Sweden's Path, Not Japan's, Can Guide Cleanup

In tackling the national economic downturn, President-elect Barack Obama and his newly appointed economic team might want to study how Japan and Sweden weathered similar storms during the 1990s. Sweden's response to its crisis is widely considered a model. The Swedish government and central bank in 1992 quickly stabilized the krona and reversed contractions in gross domestic product and a rising unemployment rate by allowing some banks to fail, recapitalizing others and isolating bad assets. In two years, the country's economy was growing again. Tokyo's piecemeal steps, meanwhile, ushered in a "lost decade." The economy stagnated until zombie banks propped up by the government finally succumbed. The Japanese economy took almost a decade to right itself, and while most of the country's major banks have shed nonperforming loans dating from the crisis, their profitability today hovers around levels of 10 years ago. The paramount lessons for nations battered by financial crises are: Act quickly, consolidate the financial sector and pursue the right balance of recapitalizing banks and isolating troubled assets. Sweden did all three and Japan arguably did none, taking timid and unsuccessful measures for years before a new government forced sweeping action in 1998. "Some say the Japanese government did nothing for 10 years, but that's not really the case. They tried things and they failed," said Takeo Hoshi, a professor of economics at the University of California, San Diego. Among the failed ideas was establishing asset-management companies that didn't buy enough distressed assets and held on to those they did acquire instead of restructuring and selling them. In Sweden, authorities took a hard-line policy intended to weed out failing banks. Early in the crisis, the country made substantial capital injections, purchased troubled assets and temporarily nationalized some surviving banks. Sweden disposed of the bad loans briskly, liquidating them by 1997 so they couldn't linger as a drag on the economy. Stockholm's strategy succeeded in part because policy makers were clear about their goals and demanded transparency in banks' accounting, to identify and contain weak spots. "The goal in Sweden was to rehabilitate the system quickly by creating a smaller number of viable institutions out of many ailing ones," said O. Emre Ergungor, an economist at the Federal Reserve Bank of Cleveland. In 1988, before the crisis, there were 525 banks in Sweden; in 2000, there were 124. That the Swedish government proceeded with the same transparency it exacted from banks also was crucial. "The key here was not to play games with investors or taxpayers," Mr. Ergungor said. When Sweden began to sell the distressed assets, "the market didn't think, 'What is the government trying to hide now?' " In Japan, officials loath to recognize that banks were failing didn't craft a sweeping coordinated plan as circumstances got worse. The government resisted capitalization measures because using public funds to prop up tottering institutions was hugely unpopular with taxpayers. Tokyo's indulgence ceased abruptly after a major bank and a securities house collapsed in 1997. The next year, political leaders backed capital injections and determined that the financial sector's survival depended on consolidation. The nation went from having roughly 20 big banks in 1990 to half a dozen today. In taking on the crisis, the U.S. has advantages that Japan and Sweden didn't, including a strong currency and a low inflation rate. The U.S. also faces liabilities that weren't factors in the 1990s, and that could complicate solutions to today's crisis. Any recovery will have to unfold amid recessionary conditions that began at home and spread around the globe. The U.S. has acted swiftly but erratically, executing "crisis management on the fly," said Gerald P. O'Driscoll Jr., a senior fellow at the conservative Cato Institute and a former vice president at the Federal Reserve Bank of Dallas. After an initial stumble, the Treasury Department pushed a $700 billion rescue plan through Congress, establishing the Troubled Asset Relief Program to buy toxic assets through a reverse auction. Shortly thereafter, Treasury changed its focus to capital injections, which U.S. officials argue shows flexibility -- but which markets may interpret as indecision. In mid-November, Treasury Secretary Henry Paulson scrapped the plan to buy troubled assets from financial institutions. Mr. Paulson said the government planned to continue capital injections and start assisting consumers through programs such as stepping up student loans and preventing foreclosures. Last week, Mr. Paulson followed through on that plan, announcing $800 billion in assistance -- largely from the Federal Reserve -- to credit markets. Mr. Paulson and Fed Chairman Ben Bernanke have "sowed uncertainty repeatedly and serially," Mr. O'Driscoll said. "No one knows if they're going to get bailed out or not." Many banks are wondering whether the institutions that received capital injections will use the public funds to resume lending or to acquire smaller rivals. The U.S. also hasn't followed Sweden -- and ultimately Japan -- in taking the politically charged step of forcing comprehensive consolidation in the financial-services industry. "If we all agree that there was a credit bubble, then there has to be a contraction in credit," said Adam Posen, deputy director of the Peterson Institute for International Economics. Pursuing a policy of consolidation is "a genuinely difficult thing to do. That's why the Swedish political class in '92 and '93 and the Japanese political leadership in 2002 deserve credit." Thus far, the U.S. crisis has claimed few high-profile casualties, such as Lehman Brothers Holdings, which sought bankruptcy protection in September. Government intervention preserved insurer American International Group, put mortgage giants Fannie Mae and Freddie Mac into conservatorship and blessed J.P. Morgan Chase's takeovers of Bear Stearns and Washington Mutual. At the end of November, the government gave ailing Citigroup a reprieve through a patchwork of remedies, including injecting $20 billion in capital and guaranteeing some troubled assets. Treasury has said its priority is righting the banking system, not consolidating it, although federal rescue efforts may lead to some thinning of the ranks. Just as members of Congress rejected the first draft of the TARP legislation, they are likely to resist bank closings or takeovers. Mr. Obama has an opportunity to take a step that may exact a short-term political cost and yield a long-term economic gain.

Cable Operators Present Enticing Wager

Cable-TV operators have talked about expanding ad-sales businesses as a way to juice growth. Luckily for them, they haven't made much progress. Ad-dependent TV stocks have been crushed this year, as revenue has plunged. But subscription-based cable stocks have mostly outperformed the broader market. It's a truism that no matter how bad things get, Americans won't stop watching television. That has helped cable operators outperform in past recessions and should be the case this time around. Not that they will escape unscathed. Time Warner Cable Inc. warned earlier this month that it was seeing a slowdown in some of its premium video services, prompting a selloff. But investors shouldn't overreact. Cable companies are likely to continue posting revenue and cash-flow growth next year, albeit at a slower rate than the 8% or higher projected by Time Warner Cable and Comcast Corp. for 2008. Slowing premium services, such as digital video recorders, account for only a small portion of revenue. Much of the growth in recent years has instead come from high-speed Internet service, which now accounts for more than 20% of revenue for big operators and is probably more recession-resistant than video service. Another big source of growth has been cable's entry into the phone business. That business is vulnerable to belt-tightening, as people rely solely on cell service. But most cable operators are adding phone customers so quickly that they can withstand some wireless defections. Consider these numbers. Comcast, the biggest cable operator by subscribers, reported average monthly revenue per subscriber of $110.71 for the third quarter, 8.8% higher than the year-earlier number. Video accounts for about $64 of the number, up $3.20 from a year earlier, with $35 coming from Internet access and phone combined, up nearly $6. Video growth will decelerate as companies sign up fewer new customers for DVRs, high-definition TV and pay-per-view movies. But the impact shouldn't be overstated: Only about $4 of per-subscriber monthly revenue at Comcast comes from DVR and HD revenue, estimates Sanford C. Bernstein analyst Craig Moffett, while pay per view contributes less. Potentially vulnerable are subscriptions to premium-movie channels such as HBO and Showtime, which account for about $6 of monthly per-subscriber video revenue at Comcast, Mr. Moffett estimates. HBO subscriptions dipped slightly in the 1991 downturn, according to research firm SNL Kagan. But that was before HBO became famous for its programming. As these services can substitute for a night at a movie theater for many people, any dip should be small. In contrast, Internet access, where cable has been boosting market share over phone companies, is likely to keep expanding. Phone, too, should keep expanding, but at a slower rate. Comcast finished the quarter with 6.1 million digital-phone subscribers, up from 3.8 million a year earlier. Net additions were 29% lower. But even if net additions dropped by half, Comcast still could add close to a million customers next year. A drop in phone sales also would boost free cash flow short term, by reducing upfront capital investment. Investors will pay a premium for this resiliency. Comcast is trading at about 13.6 times Bernstein's estimated 2008 free cash flow per share, while Walt Disney Co., which has held up better than other media names, is at 11.4 times fiscal 2008 free cash flow. That isn't an excessive premium to pay for a steady performer.

Junk-Bond Market Has Closed the Door

U.S. companies were locked out of the junk-bond market in November, putting half of American corporations at risk of being unable to raise cash. The current environment is causing market participants to harken back to 1991, when the collapse of Drexel Burnham Lambert sent the junk, or high-yield, bond market into a tailspin. About 50% of U.S. companies have below-investment-grade credit ratings, making the $750 billion junk-bond market a vital source of financing for car makers, airlines, retailers, utilities, restaurant chains and media companies. The shutdown already has sent U.S. car makers, desperate for cash, to Washington for emergency loans. The only dollar-denominated debt deal done in November was a $9.72 million bond from Peruvian power and utility company Edegel SA, according to data provider Dealogic. Only one U.S. company -- MGM Mirage, with its $700 million deal last month -- has been able to raise debt in the junk-bond market since the end of September, according to Dealogic. Yields of 20% or more make it too expensive for borrowers. That is about triple the 7% yield threshold that used to define the term junk bond. Investors in junk bonds, meanwhile, were hammered with 8.8% losses in November for year-to-date declines of 32%, according to Merrill Lynch's high-yield index as of Nov. 27. That isn't great news for companies needing cash, and may force them to scramble to find it elsewhere. Natural-gas producer Chesapeake Energy Corp. announced Wednesday that it planned to sell up to $1.8 billion in stock, indicating the company "may need the cash now," said energy investment bank Tudor Pickering. "It's not optimal conditions for companies to go into the market right now," said Martin Fridson, chief executive officer of Fridson Advisors, an investment firm in New York. "There are no deals getting done, which shows there is no capital available at prices which are appealing to issuers," he said. October and November were the slowest two months for U.S. junk-bond issuance in more than 13 years, according to Dealogic. At zero, new-issue volume this month compares with the $784.7 million seen in January 1995, when four deals priced, the previous lowest level before October this year, according to Dealogic, which began tracking such statistics in 1995. Conditions in the leveraged-loan market aren't much better. November is shaping up to be the slowest month since January 1999, according to Dealogic. Leveraged loans typically are secured with assets, but, like junk bonds, are made to companies with risky credit ratings. In November, only $16.9 billion of leveraged loans have been sold. That is well below $77.4 billion for the same period in 2007 and only a shade more than in January 1999, when $16.6 billion was put together, Dealogic data show. The prospects for 2009 look ominous as well. "Economic challenges, deteriorating fundamentals and access to capital concerns are expected to continue weighing on the bonds and credit default swaps of issuers," analysts at Société Générale SA said in a note to clients. Ratings company Moody's Investors Service has predicted a default rate of 11.2% by the end of October 2009 for high-yield bonds, as financing conditions continue to deteriorate for many companies. Other expectations, however, are more pessimistic. In October, Garman Research called for a record default rate of 18.3% within the next year.

Extent of Sigma fall-out becomes clear

By Anousha Sakoui Published: November 27 2008 20:13 Last updated: November 27 2008 20:13 Most creditors of Sigma Finance, the last fund to collapse in a once $400bn investment industry that was decimated by the credit crunch, face complete losses when the assets of the structured investment vehicle are sold next week. Ernst & Young, the receivers to the vehicle who took charge when it ceased trading in early October, have a mixture of bank debt and structured bonds with a face value of $2bn to auction off in order to try to repay $6bn of senior medium-term note holders. EDITOR’S CHOICE Ernst & Young on standby for Sigma - Oct-02Sigma collapse ends shadow bank project - Oct-01Sigma collapse marks end of SIV era - Oct-01Ratings downgrades take their toll on Sigma - Sep-29Asset auction flies in face of turmoil - Sep-18SIV restructuring: New routes to keep vehicles on the road - Sep-15The market value of the assets in an auction is likely to be a fraction of their face value and the contract terms governing Sigma mean creditors are repaid in the order that their debt matures. This means that a few bondholders are likely to be paid in full while others, whose debt is due at a later date, get nothing. SIVs earned income from investments in bank debt, mortgage backed bonds and other structured credit, which they financed with very cheap, short-term commercial paper and medium-term notes. The credit crisis killed the SIV business model as collapsing asset values caused lenders to flee. Sigma Finance, an independent vehicle and the single largest SIV with almost $60bn in assets at its peak, kept going longer than most rivals by replacing short-term debt with repo, or repurchase, agreements with a string of banks. However, one of its biggest repo counterparties, JPMorgan, in effect pulled the plug on Sigma by seizing the assets it held when further big value declines meant it could be left facing losses. Other banks quickly followed suit and Sigma was forced to cease trading. At the time the structured investment vehicle had $27bn in assets, $25bn of which had been pledged to counterparties in exchange for $17bn in repo financing. Receivers Alan Bloom, Maggie Mills and Stephen Harris, each of Ernst & Young LLP, declined to comment on the auction and said “they hoped very much to share fuller information with creditors in early December”. Sigma also has $4bn of junior capital note investors who will be wiped out by the collapse. Last month, the receivers appointed UK money manager Henderson Global Investors as advisers to help sort out what creditors to the vehicle will recover. Henderson declined to comment. Sigma Finance, was managed by London-based manager Gordian Knot, which also manages another complex vehicle, Theta, that invests in credit derivatives

Stockholm syndrome - ECO

Nov 27th 2008 From The Economist print edition Bad banks were a big part of Sweden’s 1990s rescue package “US OLD guys are really being dusted off at the moment,” jokes one architect of Sweden’s successful bank bail-out in the early 1990s. Maybe so, but policymakers, particularly in America, are still taking an age to learn their Swedish lessons. The country took a comprehensive approach to its crisis, not only guaranteeing debts and injecting government cash into banks that could not raise private capital, but also setting up “bad banks” to manage institutions’ toxic assets. The Citigroup rescue edged in this direction; UBS is setting up a bad bank with Swiss government money. But there is further to go. The idea of a bad bank, a separate entity which takes ownership of non-performing assets and then manages them in order to maximise their value, is simple enough. The Swedes set up two bad banks (with the reassuringly solid names of “Securum” and “Retriva”) to handle the crummier assets of Nordbanken and Gota Bank, two nationalised institutions. And very effective they were (indeed, some borrowers complained they were too ruthless). Their efforts to restructure and sell distressed loans helped Sweden to keep the eventual cost of its bail-out below 2% of GDP. One advantage of the bad-bank structure is neatness. Taking toxic assets off the balance-sheet leaves behind a cleaner bank which should find it easier to raise capital or attract buyers. Another is specialisation. According to Jonathan Macey, a professor at Yale University, the genius of the Swedish scheme was that it allowed people who were good at restructuring bad loans to focus on that job, and those who were better at running banks to concentrate their efforts there. Things are more difficult today. The Swedish loans were much less complex than modern securitised assets. Pricing the assets was also easier because taxpayers were on both sides of the deal, owning both the nationalised good banks and the bad banks. Nor was the rescue a panacea: Swedish bank lending to the private sector contracted for years after the intervention. But ugly as they sound, bad banks are a good idea.

The perils of incrementalism - ECO

--This is a global crisis and needs a global response. The economy is trapped in a vicious cycle and needs a big jolt to ease the flow of credit and cushion the drop in private demand. --Redouble the effort in bolstering banks, fiscal stimulus, and cutting interests. And interfere directly in credit markets. Nov 27th 2008 From The Economist print edition Bold, unorthodox remedies are needed to jolt the world economy back to life THE prognosis is looking ever more grave. What began 15 months ago with a seizure of the credit markets has become a disease with an alarming list of real economic symptoms. America, Britain, the euro zone and Japan are already in a recession that threatens to be the worst, in some places, for a quarter of a century and possibly since the Depression. American consumers, unable to borrow and fearful for their jobs, are cutting spending; so are firms, short of cash and worried about sales. German business confidence is at a 15-year low. Japan’s exports to both rich countries and emerging ones are falling. Emerging economies are suffering too, as commodity prices fall and capital flees faster than in those countries’ own crises of a decade ago. In some countries—notably the United States—a vicious deflationary spiral of banks withdrawing credit and demand contracting is no longer unimaginable. Seeing the threat to the world economy’s vital functions, the policymakers have been working overtime. Interest rates have been cut dramatically. American rates are already down to 1%; Britain’s are at a 50-year low; and this week China’s central bank lopped 108 basis points off its main policy rate. Hundreds of billions have been pumped into banks and financial markets. Many financial institutions have been bailed out: the rescue of the once mighty Citigroup (see article) is merely the latest unthinkable to happen. Despite all this, the patient has not responded. This is partly because some traditional remedies, such as looser monetary policy, are weakened in a credit crunch. It is also because the doctors have been ham-fisted: look at Hank Paulson’s changes of mind about whether to use America’s $700 billion rescue fund to recapitalise banks or to buy toxic assets. In addition, though, a lot of policy has been far too timid. Halting the world economy’s decline will demand something rather bolder than anything seen so far in this crisis. Sense and the Citi That means redoubling existing efforts in each of the three traditional areas of policy: bolstering banks; providing greater fiscal stimulus; and cutting interest rates. It also involves using more unorthodox tools, such as interfering directly in credit markets by buying up assets—a route where America’s Federal Reserve has shown the most creativity. Indeed, such “quantitative easing” is an augury for the option to be tried in extremis: reflating the economy by printing money to finance budget deficits. That risks inflation, which is economic poison; but, in highly indebted countries, it is less murderous than deflation. Mercifully, the world is not at that stage yet. But it is getting closer. One person who seems to understand the need for action on a bigger scale is Barack Obama. In his various press conferences this week America’s president-elect laid out the nature of the challenge better than many leaders already in office. This was a “global crisis”, he argued, which merited a “global response”. The economy was “trapped in a vicious cycle” and needed a big “jolt” to ease the flow of credit and to cushion the drop in private demand. He is right. The starting-point for many policymakers remains lowering interest rates. Central banks in some rich economies, in particular Britain and the euro zone, still have room to cut rates—though it is notable how even fairly dramatic cuts are not working as they once did. The Bank of England reduced rates by one and a half percentage points in one go this month. But with banks reluctant to lend, lower rates from central banks will not work miracles. That suggests there is a lot to be gained in most places by concentrating more on the banks. The fact that Citigroup, the world’s biggest bank not so long ago, needed a rushed weekend rescue was an indictment of the authorities’ failures thus far, especially in America. Above all, Citi’s collapse showed the dangers of leaving huge quantities of toxic assets to fester on banks’ balance-sheets. Pumping in capital—as governments have been doing—is essential, but may not be enough. The history of successfully handled banking crises, such as Sweden’s in the early 1990s, suggest that governments also need to remove bad assets from banks’ balance sheets. It would be good to report that the Citi deal provided a new model. Not really. The rescue is opaque—yet another ad hoc bail-out rather than part of a systematic plan; and it is too kind to the bank’s management, board and shareholders. Granted, the rescue ring-fences and limits Citi’s losses on a pile of the worst loans. But it would probably have been better to hive off its most toxic assets into a separate “bad bank”. The charm of unorthodoxy Looking ahead, governments in rich countries will need to do more to help their banks on both fronts—injecting capital and buying up assets. That would mean admitting to the scale of the problem: America may need more than the $350 billion left in the Treasury’s financial-rescue fund. A more stable banking system will eventually get the money flowing, but in the meantime there are other ways. Intervening directly in credit markets makes a lot of sense in America, which relies more than other countries on non-bank finance and where official interest rates are hard to cut further. This is where the Fed has already been inventive: printing money to buy all manner of assets. In October it said it would buy short-term commercial paper. This week it unveiled two new schemes: a $600 billion plan to reduce mortgage rates by buying government-backed mortgage securities and the debt of America’s state-sponsored mortgage giants; and a $200 billion scheme to buy the debt backed by credit-card, car, small-business and student loans (see article). This approach could be broadened to other markets that have shut down. For instance, there is little fresh (senior) credit for firms in bankruptcy. If the government can provide that cash, it could stop the coming wave of bankruptcies from becoming one of corporate liquidations. However, all the bank rescues, credit interventions and looser monetary policy will only get the world so far. The biggest part of Mr Obama’s “jolt”, as he made clear, must be fiscal. When private demand sags so dramatically, the public sector must step in to boost spending, and boldly enough to make a difference. In America, although Mr Obama has refused to give a figure, talk among Democrat bigwigs is of a fiscal boost worth $500 billion-700 billion, or 3-5% of GDP. So far the only other big country to conjure up sums on this scale is China (and its huge stimulus keeps on having to be revised downward as the figures are checked). Some of the timidity in Europe is explicable: its generous welfare states have more “automatic stabilisers”, such as payouts to unemployed workers, to support economies in recessions than hard-hearted America does. Even so, the Europeans have hardly impressed with their daring. This week Britain’s chancellor laid out tax cuts worth 1% of GDP, but coupled these with a counterproductive plan to raise income taxes on high earners later (see article). The European Commission has proposed a fiscal boost, across the European Union, of €200 billion ($258 billion), or 1.5% of GDP, but its proposal seems unlikely to be taken up enthusiastically by member states. Germany, the EU’s biggest country, has both the heft and the money to loosen budgetary policy. Yet the government’s recent boost, amounting to just 0.25% of GDP, hardly suggested urgency. Plainly, not all countries can afford precisely the same dose of fiscal stimulus. Those reliant on skittish foreign capital have less room to take action than those countries with large amounts of domestic saving. But cautious incrementalism, ironically, risks letting the world slip ever further down the deflationary spiral. It is time to follow Mr Obama’s lead and jolt the patient back to life.

In 'Milk,' A Man And A Movement Remembered

“Penn is so engaging, physically loose and just plain smart in the title role, he's bound to top everyone's shortlist come awards time.” The film suggests that Milk's married, conservative political opponent (and eventual assassin) Dan White (Josh Brolin) might have had one foot in the closet. Focus Features All Things Considered, November 26, 2008 · The first onscreen images are eerie reminders of the time in which Harvey Milk came of age: black-and-white footage of young men being quietly led from gay bars to police vans. They are not resisting. It's the 1960s, and the men are docile, hiding their faces, clearly ashamed. In the '70s, Milk was not ashamed. And as played by Sean Penn, once he makes it to City Hall, he doesn't want his staff to be ashamed either. "Any time you come here," he tells a supporter on his first day in office, "I want you to wear the tightest jeans possible. Never blend in." Milk's unlikely story — the tale of how a transplanted New Yorker in San Francisco built an unlikely coalition with the Teamsters, united a largely apolitical gay community and rode into public office on the issue of cleaning up dog poop — fills Gus Van Sant's briskly entertaining film with plenty of incident. Also with colorful characters: Emile Hirsch, flirting madly as street punk-turned-community organizer Cleve Jones; James Franco and Diego Luna as Milk's wildly different lovers; Josh Brolin as his fellow city supervisor Dan White, who'd be a political antagonist and eventually Milk's assassin. White was a family-values conservative — a likely opponent, once Milk introduced a citywide gay-rights bill just like the one that homophobic singer Anita Bryant had crusaded successfully against in Florida. What sets this film entertainingly apart from most civil rights sagas, though, are a slew of relaxed, offhandedly persuasive performances, along with the flamboyance of hippie-era San Francisco. And of course there's Penn, who's so engaging, physically loose and just plain smart in the title role, he's bound to top everyone's shortlist come awards time. Brolin, who has far fewer scenes in which to morph from family man to monster, is also terrific. And he makes a nicely ambiguous case for the screenplay's most arresting notion: that Milk could have regarded his killer as a kind of kindred spirit, who might himself have one foot in the closet. Director Gus Van Sant builds his era-evoking story around some enormous, screen-filling set pieces by mixing '70s news footage with freshly shot sequences. He re-creates political rallies — the fight against an anti-gay ballot proposition that feels all-too-familiar this year — and of course, the gunshots that ended the lives of Milk and Mayor George Moscone 30 years ago. The killings are treated in the film as a literally operatic climax, but Van Sant doesn't end the story with them. Instead, he provides a rending bookend to those first black-and-white shots of embarrassed men being rounded up by the police. This time, the news footage is in color, and the police are on the sidelines. And the thousands marching with candles are sadly — but proudly — honoring one of their own. (Recommended)

Why Trea yield dropped to record low on Nov 24th

--$600 bill mortgate purchase plan spurred demand for Mortgages and T is highly demanded as a hedge for mortgage bonds. --As a result, yield spread for Mortgage narrowed because of strong demand; Yield narrowed to 2.97%; and Swap spread declined 30 bp to 3.2% Treasuries rallied yesterday as the Fed’s plan to purchase as much as $600 billion in mortgages spurred demand for U.S. securities as a replacement for bonds that are backed by home loans that may be repaid early. Investors holding mortgage securities often use swaps and Treasuries to guard against swings in interest rates, which can trigger changes in levels of expected mortgage refinancing and duration, a measure of the average maturity of their holdings. A swap is an agreement to exchange fixed- for variable-rate payments.

Sales of Corporate Debt Recovered a little in Oct 2008

Sales of corporate debt, meanwhile, are increasing. U.S.corporations sold $36.6 billion of debt this month, compared with $29 billion in October. Still, sales are down from a year ago. Corporations sold $109.5 billion of debt in October 2007.

中国十年来最大幅度降息 刺激经济增长

中国央行周三宣布大幅下调基准贷款利率，降幅为十年来最高水平，此举彰显出政府支持经济的措施不仅限于两周多之前公布的一项大规模刺激计划。 央行在新闻稿中称，此次降息将基准的1年期人民币存款利率和贷款利率各下调108个基点。1年期贷款利率将下调至5.58%；1年期存款利率则下调至2.52%。 最近一次如此幅度的降息还是在亚洲金融危机期间，中国央行当时在1997年10月将基准贷款利率下调了144个基点。（中国的利率通常是9的倍数。） 与此同时，银行监管机构也在着手支撑中国的放贷机构，敦促银行提高损失拨备，并为计划明年之前制定的一项存款保险计划铺平道路。 政府接连推出各项政策举措，彰显出其对不断恶化的全球经济对中国影响的担忧程度，同时也显示出政府重树投资者、消费者和企业对中国经济信心的决心。 花旗集团(Citigroup)经济学家Ken Peng说，信心很容易失去，但很难重新获得，我想他们从美国危机中看到了这一点。他说，尽管中国11月9日公布了人民币4万亿元（合5,860亿美元）的一揽子刺激计划，但中国股市仍持续下挫，我认为他们意识到需要立即采取更多的行动。 中国的投资者们期待降息这是中国央行自9月份以来第四次降息；四次降息累计将基准贷款利率下调了189个基点。央行周三还下调了商业银行存款准备金率，意在释出更多资金用于放贷。中国央行表示，此次降息意在“保证银行体系流动性充分供应，促进货币信贷稳定增长，发挥货币政策在支持经济增长中的积极作用”。 此外，中国银行业监督管理委员会（简称：银监会）敦促各商业银行年底前主动将资本充足率从目前法定要求的8%提高到10%。一位不愿具名的银监会官员周三表示，该建议意在鼓励银行计提更多准备金以应对金融危机。 与此同时，中国正在推进实施规划已久的银行存款保险机制。中国央行研究局局长张建华周三在一个金融论坛上表示，已经向国务院提交了设立银行存款保险机制的计划，该机制有望在明年设立。在全球银行业危机中，最近几周许多其他国家政府都扩大了银行存款保险范围。中国银行业的财务状况尚未承受同样压力，它们仍然保持着盈利。由于多数银行都是国有的，政府担保也从来不是问题。 尽管中国经济增长势头与大多数其他主要经济体相比依然强劲，第三季度经济增速为9%，但自9月份中国央行首次降息以来，经济形势已经明显掉头向下。住房市场的信心已经崩溃，出口工厂失业人数不断增加，钢铁和电力等重要工业部门正在收缩。决策者们已经表示，他们认为经济形势在转好之前可能还会进一步走软，他们正在集中精力防止可怕的后果。 中国金融市场也正在承受阵痛：股票价格和房地产交易已经崩盘，一度活跃的银行间货币市场也开始显现压力。中国央行副行长易纲在上周发表的一篇文章中写道，如果应对不好，上述负面冲击可能扩大蔓延，影响中国经济和金融的稳定。因此我们必须高度重视潜在风险，采取有效措施予以解决。 易纲随后还表示，目前的一大风险是通货紧缩，即物价持续下滑。通货紧缩是经济低迷时期令人担忧的问题，因为这增加了实际借贷成本，促使消费者和企业削减支出。 虽然中国的物价仍然高于去年水平，但势头已经明显转为下行。尽管中国10月份消费者价格指数(CPI)较上年同期增长4%，但该指数过去3个月一直呈下滑趋势，虽然降幅较小。物价回落很大程度上是受到全球能源和原材料价格暴跌的影响，这在其他指标上体现得更显。中国衡量企业投入成本的企业商品价格指数10月份较9月份下滑了2.7%。

Perot Fund Liquidates as Debt Bets Turn Sour

Last week's record plunge of the commercial real-estate securities market has claimed its first major casualty: a $1.5 billion fund with investors including Texas billionaire H. Ross Perot and members of his family, said people familiar with the matter. Other hedge funds and money-management firms that invested in real-estate debt face the potential for more margin calls. These include a $2 billion fund managed by Petra Capital Management LLC, a firm founded by Andy Stone, one of the founders of the commercial-mortgage securities business. Also, Guggenheim Partners LLC, one of the best-known managers in the business of investing in commercial real-estate debt, recently asked its investors for about $300 million in additional capital to help one of its debt funds to pay down borrowings. And Centerline Holding Co., the asset manager led by real-estate mogul Stephen M. Ross, is talking to its lenders to restructure its loan obligations. Mr. Ross and Edward L. Shugrue III, manager of real-estate debt funds for Guggenheim, declined to comment. Andy Stone The woes of these funds promise to put more strain on the banking sector. Banks that have made short-term loans to these funds mightn't recoup all their money even if the funds liquidate. Parkcentral Global Hub Ltd., the fund overseen by Parkcentral Capital Management LP, a Plano, Texas, firm controlled by the Perot family, peaked this year at $2.5 billion in assets. It used borrowed money to amplify its bets, said people familiar with the matter, and began dumping assets last week. That leverage helped hasten the fund's meltdown as the commercial mortgage-backed securities, or CMBS, market cratered last week, and the borrowings also could leave lenders with tens of millions of dollars in losses, the people said. A Parkcentral spokesman Tuesday confirmed that the fund has been forced to liquidate to pay off creditors, but he declined to elaborate. He blamed the "unprecedented upheaval of the capital markets in general and the freezing of credit markets in particular." The nose dive of commercial real-estate debt marks the latest blow for hedge funds, which globally are having their worst year on record. Some investment managers are trying to persuade investors to pony up more money to shore up funds. Oregon Investment Council, which manages the $54 billion Oregon Public Employees Retirement System and is an investor in the troubled Guggenheim debt fund, has agreed to make an additional $100 million commitment to the fund, said a spokeswoman at the council. But she said the commitment is contingent on, among other things, Guggenheim's ability to raise the $300 million for the fund -- including at least $50 million from new capital sources other than existing investors. Petra has met margin calls by using cash on hand and asset sales, said a person familiar with the fund. But "if the market continues to break, everybody will be big losers," said this person. The structure of the Petra hedge fund was creative, complicated and risky, all hallmarks of the deals done by Mr. Stone, a former star banker at Credit Suisse First Boston who left the firm in 1999 after his real-estate-finance group flamed out in the wake of the Russian debt crisis. At its peak, Petra leveraged the $418 million it raised in equity to buy $1.6 billion in high-yield commercial real-estate debt. Key to the fund's success was its ability to borrow at much lower rates than those being paid by the debt it was buying. It did this initially by borrowing short-term money on the "repo" market. Then Petra's plan was to pay off the short-term loans by packaging the debt (not short term loans) it purchased into a long-term collateralized debt obligation and selling it to investors. By doing that, Petra insulated itself from margin calls because it wouldn't have to repay the CDO bondholders before its assets matured. But Petra's strategy was tripped up by the market. It succeeded in selling one CDO totaling $1 billion. However, as the credit crisis intensified, the CDO market collapsed. That left Petra holding some short-term repo debt. The firm already has paid off about $140 million in that debt but still has about $160 million remaining.

Fear Recedes in the Debt Markets

The government's $800 billion plan to bolster mortgages and other consumer loans pushed credit markets to their best day in weeks as yields fell on mortgages and corporate bonds, as well as Treasurys. Persistently high yields and frozen markets have made it difficult and expensive for consumers to borrow to buy homes, cars and to pay for college. The plan, announced Tuesday, goes right to the heart of those issues by buying or lending money to buy securities tied to these loans. View Full Image European Pressphoto Agency SUPPORT SYSTEM: Treasury Secretary Henry Paulson announces the latest lending plan on Tuesday. "To the extent you're trying to help the credit markets I can't think of too many better ways you can do it than a direct injection like this," said Joseph Balestrino, fixed-income market strategist at Federated Investment Management Co. The move in mortgage securities contributed to a rally in prices of 10-year Treasurys, pushing down the yield to 3.094% -- the lowest in at least 31 years. Under the twin plans, the Federal Reserve Bank of New York will create a Term Asset-Backed Securities Loan Facility, or TALF, that will lend as much as $200 billion to holders of certain high-grade securities backed by assets such as student loans, credit-card loans, auto loans and small-business loans. The Treasury will backstop $20 million of that through the $700 billion Troubled Assets Relief Program passed by Congress in September. In addition, the Fed said it would buy as much as $500 billion of mortgage bonds guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. The central bank also will buy $100 billion of the mortgage finance companies' debt securities, including that of the Federal Home Loan Bank, through reverse auctions starting next week. The lending facilities "should theoretically be positive for the markets and help unfreeze the logjam, but it remains to be seen if the government will effectively soak up the supply of debt or whether it will help attract investors back to these markets," says Jon Thompson, vice president of structured finance at Advantus Capital Management in St. Paul, Minn. Paulson Looking to Boost Lending 1:56 Treasury Secretary Hank Paulson announces plans to try and help banks loan money out to people faster. But critics say that "throwing money at the problem" is what spurred the crisis to begin with. Video courtesy of Fox News. (Nov. 25) Over the past year, the gap between yields of triple-A-rated asset-backed securities and Treasury bonds jumped from 2 percentage points to 7.4 percentage points, according to data from Merrill Lynch. Before the credit crunch, that spread was less than half a percentage point and was a key factor that kept borrowing rates on auto loans and subprime mortgages relatively low. By staying high, yields on these securities were making the economic slowdown worse. Normally Treasury yields fall during an economic downturn. That should pull down lending rates. But the yields of these securities remained high because investors were worried about rising loan defaults and demanding higher returns to hold the debt as a result. On Monday, triple-A asset-backed securities yielded 8.7%, versus 5.3% a year ago. Tuesday's Fed announcement brought back mortgage-debt buyers in force. The spread between mortgages and Treasurys fell from 2.09 percentage points to 1.86, the biggest drop since the government put Fannie and Freddie into conservatorship Sept. 8, said Art Frank, director and head of mortgage-backed securities research at Deutsche Bank. Normally, mortgage yields are 1 to 1.5 points over Treasurys. The bond markets got another boost from a different government bailout program that was used for the first time Tuesday. This one allows financial firms to sell debt that is backed by the Federal Deposit Insurance Corp., and Goldman Sachs Group Inc. became the first beneficiary, selling $5 billion of three-year notes that yielded 3.25%, which is roughly half the rate Goldman would have had to pay if it borrowed without the government guarantee. Write to Michael Aneiro at michael.aneiro@dowjones.com

Mortgage Rates Fall as U.S. Expands Rescue

--200 bil will be used via Term Asset-Backed Securities Loan Facility (TALF) to buy high grade securities backed by consumer loans, including auto, student loand, cards, SMB, --500 bil will be used to buy agency MBS, driving 30y mortgage rate to 5.8% --100 bill will be used to buy agency bonds U.S. officials pledged to pump another $800 billion into ailing credit markets, much of it directly from the Federal Reserve -- a move that makes the nation's central bank a lender to almost every corner of American life. The Fed, whose traditional lending role has been to make emergency loans to banks, plans to purchase in coming months up to $600 billion of debt issued or backed by Fannie Mae, Freddie Mac, Ginnie Mae and Federal Home Loan Banks, all mortgage-finance businesses with close ties to the government. Paulson Looking to Boost Lending 1:56 Treasury Secretary Hank Paulson announces plans to try and help banks loan money out to people faster. But critics say that "throwing money at the problem" is what spurred the crisis to begin with. Video courtesy of Fox News. (Nov. 25) In addition, with support from the U.S. Treasury, the Fed will provide up to $200 billion in financing to investors buying securities tied to student loans, car loans, credit-card debt and small-business loans. The intervention, the latest in a series of unprecedented government actions, immediately pushed down rates on 30-year mortgages by as much as one-half percentage point. Lower rates could help borrowers looking to refinance or buy homes, and potentially bolster ailing housing markets. The Dow Jones Industrial Average rose 36.08 points, or 0.43%, to 8479.47, posting its first three-day string of gains since August. The moves are no guarantee of an end to the financial crisis, or to the recession that has gathered force in recent weeks. Since September, the Fed and the Bush administration have repeatedly changed course as they've attempted to navigate the financial storm. The latest action came just a few days after Treasury Secretary Henry Paulson had unnerved investors by suggesting he might hold off on making new commitments from the $700 billion Troubled Asset Relief Program approved by Congress in October. The Fed's new $200 billion financing program for consumer loans is backed by $20 billion of Treasury funds. It was announced one day after a government rescue of Citigroup Inc. The government has already made more than $4 trillion of financial commitments, ranging from direct investments to debt guarantees, through a wide range of rescue programs hatched by the Fed, Treasury and Federal Deposit Insurance Corp. That number could grow if markets worsen. Other programs in the works, like a large fiscal-stimulus plan being worked out by president-elect Barack Obama, promise to push the government tab higher. Mr. Paulson said on Tuesday that market problems would have been much worse without the bailouts. He added that the latest moves were aimed at increasing the availability of lending to consumers and homebuyers. "Nothing is more important to getting through this housing correction than the availability of affordable mortgage finance," he said. He added that the market for securities backed by consumer debt "came to a halt" last month, making it nearly impossible for millions of Americans to find affordable financing for everything from college to computers. These markets have deteriorated sharply. Yields on mortgage debt have increased, raising borrowing costs to many households. Last week, debt issued by Fannie Mae was yielding around 1.8 percentage points more than Treasury bonds of the same maturity. That compared to a 0.7 percentage point "spread" over Treasury bonds in September. Investors, including foreign central banks, have shunned Fannie and Freddie debt because of uncertainty about the government's backing, and because new forms of debt, such as bank borrowing backed by the Federal Deposit Insurance Corp., have gotten explicit government guarantees. As Fannie Mae and Freddie Mac's borrowing costs have risen, so have mortgage rates. The Fed's traditional main mission is to set short-term interest rates. Its target interest rate, now 1%, is already low, and some officials are leaning toward reducing it again in December. The Fed also lends to banks in need of short-term funding. The new programs transform the Fed into a mammoth lender with much broader scope. Over the past few months, the Fed has expanded lending programs to brokers and to businesses. It has even announced plans to start buying some of the complex debt at the heart of the financial crisis -- instruments known as collateralized debt obligations -- through its rescue of American International Group Inc., the troubled insurance giant. As its lending has expanded, the Fed's own balance sheet has also ballooned, from less than $900 billion in August to more than $2 trillion. With the new programs, it is likely to grow even more. While the Treasury has to borrow money from the public to finance its rescue programs, the Fed doesn't. A central bank can effectively create new money by pumping funds, also known as reserves, into the banking system. The Fed is doing that now. Its approach is similar to steps taken in Japan in the 1990s and earlier this decade, when the Bank of Japan pumped reserves into Japanese banks. The Fed is taking that process a step further. Not only is it pumping in reserves, it is deciding where that cash should go, through its own lending programs. "The Fed is going market to market and saying, 'Where is credit clogged?' and trying to deal with that in a direct way," says Laurence Meyer, a former Fed governor and now vice chairman of Macroeconomic Advisers, an economic consulting firm. There are many risks to this approach. Markets could become dependent on Fed financing, possibly slowing their own recovery. Fed officials are concerned about how they will exit from lending programs, but see that as a problem they'll have to confront when the crisis subsides, something that is still seen as far off. The Fed's approach, coupled with the fiscal stimulus planned by the incoming Obama administration, is also inflationary. But given a weakening economy, with unemployment rising and consumer spending slowing, Fed officials don't see inflation as a near-term risk. There are other risks: that the new programs won't work, that more money will be needed, and that the Fed could suffer losses on all of this lending, particularly with the economy so fragile. The central bank is taking several steps to avoid this. The Treasury has agreed to absorb the first $20 billion of losses on the new $200 billion lending program for car loans, student loans, and other consumer credit. The structure of the program is complex. The central bank will lend money to investors via big banks known as primary dealers. Investors can use the money to buy AAA-rated securities tied to consumer debt. The Fed's goal is to bolster those markets, sparking more lending to consumers and lower interest rates for students, car buyers and others. But if consumer-loan delinquencies rise sharply and these securities default, losses will ultimately fall to the Fed and Treasury. The program could grow beyond $200 billion, and be expanded to include other asset classes such as commercial real estate. The mortgage program is more straightforward. Beginning next week, the Fed will start buying $100 billion of debt issued by Fannie Mae, Freddie Mac, and the other government-sponsored enterprises. It also plans to buy up to $500 billion of mortgage-backed securities that these firms guarantee. Private asset managers will be hired to manage this portfolio of investments. By purchasing securities tied to mortgage debt, the Fed hopes to push up the price of the debt, thereby lowering yields. This maneuver, theoretically, should push down mortgage rates. "We expect this action will measurably improve conditions in the mortgage markets and will have beneficial effects on housing and the broader economy," said Michael Feroli, an economist at J.P. Morgan Chase & Co., in a note to clients Tuesday. More Fed Aid Sets Off a Rush to RefinanceDiscuss: Will the Fed's latest programs be effective in easing the consumer credit crunch? FDIC Says Number of Problem Banks GrowsFed statements on TALF, GSEsEcon Newsletter: Click here to sign upWith Tuesday's announcement, the Treasury has effectively committed $330 billion of the $700 billion rescue package. It needs to go to Congress to use any funds beyond the initial $350 billion authorization. Taking such a step could be politically difficult. The law passed by Congress in October requires the administration to submit a report detailing how it plans to use the second $350 billion when it makes such a request. That would make an easy target for lawmakers critical of Treasury's frequent pivots on how it intends use the TARP program. Once a request is submitted, Treasury would then have to wait up to 15 days while lawmakers decide whether to vote to withhold the funds. Without a vote, the funds would be released. There is growing sentiment that lawmakers should attach new restrictions on the second chunk of funds to reduce Mr. Paulson's leeway in implementing the program. Some Democrats and Republicans have pressed for Treasury to do more to avert foreclosures, as required in the legislation authorizing the financial rescue plan. Separately, Treasury disclosed on Tuesday the criteria it is using when determining whether to bail out financial firms. Among the factors Treasury said it considers: the effect on creditors and counterparties if an institution is allowed to fail; whether the failure of the institution would lead to follow-on failures at similar institutions; and whether there's a high probability the failure of the firm would cause "major disruptions to credit markets." Treasury said it would evaluate firms individually to determine whether they are "systemically significant." It said there are few, if any, limitations on the types of investments it can make if a key financial institution is failing. http://online.wsj.com/article/SB122761978389056335.html?mod=todays_us_page_one

FDIC: "Problem Banks" Reach 13 Year High

The Federal Deposit Insurance Corp. said banks categorized as “problem” institutions increased 46 percent in the third quarter to the highest level in 13 years as the credit crisis battered the financial industry. The FDIC identified 171 problem banks as of Sept. 30, up from 117 in the second quarter and the highest since December 1995, the regulator said today in its quarterly report.,,, Banks are rated by regulators based on measures including asset quality, earnings and liquidity. They are ranked on a numerical scale, 1 being the highest and 5 the lowest. A bank with a rating of 4 or 5 is designated a problem.... “Declining asset quality is the main reason for the weakness in earnings,” said Bair, 54. The erosion was concentrated in residential mortgages and construction and development loans, she said. The banking industry wrote off $27.9 billion in loan losses at the end of September, an increase of 157 percent from the $10.9 billion reported in the third quarter a year earlier. Funds set aside to cover loan losses increased to $50.5 billion, more than triple the $16.8 billion reported in the year- earlier quarter. “Many institutions are aggressively growing their reserves,” Bair said. “But overall reserve growth continues to lag behind the growth in troubled loans.”

In Present Economic Crisis, Echoes Of 1932 - Daniel Schorr

All Things Considered, November 25, 2008 · For one old enough to have been around at the time, there's a certain feeling of 1932 in the air as an activist new president mounts an attack on a crushing economic crisis. Then, as now, the preceding years had been marked by regulatory laxity that contributed to a Wall Street crash followed by an economic downturn. Worse than today, unemployment neared 25 percent. President Franklin Roosevelt spoke of one-third of a nation ill-house, ill-clad, ill-nourished. A new phenomenon was technological unemployment attributed to automation. FDR came on the scene pledging a New Deal for the American people. The New Deal followed a Keynesian principle of deficit spending to prime the fiscal pump. A variety of new agencies, starting with the national recovery administration, including the WPA and the CCC worked at the renewal of America. The Works Progress Administration built the bridges and the post offices. The Civilian Conservation Corps worked at protecting the land. One of its monuments was an area in the Catoctin Mountains that FDR called Shangri-la, later to become Camp David. The NYA — the National Youth Administration — helped needy students. I got 50 cents an hour sorting library slips in college. The New Deal left many monuments ranging from the Tennessee Valley Authority to the Federal Theater Project. In two years, in 1934, the economy began to turn around. Unemployment began to fall. But the Depression didn't finally end until the 1939 military buildup. No alphabetical agencies this time as president-elect Barack Obama works to create 2.5 million jobs in two years, but once again a Keynesian dip into deficit spending.

Fire sale prices spark shift to loan buybacks

By Nicole Bullock in New York Published: November 24 2008 19:37 Last updated: November 24 2008 19:37 Fire sale prices in the US leveraged loan market are finally attracting buyers – the borrowers themselves. Enticed by the lowest prices ever for leveraged loans, six companies unveiled a total of $2.4bn worth of proposals to repurchase their existing loans in November, according to Standard & Poor’s Leveraged Commentary & Data (S&P LCD), which tracks the leveraged loan market. Though buybacks are common in the equity and corporate bond markets, they are a new phenomenon for loans. And the idea remains controversial. “The recent well-spring of proposed tenders is a mixed blessing at best,” says Steven Miller, managing director at S&P LCD. A buyback can inject sorely needed cash into the loan market, where heavy selling has set the asset class on track to report its first annual loss ever. In the boom years, leveraged loans were driven by the interest of hedge funds and other leveraged buyers. Now that these players are selling assets to raise cash and to meet margin calls and redemptions, loans are among the hardest-hit asset classes. Average prices recently hit a new low of 67 cents on the dollar. Against that backdrop, any buyer might be a good one. “Prices are so low and liquidity is so thin that investors are willing to do this because investors are looking for a way to sell into an illiquid market,” says a leveraged finance banker at a large bank. While a rare opportunity to repay debt at discount is clearly a good move for the borrowers, the situation is less clear for the lenders. To start with, the lending group must accept less than par value. Buyback proposals have typically been near current trading levels and until now, repayment at 100 cents on the dollar has been sacrosanct in the loan market. Another concern is the potential conflict of interest created if the borrower builds up a position in its own debt, creating a scenario where it could influence key lender decisions, such as enforcing a default. “No lenders want their loan to be controlled by the borrower,” says Eli Weber of Clifford Chance. These issues have led to piecemeal approval of tender requests. In the past few weeks, companies such asWynn Resorts and Allison Transmission have convinced lenders to approve sizeable buybacks, whereas lenders refused to agree a buyback from Hanesbrands, market sources say. As the weak economy begins to hurt companies’ financial performance, a buyback can provide a back door means to inject equity while cutting debt or avoiding tripping covenants in loan agreements, thus staving off a potential default. The outlook for loan buybacks remains clouded by myriad issues for lender and borrower. Whether the market will see a rash of them ultimately comes down to price. “It will be a continuing trend as long as the market is trading at these levels,” says Tom Newberry, head of leveraged finance origination at Credit Suisse. “The reality is that a bid is a bid.”

Swiss franc's safe currency status is hit by the storm

By Peter Garnham Published: November 25 2008 02:00 Last updated: November 25 2008 02:00 When global markets are volatile, the Swiss franc normally rises because it is regarded as a safe haven. Not this time. The currency's limited role in the global carry trade, deep interest cuts from the Swiss National Bank and concerns over Switzerland's banking sector all threaten to destroy its appeal as a refuge as volatility grips global markets. The loss of status can be seen in the fall of the franc against both the dollar and the yen since the collapse of Lehman in mid-September. The Swiss franc is down 7.5 per cent against the dollar and down 15.5 per cent against the yen. The franc is still up against some currencies - it has risen 3.7 per cent against the euro and 10.1 per cent against the pound since Lehman - but analysts say its prospects are increasingly bleak. That seems surprising given Switzerland's favourable external position. Relative to its size, Switzerland is not only the world's largest net creditor, but it also runs one of the world's largest current account surpluses. Were the loss of safehaven status to prove permanent, it would mark a reversal of the received wisdom that has been in place since currency trading took off in the 1970s. First, the franc has failed to benefit as much as expected from the unwinding of the global carry trade. The franc, dollar and yen have all been used to fund carry trades, in which the purchase of riskier, higher-yielding assets is funded by selling low-yielding currencies. Thus, when confidence in the global financial system and economic growth plunged, sparking a wave of deleveraging across markets, the franc, dollar and yen all rose as carry trades were unwound. Analysts say it is clear now, that the franc is the laggard. Steve Barrow, at Standard Bank, says this reflects the likelihood that the franc was used in a more limited way than the yen and dollar as a funding currency by carry trade investors. He says the yen was sold to fund carry trades in Asian currencies, against the Australian and New Zealand dollars and against some higher-yielding currencies, such as the pound. In contrast, the dollar was mainly sold to fund long positions in emerging market currencies, like the Brazilian real, South African rand and Turkish lira. Mr Barrow says the franc's use may have been narrower, confined for the most part to funding positions in other European currencies. "These suspicions about the relatively limited role [in the carry trade] for the franc have been borne out by the way it has fallen both against the dollar and the yen during the sharp riskreduction process of the last few months," he says. "Clearly, the currency has made some good gains elsewhere, but this could be in the process of changing." The Swiss franc not only dropped to a 16-month low against the dollar but also fell sharply against the euro after the Swiss National Bank delivered a surprise cut in interest rates last Thursday. The 100 basis point cut took the central bank's three-month Libor target down to 1 per cent. This was the third time the central bank had lowered rates outside of a regular meeting in two months, following a 25bp cut on October 8 as part of a globally co-ordinated move and a 50bp cut on November 6. The central bank said as a result of the decline in the prices of raw materials and oil, inflation was likely to fall below 2 per cent as early as the end of this year. Ulrich Leucthmann at Commerzbank says the Swiss authorities deliberately chose to shock the market in an attempt to undermine the Swiss franc. "The market is still worried about global risk aversion, but clearly the Swiss authorities are interested in the domestic economy, which is threatened by a slowdown in the eurozone and its reliance on the financial sector," he says. Concern over the health of the country's banking system has increasingly weighed on the franc. Switzerland has a larger banking system relative to gross domestic product than any major country - liabilities equal to 675 per cent - raising potential systemic concerns for its currency. Paul Meggyesi at JPMorgan says these worries have been fuelled by the adverse fate suffered by the currencies of other countries with bloated financial systems, notably the pound and the Icelandic krona. "In the boom times, the Swiss banking and financial system was seen very much as an asset for the country," he says. However, he says ever since the banking crisis reached its crescendo nearly two months ago, the market has become more concerned that the size of the banking system represents something of a liability for the franc. As well as the Swiss banking sector's size relative to GDP, the level of its foreign currency borrowing is also a cause for concern. Swiss banks have huge foreign currency balance sheets, with some SFr2,100bn ($1,751bn) denominated in foreign currencies at the end of September. At nearly 400 per cent of GDP, this FX exposure is larger than that of UK banks, though less than the 700 per cent built up by Icelandic banks prior to its banking crisis. Mr Meggysesi warns that the sheer scale of the Swiss banking sector and the extent of its foreign currency liabilities constitute a potential problem for the franc. "Large-scale FX borrowing by the banking system can be implicated in all manner of currency crisis, most notably the Asian currency crisis and latterly the collapse of the Icelandic krona," says Mr Meggyesi.

U.S. Agrees to Rescue Struggling Citigroup

Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies -- the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. -- will take on any additional losses, though Citigroup could have to share a small portion of additional losses. The plan would essentially put the government in the position of insuring a slice of Citigroup's balance sheet. That means taxpayers will be on the hook if Citigroup's massive portfolios of mortgage, credit cards, commercial real-estate and big corporate loans continue to sour. In exchange for that protection, Citigroup will give the government warrants to buy shares in the company. In addition, the Treasury Department also will inject $20 billion of fresh capital into Citigroup. That comes on top of the $25 billion infusion that Citigroup recently received as part of the broader U.S. banking-industry bailout.

Spending and the economy

--expansion of assets and debt size weakened the kick of interest rate, making recovery anemic --consumer over indebtedness lead is to blame. --the golden age of consumption is over and the ear of thrfit has begun The end of the affair Nov 20th 2008 WASHINGTON, DC From The Economist print edition America’s return to thrift presages a long and deep recession DEBBIE JEFFRIES could see it coming. When she manned the cash register at Linens ’n Things, the household-goods chain where she has worked for 14 years, a customer would sometimes open her wallet and display 15 credit cards. “That people can pull out that many credit cards—that’s insane. You say, whoa, maybe that’s why we’re here. We have so much debt.” Ms Jeffries cut up her own credit card several years ago when the balance became unmanageable, but still became an indirect victim of the credit crunch that is now dragging America into recession. Linens ’n Things filed for bankruptcy protection in May; in October, unable to find a buyer for its stores, it began to liquidate itself. A sign in the window of Ms Jeffries’ store in suburban Maryland invites anyone interested in buying the fixtures to see the manager. Ms Jeffries expects to be out of a job by the end of December. An important reason why the American economy has been so resilient and recessions so mild since 1982 is the energy of consumers. Their spending has been remarkably stable, not only because drops in employment and income have been less severe than of old, but also because they have been willing and able to borrow. The long rise in asset prices—first of stocks, then of houses—raised consumers’ net worth and made saving seem less necessary. And borrowing became easier, thanks to financial innovation and lenders’ relaxed underwriting, which was itself based on the supposedly reliable collateral of ever-more-valuable houses. On average, consumers from 1950 to 1985 saved 9% of their disposable income. That saving rate then steadily declined, to around zero earlier this year (see chart). At the same time, consumer and mortgage debts rose to 127% of disposable income, from 77% in 1990. Those forces have now reversed. The stockmarket has fallen to the levels of a decade ago. House values have fallen 18% since their peak in 2006. Banks and other lenders have tightened lending standards on all types of consumer loans. As a consequence, consumer spending fell at a 3.1% annual rate in the third quarter (in part because tax rebates boosted spending in the second), the steepest since the second quarter of 1980 when Jimmy Carter briefly imposed credit controls. More such declines are likely to follow. Richard Berner of Morgan Stanley projects that in the 12 months up to the second quarter of next year real consumer spending will fall by 1.6%—a post-war record. “The golden age of spending for the American consumer has ended and a new age of thrift likely has begun,” he says. Even before this crisis hit, saving was bound to rise. Baby-boomer Americans have saved far less than their parents, according to McKinsey Global Institute, the consultancy’s affiliated think-tank, and are unprepared for retirement. Drawn out over many years, a rise in saving would be a good thing. But compressed into a matter of months, it would be downright dangerous. But the possibility cannot be dismissed. Bruce Kasman and Joseph Lupton of JPMorgan predict that the saving rate will jump to around 4.5% by the end of next year, the sharpest jump in so short a time in the post-war period. Patricia Baker, a part-time hostess at a Maryland country club, is spending $1,000 on Christmas this year compared with $3,000 last year. She worries about the economy. People at the club still play golf, but instead of ordering lunch and a beer, many just buy crackers and a soda. She also has less to spend. Illness kept her husband off work for a bit, and they fell behind on payments on their two credit cards. The credit-card company docked his wages to pay off the first, and she is still battling over the second. She expects her monthly mortgage payment to reset next year from $1,700 to $2,000 or more, and doubts she can find anything better: “Banks aren’t going to touch anyone that doesn’t have perfect credit.” She now pays cash—as she did for two pillows in the Linens ’n Things closing sale. This compulsory return to thrift will be deeply painful; consumer spending and housing are almost three-quarters of GDP. Of the 1.2 million, or 0.9%, decline in jobs since December, about 700,000 are directly related to consumers: retail trade, transportation manufacturing and home-building. The rise in unemployment, from 4.4% in 2006 to 6.5% in October, is nearing that of 2001-03 and is not over. On November 19th Federal Reserve policymakers disclosed they expect the recession to last until mid-2009. Their inflation worries have evaporated; indeed, consumer prices plunged a record 1% in October from September, and by 0.1% excluding fuel and food, the first such decline since 1982. The Fed’s vice-chairman, Donald Kohn, said outright deflation “is a risk out there but it’s still small”. The risk is that the recession will be longer and the recovery weaker than expected as consumers retrench. Until 1982 recessions were often induced by the Fed to weaken demand and reduce inflation. Declines in GDP were dominated by business inventories and interest-sensitive spending such as cars and houses. Once the Fed eased money, spending sprang back. Since then inventories have become less important to the business cycle and deregulation and financial innovation mean higher interest rates take longer to affect spending. Expansions are marked by sizeable growth in assets and debt. When the cycle turns, falling asset values and debt reduction weaken the kick of lower rates, producing anaemic recoveries with rising unemployment. The Fed has already lowered its interest-rate target to 1%, but it is fighting gale-force headwinds as lenders reduce their loan portfolios. Citigroup recently told many of its credit-card holders that it was raising their interest rates by up to three percentage points. Lenders once routinely pooled credit-card, student and car loans into securities and sold them to capital-markets investors. Joseph Astorina of Barclays Capital says no one wants to buy such securities now for fear that some overextended investor will dump its own holdings a week later, driving their values down sharply. The issuance of credit-card-backed securities, which averaged $8 billion a month in 2007, was zero in October, he says. Alan Greenspan, the former Fed Chairman, told The Economist this week that banks were satisfied with capital equal to 10% of their assets in the past. Now, to soothe depositors and investors, they will need a much higher ratio—perhaps around 15%. Until they get there, through a combination of raising new capital, reducing dividends and share buybacks, and shedding assets, lending will be constrained. This makes a strong case for more government stimulus. Lawrence Summers, the former treasury secretary and a candidate for the same post under Barack Obama, said on November 17th that it should be “speedy, substantial and sustained over a several-year interval”. Fiscal stimulus at this stage would replace some of the demand which has been wiped out by the credit crunch. It won’t prevent a recession; but without it, the recession is guaranteed to be far worse.

Plus ça change - ECO

Nov 20th 2008 From Economist.com A conference on financial crises reveals striking similarities FORTY years of financial history were debated in a London livery hall on November 17th by a heavyweight group of speakers including Paul Volcker, the former Federal Reserve chairman, Jacques de Larosiere, a former managing director of the International Monetary Fund and Nigel (now Lord) Lawson, a one-time British finance minister. As the Lombard Street Research seminar discussed past crises, what was remarkable was how the old battles are still being fought. The Europeans always seem to be calling on the Americans to put their house in order by reducing their trade, or budget, deficits while Washington always wants the rest of the world to increase domestic demand (and thus buy more American exports). The Europeans tend to believe in international arrangements (such as fixed, or targeted, exchange rates); the Americans do not want any constraints placed on their domestic economic policies. So in the early 1970s, the Bretton Woods system broke down because the Americans (to European eyes) neglected their responsibility to maintain the value of the dollar relative to gold; in contrast, the Americans felt they bore an unfair burden because Europeans had the option to devalue their currencies which the US did not. In the 1980s, the Americans saw their deficits as the short-term consequences of pro-growth, tax-cutting policies; rather than being forced to cut back, they wanted other countries (and particularly the Japanese) to adopt the same approach. Jump forward twenty years and the cast has changed, but the script remains the same; Washington now wants the Chinese to play the role of consumer of last resort. Several panellists commented that countries with trade deficits come under pressure to change tack (with the currency markets leading the charge) but there is no mechanism (apart from the unpalatable option of tariffs) to force surplus countries to change policies. The same problem applies today. No wonder politicians struggle to cope. Mr Volcker recalled President Nixon’s plea to "give me some monetary system that doesn’t have crises". Many modern leaders will echo the sentiment.

Job Losses Surge as U.S. Downturn Accelerates

Rising unemployment across the nation reveals a pervasive downturn that is spreading at an accelerating pace. In data released Friday by the Bureau of Labor Statistics, 12 states, including Florida, Idaho, North Carolina and Illinois, reported a rise of at least two percentage points in unemployment rates over the past year. For many states, the pace of decline is more severe than during the 2001 recession. Job losses have spread beyond construction and manufacturing to service sectors such as tourism, hospitality and professional and business services. "It's remarkable how fast the unemployment rate is increasing" in several states, said Luke Tilley, a senior economist at IHS Global Insight. "We are now seeing the full ripple effects." In October, month-over-month unemployment rates increased in 38 states and the District of Columbia. Unemployment rates held steady in seven states and fell in five. Many economists forecast the national unemployment rate, currently at 6.5%, will top 8% in the next few months. The weakest states are those with concentrations of construction and manufacturing jobs. Michigan and Rhode Island, both heavily dependent on manufacturing, posted October unemployment rates of 9.3%, highest in the nation. Ohio's rate rose to 7.3% from 7.2% in September. Unemployment generally was higher in Western states, which have been hit particularly hard by the housing bust, and the Midwest, which continues to bleed manufacturing jobs. But joblessness affected the entire country, even touching energy-producing states that had been resilient up to this point. Florida has lost 156,000 jobs over the past 12 months, but the weakness has spread beyond the state's housing industry. About half the losses were in the construction sector, but the state also lost 47,000 jobs in the professional and business service sector, 38,000 in trade, transportation and utilities, and 20,000 in manufacturing. Unemployment rose throughout the Sunbelt, as falling home prices and surging foreclosures continued to weigh on employers. Florida and Georgia both posted unemployment rates of 7%, while Nevada's rose to 7.6% and California to 8.2%. While Sunbelt states have been buffeted by the housing bust and subsequent falloff in consumer spending, they may have further to fall. In Florida, Arizona and Nevada, construction jobs account for between 6.5% and 9.4% of employment, compared with 5.3% nationally, according to economists at Goldman Sachs. An exception is California, where construction employment is now in line with the national average. Energy states remain the lone bright spot, but not necessarily for long. Wyoming and South Dakota had the lowest unemployment rates in the nation, at 3.3%. North Dakota's unemployment rate fell to 3.4%. Falling energy prices have removed an economic buffer from many of those states. Unemployment rose 0.5 percentage point to 5.6% in Texas; in Oklahoma, the rate rose to 4.3% from 3.8% last month.

market outlook as of 11/22/2008

--Initial jobless claims registered more than 500k each week for the past month, worst since 1982 --CPI MoM is negative -1%, feuling the deflation concern --Flight to quality drove 10y T-bond yield to 3%, lowest level since 1973 --S&P declined 54% since the peak in Oct 2007, the worst since 1930s --Advance retail sales dropped four months in row, unseen since the indcoator started 198x? --CMBS BBB- credit spread shot up to 40% --S&P dividiend yield exceeds yield on 10-y T-bond yield

Similarities to Dark Days Seen in Oil

As crude slips below $50 a barrel, the dark days of the early 1980s are haunting the oil market. Oil Prices May Fall Further 2:50 Sean Brodrick, natural resources analyst at Moneyandmarkets.com, explains why more bad economic news could depress oil prices further. He also discusses what traders can expect from OPEC's upcoming meeting. Benchmark crude on Thursday ended at $49.62 a barrel on the New York Mercantile Exchange, a level unseen since May 2005. But it is the early 1980s that offer a more-useful reference point. Then the U.S. entered a deep recession and world oil demand declined four years running on a conservation push and after spiking prices. "We could have negative oil-demand growth for four years in a row again," said Philip Verleger, an independent energy economist who served in the Carter administration. "This is a really bad recession." While President Jimmy Carter in the late '70s pushed for conservation efforts, President-elect Barack Obama is advocating strict controls on carbon-dioxide emissions, which would force greater efficiency in the way the U.S. burns oil. To be sure, there are big differences. That era's price spike followed the 1979 Iranian revolution and the start of the Iran-Iraq war. The Nymex crude-futures market was formed only in 1983. But the basic similarity to the earlier period is that the economic outlook is decidedly stark. The International Energy Agency estimates that world oil use is down 0.6% in the final quarter of 2008 from a year before and sees demand roughly flat for the year. Says Antoine Halff, deputy head of research at futures brokerage Newedge USA: "Demand destruction today rivals that caused by the oil shocks of the 1970s, and may prove to be, to an even greater extent, a game changer."

More Hedge Funds Expected to Succumb

This has been the toughest year on record for hedge funds. Several factors suggest it could get even worse. In recent weeks, many hedge funds have been stockpiling cash in the hopes of stanching losses and having the wherewithal to satisfy investor redemptions. Some hedge-fund managers had hoped investors might reverse their withdrawal requests if the market improved. But amid the past week's rout (even with Friday's gain), and a steady redemptions drumbeat from pension funds, endowments and others, there is a sense that more hedge funds will have to close. 'Survival Mode' "A lot of hedge funds are in survival mode trying to ride the year out," says Jack McDonald, president and chief executive of Conifer Securities LLC, which does trading and accounting for hedge funds. Redemptions in the industry will amount to between 25% and 40% of hedge-fund assets by March 2009, says Barry Colvin, vice chairman of Balyasny Asset Management, a New York hedge fund. The market continues to pummel many funds' performance, including some that outperformed peers in recent years. One of them, Glenview Capital Management, the $5 billion equities-focused hedge-fund firm overseen by Lawrence Robbins, is down about 50% this year in its biggest fund, according to investors. Redemptions and investment declines will likely cause hedge-fund assets to fall as much as 50% from their peak by mid-2009, Citigroup Inc. said in a Nov. 16 research report. Meanwhile, funds are scrambling to figure out how to satisfy investors' demands for cash. Some have curtailed their selling of securities in recent days even amid a torrent of withdrawal requests. Instead, a number of firms, including Platinum Grove Asset Management, Blue Mountain Capital and Whitebox Advisors, are limiting investor withdrawals or restructuring to avoid forced asset sales. Some, like Trafelet & Co. and Plainfield Asset Management, are placing investments into separate funds, sometimes called "special purpose vehicles," that will sell the assets over time, to avoid dumping securities in a rough market, according to investors. Lawyers say more firms are working on similar moves. The biggest funds run by Farallon Capital Management are down about 30% this year, and a higher-than-normal level of redemptions has prompted discussions about whether the San Francisco firm will curb withdrawals, which have reached into the billions of dollars this year. A spokesman declined to comment. Earlier this month, large London hedge fund GLG Partners LP told investors it is suspending withdrawals from its Market Neutral fund, which invests in convertible bonds and had about $1.5 billion at the end of September. Convertible bonds and bank loans have been among the biggest money-losing assets for hedge funds in recent weeks. "I don't think people are selling their less-liquid holdings to meet redemptions, they're just telling investors they can't have that portion of their money or that it's in a liquidating class," says Brett Barth, who helps run BBR Partners, a firm that manages money for wealthy families. One large force sucking hedge money are the "fund-of-fund" firms, which spread their clients' money across pools of hedge funds and account for about 40% of hedge-fund assets. Some such managers are now blocking withdrawals out of their firms. Switzerland's Gottex Fund Management Holdings AG, for instance, recently said it is barring clients from cashing out from some funds for several months. Hope Coming? The woes have dimmed hopes that hedge-fund cash could fuel a year-end market upturn. Still, a late-year hedge-fund driven rally can't be ruled out, Citigroup said, given the declines in stock prices. "While hedge funds are not in a great position to put money to work at this juncture," the firm said, "they most likely would try to participate to limit annual losses and possibly retain other investors who are on the fence about reallocating capital."

Last Month, $40 Billion Pulled From Hedge Funds

Investors withdrew $40 billion from hedge funds last month amid the stock market's crushing declines. Coupled with $115 billion in losses, the industry's assets fell by the biggest one-month amount on record, according to Hedge Fund Research. The once-hot industry, which managed $1.56 trillion as of Oct. 31, has seen numerous funds shut because of big losses this year, and the number of funds is expected to be nearly halved to around 5,000 before the dust settles. The $155 billion drop in hedge funds' assets follows a $210 billion decline in the third quarter. Year-end redemption requests from investors, meanwhile, are expected to be massive. Funds unwinding positions amid the looming redemption requests and increased difficulty in borrowing money have been among the reasons cited for the stock market's swoon over the past two months. October's withdrawals were broad and resulted in four fund types seeing net outflows for the year: equity hedge, event driven, relative value and macro. The latter bets on global economic trends and saw $11 billion in net outflows for the month even as such funds are up 4% year-to-date, said Hedge Fund Research. The investments known as "funds of hedge funds," which invest in several other funds, saw $22 billion in withdrawals. That group's performance is negative 18.5% this year. Hedge Fund Research said its composite hedge-fund index fell 6% in October, which was less than the major U.S. stock indexes.

Fed liquidity flood swamps rate controls - FT

By Krishna Guha The dramatic expansion of liquidity operations by the Federal Reserve is making it difficult for the US central bank to manage the federal funds rate, the basic interest rate in the US economy, as the minutes of its October policy meeting make clear. The flood of reserves created by the Fed since September has made the actual funds rate highly volatile and left it trading on average far below the target rate of 1 per cent. The problem highlights the challenge facing all the world’s central banks as they try to ramp up liquidity support and fill in for a dysfunctional interbank lending market by providing loans for periods of several months, without losing control of their basic interest rate in the process. The Fed, which until recently relied on old mechanisms to manage interest rates, has a new tool to tackle this problem – the ability to pay interest on bank deposits held at the central bank. These interest-bearing accounts suck excess reserves out of the market. But while this is helping, market dislocations have prevented it from working as smoothly as hoped. The US central bank has already had to retune this facility twice in a matter of weeks and may have to make other changes, including finding an indirect way to pay mortgage groups Fannie Mae and Freddie Mac interest on their reserve holdings. Prior to the credit crisis, the Fed managed the Fed funds rate through open market operations – estimating how much demand there would be for reserves each day, the supply required to meet this demand at the target interest rate, and adding or subtracting reserves from the market accordingly by buying or selling US government securities. After the crisis began in August 2007, the US central bank used these open market operations to suck out excess reserves created by its new liquidity operations. But these operations, which grew more difficult as the liquidity operations swelled, became unmanageable from September of this year, with huge further increases in liquidity support that created reserves on a giant scale. The US Treasury stepped in to help by issuing about $500bn in what were, in effect, sterilisation bonds intended to mop up the excess reserves created by Fed lending. However, this was only a stopgap measure. Ben Bernanke, the Fed chairman, believed that the real solution lay in the ability to pay interest on reserves, which would put a floor under the actual fed funds rate. This authority was granted by Congress as part of the $700bn bail-out plan, since when the Fed has been able to ramp up its liquidity operations still further, with unlimited swap lines to a number of other big central banks and large-scale purchases of commercial paper. Yet, while the ability to pay interest on reserves has helped the Fed expand lending without completely losing control of the Fed funds rate, it has not prevented the actual rate from consistently undershooting the target rate, forcing the Fed to twice amend the way it operates. Initially the Fed hoped to use the deposit rate on reserves to establish a corridor around the Fed funds rate, using it as a backstop for its traditional open market operations, loosely following the model used by Canada and Australia. So it set the deposit rate 65 basis points below the target Fed funds rate. But the actual Fed funds rate simply sank to the deposit rate – the bottom of the Fed’s new corridor. So the Fed was forced to narrow the gap, reducing the spread so the deposit rate was set at 35bp below fed funds. The actual Fed funds rate still sank to – or even below – the new deposit rate. So the Fed last week dropped the gap altogether, announcing that it would set the deposit rate equal to the Fed funds rate – loosely following the model used by New Zealand. That, in theory, should have stopped the Fed funds rate falling below target, because banks would not want to lend money to each other in the overnight Fed funds market for less than they could get with no risk by putting their money on deposit at the Fed. Yet the Fed funds rate still sometimes trades below target. Fed officials believe this is in large part because Fannie Mae and Freddie Mac, which account for between a third and a half of the Fed funds market, and a still larger proportion of net lenders of reserves, cannot by law directly receive interest on reserves from the Fed. In a normal market this would not be a problem, because banks would queue up to act as intermediaries for Fannie and Freddie. But banks are not doing this, apparently because they are too capital constrained to swell their assets with Fannie and Freddie’s excess reserves. So the two enterprises continue to loan funds at less than the target Fed funds rate, allowing the actual interest rate to trade below its target. The Fed is now looking at ways to overcome the Fannie/Freddie problem – for instance, by inducing a bank to act as an intermediary – in the hope that resolving this will finally restore their ability to tightly control US interest rates.

Mass unemployment could reach 8.1% in the next two years

BOSTON - November 20, 2008 - A U-Mass Boston public-policy professor says Massachusetts could see its unemployment rate rise to 8.1 percent in the next two years. The state lost 7,000 jobs last month, raising the jobless rate to 5.5 percent. Professor Allen Clayton Matthews says Massachusetts could lose as many as 135,000 jobs by the end of 2010. But Matthews says this recession won't be as bad as the last one. MATTHEWS: The federal government has been taking very strong and deliberate action and will take more in the form of fiscal stimulus. Matthews says federal aid to states, tax cuts, and more job insurance will help moderate the recession.

Going long on government bonds - FT

--long government bond because inflation will be contained due to unfettered leverage accumulation since 1970s. --Soros suggested shorting government in 1970s because Fed failed to contain inflation due to unleverage in the past decades. By Hugh Hendry Published: November 19 2008 16:03 Last updated: November 19 2008 16:03 Someone once said there are certain things that cannot be adequately explained to a virgin, either by words or pictures. It is therefore with some trepidation that I attempt to outline our investment policy. We are bullish on agriculture and bearish on the financial community. For 10 years we have contended that equity markets can, and do, stagnate for periods as long as a quarter of a century. Accordingly, we have refused to follow the market, choosing instead to invest in unleveraged sectors which have endured long bear markets. However, there are complicating cycle considerations. A process of debt liquidation is under way that resembles a turning point heralding weaker global growth. This undermines almost all risk taking, including agriculture, and for this reason we presently favour only government bonds. According to Prada: “There is a rejection of fakeness – the fake avant-garde.” And the inflation scare that took the price of oil to almost $150 per barrel, and created a hawkish central banking community, was perhaps the biggest head-fake of all. Certainly, the market for 10-year government bonds is beginning to think so. It is trading near a record high. And today, even those regional Fed governors and hawkish European central bankers seem to see it as well. As I say, this is the time to own government bonds. But we are aware of just how out of sync we are with our heroes. Can the combined intellectual weight of Mark Faber, George Soros and James Grant all be wrong? Why do they insist on shorting Treasuries during the worst financial crisis since the Depression? I blame the Romans. Monty Python’s Life of Brian famously asked, “What have the Romans ever done for us?” In a similar vein, one might enquire: “What did the central banks do to contain inflation in the 1970s?” As in most things, fate and chance play an important part. Let’s consider the facts. The Fed reacted to the first oil shock 36 years ago by driving its rate up from 3.5 per cent in February 1972 to 13 per cent in the second quarter of 1974. Such high nominal rates were unheard of and at the time ranked as the highest in American economic history. The average US stock lost 74 per cent of its value from its 1968 high. The real economy went into reverse and contracted in both 1974 and 1975. Perversely, I would attribute the decade’s inflation to the lack of leverage in the economy. The bankruptcy of so many banks during the 1930s encouraged the politicians to de-risk the sector. For more than 40 years, the banking sector grew modestly, attracted modest people and produced modest returns. The emergence of today’s cadre of cavalier banker was only detected by Soros, Rogers et al in their 1972 report, The Case for Growth Banks, some 43 years after the stock market peak in 1929. If a tree falls in a forest and no one is round to hear it, does it make a sound? Likewise, if house prices fall but mortgage debt is low, does it really matter? This was the case in the mid 1970s and, in the absence of today’s unprecedented leverage, house prices did not falter, repossessions never soared and there was no major bank insolvency. I would contend therefore that it was the phenomena of low asset prices and a conservative banking sector that ensured that the Fed’s monetary policy response failed to tame inflation. Contrast with today and the prospect of containing inflation should be high. Thirty years of unfettered monetary expansion has left the banking sector fully leveraged and vulnerable to insolvency. For instance, the mere act of holding UK interest rates at 5 per cent from April through to October of this year has guaranteed a sharp contraction in the economy which has the Bank of England reaching for the “D” word. Don’t get me wrong, I think Soros, Faber and Grant are right to fear the inflationary consequences of our present breed of central banker. But my paradoxical recommendation is to buy bonds. Many scoffed, but this policy is working. A paradox, remember, is a self- contradictory statement based on a valid deduction from acceptable premises. Here is another: the smartest investor in London is short bonds. I’m long bonds, yet we share the same vision of the future. I’ll let you decide.

Consumer Price Fall 1%, Raising Deflation Fear

Nov. 19 (Bloomberg) -- The cost of living in the U.S. fell by the most on record and construction began on the fewest homes ever last month, evidence the economy is in the worst recession in at least a quarter century. The consumer price index plunged 1 percent last month, the most since records began in 1947, the Labor Department said in Washington. Commerce Department figures showed housing starts tumbled to an annual rate of 791,000, indicating the industry’s contraction may extend into a fourth year. Today’s CPI report signals deflation, or a prolonged price slide, may become another hazard facing Federal Reserve Chairman Ben S. Bernanke and President-elect Barack Obama. Deflation could worsen the economic downturn by making debts harder to pay off and countering the impact of Fed interest-rate cuts. Excluding food and energy, so-called core pricesunexpectedly fell for the first time since 1982.

Hedge funds took hit in Oct

Nov. 19 (Bloomberg) -- Money manager John Paulson has started buying beaten-up mortgage bonds as hedge funds stumbled for a fifth straight month. Paulson, 52, is purchasing debt backed by home loans after generating sixfold returns last year with help from bets against subprime mortgages, investors in his funds said. Paulson's Advantage Plus fund rose 29 percent this year through October, while the Eurekahedge Hedge Fund Index, which tracks more than 2,000 funds that invest globally, dropped about 12 percent. ``Paulson's timing is typically very good,'' said Louis Gargour, chief investment officer of LNG Capital LLP, a London- based hedge fund that invests in distressed credit markets. The $1.65 trillion hedge fund industry is enduring its worst period in at least eight years as global declines in stocks and commodity prices led to investment losses and customers withdrew a net $62.7 billion from the funds last month, Singapore-based Eurekahedge reported. Assets may fall to about $1 trillion by the middle of next year, analysts at New York-based Citigroup Inc. estimated in a report published earlier this week. ``Hedge funds will probably face more redemptions for a while,'' said Akihiro Nishi, executive director at Tokyo-based Mitsubishi Asset Brains Co.'s investment advisory division. The average hedge fund followed by Eurekahedge fell 4.5 percent last month, compared with the 19 percent drop in the MSCI World Index and the 22 percent slump in the Reuters Jefferies CRB Index, a benchmark for commodities.