. Wagoner's appeal for help from the U.S. government. In congressional testimony, Mr. Wagoner cited a CNW Research survey, conducted in July among 6,000 respondents, that suggested 80% of potential car buyers would abandon plans to purchase a vehicle from an auto maker that filed for bankruptcy-court protection.
--the notion that care buyers will be cautious about Chapter 11 has been at the heart of Wagoner's appeal for help
--Chapter 11 will spiral into chapter 7 as auto maker will be branded as insolvent by buyers
--Senate voted down the bailout plan last week. Concerned about riplle effect, Governm has been working on bridge loans.
By JOHN D. STOLL
A pair of new surveys suggests consumers aren't likely to be as cautious about buying a vehicle from an auto maker that has filed for bankruptcy-court protection as originally thought, as long as the U.S. government is willing to play a role in the Chapter 11 process.
One study, conducted by Merrill Lynch & Co. for its clients, concluded that a "large majority of consumers would consider buying or leasing their next vehicle from an auto maker that is backed by U.S. government funding and may emerge as a strong company, following a restructuring through the bankruptcy process."
The Wall Street Journal reviewed a copy of the survey, which won't be released publicly.
A separate survey of 9,700 domestic car owners, completed Sunday by CNW Research, suggested 48% of buyers would be willing to consider a product sold by an auto maker in bankruptcy court, as long as the government was involved in the process, the firm's president, Art Spinella, said Tuesday.
CNW had been the source of an earlier study whose conclusions raised concerns about the impact of a bankruptcy filing on a car company. That survey found buyers would stay away and the company's revenue would plunge. But Mr. Spinella said in an interview that people would feel much better about a Chapter 11 auto maker's chances "as long as there are loan guarantees by the government."
The results contradict much of what executives at U.S. auto makers and the United Auto Workers have been arguing concerning the impact a bankruptcy filing would have on one or more of the auto makers. General Motors Corp. Chief Executive Rick Wagoner has said a filing under Chapter 11 of the U.S. Bankruptcy Code would quickly spiral into Chapter 7 liquidation because an auto maker would be branded as insolvent by buyers, even though many companies simply use Chapter 11 as a vehicle to restructure.
Merrill Lynch's consumer-research service, Primary Source, conducted the firm's survey among 507 respondents. Merrill Lynch auto analyst John Murphy, writing to clients in a report accompanying the poll results, said the firm believes the results "will come as a surprise to many."
After seeing the results of earlier studies suggesting people would shun an auto maker in Chapter 11, Merrill Lynch decided to conduct its own research that made it clear to survey participants that a company could continue to operate while restructuring in bankruptcy court. The firm also made it clear the government would provide financing during the Chapter 11 filing and likely guarantee vehicle warranties.
In recent weeks, the chief executives of GM , Ford Motor Co. and Chrysler LLC, as well as the head of the United Auto Workers union, have told congressional leaders and the Bush administration that the vast majority of potential buyers would refuse to buy vehicles from an auto maker in bankruptcy court, fearing the company wouldn't exist long enough to honor warranties or provide needed service and parts.
"We've seen studies that have shown that," Ford Chief Executive Alan Mulally told reporters Tuesday. "Sales would fall off really fast if one of the companies went into bankruptcy."
After reporting dismal results for November auto sales, GM Marketing Chief Mark LaNeve said many buyers crossed the auto maker's cars and trucks off their shopping lists because of increasing reports about the company's fragile financial status, and the potential of a bankruptcy filing.
The Big Three auto makers asked Congress for $34 billion in emergency loans but were blocked mainly by Republican senators. President George W. Bush is now deciding whether to use the Treasury Department's fund for troubled financial institutions to extend help to GM and Chrysler. Ford has said it doesn't need financial help right now.
GM alone needs $4 billion by Dec. 31 to stay afloat. Mr. Mulally has been an advocate for the lifeline because he has said that a GM or Chrysler bankruptcy filing would lead to a collapse of the U.S. supply base and dealer body, therefore putting Ford at risk of collapsing.
The Senate last week voted down a bailout of the Detroit auto makers after intense hearings and debates on the matter. But the Bush administration, concerned at the potential negative ripple effect a failure in Detroit would have on the overall economy, is considering extending short-term loans to GM and Chrysler that would get them through at least the first quarter of 2009. At that point, a so-called auto czar, appointed by the White House, could force at least one of the auto makers to seek a restructuring in bankruptcy court.
As GM and Chrysler continued discussions with Bush administration officials Tuesday, negotiators kept the potential of an eventual bankruptcy filing on the table, according to people familiar with the matter. The bankruptcy filing, which would assist GM's attempt to reduce about $30 billion of its debt and restructure contracts with unions, dealers and suppliers, could be one of the strings attached to obtaining federal aid, these people said.
The notion that people won't buy cars from an auto maker in bankruptcy court has been at the heart of Mr. Wagoner's appeal for help from the U.S. government. In congressional testimony, Mr. Wagoner cited a CNW Research survey, conducted in July among 6,000 respondents, that suggested 80% of potential car buyers would abandon plans to purchase a vehicle from an auto maker that filed for bankruptcy-court protection.
台湾和中国大陆间终于实现直航
台湾和中国大陆间周一首次开启了每日直飞航班和定期班轮服务，这两个宿敌终于突破了持续近60年的禁区，实现了直航。
多年来，投资者和分析师们一直希望海峡两岸能实现直接通航，以带动两岸贸易和投资。不过，此次实现直航正值全球经济陷入萧条之际，这可能意味着直航可能不会像人们希望的那样使两岸立竿见影地从中受益。
不过，定期直航却消除了阻梗在两岸人士心头的一个重要心理障碍，从而有望改变台湾和中国大陆看待彼此的方式，自从中国共产党1949年在国共内战中获胜以来，这一心理障碍一直使海峡两岸彼此分离。
Associated Press
两岸直飞航班每周共54个台湾一些人担心，两岸间此类密切联系的不断增多将使台湾事实上被中国大陆所吞，而一直视台湾为中国领土一部分的中国则乐见此事发生。
中国大陆和台湾间此前已经开通了周末包机服务。但周一之前往来于两岸间的所有航班和班轮都必须绕行第三方的空域和水域。
据台湾负责两岸政策的大陆委员会说，两岸实现直航每年可以为航空和船运公司节省1.4亿美元。
中国大陆和台湾现在都准许对方每周共开飞54个往来于两岸间的航班。
台湾还希望两岸实现直航将吸引更多中国大陆游客前来旅游，并吸引在大陆经营的台湾人和外国公司前往台湾投资。台湾政府希望，改善与大陆间的联系最终会帮助台湾成为亚洲的金融中心和交通枢纽。
中国大陆是台湾最大的出口市场。而台湾从大陆的进口额要远小于其对大陆的出口额，据估计今年前7个月台湾对大陆出口额为660亿美元。在此期间，前往大陆的台湾人为4,900万人次，高于2007年全年的4,700万人次。
台湾宝来金融集团(Polaris Financial Group)的航运业分析师Peter Tzeng说，两岸实现直航至少能使台湾的（航空和海运公司）得以与同行平等竞争。不过他认为直航对台湾的益处可能将大打折扣。
Peter Tzeng说，现在直航禁令终于解除了，可全球海运量却已急剧下滑
多年来，投资者和分析师们一直希望海峡两岸能实现直接通航，以带动两岸贸易和投资。不过，此次实现直航正值全球经济陷入萧条之际，这可能意味着直航可能不会像人们希望的那样使两岸立竿见影地从中受益。
不过，定期直航却消除了阻梗在两岸人士心头的一个重要心理障碍，从而有望改变台湾和中国大陆看待彼此的方式，自从中国共产党1949年在国共内战中获胜以来，这一心理障碍一直使海峡两岸彼此分离。
Associated Press
两岸直飞航班每周共54个台湾一些人担心，两岸间此类密切联系的不断增多将使台湾事实上被中国大陆所吞，而一直视台湾为中国领土一部分的中国则乐见此事发生。
中国大陆和台湾间此前已经开通了周末包机服务。但周一之前往来于两岸间的所有航班和班轮都必须绕行第三方的空域和水域。
据台湾负责两岸政策的大陆委员会说，两岸实现直航每年可以为航空和船运公司节省1.4亿美元。
中国大陆和台湾现在都准许对方每周共开飞54个往来于两岸间的航班。
台湾还希望两岸实现直航将吸引更多中国大陆游客前来旅游，并吸引在大陆经营的台湾人和外国公司前往台湾投资。台湾政府希望，改善与大陆间的联系最终会帮助台湾成为亚洲的金融中心和交通枢纽。
中国大陆是台湾最大的出口市场。而台湾从大陆的进口额要远小于其对大陆的出口额，据估计今年前7个月台湾对大陆出口额为660亿美元。在此期间，前往大陆的台湾人为4,900万人次，高于2007年全年的4,700万人次。
台湾宝来金融集团(Polaris Financial Group)的航运业分析师Peter Tzeng说，两岸实现直航至少能使台湾的（航空和海运公司）得以与同行平等竞争。不过他认为直航对台湾的益处可能将大打折扣。
Peter Tzeng说，现在直航禁令终于解除了，可全球海运量却已急剧下滑
Regulation vs Deregualtion - quoted from bloomberg
"Both Franklin Delano Roosevelt in the 1930sand Ronald Reagan five decades later saw an economic crisis as an opportunity to make major changes. Roosevelt, in response to the Great Depression, created Social Security and fedearl deposit insurance. During teh 1981-82 recession, Reagan set out to reverse the centralization of power in Washington tha was at the haert of the Roosevelet revolution; he usered in a quarter century of deregualtion. "Most politicians are incrementalists," says presidentail historian Richard Nortonn Smith. "Reagan was no incrementialist. He took advantage of the dire cicumsances inerieted, and he saw them as justificaion for significantly if not radically different policies."
Heidi Przybyla " Why Obama won't bash Wall Street"
Heidi Przybyla " Why Obama won't bash Wall Street"
Crisis Pushed Foreign Investors Toward Treasurys
By MAYA JACKSON RANDALL and MIN ZENG
A global flight to safety sent foreign investors scrambling for short-term dollar-denominated assets in October, with buyers from around the world snapping up some $147 billion in Treasury bills as the credit crisis hit a peak.
With global markets roiled by the fallout from the Lehman Brothers bankruptcy and the bailout of insurance giant American International Group Inc., foreign buyers shunned longer-dated securities including stocks and corporate debt, purchasing just $1.5 billion after buying $65.4 billion in September, according to monthly data published by the Treasury Department.
Monday Markets: Fed As Backstop
3:00
The Federal Reserve must create an incentive for the private sector to participate in the markets, says Axel Merk of Merk Investments. MarketWatch's Stacey Delo reports. (Dec. 15)
"Net long-term capital flows to the U.S. declined sharply in October, as the global financial crisis reached a zenith and risk aversion became acute," said Brian Bethune, chief U.S. financial economist at IHS Global Insight. "Sharp business-cycle downturns in Europe, Japan and emerging markets precipitated sharp drops in commodity prices and a severe global flight to quality," he added.
That trend likely continued in November and December, as hefty demand for T-bills drove annual yields on the three-month bill into negative territory last week. Monday, the three-month bill yield stood at 0.02% as investors continued to opt for safety over returns.
Amid the turmoil, foreigners fled debt issued by the federally chartered housing finance firms such as Fannie Mae and Freddie Mac, which the government had nationalized in the previous month. Foreign investors sold a net $50.2 billion in such debt in October, compared with purchases of $6.2 billion in September. What's more, this trend continued in November and December, noted Tony Crescenzi, interest rate strategist at Miller Tabak & Co., citing data from the Federal Reserve.
UPI/Landov
Lehman Brothers' collapse spurred a flight to Treasurys.
"It is critical that foreign investors stay invested in U.S. securities, in particular in light of the massive U.S. effort to end the financial crisis and given the size of the U.S. budget deficit," Mr. Crescenzi wrote in a note.
Foreigners have continued to move out of so-called agency debt even after the Fed in late November launched a plan to buy as much as $100 billion of this debt. The Fed's actions have however helped the agency market recover, Mr.Crescenzi noted.
In total, net capital inflows to the U.S. soared to $286.3 billion in October from September's $142.6 billion.
Among foreign holders of Treasurys, China remained in the lead, after overtaking Japan in September as biggest holder of U.S. government debt. Its holdings jumped to $652.9 billion in October from $587 billion in September. Japan's October holdings totaled $585.5 billion.
"China has apparently been swapping its agencies for Treasurys, as evidenced by its massive net purchase of $65.9 billion of Treasurys in October," Mr. Crescenzi said.
Foreign demand for Treasurys has remained strong even as the government has sold massive amounts of new debt to fund its support programs for the economy.
Monday, Treasurys continued to rally as investors mulled the prospects of the Fed using unconventional tools -- such as buying longer-dated Treasury debt -- to keep cash flowing to the economy as official lending rates fall toward zero. Investors expect the central bank to cut its key lending rate, currently at 1%, by as much as 0.75 percentage point Tuesday at the end of its two-day meeting.
"The bond market is setting up for the possibility of a profound shift in stance by the Fed that could include the buying of Treasurys," said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto.
The benchmark 10-year note ended up 16/32 point, or $5 for every $1,000 invested, to yield 2.535%. That is down from 2.590% as bond yields fall when prices rise. Indications of a broad drop in prices in a regional manufacturing report also added fuel to Treasurys' gains.
Write to Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com and Min Zeng at min.zeng@dowjones.com
A global flight to safety sent foreign investors scrambling for short-term dollar-denominated assets in October, with buyers from around the world snapping up some $147 billion in Treasury bills as the credit crisis hit a peak.
With global markets roiled by the fallout from the Lehman Brothers bankruptcy and the bailout of insurance giant American International Group Inc., foreign buyers shunned longer-dated securities including stocks and corporate debt, purchasing just $1.5 billion after buying $65.4 billion in September, according to monthly data published by the Treasury Department.
Monday Markets: Fed As Backstop
3:00
The Federal Reserve must create an incentive for the private sector to participate in the markets, says Axel Merk of Merk Investments. MarketWatch's Stacey Delo reports. (Dec. 15)
"Net long-term capital flows to the U.S. declined sharply in October, as the global financial crisis reached a zenith and risk aversion became acute," said Brian Bethune, chief U.S. financial economist at IHS Global Insight. "Sharp business-cycle downturns in Europe, Japan and emerging markets precipitated sharp drops in commodity prices and a severe global flight to quality," he added.
That trend likely continued in November and December, as hefty demand for T-bills drove annual yields on the three-month bill into negative territory last week. Monday, the three-month bill yield stood at 0.02% as investors continued to opt for safety over returns.
Amid the turmoil, foreigners fled debt issued by the federally chartered housing finance firms such as Fannie Mae and Freddie Mac, which the government had nationalized in the previous month. Foreign investors sold a net $50.2 billion in such debt in October, compared with purchases of $6.2 billion in September. What's more, this trend continued in November and December, noted Tony Crescenzi, interest rate strategist at Miller Tabak & Co., citing data from the Federal Reserve.
UPI/Landov
Lehman Brothers' collapse spurred a flight to Treasurys.
"It is critical that foreign investors stay invested in U.S. securities, in particular in light of the massive U.S. effort to end the financial crisis and given the size of the U.S. budget deficit," Mr. Crescenzi wrote in a note.
Foreigners have continued to move out of so-called agency debt even after the Fed in late November launched a plan to buy as much as $100 billion of this debt. The Fed's actions have however helped the agency market recover, Mr.Crescenzi noted.
In total, net capital inflows to the U.S. soared to $286.3 billion in October from September's $142.6 billion.
Among foreign holders of Treasurys, China remained in the lead, after overtaking Japan in September as biggest holder of U.S. government debt. Its holdings jumped to $652.9 billion in October from $587 billion in September. Japan's October holdings totaled $585.5 billion.
"China has apparently been swapping its agencies for Treasurys, as evidenced by its massive net purchase of $65.9 billion of Treasurys in October," Mr. Crescenzi said.
Foreign demand for Treasurys has remained strong even as the government has sold massive amounts of new debt to fund its support programs for the economy.
Monday, Treasurys continued to rally as investors mulled the prospects of the Fed using unconventional tools -- such as buying longer-dated Treasury debt -- to keep cash flowing to the economy as official lending rates fall toward zero. Investors expect the central bank to cut its key lending rate, currently at 1%, by as much as 0.75 percentage point Tuesday at the end of its two-day meeting.
"The bond market is setting up for the possibility of a profound shift in stance by the Fed that could include the buying of Treasurys," said Eric Lascelles, chief economics and rates strategist at TD Securities in Toronto.
The benchmark 10-year note ended up 16/32 point, or $5 for every $1,000 invested, to yield 2.535%. That is down from 2.590% as bond yields fall when prices rise. Indications of a broad drop in prices in a regional manufacturing report also added fuel to Treasurys' gains.
Write to Maya Jackson Randall at Maya.Jackson-Randall@dowjones.com and Min Zeng at min.zeng@dowjones.com
OppenheimerFunds Officer Steps Down
--wrong bet on CMBS and CDS killed the Oppenheimer junk funds.
By DIYA GULLAPALLI
The OppenheimerFunds Inc. executive who oversaw big leveraged bets that backfired has left the company.
Senior Vice President Angelo Manioudakis, who headed the firm's Core Plus team, resigned Friday. The team managed more than $16 billion in individual-investor-oriented fund assets. Under Mr. Manioudakis, investments in the likes of mortgage-backed securities and credit-default swaps went awry.
Those woes fueled an 82% drop at its flagship junk-bond mutual fund, Oppenheimer Champion Income, one of the worst showings among the roughly 150 U.S. junk funds that invest in high yield, or below-investment-grade, bonds. The average junk-bond fund is down 32% in 2008.
The situation is a rare black mark for OppenheimerFunds, a unit of Massachusetts Mutual Life Insurance Co. that recently had $195 billion in assets. OppenheimerFunds is no longer part of Oppenheimer & Co. But OppenheimerFunds owns Tremont Capital Management, an investment-management firm that put hundreds of millions of investors' dollars into funds overseen by Bernard Madoff, who, authorities said, admitted to carrying out a $50 billion Ponzi scheme.
Mr. Manioudakis, 42 years old, couldn't be reached for comment. He joined OppenheimerFunds in 2002 and was previously with a unit of Morgan Stanley Investment Management.
The firm earlier this month said it is bringing in Geoffrey Craddock as new director of risk management and asset allocation. Mr. Craddock, who formerly headed market risk management at Canadian bank CIBC, will monitor risk for OppenheimerFunds' stock and bond offerings.
For Core Plus, Jerry Webman, director of fixed income at OppenheimerFunds, will temporarily take over as team leader.
Mr. Webman, 59, acknowledges it's "been a disappointing performance year" for the team's funds. Several have declined sharply relative to peers. At Oppenheimer Champion Income, assets have fallen more than 70% to about $625 million from a peak in May, largely due to declines in the fund's holdings. OppenheimerFunds put $150 million in the fund last month to help boost liquidity.
The Champion Income fund was a relatively orthodox junk-bond offering until late 2006, when Mr. Manioudakis's team took over. Since then, the fund gambled more with derivatives.
One problem bet involved total-return swaps, which are basically agreements between parties to exchange cash flows in the future based on how a set of securities performs. In this case, the fund was betting that top-rated commercial mortgage-backed securities would rally this year. They didn't.
The fund began employing many of those swaps last year. This seemed like a good way to diversify away from the junk-bond market, which in 2007 had started to wobble as the credit crunch commenced. By December 2007, the swaps had appreciated $7.7 million.
But the trade has gone south in recent months, as the market for office buildings and other commercial properties has deteriorated amid the slowing economy. The swaps were down $47 million by September, which is the latest data available.
The bet "backfired in unprecedented ways" as "what had been the most liquid part of the market turned out to be the most illiquid," Mr. Webman says.
Credit-default swaps, or CDSs, have hurt the fund, too, declining $238 million through September. CDSs are basically insurance contracts that protect investors against bond and loan defaults. In exchange for being on the hook to pay out for such issues, CDS sellers receive a stream of interest payments.
Selling CDSs can be a particularly risky proposition when insuring companies that are already struggling with credit problems. Indeed, through September the fund was selling CDSs on troubled companies including Lehman Brothers Holdings Inc., American International Group Inc., General Motors Corp. and newspaper company Tribune Co. Many of those firms have collapsed, filed for bankruptcy or otherwise have problems.
Funds' Derivative Bets
Federal investment rules permit mutual funds to invest in derivatives, and they have done so in recent years to boost returns. However, regulators have worried about the risks these investments can pose for investors. One concern is how swaps can add leverage because they allow a fund to bet on more securities than they actually hold in the portfolio. That can exacerbate losses when a fund's holdings are sinking.
On top of that, the Champion Income fund increased its stake in many mortgage bonds that have fallen this year.
Mortgage securities tied to Washington Mutual Inc. with a $9 million principal value were valued at only $3 million at the end of September, the last fund reporting date. A set of five Freddie Mac mortgage-backed securities with a combined principal amount of $20 million were valued at just $2.5 million. Prospects for the mortgage market have dimmed since September, as defaults have been rising.
Further, the fund erred with corporate bonds for struggling Wall Street houses. The fund bought Lehman bonds between June and September with $29 million in principal value. Lehman filed for Chapter 11 bankruptcy-court protection in mid-September, and those bonds fell to just $144,000. It also added Morgan Stanley bonds with $13 million in principal during that period; they were valued at $8.3 million by the end of September.
Strategic Logic
Mr. Webman says the firm had focused on bank bonds because "we believed the financial crisis would allow banks to rebuild their balance sheets over time."
The fund spread pain beyond its own immediate investors. More than 10% of the fund also was recently held by other OppenheimerFunds offerings. This includes several funds of funds that bundle various products from the firm and at least one target-date retirement offering.
One of the hardest hit has been the $290 million Oppenheimer Conservative Investor Fund, which had 4% in the Champion Income fund through November. It is down almost 40% this year, making it one of the worst-performing conservative allocation funds followed by fund tracker Morningstar Inc.
By DIYA GULLAPALLI
The OppenheimerFunds Inc. executive who oversaw big leveraged bets that backfired has left the company.
Senior Vice President Angelo Manioudakis, who headed the firm's Core Plus team, resigned Friday. The team managed more than $16 billion in individual-investor-oriented fund assets. Under Mr. Manioudakis, investments in the likes of mortgage-backed securities and credit-default swaps went awry.
Those woes fueled an 82% drop at its flagship junk-bond mutual fund, Oppenheimer Champion Income, one of the worst showings among the roughly 150 U.S. junk funds that invest in high yield, or below-investment-grade, bonds. The average junk-bond fund is down 32% in 2008.
The situation is a rare black mark for OppenheimerFunds, a unit of Massachusetts Mutual Life Insurance Co. that recently had $195 billion in assets. OppenheimerFunds is no longer part of Oppenheimer & Co. But OppenheimerFunds owns Tremont Capital Management, an investment-management firm that put hundreds of millions of investors' dollars into funds overseen by Bernard Madoff, who, authorities said, admitted to carrying out a $50 billion Ponzi scheme.
Mr. Manioudakis, 42 years old, couldn't be reached for comment. He joined OppenheimerFunds in 2002 and was previously with a unit of Morgan Stanley Investment Management.
The firm earlier this month said it is bringing in Geoffrey Craddock as new director of risk management and asset allocation. Mr. Craddock, who formerly headed market risk management at Canadian bank CIBC, will monitor risk for OppenheimerFunds' stock and bond offerings.
For Core Plus, Jerry Webman, director of fixed income at OppenheimerFunds, will temporarily take over as team leader.
Mr. Webman, 59, acknowledges it's "been a disappointing performance year" for the team's funds. Several have declined sharply relative to peers. At Oppenheimer Champion Income, assets have fallen more than 70% to about $625 million from a peak in May, largely due to declines in the fund's holdings. OppenheimerFunds put $150 million in the fund last month to help boost liquidity.
The Champion Income fund was a relatively orthodox junk-bond offering until late 2006, when Mr. Manioudakis's team took over. Since then, the fund gambled more with derivatives.
One problem bet involved total-return swaps, which are basically agreements between parties to exchange cash flows in the future based on how a set of securities performs. In this case, the fund was betting that top-rated commercial mortgage-backed securities would rally this year. They didn't.
The fund began employing many of those swaps last year. This seemed like a good way to diversify away from the junk-bond market, which in 2007 had started to wobble as the credit crunch commenced. By December 2007, the swaps had appreciated $7.7 million.
But the trade has gone south in recent months, as the market for office buildings and other commercial properties has deteriorated amid the slowing economy. The swaps were down $47 million by September, which is the latest data available.
The bet "backfired in unprecedented ways" as "what had been the most liquid part of the market turned out to be the most illiquid," Mr. Webman says.
Credit-default swaps, or CDSs, have hurt the fund, too, declining $238 million through September. CDSs are basically insurance contracts that protect investors against bond and loan defaults. In exchange for being on the hook to pay out for such issues, CDS sellers receive a stream of interest payments.
Selling CDSs can be a particularly risky proposition when insuring companies that are already struggling with credit problems. Indeed, through September the fund was selling CDSs on troubled companies including Lehman Brothers Holdings Inc., American International Group Inc., General Motors Corp. and newspaper company Tribune Co. Many of those firms have collapsed, filed for bankruptcy or otherwise have problems.
Funds' Derivative Bets
Federal investment rules permit mutual funds to invest in derivatives, and they have done so in recent years to boost returns. However, regulators have worried about the risks these investments can pose for investors. One concern is how swaps can add leverage because they allow a fund to bet on more securities than they actually hold in the portfolio. That can exacerbate losses when a fund's holdings are sinking.
On top of that, the Champion Income fund increased its stake in many mortgage bonds that have fallen this year.
Mortgage securities tied to Washington Mutual Inc. with a $9 million principal value were valued at only $3 million at the end of September, the last fund reporting date. A set of five Freddie Mac mortgage-backed securities with a combined principal amount of $20 million were valued at just $2.5 million. Prospects for the mortgage market have dimmed since September, as defaults have been rising.
Further, the fund erred with corporate bonds for struggling Wall Street houses. The fund bought Lehman bonds between June and September with $29 million in principal value. Lehman filed for Chapter 11 bankruptcy-court protection in mid-September, and those bonds fell to just $144,000. It also added Morgan Stanley bonds with $13 million in principal during that period; they were valued at $8.3 million by the end of September.
Strategic Logic
Mr. Webman says the firm had focused on bank bonds because "we believed the financial crisis would allow banks to rebuild their balance sheets over time."
The fund spread pain beyond its own immediate investors. More than 10% of the fund also was recently held by other OppenheimerFunds offerings. This includes several funds of funds that bundle various products from the firm and at least one target-date retirement offering.
One of the hardest hit has been the $290 million Oppenheimer Conservative Investor Fund, which had 4% in the Champion Income fund through November. It is down almost 40% this year, making it one of the worst-performing conservative allocation funds followed by fund tracker Morningstar Inc.
Monday, December 15, 2008
Red flags of Madoff Investment
On Wall Street, traders started picking apart Mr. Madoff's strategy based on client statements -- which they said raised several red flags that should have been obvious to the banks and investment firms that promoted Mr. Madoff. Several concluded that while Mr. Madoff's stated investing strategy was valid, it would have been impossible to execute with the amount of money he was managing.
Mr. Madoff told clients he was using a fairly common options-trading strategy to generate modest but steady returns for more than two decades. The strategy involved buying stocks, while also trading options -- which grant the right, but not the obligation, to buy or sell securities at pre-established prices and dates -- in a way designed to limit losses on the shares.
People who analyzed client statements said Mr. Madoff's firm couldn't have bought and sold the options he claimed because those totals would have outstripped total trading volume those days.
A typical account statement provided to clients by Mr. Madoff's firm showed him buying shares of blue-chip companies such as Intel Corp., AT&T Inc. and IBM Corp. and also trading options on the Standard & Poor's 100-stock index, which tracks the movements of the market's very largest stocks. Then, at the end of each month, all of the stocks are sold, and the cash put into Treasury bills.
That was another red flag, because the options strategy he used, when practiced by others, typically held its investments for longer periods, says Millicent Holmes of Crowe Wealth Management, who had researched Mr. Madoff's firm as a possible investment but ultimately steered clear.
Mr. Madoff's option-trading technique is known as "split-strike conversion strategy," and it is designed to earn income off a stock portfolio while protecting against big declines in the market.
Experts say it would be a difficult investing strategy to pull off with the immense amounts of money Mr. Madoff's firm was managing. For example, a client statement reviewed by The Wall Street Journal for last month showed that on Nov. 12 Mr. Madoff moved $500,000 out of U.S. Treasury bills, as well as $1,460 out of a Fidelity Investments money-market account. That cash was invested in nearly three dozen stocks, such as Exxon Mobil Corp., Proctor & Gamble Corp. and Microsoft Corp.
That same day Madoff bought 11 "put" option contracts on the S&P 100 for $19,591 and sold 11 "call" option contracts on the S&P 100 which took in $17,369.
During this time, the stock market was in a steep decline. By Nov. 19, when the firm next did a trade, the S&P 500 fell nearly 10%. On Nov. 19, Mr. Madoff closed out those particular options trades, losing about $14,000 on the "call" but making about $21,000 on the "put" for a net $7,000 profit.
On the surface, this was a straightforward example of the strategy. However, the problem is that if Mr. Madoff replicated the trade firmwide, as he was thought to be doing, the trading wasn't showing up in the options market. On Nov. 11, if it took 11 contracts to hedge a half-million dollars, it would have taken 22,000 contracts to protect $1 billion. Mr. Madoff claimed to be managing $17 billion.
But on Nov. 11, only 393 of the "call" contracts the firm sold actually changed hands, according to the Chicago Board Options Exchange. And trading totaled 183 in the "put" options he bought. The so-called open interest in both those contracts -- the measure of contracts outstanding -- was just 4,639.
Madoff records from another client show a similar discrepancy in 2007. According to a copy of the client's statement reviewed by the Journal, Madoff bought 114 options contracts based on the S&P 100, while selling 114 others at a different price. The 114 "call" contracts Madoff entered into represented about 10% of the trading volume recorded that day for that contact at the Chicago Board Options Exchange. The 114 "put" contracts represented about 20% of the volume, meaning that if Madoff would have executed similar trades for five other clients, the firm would have made up the entire trading in the options contract that day.
Meanwhile, between the Nov. 11 and Nov. 19, the S&P 100 lost nearly 10%. The statement reviewed by the Journal didn't provide a line updating the value of the stocks in the account, but if the stock portfolio behaved as designed and mirrored the move in the index, it would have been down roughly $50,000, far overwhelming the $7,000 gain in the options position.
http://online.wsj.com/article/SB122938212422208613.html?mod=testMod
Mr. Madoff told clients he was using a fairly common options-trading strategy to generate modest but steady returns for more than two decades. The strategy involved buying stocks, while also trading options -- which grant the right, but not the obligation, to buy or sell securities at pre-established prices and dates -- in a way designed to limit losses on the shares.
People who analyzed client statements said Mr. Madoff's firm couldn't have bought and sold the options he claimed because those totals would have outstripped total trading volume those days.
A typical account statement provided to clients by Mr. Madoff's firm showed him buying shares of blue-chip companies such as Intel Corp., AT&T Inc. and IBM Corp. and also trading options on the Standard & Poor's 100-stock index, which tracks the movements of the market's very largest stocks. Then, at the end of each month, all of the stocks are sold, and the cash put into Treasury bills.
That was another red flag, because the options strategy he used, when practiced by others, typically held its investments for longer periods, says Millicent Holmes of Crowe Wealth Management, who had researched Mr. Madoff's firm as a possible investment but ultimately steered clear.
Mr. Madoff's option-trading technique is known as "split-strike conversion strategy," and it is designed to earn income off a stock portfolio while protecting against big declines in the market.
Experts say it would be a difficult investing strategy to pull off with the immense amounts of money Mr. Madoff's firm was managing. For example, a client statement reviewed by The Wall Street Journal for last month showed that on Nov. 12 Mr. Madoff moved $500,000 out of U.S. Treasury bills, as well as $1,460 out of a Fidelity Investments money-market account. That cash was invested in nearly three dozen stocks, such as Exxon Mobil Corp., Proctor & Gamble Corp. and Microsoft Corp.
That same day Madoff bought 11 "put" option contracts on the S&P 100 for $19,591 and sold 11 "call" option contracts on the S&P 100 which took in $17,369.
During this time, the stock market was in a steep decline. By Nov. 19, when the firm next did a trade, the S&P 500 fell nearly 10%. On Nov. 19, Mr. Madoff closed out those particular options trades, losing about $14,000 on the "call" but making about $21,000 on the "put" for a net $7,000 profit.
On the surface, this was a straightforward example of the strategy. However, the problem is that if Mr. Madoff replicated the trade firmwide, as he was thought to be doing, the trading wasn't showing up in the options market. On Nov. 11, if it took 11 contracts to hedge a half-million dollars, it would have taken 22,000 contracts to protect $1 billion. Mr. Madoff claimed to be managing $17 billion.
But on Nov. 11, only 393 of the "call" contracts the firm sold actually changed hands, according to the Chicago Board Options Exchange. And trading totaled 183 in the "put" options he bought. The so-called open interest in both those contracts -- the measure of contracts outstanding -- was just 4,639.
Madoff records from another client show a similar discrepancy in 2007. According to a copy of the client's statement reviewed by the Journal, Madoff bought 114 options contracts based on the S&P 100, while selling 114 others at a different price. The 114 "call" contracts Madoff entered into represented about 10% of the trading volume recorded that day for that contact at the Chicago Board Options Exchange. The 114 "put" contracts represented about 20% of the volume, meaning that if Madoff would have executed similar trades for five other clients, the firm would have made up the entire trading in the options contract that day.
Meanwhile, between the Nov. 11 and Nov. 19, the S&P 100 lost nearly 10%. The statement reviewed by the Journal didn't provide a line updating the value of the stocks in the account, but if the stock portfolio behaved as designed and mirrored the move in the index, it would have been down roughly $50,000, far overwhelming the $7,000 gain in the options position.
http://online.wsj.com/article/SB122938212422208613.html?mod=testMod
Treasurys Can Burst Bubble, Land Safely
In the wake of popped stock, housing and commodity bubbles, some see a fourth bubble building -- in Treasury bonds. Unlike those bubbles, this one doesn't have to end disastrously.
Treasury yields, which move inversely to prices, are at historic lows. Friday, the yield on the 10-year note fell to 2.47%, the lowest in Federal Reserve records going back to 1962 and well below the average of the past decade of about 4.7%.
Treasurys have been rare good investments in this awful year, returning 10% through November, according to Merrill Lynch chief North American economist David Rosenberg, a longtime bond bull. But even he recently told clients that Treasurys were "clearly heading into a bubble phase" and suggested there might be greener pastures in other fixed-income investments, such as debt backed by government-sponsored entities.
Meanwhile, the U.S. government may post a trillion-dollar budget deficit in the fiscal year ending in September and has pounding fiscal headaches looming far beyond that. Some key buyers of its debt, foreign central banks, are launching their own expensive stimulus packages and would seemingly have better uses for their cash.
And while the U.S. government's access to cheap money helps its efforts to stimulate the economy, it also may crowd out other borrowers. Municipalities and companies with good credit histories are paying exorbitant rates to borrow, arguably extending the pain of the credit crunch.
"We have a remarkable situation in which a 30-year loan to the U.S. government with a taxable instrument pays you 3% and a loan to the state of Ohio pays you 5% tax-free," said David Kotok, president of money-management firm Cumberland Advisors in Vineland, N.J.
Eventually, investors will demand a higher yield for Treasurys. It could happen when risk appetite returns, or if the cash the Fed is pumping into the economy sparks inflation. Some worry a snapback could be as brutal as the popping of any bubble, sending interest rates soaring and short-circuiting any economic recovery.
But Treasurys have long defied bubble warnings, which cropped up as early as February, when the 10-year note yielded just below 4%. At the time, inflation was rising. Now it is falling. And the economy has turned much uglier, justifying lower yields.
Meanwhile the Fed, which begins a two-day policy meeting on Monday, has been swapping Treasurys for riskier assets. It can reverse that trade to keep yields from soaring and derailing the economy again.
"There's a big actor out there called the Fed that has a huge balance sheet that used to be all in Treasurys and now isn't," said Council on Foreign Relations economist Brad Setser.
The Fed would have other allies in that effort -- particularly China, which has an interest in keeping U.S. borrowing costs low, if only because it wants to protect American demand for its exports. Foreign central banks may have contributed to a Treasury bubble in the first place, but they also can keep its bursting from being messy.
Treasury yields, which move inversely to prices, are at historic lows. Friday, the yield on the 10-year note fell to 2.47%, the lowest in Federal Reserve records going back to 1962 and well below the average of the past decade of about 4.7%.
Treasurys have been rare good investments in this awful year, returning 10% through November, according to Merrill Lynch chief North American economist David Rosenberg, a longtime bond bull. But even he recently told clients that Treasurys were "clearly heading into a bubble phase" and suggested there might be greener pastures in other fixed-income investments, such as debt backed by government-sponsored entities.
Meanwhile, the U.S. government may post a trillion-dollar budget deficit in the fiscal year ending in September and has pounding fiscal headaches looming far beyond that. Some key buyers of its debt, foreign central banks, are launching their own expensive stimulus packages and would seemingly have better uses for their cash.
And while the U.S. government's access to cheap money helps its efforts to stimulate the economy, it also may crowd out other borrowers. Municipalities and companies with good credit histories are paying exorbitant rates to borrow, arguably extending the pain of the credit crunch.
"We have a remarkable situation in which a 30-year loan to the U.S. government with a taxable instrument pays you 3% and a loan to the state of Ohio pays you 5% tax-free," said David Kotok, president of money-management firm Cumberland Advisors in Vineland, N.J.
Eventually, investors will demand a higher yield for Treasurys. It could happen when risk appetite returns, or if the cash the Fed is pumping into the economy sparks inflation. Some worry a snapback could be as brutal as the popping of any bubble, sending interest rates soaring and short-circuiting any economic recovery.
But Treasurys have long defied bubble warnings, which cropped up as early as February, when the 10-year note yielded just below 4%. At the time, inflation was rising. Now it is falling. And the economy has turned much uglier, justifying lower yields.
Meanwhile the Fed, which begins a two-day policy meeting on Monday, has been swapping Treasurys for riskier assets. It can reverse that trade to keep yields from soaring and derailing the economy again.
"There's a big actor out there called the Fed that has a huge balance sheet that used to be all in Treasurys and now isn't," said Council on Foreign Relations economist Brad Setser.
The Fed would have other allies in that effort -- particularly China, which has an interest in keeping U.S. borrowing costs low, if only because it wants to protect American demand for its exports. Foreign central banks may have contributed to a Treasury bubble in the first place, but they also can keep its bursting from being messy.
Sunday, December 14, 2008
market summary and outlook as of 12/14/2008
Market is waiting for the progress on Auto bailout.
Credit Market
--investors are still risk averse. T-bill yield dropped almost to zero.
--no dramatic change in other major credit markets relative to last week. Level remained elevated
--More investors favored IG coporate bonds, the strategy I mentioned last weekend.
Mortgage market
--Risk preimiums remain close to the level of last week. 30y yields hovers around 5.4%.
Stock market
--relatively stable in the past week. But the fate of $15 bil bridge loan can swing the market next week.
Economy
--weekly Jobless claims reached 26 year high, 573k seasonablly adjusted.
--trade deficit widened for the first time as the volume increase in imported oil more than offset the decline in oil price and plunging car purchases.
--More companies took a hit, like newspaper firm Tribune filed for bankruptcies and Hedge funds Citadel scaled operation in Asia.
Outlook
--Government won't let auto industry go bankrupt now to worsen the recession. The collapse of the auto bailout by Congress on Thursday forced Government to try alternatives.
--The fate of bailout depends on the stance of UAW. If UAW still refuses to cut their salary in line with other positions provided by foreigh auto makers, they may deserve a bankruptcy.
Credit Market
--investors are still risk averse. T-bill yield dropped almost to zero.
--no dramatic change in other major credit markets relative to last week. Level remained elevated
--More investors favored IG coporate bonds, the strategy I mentioned last weekend.
Mortgage market
--Risk preimiums remain close to the level of last week. 30y yields hovers around 5.4%.
Stock market
--relatively stable in the past week. But the fate of $15 bil bridge loan can swing the market next week.
Economy
--weekly Jobless claims reached 26 year high, 573k seasonablly adjusted.
--trade deficit widened for the first time as the volume increase in imported oil more than offset the decline in oil price and plunging car purchases.
--More companies took a hit, like newspaper firm Tribune filed for bankruptcies and Hedge funds Citadel scaled operation in Asia.
Outlook
--Government won't let auto industry go bankrupt now to worsen the recession. The collapse of the auto bailout by Congress on Thursday forced Government to try alternatives.
--The fate of bailout depends on the stance of UAW. If UAW still refuses to cut their salary in line with other positions provided by foreigh auto makers, they may deserve a bankruptcy.
More outages possible in ice-ravaged Northeast
More outages possible in ice-ravaged Northeast
from The Associated Press
Enlarge
A horse breaks up the icy ground cover for food in Hillsborough, N.H., Saturday, Dec. 13, 2008. More than 1 million homes and business in the Northeast lost power following an ice storm Friday.
Rob Serverius of Manchester, N.H. clears ice-covered branches of trees from a closed road after a storm in Derry, N.H., Saturday, Dec. 13, 2008. Hundreds of thousands of residents in New Hampshire, Maine and Vermont were without power after an ice storm dropped trees and power lines all over the region. Associated Press © 2008
ROCHESTER, N.H. December 14, 2008, 09:38 am ET · Utility officials trying to recover from the devastating ice storm in the Northeast warned there could be more outages Sunday as drooping branches shed ice and snap back to their original positions, potentially taking out more power lines.
Roughly 800,000 customers were still without power in upstate New York, Massachusetts, New Hampshire and Maine late Saturday. Utilities in hardest-hit New Hampshire said power might not be totally restored to the region until Thursday or Friday, a week after the storm knocked down utility lines, poles and equipment and blacked out 1.4 homes and businesses.
President Bush declared a state of emergency in the Granite State and in nine of Massachusetts' 14 counties late Saturday, directing the Federal Emergency Management Agency to provide relief assistance.
Temperatures early Sunday were largely in the teens and 20s, with single-digit readings in much of Maine. The low at Concord, N.H., was just 9 degrees, the National Weather Service said.
At a shelter in the Rindge town recreation center, volunteers serving soup and sandwiches saw some new faces as residents decided not to try to endure a third night without electricity or heat.
"I have an apartment, but there's no heat, no lights, no water. I spent last night there, but after going through that, I decided not to do it again," said Amy Raymond, 74.
"If you don't have power, assume that you will not get it restored today, and right now make arrangements to stay someplace warm tonight," Gov. John Lynch said Saturday.
Crews across the region reported the ice had destroyed utility poles, wires and other equipment, but said the extent of damage was unclear because some roads still were impassable.
"We'd put one line up, and it seemed like another would break," said Stan Tucker, operations supervisor in Springfield for Central Vermont Public Service Corp. "It seems like every line has multiple problems."
Despite the difficulties, progress was being made. As of Sunday morning, Public Service Company of New Hampshire said about 194,000 of its customers still had no electricity, down from 313,000 Saturday. Statewide, about 234,000 customers were still blacked out Sunday, down from a peak of 430,000 on Friday, utilities reported.
In New York, all but five roads managed by state highway officials had been cleared Saturday. "But there are still trees coming down because of ice on branches; they're heavy and they can break at any point," said Carol Breen of the state Department of Transportation.
New Hampshire, Massachusetts, New York and Maine declared either limited or full states of emergency.
Utility crews flocked to the region from Canada and as far away as Michigan and Virginia.
At least four deaths appear to be related to the storm. A Danville, N.H., man died of carbon monoxide poisoning from the generator he was using after his power went out Thursday night. Carbon monoxide from a gasoline-powered generator killed a couple in their 60s at Glenville, N.Y., police said Saturday. The body of a Marlborough, Mass., public works supervisor was recovered from a reservoir Saturday, a day after he went missing while checking on tree limbs downed by the ice.
At the shelter in Rindge, about 30 miles west of Nashua, Raymond's plight was shared by many.
"Everyone asks, why don't I just stay with friends and relatives, but I say, 'Who?' They're all in the same boat I am,'" she said.
In nearby Jaffrey, gunsmith Len Vigneault said the storm was impressive.
"Telephone poles snapped like toothpicks just laying there," he said. "Fifteen-, 20-inch trees, just in splinters and laying in the road."
from The Associated Press
Enlarge
A horse breaks up the icy ground cover for food in Hillsborough, N.H., Saturday, Dec. 13, 2008. More than 1 million homes and business in the Northeast lost power following an ice storm Friday.
Rob Serverius of Manchester, N.H. clears ice-covered branches of trees from a closed road after a storm in Derry, N.H., Saturday, Dec. 13, 2008. Hundreds of thousands of residents in New Hampshire, Maine and Vermont were without power after an ice storm dropped trees and power lines all over the region. Associated Press © 2008
ROCHESTER, N.H. December 14, 2008, 09:38 am ET · Utility officials trying to recover from the devastating ice storm in the Northeast warned there could be more outages Sunday as drooping branches shed ice and snap back to their original positions, potentially taking out more power lines.
Roughly 800,000 customers were still without power in upstate New York, Massachusetts, New Hampshire and Maine late Saturday. Utilities in hardest-hit New Hampshire said power might not be totally restored to the region until Thursday or Friday, a week after the storm knocked down utility lines, poles and equipment and blacked out 1.4 homes and businesses.
President Bush declared a state of emergency in the Granite State and in nine of Massachusetts' 14 counties late Saturday, directing the Federal Emergency Management Agency to provide relief assistance.
Temperatures early Sunday were largely in the teens and 20s, with single-digit readings in much of Maine. The low at Concord, N.H., was just 9 degrees, the National Weather Service said.
At a shelter in the Rindge town recreation center, volunteers serving soup and sandwiches saw some new faces as residents decided not to try to endure a third night without electricity or heat.
"I have an apartment, but there's no heat, no lights, no water. I spent last night there, but after going through that, I decided not to do it again," said Amy Raymond, 74.
"If you don't have power, assume that you will not get it restored today, and right now make arrangements to stay someplace warm tonight," Gov. John Lynch said Saturday.
Crews across the region reported the ice had destroyed utility poles, wires and other equipment, but said the extent of damage was unclear because some roads still were impassable.
"We'd put one line up, and it seemed like another would break," said Stan Tucker, operations supervisor in Springfield for Central Vermont Public Service Corp. "It seems like every line has multiple problems."
Despite the difficulties, progress was being made. As of Sunday morning, Public Service Company of New Hampshire said about 194,000 of its customers still had no electricity, down from 313,000 Saturday. Statewide, about 234,000 customers were still blacked out Sunday, down from a peak of 430,000 on Friday, utilities reported.
In New York, all but five roads managed by state highway officials had been cleared Saturday. "But there are still trees coming down because of ice on branches; they're heavy and they can break at any point," said Carol Breen of the state Department of Transportation.
New Hampshire, Massachusetts, New York and Maine declared either limited or full states of emergency.
Utility crews flocked to the region from Canada and as far away as Michigan and Virginia.
At least four deaths appear to be related to the storm. A Danville, N.H., man died of carbon monoxide poisoning from the generator he was using after his power went out Thursday night. Carbon monoxide from a gasoline-powered generator killed a couple in their 60s at Glenville, N.Y., police said Saturday. The body of a Marlborough, Mass., public works supervisor was recovered from a reservoir Saturday, a day after he went missing while checking on tree limbs downed by the ice.
At the shelter in Rindge, about 30 miles west of Nashua, Raymond's plight was shared by many.
"Everyone asks, why don't I just stay with friends and relatives, but I say, 'Who?' They're all in the same boat I am,'" she said.
In nearby Jaffrey, gunsmith Len Vigneault said the storm was impressive.
"Telephone poles snapped like toothpicks just laying there," he said. "Fifteen-, 20-inch trees, just in splinters and laying in the road."
Saturday, December 13, 2008
Deutsche Trading Hit: $1 Billion
By SCOTT PATTERSON and GREGORY ZUCKERMAN
One of Wall Street's best-regarded young traders sustained a $1 billion hit recently, as the corporate-bond-trading market has been upended by the credit crisis.
Boaz Weinstein
A Deutsche Bank AG team led by 35-year-old Boaz Weinstein had for months been using a "basis trade" that involved buying large amounts of corporate bonds, and at the same time hedging those bets by buying credit-default swaps, in essence insurance against a default on those bonds. Profits flowed, as the corporate bonds carried yields that were slightly higher than the cost of buying swaps protection.
But in recent months, amid the credit-market upheaval, investors have fled from many corporate bonds. And because they are less liquid than credit-default swaps, or harder to trade, Deutsche's corporate-bond positions have dropped more in value than their CDS hedges gained, leading to the losses.
"I don't think there's anybody around who expected the CDS-cash basis to widen out this much this fast," said Brian Yelvington, senior macrostrategist at research group CreditSights.
A recent move by Deutsche to reduce borrowed money in its trading area also has added to the losses, by forcing traders to sell while the corporate-bond market has fallen, according to a person familiar with the bank. Mr. Weinstein's team was involved in other trading as well, including convertible bonds. Mr. Weinstein didn't respond to a request for comment.
The losses represent a setback for what has been one of the more successful credit-trading desks on Wall Street in recent years. In November, Deutsche had said it planned to lay off 900 people, including employees in its structured-products and proprietary-trading desks. Other banks such as Morgan Stanley have said they are scaling back risk-taking businesses, too.
The risk premium on highly rated corporate bonds has doubled since early September to historic highs of 6.5 percentage points over comparable Treasury bonds, according to Merrill Lynch & Co.
Some market observers think the losses in the basis trades are likely to shrink when credit markets stabilize. Tim Backshall, a strategist at Credit Derivatives Research in Walnut Creek, Calif., said he has been telling clients that the trades represent an opportunity.
Though the German bank has recorded gains in other trading areas this year, recent troubles in the corporate-bond market have made it more difficult for Deutsche to dig out from the losses, according to a person familiar with the matter. The news of losses was previously reported by Bloomberg News.
The trades that hurt Deutsche are similar to ones that led to losses at Chicago hedge fund Citadel Investment Group LLC, which was down almost 50% this year in its two largest funds through early December. Losses on the trades for Citadel have slowed in December, said a person familiar with the matter.
Mr. Weinstein joined Deutsche in 1998 to trade credit derivatives and soon started trading credit-default swaps, which were relatively new at the time.
His skill at trading the instruments, and in discovering hidden pockets of value in the market, put Mr. Weinstein on the fast track at Deutsche. He was an innovator of a strategy known as capital-structure arbitrage, which exploits discrepancies between the price of a company's bond and its stock, and often uses credit-default swaps.
As the CDS market expanded into one of the largest in the world, so did Mr. Weinstein's cachet at the bank. In February 2008, he was appointed co-head of global credit trading at Deutsche along with Colin Fan.
One of Wall Street's best-regarded young traders sustained a $1 billion hit recently, as the corporate-bond-trading market has been upended by the credit crisis.
Boaz Weinstein
A Deutsche Bank AG team led by 35-year-old Boaz Weinstein had for months been using a "basis trade" that involved buying large amounts of corporate bonds, and at the same time hedging those bets by buying credit-default swaps, in essence insurance against a default on those bonds. Profits flowed, as the corporate bonds carried yields that were slightly higher than the cost of buying swaps protection.
But in recent months, amid the credit-market upheaval, investors have fled from many corporate bonds. And because they are less liquid than credit-default swaps, or harder to trade, Deutsche's corporate-bond positions have dropped more in value than their CDS hedges gained, leading to the losses.
"I don't think there's anybody around who expected the CDS-cash basis to widen out this much this fast," said Brian Yelvington, senior macrostrategist at research group CreditSights.
A recent move by Deutsche to reduce borrowed money in its trading area also has added to the losses, by forcing traders to sell while the corporate-bond market has fallen, according to a person familiar with the bank. Mr. Weinstein's team was involved in other trading as well, including convertible bonds. Mr. Weinstein didn't respond to a request for comment.
The losses represent a setback for what has been one of the more successful credit-trading desks on Wall Street in recent years. In November, Deutsche had said it planned to lay off 900 people, including employees in its structured-products and proprietary-trading desks. Other banks such as Morgan Stanley have said they are scaling back risk-taking businesses, too.
The risk premium on highly rated corporate bonds has doubled since early September to historic highs of 6.5 percentage points over comparable Treasury bonds, according to Merrill Lynch & Co.
Some market observers think the losses in the basis trades are likely to shrink when credit markets stabilize. Tim Backshall, a strategist at Credit Derivatives Research in Walnut Creek, Calif., said he has been telling clients that the trades represent an opportunity.
Though the German bank has recorded gains in other trading areas this year, recent troubles in the corporate-bond market have made it more difficult for Deutsche to dig out from the losses, according to a person familiar with the matter. The news of losses was previously reported by Bloomberg News.
The trades that hurt Deutsche are similar to ones that led to losses at Chicago hedge fund Citadel Investment Group LLC, which was down almost 50% this year in its two largest funds through early December. Losses on the trades for Citadel have slowed in December, said a person familiar with the matter.
Mr. Weinstein joined Deutsche in 1998 to trade credit derivatives and soon started trading credit-default swaps, which were relatively new at the time.
His skill at trading the instruments, and in discovering hidden pockets of value in the market, put Mr. Weinstein on the fast track at Deutsche. He was an innovator of a strategy known as capital-structure arbitrage, which exploits discrepancies between the price of a company's bond and its stock, and often uses credit-default swaps.
As the CDS market expanded into one of the largest in the world, so did Mr. Weinstein's cachet at the bank. In February 2008, he was appointed co-head of global credit trading at Deutsche along with Colin Fan.
1 millions jobs and 1% GDP growth is at stake
The Big Three directly employ almost 250,000, according to an administration estimate, and also support about one million retirees and their spouses, not counting the vast network of suppliers and dealers whose businesses are intertwined. In all, administration officials estimate that the failure of the U.S. auto makers would cost the economy more than one million jobs and would reduce economic output by more than 1%, significantly prolonging the downturn.
"We think that the current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry," White House spokeswoman Dana Perino told reporters aboard Air Force One Friday. "We'll have to take another look at what they [the companies] might need and how we might be able to provide that as a short-term mechanism to help prevent a disorderly bankruptcy that we think could devastate further an already very weak economy."
"We think that the current weakened state of the economy is such that it could not withstand a body blow like a disorderly bankruptcy in the auto industry," White House spokeswoman Dana Perino told reporters aboard Air Force One Friday. "We'll have to take another look at what they [the companies] might need and how we might be able to provide that as a short-term mechanism to help prevent a disorderly bankruptcy that we think could devastate further an already very weak economy."
General Growth Gets a Breather on Some Debt
General Growth Properties Inc. scored a victory in its struggle to manage its $27 billion debt load by refinancing several mortgages coming due, but the mall owner still was negotiating Friday to extend the deadline on a $900 million loan due at midnight.
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Reuters
The Shoppes at the Palazzo mall is among the properties General Growth is putting up for sale after a bid to raise capital fizzled.
General Growth gave itself some breathing room by retiring $58 million in bonds and refinancing $814 million in mortgages due in 2009. The mortgages and retired bonds were held by a retirement system, according to people familiar with the matter, who declined to identify the debt holder.
The company landed $896 million in new debt from that retirement system to replace the mortgages coming due next year as well as the $58 million in bonds, which were due Thursday.
The new mortgages, which gave General Growth an extra $24 million in cash likely used to cover fees and closing costs, aren't due until 2013 to 2015. A General Growth representative declined to divulge terms of the new debt.
General Growth shares, which have fallen 96% this year, rose 36 cents, or 25%, to $1.80 in 4 p.m. composite trading on the New York Stock Exchange. Earlier in the day, they were up 73% on the refinancing news.
General Growth's refinancing success also boosted the entire real-estate sector, which has seen sharp losses partly due to uncertainties over whether credit will be available next year. The Dow Jones Real Estate Investment Trust index rose 10.8% Friday, strongly outperforming the broader market.
But challenges remain for Chicago-based General Growth, which owns and manages more than 200 U.S. malls. It still has $2 billion in debt coming due next year and $4.5 billion due in 2010.
The most pressing concern is a $900 million bank loan on two luxury malls on the Las Vegas Strip -- Fashion Show mall and the Shoppes at the Palazzo -- that was due at midnight Friday. As of Friday afternoon, the company had yet to announce an extension of that deadline. Even if the deadline passes without a pact, General Growth isn't in default on the loan unless the banks declare it so, so it could continue negotiating with its banks through the weekend.
Late last month, General Growth sought a nine-month extension from the banks, which include Citigroup Inc., Eurohypo AG, Deutsche Bank AG and four others. But it only got a two-week extension until midnight Friday, largely because of hardball tactics by Citigroup, according to people familiar with the matter. Citigroup has declined to comment.
View Full Image
Reuters
The Shoppes at the Palazzo mall is among the properties General Growth is putting up for sale after a bid to raise capital fizzled.
General Growth gave itself some breathing room by retiring $58 million in bonds and refinancing $814 million in mortgages due in 2009. The mortgages and retired bonds were held by a retirement system, according to people familiar with the matter, who declined to identify the debt holder.
The company landed $896 million in new debt from that retirement system to replace the mortgages coming due next year as well as the $58 million in bonds, which were due Thursday.
The new mortgages, which gave General Growth an extra $24 million in cash likely used to cover fees and closing costs, aren't due until 2013 to 2015. A General Growth representative declined to divulge terms of the new debt.
General Growth shares, which have fallen 96% this year, rose 36 cents, or 25%, to $1.80 in 4 p.m. composite trading on the New York Stock Exchange. Earlier in the day, they were up 73% on the refinancing news.
General Growth's refinancing success also boosted the entire real-estate sector, which has seen sharp losses partly due to uncertainties over whether credit will be available next year. The Dow Jones Real Estate Investment Trust index rose 10.8% Friday, strongly outperforming the broader market.
But challenges remain for Chicago-based General Growth, which owns and manages more than 200 U.S. malls. It still has $2 billion in debt coming due next year and $4.5 billion due in 2010.
The most pressing concern is a $900 million bank loan on two luxury malls on the Las Vegas Strip -- Fashion Show mall and the Shoppes at the Palazzo -- that was due at midnight Friday. As of Friday afternoon, the company had yet to announce an extension of that deadline. Even if the deadline passes without a pact, General Growth isn't in default on the loan unless the banks declare it so, so it could continue negotiating with its banks through the weekend.
Late last month, General Growth sought a nine-month extension from the banks, which include Citigroup Inc., Eurohypo AG, Deutsche Bank AG and four others. But it only got a two-week extension until midnight Friday, largely because of hardball tactics by Citigroup, according to people familiar with the matter. Citigroup has declined to comment.
Fund Fraud Hits Big Names - Ponzi scheme
By ROBERT FRANK, PETER LATTMAN, DIONNE SEARCEY and AARON LUCCHETTI
New potential victims emerged of Wall Street veteran Bernard Madoff's alleged giant Ponzi scheme, with international banks, hedge funds and wealthy private investors among those sorting out what could amount to tens of billions of dollars in losses.
New York Mets owner Fred Wilpon, GMAC LLC Chairman J. Ezra Merkin and former Philadelphia Eagles owner Norman Braman were among the dozens of seemingly sophisticated investors who placed money on what could prove to be history's largest financial scam.
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Complete Coverage: Bernard MadoffHow Madoff Makes People Look DumbHow Safe Are Investors From Fallout?SEC Press Release on Madoff's CaseSEC ComplaintPress Release on Madoff's ArrestCriminal ComplaintArchives
Bernie Madoff Asks Investors To Keep Mum
5/7/2001Wall Street Mystery Features a Big Board Rival
12/16/1992Giant French bank BNP Paribas, Tokyo-based Nomura Holdings Inc. and Neue Privat Bank in Zurich are also exposed, according to people familiar with the matter.
And at least three funds of hedge funds -- which raise money from investors and farm it out to hedge funds -- may have significant losses. Fairfield Greenwich Group and Tremont Capital Management of New York placed hundreds of millions of their investors' dollars into funds overseen by Mr. Madoff. On Friday, Maxam Capital Management LLC reported a combined loss of $280 million on funds they had invested with Mr. Madoff.
"I'm wiped out," said Sandra Manzke, Maxam's founder and chairman. The Darien, Conn., fund of hedge funds will have to close as a result of the losses, she said.
Mr. Madoff, the founder and primary owner of Bernard L. Madoff Investment Securities LLC in New York, was arrested and charged Thursday. Prosecutors allege that the 70-year-old Mr. Madoff hid losses, paying certain investors returns using principal he received from other investors. Prosecutors and regulators have yet to determine how much has been lost, or the amount in assets still held by Mr. Madoff's business.
The alleged fraud has "swept up some of the most prominent and wealthy Americans, along with many people who thought they were embarking on a comfortable retirement and have now been left destitute," says Brad Friedman, a lawyer at Milberg LLP, which with Seeger Weiss LLP represents more than 30 investors with losses they believe could total more than $1 billion.
In criminal and civil complaints, Mr. Madoff is quoted as saying the losses could amount to $50 billion.
"This is a real tragedy," Mr. Madoff's attorney, Ike Sorkin, said Friday. "We're going to fight through these events and do what we can to minimize the loss."
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Splash News
Bernard Madoff leaving court after his arrest late Thursday.
Details emerged Friday of how Mr. Madoff ran the alleged scam, fostering a veneer of exclusivity and creating an A-list of investors that became his most powerful marketing tool. From New York and Florida to Minnesota and Texas, the money manager became an insider's choice among well-heeled investors seeking steady returns. By hiring unofficial agents, tapping into elite country clubs and creating "invitation only" policies for investors, he recruited a steady stream of new clients.
During golf-course and cocktail-party banter, Mr. Madoff's name frequently surfaced as a money manager who could consistently deliver high returns. Older, Jewish investors called Mr. Madoff " 'the Jewish bond,' " says Ken Phillips, head of a Boulder, Colo., investment firm. "It paid 8% to 12%, every year, no matter what."
As his reputation grew, Mr. Madoff gained the trust of prominent businessmen, including ex-Eagles owner Mr. Braman, who owns a chain of Florida auto dealers. A voicemail message left with Mr. Braman's office was not immediately returned.
Mets owner Mr. Wilpon, who also owns real-estate investor Sterling Equities, often raved about Mr. Madoff's investment prowess and invested tens of millions of dollars of both his own money and the team's with his company, say financiers who have worked with him. Mr. Madoff handled investments for the Judy & Fred Wilpon Family Foundation, which distributed about $1 million a year in 2005 and 2006 to charities, according to its most recent federal tax returns..
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Associated Press
People flocked to the lobby of Mr. Madoff's office building Friday.
Mets spokesman Jay Horowitz declined to comment Friday. Mr. Wilpon's Sterling Equities said in a statement: "We are shocked by recent events and, like all investors, will continue to monitor the situation."
Mr. Merkin, the chairman of former General Motors Corp. financing arm GMAC, is also a money manager at Ascot Partners LLC in New York. Ascot, which had $1.8 billion under management as of Sept. 30, had substantially all of its assets invested with Mr. Madoff, according to a letter to Mr. Merkin sent to clients Thursday night. Mr. Merkin said as one of the largest investors in Ascot, he believed he had personally "suffered major losses from this catastrophe."
Mr. Merkin could not be reached for comment.
Mr. Madoff tapped social networks in Dallas, Chicago, Boston and Minneapolis. In Minnesota, he attracted investors from Hillcrest Golf Club of St. Paul and Oak Ridge Country Club in Hopkins, investors say. One of them estimated that investors from the two clubs may have invested more than $100 million combined.
One of the largest clusters of Madoff investors was in Florida, where losses could be substantial. Mr. Madoff relied on a network of friends, family and business colleagues to attract investors. According to investors and agents, some of these agents were paid commissions for harvesting investors. Others had separate, lucrative business relationships with Mr. Madoff.
"If you were eating lunch at the club or golfing, everyone was always talking about how Madoff was making them all this money," one investor says. "Everyone wanted to sign up."
Jeff Fischer, a top divorce attorney in Palm Beach, says many of his clients were also Mr. Madoff's clients. "Every big divorce that came through my office had portfolio positions with Madoff," he says.
Two of his investors said that among his clients, Mr. Madoff was considered a money-management legend; they would joke that if Mr. Madoff was a fraud, he'd take down half the world with him.
Richard Spring, a Boca Raton resident and former securities analyst, says he had about $11 million -- or 95% of his net worth -- invested with Mr. Madoff. "That's how much I believed in him," Mr. Spring said.
Inside Wall Street's Madoff Scandal
3:55
Another large-scale scandal rocks Wall Street as Bernard Madoff, a Wall Street titan and investment advisor was arrested for an alleged $50 billion dollar fraud against investors, WSJ's Kelsey Hubbard and Amir Efrati discuss.
Mr. Spring said he was also one of the unofficial agents who connected Mr. Madoff with dozens of investors, from a teacher who put in $50,000 to entrepreneurs and executives who would put in millions. Mr. Spring said Mr. Madoff didn't want people to put in large amounts right away. "Bernie would tell me, 'Let them start small, and if they're happy the first year or two, they can put it more.' "
Mr. Spring says he never was paid a commission, but he received fees from a small investment-research firm that counted Mr. Madoff as a client; he declined to say how much he received. He said investors would always come to him asking to invest with Mr. Madoff. "I never solicited anyone," he says.
Mr. Spring says he never detected signs of impropriety with Mr. Madoff's investing, but he concedes that he may receive some blame from some investors. "I can understand where people who lost money are looking for a scapegoat," he says. "I'm heartbroken that so many people have been hurt so badly."
Mr. Madoff's main go-between in Palm Beach was Robert Jaffe, say several investors. Mr. Jaffe is the son-in-law of Carl Shapiro, the founder and former chairman of apparel company Kay Windsor Inc. and an early investor and close friend of Mr. Madoff's. Mr. Jaffe, a philanthropist in Palm Beach, attracted many investors from the Palm Beach Country Club in Palm Beach, Fla.
A spokeswoman for Mr. Jaffe's family said several family members were investors with Mr. Madoff and were "significantly adversely impacted" by recent events. There are no indications that Mr. Jaffe or Mr. Spring are implicated in the alleged fraud. Mr. Jaffe didn't return messages yesterday.
Other investors stand to lose through their investments with the likes of Fairfield Greenwich Group and Tremont Capital Management, funds of hedge funds that invested their cash with Mr. Madoff.
"Needless to say, our level of anger and dismay over the apparent betrayal by Mr. Madoff and his organization of his 14-year relationship with Tremont is immeasurable," Tremont told clients in a letter Friday.
Fairfield Greenwich said in a statement late Friday that it is trying to assess the extent of potential losses. The firm said that on Nov. 1, it had $7.5 billion in investments connected to Mr. Madoff's firm, slightly more than half of its total assets. Founding partner Jeffrey Tucker said the firm had no indication of any potential wrongdoing. "We are shocked an appalled by this news," he said.
Ms. Manzke, 60, of Maxam Capital Management, said she met Mr. Madoff through investors in the mid-1980s and introduced him to Tremont, where she was then chief executive. That introduction led to Tremont's decision to market Mr. Madoff as a money manager to its own investors, she adds.
In November, she says, Maxam asked to pull $30 million from Mr. Madoff, and he returned the money.
"He was a low-key guy," Ms. Manzke says. "He would say, 'Look, I'm a market-maker, and I don't want anyone to know I'm running money.' It was always for select people. He was always closed, he wasn't taking new money."
Several European investors were also apparent victims. Bramdean Alternatives in the U.K. said it had more than 9% of its portfolio invested in Madoff funds. Geneva-based Banque Benedict Hentsch, a white-glove private bank, said it is exposed for $47.5 million.
BNP Paribas's exposure, the extent of which is not clear, may stem from BNP's lending relationship with a fund of funds that was a big Madoff client, said people familiar with the matter. A BNP spokeswoman declined to comment.
Nomura and Neue Privat Bank, meanwhile, together marketed access to Fairfield Sentry Ltd., a fund overseen by Mr. Madoff and sold through Fairfield Greenwich. The shares offered by Neue Privat and Nomura were leveraged three times -- meaning $3 of borrowed money was added to every $1 of capital invested in order to magnify returns, greatly increasing the potential losses for those investors.
A Nomura spokesman declined to comment. A message left with Neue Privat was not returned.
The federal complaints against Mr. Madoff allege his fraudulent activities came through a secretive private wealth-management wing of Bernard L. Madoff Investment Securities, the investment firm he founded in 1960. On Wall Street, his company was perhaps better known for its operations in market-making -- the business of serving as a middleman between buyers and sellers -- and proprietary trading.
Through those higher-profile parts of his operation, Mr. Madoff was a pioneer in trading New York Stock Exchange shares away from the exchange. He is a past chairman of the board of directors of the Nasdaq Stock Market as well as a member of the board of governors of the National Association of Securities Dealers and a member of numerous committees of the organization, according to his firm's Web site.
Mr. Madoff owns a home in Roslyn, N.Y., records show, and an elaborate beachfront home and grounds in Montauk on Long Island.
Mr. Madoff and his wife live in an apartment building on Manhattan's Upper East Side where property records list individual apartments valued at more than $5 million. One property database estimated the 2008 market value of Mr. Madoff's two-floor unit to be roughly $9 million. For years he has served as president of the building's co-op board, according to a tenant.
Tenants say he appeared down-to-earth, friendly and always greeted everyone by their first name.
Colleagues of Mr. Madoff said he was fair to those he dealt with and generous to charities including the Special Olympics. Mr. Madoff treated employees well and loved to take friends and colleagues on his 55-foot fishing boat, called Bull, said Frank Christensen, a retired New York Stock Exchange broker. "I really think very highly of him," said Mr. Christensen. "People make mistakes."
—Matthew Futterman, Jenny Strasburg, David Enrich, and Craig Karmin contributed to this article.
New potential victims emerged of Wall Street veteran Bernard Madoff's alleged giant Ponzi scheme, with international banks, hedge funds and wealthy private investors among those sorting out what could amount to tens of billions of dollars in losses.
New York Mets owner Fred Wilpon, GMAC LLC Chairman J. Ezra Merkin and former Philadelphia Eagles owner Norman Braman were among the dozens of seemingly sophisticated investors who placed money on what could prove to be history's largest financial scam.
View Interactive
Read more about previous Ponzi schemes.
More
Complete Coverage: Bernard MadoffHow Madoff Makes People Look DumbHow Safe Are Investors From Fallout?SEC Press Release on Madoff's CaseSEC ComplaintPress Release on Madoff's ArrestCriminal ComplaintArchives
Bernie Madoff Asks Investors To Keep Mum
5/7/2001Wall Street Mystery Features a Big Board Rival
12/16/1992Giant French bank BNP Paribas, Tokyo-based Nomura Holdings Inc. and Neue Privat Bank in Zurich are also exposed, according to people familiar with the matter.
And at least three funds of hedge funds -- which raise money from investors and farm it out to hedge funds -- may have significant losses. Fairfield Greenwich Group and Tremont Capital Management of New York placed hundreds of millions of their investors' dollars into funds overseen by Mr. Madoff. On Friday, Maxam Capital Management LLC reported a combined loss of $280 million on funds they had invested with Mr. Madoff.
"I'm wiped out," said Sandra Manzke, Maxam's founder and chairman. The Darien, Conn., fund of hedge funds will have to close as a result of the losses, she said.
Mr. Madoff, the founder and primary owner of Bernard L. Madoff Investment Securities LLC in New York, was arrested and charged Thursday. Prosecutors allege that the 70-year-old Mr. Madoff hid losses, paying certain investors returns using principal he received from other investors. Prosecutors and regulators have yet to determine how much has been lost, or the amount in assets still held by Mr. Madoff's business.
The alleged fraud has "swept up some of the most prominent and wealthy Americans, along with many people who thought they were embarking on a comfortable retirement and have now been left destitute," says Brad Friedman, a lawyer at Milberg LLP, which with Seeger Weiss LLP represents more than 30 investors with losses they believe could total more than $1 billion.
In criminal and civil complaints, Mr. Madoff is quoted as saying the losses could amount to $50 billion.
"This is a real tragedy," Mr. Madoff's attorney, Ike Sorkin, said Friday. "We're going to fight through these events and do what we can to minimize the loss."
View Full Image
Splash News
Bernard Madoff leaving court after his arrest late Thursday.
Details emerged Friday of how Mr. Madoff ran the alleged scam, fostering a veneer of exclusivity and creating an A-list of investors that became his most powerful marketing tool. From New York and Florida to Minnesota and Texas, the money manager became an insider's choice among well-heeled investors seeking steady returns. By hiring unofficial agents, tapping into elite country clubs and creating "invitation only" policies for investors, he recruited a steady stream of new clients.
During golf-course and cocktail-party banter, Mr. Madoff's name frequently surfaced as a money manager who could consistently deliver high returns. Older, Jewish investors called Mr. Madoff " 'the Jewish bond,' " says Ken Phillips, head of a Boulder, Colo., investment firm. "It paid 8% to 12%, every year, no matter what."
As his reputation grew, Mr. Madoff gained the trust of prominent businessmen, including ex-Eagles owner Mr. Braman, who owns a chain of Florida auto dealers. A voicemail message left with Mr. Braman's office was not immediately returned.
Mets owner Mr. Wilpon, who also owns real-estate investor Sterling Equities, often raved about Mr. Madoff's investment prowess and invested tens of millions of dollars of both his own money and the team's with his company, say financiers who have worked with him. Mr. Madoff handled investments for the Judy & Fred Wilpon Family Foundation, which distributed about $1 million a year in 2005 and 2006 to charities, according to its most recent federal tax returns..
View Full Image
Associated Press
People flocked to the lobby of Mr. Madoff's office building Friday.
Mets spokesman Jay Horowitz declined to comment Friday. Mr. Wilpon's Sterling Equities said in a statement: "We are shocked by recent events and, like all investors, will continue to monitor the situation."
Mr. Merkin, the chairman of former General Motors Corp. financing arm GMAC, is also a money manager at Ascot Partners LLC in New York. Ascot, which had $1.8 billion under management as of Sept. 30, had substantially all of its assets invested with Mr. Madoff, according to a letter to Mr. Merkin sent to clients Thursday night. Mr. Merkin said as one of the largest investors in Ascot, he believed he had personally "suffered major losses from this catastrophe."
Mr. Merkin could not be reached for comment.
Mr. Madoff tapped social networks in Dallas, Chicago, Boston and Minneapolis. In Minnesota, he attracted investors from Hillcrest Golf Club of St. Paul and Oak Ridge Country Club in Hopkins, investors say. One of them estimated that investors from the two clubs may have invested more than $100 million combined.
One of the largest clusters of Madoff investors was in Florida, where losses could be substantial. Mr. Madoff relied on a network of friends, family and business colleagues to attract investors. According to investors and agents, some of these agents were paid commissions for harvesting investors. Others had separate, lucrative business relationships with Mr. Madoff.
"If you were eating lunch at the club or golfing, everyone was always talking about how Madoff was making them all this money," one investor says. "Everyone wanted to sign up."
Jeff Fischer, a top divorce attorney in Palm Beach, says many of his clients were also Mr. Madoff's clients. "Every big divorce that came through my office had portfolio positions with Madoff," he says.
Two of his investors said that among his clients, Mr. Madoff was considered a money-management legend; they would joke that if Mr. Madoff was a fraud, he'd take down half the world with him.
Richard Spring, a Boca Raton resident and former securities analyst, says he had about $11 million -- or 95% of his net worth -- invested with Mr. Madoff. "That's how much I believed in him," Mr. Spring said.
Inside Wall Street's Madoff Scandal
3:55
Another large-scale scandal rocks Wall Street as Bernard Madoff, a Wall Street titan and investment advisor was arrested for an alleged $50 billion dollar fraud against investors, WSJ's Kelsey Hubbard and Amir Efrati discuss.
Mr. Spring said he was also one of the unofficial agents who connected Mr. Madoff with dozens of investors, from a teacher who put in $50,000 to entrepreneurs and executives who would put in millions. Mr. Spring said Mr. Madoff didn't want people to put in large amounts right away. "Bernie would tell me, 'Let them start small, and if they're happy the first year or two, they can put it more.' "
Mr. Spring says he never was paid a commission, but he received fees from a small investment-research firm that counted Mr. Madoff as a client; he declined to say how much he received. He said investors would always come to him asking to invest with Mr. Madoff. "I never solicited anyone," he says.
Mr. Spring says he never detected signs of impropriety with Mr. Madoff's investing, but he concedes that he may receive some blame from some investors. "I can understand where people who lost money are looking for a scapegoat," he says. "I'm heartbroken that so many people have been hurt so badly."
Mr. Madoff's main go-between in Palm Beach was Robert Jaffe, say several investors. Mr. Jaffe is the son-in-law of Carl Shapiro, the founder and former chairman of apparel company Kay Windsor Inc. and an early investor and close friend of Mr. Madoff's. Mr. Jaffe, a philanthropist in Palm Beach, attracted many investors from the Palm Beach Country Club in Palm Beach, Fla.
A spokeswoman for Mr. Jaffe's family said several family members were investors with Mr. Madoff and were "significantly adversely impacted" by recent events. There are no indications that Mr. Jaffe or Mr. Spring are implicated in the alleged fraud. Mr. Jaffe didn't return messages yesterday.
Other investors stand to lose through their investments with the likes of Fairfield Greenwich Group and Tremont Capital Management, funds of hedge funds that invested their cash with Mr. Madoff.
"Needless to say, our level of anger and dismay over the apparent betrayal by Mr. Madoff and his organization of his 14-year relationship with Tremont is immeasurable," Tremont told clients in a letter Friday.
Fairfield Greenwich said in a statement late Friday that it is trying to assess the extent of potential losses. The firm said that on Nov. 1, it had $7.5 billion in investments connected to Mr. Madoff's firm, slightly more than half of its total assets. Founding partner Jeffrey Tucker said the firm had no indication of any potential wrongdoing. "We are shocked an appalled by this news," he said.
Ms. Manzke, 60, of Maxam Capital Management, said she met Mr. Madoff through investors in the mid-1980s and introduced him to Tremont, where she was then chief executive. That introduction led to Tremont's decision to market Mr. Madoff as a money manager to its own investors, she adds.
In November, she says, Maxam asked to pull $30 million from Mr. Madoff, and he returned the money.
"He was a low-key guy," Ms. Manzke says. "He would say, 'Look, I'm a market-maker, and I don't want anyone to know I'm running money.' It was always for select people. He was always closed, he wasn't taking new money."
Several European investors were also apparent victims. Bramdean Alternatives in the U.K. said it had more than 9% of its portfolio invested in Madoff funds. Geneva-based Banque Benedict Hentsch, a white-glove private bank, said it is exposed for $47.5 million.
BNP Paribas's exposure, the extent of which is not clear, may stem from BNP's lending relationship with a fund of funds that was a big Madoff client, said people familiar with the matter. A BNP spokeswoman declined to comment.
Nomura and Neue Privat Bank, meanwhile, together marketed access to Fairfield Sentry Ltd., a fund overseen by Mr. Madoff and sold through Fairfield Greenwich. The shares offered by Neue Privat and Nomura were leveraged three times -- meaning $3 of borrowed money was added to every $1 of capital invested in order to magnify returns, greatly increasing the potential losses for those investors.
A Nomura spokesman declined to comment. A message left with Neue Privat was not returned.
The federal complaints against Mr. Madoff allege his fraudulent activities came through a secretive private wealth-management wing of Bernard L. Madoff Investment Securities, the investment firm he founded in 1960. On Wall Street, his company was perhaps better known for its operations in market-making -- the business of serving as a middleman between buyers and sellers -- and proprietary trading.
Through those higher-profile parts of his operation, Mr. Madoff was a pioneer in trading New York Stock Exchange shares away from the exchange. He is a past chairman of the board of directors of the Nasdaq Stock Market as well as a member of the board of governors of the National Association of Securities Dealers and a member of numerous committees of the organization, according to his firm's Web site.
Mr. Madoff owns a home in Roslyn, N.Y., records show, and an elaborate beachfront home and grounds in Montauk on Long Island.
Mr. Madoff and his wife live in an apartment building on Manhattan's Upper East Side where property records list individual apartments valued at more than $5 million. One property database estimated the 2008 market value of Mr. Madoff's two-floor unit to be roughly $9 million. For years he has served as president of the building's co-op board, according to a tenant.
Tenants say he appeared down-to-earth, friendly and always greeted everyone by their first name.
Colleagues of Mr. Madoff said he was fair to those he dealt with and generous to charities including the Special Olympics. Mr. Madoff treated employees well and loved to take friends and colleagues on his 55-foot fishing boat, called Bull, said Frank Christensen, a retired New York Stock Exchange broker. "I really think very highly of him," said Mr. Christensen. "People make mistakes."
—Matthew Futterman, Jenny Strasburg, David Enrich, and Craig Karmin contributed to this article.
Thursday, December 11, 2008
T-bill yield dropped to zero
According to the Treasury's data, the government sold 47.2% of the four-week T-bill deal Tuesday to investors that put their hands in for a stake through a broker-dealer, which points to higher-than-average buying from central banks and institutional clients such as pension funds. According to the data, the bulk of rest was likely purchased by money-market funds, banks and a few others.
Many investors don't have a choice, bound by law or contract to hold Treasurys of a certain duration, no matter the cost. According to one market participant, some dealers in what is known as the "repo market," where people borrow cash for short periods using Treasury bonds as collateral, have been forced to buy Treasurys to settle those arrangements.
Many investors don't have a choice, bound by law or contract to hold Treasurys of a certain duration, no matter the cost. According to one market participant, some dealers in what is known as the "repo market," where people borrow cash for short periods using Treasury bonds as collateral, have been forced to buy Treasurys to settle those arrangements.
Concern over US Dollar
有人认为，随着提振美国经济的各项庞大计划逐步落实到位，美元头上的阴云也在日渐聚积。问题倒未必出在美国财政赤字的增加上。摩根大通(J.P. Morgan Chase)最近在一份报告中指出，从经济理论和历史记录中都得不出财政刺激计划和货币汇率间有必然联系。
其实观察人士关注的是美国联邦储备委员会(Fed)的行动，后者已经扩大了其资产负债表的规模，这实际上是在为各种纾困计划“印钱”筹资。
一旦美国经济开始复苏，Fed大量注入的这些资金就有可能引发猖獗的通货膨胀，从而侵蚀美元的价值，对美元汇率产生负面影响。也有人说，Fed在这种情况出现之前就会通过加息或其他手段减少流动性的注入。而Fed目前正在努力避免通货紧缩这种与之截然相反的风险。所谓通货紧缩就是信贷收缩和价格下跌的恶性循环。
其实观察人士关注的是美国联邦储备委员会(Fed)的行动，后者已经扩大了其资产负债表的规模，这实际上是在为各种纾困计划“印钱”筹资。
一旦美国经济开始复苏，Fed大量注入的这些资金就有可能引发猖獗的通货膨胀，从而侵蚀美元的价值，对美元汇率产生负面影响。也有人说，Fed在这种情况出现之前就会通过加息或其他手段减少流动性的注入。而Fed目前正在努力避免通货紧缩这种与之截然相反的风险。所谓通货紧缩就是信贷收缩和价格下跌的恶性循环。
GMAC Bondholders Balk at Debt Swap
By MICHAEL ANEIRO and APARAJITA SAHA-BUBNA
GMAC LLC is facing opposition as it tries to persuade investors to swap bonds for lesser-valued debt.
GMAC, the financing arm of General Motors Corp., said Wednesday that it has received only a fraction of the bonds it needs to exchange so it can reduce its debt level and raise the capital required to let it become a bank-holding company. It said it would extend the $38 billion swap-offer deadline until Friday, although there is speculation that it will be extended.
To pressure bondholders, GMAC threatened to drop its bid to convert to a bank structure if it doesn't get the required support. Some bondholders said the plan doesn't ask enough sacrifice from GMAC's owners, an investor group led by Cerberus Capital Management LP and GM.
GMAC Swap
To lighten its debt load, the auto lender wants bondholders to swap debt for other securities worth less. Here is how it would work for one of its bond issues:
BEFORE: The GMAC 8% notes due 2031 (face amount: $3.97 billion) are now trading at 26.5 cents on the dollar, according to MarketAxess.
AFTER: Investors can exchange the old notes for new 8% senior guaranteed notes due 2031, with a par value of $800 of the old bonds' $1,000 principal. Plus, they may in the future get preferred stock valued at $200. This allows GMAC to save a fifth of its interest costs on the notes and boost its capital. Alternately, investors can elect to receive a $600 cash buyout per bond.
IMPACT ON INVESTORS: Investors who opt for the bond swap lose $200 from $1,000 face value of the old bond but get more than the bond is worth in the secondary market and move higher in the line for repayment if there is a default.
Some believe GMAC's threat is a negotiating tactic. Kathleen Shanley, an analyst at research firm Gimme Credit, said in a note Wednesday that in GMAC's statement "there is an implicit threat that the company will consider filing for bankruptcy." Bank-holding-company status "has been seen as GMAC's last best hope for survival," she said.
GMAC bondholders aren't eager to receive common stock in a swap because they are leery about its value. They prefer new debt as it ranks higher in the capital structure in case of a bankruptcy filing.
GMAC said it had gotten just 22% or less of existing debt securities from bondholders, who include debt investors in the company's mortgage subsidiary, Residential Capital LLC, or ResCap. The proposed debt restructuring is a critical part of the auto lender's efforts to become a bank-holding company, which will allow it access to federal funds.
GMAC bonds fell Wednesday. Its 7.75% bonds maturing in 2010 declined to 55.5 cents on the dollar from 58.5 cents, according to the MarketAxess bond-trading platform.
Under the exchange offer, investors may swap existing debt of GMAC and its mortgage unit for new debt with a lower face value, and preferred stock. Or they can opt for a cash payout valued at much less than the face value of the bonds they hold.
GMAC has a low credit rating for a company that lends money, and has been shut out of the markets for raising funds. Without access to Federal Reserve lending facilities and to the market for Federal Deposit Insurance Corp. insured bank debt, GMAC will have to further scale back lending to shore up its balance sheet.
This means that the financing arm will be further restricted in its ability to make auto and other consumer loans, deepening the sales erosion at GM. A lack of funds also means GMAC may have to pull the life-support plug on its mortgage unit.
In the year to date, the seven completed exchange offers of distressed debt total $11 billion, which exceeds the entire amount swapped over the previous quarter-century ending in 2007, according to a study by New York University Prof. Ed Altman. "Distressed debt" is debt that trades at prices significantly below face value.
View Full Image
Associated Press
GMAC has extended its $38 billion debt-exchange offer.
More
Heard on the Street: GMAC Holders Drive Hard BargainIf the GMAC exchange goes through, as well as two other pending deals from Realogy Corp. and Station Casinos Inc., the total this year would balloon to $44 billion in par value. Previously, the biggest debt-swap year had been 1999, with six deals valued at $2.1 billion.
The offers to exchange bonds for lower-value instruments, known in Wall Street parlance as a "haircut," has provoked investor resistance beyond GMAC bondholders.
Faced with a decision to accept significant losses in the hopes bond-issuing companies survive the credit squeeze, many bondholders said the offers seem tilted toward increasing value for equity holders and don't provide enough protection for debt investments. In GMAC's case, some bondholders said they want to see parent Cerberus inject more equity capital into the firm.
"Investors are banding together strongly in some cases to oppose these exchanges," said Wes Sparks, head of U.S. fixed income at Schroders PLC. "The key thing is the issuer's ability to avert enough near-term debt maturities to get over the hurdle."
At Station Casinos, two-thirds of affected creditors, representing $1.5 billion in debt maturing between 2012 and 2018, have formed a committee to fight the company's offer, to swap senior notes for new debt with a higher interest rate but at just over half the face value of the old bonds. The bonds trade between eight cents and 29 cents on the dollar, said MarketAxess.
The committee called the offer deficient and proposed more discussions ahead of Thursday's exchange-offer deadline. A Station spokeswoman declined comment.
Dissident bondholders at Realogy, owned by Apollo Management LP, filed a complaint in Delaware Chancery Court contending that the company's offer would constitute a breach of bond-contract terms.
As part of the complaint, High River LP, a Realogy creditor owned by activist investor Carl Icahn, sued Realogy, calling the transaction a fraudulent transfer of assets benefiting Apollo, at bondholders' expense. It reasoned that the action delays debt repayment and pushes current bondholders lower in the payout order. Realogy, the parent of real estate brokers Century 21 and Coldwell Banker, in a regulatory filing said it believes the allegations in the complaint are without merit.
Realogy last week said that it had received $237 million of commitments toward a $500 million offer to swap senior bonds maturing in 2014 and 2015, at between 36 cents and 50 cents on the dollar. Those bonds trade between 12 cents and 18.5 cents on the dollar. The deadline for the exchange is Dec. 18.
GMAC LLC is facing opposition as it tries to persuade investors to swap bonds for lesser-valued debt.
GMAC, the financing arm of General Motors Corp., said Wednesday that it has received only a fraction of the bonds it needs to exchange so it can reduce its debt level and raise the capital required to let it become a bank-holding company. It said it would extend the $38 billion swap-offer deadline until Friday, although there is speculation that it will be extended.
To pressure bondholders, GMAC threatened to drop its bid to convert to a bank structure if it doesn't get the required support. Some bondholders said the plan doesn't ask enough sacrifice from GMAC's owners, an investor group led by Cerberus Capital Management LP and GM.
GMAC Swap
To lighten its debt load, the auto lender wants bondholders to swap debt for other securities worth less. Here is how it would work for one of its bond issues:
BEFORE: The GMAC 8% notes due 2031 (face amount: $3.97 billion) are now trading at 26.5 cents on the dollar, according to MarketAxess.
AFTER: Investors can exchange the old notes for new 8% senior guaranteed notes due 2031, with a par value of $800 of the old bonds' $1,000 principal. Plus, they may in the future get preferred stock valued at $200. This allows GMAC to save a fifth of its interest costs on the notes and boost its capital. Alternately, investors can elect to receive a $600 cash buyout per bond.
IMPACT ON INVESTORS: Investors who opt for the bond swap lose $200 from $1,000 face value of the old bond but get more than the bond is worth in the secondary market and move higher in the line for repayment if there is a default.
Some believe GMAC's threat is a negotiating tactic. Kathleen Shanley, an analyst at research firm Gimme Credit, said in a note Wednesday that in GMAC's statement "there is an implicit threat that the company will consider filing for bankruptcy." Bank-holding-company status "has been seen as GMAC's last best hope for survival," she said.
GMAC bondholders aren't eager to receive common stock in a swap because they are leery about its value. They prefer new debt as it ranks higher in the capital structure in case of a bankruptcy filing.
GMAC said it had gotten just 22% or less of existing debt securities from bondholders, who include debt investors in the company's mortgage subsidiary, Residential Capital LLC, or ResCap. The proposed debt restructuring is a critical part of the auto lender's efforts to become a bank-holding company, which will allow it access to federal funds.
GMAC bonds fell Wednesday. Its 7.75% bonds maturing in 2010 declined to 55.5 cents on the dollar from 58.5 cents, according to the MarketAxess bond-trading platform.
Under the exchange offer, investors may swap existing debt of GMAC and its mortgage unit for new debt with a lower face value, and preferred stock. Or they can opt for a cash payout valued at much less than the face value of the bonds they hold.
GMAC has a low credit rating for a company that lends money, and has been shut out of the markets for raising funds. Without access to Federal Reserve lending facilities and to the market for Federal Deposit Insurance Corp. insured bank debt, GMAC will have to further scale back lending to shore up its balance sheet.
This means that the financing arm will be further restricted in its ability to make auto and other consumer loans, deepening the sales erosion at GM. A lack of funds also means GMAC may have to pull the life-support plug on its mortgage unit.
In the year to date, the seven completed exchange offers of distressed debt total $11 billion, which exceeds the entire amount swapped over the previous quarter-century ending in 2007, according to a study by New York University Prof. Ed Altman. "Distressed debt" is debt that trades at prices significantly below face value.
View Full Image
Associated Press
GMAC has extended its $38 billion debt-exchange offer.
More
Heard on the Street: GMAC Holders Drive Hard BargainIf the GMAC exchange goes through, as well as two other pending deals from Realogy Corp. and Station Casinos Inc., the total this year would balloon to $44 billion in par value. Previously, the biggest debt-swap year had been 1999, with six deals valued at $2.1 billion.
The offers to exchange bonds for lower-value instruments, known in Wall Street parlance as a "haircut," has provoked investor resistance beyond GMAC bondholders.
Faced with a decision to accept significant losses in the hopes bond-issuing companies survive the credit squeeze, many bondholders said the offers seem tilted toward increasing value for equity holders and don't provide enough protection for debt investments. In GMAC's case, some bondholders said they want to see parent Cerberus inject more equity capital into the firm.
"Investors are banding together strongly in some cases to oppose these exchanges," said Wes Sparks, head of U.S. fixed income at Schroders PLC. "The key thing is the issuer's ability to avert enough near-term debt maturities to get over the hurdle."
At Station Casinos, two-thirds of affected creditors, representing $1.5 billion in debt maturing between 2012 and 2018, have formed a committee to fight the company's offer, to swap senior notes for new debt with a higher interest rate but at just over half the face value of the old bonds. The bonds trade between eight cents and 29 cents on the dollar, said MarketAxess.
The committee called the offer deficient and proposed more discussions ahead of Thursday's exchange-offer deadline. A Station spokeswoman declined comment.
Dissident bondholders at Realogy, owned by Apollo Management LP, filed a complaint in Delaware Chancery Court contending that the company's offer would constitute a breach of bond-contract terms.
As part of the complaint, High River LP, a Realogy creditor owned by activist investor Carl Icahn, sued Realogy, calling the transaction a fraudulent transfer of assets benefiting Apollo, at bondholders' expense. It reasoned that the action delays debt repayment and pushes current bondholders lower in the payout order. Realogy, the parent of real estate brokers Century 21 and Coldwell Banker, in a regulatory filing said it believes the allegations in the complaint are without merit.
Realogy last week said that it had received $237 million of commitments toward a $500 million offer to swap senior bonds maturing in 2014 and 2015, at between 36 cents and 50 cents on the dollar. Those bonds trade between 12 cents and 18.5 cents on the dollar. The deadline for the exchange is Dec. 18.
Jobless Claims Hit 26-Year High
WASHINGTON -- The number of U.S. workers filing new claims for state unemployment benefits rose more than twice as much as expected last week to a 26-year high indicative of continued employment declines amidst a recessionary economy.
Separately, the U.S. trade deficit unexpectedly widened in October, rising for the first time in three months as a record increase in quantity of oil imported offset falling oil prices and plunging car purchases.
Initial claims for jobless benefits spiked 58,000 to a seasonally adjusted 573,000 in the week ended Dec. 6, the Labor Department said in a weekly report Thursday. Economists surveyed by Dow Jones Newswires had expected claims would rise by 24,000.
The four-week average of new claims, which aims to smooth volatility in the data, also reached a nearly 26-year high, rising 14,250 to 540,500 from the previous week's revised average of 526,250.
Several factors contributed to the elevated numbers, a Labor Department analyst said. The week after Thanksgiving traditionally shows the largest increase in unadjusted claims filings, a factor that combined with administrative catch-up related to the holiday and a low seasonal adjustment hurdle drove up numbers.
The tally of continuing claims, those drawn by workers collecting benefits for more than one week in the week ended Nov. 29, also rose, climbing 338,000 to 4,429,000 suggesting it is taking the unemployed longer to find new work. The increase is the largest in 34 years and brings the level of continuing claims near one not seen since 1982.
The data comes after 11 months of declining nonfarm payrolls. Employers in November alone shed 533,000 jobs as the unemployment rate continued rising. The latest data suggests those trends are continuing into December.
The unemployment rate for workers with unemployment insurance rose again last week, climbing to 16-year high of 3.3%.
Not adjusted to reflect seasonal fluctuations, Wisconsin reported the largest jump in new claims during the Nov. 29 week due to an increase in layoffs in the construction, trade, service and manufacturing industries. The state reported initial claims of more than 16,000 for the week.
California reported the largest decrease due to fewer layoffs in the service industry.
Trade Deficit Widens
The U.S. deficit in international trade of goods and services rose by 1.1% to $57.19 billion from September's revised $56.56 billion, the Commerce Department said Thursday. Originally, the September deficit was estimated at $56.47 billion. The last time the deficit had gone up was July.
The U.S. deficit with China rose, widening to $27.96 billion from September's $27.77 billion.
The overall U.S. trade deficit of $57.19 billion was much bigger than expected by Wall Street. Economists surveyed by Dow Jones Newswires estimated a $52.8 billion shortfall in October. Analysts thought the deficit would shrink for a couple reasons. A weak U.S. economy is curbing demand for overall imports. Also, falling oil prices have lowered the value of oil imports.
The numbers Thursday showed oil prices did fall -- by a record amount. Yet crude import volume increased, also by a record amount. Overall imports declined -- modestly.
The trade report showed U.S. exports in October declined 2.2% to $151.73 billion from $155.09 billion. The economies of the nation's major trading partners have slowed, hurting overseas sales of U.S. goods and services.
Imports fell 1.3% to $208.92 billion from $211.65 billion.
Crude oil imports climbed to $29.83 billion from $27.25 billion in September. The average price per barrel decreased by a record $15.56 to $92.02 from $107.58. The volume of oil imported increased to 324.19 million barrels from 253.28 million; the advance of 70.9 million barrels was a record.
The U.S. paid $37.63 billion for all types of energy-related imports, up from $36.18 billion in September.
Imports of industrial supplies, which includes chemicals and copper, slipped $104 million. Imports of capital goods such as computer accessories dived $1.4 billion.
Auto and related parts imports fell by $921 million. Americans are cutting car purchases because of tight credit and an uncertain economy, with fears swirling of layoffs.
Purchases of foreign-made consumer goods, however, like pharmaceutical preparations and clothes climbed in October by $466 million. Food and feed imports rose $81 million.
As for exports, U.S. sales abroad of cars and parts decreased $236 million. Consumer goods exports fell by $156 million. Sales of industrial supplies dropped $1.41 billion.
Food, feed, and beverages went down $774 million.
U.S. sales abroad of capital goods decreased by $113 million during October. Within that category was a big decrease in sales of civilian airplanes; there was a strike earlier this autumn at aircraft giant Boeing.
U.S. trade deficits with some of its major trading partners were mixed in October, Commerce said.
The deficit with Japan widened to $6.05 billion from $5.59 billion.
The trade gap with the euro area widened to $7.71 billion from $5.99 billion. The deficit with Canada fell to $5.96 billion from $7.63 billion. The U.S. gap with Mexico slid to $4.80 billion from $4.94 billion.
Separately, the U.S. trade deficit unexpectedly widened in October, rising for the first time in three months as a record increase in quantity of oil imported offset falling oil prices and plunging car purchases.
Initial claims for jobless benefits spiked 58,000 to a seasonally adjusted 573,000 in the week ended Dec. 6, the Labor Department said in a weekly report Thursday. Economists surveyed by Dow Jones Newswires had expected claims would rise by 24,000.
The four-week average of new claims, which aims to smooth volatility in the data, also reached a nearly 26-year high, rising 14,250 to 540,500 from the previous week's revised average of 526,250.
Several factors contributed to the elevated numbers, a Labor Department analyst said. The week after Thanksgiving traditionally shows the largest increase in unadjusted claims filings, a factor that combined with administrative catch-up related to the holiday and a low seasonal adjustment hurdle drove up numbers.
The tally of continuing claims, those drawn by workers collecting benefits for more than one week in the week ended Nov. 29, also rose, climbing 338,000 to 4,429,000 suggesting it is taking the unemployed longer to find new work. The increase is the largest in 34 years and brings the level of continuing claims near one not seen since 1982.
The data comes after 11 months of declining nonfarm payrolls. Employers in November alone shed 533,000 jobs as the unemployment rate continued rising. The latest data suggests those trends are continuing into December.
The unemployment rate for workers with unemployment insurance rose again last week, climbing to 16-year high of 3.3%.
Not adjusted to reflect seasonal fluctuations, Wisconsin reported the largest jump in new claims during the Nov. 29 week due to an increase in layoffs in the construction, trade, service and manufacturing industries. The state reported initial claims of more than 16,000 for the week.
California reported the largest decrease due to fewer layoffs in the service industry.
Trade Deficit Widens
The U.S. deficit in international trade of goods and services rose by 1.1% to $57.19 billion from September's revised $56.56 billion, the Commerce Department said Thursday. Originally, the September deficit was estimated at $56.47 billion. The last time the deficit had gone up was July.
The U.S. deficit with China rose, widening to $27.96 billion from September's $27.77 billion.
The overall U.S. trade deficit of $57.19 billion was much bigger than expected by Wall Street. Economists surveyed by Dow Jones Newswires estimated a $52.8 billion shortfall in October. Analysts thought the deficit would shrink for a couple reasons. A weak U.S. economy is curbing demand for overall imports. Also, falling oil prices have lowered the value of oil imports.
The numbers Thursday showed oil prices did fall -- by a record amount. Yet crude import volume increased, also by a record amount. Overall imports declined -- modestly.
The trade report showed U.S. exports in October declined 2.2% to $151.73 billion from $155.09 billion. The economies of the nation's major trading partners have slowed, hurting overseas sales of U.S. goods and services.
Imports fell 1.3% to $208.92 billion from $211.65 billion.
Crude oil imports climbed to $29.83 billion from $27.25 billion in September. The average price per barrel decreased by a record $15.56 to $92.02 from $107.58. The volume of oil imported increased to 324.19 million barrels from 253.28 million; the advance of 70.9 million barrels was a record.
The U.S. paid $37.63 billion for all types of energy-related imports, up from $36.18 billion in September.
Imports of industrial supplies, which includes chemicals and copper, slipped $104 million. Imports of capital goods such as computer accessories dived $1.4 billion.
Auto and related parts imports fell by $921 million. Americans are cutting car purchases because of tight credit and an uncertain economy, with fears swirling of layoffs.
Purchases of foreign-made consumer goods, however, like pharmaceutical preparations and clothes climbed in October by $466 million. Food and feed imports rose $81 million.
As for exports, U.S. sales abroad of cars and parts decreased $236 million. Consumer goods exports fell by $156 million. Sales of industrial supplies dropped $1.41 billion.
Food, feed, and beverages went down $774 million.
U.S. sales abroad of capital goods decreased by $113 million during October. Within that category was a big decrease in sales of civilian airplanes; there was a strike earlier this autumn at aircraft giant Boeing.
U.S. trade deficits with some of its major trading partners were mixed in October, Commerce said.
The deficit with Japan widened to $6.05 billion from $5.59 billion.
The trade gap with the euro area widened to $7.71 billion from $5.99 billion. The deficit with Canada fell to $5.96 billion from $7.63 billion. The U.S. gap with Mexico slid to $4.80 billion from $4.94 billion.
Wednesday, December 10, 2008
Charge-Offs Start to Shred Card Issuers
--pay attention the delinquencies of 60 to 89 days
--delinquencies of more than 180 are charged off
--roll rate, deliqneuncy to charge off, is on the rise
More credit-card holders who fall behind on their payments are eventually defaulting, deepening losses for thousands of banks that issue plastic.
The worsening trend indicates that charge-off rates among credit-card issuers, which stood at more than 6% in the third quarter, are poised to rise more than expected in the fourth quarter and into next year. That means additional misery for financial firms already besieged with losses on everything from soured mortgages to bad bets on capital markets.
Card-industry executives are worried about escalating "roll rates," a term that refers to the percentage of cardholders who go from merely late on their payments to not making them at all. Among cardholders who are between 60 days and 89 days overdue, about 20% of such card balances eventually are being charged off by card issuers as uncollectible, according to Auriemma Consulting Group Inc., a Westbury, N.Y., financial-services consulting firm. The percentage is up by about a third from last year, before the U.S. economy tipped into recession.
The problem can be even worse for bundles of outstanding credit-card balances that are securitized by some of the largest issuers. For example, American Express Co.'s roll rate worsened to 47% in the third quarter from 35% a year earlier, says investment bank Keefe, Bruyette & Woods Inc., which calculated the figures from securities filings. At Capital One Financial Corp., known for its cheeky ads and mass-market strategy, the roll rate has reached 34%, up from 28% in last year's third quarter. Those figures don't reflect credit-card loans that the issuers keep on their books.
Much of the surge is being blamed on rising unemployment, typically a leading indicator of credit-card performance. November's loss of a half-million jobs will make it impossible for even more cardholders to make their payments on time. Others who already are delinquent in their payments will be unable to catch up.
"They're rolling through a lot faster, and once they go bad, there's nowhere for them to turn," one credit-card industry executive says.
"There is definitely concern" about the rising percentage of cardholders who can't resume timely payments on their cards, says Mike Viola, a managing associate at Auriemma.
The three largest U.S. card issuers are J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. Those three banks had nearly 60% of the $724.44 billion in outstanding loans at the 10 biggest card issuers in the U.S. as of June 30, according to the Nilson Report, a Carpinteria, Calif., newsletter that follows the industry.
Card issuers are scrambling to reverse the trend, with moves that include cutting credit lines to some customers and contacting cardholders before they become delinquent. In a report last week, Meredith Whitney, a banking analyst at Oppenheimer & Co., estimated that card issuers will reduce credit lines by more than $2 trillion in the next 18 months.
But some of the actions aimed at mitigating losses, such as raising minimum payments and interest rates, also can make it harder for struggling cardholders. Capital One, of McLean, Va., is boosting payment requirements for delinquent customers. "We expect that the implementation of this policy will cause delinquencies and roll rates to increase starting in early 2009," Gary Perlin, Capital One's chief financial officer, told analysts in October.
Fewer J.P. Morgan cardholders are falling behind on their payments. Once they do, though, "more of them are going through to charge-off," says Gordon Smith, who runs the New York bank's credit-card business. J.P. Morgan had $157.6 billion of outstanding credit-card loans as of Sept. 30, up 6% from a year earlier.
Card issuers divide shaky balances into so-called delinquency buckets, which represent customers at various stages of tardiness in their bills. Customers flow through the buckets, divided into 30-day increments, based how far behind they are. Most card companies write off the loans after a customer is delinquent for 180 days.
Data for cardholders deemed delinquent by fewer than 30 days aren't considered especially meaningful. Some of those customers are assumed to have forgotten to pay a bill before leaving town. Experts pay much more attention to delinquencies of 60 days to 89 days, because that typically reflects borrowers in financial distress.
Roll-rate disclosures vary by card issuers. To examine the trends, analysts scour monthly data tracking loans that have been securitized. While those figures don't reflect an issuer's entire card portfolio, they are widely viewed as reliable indicators.
In the third quarter, Discover Financial Services' roll rate climbed to 39% from 32% a year earlier, according to Keefe, Bruyette & Woods. November data is expected starting next week.
--delinquencies of more than 180 are charged off
--roll rate, deliqneuncy to charge off, is on the rise
More credit-card holders who fall behind on their payments are eventually defaulting, deepening losses for thousands of banks that issue plastic.
The worsening trend indicates that charge-off rates among credit-card issuers, which stood at more than 6% in the third quarter, are poised to rise more than expected in the fourth quarter and into next year. That means additional misery for financial firms already besieged with losses on everything from soured mortgages to bad bets on capital markets.
Card-industry executives are worried about escalating "roll rates," a term that refers to the percentage of cardholders who go from merely late on their payments to not making them at all. Among cardholders who are between 60 days and 89 days overdue, about 20% of such card balances eventually are being charged off by card issuers as uncollectible, according to Auriemma Consulting Group Inc., a Westbury, N.Y., financial-services consulting firm. The percentage is up by about a third from last year, before the U.S. economy tipped into recession.
The problem can be even worse for bundles of outstanding credit-card balances that are securitized by some of the largest issuers. For example, American Express Co.'s roll rate worsened to 47% in the third quarter from 35% a year earlier, says investment bank Keefe, Bruyette & Woods Inc., which calculated the figures from securities filings. At Capital One Financial Corp., known for its cheeky ads and mass-market strategy, the roll rate has reached 34%, up from 28% in last year's third quarter. Those figures don't reflect credit-card loans that the issuers keep on their books.
Much of the surge is being blamed on rising unemployment, typically a leading indicator of credit-card performance. November's loss of a half-million jobs will make it impossible for even more cardholders to make their payments on time. Others who already are delinquent in their payments will be unable to catch up.
"They're rolling through a lot faster, and once they go bad, there's nowhere for them to turn," one credit-card industry executive says.
"There is definitely concern" about the rising percentage of cardholders who can't resume timely payments on their cards, says Mike Viola, a managing associate at Auriemma.
The three largest U.S. card issuers are J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc. Those three banks had nearly 60% of the $724.44 billion in outstanding loans at the 10 biggest card issuers in the U.S. as of June 30, according to the Nilson Report, a Carpinteria, Calif., newsletter that follows the industry.
Card issuers are scrambling to reverse the trend, with moves that include cutting credit lines to some customers and contacting cardholders before they become delinquent. In a report last week, Meredith Whitney, a banking analyst at Oppenheimer & Co., estimated that card issuers will reduce credit lines by more than $2 trillion in the next 18 months.
But some of the actions aimed at mitigating losses, such as raising minimum payments and interest rates, also can make it harder for struggling cardholders. Capital One, of McLean, Va., is boosting payment requirements for delinquent customers. "We expect that the implementation of this policy will cause delinquencies and roll rates to increase starting in early 2009," Gary Perlin, Capital One's chief financial officer, told analysts in October.
Fewer J.P. Morgan cardholders are falling behind on their payments. Once they do, though, "more of them are going through to charge-off," says Gordon Smith, who runs the New York bank's credit-card business. J.P. Morgan had $157.6 billion of outstanding credit-card loans as of Sept. 30, up 6% from a year earlier.
Card issuers divide shaky balances into so-called delinquency buckets, which represent customers at various stages of tardiness in their bills. Customers flow through the buckets, divided into 30-day increments, based how far behind they are. Most card companies write off the loans after a customer is delinquent for 180 days.
Data for cardholders deemed delinquent by fewer than 30 days aren't considered especially meaningful. Some of those customers are assumed to have forgotten to pay a bill before leaving town. Experts pay much more attention to delinquencies of 60 days to 89 days, because that typically reflects borrowers in financial distress.
Roll-rate disclosures vary by card issuers. To examine the trends, analysts scour monthly data tracking loans that have been securitized. While those figures don't reflect an issuer's entire card portfolio, they are widely viewed as reliable indicators.
In the third quarter, Discover Financial Services' roll rate climbed to 39% from 32% a year earlier, according to Keefe, Bruyette & Woods. November data is expected starting next week.
Tuesday, December 9, 2008
Prime Time? Investors Bet Against AAA
SCOTT PATTERSON
In the past month, there has been a big selloff in a corner of the mortgage-bond market that investors once thought impregnable: triple A.
Since October, Markit Group's ABX index that tracks triple-A-rated subprime bonds has been almost sliced in half. Triple-A Alt-A mortgage bonds, the netherworld between subprime and prime, also have been hit hard.
The most troubling change has been a wave of selling in triple-A prime mortgages.
Known as "nonagency" mortgages, these don't conform to Fannie Mae and Freddie Mac standards. Many are backed by jumbo loans, large mortgages that Fannie and Freddie don't deal with. The people who signed the dotted line on these loans generally had solid credit. That isn't how the market is treating them.
Leland Abrams, a trader at a Florida broker dealer, says his firm has bought prime triple-A mortgage bonds for about 30 cents on the dollar. Similar bonds traded for about 70 cents a few months ago. "This market is priced for Armaggedon," Mr. Abrams says.
Traders say large institutional investors have been big sellers of triple-A mortgage bonds. One reason could be the Standard & Poor's November downgrade of a swath of securities backed by Alt-A mortgages. The fear is prime mortgage bonds will be next.
Mr. Abrams thinks bargain-hunters eventually will start buying. But investors have been catching falling knives ever since the credit crunch started in 2007. When the dust settles, there mightn't be many hands left to grab hold of all those bargains.
In the past month, there has been a big selloff in a corner of the mortgage-bond market that investors once thought impregnable: triple A.
Since October, Markit Group's ABX index that tracks triple-A-rated subprime bonds has been almost sliced in half. Triple-A Alt-A mortgage bonds, the netherworld between subprime and prime, also have been hit hard.
The most troubling change has been a wave of selling in triple-A prime mortgages.
Known as "nonagency" mortgages, these don't conform to Fannie Mae and Freddie Mac standards. Many are backed by jumbo loans, large mortgages that Fannie and Freddie don't deal with. The people who signed the dotted line on these loans generally had solid credit. That isn't how the market is treating them.
Leland Abrams, a trader at a Florida broker dealer, says his firm has bought prime triple-A mortgage bonds for about 30 cents on the dollar. Similar bonds traded for about 70 cents a few months ago. "This market is priced for Armaggedon," Mr. Abrams says.
Traders say large institutional investors have been big sellers of triple-A mortgage bonds. One reason could be the Standard & Poor's November downgrade of a swath of securities backed by Alt-A mortgages. The fear is prime mortgage bonds will be next.
Mr. Abrams thinks bargain-hunters eventually will start buying. But investors have been catching falling knives ever since the credit crunch started in 2007. When the dust settles, there mightn't be many hands left to grab hold of all those bargains.
Record loan growth at Japanese banks highlights lack of liquidity
By Michiyo Nakamoto in Tokyo
Published: December 9 2008 02:00 Last updated: December 9 2008 02:00
Japanese banks last month enjoyed record loan growth as companies rushed to put aside cash and maintain liquidity amid difficult conditions in the capital markets.
Bank lending in the world's second-largest economy grew 3.6 per cent year on year, the strongest rise since records became available in 1992, as Japanese companies turned increasingly to banks to meet their funding needs.
The unexpectedly strong expansion of bank lending last month follows loan growth of 2.3 per cent in October and comes as the government stepped up its pressure on banks to extend credit particularly to small and medium-sized businesses.
Analysts said growth in lending - which eluded Japan's banks for years after the country's asset bubble burst - reflected tightening conditions in money markets and companies' fears of running out of cash, rather than higher economic activity.
Faced with tightening liquidity, "companies are hoarding cash over the end of the calendar year," said one bank analyst in Tokyo.
A representative of the National Federation of Small Business Associations said companies appeared to be rushing to secure funds out of concern latecomers would find it difficult to borrow. "Many companies are borrowing now because they see no prospect for sales in the new year," he said.
Bank lending increased as the outstanding balance of commercial paper, which companies issue to investors for short-term funding needs, dropped nearly 10 per cent in November year on year.
"With the CP market losing functionality and a shift to bank lending underway, businesses are confronting ever-tighter financial conditions as reflected in high term interest rates . . . (which, in turn) is feeding into deterioration in business conditions," said Goldman Sachs in a report.
With Japan's recession expected to be prolonged, analysts forecast that the Bank of Japan's Tankan report, to be unveiled next Monday, will show that business confidence has plunged.
To encourage banks to lend more, the government has said it will relax rules on capital adequacy ratios until March 2012 and expand its loan guarantees for small and medium-sized companies. Growth in bank lending has failed to stem corporate bankruptcies, which renewed their post-war record. Bankruptcies of listed companies have risen to a record 30 this year, according to Tokyo Shoko Research, overtaking the 29 bankruptcies in 2002 when Japan was mired in a banking crisis.
Overall corporate bankruptcies rose 5.3 per cent year on year to 1,277, with more companies failing due to a lack of operating funds, said the research group.
Published: December 9 2008 02:00 Last updated: December 9 2008 02:00
Japanese banks last month enjoyed record loan growth as companies rushed to put aside cash and maintain liquidity amid difficult conditions in the capital markets.
Bank lending in the world's second-largest economy grew 3.6 per cent year on year, the strongest rise since records became available in 1992, as Japanese companies turned increasingly to banks to meet their funding needs.
The unexpectedly strong expansion of bank lending last month follows loan growth of 2.3 per cent in October and comes as the government stepped up its pressure on banks to extend credit particularly to small and medium-sized businesses.
Analysts said growth in lending - which eluded Japan's banks for years after the country's asset bubble burst - reflected tightening conditions in money markets and companies' fears of running out of cash, rather than higher economic activity.
Faced with tightening liquidity, "companies are hoarding cash over the end of the calendar year," said one bank analyst in Tokyo.
A representative of the National Federation of Small Business Associations said companies appeared to be rushing to secure funds out of concern latecomers would find it difficult to borrow. "Many companies are borrowing now because they see no prospect for sales in the new year," he said.
Bank lending increased as the outstanding balance of commercial paper, which companies issue to investors for short-term funding needs, dropped nearly 10 per cent in November year on year.
"With the CP market losing functionality and a shift to bank lending underway, businesses are confronting ever-tighter financial conditions as reflected in high term interest rates . . . (which, in turn) is feeding into deterioration in business conditions," said Goldman Sachs in a report.
With Japan's recession expected to be prolonged, analysts forecast that the Bank of Japan's Tankan report, to be unveiled next Monday, will show that business confidence has plunged.
To encourage banks to lend more, the government has said it will relax rules on capital adequacy ratios until March 2012 and expand its loan guarantees for small and medium-sized companies. Growth in bank lending has failed to stem corporate bankruptcies, which renewed their post-war record. Bankruptcies of listed companies have risen to a record 30 this year, according to Tokyo Shoko Research, overtaking the 29 bankruptcies in 2002 when Japan was mired in a banking crisis.
Overall corporate bankruptcies rose 5.3 per cent year on year to 1,277, with more companies failing due to a lack of operating funds, said the research group.
Rescue Plan Aims to Aid Some Large Credit Unions
By MARK MAREMONT
Federal regulators are preparing a rescue plan to shore up the finances of some large credit unions, using billions of dollars in new government borrowings.
The plan, expected to be announced this week, involves tapping into a $41 billion lending facility that Congress made available to credit-union regulators in September. The aim is to provide help for a handful of big credit unions -- all of them institutions known as corporate credit unions that don't deal with the general public -- that have been reeling from large paper losses on mortgage-backed securities.
Some observers feared the financial woes were so severe they had the potential to undermine the stability of the credit-union system. Credit unions largely haven't received any funds from the financial-rescue packages announced by the Bush administration.
Michael E. Fryzel, chairman of the National Credit Union Administration, the industry's federal regulator, said in an interview that the plan wasn't a taxpayer-funded bailout. Instead, Mr. Fryzel called it a short-term "mechanism to stabilize the credit-union system" while regulators work on other steps, to be announced early in 2009.
A related program also to be announced by NCUA will provide as much as $2 billion in inexpensive loans to credit unions, which the institutions can use to reduce mortgage interest rates for homeowners.
Regulators hope the program will bring relief to as many as 10,000 homeowners, by cutting their mortgage rates by as much as two percentage points.
Mr. Fryzel said he didn't know how much new federal borrowing the two programs would entail. Funding for the loan programs will come through the Treasury Department.
Credit unions are member-owned cooperatives that act much like banks, taking deposits and offering loans. At the end of last year, there were about 8,400 credit unions in the U.S. with $775 billion in assets. Most are faring fine financially.
The rescue plan is aimed at shoring up the network of corporate credit unions, which are wholesale-style institutions that provide financing, investment and clearing services to retail credit unions. The retail credit unions are cooperative owners of the corporate credit unions.
As part of their role, corporates take deposits from retail credit unions, then invest that money in longer-term assets. But some of the largest corporates invested in mortgage-backed securities, and lately have suffered paper losses.
The losses show no sign of abating, expanding from $5.7 billion at the end of May to more than $10 billion as of Oct. 31. Retail credit unions have been pulling funds out of some of the corporates, which have been forced to borrow to meet demands.
The largest by most measures, U.S. Central Federal Credit Union, had used up 96% of its borrowing facility from the Federal Home Loan Bank system by Oct. 31. It said in its most recent financial statement that it had other sources of borrowing.
In September, NCUA got approval from Congress to expand an existing loan facility that was originally intended to act as a lender of last resort to retail credit unions. Congress increased the funding authorization from $1.5 billion to $41 billion.
Regulators first thought of directly lending some of that money to the corporate credit unions. But it turned out that wasn't allowed; under the law, only retail credit unions could tap into the funds.
The stabilization plan to be announced by the NCUA would involve two steps. Retail credit unions would borrow from the lending facility, at a favorable interest rate, currently 1.5%. They would then deposit that money with the corporate credit unions, earning a small additional rate of return. The idea is to stop the outflow of funds from the corporate credit unions, and generate an inflow of relatively stable, low-cost money that the corporates could use to retire other debt.
The new deposits would be guaranteed under a federal program announced in October.
Mr. Fryzel, the NCUA chairman, said he recognizes there is no guarantee the retail credit unions will take advantage of the loan program. But he said retail credit unions "have a vested interest in those corporates. If they want to maintain those as strong entities, they will have to take advantage of these programs."
NCUA officials said the retail credit unions also have a financial interest in helping the corporate credit unions. They stand to lose their ownership stakes, and they have other, older deposits at risk.
The plan doesn't provide any new capital for the corporate credit unions, and doesn't do anything to relieve them of the losses on mortgage securities.
"This is not a long-term solution," Mr. Fryzel said. "We're buying time." Further out, he said, "we are looking at the entire corporate system," but he declined to provide details.
The second program, which NCUA has dubbed the Credit Union Homeowner Affordability Relief Program, also involves loans from the $41 billion lending facility. Under it, retail credit unions could borrow up to $2 billion at favorable rates, now 1.25%, and use the money to subsidize interest-rate relief for homeowners who are having trouble paying mortgages. The retail credit unions would be expected to shoulder about half the expense of reducing homeowners' interest rates.
Money that a retail credit union borrows under the program also would have to be kept on deposit with a corporate credit union, further bolstering liquidity in that segment of the industry.
Previously, credit-union regulators and executives had hoped to tap into the Treasury's $700 billion bailout package. Credit unions were explicitly included among the institutions that could be aided by the Troubled Asset Relief Program, or TARP, which initially was aimed at shoring up financial institutions by buying some of their illiquid mortgage-related holdings.
But last month, Treasury Secretary Henry Paulson announced that his agency was abandoning that plan, in favor of taking direct stakes in banks and other financial firms. Nearly all of the $350 billion initially allocated by Congress was spent on major banks and insurers. That left credit unions out in the cold.
"I am concerned about the second-place status into which credit unions and other smaller financial institutions have been placed," Mr. Fryzel wrote to Mr. Paulson on Nov. 13. The credit-union regulator asked for credit unions to be given access to federal bailout money. Mr. Fryzel, who took office in August, said he still hopes credit unions could gain access to TARP money.
Federal regulators are preparing a rescue plan to shore up the finances of some large credit unions, using billions of dollars in new government borrowings.
The plan, expected to be announced this week, involves tapping into a $41 billion lending facility that Congress made available to credit-union regulators in September. The aim is to provide help for a handful of big credit unions -- all of them institutions known as corporate credit unions that don't deal with the general public -- that have been reeling from large paper losses on mortgage-backed securities.
Some observers feared the financial woes were so severe they had the potential to undermine the stability of the credit-union system. Credit unions largely haven't received any funds from the financial-rescue packages announced by the Bush administration.
Michael E. Fryzel, chairman of the National Credit Union Administration, the industry's federal regulator, said in an interview that the plan wasn't a taxpayer-funded bailout. Instead, Mr. Fryzel called it a short-term "mechanism to stabilize the credit-union system" while regulators work on other steps, to be announced early in 2009.
A related program also to be announced by NCUA will provide as much as $2 billion in inexpensive loans to credit unions, which the institutions can use to reduce mortgage interest rates for homeowners.
Regulators hope the program will bring relief to as many as 10,000 homeowners, by cutting their mortgage rates by as much as two percentage points.
Mr. Fryzel said he didn't know how much new federal borrowing the two programs would entail. Funding for the loan programs will come through the Treasury Department.
Credit unions are member-owned cooperatives that act much like banks, taking deposits and offering loans. At the end of last year, there were about 8,400 credit unions in the U.S. with $775 billion in assets. Most are faring fine financially.
The rescue plan is aimed at shoring up the network of corporate credit unions, which are wholesale-style institutions that provide financing, investment and clearing services to retail credit unions. The retail credit unions are cooperative owners of the corporate credit unions.
As part of their role, corporates take deposits from retail credit unions, then invest that money in longer-term assets. But some of the largest corporates invested in mortgage-backed securities, and lately have suffered paper losses.
The losses show no sign of abating, expanding from $5.7 billion at the end of May to more than $10 billion as of Oct. 31. Retail credit unions have been pulling funds out of some of the corporates, which have been forced to borrow to meet demands.
The largest by most measures, U.S. Central Federal Credit Union, had used up 96% of its borrowing facility from the Federal Home Loan Bank system by Oct. 31. It said in its most recent financial statement that it had other sources of borrowing.
In September, NCUA got approval from Congress to expand an existing loan facility that was originally intended to act as a lender of last resort to retail credit unions. Congress increased the funding authorization from $1.5 billion to $41 billion.
Regulators first thought of directly lending some of that money to the corporate credit unions. But it turned out that wasn't allowed; under the law, only retail credit unions could tap into the funds.
The stabilization plan to be announced by the NCUA would involve two steps. Retail credit unions would borrow from the lending facility, at a favorable interest rate, currently 1.5%. They would then deposit that money with the corporate credit unions, earning a small additional rate of return. The idea is to stop the outflow of funds from the corporate credit unions, and generate an inflow of relatively stable, low-cost money that the corporates could use to retire other debt.
The new deposits would be guaranteed under a federal program announced in October.
Mr. Fryzel, the NCUA chairman, said he recognizes there is no guarantee the retail credit unions will take advantage of the loan program. But he said retail credit unions "have a vested interest in those corporates. If they want to maintain those as strong entities, they will have to take advantage of these programs."
NCUA officials said the retail credit unions also have a financial interest in helping the corporate credit unions. They stand to lose their ownership stakes, and they have other, older deposits at risk.
The plan doesn't provide any new capital for the corporate credit unions, and doesn't do anything to relieve them of the losses on mortgage securities.
"This is not a long-term solution," Mr. Fryzel said. "We're buying time." Further out, he said, "we are looking at the entire corporate system," but he declined to provide details.
The second program, which NCUA has dubbed the Credit Union Homeowner Affordability Relief Program, also involves loans from the $41 billion lending facility. Under it, retail credit unions could borrow up to $2 billion at favorable rates, now 1.25%, and use the money to subsidize interest-rate relief for homeowners who are having trouble paying mortgages. The retail credit unions would be expected to shoulder about half the expense of reducing homeowners' interest rates.
Money that a retail credit union borrows under the program also would have to be kept on deposit with a corporate credit union, further bolstering liquidity in that segment of the industry.
Previously, credit-union regulators and executives had hoped to tap into the Treasury's $700 billion bailout package. Credit unions were explicitly included among the institutions that could be aided by the Troubled Asset Relief Program, or TARP, which initially was aimed at shoring up financial institutions by buying some of their illiquid mortgage-related holdings.
But last month, Treasury Secretary Henry Paulson announced that his agency was abandoning that plan, in favor of taking direct stakes in banks and other financial firms. Nearly all of the $350 billion initially allocated by Congress was spent on major banks and insurers. That left credit unions out in the cold.
"I am concerned about the second-place status into which credit unions and other smaller financial institutions have been placed," Mr. Fryzel wrote to Mr. Paulson on Nov. 13. The credit-union regulator asked for credit unions to be given access to federal bailout money. Mr. Fryzel, who took office in August, said he still hopes credit unions could gain access to TARP money.
Monday, December 8, 2008
Why General Growth Failed
--Rather than apply for bank loans, General Growth began taking out short-term mortgages on its malls. The strategy picked up steam with the emergence of new debt-trading markets. In the mid-1990s, lenders started slicing up commercial mortgages and selling them to multiple investors as bonds. The boom in trading made mortgage-backed debt much cheaper and more plentiful -- as long as investors were willing to buy.
General Growth was soon at the forefront of this market. And because the company was borrowing mostly against its individual properties, lenders didn't place restrictions on its overall debt load, allowing it to accumulate more and more debt.
General Growth's ratio of its debt as a percentage of its asset value has soared to 83%, compared to 63% for mall owner Macerich Co., 54% for Simon Property and 48% for Taubman Centers, according to Green Street Advisors.
--Acquisition: General Growth's debt troubles date back to the mid-1990s, when Martin's health began to weaken. The family had been conservative managers, building the dominant shopping venues in secondary and tertiary towns like Bettendorf, Iowa, Hutchinson, Kan., and Fayetteville, Ark. But after emerging in 1993 for a second stint as a public company, the Bucksbaums decided to grow through acquisitions.
In August 2004, General Growth made its biggest acquisition to date: $12 billion for Rouse Co. Rouse owned three dozen upscale malls in the Midwest and Northeast, including Chicago's Water Tower Place, Boston's Faneuil Hall and Washington, D.C.'s Columbia Town Center. The deal instantly transformed General Growth from a small-town, industry stalwart to one of the leading lights of marquee retailing.
--The stock plunge set off a second crisis: Top executives had to dump millions of their General Growth shares to cover margin calls. Many executives had borrowed heavily to buy General Growth stock. Mr. Freibaum bought 7.6 million shares -- more than 3% of General Growth's total -- mostly on margin.
The Bucksbaum family's trust loaned Mr. Freibaum $90 million and President and Chief Operating Officer Bob Michaels $10 million to meet the margin requirements without dumping stock. Any executive sale of stocks would have had to be publicly disclosed, which could have spooked investors and led to more selloffs. The board said it had no knowledge of the loans.
General Growth was soon at the forefront of this market. And because the company was borrowing mostly against its individual properties, lenders didn't place restrictions on its overall debt load, allowing it to accumulate more and more debt.
General Growth's ratio of its debt as a percentage of its asset value has soared to 83%, compared to 63% for mall owner Macerich Co., 54% for Simon Property and 48% for Taubman Centers, according to Green Street Advisors.
--Acquisition: General Growth's debt troubles date back to the mid-1990s, when Martin's health began to weaken. The family had been conservative managers, building the dominant shopping venues in secondary and tertiary towns like Bettendorf, Iowa, Hutchinson, Kan., and Fayetteville, Ark. But after emerging in 1993 for a second stint as a public company, the Bucksbaums decided to grow through acquisitions.
In August 2004, General Growth made its biggest acquisition to date: $12 billion for Rouse Co. Rouse owned three dozen upscale malls in the Midwest and Northeast, including Chicago's Water Tower Place, Boston's Faneuil Hall and Washington, D.C.'s Columbia Town Center. The deal instantly transformed General Growth from a small-town, industry stalwart to one of the leading lights of marquee retailing.
--The stock plunge set off a second crisis: Top executives had to dump millions of their General Growth shares to cover margin calls. Many executives had borrowed heavily to buy General Growth stock. Mr. Freibaum bought 7.6 million shares -- more than 3% of General Growth's total -- mostly on margin.
The Bucksbaum family's trust loaned Mr. Freibaum $90 million and President and Chief Operating Officer Bob Michaels $10 million to meet the margin requirements without dumping stock. Any executive sale of stocks would have had to be publicly disclosed, which could have spooked investors and led to more selloffs. The board said it had no knowledge of the loans.
China Oversupply vs US Overconsumption
Beijing University finance professor Michael Pettis says that the most likely way out of this imbalance is that U.S. household savings must go up, and Chinese production must come down.
"There's two ways production [can] come down. One way is the way it happened to America in the 1930s, where basically American overproduction collapsed," Pettis says. "We could have that in China — China overproduction could collapse. China may try to protect it, by exporting more, but my fear is that that creates a trade war, in which case it will have to come back to China."
Pettis points out that 80 years ago, the tables were turned — it was the U.S. that was exporting its oversupply of goods to Europe. And its efforts to protect those exports, such as the Smoot-Hawley Tariff Act of 1930, led to a bruising trade war, falling foreign trade and an even harder economic landing.
"There's two ways production [can] come down. One way is the way it happened to America in the 1930s, where basically American overproduction collapsed," Pettis says. "We could have that in China — China overproduction could collapse. China may try to protect it, by exporting more, but my fear is that that creates a trade war, in which case it will have to come back to China."
Pettis points out that 80 years ago, the tables were turned — it was the U.S. that was exporting its oversupply of goods to Europe. And its efforts to protect those exports, such as the Smoot-Hawley Tariff Act of 1930, led to a bruising trade war, falling foreign trade and an even harder economic landing.
China's Stimulus Slights Human Capital
By ANDREW BATSON
Beijing -- In its drive to avoid a sharp economic downturn, China plans to spend four trillion yuan ($581 billion) on a stimulus package that focuses on railways, airports and other hard assets. But just 1% of that sum is going to increased social services.
That balance needs to be corrected, many scholars say, if China is to keep growing rapidly and improving living standards in the years ahead. More spending by its own consumers would both support growth and reduce reliance on exports, but that isn't going to happen unless the government eases the burden on families to provide for education, health care and old age. A healthier and better-educated populace should also be more productive.
"You need investment in human capital to produce high growth rates in the future," says Khalid Malik, head of the United Nations Development Program in China.
It's easy to understand why China is investing so heavily in infrastructure. Construction is the part of the economy that has slowed most sharply, and thus is most in need of support. Putting money into infrastructure has a quick payoff and is a tested strategy that China employed in 1998 to pull out of the Asian financial crisis.
But improving infrastructure may not be enough to support long-term growth -- especially in China, which already has one of the highest investment rates of any major economy. Some worry that China could eventually go down the same road as Japan, which kept spending even after officials ran out of worthwhile projects.
Yet weaving a social safety net has proved a particularly tricky task in China. President Hu Jintao and Premier Wen Jiabao have made social programs a higher priority, but spending has usually lagged behind government promises. In 1997, the government said it would spend 4% of China's annual gross domestic product on education by 2000. The goal was never reached. Last year spending totaled 2.8% of GDP.
"We have no shortage of goals and targets. What we lack are specific policies and measures to achieve these targets," Zhao Dianguo, director of the department of rural social security at the Ministry of Human Resources and Social Security, said at a recent U.N. forum.
In the U.S., expansion of social programs is a conventional part of measures to cope with economic downturns. Congress has already passed an extension of unemployment benefits, and more measures are likely in the stimulus package President-elect Barack Obama has promised to push through after he takes office in January. Options being discussed include increasing support for lower-income families' health-care costs, expanding food stamps and college grants, and further extending jobless benefits.
Earlier, the administration of President George W. Bush offered tax rebates to boost consumer spending. But fiddling with personal taxes wouldn't help as much in China. That is because the country's nascent tax system covers so few people to begin with.
And increasing social spending is surprisingly difficult in China because it is often unclear which parts of government are responsible for funding and operating the programs. China is a huge country with a bureaucracy to match: It has 31 provinces, 333 municipalities, 2,859 counties and 694,745 rural villages. For decades, there has been little direction on this issue from Beijing, which generally lets local governments fend for themselves financially.
Local officials are often more interested in supporting industrial projects that boost their tax revenue than in expanding social programs that only cost them money. For instance, the program to support incomes of the worst-off -- the urban minimum living allowance, often known by its Chinese shorthand dibao -- reaches only a fraction of the people who are eligible for it, and its rolls haven't significantly expanded in recent years.
Beijing often doesn't have the means to control how money is spent locally, where priorities are different. While local officials complain of unfunded mandates for new programs, central officials worry that any money they send to the provinces will get lost. "The central government has great difficulty in monitoring local government spending," says Mark Williams of Capital Economics in London.
The lack of much of a social safety net is one reason Chinese consumers save so much. Urban households put away more than a quarter of their income, and that proportion has been gradually rising. That thrift is less a sign of virtue than of the great pressures on most families.
Many of China's public institutions collapsed in the transition to a market economy and have mostly not been replaced. In today's China, welfare for the poorest and pensions for the elderly are minimal. There is little government or private health insurance. So families need to pay for education, health care and to support aged parents -- expenses that are broadly covered in Europe and to a lesser extent in the U.S.
Optimists point out that China's government has been building up social programs for the past couple of years, such as free primary education and expanded health and welfare benefits for the rural poor. Though they are small now, the new programs mean the government may now be better able to live up to its promises.
The government says improving living standards is a priority of the stimulus plan: It has promised to increase state pensions and welfare payments to the urban and rural poor. There is also 4.8 billion yuan in new funds going to support thousands of clinics in poor rural areas. That isn't much compared with China's other spending plans, but it's a start.
And China's leaders, facing many calls for additional stimulus measures that will more directly aid consumers, could well do more in coming weeks. But a longer-term fix also requires sorting out the division of labor between central and local governments -- a messy task that could take years.
Beijing -- In its drive to avoid a sharp economic downturn, China plans to spend four trillion yuan ($581 billion) on a stimulus package that focuses on railways, airports and other hard assets. But just 1% of that sum is going to increased social services.
That balance needs to be corrected, many scholars say, if China is to keep growing rapidly and improving living standards in the years ahead. More spending by its own consumers would both support growth and reduce reliance on exports, but that isn't going to happen unless the government eases the burden on families to provide for education, health care and old age. A healthier and better-educated populace should also be more productive.
"You need investment in human capital to produce high growth rates in the future," says Khalid Malik, head of the United Nations Development Program in China.
It's easy to understand why China is investing so heavily in infrastructure. Construction is the part of the economy that has slowed most sharply, and thus is most in need of support. Putting money into infrastructure has a quick payoff and is a tested strategy that China employed in 1998 to pull out of the Asian financial crisis.
But improving infrastructure may not be enough to support long-term growth -- especially in China, which already has one of the highest investment rates of any major economy. Some worry that China could eventually go down the same road as Japan, which kept spending even after officials ran out of worthwhile projects.
Yet weaving a social safety net has proved a particularly tricky task in China. President Hu Jintao and Premier Wen Jiabao have made social programs a higher priority, but spending has usually lagged behind government promises. In 1997, the government said it would spend 4% of China's annual gross domestic product on education by 2000. The goal was never reached. Last year spending totaled 2.8% of GDP.
"We have no shortage of goals and targets. What we lack are specific policies and measures to achieve these targets," Zhao Dianguo, director of the department of rural social security at the Ministry of Human Resources and Social Security, said at a recent U.N. forum.
In the U.S., expansion of social programs is a conventional part of measures to cope with economic downturns. Congress has already passed an extension of unemployment benefits, and more measures are likely in the stimulus package President-elect Barack Obama has promised to push through after he takes office in January. Options being discussed include increasing support for lower-income families' health-care costs, expanding food stamps and college grants, and further extending jobless benefits.
Earlier, the administration of President George W. Bush offered tax rebates to boost consumer spending. But fiddling with personal taxes wouldn't help as much in China. That is because the country's nascent tax system covers so few people to begin with.
And increasing social spending is surprisingly difficult in China because it is often unclear which parts of government are responsible for funding and operating the programs. China is a huge country with a bureaucracy to match: It has 31 provinces, 333 municipalities, 2,859 counties and 694,745 rural villages. For decades, there has been little direction on this issue from Beijing, which generally lets local governments fend for themselves financially.
Local officials are often more interested in supporting industrial projects that boost their tax revenue than in expanding social programs that only cost them money. For instance, the program to support incomes of the worst-off -- the urban minimum living allowance, often known by its Chinese shorthand dibao -- reaches only a fraction of the people who are eligible for it, and its rolls haven't significantly expanded in recent years.
Beijing often doesn't have the means to control how money is spent locally, where priorities are different. While local officials complain of unfunded mandates for new programs, central officials worry that any money they send to the provinces will get lost. "The central government has great difficulty in monitoring local government spending," says Mark Williams of Capital Economics in London.
The lack of much of a social safety net is one reason Chinese consumers save so much. Urban households put away more than a quarter of their income, and that proportion has been gradually rising. That thrift is less a sign of virtue than of the great pressures on most families.
Many of China's public institutions collapsed in the transition to a market economy and have mostly not been replaced. In today's China, welfare for the poorest and pensions for the elderly are minimal. There is little government or private health insurance. So families need to pay for education, health care and to support aged parents -- expenses that are broadly covered in Europe and to a lesser extent in the U.S.
Optimists point out that China's government has been building up social programs for the past couple of years, such as free primary education and expanded health and welfare benefits for the rural poor. Though they are small now, the new programs mean the government may now be better able to live up to its promises.
The government says improving living standards is a priority of the stimulus plan: It has promised to increase state pensions and welfare payments to the urban and rural poor. There is also 4.8 billion yuan in new funds going to support thousands of clinics in poor rural areas. That isn't much compared with China's other spending plans, but it's a start.
And China's leaders, facing many calls for additional stimulus measures that will more directly aid consumers, could well do more in coming weeks. But a longer-term fix also requires sorting out the division of labor between central and local governments -- a messy task that could take years.
Citadel Scales Back Asian Operations
HONG KONG -- Citadel Investment Group became the latest major hedge fund to pull back from Asia, as a sharp market slump diminishes the appeal of a region once seen as a promising source of growth.
Chicago-based Citadel said it was closing its Tokyo office, laying off 12 employees there. It will also cut 25 jobs in its Hong Kong office, representing nearly half of its employees there.
Citadel also said it will deal more in foreign exchange, derivatives and possibly other transactions. Previously, it had pursued an investment strategy that resembled that of many private-equity firms, in which it invested in small companies with sound prospects, often hoping to cash out in an initial public offering. But the IPO market has dried up as Asia's stock markets have fallen.
The firm will "focus on the greatest potential opportunities and scale back where the opportunity set is no longer as attractive," a spokeswoman said.
The retreat follows a similar scaling back by other big Western hedge funds. Last month, Ramius LLC, a New York-based hedge fund with about $11 billion under management, eliminated a staff of about a dozen people in Hong Kong focused on trading of equities, convertible bonds and other securities. Also last month, Blackstone Group LP lowered its sights for a new Asia-focused hedge fund, cutting the size to about $200 million from earlier plans of between $500 million and $1 billion.
Many of the region's funds, including Citadel, established a presence in Asia only in the last few years. They often depended on taking direct equity stakes in regional companies. But many hedge funds didn't adequately protect themselves through short-sale bets or derivatives contracts, as tighter regulations and smaller public floats in many Asian markets make such moves cumbersome. The Eurekahedge Asian index, which doesn't include Japan, is down 21.7% through November, while its global index has lost just 12.3%.
Hedge-fund managers, prime brokers and consultants say that pressures on their business globally are forcing them to pare back operations in Asia. "Every single manager is getting redeemed this year, whether they are up or down," said one manager. As investors world-wide yank money from hedge funds, managers are rushing to raise cash and reduce unnecessary overhead.
"This is part of the classic Asian cycle," said Peter Douglas, a Singapore-based independent consultant to hedge funds. "Always at the top of the cycle, a lot of international firms come in. Then the cycle turns, and people pick up their ball and go home."
For Asian corporations, the cutbacks by hedge funds represent the loss of a potential source of capital. Western hedge funds with traders and analysts on the ground often forged privately negotiated deals with publicly traded companies. The deals allowed large hedge funds such as Citadel to deploy capital in fast-growing companies that the funds believe had solid growth prospects. Many of these companies had small public floats and were thinly traded.
In return for the cash from hedge funds, the companies often agreed to provide the funds with a seat on the board and some influence over decision-making.
For Citadel, the move comes amid stinging losses for the once high-flier. According to investors, Citadel lost 13% globally in November, contributing to a 47% decline so far this year.
Chicago-based Citadel said it was closing its Tokyo office, laying off 12 employees there. It will also cut 25 jobs in its Hong Kong office, representing nearly half of its employees there.
Citadel also said it will deal more in foreign exchange, derivatives and possibly other transactions. Previously, it had pursued an investment strategy that resembled that of many private-equity firms, in which it invested in small companies with sound prospects, often hoping to cash out in an initial public offering. But the IPO market has dried up as Asia's stock markets have fallen.
The firm will "focus on the greatest potential opportunities and scale back where the opportunity set is no longer as attractive," a spokeswoman said.
The retreat follows a similar scaling back by other big Western hedge funds. Last month, Ramius LLC, a New York-based hedge fund with about $11 billion under management, eliminated a staff of about a dozen people in Hong Kong focused on trading of equities, convertible bonds and other securities. Also last month, Blackstone Group LP lowered its sights for a new Asia-focused hedge fund, cutting the size to about $200 million from earlier plans of between $500 million and $1 billion.
Many of the region's funds, including Citadel, established a presence in Asia only in the last few years. They often depended on taking direct equity stakes in regional companies. But many hedge funds didn't adequately protect themselves through short-sale bets or derivatives contracts, as tighter regulations and smaller public floats in many Asian markets make such moves cumbersome. The Eurekahedge Asian index, which doesn't include Japan, is down 21.7% through November, while its global index has lost just 12.3%.
Hedge-fund managers, prime brokers and consultants say that pressures on their business globally are forcing them to pare back operations in Asia. "Every single manager is getting redeemed this year, whether they are up or down," said one manager. As investors world-wide yank money from hedge funds, managers are rushing to raise cash and reduce unnecessary overhead.
"This is part of the classic Asian cycle," said Peter Douglas, a Singapore-based independent consultant to hedge funds. "Always at the top of the cycle, a lot of international firms come in. Then the cycle turns, and people pick up their ball and go home."
For Asian corporations, the cutbacks by hedge funds represent the loss of a potential source of capital. Western hedge funds with traders and analysts on the ground often forged privately negotiated deals with publicly traded companies. The deals allowed large hedge funds such as Citadel to deploy capital in fast-growing companies that the funds believe had solid growth prospects. Many of these companies had small public floats and were thinly traded.
In return for the cash from hedge funds, the companies often agreed to provide the funds with a seat on the board and some influence over decision-making.
For Citadel, the move comes amid stinging losses for the once high-flier. According to investors, Citadel lost 13% globally in November, contributing to a 47% decline so far this year.
Tribune Co. Taps Lazard,Weighs Filing for Chapter 11
--dwindling profits and heavy debt took a toll on Tribune and other news paper publishers.
Tribune Co. is preparing for a possible filing for bankruptcy-court protection as soon as this week, according to people familiar with the matter, in a sign of worsening trouble for the newspaper industry.
Samuel Zell
In recent days, as Chicago-based Tribune continued talks with lenders to restructure its debt, the newspaper-and-television concern hired investment bank Lazard Ltd. as its financial adviser and law firm Sidley Austin to advise the company on a possible trip through Chapter 11 bankruptcy, people familiar with the matter say.
A Tribune spokesman said the company doesn't comment on rumors or speculation. Tribune owns eight major daily newspapers, including the Los Angeles Times, Chicago Tribune and Baltimore Sun, plus a string of local TV stations.
A spokeswoman for Lazard didn't respond to requests for comment. Representatives of Sidley Austin couldn't be reached for comment.
Tribune's latest actions underscore the deepening distress enveloping Tribune and other newspaper publishers. Their businesses are being battered by dwindling advertising sales, and many are carrying debt loads that are unmanageable in current market conditions. Industry insiders expect some papers will need to fold in coming months or seek protection from creditors to reorganize.
From the Archives
Zell Extends Latest Deadline For Cubs Bids
11/14/08Tribune Swings to Loss on Ad Slump
11/11/08Tribune May Retain Half of Cubs
11/07/08Newspapers' Circulation Drops 4.6%
10/28/08Tribune Taps Credit Line
10/20/08Turmoil Hits Newspaper Publishers
10/02/08Tribune Draws Private-Equity Interest
10/23/06Tribune Hopes CW Network Is Must-See TV
10/04/06Tribune has been on wobbly footing since last December, when real-estate mogul Samuel Zell led a debt-backed deal to take the company private. Tribune has stayed ahead of its $12 billion in borrowings with the help of asset sales. Now, however, shrinking profits are tightening the noose.
The company's cash flow may not be enough to cover nearly $1 billion in interest payments due this year, and Tribune owes a $512 million debt payment in June.
One of Tribune's most pressing concerns: The company is likely to be in violation of debt terms that limit borrowings at the end of the year to nine times its adjusted profits. The ratio stood at 8.3 at the end of the second quarter, before Tribune reported an 83% decline in operating profit for the three months ended Sept 28.
Violations of such debt covenants have become commonplace for newspaper companies as their profits have ebbed. Lenders so far have been willing to give the companies a pass in exchange for higher interest rates and other concessions, but Tribune has little wiggle room. Terms of the company's debt already are so loose and its financial standing so unsteady that a covenant waiver may not help.
To be sure, a restructuring outside of bankruptcy court remains an option for Tribune. Executives have indicated that its talks with lenders are amicable, and it remains possible the two sides can agree to rework the company's borrowings on their own, as other newspaper publishers are doing.
Tribune's hiring of Lazard, meanwhile, brings it a firm experienced in debt restructuring, and one that has become a go-to adviser for newspaper companies in financial distress.
Even as its financial performance worsens, Tribune has some options. A sale of its Chicago Cubs baseball team is under way, and Tribune owns valuable stakes in businesses including the cable-TV channel Food Network.
Tribune already has auctioned off pieces of the company, including the Long Island, N.Y., daily Newsday to raise cash. Now, frozen credit markets have depressed sale prices.
Selling off more newspapers may not be a viable alternative because buyers are scarce and Tribune may be better off holding onto the profits from its papers.
—Jeffrey McCracken contributed to this article.
Tribune Co. is preparing for a possible filing for bankruptcy-court protection as soon as this week, according to people familiar with the matter, in a sign of worsening trouble for the newspaper industry.
Samuel Zell
In recent days, as Chicago-based Tribune continued talks with lenders to restructure its debt, the newspaper-and-television concern hired investment bank Lazard Ltd. as its financial adviser and law firm Sidley Austin to advise the company on a possible trip through Chapter 11 bankruptcy, people familiar with the matter say.
A Tribune spokesman said the company doesn't comment on rumors or speculation. Tribune owns eight major daily newspapers, including the Los Angeles Times, Chicago Tribune and Baltimore Sun, plus a string of local TV stations.
A spokeswoman for Lazard didn't respond to requests for comment. Representatives of Sidley Austin couldn't be reached for comment.
Tribune's latest actions underscore the deepening distress enveloping Tribune and other newspaper publishers. Their businesses are being battered by dwindling advertising sales, and many are carrying debt loads that are unmanageable in current market conditions. Industry insiders expect some papers will need to fold in coming months or seek protection from creditors to reorganize.
From the Archives
Zell Extends Latest Deadline For Cubs Bids
11/14/08Tribune Swings to Loss on Ad Slump
11/11/08Tribune May Retain Half of Cubs
11/07/08Newspapers' Circulation Drops 4.6%
10/28/08Tribune Taps Credit Line
10/20/08Turmoil Hits Newspaper Publishers
10/02/08Tribune Draws Private-Equity Interest
10/23/06Tribune Hopes CW Network Is Must-See TV
10/04/06Tribune has been on wobbly footing since last December, when real-estate mogul Samuel Zell led a debt-backed deal to take the company private. Tribune has stayed ahead of its $12 billion in borrowings with the help of asset sales. Now, however, shrinking profits are tightening the noose.
The company's cash flow may not be enough to cover nearly $1 billion in interest payments due this year, and Tribune owes a $512 million debt payment in June.
One of Tribune's most pressing concerns: The company is likely to be in violation of debt terms that limit borrowings at the end of the year to nine times its adjusted profits. The ratio stood at 8.3 at the end of the second quarter, before Tribune reported an 83% decline in operating profit for the three months ended Sept 28.
Violations of such debt covenants have become commonplace for newspaper companies as their profits have ebbed. Lenders so far have been willing to give the companies a pass in exchange for higher interest rates and other concessions, but Tribune has little wiggle room. Terms of the company's debt already are so loose and its financial standing so unsteady that a covenant waiver may not help.
To be sure, a restructuring outside of bankruptcy court remains an option for Tribune. Executives have indicated that its talks with lenders are amicable, and it remains possible the two sides can agree to rework the company's borrowings on their own, as other newspaper publishers are doing.
Tribune's hiring of Lazard, meanwhile, brings it a firm experienced in debt restructuring, and one that has become a go-to adviser for newspaper companies in financial distress.
Even as its financial performance worsens, Tribune has some options. A sale of its Chicago Cubs baseball team is under way, and Tribune owns valuable stakes in businesses including the cable-TV channel Food Network.
Tribune already has auctioned off pieces of the company, including the Long Island, N.Y., daily Newsday to raise cash. Now, frozen credit markets have depressed sale prices.
Selling off more newspapers may not be a viable alternative because buyers are scarce and Tribune may be better off holding onto the profits from its papers.
—Jeffrey McCracken contributed to this article.
Central banks need a helicopter
--helicopter dropping model might be warranted to distribute cash to the hands of consumer if banks still conserve cash
--printing money is different from borrowing money from consumers through notes
--this method might work when interest rate drops to zero
By Eric Lonergan
The most direct and efficient solution to the economic and financial problems is for central banks to transfer cash directly to the household sector.Final demand and profits would recover, asset prices would rise and as a result banks would have strengthening balance sheets. Fiscal positions would similarly improve with rising revenue.
These are the effects that policymakers are trying to achieve in an indirect and inefficient manner: we are using governments to do the spending, and we are trying to fix the financial system piecemeal, when the problem is demand, profits and prospective default risk.
Allowing central banks to transfer cash directly to households would be the purest form of Milton Friedman’s “helicopter drop”.
What is lacking is a legal and institutional framework to do this. The helicopter model is right, but we don’t have any helicopters. Open market operations are ineffective at the zero bound because the financial system just holds more cash, as we have seen in Japan. We need to print the money and give it directly to consumers.
Central banks, and not the fiscal authorities, are best placed to make these cash transfers. The government should determine a rule for the transfer. It is the government’s remit to decide if transfers should be equal, or skewed to lower income groups.
This rule should be decided in advance. But the quantity and timing of the transfers should be the authority of the central bank, subject to their discretion and to be used with the intention of meeting their inflation and growth objectives. The central bank would then raise interest rates and shrink its balance sheet when the economy recovers.
The reasons for granting this authority to the central bank are clear: it requires use of the monetary base. Granting government such powers would be vulnerable to political manipulation and misuse. These are the same reasons for giving central banks independent authority over interest rates.
Under the existing legal and institutional framework, the closest equivalent policy to this helicopter drop is for the government to make transfers financed by the central bank. Indeed, I suspect this is indirectly what America will do next year.
Tax rebates (i.e. cash transfers) will likely be a part of Larry Summers and Tim Geithner’s fiscal stimulus and US Federal Reserve chairman Ben Bernanke has already talked - to considerable effect - about buying government debt as a next step for the Fed.
This is an entirely reasonable approach, given current institutional constraints. But a pure helicopter drop has obvious and compelling advantages. It protects central bank independence, and gives central banks a means for stimulating demand quickly and efficiently when interest rates reach zero. What will we do if the fiscal stimulus fails to trigger a recovery?
Possibly of importance is the issue of Ricardian equivalence (the theory that suggests that unfunded tax cuts will have no effect on spending because the public know they will be taxed in future to pay for current government largesse).
Ricardian equivalence is a useful concept not because individuals are hyper-rational, but because the opposite is true: framing matters. If cash transfers are financed by government borrowing from the central bank there will be calls for prospective fiscal policy to be tightened. If the central bank prints money this pressure will not exist, and a framework for responsible use of this tool already exists - medium-term price stability.
We need a legal and administrative framework to allow central banks print money and transfer it to households. This would be efficient, effective and would eliminate the deflation risk for good.
Eric Lonergan is a macro hedge fund manager at M&G Investments
December 4th, 2008 in Central bank independence, Central banks, Global economic crisis, Government spending | Permalink
5 Responses to “Central banks need a helicopter”
Comments
Alistair Milne: I wish what Eric writes were correct, that the entire crisis can be solved by the central bank distributing cash to households and getting them to spend again.
But I regret to say it is pipedream to think that the central bank can do this without an accompanying fiscal expansion. Take the simplest possible version of this policy - printing billions of notes and using secure mail to send them to citizens. The central bank can do this, but by giving the notes away for free, it undermines its own balance sheet and then itself becomes insolvent. An insolvent central bank is hardly a recipe for promoting financial stability.
You might think that the central bank will survive, since there is no interest payment on notes, there is no cash flow cost, only printing costs. But most notes will end up placed in bank accounts, increasing bank reserves with the central bank on which interest is paid. So the central bank will experience massive loss of interest revenue.
The same problem applies if the central bank creates reserves and uses them for credit transfers to households - if done on a large scale without an accompanying fiscal expansion the central bank balance sheet is undermined.
The only way to implement this policy without undermining the central bank balance sheet is for government to borrow the money that is transferred to households through a bond issue (The easiest course of action is simply sell these bonds to the central bank, exchanging them for an increase in government accounts with the central bank, and the necessary credit transfers to citizens can be made using this government money, in an environment of collapsing credit this monetization is not inflationary). The bottom line is that what Eric has in mind is simply a fiscal stimulus of the kind already tried in the US and now being attempted in other countries as well.
Whether such fiscal stimulus helps is another matter. The underlying problem is loss of confidence in bank assets and liabilities. Until that confidence is restored we will have a continuing collapse of money, credit, output, and employment. Fiscal expansion has to be paid for out of higher future taxation. Fiscal expansion could therefore instead undermine confidence in the governments own balance sheet and make our problems worse not better.
--printing money is different from borrowing money from consumers through notes
--this method might work when interest rate drops to zero
By Eric Lonergan
The most direct and efficient solution to the economic and financial problems is for central banks to transfer cash directly to the household sector.Final demand and profits would recover, asset prices would rise and as a result banks would have strengthening balance sheets. Fiscal positions would similarly improve with rising revenue.
These are the effects that policymakers are trying to achieve in an indirect and inefficient manner: we are using governments to do the spending, and we are trying to fix the financial system piecemeal, when the problem is demand, profits and prospective default risk.
Allowing central banks to transfer cash directly to households would be the purest form of Milton Friedman’s “helicopter drop”.
What is lacking is a legal and institutional framework to do this. The helicopter model is right, but we don’t have any helicopters. Open market operations are ineffective at the zero bound because the financial system just holds more cash, as we have seen in Japan. We need to print the money and give it directly to consumers.
Central banks, and not the fiscal authorities, are best placed to make these cash transfers. The government should determine a rule for the transfer. It is the government’s remit to decide if transfers should be equal, or skewed to lower income groups.
This rule should be decided in advance. But the quantity and timing of the transfers should be the authority of the central bank, subject to their discretion and to be used with the intention of meeting their inflation and growth objectives. The central bank would then raise interest rates and shrink its balance sheet when the economy recovers.
The reasons for granting this authority to the central bank are clear: it requires use of the monetary base. Granting government such powers would be vulnerable to political manipulation and misuse. These are the same reasons for giving central banks independent authority over interest rates.
Under the existing legal and institutional framework, the closest equivalent policy to this helicopter drop is for the government to make transfers financed by the central bank. Indeed, I suspect this is indirectly what America will do next year.
Tax rebates (i.e. cash transfers) will likely be a part of Larry Summers and Tim Geithner’s fiscal stimulus and US Federal Reserve chairman Ben Bernanke has already talked - to considerable effect - about buying government debt as a next step for the Fed.
This is an entirely reasonable approach, given current institutional constraints. But a pure helicopter drop has obvious and compelling advantages. It protects central bank independence, and gives central banks a means for stimulating demand quickly and efficiently when interest rates reach zero. What will we do if the fiscal stimulus fails to trigger a recovery?
Possibly of importance is the issue of Ricardian equivalence (the theory that suggests that unfunded tax cuts will have no effect on spending because the public know they will be taxed in future to pay for current government largesse).
Ricardian equivalence is a useful concept not because individuals are hyper-rational, but because the opposite is true: framing matters. If cash transfers are financed by government borrowing from the central bank there will be calls for prospective fiscal policy to be tightened. If the central bank prints money this pressure will not exist, and a framework for responsible use of this tool already exists - medium-term price stability.
We need a legal and administrative framework to allow central banks print money and transfer it to households. This would be efficient, effective and would eliminate the deflation risk for good.
Eric Lonergan is a macro hedge fund manager at M&G Investments
December 4th, 2008 in Central bank independence, Central banks, Global economic crisis, Government spending | Permalink
5 Responses to “Central banks need a helicopter”
Comments
Alistair Milne: I wish what Eric writes were correct, that the entire crisis can be solved by the central bank distributing cash to households and getting them to spend again.
But I regret to say it is pipedream to think that the central bank can do this without an accompanying fiscal expansion. Take the simplest possible version of this policy - printing billions of notes and using secure mail to send them to citizens. The central bank can do this, but by giving the notes away for free, it undermines its own balance sheet and then itself becomes insolvent. An insolvent central bank is hardly a recipe for promoting financial stability.
You might think that the central bank will survive, since there is no interest payment on notes, there is no cash flow cost, only printing costs. But most notes will end up placed in bank accounts, increasing bank reserves with the central bank on which interest is paid. So the central bank will experience massive loss of interest revenue.
The same problem applies if the central bank creates reserves and uses them for credit transfers to households - if done on a large scale without an accompanying fiscal expansion the central bank balance sheet is undermined.
The only way to implement this policy without undermining the central bank balance sheet is for government to borrow the money that is transferred to households through a bond issue (The easiest course of action is simply sell these bonds to the central bank, exchanging them for an increase in government accounts with the central bank, and the necessary credit transfers to citizens can be made using this government money, in an environment of collapsing credit this monetization is not inflationary). The bottom line is that what Eric has in mind is simply a fiscal stimulus of the kind already tried in the US and now being attempted in other countries as well.
Whether such fiscal stimulus helps is another matter. The underlying problem is loss of confidence in bank assets and liabilities. Until that confidence is restored we will have a continuing collapse of money, credit, output, and employment. Fiscal expansion has to be paid for out of higher future taxation. Fiscal expansion could therefore instead undermine confidence in the governments own balance sheet and make our problems worse not better.
Sunday, December 7, 2008
market summary and outlook as of 12/07/2008
Capital markets recovered somewhat and danger still ahead
Credit Market
--Money markets have been stable for the past two weeks. 3M Libor hovered around 2.2%, though remained elevated compared to 1% Fed Fund rate.
--CP market have recovered due the term facility set up by government. Many large firms, such as GS and GE, were able to issue CP at reasonable prices, lowering their funding cost.
--Mid and long term funding market for high quality firms is thawing. FDICS-backed lowered the funding costs of financial firms. GS is able to raise fund at a yield level slightly higher corresponding T-bonds. Risk preimum for Investment Grade firms have retreated from historic high three weeks. The OAS of AA ML index has retreated from 688 bp to 409 bp. The record high yield, concern over deflation, and uncertainty of future stock market made high quality more attractive to stock.
--HY is still trading low due to rising bankruptcies. OAS of BBB ML index traded 11% and BB at 13%.
Mortgage Market
--Mortgage market is recovering since government planned to buy $500 bil agency MBS and $100 agency bonds. CMBX BBB risk preimum level has retreated from 40% to 36%.
Mortgage fundamentals is deteriorating: unemployment and delinquency are in the rise, home price is still falling hard, and inventory is 11 months. But $500 bil will help reduce the inventory and prevent damatic fall in home prices. 30y Mortgage rate is around 5.5%, 5% for new home buyers. Demand for house will pick up.
But the root cause, exotic asset, of this crisis is still unrevolved. Exotic assets are still handing in banks' balance sheet, raising the uncertainty of future capital eroson. Government might still need to raise further money to remove this issue.
Stock Market
SP might not drop below 700 unless something big occur, like the bankruptcy of Auto sector or mortgage market or fall collapse international economics, like UK. US market showed great resilience, even shrugging off record loss in employment.
Economy
Economic data remains grim. US labor market lost 2.7 mil jobs since December last year. The job loss in Nov 2008 was the worst since 1974. ISM Manufacuturing index reached to 36.2, rivaling the level created in earely 1980s recession. ISM service index also plummeted historic low since 1997 the index was created. Grim economic statistics abound as well. China's purchasing manger index plummedted to historic low since 2005 when the index started. Similar manufacutring measures across UK and Euro zone also spelled out all-time lows.
Risk
Looming risks might be from mortgage. US credit has increased from ~27 tril in 200 to ~52 tril. Until now, US government planned to raise ~1.7 tril, including stilimulus package. To recapitalize banks and cushion the slack created by private demand, this measure might not enough. I am expcting govenrment to raise at least $500- $1000 bil new fund.
opionions
--Continue to buy high quality IG bonds for the long term or wait for the next wave of crisis to jump in.
--10y Treasury is trading at 2.5%, might stay at this level for a while.
--Strong buy for S&P if it drops to 750.
Credit Market
--Money markets have been stable for the past two weeks. 3M Libor hovered around 2.2%, though remained elevated compared to 1% Fed Fund rate.
--CP market have recovered due the term facility set up by government. Many large firms, such as GS and GE, were able to issue CP at reasonable prices, lowering their funding cost.
--Mid and long term funding market for high quality firms is thawing. FDICS-backed lowered the funding costs of financial firms. GS is able to raise fund at a yield level slightly higher corresponding T-bonds. Risk preimum for Investment Grade firms have retreated from historic high three weeks. The OAS of AA ML index has retreated from 688 bp to 409 bp. The record high yield, concern over deflation, and uncertainty of future stock market made high quality more attractive to stock.
--HY is still trading low due to rising bankruptcies. OAS of BBB ML index traded 11% and BB at 13%.
Mortgage Market
--Mortgage market is recovering since government planned to buy $500 bil agency MBS and $100 agency bonds. CMBX BBB risk preimum level has retreated from 40% to 36%.
Mortgage fundamentals is deteriorating: unemployment and delinquency are in the rise, home price is still falling hard, and inventory is 11 months. But $500 bil will help reduce the inventory and prevent damatic fall in home prices. 30y Mortgage rate is around 5.5%, 5% for new home buyers. Demand for house will pick up.
But the root cause, exotic asset, of this crisis is still unrevolved. Exotic assets are still handing in banks' balance sheet, raising the uncertainty of future capital eroson. Government might still need to raise further money to remove this issue.
Stock Market
SP might not drop below 700 unless something big occur, like the bankruptcy of Auto sector or mortgage market or fall collapse international economics, like UK. US market showed great resilience, even shrugging off record loss in employment.
Economy
Economic data remains grim. US labor market lost 2.7 mil jobs since December last year. The job loss in Nov 2008 was the worst since 1974. ISM Manufacuturing index reached to 36.2, rivaling the level created in earely 1980s recession. ISM service index also plummeted historic low since 1997 the index was created. Grim economic statistics abound as well. China's purchasing manger index plummedted to historic low since 2005 when the index started. Similar manufacutring measures across UK and Euro zone also spelled out all-time lows.
Risk
Looming risks might be from mortgage. US credit has increased from ~27 tril in 200 to ~52 tril. Until now, US government planned to raise ~1.7 tril, including stilimulus package. To recapitalize banks and cushion the slack created by private demand, this measure might not enough. I am expcting govenrment to raise at least $500- $1000 bil new fund.
opionions
--Continue to buy high quality IG bonds for the long term or wait for the next wave of crisis to jump in.
--10y Treasury is trading at 2.5%, might stay at this level for a while.
--Strong buy for S&P if it drops to 750.
Employmenet fell faster output
The chairman of that committee, Robert Hall, an economist at Stanford University, points out a significant difference between earlier recessions and those since 1990. In recessions pre-dating 1990 employment fell more slowly than output. But since 1990, it has fallen as quickly or even quicker than output. The reason is that employers are now more willing to cut their workforce quickly when conditions turn against them.
This is borne out by the economic data for this recession. While employment has declined steadily since December, real GDP as of the third quarter was still above its level at the end of 2007. The November jobs figures, though, point to a deeper recession than many had initially expected. The signs from the wider economy are also grim. Consumer spending will be under pressure for months to come. Home prices have fallen by 16.6% in the year to the end of the third quarter according to the Standard & Poors/Case-Shiller national index, and they still have further to go.
This is borne out by the economic data for this recession. While employment has declined steadily since December, real GDP as of the third quarter was still above its level at the end of 2007. The November jobs figures, though, point to a deeper recession than many had initially expected. The signs from the wider economy are also grim. Consumer spending will be under pressure for months to come. Home prices have fallen by 16.6% in the year to the end of the third quarter according to the Standard & Poors/Case-Shiller national index, and they still have further to go.
Saturday, December 6, 2008
Strong reasons why investors will put their faith in bonds
--High quality bonds a safer bet than volatile equity
--Lower inflation and even concern over delfation makes bonds attractive
--Many high quality bonds yields at historic high levels. The chance they will get downgraded remain slim.
--record dire econmic data, unemployment & sales & auto & ISM manu and service index, and changing economic policy increase the downside risk while tighter regulation, continuing deleverage lower the upside risk of equity.
--It is tempting to assume stock market priced in the bottom but it might be a prolonged recession and the the intertwined capital market might not have priced in foreign bottoms.
--Yield for high qualities bonds are recovering. It will be better to find out the trading volume in secondary market.
By Michael Mackenzie in New York
Published: December 6 2008 02:00 Last updated: December 6 2008 02:00
Choosing between equities and high quality corporate bonds is not difficult at the moment.
As the equity market struggles to find its footing in an environment of extreme volatility, the generous yields on offer from good quality corporate bonds look a safer bet right now than equities, argue some investors.
Mark Kiesel, portfolio manager at Pimco, says the asset allocation choice between fixed income and equities comes down to owning high quality corporate bonds, that is, those that currently offer expected returns normally associated with equities.
"Investors should buy credit now and equities later," he says. "Over the past 20 years, the S&P 500 has returned only 2 per cent more than the investment-grade corporate bond market, yet with nearly three times the volatility."
Volatility remains the defining characteristic of the S&P as it tries to find its footing amid its worst bear market since the 1930s and the stunning loss of 533,000 jobs in November.
The S&P's low last month reflected a drop of 52 per cent from its record closing high set in October 2007. Only the slide of 54.5 per cent in 1937/38 and the 83 per cent plunge during the 1930-1932 period have seen bigger bear market falls.
In spite of this week's dire economic data, the S&P stands more than 16 per cent above its recent low. The big drop in mortgage rates and petrol prices is helping to make the case that a bottom has been made in stocks.
Then there is precedent. Earlier this week, the National Bureau of Economic Research in its capacity as the official arbiter of calling recessions, said the US economy began sliding in December 2007. So, at a year and counting, some people are hoping that if the current downturn emulates the 16month recession of 1981/82, a recovery could be just around the corner.
The trouble is that there are plenty of reasons for thinking that the current recession could become a lot worse than that of the early 1980s. While stocks have arguably priced in a lot of pain, there is no guarantee that when they climb up from the canvas, they can stay on their feet.
Indeed, Ben Bernanke, chairman of the Federal Reserve, hardly calmed the market's nerves this week when he suggested that the central bank could purchase long-dated government bonds in order to drive down yields - thus helping struggling home owners refinance their mortgages at lower rates.
Being positioned for a low inflation environment that could potentially usher in deflation supports top quality bonds, whose fixed rate coupons are eroded by rising consumer prices. In contrast, a look at Japan's stock market, which remains a shadow of its 1989 glory, shows what deflation means for equities.
Fixed income investors are already casting their vote. Treasury yields have plumbed historic lows and the average yield for AA rated corporate debt has fallen one percentage point towards 6 per cent since mid-October.
Lower down the spectrum of investment grade debt, Moody's index of corporate bonds rated BAA, currently shows an average yield of about 8.8 per cent. That's down from a peak of 9.54 per cent at the end of October and at current levels this type of debt remains above the 8.25 per cent ceiling recorded during the wave of corporate bankruptcies in 2001 and 2002. In other words, investment grade credit has more than priced in a period of severe corporate distress.
If investors accept the forecast currently painted by inflation linked bonds, these type of investment grade yields look positively stellar. In recent weeks, prices of Treasury and inflation protected securities imply that the US will experience deflation for at least five years. But only during the early 1930s has such an episode occurred.
Jack Ablin, chief investment officer at Harris Private Bank, says if the Treasury market's pricing of inflation risk holds, "an 8.8 per cent yield is pretty compelling competition for stocks".
That could leave stocks twisting in the wind for a while yet. "Stocks can't go up until corporate bonds recover," adds Mr Ablin.
--Lower inflation and even concern over delfation makes bonds attractive
--Many high quality bonds yields at historic high levels. The chance they will get downgraded remain slim.
--record dire econmic data, unemployment & sales & auto & ISM manu and service index, and changing economic policy increase the downside risk while tighter regulation, continuing deleverage lower the upside risk of equity.
--It is tempting to assume stock market priced in the bottom but it might be a prolonged recession and the the intertwined capital market might not have priced in foreign bottoms.
--Yield for high qualities bonds are recovering. It will be better to find out the trading volume in secondary market.
By Michael Mackenzie in New York
Published: December 6 2008 02:00 Last updated: December 6 2008 02:00
Choosing between equities and high quality corporate bonds is not difficult at the moment.
As the equity market struggles to find its footing in an environment of extreme volatility, the generous yields on offer from good quality corporate bonds look a safer bet right now than equities, argue some investors.
Mark Kiesel, portfolio manager at Pimco, says the asset allocation choice between fixed income and equities comes down to owning high quality corporate bonds, that is, those that currently offer expected returns normally associated with equities.
"Investors should buy credit now and equities later," he says. "Over the past 20 years, the S&P 500 has returned only 2 per cent more than the investment-grade corporate bond market, yet with nearly three times the volatility."
Volatility remains the defining characteristic of the S&P as it tries to find its footing amid its worst bear market since the 1930s and the stunning loss of 533,000 jobs in November.
The S&P's low last month reflected a drop of 52 per cent from its record closing high set in October 2007. Only the slide of 54.5 per cent in 1937/38 and the 83 per cent plunge during the 1930-1932 period have seen bigger bear market falls.
In spite of this week's dire economic data, the S&P stands more than 16 per cent above its recent low. The big drop in mortgage rates and petrol prices is helping to make the case that a bottom has been made in stocks.
Then there is precedent. Earlier this week, the National Bureau of Economic Research in its capacity as the official arbiter of calling recessions, said the US economy began sliding in December 2007. So, at a year and counting, some people are hoping that if the current downturn emulates the 16month recession of 1981/82, a recovery could be just around the corner.
The trouble is that there are plenty of reasons for thinking that the current recession could become a lot worse than that of the early 1980s. While stocks have arguably priced in a lot of pain, there is no guarantee that when they climb up from the canvas, they can stay on their feet.
Indeed, Ben Bernanke, chairman of the Federal Reserve, hardly calmed the market's nerves this week when he suggested that the central bank could purchase long-dated government bonds in order to drive down yields - thus helping struggling home owners refinance their mortgages at lower rates.
Being positioned for a low inflation environment that could potentially usher in deflation supports top quality bonds, whose fixed rate coupons are eroded by rising consumer prices. In contrast, a look at Japan's stock market, which remains a shadow of its 1989 glory, shows what deflation means for equities.
Fixed income investors are already casting their vote. Treasury yields have plumbed historic lows and the average yield for AA rated corporate debt has fallen one percentage point towards 6 per cent since mid-October.
Lower down the spectrum of investment grade debt, Moody's index of corporate bonds rated BAA, currently shows an average yield of about 8.8 per cent. That's down from a peak of 9.54 per cent at the end of October and at current levels this type of debt remains above the 8.25 per cent ceiling recorded during the wave of corporate bankruptcies in 2001 and 2002. In other words, investment grade credit has more than priced in a period of severe corporate distress.
If investors accept the forecast currently painted by inflation linked bonds, these type of investment grade yields look positively stellar. In recent weeks, prices of Treasury and inflation protected securities imply that the US will experience deflation for at least five years. But only during the early 1930s has such an episode occurred.
Jack Ablin, chief investment officer at Harris Private Bank, says if the Treasury market's pricing of inflation risk holds, "an 8.8 per cent yield is pretty compelling competition for stocks".
That could leave stocks twisting in the wind for a while yet. "Stocks can't go up until corporate bonds recover," adds Mr Ablin.
Unemployment Rate Exludes People Stopping Looking for Jobs
Does the official unemployment rate exclude people who have stopped looking for
work?
Yes; however, there are separate estimates of persons outside the labor force
who want a job, including those who have stopped looking because they believe no
jobs are available (discouraged workers). In addition, alternative measures of
labor underutilization (discouraged workers and other groups not officially
counted as unemployed) are published each month in the Employment Situation news
release.
Labor underutilization
http://stats.bls.gov/news.release/empsit.t12.htm
work?
Yes; however, there are separate estimates of persons outside the labor force
who want a job, including those who have stopped looking because they believe no
jobs are available (discouraged workers). In addition, alternative measures of
labor underutilization (discouraged workers and other groups not officially
counted as unemployed) are published each month in the Employment Situation news
release.
Labor underutilization
http://stats.bls.gov/news.release/empsit.t12.htm
Friday, December 5, 2008
How does US currency status affect capital flows
The position of the U.S. dollar as the premier international currency since the end of the gold standard in 1971, has resulted in a worldwide habit of accumulating savings in dollars.
This has led to an excess of imports over exports (the trade deficit) and in international players having an increasing amount of dollars to invest.
Foreign holders of dollars have long shown preference for fixed income investments over equities.
Therefore, the increasing volume of dollars held by foreigners has put upward pressure on bond prices.
The long up trend in U.S. bond prices since the 1980s is directly correlated to increasing foreign trade deficits.
Other things remaining the same, we would expect bond prices to continue to rise along with the trade deficit.
Therefore, the driving force behind the long-term rise in bond prices has been the desire of foreign exporters to sell goods to the U.S. in order to accumulate dollar assets.
This has led to an excess of imports over exports (the trade deficit) and in international players having an increasing amount of dollars to invest.
Foreign holders of dollars have long shown preference for fixed income investments over equities.
Therefore, the increasing volume of dollars held by foreigners has put upward pressure on bond prices.
The long up trend in U.S. bond prices since the 1980s is directly correlated to increasing foreign trade deficits.
Other things remaining the same, we would expect bond prices to continue to rise along with the trade deficit.
Therefore, the driving force behind the long-term rise in bond prices has been the desire of foreign exporters to sell goods to the U.S. in order to accumulate dollar assets.
Employment numbers Nov 08
--Nonfarm payroll shed 533k jobs in Nov, much larger than expected 335k
--It was the worst monthly loss since 1974
--Job losses in previous two months were revised upward, 240k to 320k in Oct, 284k to 403 in Sep
--US economy lost 2.7 million since the recession began in Dec 2007
--The pullback is broad based, espcially in service industry
--Only employment in hospital and government sector is holding up
--the loss severity might rival 1980s
--It was the worst monthly loss since 1974
--Job losses in previous two months were revised upward, 240k to 320k in Oct, 284k to 403 in Sep
--US economy lost 2.7 million since the recession began in Dec 2007
--The pullback is broad based, espcially in service industry
--Only employment in hospital and government sector is holding up
--the loss severity might rival 1980s
China Looks to Wall Street to Lure Back Native Talent
By JAMES T. AREDDY in Shanghai and CAROLYN CUI in New York
China, which has long sent its best and brightest abroad, is now siphoning talent from Wall Street.
Professionals are peppering brokerages, banks and law firms in Beijing and Shanghai with résumés, and Chinese officials and executives are taking advantage. This month, officials from Shanghai will lead a delegation to New York, Chicago and London looking to poach specialists in risk management and other fields. At an earlier session in New York last month, Wall Street professionals packed a theater to hear pitches from Chinese regulators and mutual funds.
Jeff Lu Min
The big lure: a belief that China's financial sector is in the early stages of an expansion while financial centers in New York and London are contracting.
Of course, China's own financial sector has taken a hit in the past year. The benchmark Shanghai index is one of the worst performing in the world, losing nearly 70% since its peak in October 2007. Some of China's 100-plus brokerages have started to lay off staff. The 100 foreign banks with outlets in China, as well as overseas insurers, have slowed expansion.
Language alone helps dictate that most of these jobs in China will go to those born in the country and who went overseas for school or work. Some 1.2 million Chinese have gone abroad to study -- mostly in engineering and finance -- in the past three decades. About one-fourth have come back to work in China, according to the Ministry of Education.
Jeff Lu Min was ahead of the curve. Last February, the native of eastern China's Anhui province, left his stock-picking job at American International Group Inc. to join a big Chinese mutual-fund company, China Asset Management Co. He landed on Wall Street nearly a decade ago after earning masters degrees in science and business at Yale University, but was impressed with the growth in China's asset-management business.
When Mr. Lu left New York, Wall Street's pains still were in the early stages and AIG looked solid. Mr. Lu's friends in New York greeted his decision to return home with "curious" comments, he said. Now, some want to replicate his move. "In this market absolutely," said the 40-year-old Mr. Lu. "You can imagine."
Robert Grandy, an executive at recruitment firm Korn/Ferry International, said he sees five to six résumés a week from experienced executives who want a job in China, up from maybe one a week earlier this year.
Ethnic Chinese with Wall Street experience and fluent Mandarin appear to have the best chances in local firms, as well as multinational companies. Chinese who return home after working overseas are dubbed "hai gui," or sea turtles, and government officials have for years worked hard to entice them back.
Patriotism has been part of the pitch. But now, officials are floating the prospect of tax breaks to lure highly paid lawyers, accountants and bankers.
Some top talent is being lured back. David Li, a former Barclays Capital and J.P. Morgan Chase & Co. executive, joined China International Capital Corp., a Beijing investment bank, in July as an executive director and chief risk officer. Mr. Li, who has extensive experience designing risk models used to value credit derivatives, declined to comment.
Chinese companies also are starting to address one of the big impediments to drawing talent: low compensation. Cheng Haiyong, deputy chief investment officer of China Asset Management, which hired Mr. Lu, has visited the U.S. twice on recruiting drives looking for "people who are quite familiar with both the U.S. and Chinese financial sector." Mr. Cheng said his firm can afford "global standard" salaries for the industry.
Top Chinese institutions are paying talent at least 75% of the global standard for some positions, according to Options Group, an executive-search firm. In some cases, Chinese firms are paying 100%, or slightly more, in areas such as private wealth management, private equity and portfolio management, Options Group said.
China's financial markets are far less developed than those in the U.S., and Chinese officials pledge they will continue to liberalize markets, though they may introduce financial products carefully, particularly the kinds of derivatives blamed for sparking the crisis on Wall Street. Still, they note modern finance has plenty of basic products that remain untried in China.
Surging stock prices through most of 2006 and 2007 gave China a taste of its potential as a financial-services center. For a brief period, Shanghai led the world in initial public offerings and mutual-fund launches.
Also, the country saw its futures exchanges and bond markets start to influence global pricing.
Not everyone is ready to return. Zhao Hongqiang, a 32-year-old manager of KPMG LLP's Audit & Risk Advisory Services in Washington, said he can see an approaching "glass ceiling" if he stays in the U.S. and was heartened with a recent offer to work for the firm in Beijing. But he is on the fence. The concern: reverse cultural shock after nine years in the U.S.
China, which has long sent its best and brightest abroad, is now siphoning talent from Wall Street.
Professionals are peppering brokerages, banks and law firms in Beijing and Shanghai with résumés, and Chinese officials and executives are taking advantage. This month, officials from Shanghai will lead a delegation to New York, Chicago and London looking to poach specialists in risk management and other fields. At an earlier session in New York last month, Wall Street professionals packed a theater to hear pitches from Chinese regulators and mutual funds.
Jeff Lu Min
The big lure: a belief that China's financial sector is in the early stages of an expansion while financial centers in New York and London are contracting.
Of course, China's own financial sector has taken a hit in the past year. The benchmark Shanghai index is one of the worst performing in the world, losing nearly 70% since its peak in October 2007. Some of China's 100-plus brokerages have started to lay off staff. The 100 foreign banks with outlets in China, as well as overseas insurers, have slowed expansion.
Language alone helps dictate that most of these jobs in China will go to those born in the country and who went overseas for school or work. Some 1.2 million Chinese have gone abroad to study -- mostly in engineering and finance -- in the past three decades. About one-fourth have come back to work in China, according to the Ministry of Education.
Jeff Lu Min was ahead of the curve. Last February, the native of eastern China's Anhui province, left his stock-picking job at American International Group Inc. to join a big Chinese mutual-fund company, China Asset Management Co. He landed on Wall Street nearly a decade ago after earning masters degrees in science and business at Yale University, but was impressed with the growth in China's asset-management business.
When Mr. Lu left New York, Wall Street's pains still were in the early stages and AIG looked solid. Mr. Lu's friends in New York greeted his decision to return home with "curious" comments, he said. Now, some want to replicate his move. "In this market absolutely," said the 40-year-old Mr. Lu. "You can imagine."
Robert Grandy, an executive at recruitment firm Korn/Ferry International, said he sees five to six résumés a week from experienced executives who want a job in China, up from maybe one a week earlier this year.
Ethnic Chinese with Wall Street experience and fluent Mandarin appear to have the best chances in local firms, as well as multinational companies. Chinese who return home after working overseas are dubbed "hai gui," or sea turtles, and government officials have for years worked hard to entice them back.
Patriotism has been part of the pitch. But now, officials are floating the prospect of tax breaks to lure highly paid lawyers, accountants and bankers.
Some top talent is being lured back. David Li, a former Barclays Capital and J.P. Morgan Chase & Co. executive, joined China International Capital Corp., a Beijing investment bank, in July as an executive director and chief risk officer. Mr. Li, who has extensive experience designing risk models used to value credit derivatives, declined to comment.
Chinese companies also are starting to address one of the big impediments to drawing talent: low compensation. Cheng Haiyong, deputy chief investment officer of China Asset Management, which hired Mr. Lu, has visited the U.S. twice on recruiting drives looking for "people who are quite familiar with both the U.S. and Chinese financial sector." Mr. Cheng said his firm can afford "global standard" salaries for the industry.
Top Chinese institutions are paying talent at least 75% of the global standard for some positions, according to Options Group, an executive-search firm. In some cases, Chinese firms are paying 100%, or slightly more, in areas such as private wealth management, private equity and portfolio management, Options Group said.
China's financial markets are far less developed than those in the U.S., and Chinese officials pledge they will continue to liberalize markets, though they may introduce financial products carefully, particularly the kinds of derivatives blamed for sparking the crisis on Wall Street. Still, they note modern finance has plenty of basic products that remain untried in China.
Surging stock prices through most of 2006 and 2007 gave China a taste of its potential as a financial-services center. For a brief period, Shanghai led the world in initial public offerings and mutual-fund launches.
Also, the country saw its futures exchanges and bond markets start to influence global pricing.
Not everyone is ready to return. Zhao Hongqiang, a 32-year-old manager of KPMG LLP's Audit & Risk Advisory Services in Washington, said he can see an approaching "glass ceiling" if he stays in the U.S. and was heartened with a recent offer to work for the firm in Beijing. But he is on the fence. The concern: reverse cultural shock after nine years in the U.S.
Some Credit Thaws Amid Freeze
The government has stepped in to oil several gears in the credit markets, but they remain squeaky.
Since September, the Federal Reserve and the Treasury Department have agreed to buy short-term debt known as commercial paper directly from companies, insure debt issued by banks such as Goldman Sachs Group Inc. and Citigroup Inc., help finance investors' purchases of debt backed by consumer auto and credit-card loans and purchase mortgage-backed securities. All this is aimed at getting money flowing through the financial system and into the hands of companies and consumers.
Their efforts have stabilized several of the worst-hit markets and allowed some companies to avert disaster. But they still haven't stimulated much lending back into the economy, which is reeling from rising unemployment and a declining housing market. In the case of many programs, there also is a lag time between its announcement and implementation.
As U.S. auto makers plead for a bailout from Congress, the markets remain unconvinced that the plans will work. The Dow Jones Industrial Average fell more than 200 points Thursday as investors fled to the safety of U.S. Treasurys, which fell to lows again.
Late Thursday in New York, the two-year note was up 4/32 point, or $1.25 for every $1,000 invested, at 100 26/32, to yield 0.837%, from 0.893% Wednesday. The 10-year note was up one point, or $10 for every $1,000 invested, at 110 10/32, to yield 2.569%, from 2.678% Wednesday. The three-month Treasury bill ended the day yielding nearly zero, at 0.02%.
"The markets are still out of balance," said James Bianco, president of Bianco Research in Chicago. "In many markets the government has had to be the buyer of last resort to make the markets work."
The market for mortgage-backed securities, or MBS, has improved since early October. Back then, the difference in yield between MBS that package loans guaranteed by Fannie Mae and Freddie Mac, both government-controlled entities, and comparable risk-free Treasury bonds hit a peak at 2.8 percentage points. That spread had fallen to about 2.1 percentage points Thursday, according to FTN Financial.
Most of the mortgage-bond market's rally has occurred in the past two weeks after the Federal Reserve and the Treasury announced plans to aid the housing market, including direct purchases of mortgage bonds. Federal Reserve Chairman Ben Bernanke said Thursday that "more needs to be done" to stem the tide of home foreclosures.
His comments follow a Thanksgiving week announcement that the Fed would directly buy $500 billion of mortgage-backed securities and $100 billion of debt issued by Fannie Mae and Freddie Mac. Mr. Bernanke also said earlier this week that the Fed may purchase Treasury bonds to help keep rates down.
Separately, the Treasury announced Wednesday that it wants to initiate a plan to encourage banks to lend mortgages for home buyers at rates as low as 4.5%, though details are sketchy.
The commercial-paper market, which feeds the immediate cash needs of many U.S. corporations such as General Electric Co. and Ford Motor Credit, has healed in the wake of several initiatives to shore up money-market fund managers' confidence that their investments have a backstop at the Fed.
While many investors still are anxious about owning debt that matures in more than one day, the Fed last week bought nearly $300 billion of three-month commercial paper at relatively low rates of between 1% and 3.5%, according to Fed data. Other commercial-paper rates hover around 2%, closer in line with other short-term market rates such as London interbank offered rates.
The corporate-debt market has been less responsive to government actions, despite banks' push to issue government-guaranteed debt at rates of about 3%. Companies such as Goldman Sachs, Citigroup, Bank of America Corp., Morgan Stanley and General Electric have taken advantage of the low rates, but it may be some time before they lend into the economy at higher rates, said analysts.
Companies in weaker financial straits still would have to pay, on average, more than 20 percentage points higher than comparable Treasury-bond yields to borrow in the markets, according to Merrill Lynch. Investment-grade companies would have to pay 6.5 percentage points on average to issue debt in the market, according to Merrill Lynch.
Since September, the Federal Reserve and the Treasury Department have agreed to buy short-term debt known as commercial paper directly from companies, insure debt issued by banks such as Goldman Sachs Group Inc. and Citigroup Inc., help finance investors' purchases of debt backed by consumer auto and credit-card loans and purchase mortgage-backed securities. All this is aimed at getting money flowing through the financial system and into the hands of companies and consumers.
Their efforts have stabilized several of the worst-hit markets and allowed some companies to avert disaster. But they still haven't stimulated much lending back into the economy, which is reeling from rising unemployment and a declining housing market. In the case of many programs, there also is a lag time between its announcement and implementation.
As U.S. auto makers plead for a bailout from Congress, the markets remain unconvinced that the plans will work. The Dow Jones Industrial Average fell more than 200 points Thursday as investors fled to the safety of U.S. Treasurys, which fell to lows again.
Late Thursday in New York, the two-year note was up 4/32 point, or $1.25 for every $1,000 invested, at 100 26/32, to yield 0.837%, from 0.893% Wednesday. The 10-year note was up one point, or $10 for every $1,000 invested, at 110 10/32, to yield 2.569%, from 2.678% Wednesday. The three-month Treasury bill ended the day yielding nearly zero, at 0.02%.
"The markets are still out of balance," said James Bianco, president of Bianco Research in Chicago. "In many markets the government has had to be the buyer of last resort to make the markets work."
The market for mortgage-backed securities, or MBS, has improved since early October. Back then, the difference in yield between MBS that package loans guaranteed by Fannie Mae and Freddie Mac, both government-controlled entities, and comparable risk-free Treasury bonds hit a peak at 2.8 percentage points. That spread had fallen to about 2.1 percentage points Thursday, according to FTN Financial.
Most of the mortgage-bond market's rally has occurred in the past two weeks after the Federal Reserve and the Treasury announced plans to aid the housing market, including direct purchases of mortgage bonds. Federal Reserve Chairman Ben Bernanke said Thursday that "more needs to be done" to stem the tide of home foreclosures.
His comments follow a Thanksgiving week announcement that the Fed would directly buy $500 billion of mortgage-backed securities and $100 billion of debt issued by Fannie Mae and Freddie Mac. Mr. Bernanke also said earlier this week that the Fed may purchase Treasury bonds to help keep rates down.
Separately, the Treasury announced Wednesday that it wants to initiate a plan to encourage banks to lend mortgages for home buyers at rates as low as 4.5%, though details are sketchy.
The commercial-paper market, which feeds the immediate cash needs of many U.S. corporations such as General Electric Co. and Ford Motor Credit, has healed in the wake of several initiatives to shore up money-market fund managers' confidence that their investments have a backstop at the Fed.
While many investors still are anxious about owning debt that matures in more than one day, the Fed last week bought nearly $300 billion of three-month commercial paper at relatively low rates of between 1% and 3.5%, according to Fed data. Other commercial-paper rates hover around 2%, closer in line with other short-term market rates such as London interbank offered rates.
The corporate-debt market has been less responsive to government actions, despite banks' push to issue government-guaranteed debt at rates of about 3%. Companies such as Goldman Sachs, Citigroup, Bank of America Corp., Morgan Stanley and General Electric have taken advantage of the low rates, but it may be some time before they lend into the economy at higher rates, said analysts.
Companies in weaker financial straits still would have to pay, on average, more than 20 percentage points higher than comparable Treasury-bond yields to borrow in the markets, according to Merrill Lynch. Investment-grade companies would have to pay 6.5 percentage points on average to issue debt in the market, according to Merrill Lynch.
Securitisation sector braced for a long, painful haul - FT
Securitisation sector braced for a long, painful haul
By Aline van Duyn
Published: December 5 2008 02:00 Last updated: December 5 2008 02:00
The toxic assets backed by mortgages and other consumer loans, which have contributed to more than $1,000bn of writedowns and losses across the global financial system, continue to cast a dark cloud.
These markets face a huge problem: the biggest buyers of securitised bonds have disappeared, and there are few, if any, new ones on the horizon.
"We are back to where we were several years ago, with real investors who pay cash for assets [the only buyers]," said Sanjeev Handa, head of global public markets at TIAA-CREF, which manages pensions for teachers.
The effects of this enormous overhang of excess supply continues to push down the value of thousands of billions of dollars worth of securities, from those backed by mortgages to other categories including securities backed by car loans, credit cards and student loans.
"The problem is liquidity," said Cecilia Tarrant, managing director at Morgan Stanley. "This may be a great price to buy these securities at. But most buyers [of triple A securitised debt] were levered buyers and these are now not around."
These comments were made at a meeting aimed at discussing ways to restore confidence in the securitised markets, which have in the last decade in particular financed large numbers of mortgages and other loans made to individuals and businesses.
Yet the collapse of house prices across the US and the large spike in foreclosures and defaults, particularly on risky mortgages which were used as collateral in many mortgage-backed securities, has resulted in huge losses and exposed gaping holes in banks' capital bases.
Many former buyers of securitised debt have suffered from banks' reduced ability to lend due to capital constraints. Some of these buyers were vehicles owned by banks, and most of them relied on borrowing money in order to make the purchases. New issuance activity has ground to a halt.
"A large, large portion of the asset-backed investor base, anywhere from 65 per cent to 75 per cent, is gone," said Chris Flanagan, head of asset-backed research at JP Morgan, in a recent interview with the Financial Times. "It's going to be gone for a very, very long time."
Calls continue to be made for the US government to step in as a buyer of these assets, the original intent of the $700bn Troubled Asset Relief Programme (Tarp) when it was proposed by Hank Paulson, the Treasury secretary, in October.
That aim - complicated by the difficulties around valuing many mortgage-backed securities in the absence of trading and the fact that many bonds have unique characteristics and cannot easily be lumped together - was replaced with a programme of direct capital infusions into the banking system.
Mr Paulson, with the Federal Reserve, has since introduced a plan to use some of the Tarp funds to potentially fund investors to buy securities backed by credit cards and car loans, but the most toxic mortgage assets continue to exist with no sign of relief.
A fresh round of price declines contributed to the recent crisis at Citigroup, which required US government help. Mr Flanagan said "it would be very difficult to rule out" the possibility of further price falls hurting banks' balance sheets.
"Eventually the government will have to buy," said Timonthy Ryan, chief executive of the Securities Industry and Financial Markets Association (Sifma). "We have not had much luck with the current administration but are all over the next administration [to get them to buy the securities]," he said.
Timothy Geithner, the current head of the New York Fed, is President-elect Barack Obama's choice for US Treasury secretary.
There is no shortage of ideas about how to improve the securitised markets when they return, such as better disclosure of information. However, the problems that have built up in the last decade are far from being resolved.
Analysts at Barclays Capital said there was still "no real practical guidance to market participants as to how to deal with the upcoming structural problems and the challenging fundamentals impacting current deals".
In addition, they said that help from "central banks and the respective governments can help balance sheet issues and provide financing to some of these assets creating some demand. But it is unclear if that would be enough to return to a more normal market".
As well as the lack of buyers, the availability of cheap funding to banks and providers of credit through government-guaranteed debt also makes it less likely that activity will resume in the securitised capital markets, where funding costs are relatively much higher. "Until the system works through both of these issues we will not see securitisation start up again," said Jeff Perlowitz, co-head of global securitised markets at Citigroup.
In a report compiled by McKinsey with recommendations to restore confidence, causes of the current crisis are highlighted.
First, deteriorating loan underwriting standards undermined underlying asset quality. Second, investors relied too extensively on ratings. Third, the level of complexity of products, such as collateralised debt obligation of asset-backed securities, "exceeded the analytical and risk management capabilities of even some of the most sophisticated market participants", says the report.
In addition, there was a lack of shared responsibility; plenty of people worried about extending mortgages to people with no proven incomes, but they did nothing about it. "[We now realise that] every member of the securitised industry has a stake in the system as a whole," said Jason Kravitt, senior partner at Mayer Brown. "We all are responsible for all of us."
By Aline van Duyn
Published: December 5 2008 02:00 Last updated: December 5 2008 02:00
The toxic assets backed by mortgages and other consumer loans, which have contributed to more than $1,000bn of writedowns and losses across the global financial system, continue to cast a dark cloud.
These markets face a huge problem: the biggest buyers of securitised bonds have disappeared, and there are few, if any, new ones on the horizon.
"We are back to where we were several years ago, with real investors who pay cash for assets [the only buyers]," said Sanjeev Handa, head of global public markets at TIAA-CREF, which manages pensions for teachers.
The effects of this enormous overhang of excess supply continues to push down the value of thousands of billions of dollars worth of securities, from those backed by mortgages to other categories including securities backed by car loans, credit cards and student loans.
"The problem is liquidity," said Cecilia Tarrant, managing director at Morgan Stanley. "This may be a great price to buy these securities at. But most buyers [of triple A securitised debt] were levered buyers and these are now not around."
These comments were made at a meeting aimed at discussing ways to restore confidence in the securitised markets, which have in the last decade in particular financed large numbers of mortgages and other loans made to individuals and businesses.
Yet the collapse of house prices across the US and the large spike in foreclosures and defaults, particularly on risky mortgages which were used as collateral in many mortgage-backed securities, has resulted in huge losses and exposed gaping holes in banks' capital bases.
Many former buyers of securitised debt have suffered from banks' reduced ability to lend due to capital constraints. Some of these buyers were vehicles owned by banks, and most of them relied on borrowing money in order to make the purchases. New issuance activity has ground to a halt.
"A large, large portion of the asset-backed investor base, anywhere from 65 per cent to 75 per cent, is gone," said Chris Flanagan, head of asset-backed research at JP Morgan, in a recent interview with the Financial Times. "It's going to be gone for a very, very long time."
Calls continue to be made for the US government to step in as a buyer of these assets, the original intent of the $700bn Troubled Asset Relief Programme (Tarp) when it was proposed by Hank Paulson, the Treasury secretary, in October.
That aim - complicated by the difficulties around valuing many mortgage-backed securities in the absence of trading and the fact that many bonds have unique characteristics and cannot easily be lumped together - was replaced with a programme of direct capital infusions into the banking system.
Mr Paulson, with the Federal Reserve, has since introduced a plan to use some of the Tarp funds to potentially fund investors to buy securities backed by credit cards and car loans, but the most toxic mortgage assets continue to exist with no sign of relief.
A fresh round of price declines contributed to the recent crisis at Citigroup, which required US government help. Mr Flanagan said "it would be very difficult to rule out" the possibility of further price falls hurting banks' balance sheets.
"Eventually the government will have to buy," said Timonthy Ryan, chief executive of the Securities Industry and Financial Markets Association (Sifma). "We have not had much luck with the current administration but are all over the next administration [to get them to buy the securities]," he said.
Timothy Geithner, the current head of the New York Fed, is President-elect Barack Obama's choice for US Treasury secretary.
There is no shortage of ideas about how to improve the securitised markets when they return, such as better disclosure of information. However, the problems that have built up in the last decade are far from being resolved.
Analysts at Barclays Capital said there was still "no real practical guidance to market participants as to how to deal with the upcoming structural problems and the challenging fundamentals impacting current deals".
In addition, they said that help from "central banks and the respective governments can help balance sheet issues and provide financing to some of these assets creating some demand. But it is unclear if that would be enough to return to a more normal market".
As well as the lack of buyers, the availability of cheap funding to banks and providers of credit through government-guaranteed debt also makes it less likely that activity will resume in the securitised capital markets, where funding costs are relatively much higher. "Until the system works through both of these issues we will not see securitisation start up again," said Jeff Perlowitz, co-head of global securitised markets at Citigroup.
In a report compiled by McKinsey with recommendations to restore confidence, causes of the current crisis are highlighted.
First, deteriorating loan underwriting standards undermined underlying asset quality. Second, investors relied too extensively on ratings. Third, the level of complexity of products, such as collateralised debt obligation of asset-backed securities, "exceeded the analytical and risk management capabilities of even some of the most sophisticated market participants", says the report.
In addition, there was a lack of shared responsibility; plenty of people worried about extending mortgages to people with no proven incomes, but they did nothing about it. "[We now realise that] every member of the securitised industry has a stake in the system as a whole," said Jason Kravitt, senior partner at Mayer Brown. "We all are responsible for all of us."
Return-free risk - FT
By James Grant
Published: December 4 2008 17:39 Last updated: December 4 2008 17:39
US Treasuries are the investment asset of the year. The less they yield, the more their fans adore them. Then, again, these fearful days, yield seems to have nothing to do with investment calculation. Purported safety is all.
“Super-safe Treasuries”, the papers call these emissions of a government that, this year, will take in $2,500bn but spend $3,500bn. “Toxic assets” is how the same papers characterise orphaned mortgage-backed securities—or, for that matter, secured bank loans, convertible bonds, junk bonds or almost any other kind of debt obligation not bearing the US imprimatur.
“There are no bad bonds, only bad prices,” the traders used to say. They should say it again, only louder. In the spring of 1984, long-dated Treasuries went begging at yields of nearly 14 per cent in the context of an inflation rate of just 4 per cent. Those, too, were fearful times, the recollected horror being the great inflation of the 1970s. Inflation was ineradicable, the bondphobes said. Now a new generation of creditors espouses the opposite proposition. Deflation is baked in the cake, they say.
The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price. At the right price, a lowly convertible bond is a safer proposition than an exalted Treasury. Watching the government securities market zoom, many mistake price action for price.
Yes, Treasuries might conceivably redeem the hopes of their besotted admirers. Maybe a deflationary chasm is about to swallow us all. Never before has the US been so leveraged. And—just possibly—never before were lending standards so reckless as the ones that brought joy to so many astonished mortgage applicants in 2005 and 2006.
In their magnum opus Security Analysis Benjamin Graham and David L. Dodd advise that “bonds should be bought on their ability to withstand depression”. They wrote that in 1934. So far is that rule from being honoured by today’s financiers that not a few bonds—and boxcars full of mortgages – could hardly withstand prosperity. Two urgent questions present themselves. One: does something far worse than recession loom? Two: does that certain something definitely spell much lower interest rates?
We can’t know, but we can at least observe. What I observe is a monumental push to reflate. The Federal Reserve is creating more credit in less time than it has ever done before – in the past three months the sum of its earning assets, known in the trade as Reserve Bank credit, has grown at the astounding annual rate of 2,922 per cent. Are the bond bulls quite sure that these exertions will raise no inflationary sweat?
Evidently, they are—at least, forward swap rates betray no such concern. The market’s best guess as to what the 10-year Treasury will yield in 10 years’ time is 2.78 per cent, never mind the famous (and now, as it seems, prophetic) remark of Fed Chairman Ben Bernanke that the Fed could drop dollars out of a helicopter in a deflationary pinch.
The non-Treasury departments of the credit markets have crashed. No surprise then that prices and values are deranged. Market makers have closed up shop for the year, while hedge funds cower in fear of redemptions. You’d suppose that professional investors – doughty seekers of value – would be combing through the debris for bargains. Alas, no. Most seem content to lend money to Henry Paulson (subsequently to Timothy Geithner) at 2 per cent or 3 per cent.
In corporate debt and mortgages, anomalies and non sequiturs abound. They are especially prevalent in convertible bonds. More so than even the average stressed-out fund manager, convertible arbitrageurs have been through the mill. It was they—and almost they alone—who owned convertibles. Now many of these folk must sell them.
Few buyers are presenting themselves, however, though extraordinary bargains keep popping up. Thus, at the end of October, a Medtronic convertible bond with a 1.5 per cent coupon with the debt maturing in April 2011 briefly traded at 80.75. This was a price to yield 10.6 per cent, an adjusted spread of 1,600 basis points over the Treasury curve (adjusted, that is, for the value of the options embedded in the convert, notably the option to exchange it for common stock at the stipulated rate). Contrary to what such a yield might imply, A1/AA minus rated Medtronic, the world’s top manufacturer of medical devices for the treatment of heart disease, spinal injuries and diabetes, is no early candidate for insolvency. Almost every day brings comparable examples of risks not borne by people who, in this time of crisis, have come to define risk as “anything not guaranteed by Uncle Sam”.
“Risk-free return” is the standard tag attached to the government’s solemn obligations. An investor I know, repulsed by prevailing government yields, has a timelier description – “return-free risk”.
James Grant, editor of Grant’s Interest Rate Observer, is an editor of the newly published sixth edition of “Security Analysis,” by Benjamin Graham and David L. Dodd.
Published: December 4 2008 17:39 Last updated: December 4 2008 17:39
US Treasuries are the investment asset of the year. The less they yield, the more their fans adore them. Then, again, these fearful days, yield seems to have nothing to do with investment calculation. Purported safety is all.
“Super-safe Treasuries”, the papers call these emissions of a government that, this year, will take in $2,500bn but spend $3,500bn. “Toxic assets” is how the same papers characterise orphaned mortgage-backed securities—or, for that matter, secured bank loans, convertible bonds, junk bonds or almost any other kind of debt obligation not bearing the US imprimatur.
“There are no bad bonds, only bad prices,” the traders used to say. They should say it again, only louder. In the spring of 1984, long-dated Treasuries went begging at yields of nearly 14 per cent in the context of an inflation rate of just 4 per cent. Those, too, were fearful times, the recollected horror being the great inflation of the 1970s. Inflation was ineradicable, the bondphobes said. Now a new generation of creditors espouses the opposite proposition. Deflation is baked in the cake, they say.
The truth is that no investment asset is inherently safe. Risk or safety is an attribute of price. At the right price, a lowly convertible bond is a safer proposition than an exalted Treasury. Watching the government securities market zoom, many mistake price action for price.
Yes, Treasuries might conceivably redeem the hopes of their besotted admirers. Maybe a deflationary chasm is about to swallow us all. Never before has the US been so leveraged. And—just possibly—never before were lending standards so reckless as the ones that brought joy to so many astonished mortgage applicants in 2005 and 2006.
In their magnum opus Security Analysis Benjamin Graham and David L. Dodd advise that “bonds should be bought on their ability to withstand depression”. They wrote that in 1934. So far is that rule from being honoured by today’s financiers that not a few bonds—and boxcars full of mortgages – could hardly withstand prosperity. Two urgent questions present themselves. One: does something far worse than recession loom? Two: does that certain something definitely spell much lower interest rates?
We can’t know, but we can at least observe. What I observe is a monumental push to reflate. The Federal Reserve is creating more credit in less time than it has ever done before – in the past three months the sum of its earning assets, known in the trade as Reserve Bank credit, has grown at the astounding annual rate of 2,922 per cent. Are the bond bulls quite sure that these exertions will raise no inflationary sweat?
Evidently, they are—at least, forward swap rates betray no such concern. The market’s best guess as to what the 10-year Treasury will yield in 10 years’ time is 2.78 per cent, never mind the famous (and now, as it seems, prophetic) remark of Fed Chairman Ben Bernanke that the Fed could drop dollars out of a helicopter in a deflationary pinch.
The non-Treasury departments of the credit markets have crashed. No surprise then that prices and values are deranged. Market makers have closed up shop for the year, while hedge funds cower in fear of redemptions. You’d suppose that professional investors – doughty seekers of value – would be combing through the debris for bargains. Alas, no. Most seem content to lend money to Henry Paulson (subsequently to Timothy Geithner) at 2 per cent or 3 per cent.
In corporate debt and mortgages, anomalies and non sequiturs abound. They are especially prevalent in convertible bonds. More so than even the average stressed-out fund manager, convertible arbitrageurs have been through the mill. It was they—and almost they alone—who owned convertibles. Now many of these folk must sell them.
Few buyers are presenting themselves, however, though extraordinary bargains keep popping up. Thus, at the end of October, a Medtronic convertible bond with a 1.5 per cent coupon with the debt maturing in April 2011 briefly traded at 80.75. This was a price to yield 10.6 per cent, an adjusted spread of 1,600 basis points over the Treasury curve (adjusted, that is, for the value of the options embedded in the convert, notably the option to exchange it for common stock at the stipulated rate). Contrary to what such a yield might imply, A1/AA minus rated Medtronic, the world’s top manufacturer of medical devices for the treatment of heart disease, spinal injuries and diabetes, is no early candidate for insolvency. Almost every day brings comparable examples of risks not borne by people who, in this time of crisis, have come to define risk as “anything not guaranteed by Uncle Sam”.
“Risk-free return” is the standard tag attached to the government’s solemn obligations. An investor I know, repulsed by prevailing government yields, has a timelier description – “return-free risk”.
James Grant, editor of Grant’s Interest Rate Observer, is an editor of the newly published sixth edition of “Security Analysis,” by Benjamin Graham and David L. Dodd.
Thursday, December 4, 2008
Housing Model
--Existing Home Inventory - 4.2 mil, over 10 months supply
http://www.data360.org/graph_group.aspx?Graph_Group_Id=852
--US 300 mil populatin, 150 mil labor force, 6.5% current unemployment, it is expected to rise to 8.5%, 2% increase means around 3 mil labor force will be axed.
--Homeowership is above 50%
http://www.census.gov/hhes/www/housing/hvs/qtr208/q208tab5.html
--So 3 mil labor force will probabily bring another 1.5 mil housing units to the market. It will bring house supply to 5.5 mil
--Treasury will buy 500 bil, average housing price is around 190,000. So it might help reduce 2.6 mil housing units.
--Still nearly 3 mil is left, hgiher than average 2 mil
http://www.data360.org/graph_group.aspx?Graph_Group_Id=852
--US 300 mil populatin, 150 mil labor force, 6.5% current unemployment, it is expected to rise to 8.5%, 2% increase means around 3 mil labor force will be axed.
--Homeowership is above 50%
http://www.census.gov/hhes/www/housing/hvs/qtr208/q208tab5.html
--So 3 mil labor force will probabily bring another 1.5 mil housing units to the market. It will bring house supply to 5.5 mil
--Treasury will buy 500 bil, average housing price is around 190,000. So it might help reduce 2.6 mil housing units.
--Still nearly 3 mil is left, hgiher than average 2 mil
Stock is Cheap? Maybe not - Bill Gross
Here I go again! Gosh it was only six years ago that I cemented my place in stock market history by predicting that the Dow would fall from 8,500 to 5,000, instead of going up to 14,000 where it peaked in October of 2007. Well, I could use the standard set of excuses: 1) No one else saw it coming, 2) I was misinterpreted, and taken out of context, 3) I was tired, overworked, and had family problems, or 4) I had just come out of rehab. But these days what really works is a full confession. I mean, like, uh, it was totally my fault and I take full responsibility. The fact is I was only off by 9,000 points. That’s my story, and I’m stickin’ to it.
Well, fools rush in. This time though I’m definitely older and maybe a little bit wiser. No magic number, nor a specific target date from the Swami of the Dow. This one will be more conceptual, but still present a “take” that you can criticize or damn with faint praise. And no, despite the title, it doesn’t imply that the stock market is headed to 5,000 and that I was always right or just a little bit early. It only suggests that I’m readdressing the critical topic of equity valuation – that mysterious fragile flower where price is part perception, part valuation, and part hope or lack thereof. Press on, Swami.
Let me first announce a fundamental premise with which I think all rational investors would agree: I believe in stocks for the long run – but only if purchased at the right price. That statement packs a real punch. It says that capitalism is and will remain a going concern, that risk-taking – over the long run – will be rewarded, but only from a starting price that correctly anticipates the economy’s growth and its share of after-tax corporate profits within it. Acknowledging the above, let’s look at a few basic standards of valuation that historically have stood the test of time, to see if at least the price is right.
One of them is what is known as the “Q” ratio, or the value of the stock market relative to the replacement cost of net assets. The basic logic behind “Q” is that capitalism works. If the “Q” is above 1.0, then the market is valuing a company at more than it costs to reproduce it; stock prices should fall. If it is below 1.0, then stocks are undervalued because new businesses can’t be created at as cheap a price as they can be bought in the open market. In the short run, this ratio is volatile as shown below but it tends to be mean reverting, which is critical. As long as capitalism is a going concern, “Q” should mean revert to 1.0. If so, then oh, oh what a “Q”! Today’s Q ratio has almost never been lower and certainly not since WWII, implying extreme undervaluation, as seen in Chart 1.
Another long-term standard of valuation comes from the good ol‘ P/E ratio, where earnings per share, or E, is compared as a function of P, or price. Chart 2, going all the way back to 1871, shows the same relatively massive undervaluation, not only in the U.S. but elsewhere. This has been a global bear market. Yet here one should be careful. The sage of rationality, Yale’s Robert Shiller, cautions us to look at earnings on an historical 10-year moving average to remove adverse or fortuitous cyclicality. When measured on this basis, P/E’s are cheap but less so, slightly below their mean average for the past century.
Professor Shiller may be on to something, although even his 10-year approach may not be enough to adjust for our future economy and its functioning within the context of a delevering as opposed to a levering financial system. Recent Investment Outlooks and indeed, discussions in PIMCO’s Investment Committee and Secular Forums for the past several years have pointed to the necessity to view current changes as not only non-cyclical, but non-secular. They are, in fact, likely to be transgenerational. We will not go back to what we have known and gotten used to. It’s like comparing Newton and Einstein: both were right but their rules governed entirely different domains. We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people’s money. Welcome to a new universe stock market investors! In this rather “sheepish” as opposed to “brave” new world, here are some considerations that may affect Q ratios, P/E’s, and ultimately stock prices for years to come:
Corporate profits have been positively affected for at least the past several decades by several trends that appear to be reversing. Leverage and gearing ratios – the ability of companies to make money by making paper – are coming down, not going up. In addition, the availability of cheap financing – absent government’s checkbook – will likely not return. Narrow yield spreads and low real corporate interest rates are gone. Last, but not least, the historical declines of corporate tax rates, shown graphically in Chart 3, will not likely continue downward in a Democratically-dominated Washington.
Globalization’s salutary growth rate of recent years may now be stunted. While public pronouncements from almost all major economies affirm the necessity for increased trade and policy coordination, and avoiding the destructive tendencies of one-off currency devaluations as a local remedy for global problems, investors should not bank on the free trade mentality of recent years to support historic growth rates. Already we are seeing separate ad hoc policy responses with very little cooperation. Not only does the EU’s approach differ from that of the U.S., but France is in many ways an odd man out within its own community. Asia is legitimately suspicious of any U.S. endorsed approach given the failure of America’s capitalistic model.
Animal spirits, and with them the entrepreneurial dynamism of risk-taking has likely experienced a body blow. Not only have dancers on the financed-based dance floor been shown the exit à la Chuck Prince, but those that remain have been publicly chastened and handcuffed. Golden parachutes, options, executive compensation and bonuses themselves are now at risk. Care to climb to the throne of this new world? Well, yes, egos will always dominate, but the rules will be changed and hormone levels lowered.
The benevolent fist of government is imperative and inevitable, but it will come at a cost. The champion of free enterprise, Ronald Reagan, knew that growth of the private sector was in no small way dependent on deregulation and the lowering of tax rates. Now that those trends have necessarily come to an end, no rational investors should expect innovation and productivity to be unaffected. Profit and earnings per share growth will suffer.
My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5,000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well. One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks, but that’s a story for another Investment Outlook.
William H. Gross
Managing Director
Well, fools rush in. This time though I’m definitely older and maybe a little bit wiser. No magic number, nor a specific target date from the Swami of the Dow. This one will be more conceptual, but still present a “take” that you can criticize or damn with faint praise. And no, despite the title, it doesn’t imply that the stock market is headed to 5,000 and that I was always right or just a little bit early. It only suggests that I’m readdressing the critical topic of equity valuation – that mysterious fragile flower where price is part perception, part valuation, and part hope or lack thereof. Press on, Swami.
Let me first announce a fundamental premise with which I think all rational investors would agree: I believe in stocks for the long run – but only if purchased at the right price. That statement packs a real punch. It says that capitalism is and will remain a going concern, that risk-taking – over the long run – will be rewarded, but only from a starting price that correctly anticipates the economy’s growth and its share of after-tax corporate profits within it. Acknowledging the above, let’s look at a few basic standards of valuation that historically have stood the test of time, to see if at least the price is right.
One of them is what is known as the “Q” ratio, or the value of the stock market relative to the replacement cost of net assets. The basic logic behind “Q” is that capitalism works. If the “Q” is above 1.0, then the market is valuing a company at more than it costs to reproduce it; stock prices should fall. If it is below 1.0, then stocks are undervalued because new businesses can’t be created at as cheap a price as they can be bought in the open market. In the short run, this ratio is volatile as shown below but it tends to be mean reverting, which is critical. As long as capitalism is a going concern, “Q” should mean revert to 1.0. If so, then oh, oh what a “Q”! Today’s Q ratio has almost never been lower and certainly not since WWII, implying extreme undervaluation, as seen in Chart 1.
Another long-term standard of valuation comes from the good ol‘ P/E ratio, where earnings per share, or E, is compared as a function of P, or price. Chart 2, going all the way back to 1871, shows the same relatively massive undervaluation, not only in the U.S. but elsewhere. This has been a global bear market. Yet here one should be careful. The sage of rationality, Yale’s Robert Shiller, cautions us to look at earnings on an historical 10-year moving average to remove adverse or fortuitous cyclicality. When measured on this basis, P/E’s are cheap but less so, slightly below their mean average for the past century.
Professor Shiller may be on to something, although even his 10-year approach may not be enough to adjust for our future economy and its functioning within the context of a delevering as opposed to a levering financial system. Recent Investment Outlooks and indeed, discussions in PIMCO’s Investment Committee and Secular Forums for the past several years have pointed to the necessity to view current changes as not only non-cyclical, but non-secular. They are, in fact, likely to be transgenerational. We will not go back to what we have known and gotten used to. It’s like comparing Newton and Einstein: both were right but their rules governed entirely different domains. We are now morphing towards a world where the government fist is being substituted for the invisible hand, where regulation trumps Wild West capitalism, and where corporate profits are no longer a function of leverage, cheap financing and the rather mindless ability to make a deal with other people’s money. Welcome to a new universe stock market investors! In this rather “sheepish” as opposed to “brave” new world, here are some considerations that may affect Q ratios, P/E’s, and ultimately stock prices for years to come:
Corporate profits have been positively affected for at least the past several decades by several trends that appear to be reversing. Leverage and gearing ratios – the ability of companies to make money by making paper – are coming down, not going up. In addition, the availability of cheap financing – absent government’s checkbook – will likely not return. Narrow yield spreads and low real corporate interest rates are gone. Last, but not least, the historical declines of corporate tax rates, shown graphically in Chart 3, will not likely continue downward in a Democratically-dominated Washington.
Globalization’s salutary growth rate of recent years may now be stunted. While public pronouncements from almost all major economies affirm the necessity for increased trade and policy coordination, and avoiding the destructive tendencies of one-off currency devaluations as a local remedy for global problems, investors should not bank on the free trade mentality of recent years to support historic growth rates. Already we are seeing separate ad hoc policy responses with very little cooperation. Not only does the EU’s approach differ from that of the U.S., but France is in many ways an odd man out within its own community. Asia is legitimately suspicious of any U.S. endorsed approach given the failure of America’s capitalistic model.
Animal spirits, and with them the entrepreneurial dynamism of risk-taking has likely experienced a body blow. Not only have dancers on the financed-based dance floor been shown the exit à la Chuck Prince, but those that remain have been publicly chastened and handcuffed. Golden parachutes, options, executive compensation and bonuses themselves are now at risk. Care to climb to the throne of this new world? Well, yes, egos will always dominate, but the rules will be changed and hormone levels lowered.
The benevolent fist of government is imperative and inevitable, but it will come at a cost. The champion of free enterprise, Ronald Reagan, knew that growth of the private sector was in no small way dependent on deregulation and the lowering of tax rates. Now that those trends have necessarily come to an end, no rational investors should expect innovation and productivity to be unaffected. Profit and earnings per share growth will suffer.
My transgenerational stock market outlook is this: stocks are cheap when valued within the context of a financed-based economy once dominated by leverage, cheap financing, and even lower corporate tax rates. That world, however, is in our past not our future. More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner. Dow 5,000? We don’t have to go there if current domestic and global policies are focused on asset price support and eventual recapitalization of lending institutions. But 14,000 is a stretch as well. One only has to recognize that roughly 20% of bank capital is now owned by the U.S. government and that a near proportionate share of profits will flow in that direction as well. Better to own corporate bonds than corporate stocks, but that’s a story for another Investment Outlook.
William H. Gross
Managing Director