China may shift shares to fund pensions

--Beijing is considering transferring shares from state-owned companies to the national pension fund to help fill a gaping shortfall, the fund’s new head told the Financial Times on Friday. --Dai Xianglong, chairman of the National Council for Social Security Fund, said the government, individuals and companies all had to increase contributions if the $70bn fund was to meet the pension commitments to the country’s ageing workforce. --“In the future it is possible for a portion of domestic public state-owned shares to be transferred to the NCSSF,” said Mr Dai, a former central bank governor, in an interview. --Internal government estimates put the NCSSF’s shortfall at close to $350bn and the funding gap is expected to worsen as the population ages. The government is looking at relaxing the one-child policy to address the problem of a progressively small workforce. --The NCSSF is the largest institutional investor in Hong Kong stocks because of a policy that grants it 10 per cent of all initial public offerings by Chinese state-owned enterprises in that market. --For years the fund has lobbied to have the policy extended to companies listing in Shanghai and Shenzhen. --The appointment of a politician as senior as Mr Dai, who most recently served as mayor of the port city of Tianjin, is seen as a boost to the fund's clout in the bureaucracy. --The fund receives money directly from central government, sales of lottery tickets, its share of Hong Kong IPOs and returns on investments. --Mr Dai did not say whether the NCSSF would get a portion of the shares of listed state companies or only those that carry out IPOs in the future. He did not address the issue of opposition to the plan from state-owned enterprises or other interests. --The transfer of shares to the NCSSF from parent companies of listed firms would act as a stabilising force in the domestic stock market at a time when the lock-up on huge volumes of state-owned shares is expiring and share prices have fallen 30 per cent from highs reached in October last year.

AIG Q4 2007

--loss 5.3 bil, driven by After Tax writeoff of $7.23 bil in unrelized super senior CDS in Financial service operation capital market business (AIGFP) --exposure: 116 bil by the end of 2007 --1 tril asset, 95.8 bil equity evaluations --AA, 10 y 210 bps --AA, 10y 6.9 12/2017, 280 bps --5y, 10y 170 bps, 5y 180. comments/strategy --market will continue to deteriorate until Q2. buy 10y (6.9%) + long 5y CDS --or long 10y bond directly. large company diversified business, 6 bil profit in 2007, enough cushion to avoid a default.

Sprint loss $29.7 bil in Q4

-- Sprint Nextel Corp., the third-biggest U.S. wireless carrier, posted a $29.5 billion loss andscrapped its dividend after writing down most of the NextelCommunications Inc. acquisition from two years ago. --reasons: wireless: due to lower service revenues and higher SG+A expenses. --Sprint sank as much as 13 percent in New York trading andits credit-default swaps reached a record. The company reported afourth-quarter net loss of $10.36 a share. Sales fell 5.7 percentto $9.85 billion, missing analysts' estimates, and the carrierborrowed $2.5 billion under a credit line. --The writedown put Nextel's value at 80 percent less thanwhen it was acquired and the loss is the fifth-largest amongStandard & Poor's 500 Index companies since 1990. Sprint expects1.2 million subscribers to leave this quarter, as many as it lostin all of 2007. Chief Executive Officer Dan Hesse, who took overin December, said business is deteriorating. -- To win back customers, Hesse today announced an unlimited calling plan for $89.99 a month, including text-messaging andwalkie-talkie calling in addition to regular phone calls. Thatescalates a price war that started last week, when bigger rivalsAT&T Inc. and Verizon Wireless unveiled $99.99 offerings. Sprintwill sell a $99.99 version with Web access, television and music. -- Big mergers often haven't provided the gains companies wereseeking, and telecommunications and media purchases have providedsome of the most stark examples. -- The $124 billion combination of Time Warner Inc. and AmericaOnline Inc. in 2001 caused $100 billion in writedowns. DeutscheTelekom AG, Europe's biggest phone company, took 21.4 billioneuros ($32.5 billion) of writedowns in 2002 to cut the value ofmobile-phone assets. Vivendi SA wrote down the value of mobile-phone assets. Vivendi SA wrote down the value ofentertainment, TV and music units by 18.4 billion euros for 2002. -- Sprint's $2 billion of 8.75 percent bonds due in 2032 fellabout 12 cents to 82 cents on the dollar, according to Trace, thebond-price reporting system of the Financial Industry RegulatoryAuthority. The debt yields 10.9 percent, or 632 basis points more -- Credit-default swaps tied to Sprint's bonds soared to thehighest on record, a signal that debt-market investors aregrowing concerned about the company's ability to repay its debt.The contracts climbed 206 basis points to 580 basis points,according to London-based CMA Datavision. --The company said that the charge would not affect future cash flows and did not cause it to break any of its debt covenants. --expect: layoff

latest acronym VIEs for WS notoriety

--The latest source of concern is variable interest entities (VIEs), another three-letter acronym that now holds toxic properties. This follows the failure of municipal auctions, known as auction rate securities (ARS) in recent weeks, while collateralised debt obligations and (CDOs) collateralised loan obligations (CLOs) continue to loom over the balance sheets of banks and investors. --VIE is an accounting term that covers a multitude of activities in almost any kind of special purpose vehicle – from conduits and structured investment vehicles (SIVs) to individual CDOs themselves. The term VIE refers to the way in which a bank’s economic exposure to a vehicle can change, which is key to whether it can be kept off-balance sheet. --Accounting for VIEs has been increasingly in the spotlight since US banks began to reveal more details about their exposure to various vehicles, such as the asset-backed commercial paper conduits used to fund investment in mortgage-backed bonds and other structured debt --For example, Citigroup shocked investors when it took $11bn writedowns, much of which was on $25bn of previously off-balance sheet exposures. --According to analysts at CreditSights, banks could still face $88bn in extra losses linked to writing down the value of their VIEs, excluding any provisions already in place against monoline exposures.

Insight: True impact of mark-to-market on the credit crisis - FT

Back in April 1993 the eyes of the world were on the beseiged Balkan town of Srebrenica, which the UN declared a safe haven for Bosnian muslims, and on Northern Ireland, where secret talks between leaders from rival factions kick-started a tentative peace process. In the same month, a less-noticed development saw US accountancy regulators approve a rule that paved the way for today’s widespread use of mark-to-market accounting standards. This rule, which forced US banks to carry more securities at market value, emerged from the wreckage of the US savings and loan crisis when losses on loans had been hidden by the use of “historic cost” accounting. Only now, in the middle of a global credit crisis, is the impact of the broad introduction of mark-to-market accounting becoming clear. The critical concerns are around how much these changes helped to inflate the credit bubble and whether they will increase the speed and destructive power of its collapse. To be fair, the US banks protested at the outset that the move would change their role in the economy. So did the French banking federation before similar changes came to Europe in 2005. It warned that fair-value accounting “could even further increase the euphoria in a financial bubble or the panic in the markets in a time of crisis”. Tobias Adrian, an economist at the New York Fed, and Hyun Song Shin of Princeton University, have produced a string of work about this kind of “pro-cyclicality” in finance and the economy, culminating in a paper last September entitled Liquidity and Leverage. This paper examines the links between asset prices and the value of banks’ capital bases when mark-to-market accounting is used. It postulates that banks are driven to lend more and grow their balance sheets as the value of their capital rises. This is because they target a more or less constant leverage multiple on their balance sheets. The paper concludes it was inevitable that an industry buoyed by rising asset prices would pursue increasingly aggressive lending growth. This pushed credit upon ever more risky clients and loan structures, which then fed into asset price growth. This of course added more fuel to the fire – or created “positive feedback loops”. The most disturbing conclusion is that this system should behave in exactly the same way in reverse, creating “negative feedback loops” with a destructive impact on all kinds of asset values – from structured finance to house prices and equities. In a way this is nothing new – the old adage about a banker is that he gives you an umbrella when it is sunny and asks for it back when it starts to rain. But there are two important differences. First, fair-value accounting will speed up the process. One of Adrian and Hyun’s conclusions is that it was the speed of balance sheet expansion that caused the most blatant excesses of US mortgage lending. Second – this isn’t mentioned in the paper – there is the impact of securitisation, the practice of converting illiquid individual loans into saleable securities. This accelerated the speed at which banks could increase lending because it reduced the amount of capital needed for each new loan. It was so widely adopted because of the way it turbo-charged returns on capital. Banks’ use of pseudo off-balance-sheet vehicles to house securitised bonds further boosted this process, particularly from 2005 onwards, as can be seen in the asset-backed commercial paper market. What we will see over the remainder of this year is an ongoing painful reduction of capital values and leverage levels throughout the economy, centred around banking. Investors need to believe this re-adjustment has at least stabilised before they will return. Each new wave of price falls in leveraged loan markets or asset-backed securities markets – and each post-earnings restatement of losses from the likes of AIG, Credit Suisse or whoever is next – illustrates that the prognosis is not good either for the financial world or the wider economy. The lesson for regulators is that the solution to one problem almost always contains the seeds of another.

New Monkey, Same Backs

--A new round of higher debt costs confronts some states and cities as another usually humdrum part of the credit markets runs into trouble. This time, the culprits are variable-rate demand notes. And banks that guarantee they will act as buyers of last resort face something they never expected -- having to purchase many of them at once. --Variable-rate demand notes let issuers borrow for long periods -- but at short-term interest rates. Like auction-rate securities, interest payments adjust on a weekly or even daily basis. The difference is that for variable-rate demand notes, securities firms sell the debt at whatever interest rate meets the market's demand. --The problem: Just like many issuers of auction-rate securities whose interest costs soared after auctions for some of their debt failed, an increasing number of municipalities are being hit with sharply higher interest on their variable-rate demand notes because dealers of the debt are having trouble selling it. --Last week, rates on $300 million of California's variable-rate demand notes rose to 8.25% from 2% the previous week. "This is an amazing confluence of problems that no one expected to happen," California Deputy Treasurer Paul Rosenstiel said. --"The entire floating-rate [municipal bond] market is in disarray," said Michael J. Marz, vice chairman at First Southwest Co., a Dallas financial adviser to governments and municipalities. There are about $500 billion of variable-rate demand notes in the market compared with an estimated $330 billion of auction-rate securities --In the auction-rate market, when auctions fail to generate enough bidders, investors are stuck holding investments they can't cash out of. With variable-rate demand notes, securities firms unable to sell the debt -- as has been happening for the past couple of months -- have the right to essentially turn the bonds over to a bank that has guaranteed to buy them. --With limited room on their balance sheets to hold the ballooning inventory of variable-rate demand notes, firms such as Bear Stearns Cos., Lehman Brothers Holdings Inc. and Morgan Stanley have bounced bonds back to "backstop" banks or notified them that they may do so in coming days and weeks if their sales efforts continue to founder. --The largest participants in the backstop business include Bank of America Corp., J.P. Morgan Chase & Co., Citigroup Inc. and State Street Corp. Also, Depfa Bank of Dublin and several other European banks have a sizable presence. --"We as a community can't be warehousing all the risk" of holding inventory of these assets on the balance sheet," said a treasurer at one broker dealer that expects to sell back some bonds to liquidity backstop banks. As the end of the first quarter nears, many firms that once supported the market by buying and holding the notes are being extra cautious and trimming their fixed-income inventories, a municipal-bond banker said. --When the backstop banks buy the bonds, the debt turns into so-called bank bonds. The interest payment rises to the prime rate -- or an amount even higher than the prime rate, now 6%.

Freddie Mac Q4

--Freddie Mac, the second-largestsource of money for U.S. home loans, posted a record $2.45billion loss for the fourth quarter as rising mortgage defaultssent credit costs soaring. The net loss, which amounted to $3.97 a share, widened from$401 million, or 73 cents, a year earlier, the McLean, Virginia-based company said in a statement distributed by PRNewswiretoday. --Government-chartered Freddie Mac and the larger Fannie Mae,which account for 45 percent of the $11.5 trillion residentialhome loan market, are posting their biggest-ever losses as homeforeclosures and tumbling housing prices increase costs on themortgages they buy and guarantee. Chief Economist Frank Nothafttold investors in London yesterday that home prices will slidethrough 2009 and a recession is more likely. --Freddie Mac warned investors in December that fourth-quarter losses would resemble the record, third-quarter net lossof $2.02 billion as the company's default rate rose to as highas 3.5 percent, or the worst since 1991. --Bank seizures of U.S. homes almost rose 90 percent to45,327 last month from the same period a year ago, according toRealtyTrac Inc., a seller of foreclosure statistics that has adatabase of more than 1 million properties. Total foreclosure filings, which include default and auction notices as well asbank seizures, increased 57 percent. More than 233,000 properties were in some stage of default last month, RealtyTracsaid in a statement yesterday.

Cap for Fannie and Freddie lifted

-- U.S. regulators for Fannie Mae andFreddie Mac removed limits on the companies' $1.5 trillion mortgage portfolios, bringing an end to a restriction that stifled their ability to provide financing for the housing market. --The caps, imposed in 2006 after the two largest mortgage finance companies uncovered $11.3 billion of accounting errors,will end on March 1, the Office of Federal Housing EnterpriseOversight said in a statement today. Ofheo kept in place arequirement for the companies to hold extra capital. --Fannie Mae of Washington and McLean, Virginia-based FreddieMac account for 45 percent of the $11.5 trillion residential mortgage market and were created to help expand homeownershipand to provide market stability. They make money by holding mortgage assets and on guarantees of securities they create outof loans from lenders.

VIE loss for US banks

The new source of potential losses: so-called variableinterest entities that allow financial firms to keep assets suchas subprime-mortgage securities off their balance sheets. VIEsmay contribute to another $88 billion in losses for banks roiledby the collapse of the housing market, according to bond researchfirm CreditSights Inc. Goldman, which hasn't had any of theindustry's $163 billion in writedowns, said last month it mayincur as much as $11.1 billion of losses from the instruments.

Citi Q4

exposure --$37.3 bil direct net exposure ($8 bil subprime in lending and structuring business, $29 bil super senior CDO) --$967 bil adjustment in exposure to monoline --$43 bil leverage loan ($22 bil funded, $21 unfunded), $1.5 bil loss --$20 bil commercial real estate, level 3 --credit for Falcon funds increased asset by 10 bil --of $121.8 bil consolidated VIE, $58.5 bil are SIVs and $22.3 bil are CDOs --incurred $22.1 billion in losses from the subprime crisis, has $320 billion in ``significant unconsolidated VIEs,'' --expecct broad asset sale, either prime mortgage loan book or retail banks --rising credit cost due to market deterioration --growth from overseas except Japan

Discount to Priceless -- Can Visa Make Money?

--Credit-card issuers entice customers to use their cards by promising freebies and cash back. Visa seems to be thinking along the same lines for its initial public offering. The $18.6 billion price tag for half the company values it at a significant discount to rival MasterCard -- 20% or more on a trailing price-to-earnings ratio basis after accounting for Visa's planned litigation reserve. While credit-card businesses have some immunity from credit conditions, a weak economy and tightening by lenders are likely to drag on both card giants' growth. --As intermediaries, Visa and MasterCard get a fee whenever someone swipes their cards. They don't make loans and aren't responsible if a borrower defaults. That is why they aren't exposed to bad loans in the way big banks are. That also is arguably why Visa can press ahead with its IPO in the current environment. --Still, the banks that do issue the cards and extend credit are belt-tightening. Citigroup, the third-largest card issuer, recently reduced credit lines for borrowers in California, Florida and other states where the subprime-mortgage crisis has hit hard. Such moves, together with weakening economic conditions, are likely to crimp consumers' access to credit-card debt, which would naturally slow their spending. --Of course, the U.S. economy isn't everything -- roughly 30% of Visa's business is with non-U.S. issuers. And the use of debit cards, which don't come with credit worries, also is growing. Still, investors in a Visa IPO can't realistically expect the kind of transaction-volume growth that fueled a nearly 400% rise in MasterCard's stock price since it went public in 2006. In that context, Visa's enticingly discounted valuation makes sense.

Crunch Capitalism: No Holds Barred -- Gone With Easy Credit Is Street's Collegiality; 'Law of the Jungle' Now

--Wachovia's attempt to extract itself from financing the sale of local Clear Channel television stations is the latest example of how the credit crunch has turned the once "trusted partners" into legal adversaries. --Other cases abound: In the troubled auction-rate securities market, banks have stopped providing support that customers once expected. In the market for collateralized debt obligations backed by subprime mortgages, lawsuits are brewing over the rights of different classes of investors. And in the world of buyouts, banks have been thrown into contention with each other and with private-equity clients. --It's the law of the jungle now," says Herald L. Ritch, a former co-head of mergers and acquisitions at Citigroup and DLJ and current president and co-CEO of Sagent Advisors, a boutique advisory firm. "It has become less and less relationship-oriented and more transactional. In the old days your word was your bond on Wall Street." --Wall Street is flush with many other examples of an increasingly cut-throat environment. In November, UBS asked a federal court in New York to free it from a commitment to finance Finish Line Inc.'s $1.5 billion deal to acquire shoe retailer Genesco Inc. In some cases, banks are going against each other. Last month, Credit Suisse Group angered other bankers when it broke from a group of banks lined up to sell $7.25 billion in loans tied to a buyout of Harrah's Entertainment Inc. by private-equity funds.

Discrepancies between HY firms' equity and bonds - which is right - from WSJ

-- Goodyear Tire & Co.'s stock climbed14 percent in the past six weeks, while U.S. Steel Corp. gained7 percent. Both shares rallied as their junk-rated bonds dropped. --During the past decade, a retreat in high-yield debt has foreshadowed every decline of at least 10 percent in the Standard & Poor's 500 Index. This time bonds may be wrong, andstocks may prove more prescient, signaling corporate profits canwithstand $162 billion in banks' credit writedowns and a slowingeconomy. --Shares of the 691 U.S. companies with non-investment gradebond ratings have climbed 5.3 percent in the past month,according to data compiled by Bloomberg. That compares with a5.2 percent increase in the yield investors demand to own high-yield bonds rather than U.S. Treasury notes, according to anindex of 892 issuers compiled by Merrill Lynch & Co. --Credit-default swaps, or contracts used to hedge againstthe risk a company will be unable to repay its debts, indicatethat 9 percent of junk-rated companies may default in the next12 months, according to MFS's Swanson, a former high-yield bondspecialist who has worked for the Boston-based company for 22years. That's almost double the rate that Moody's expects in2008.

US Earnings Outlook -- FT

--When an economic rough patch looms, optimists visualise a V-shaped chart, with a sharp drop followed immediately by a vigorous bounce back. Such psychology is reflected in profit forecasts for the S&P 500. Earnings probably fell by 21 per cent year on year in the fourth quarter of 2007, according to Thomson Financial. Come the third quarter of 2008, however, and we shall apparently be back to the races, with growth of almost 19 per cent. Increasing earnings is easier once they have been massacred. Financials have just absorbed huge writedowns, so a second-half rebound in 2008 looks plausible. Optimism elsewhere, however, looks overdone. As Citigroup points out, stripping out the financials, S&P 500 earnings expanded by 10 per cent in the fourth quarter – so no easy comparator there. In 2008 the non-financial sectors of the S&P 500 are forecast, in aggregate, to expand earnings at a racy 13 per cent. --More than two-thirds of that gain is expected to come from consumer discretionary, energy, industrials, and IT. The first of these sectors, however, is dealing with falling house prices and bad debt problems. For energy, it is unlikely oil price gains will outpace industry cost inflation this year while refiners will be hurt by falling US demand for fuels. As for the other sectors, it is a stretch to think capital spending will save the day when credit is tight and consumption growth is slowing. There may be a lag as order backlogs are worked off but new demand will probably slow. The jury is out on whether overseas growth can weather a US slowdown. The backdrop is that corporate profits relative to US gross domestic product are already at a four-decade high. Believing that they will rise further, by recording another year of outsized earnings growth in the midst of a slowdown, looks untenable. Expect expectations to be reined in this summer.

Auction Market Turmoil Draws Watchdogs' Scrutiny

--Regulators and lawyers are closely watching the collapsing auction-rate-securities market, which has a history of regulatory trouble, to assess damage and consider actions on behalf of investors or issuers who claim they didn't understand what could go wrong. --A pile of failed auctions is mounting in this market, in which issuers like municipalities, museums, schools, closed-end mutual funds and others raise long-term debt with short-term interest rates. Auctions reset the interest payments on the bonds every seven to 35 days, but they're failing to draw investor interest. --As the problem balloons, the implications for investors, issuers and auction dealers are coming into focus, and there may be a bit of deja vu. Eighteen months ago, regulators rapped the knuckles of Wall Street firms for intervening in the market without disclosing to investors that they could do so. --The Securities and Exchange Commission settled with 15 broker-dealers of auction rate securities and three auction agents after investigating their involvement in the auction market from 2003 to 2004. The allegation at the time was that they prevented the auctions from resetting at fair market interest rates by bidding in these auctions themselves without disclosing their involvement.

CPDO

--They offered a supposedly safe stream of income to investors by selling default protection on all of the companies in either the iTraxx or the CDX, or in some cases on a basket of financial firms that included bond insurance companies. But they had a flaw: They used borrowed money, or leverage, to increase the returns they could provide to investors -- a strategy that also magnifies losses. They also contain triggers that force them to call off their bets if losses reach a certain level, a feature that can force them to rush into the market to buy insurance just when the market is falling. --it is similar to floating rate notes, a premium plus a floats.

Buy Tips Short Cah Bonds

--Rather than buy U.S. TIPS outright, bond-fund firm Pimco, a unit of German insurer Allianz SE, advises a trade of buying inflation-protected securities and selling cash, or nominal, bonds. The reason behind this strategy: Treasury prices have risen sharply in the past few months as the subprime mortgage turmoil has fueled flight-to-quality flows. Yields, which move inversely to prices, have been pushed down to very low levels. --"U.S. Treasurys yields are too low. Therefore to hold linkers outright could be a bit risky," said John Brynjolfsson, a managing director who is part of the team that runs the $13.180 billion Real Return Fund at Pimco. By holding the TIPS versus a short position in nominals, investors can lock in the difference in yields in the linkers and the nominals, known as the break-even, said Mr. Brynjolfsson. "You could profit quite a bit if inflation flares up." --TIPS are tied to the headline consumer price index, which rose 4.3% on a year-to-year basis, matching the biggest increase since September. --In the past decade, the global market for inflation-linked products has surged to $1.3 trillion from $103 billion in February 1997, according to data from Barclays Capital Inc. The U.S. captures the biggest share, with a size of $493 billion, followed by $351 billion in the euro zone and $306 billion in the United Kingdom, according to Barclays.

Washington Shelve the 3Com Deal

--A closely watched Chinese investment in a U.S. network-technology company has fallen to political pressure in Washington, revealing new limits for deal makers who expected foreign buyers to invigorate a fallow deal market --The tech company, 3Com Corp., which agreed in September to be acquired by private-equity firm Bain Capital LLC and China-based Huawei Co. for $2.2 billion, said the three had withdrawn an application from the Committee on Foreign Investment in the U.S., or CFIUS, a 12-agency government panel that reviews the national-security implications of foreign-led deals. The decision signaled the government likely wouldn't have approved the deal, according to people familiar with the matter, fearing that Huawei's influence could put government secrets at risk. --The reverberations of the decision could be significant for deal makers, who are increasingly reliant on foreign capital for acquisitions as the debt-fueled buyout cycle has petered out. U.S. authorities have allowed banks, including Citigroup Inc. and Bear Stearns Cos., to accept billions of dollars in Chinese and other foreign funds to help shore up their balance sheets in the wake of the credit crisis. But the rejection of the 3Com transaction is a clear rebuke of Chinese designs on U.S. technology companies in some sensitive industries. --"There will be tremendous repercussions in China because of this," said Dan Harris, a Seattle lawyer who represents U.S. clients in China. "We should not be ignoring the impact that this might have on our own companies trying to do business over there." --The real pushback came from Washington, where the deal faced sharpened scrutiny over concerns about Huawei's ties to the Chinese government. Worries grew within the Bush administration, especially among security officials with a role in CFIUS. The proposed deal was given elevated attention and put through a 45-day investigation, beyond the standard 30-day review conducted by CFIUS. --Bain and Huawei said they would be willing to sell the 3Com unit that handles the government security contracts, but that wasn't enough to assuage the committee's concerns. --In a reflection of the tensions, a number of lawmakers on Capitol Hill stepped forward to voice alarm, most notably Michigan Rep. John Dingell, chairman of the powerful House Energy and Commerce Committee. --Mr. Dingell and Texas Rep. Joe Barton, the panel's senior Republican, put the White House on notice of the House committee's intention to probe the deal, a move that could have opened the door to an election-year debate about the economic competition posed by China and public concerns about globalization. Deals that raise national-security concerns are subject to review by CFIUS, which is led by the administration; this would have been a House-committee probe. In a letter sent to the administration in early February, the lawmakers said there was a "growing apprehension" in Congress about the wisdom of going forward with the transaction. --According to people familiar with the matter, the companies involved couldn't come to terms with the Bush administration on the details of a so-called mitigation agreement, which is meant to satisfy the government's security concerns. The request for CFIUS approval of the deal was pulled toward the end of the panel's 45-day investigation, individuals familiar with the matter said. --"China has lots of cash. American companies are in need of cash," Mr. Hunter said. "There's going to be a continuing conflict, between American security interest and the desire for ready cash. You're going to see this more and more."

Fears of Stagflation Return As Price Increases Gain Pace

--The U.S. faces an unwelcome combination of looming recession and persistent inflation that is reviving angst about stagflation, a condition not seen since the 1970s. --Inflation is rising. Yesterday the Labor Department said consumer prices in the U.S. jumped 0.4% in January and are up 4.3% over the past 12 months, near a 16-year high. Even stripping out sharply rising food and energy costs, prices rose 0.3% in January, driven by education, medical care, clothing and hotels. They are up by 2.5% from the previous year, a 10-month high. --Stagflation, a term coined in the United Kingdom in 1965, defined the years from 1970 to 1981 in the U.S. Inflation rose to almost 15%. The economy went through three recessions. Unemployment reached 9%. Fed Chairman Paul Volcker finally conquered inflation, but only by dramatically boosting interest rates, causing a severe recession in 1981-82. Today's circumstances are far from that. Inflation is lower. Unemployment has risen, but only to 4.9%. --Yet there are similarities. As in the 1970s, surging commodity prices are leading the way. Crude oil rose to $100.74 a barrel yesterday, a new nominal high and close to its 1980 inflation-adjusted high. Wheat prices have hit a record. And, as in the 1970s, the rate at which the U.S. economy can grow without generating inflation has fallen, because of slower growth in both the labor force and in productivity, or output per hour of work. --The biggest difference is that in the 1970s, the Fed was unwilling, or thought itself unable, to bring inflation down. The Fed today sees achieving low inflation as its primary mission. --The only generally agreed period of stagflation in the U.S. came in the 1970s. Its seeds were planted in the late 1960s, when President Johnson revved up growth with spending on the Vietnam War and his Great Society programs. Fed Chairman William McChesney Martin, meanwhile, failed to tighten monetary policy sufficiently to rein in that growth. --In the early 1970s, President Nixon, with the acquiescence of Fed Chairman Arthur Burns, tried to get inflation down by imposing controls on wage and price increases. The job became harder after the Arab oil embargo dramatically drove up energy prices, and overall inflation, in 1973. Mr. Burns persistently underestimated inflation pressure: In part, he did not realize the economy's potential growth rate had fallen, and that an influx of young, inexperienced baby boomers into the work force had made it harder to get unemployment down to early-1960s levels. --As a result, even when he raised rates, pushing the economy into a severe recession in 1974-75, inflation and unemployment didn't fall back to the levels of the previous decade. Mr. Burns and his colleagues wrongly concluded inflation no longer responded to the condition of the economy, said Ms. Romer, the Berkeley economist. "They didn't know how the world worked," she said.

Can Fed Head the danger off

Can the Fed head this danger off? In a subsequent piece, Prof Roubini gives eight reasons why it cannot***. (He really loves lists!) These are, in brief: US monetary easing is constrained by risks to the dollar and inflation; aggressive easing deals only with illiquidity, not insolvency; the monoline insurers will lose their credit ratings, with dire consequences; overall losses will be too large for sovereign wealth funds to deal with; public intervention is too small to stabilise housing losses; the Fed cannot address the problems of the shadow financial system; regulators cannot find a good middle way between transparency over losses and regulatory forbearance, both of which are needed; and, finally, the transactions-oriented financial system is itself in deep crisis. The risks are indeed high and the ability of the authorities to deal with them more limited than most people hope. This is not to suggest that there are no ways out. Unfortunately, they are poisonous ones. In the last resort, governments resolve financial crises. This is an iron law. Rescues can occur via overt government assumption of bad debt, inflation, or both. Japan chose the first, much to the distaste of its ministry of finance. But Japan is a creditor country whose savers have complete confidence in the solvency of their government. The US, however, is a debtor. It must keep the trust of foreigners. Should it fail to do so, the inflationary solution becomes probable. This is quite enough to explain why gold costs $920 an ounce. The connection between the bursting of the housing bubble and the fragility of the financial system has created huge dangers, for the US and the rest of the world. The US public sector is now coming to the rescue, led by the Fed. In the end, they will succeed. But the journey is likely to be wretchedly uncomfortable.

Credit Suisse Undoes the Good Work

--the discovery of significant losses on trading positions shatters Credit Suisses carefully reconstructed reputation for risk management --market-downs $2.85 bil, a serious dent in Q108 earnings, $1 billion on net profit --this appears to be an isolated problem but news taht the internal review is continuing raises the possibility that futhre losses could be found. --subordinate debt will be repriced at 237.5 + T from 212.5 + T

Distress Ratio of HY Bonds Rose

--More than one in five high-yield U.S. corporate bonds are now considered distressed, about the same ratio as in the months preceding a recession that began seven years ago, according to Merrill Lynch & Co. --The percentage of speculative-grade bonds that are distressed, meaning they have yields of at least 1,000 basis points more than benchmark rates, rose to 20.9 percent as of Feb. 15, Merrill Lynch analysts led by Christopher Garman in New York said today in a report. A basis point is 0.01 percentage point. --Real estate, paper, publishing, gaming and retail companies account for 40 percent of distressed companies, according to the report, as the worst home sales market since 1981 slows the U.S. economy and banks restrict lending to high-risk borrowers. High- yield, or junk, bonds are those rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's. ``With distress normally leading defaults by about three quarters, we might expect to see a 7.1 percent reading on Moody's global issuer scale by October 2008 based solely on this relationship,'' the analysts wrote. The last recession started in March 2001 and lasted until that November, according to the National Bureau of Economic Research. The U.S. distress ratio is close to levels from the third quarter of 2000, the Merrill Lynch analysts said. Asia is the most distressed region, with 28.4 percent of bonds offering spreads of more than 1,000 basis points, according to the report. In Europe, 26.5 percent of bonds are distressed. Default Rate Forecast The default rate for high-yield bonds will rise ninefold this year from 2006, according to a report Feb. 6 from Edward Altman, the New York University professor who created the Z-score mathematical formula that measures a company's bankruptcy risk. Altman predicted 4.64 percent of the $1.1 trillion in junk bonds outstanding will default this year, up from 0.51 percent at the end of 2006. The December 2001 failure of Houston-based energy trader Enron was the biggest bankruptcy to date. It sparked an 11.2 percent annualized default rate the following month, according to New York-based Moody's. Spreads reached 11.2 percentage points in October 2002, the highest since at least 1996.

a PLSQL script w collections

PROCEDURE corp_process(beg_hdr_id in number, end_hdr_id in number) is type price_col is record ( dt_updated date, buy_sell char, unit_cost_local number, usd_amt_adj number ); type price_dataset is table of price_col; dataset price_dataset; price_rec corp_agg_price%rowtype; large_size_vol number; time_then NUMBER; time_now NUMBER; old_hdr_id number; lag_1_date date; lag_4_date date; -- dynamic query used in corp_base -- get newly appended trades based on hdr_id CURSOR c1 (beg_hdr_id_in CORP_BASE.hdr_id%TYPE, end_hdr_id_in CORP_BASE.hdr_id%TYPE) IS SELECT distinct hdr_id, asset_id, trade_dt FROM SBFI.CORP_BASE -- FROM TEST_CORP_BASE WHERE hdr_id between beg_hdr_id_in and end_hdr_id_in and asset_id is not null and unit_cost_local between 1 and 200 order by hdr_id asc; -- function that can calculate weighted average proces using different criteria -- input: dataset is the data set with query resutls function return_agg_price (lag_date_in date, buy_sell_in char, size_in number, dataset_in price_dataset) return number is price_out number; min_price number; max_price number; nominator number; denominator number; begin min_price := 1000; max_price := -1000; nominator := 0; denominator := 0; price_out := null; -- calculate weighted average only for those trades passing the filter -- get max and min values FOR i IN dataset_in.FIRST..dataset_in.LAST LOOP if trunc(dataset_in(i).dt_updated) <= lag_date_in and dataset_in(i).buy_sell = buy_sell_in and abs(dataset_in(i).usd_amt_adj) >= size_in -- incase negative then if dataset_in(i).unit_cost_local > max_price then max_price := dataset_in(i).unit_cost_local; end if; if dataset_in(i).unit_cost_local <> max_price then price_out := null; end if; return price_out; end return_agg_price; begin old_hdr_id := beg_hdr_id; large_size_vol := 500000; time_then := dbms_utility.get_time; -- main loop, processing each each combination of asset_id & trade_dt FOR r1 IN c1 (beg_hdr_id, end_hdr_id) LOOP -- dbms_output.put_line ( 'loop -- asset_id:' r1.asset_id ' trade dt:' to_char(r1.trade_dt, 'YYYY MM DD')); -- blocked based commit; if r1.hdr_id != old_hdr_id then old_hdr_id := r1.hdr_id; commit; end if; -- delete formerly generated agg prices delete from corp_agg_price unlogging where asset_id = r1.asset_id and trade_dt = r1.trade_dt; lag_1_date := add_weekdays(r1.trade_dt, 1); lag_4_date := add_weekdays(r1.trade_dt, 4); -- select and calculate all values select dt_updated, buy_sell, unit_cost_local, usd_amt_adj bulk collect into dataset from sbfi.corp_base -- FROM TEST_CORP_BASE where asset_id = r1.asset_id and trade_dt = r1.trade_dt and unit_cost_local between 1 and 200; -- dbms_output.put_line ('dataset:' dataset.count); -- populate a record price_rec.hdr_id := r1.hdr_id; price_rec.asset_id := r1.asset_id; price_rec.trade_dt := r1.trade_dt; price_rec.price_all_b_0 := return_agg_price(r1.trade_dt, 'B', 0, dataset); price_rec.price_lg_b_0 := return_agg_price(r1.trade_dt, 'B', large_size_vol, dataset); price_rec.price_all_s_0 := return_agg_price(r1.trade_dt, 'S', 0, dataset); price_rec.price_lg_s_0 := return_agg_price(r1.trade_dt, 'S', large_size_vol, dataset); price_rec.price_all_b_1 := return_agg_price(lag_1_date, 'B', 0, dataset); price_rec.price_lg_b_1 := return_agg_price(lag_1_date, 'B', large_size_vol, dataset); price_rec.price_all_s_1 := return_agg_price(lag_1_date, 'S', 0, dataset); price_rec.price_lg_s_1 := return_agg_price(lag_1_date, 'S', large_size_vol, dataset); price_rec.price_all_b_4 := return_agg_price(lag_4_date, 'B', 0, dataset); price_rec.price_lg_b_4 := return_agg_price(lag_4_date, 'B', large_size_vol, dataset); price_rec.price_all_s_4 := return_agg_price(lag_4_date, 'S', 0, dataset); price_rec.price_lg_s_4 := return_agg_price(lag_4_date, 'S', large_size_vol, dataset); --quality checks, not less than min_price and no larger than max_price if price_rec.price_all_b_4 is not null or price_rec.price_all_s_4 is not null then insert into CORP_AGG_PRICE nologging values price_rec; -- else -- dbms_output.put_line ( 'fail to insert obs -- asset_id:' r1.asset_id ' trade dt:' to_char(r1.trade_dt, 'YYYY MM DD')); end if; END LOOP; commit; time_now := dbms_utility.get_time; dbms_output.put_line ( 'Finish aggregating corp prices, using Time : ' (time_now - time_then)/100 ' secs' ); end corp_process;

Think-Tank Calls fro Checks on China's Rulers

--Researchers at China’s top Communist party think-tank have called for far-reaching democratic reform to curtail corruption, wind back press censorship and make the country’s parliament more representative. --The reform blueprint is contained in a report called “Storming the Fortress: A research report on China’s political system reform after the 17th party congress”, whose authors include senior researchers at the Central Party School in Beijing. --The report says that the goal of political reform in China should not be that of “western-style general elections or a multi-party system” with press freedoms. --The authors do, however, go on to propose many reforms with a western flavour, in an effort to build a “modern civil society” and bring the political system into line with a modern and advanced economy. --A new government, which operates both under and parallel to the party leadership, will be chosen next month, at the annual session of the National People’s Congress. --The report’s contents reflect a long-standing and lively internal debate within elite policymaking circles in China on the dangers of the use of untrammelled power in a one-party state. --While questioning single-party rule is mostly taboo in public forums, leading scholars have recognised the need for formal checks on the party’s power, both through a strengthened legal system and a freer media. The report says the need for political reform is “urgent” but that liberalisation must be pursued “steadily”. --In one of the more radical recommendations, the report calls for the NPC to be made a fully representative body, with government officials gradually removed from its ranks to be replaced by people chosen by local communities. The NPC should also have a direct role in framing the budget, its sessions should be timed to coincide with the fiscal year, and competitive voting should be allowed, the report says. --The media also needed to be allowed to develop more independently of the party and its propaganda ministry, which oversees the press and dictates the news agenda. “Though the news media are under the party, which makes it impossible for them to be totally independent,” they should have some power to stand against the party and governments to fulfil their responsibilities, the report says. --The appearance of the 366-page report, which is on sale in some Beijing bookshops, where it was bought by the Financial Times, was first reported by Reuters. Other reports from the Cen­tral Party School and party bodies in recent years have pointed to systematic governance problems and grass­roots anger at corruption.

Low Rates Make Buyout Debt a Burden

--Lower interest rates may be a way to jump-start the broader economy, but right now they are serving only to further stall movement of the massive backlog of leveraged-buyout debt sitting on banks' books. --As the Federal Reserve slashes interest rates and pumps massive amounts of liquidity into strained short-term money markets, the benchmark rate off which loans are priced -- the London interbank offered rate -- has fallen sharply, from above 5% late last year to just above 3% last week. --That has forced banks to restructure new loan deals by offering investors a "Libor floor" -- a guarantee that if Libor drops any further, investors will still get a certain yield. That guarantee doesn't exist for old LBO debt. On top of that, the investor base for loans has changed -- from alternative investors immune to Libor risk to long-term investors who are more focused on real returns and hence sensitive to the ever-shrinking yields caused by Libor's decline. --For old LBO loans -- of which some $150 billion is sitting on bank balance sheets waiting to be sold -- falling Libor just adds another negative. Banks are committed to financing LBOs with debt that doesn't include Libor floors. They could go back to the private-equity firms to negotiate the addition of such floors, but there are no guarantees the firms will agree. --The backlog of LBO financing is uglier still because it is being issued by companies that already carry hefty debt loads. It also is debt that was negotiated with low risk premiums and weak covenants, or protective provisions for investors, that reflect a far more bullish time in the risky debt markets than is the case today. --"New debt is going to be structured more to today's reality. It will have wider spreads, it's much more likely to have Libor floors, more stringent prepayment provisions," said Steve Miller, managing director of Standard & Poor's Leveraged Commentary & Data unit. --On old LBO loans, banks may well just have to bite the bullet. "The only thing you can do with those," said Mr. Monteith, "is bring them at a steeper and steeper discount."

The Great D(eleveraging) -- from WSJ

--The specter of deleveraging still haunts the financial markets. Rightly so, for the removal of credit from the global economy is a process that feeds on itself. That means that the credit crunch could easily turn into something much nastier. --Before the deleveraging came the leveraging. Take the U.S. The ratio of all sorts of debt to gross domestic product rose to 342% at the end of September 2007 from 160% in 1975. Through 2000, debt increased by 2.4 percentage points a year faster than GDP. But after the turn of the millennium, the rate accelerated almost to 3.7 percentage points a year. SNOWBALL EFFECTS • When Debt Was Good: People bid more for a house because banks were willing to lend more. That helped house prices rise and gave the bank more confidence about lending yet more. So people borrowed even more and built an addition or bought a new car. • When Debt Becomes Bad: Banks decide they need to call in lines of credit. As some borrowers are forced to sell assets, prices fall. Banks get spooked by the falling value of collateral and cut back even more on lending. • How Bad is Bad? In Japan, despite massive government borrowing and five years of a near-zero interest rate on overnight borrowing, the prices of shares and real estate declined by 40% to 70%. In the U.K., house prices dropped by 40% in the early 1990s, after taking inflation into account, but share prices rose. --While it was happening, only a few sourpusses complained. Increasing debt was seen as a natural trend. As economies get richer, they have more need for debt-financed investments and inventories. But lending grew much faster after 2000 than even the most gifted apologist could explain away. It was a bubble, which has now been popped. --In a credit bubble, one thing leads to another. You can bid more for a house because banks are willing to lend more. So house prices rise, giving the banks more confidence about lending yet more. So you build an addition or buy a new car. --Multiply that by a few hundred million borrowers and presto, asset prices go up and economic growth is high. Banks rejoiced. They set up off-balance-sheet vehicles that piled on debt. Leveraged-buyout groups borrowed to take companies private; hedge funds borrowed to invest in assets. And so on. --In deleveraging, too, one thing leads to another. Start with a bank that has lost a few billion dollars on subprime mortgages. The bosses are likely to decide that troubled times call for higher capital ratios. That means calling in lines of credit. Some borrowers are forced to sell assets, pulling down prices. The banks then look at the value of their collateral and think: "Oh my god, it's not worth what we thought." They then cut their credit again -- giving another turn of the deleveraging screw. --The housing market was just the start. A series of debt mountains -- credit cards, car loans, LBO loans -- risk being leveled. The credit contraction strikes down financial arrangements that once looked solid -- from structured investment vehicles to auction-rate securities. --If the original debt helped fuel consumption, deleveraging will feed into lower economic activity. If the original debt fueled asset purchases, the consequence will be lower asset prices. There could be a dual effect because lower asset prices can make people feel poorer and less willing to spend money. This is especially the case with people's homes. --How far can this go? Historical parallels aren't terribly comforting. In Japan, a boom in the 1980s was followed by a painful deleveraging. Despite massive government borrowing and five years of a near-zero interest rate on overnight borrowing, the prices of shares and real estate declined by 40% to 70%. The U.K. did better in its deleveraging after 1990 -- house prices dropped by 40%, after taking inflation into account, but share prices rose. --Politicians and central bankers are alarmed by the rapid shift to deleveraging. There are limits to what they can do. Sharp interest-rate cuts may not be enough to make banks abandon their newfound caution in lending, especially if loan losses are rising. Higher government deficits may not help either. In a deleveraging world, the government may borrow so much it crowds out private borrowers seeking funds. --The deleveraging snowball will eventually reach the bottom of the mountain. Banks will start to see opportunities, and borrowers will become more courageous. But it could be a long and painful wait.

Somthing with Similar Contours

--One aspect of this credit crisis has a familiar ring to it. All around, investors and lenders are getting squeezed because they depended on short-term borrowing to finance long-term holdings. When their lenders get nervous, once-cheap short-term borrowing becomes dangerously expensive or disappears altogether. --Wall Street is getting trapped by short-term borrowing in different ways. Two prime examples from last year were investments known as asset-backed commercial paper and structured investment vehicles. In both cases, banks and their clients went to the short-term commercial-paper markets to raise money. They used the money to acquire long-term investments, such as mortgage debt, or to make long-term loans. When commercial-paper markets seized up, the short-term borrowing rates soured and the strategy imploded. --An old-fashioned bank run works the same way. Depositors put their money in a bank, understanding they can pull it out at a moment's notice. Banks use the money to make long-term loans to businesses or homeowners. When depositors get skittish and demand their money back, the bank has a problem: the funds are tied up for decades with customers. That is what happened to a British mortgage lender called Northern Rock last year. Now, the bank has been nationalized. --Something with similar contours is happening in the auction-rate-securities market. Municipalities, museums, student lenders and others issue these securities, which have interest rates that reset every week to 35 days. They use the money to finance projects or make student loans with long repayment periods. Investors have fled the market, and the municipalities that issue the notes have had to digest soaring interest costs. --There is nothing new about any of this. It was an ingredient in the financial crises that plagued emerging markets in the 1990s. Countries that depended on short-term debt got squeezed when investors became skittish about the miracle stories of emerging-market growth. The savings-and-loan crisis of the 1980s had its roots in a mismatch between the maturities of thrifts' long-term assets and their short-term liabilities. --The trouble is even the most sophisticated bankers have very short-term memories. Because when the strategy doesn't work, the consequences can be dire.

Leveraged Loans Inflct More Pain Globally

--Banks, already reeling from persistent losses on subprime meltdown, are facing a new hit as financial crisis spreads to deterioating corporate debts --Among U.S. banks, Citigroup Inc. has the highest volume of leveraged loans, with about $43 billion in loans or loan commitments at the end of 2007. Jeffrey Rosenberg at Banc of America Securities estimates Citigroup could write down the value of those loans by about $4.3 billion. Citigroup declined to comment. --Goldman Sachs has the second-largest U.S. portfolio, with about $36 billion in leveraged loans on its books. London research concern Atlantic Equities said Goldman may need to record a 5% write-down for the fiscal first quarter ending Feb. 29. A Goldman spokesman declined to comment. --J.P. Morgan Chase & Co. was holding about $26.4 billion in leveraged loans at the end of the fourth quarter, after shedding about $16.5 billion of the debt during the period. James Dimon, J.P. Morgan's chief executive, has said the New York bank prefers to hold some of the loans on its books as investments rather than sell them at deep discounts. --European banks will braces for pains --Upheaval in the market has led investors-owners of debt pools called collateralized-loan obligations, or CLOs, to unload loans at fire-sale prices. Like mortgage securities, leveraged loans were bundled and sold to CLOs and hedge funds. But a drop in loan prices in January contributed to borrowing triggers that resulted in hedge funds and CLOs having to sell loans. --Yesterday, the Markit iTraxx LevX Senior, an index of European leveraged-loan credit-default swaps, stood at 90.75. Indexes such as LevX have come to serve as important proxies for the value of loans or bonds, especially when a secondary trading market slows. For banks and investors, the LevX is the only tradeable index measuring the performance of the European loan market. As a result, the steep fall in the LevX, and a comparable U.S. index called the LCDX, is likely to force banks to mark down their leveraged-loan books beyond the hits suffered in last year's third quarter. --But as banks try to establish the value of the loans they hold, the process will mirror the murky pricing used with subprime securities. "There is a lot of qualitative factors and a lot of sort of massaging that the companies can do," Mr. Marinac says.

US Banks borrow $50 bn via New Fed Facility

--US banks have been quietly borrowing massive amounts of money from the Federal Reserve in recent weeks by using a new measure the Fed introduced two months ago to help ease the credit crunch. --The use of the Fed's Term Auction Facility, which allows banks to borrow at relatively attractive rates against a wider range of their assets than previously permitted, saw borrowing of nearly $50bn of one-month funds from the Fed by mid-February. --US officials say the trend shows that financial authorities have become far more adept at channelling liquidity into the banking system to alleviate financial stress, after failing to calm money markets last year. --However, the move has sparked unease among some analysts about the stress developing in opaque corners of the US banking system and the banks’ growing reliance on indirect forms of government support. --“The TAF . . . allows the banks to borrow money against all sort of dodgy collateral,” says Christopher Wood, analyst at CLSA. “The banks are increasingly giving the Fed the garbage collateral nobody else wants to take . . . [this] suggests a perilous condition for America’s banking system.” --The measure marks a distinct break from past US policy. Before its introduction, banks either had to raise money in the open market or use the so-called “discount window” for emergencies. However, last year many banks refused to use the discount window, even though they found it hard to raise funds in the market, because it was associated with the stigma of bank failure. --The Fed has not yet indicated how long the TAF will remain in place. --But the popularity of the scheme is prompting speculation the reform will stay in place as long as the financial stresses last. --Nevertheless, Mr Feroli said banks now appeared to be using the TAF instead of other funding routes, meaning that the overall level of reserves in the system was remaining constant. “The banking system certainly has its problems, however the notion that . . . banks have trouble maintaining reserves stems from a superficial reading of the Fed’s statistical reports,” he said.

08年中国股市已入高风险期 震荡将贯穿全年

--目前美国经济减速对中国出口企业的负面影响已经显现出来，近期广东已有2万至3万家大大小小的工厂倒闭，全国有20%的纺织企业出现亏损。当然这与人民币加速升值也不无关系。由于出口对中国经济拉动作用比较大，所以今年我国经济增长速度毫无疑问将会放缓。 --曹红辉, 中国社科院金融市场研究所金融研究室主任曹红辉, 指出，与1998年亚洲金融危机时情形不同，当时中国实行严格的金融管制，而现在经常项目早已开放，这使资本项目严格管制难度加大。很多热钱通过经常项目或者FDI流入中国，这会加剧我国金融市场波动程度。另外，由于国际、国内市场联动性日益紧密，近期全球金融市场出现剧烈震荡，也对A股投资者心理预期产生了很大影响。 --高盛大中华区首席经济学家梁红表示，现在美国经济在往下走，中国在宏观调控，这其中实际上是因为过去几年积累的宏观矛盾没有很好解决。“今年不敢说是一个总的爆发，至少这些矛盾到了一个有很多问题不得不解决的情况。” --中金首席经济学家哈继铭指出，中国出口增速在未来几个月还会持续放缓，以人民币计价，中国出口增速将由2007年的17.9%显著下降至2008年的11.8%。

Sptizer's plan will batter banks

--Mr. Spitzer and his insurance commissioner, Eric Dinallo, want bond insurers to separate their safe muni-bond exposures from riskier policies covering dodgy mortgage bonds, collateralized debt obligations and other structured-finance investments. One insurer, FGIC, reportedly wants to do so. --But Mr. Spitzer's plan would batter banks or investors holding insured mortgage bonds or CDOs. Look at FGIC. It backs about $95 billion worth of nonmunicipal securities. Big chunks of that are mortgage bonds -- some backed by subprime mortgages -- and CDOs. --If FGIC separates its low-risk muni-bond policies from those covering riskier securities, the latter portfolio may not be able to cover all its potential losses, unless FGIC drums up a lot more capital. Since it hasn't been able to do that for its combined portfolio, this looks like a long shot. --With loss assumptions on subprime mortgage bonds running upward of 20%, and a liquidity freeze battering CDO prices overall, there's a good chance those FGIC-backed securities would fall sharply in value, possibly by tens of billions of dollars. --What can banks and investors facing those losses do? Well, some lawyers think suits based on the concept of fraudulent conveyance -- where assets pledged to one party are fraudulently shifted to benefit another -- might stop the bond insurers from splitting themselves up. --But there's Mr. Spitzer's mastery of spin to consider. He has assumed the role of noble defender of taxpayers and muni-bond investors. Whatever legal gambits Wall Street tries, it will need to step carefully to avoid the sort of public-relations nightmares it suffered when clashing with its scourge in the past.

a few questions concerning Sexy Photo Gate

--In this part of the world, Sexy Photo Gate is much more than your average Paris Hilton affair. In mainland China, which tightly monitors Internet content through a series of blocks often called the "Great Firewall," the rapid spread of the images challenges the effectiveness of government controls. --Government inattention during the recent Lunar New Year holiday, China's biggest annual break, may be one reason. Han Yingxiang, the deputy director of the online police in Jilin, says that the censoring activity has just begun, but is difficult because the Internet "is widely used and the population of Netizens is too large." --Ms. Chung admitted the sins candidly. Sex topic used to be a tatto in China. Have people's attitude changed and become more open.

2008 life insurance outlook: slowly sinking

--negative outlook is underpinned by the expectation tha low interset rates will continue to pressure investment income and the impact of the current turmoil in the credit market. --capital managment and international expansion should continue to be the key drivers for earnings growth growth. --S&P predict 2% growth in life insurance sales in 2008, down from 7% in 2007. --two means of creating spreads, using term structure or chase yield for opting for higher risk investments. because of the flatness of yield curve, a number of life insuers have been loading up on RMBS, CDOs and other ABS backed by RM to juice returns. --Prudential Financial and MetLife are the most likely near term industry consolidators. Prudential Financial ended Q3 with a significant war chest of excess capital.

Auction Rate Securities Market

--Auction-rate securities are initially sold as long-term bonds but are effectively turned into short-term securities through auctions typically held every seven, 28 or 35 days. Issuers reap the low financing costs associated with short-term debt, while investors gain liquidity through the frequent sales. --While the bulk of the market is municipal debt, student lenders and closed-end mutual funds also raise money in this market. Estimates on the breakdown vary, but the municipal sector is thought to be $200 billion to $250 billion, with student lending accounting for less than $100 billion. --Failures to resell these securities began cropping up last month, but this week the number jumped, leaving investors -- mainly corporate treasurers but also wealthy individuals -- with paper they expected to exchange for cash. Auction-rate securities are preferred by those looking for a place to park funds for short periods of time.

Defaults beging to surface In January

--the downgrade-to-upgrade ratio moved up 4.11x in January from 3.46x in December --Although the bulk of investment grade corporate balance sheets remain in good shape, for sectors and credits at the forefront of the subprime meltdown and subsequent leveraged unwind such as the homebuilders, retailers, and financials the downgrades have been piling up.

Auction Rate Securities

Rate hikes
The Port Authority of New York and New Jersey's interest rate jumped Tuesday to 20% from about 4.2% when bidders didn't show up at an auction of its securities by Goldman Sachs Group Inc.

ARS
The auction-rate securities are essentially long-term debt, but investors treat them like a liquid, short-term holding because of the auctions. The problem is that investors have balked at the auctions lately, sending interest rates on these securities on a wild ride.

Factors
Several factors are behind these auction failures. Many of the auction-rate securities are insured by troubled bond insurers, like Ambac Financial Group Inc. and MBIA Inc. The bond insurers face billions of dollars in potential claims because of exposure to subprime mortgage debt. Investors are worried that might jeopardize the other policies the companies have written. MBIA backs the Port Authority's debt.

More broadly, the credit crisis has many investors wary of instruments with complex structures. In their search for holdings that are simple and straightforward, they're diving into Treasury securities and shifting away from products such as auction-rate securities.

Beyond driving up the costs for borrowers such as the Port Authority, disruptions in the market are a potential problem for holders of these securities, many of whom bought the instruments thinking they could be sold easily. They are finding that they might be stuck with these instruments longer than planned.

Banks Unwiling to Step in
In less tumultuous times, the banks might be expected to step in and buy some of these securities themselves to help smooth the process. But their balance sheets are already stuffed with other holdings -- loans to corporate borrowers, lines of credit to customers, mortgage debt and more -- so they have decided not to intervene in this market.

As a result, well over $10 billion worth of auction-rate securities have been frozen. These included borrowings for Massachusetts prep school Deerfield Academy, Carnegie Hall and California's De Young Museum, among many others.

On-Balance Sheet for Some Banks
The debt instruments don't show up as assets because the entities that issue them qualify to be kept off the banks' books. There is a catch: If there aren't any buyers when the debts roll over, the bank sponsoring the bonds may have to step up and essentially buy them due to what is called a liquidity backstop agreement.

That isn't likely to lead to losses because municipal bonds tend to be high-quality, but it would take up capacity on their balance sheets. According to third-quarter 2007 securities filings, Merrill said it could be on the hook for nearly $40 billion. Citigroup had pledged to provide up to $26 billion in such liquidity, and J.P. Morgan said it could be obligated to fund $17.5 billion of such debt.

four selling groups driving loan prices

At the start of a downturn --Momentum Sellers: momentum based selling is the first to appear. --Risk-based sellers: next group to emergy. Cut positions to reduce future losses. This type of selling activity is more prolonged than the momentum-based activity. --Fundametnal Sellers: sell based on company performanc exceptions. --Price Sellers: the last group. sell due to an inability to hold position based on market price. Can resutl from margin calls, structural finance price triggers or other types of forced liquidations. --It is said that current market slump is driven price selling. e.g Total Return Swaps linked to Market Value SF vehicles are unwinding and margin calls are forcing sales. Force selling did occur in 2007, but the actions were not the priamry drive of marke tprices as they are today. --the selling was less sever as it was primarily margin call driven and not in any wasy tied to structured product liquidations --turning point is close. --Technical pressure were not perceived to be the dominating facor. yet this type of selling potentially creatres an extremely negative feedback loop as lower market prices that result from the forced sales can in turn drive anotehr marke participant into a forced selling position.

hedge funds might be resivilent compared to investment banks

--Investors handed the industry a record $200 billion of new money to manage in 2007, a year in which hedge funds also managed to return an average of just more than 10%, according to Hedge Fund Research, an industry data group. That's not bad given that markets turned volatile and nasty -- at least for big banks, most of which racked up billions of dollars in losses on U.S. subprime mortgages, structured finance and buyout loans. --With hindsight, there are convincing reasons for the hedge funds' relative resilience that should be instructive for those still looking to wrap hedge funds in red tape. --Hedge funds are focused investment businesses. They live or die by making money for investors and their managers are directly, and handsomely, incentivized to do just that. Investment banks, by contrast, are collections of disparate businesses. Most have trading units but also have to please fee-paying clients, whose wishes can lead them to do things they feel uneasy about. It's arguably no accident that Goldman Sachs Group, the investment bank in the best position to pick and choose its business partners, is the one that has come out of last year's turmoil looking cleverest. --Hedge funds are also smaller and simpler than investment banks. Even at the biggest funds, bosses typically keep a close eye on trading and are able to identify and shut down losing trades in short order. Despite heavy losses last summer that led to the closure of Sowood Capital, the fund managed by Harvard endowment alum Jeff Larson, industry experts have hailed the quick action at the fund for preventing even bigger losses. --It helps that most hedge-fund chiefs have plenty of their own cash at stake. Investment bankers are often playing with faceless shareholders' money for asymmetric rewards. Bonuses based partly on individual success are almost always going to outweigh any losses on bankers' stock holdings in a firm that has a bad year. The arrival of government investment funds to inject some $50 billion of capital into Wall Street firms like Morgan Stanley and Merrill Lynch looks like yet more of other people's money for them to bet. --But this time at least, it's the supposedly highly regulated banks that face a more pressing battle to restore their credibility.

Short-Term Gain Could Yet Yield Long-Term Pain - WSJ

--Policy makers these days are fixated on stimulating a sleepy economy. But repairing its underlying problems doesn't look like the kind of fast or easy job many have in mind. --Think about the road tripper who pounds an energy drink to stay awake on a long-haul drive: He gets a short-term jolt, and then gets even sleepier. Similarly, the economy is about to start chugging the Red Bull of interest-rate cuts and tax rebates, which could briefly lift it from its doldrums. --Many still think the economy and earnings will roar back in the second half -- perhaps remembering the brief and mild recessions of the recent past. --But this cycle looks different. Home prices haven't fallen this broadly or deeply before. And the banking system is sorting out an overhang of broken debt securities it has little experience fixing. --True, tax rebates might inspire people who live from hand-to-mouth to spend a little more in the short term, usually six months to one year after their check arrives in the mail, according to a handful of studies. To the extent they buy American-made products, then that will increase U.S. gross domestic product. But it may just shift some spending forward, in effect "stealing" growth from the future. --The credit crunch also seems likely to take time to unwind. The savings-and-loan crisis, to which this one is often compared, took about a decade to mop up. Lenders won't soon revisit the days when the ability to fog a mirror was enough reason to give you a loan. --As long as banks are cleaning up their balance sheets and investors are no longer eager to buy packages of debt sliced into tranches of indiscernible risk, credit will be harder to come by. That could curtail consumer spending and business investment even as interest rates go lower. --All this will drag on corporate profits and stock prices well after the stimuli have faded.

Don't let the doomsday headlines and the careening markets scare you

rising home foreclosurers, cranky consumer spending, soaring oil price with inflation implications, nausea-inducing market swings - pileup of indicators --Here we go again. Day after day, Americans are being bombarded by a relentless drumbeat of unsettling economic news. The Dow regularly swings by hundreds of points in a single session as it gyrates near bear-market territory. Oil prices keep bubbling toward $100 a barrel. The dollar is crumbling, and a rogue trader in Paris is blamed for triggering a synchronized selloff heard round the world. We're constantly warned that an ugly recession is looming, if not already here. It's all enough to cause a panic attack. --Don't let the doomsday headlines and the careening markets scare you. Washington is in control --But any slump is likely to be short and mild, mainly because Washington is on the case. Since mid-September, Federal Reserve chairman Ben Bernanke has reduced the target for the Fed funds rate by 2.25 percentage points, with the biggest move, a sudden 75-basis-point cut, coming on Jan. 22. On Jan. 30, the Fed cut another half-point, bringing the target to 3%. It usually takes six to nine months for a Fed rate cut to bolster consumer and business spending. By midyear the flood of liquidity will be channeled into new loans for companies and consumers. A resurgence in easy credit - stoking the appetite for everything from big-screen TVs to capital equipment - will be practically irresistible. Consumer spending will get another boost from the roughly $150 billion economic stimulus plan Congress is poised to approve. Checks that could range from $1,000 to well over $2,000 are likely to start going out to families this summer. The easy money doesn't stop there. The Fed has practically promised even more rate cuts. The markets are predicting that the Fed funds rate will be 2% to 2.5% by year-end. With that kind of aggressive stimulus, look for growth to jump back to the 3% to 3.5% range in the second half of the year. Says Brian Wesbury, chief economist at First Trust Advisors: "You simply don't get recessions when the Fed funds rate is at 3% or below, and the Fed is in a strongly expansionary mode." --It usually takes six to nine months for a Fed rate to bolster consumer and business spending. By mid year, the flood of liquidity will be channeled into new loans for consumers and business. --Consumer spending will get another boost from stimulus package. --Those low rates, though, are creating the conditions for a bigger crisis down the road. "The real challenge will be inflation," warns Darda, "not the near-term economic worries that the financial press is harping on." After fretting over surging prices early last year, the Fed is now ignoring them in its all-out campaign to revive the economy. But the threat isn't going away. In 2007 the consumer price index rose 4.1%, the biggest jump in 17 years. The combination of high oil, food, and metals prices, along with low interest rates and growing global demand, is a classic recipe for inflation. "Much higher inflation is practically inevitable," says Carnegie Mellon economist Allan Meltzer. Eventually the market will wake up to the problem, and so will the Fed. "The real danger is in 2009 and 2010," says Meltzer. "The Fed will be forced to raise rates substantially to kill off inflation, possibly causing a recession." Job market has not falling off the cliff --Jobless claims, a reliable harbinger of recession, have averaged aqbout 325k for the past four weeks, far below the danger point. In hte last two recession, jobless claims increased 25%. Temper your courage --Still, investors need to temper their courage with caution by picking investments that are genuinely cheap.

daily mkt review Feb 8th, 2008

Credit markets came under the spotlight on Friday as talk that a European fund was liquidating a structured credit product added to fears that economic slowdown would lead to companies defaulting on their debt.

The Markit iTraxx Europe index – a gauge of the cost of insuring against corporate default – hit a lifetime high of 98.75 while the CDX North America investment grade index touched 133. The iTraxx crossover index of mostly junk-rated credits – an important barometer of risk appetite – widened to a record 530.

SEC May Propose Changes Concerning Rater

--The Securities and Exchange Commission may soon propose rules that require credit-ratings firms to disclose the accuracy of past ratings and distinguish between various products they rate, the first indication how the industry might be regulated in the wake of the subprime crisis. --SEC Chairman Christopher Cox said the potential rules "would require credit-rating agencies to make disclosures surrounding past ratings in a format that would improve the comparability of track records and promote competitive assessments of the accuracy of past ratings." --Mr. Cox declined to give specifics of any possible rules. He said they are geared at fostering "healthy competition" that could involve highlighting and rewarding "successful past performance to punish chronically poor and unreliable ratings." --SEC officials said the agency's early reviews of credit-rating firms and investment banks also reveal that some firms used poor assumptions about high-risk mortgage debt in establishing their ratings, while some Wall Street investment banks had poor risk controls.

Credit-Card Pinch Sap Consumer Spending

--America's love affair with credit cards may be headed for the rocks. --Credit-card delinquencies are rising across the nation, a sign that some Americans are at the end of their rope financially. And these mounting delinquencies, in turn, have prompted banks to tighten lending standards, keeping people who have maxed out their cards from finding new sources of credit. --The result could be a sharp pullback in consumer spending that would further weaken the slowing U.S. economy. --Such a pullback may already be taking shape. Yesterday, the Federal Reserve reported an abrupt slowdown in consumers' credit-card borrowings. In December, Americans had $944 billion in total revolving debt, most of it on credit cards, a seasonally adjusted annualized increase of 2.7%. That was off sharply from seasonally adjusted growth rates of 13.7% in November and 11.1% in October. And it reflects the volatility in consumers' spending habits as economic growth sputters. --Sinking home prices have made it much harder to convert home equity into cash for living expenses. At the same time, plastic has pushed into every corner of American life, making new inroads that worry some economists and card issuers. --In past economic downturns, Americans used credit cards mainly for discretionary purchases, such as furniture, appliances and jewelry. Now, however, many of them regularly whip out plastic to pay for groceries, gasoline and other everyday necessities. Credit-card issuers won't disclose exact figures, but they say it is evident that a growing percentage of card volume is for basic purchases. Many issuers even dole out extra rewards for such transactions. --Evidence is mounting that the plastic-fueled spending spree won't last. In December, an average of 7.6% of credit-card loans were either at least 60 days delinquent or had gone into default, up from 6.4% a year earlier, according to research firm RiskMetrics Group. The analysis includes a broad swath of more than $200 billion of credit-card loans that are sold off to investors by major card issuers like Citigroup Inc., Capital One Financial Corp., American Express Co. and J.P. Morgan Chase & Co. --Card delinquencies are ticking up from historically low levels, but the trend is sending shudders through lenders already reeling from the subprime-mortgage tumult. As a result, leery card issuers are bulking up their reserves against future card-related losses -- and getting so much tougher on borrowers that some consumer are reining in overall spending. --Much of the card industry's growth has come from debit cards, which aren't included in the government's revolving-credit data because they immediately draw funds out of purchaser's checking account. Still, credit-card portfolios managed by card-issuing banks are growing at single-digit percentage rates each year as consumers put more small payments and everyday purchases on their cards.

What if Muni Insurance Disappeared?

--Firms like MBIA Inc., Ambac Financial Group Inc. and Financial Guaranty Insurance Co. write insurance on tax-exempt debt issued by municipalities, hospitals, nonprofit groups and others. If there is a default, they guarantee repayment. The same firms are in trouble because of insurance they have written on shaky mortgage-backed debt. As their mortgage woes deepen, the firms' standing in the municipal-bond market could be severely shaken.

--Roughly half of the $2.6 trillion municipal-bond market is insured by these firms. Municipal issuers and taxpayers have paid as much as $2.3 billion a year in premiums to bond insurers, according to Standard & Poor's Ratings Service. But some regulators, investors and municipalities are starting to question the value of all that insurance.

--Municipal bonds don't default much. Municipal bonds with a double-B rating from credit-rating services have a cumulative average 10-year default rate of 1.74% since 1970. That is much lower than double-B-rated corporate bonds, which have a 29.93% 10-year cumulative default rate during the same period, according to research compiled by research firm Municipal Market Advisors. Municipal bonds rated triple-B by Standard & Poor's default less frequently, at 0.32% of the time, than triple-A-rated corporate bonds, which have a 0.6% default rate over time.

--Issuers of municipal bonds with insurance traditionally can expect to pay a lower interest rate than they would otherwise have to pay, thanks to the coverage. But it has always come at a price.

--Before the bond-insurer crisis, bond insurers charged about 30% of the interest-rate savings an issuer would get. In recent months, that has climbed to about 80% or 90% as the bond insurers try to extract as much premium as possible. For the issuers, though, that has reduced the value of the coverage.

three factors for China smooth growth pattern

--The 2007 growth of 11.4 per cent, although robust, is not as high as the peak of the 1980s and ’90s, when GDP growth in some years surpassed 15 per cent.

--Jonathan Anderson of the investment bank UBS says China’s boom-bust cycles of those two decades are being wound back into a more sustainable pattern. --He points to three factors helping to smooth growth cycles: improved corporate management skills, the declining role of the state in the economy and better financial institutions after recent reforms.

--“That explains why growth in the past three years has been 11 per cent and not 15,” said Mr Anderson. He added that the overcapacity of the past three years, which has fuelled the trade surplus, is now being squeezed out of the economy. The huge profits, which have funded investment, will also come back “to historical norms”.

Credit Crunch Pounds UK Economy

--The global credit crunch is threatening to claim a new casualty: The United Kingdom, a country that has staked its economic success on attracting other people's money. --For more than a decade, the U.K. has reaped vast benefits from its role as a hub for the world's capital, building London into a financial center to rival New York. No large country is more dependent on the movement of foreign money through its banks: Some $2.4 trillion flowed in and out of the U.K. in 2006, an amount equivalent to the country's entire annual economic output, the most recent data indicate. The financial sector accounts for more than one-fifth of all U.K. jobs, compared with only 6% of jobs in the U.S., and contributed about one-quarter of the nation's economic growth over the past five years. --But now, amid the deepening credit-market turmoil, the U.K.'s embrace of financial globalization is becoming a liability. The investment-banking business is already stalling, potentially eliminating thousands of high-paid jobs and demand for everything from tailored suits to high-end hunting trips. As mortgage credit dries up, house prices are sliding at the fastest rate since 1995. And retailers are facing a tough time as consumers, coming down from years of credit-fueled spending, turn decidedly gloomy. --Bank of England officials, in a crucial policy-making meeting today, will decide what, if anything, to do to ease the pain. Economists expect the central bank to take out some insurance against a recession, cutting its short-term interest-rate target by one-quarter percentage point, or perhaps one-half point, from the current 5.5%. But with inflation running above the desired level of 2%, the bank may have little leeway to ease further. Meanwhile, the government, hobbled by a large budget deficit, will be hard pressed to come up with a stimulus package like the one being considered in the U.S. --Much of the prosperity, though, depended on the global boom in credit of the past several years. The pulse of London's financial center, known as "the City," quickened as its bankers invented increasingly complex ways to package and resell all kinds of assets, from high-risk U.S. home loans to European corporate bonds. Over the five years ended September 2007, the financial-services sector grew at an average, inflation-adjusted rate of just over 8%, its most intense stretch of growth in almost two decades. --Locally oriented retail banks, such as mortgage lender Northern Rock PLC, also tapped global capital markets for cash, which they made available to British consumers. The abundance of easy money catalyzed a sharp rise in home prices and boosted consumer spending. But it also drove people deeper into debt as they stretched to buy homes and live large. According to the most recent data from Paris-based Organization for Economic Cooperation and Development, total consumer debt in the U.K. stood at 164% of annual disposable income at the end of 2006, by far the highest level of any developed country. In the U.S., that number was 138%. --As the credit cycle takes a sharp turn downward, many of the businesses that fed the U.K.'s financial sector, from taking companies public to issuing corporate debt, are set for a fall. Among the hardest hit so far have been the complex products in which London-based bankers and traders specialize, such as the collateralized debt obligations and structured investment vehicles, or CDOs and SIVs, that are at the center of the current crisis. "You've got certain sectors that are out to lunch and are likely to be out to lunch for the rest of their lives, or at least for the foreseeable future," says Mr. Kirkwood of Citigroup.

Demand for Corporate Loans is drying up

--A new problem is rippling through credit markets: Many of the corporate loans used to finance giant buyouts in the past few years are reeling in secondary market trading, making it virtually impossible for banks to unload other commitments they have made. --The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about $28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value, according to Reuters LPC. Market is reeling --The crisis started last summer, when investors turned up their noses at billions of dollars in buyout debt, just after many buyout firms and their bankers made commitments to history-making megadeals. Many investors say January was the worst performance for this market since those summer months. --"This is bizarre and baffling," said Thomas Ewald, chief investment officer of Invesco Senior Secured Management, on a panel at a Loan Syndication and Trading Association event Monday. "Loans trading in the 80s are typically on the verge of bankruptcy or a major restructuring event." Demand is drooping CLO market is reeling. --Investment vehicles called collateralized loan obligations were huge consumers of corporate loans in 2006 and early 2007. CLOs, as they are called, hold bundles of loans and are sold to investors in slices with varying levels of risk and return. As defaults rise, demand for the riskiest pieces of these instruments is undermined. Less Appealing because of lowering LIBOR. --Investment banks last year touted new investors in the loan market -- hedge funds and high-yield bond investors that crossed over into loans. Many investors were burned on their bets in buyout-related loans when their secondary market values dropped. --Some investors are turning to moving out of loans to find better yields in fixed-rate junk bonds Margin Call pushed out Hedge funds --Hedge funds are also being pushed out of the market as facilities called total return swaps unwind. --Total return swaps are set up by banks for hedge funds and other investors to buy loans with borrowed money. As the value of the loans declines, provisions in these swap agreements are being triggered that act like margin calls to unwind the contracts. Investment Banks Panic --The saga of Harrah's Entertainment Inc.'s loan sale is a sign of the distress in the market. Credit Suisse broke from a group of banks lined up to sell $7.25 billion in loans tied to Harrah's buyout. It offloaded its commitment of about $1 billion through derivatives transactions in December, says a person briefed on the transaction. The move sent other banks scrambling to sell some of their own Harrah's loan commitments in January, and the price of the loans dropped to between 91 and 92 cents on the dollar, bankers said. --The transaction roiled other underwriters involved in the deal who were unable to sell their portions of Harrah's debt, but didn't want to sell it at such a steep discount.