Mortgage 'Cram-Downs' Loom as Foreclosures Mount

--morgage bankruptcy reform will be part of the foreclosure prevention effort --cram-down measure that is gaining momentum will alow judges to slash mortgage principal amount --the measure will break the standoff between mortgagte servicers and investors since judges has the ultimate power to force a deal --Lenders hate the measure because they have to absorb the losses. --the measure might systematically solve the mortgage issue where moretgage owners has negative equity By MICHAEL CORKERY Mortgage lenders who wake up Thursday with a New Year's hangover are likely to face another headache soon: The effort to give bankruptcy judges the power to rewrite mortgages is gaining steam. The banking industry hoped the mortgage "cram-down" measure died when Congress removed it from the $700 billion bailout bill that passed in October. But it has been gathering momentum in Democrat-controlled Washington, as evidence emerges that current voluntary foreclosure-prevention programs are falling short. Associated Press With efforts to stem home foreclosures stagnating, mortgage 'cram-down' efforts seem destined to re-emerge under the new Congress. Here, a foreclosed home for sale in Lakewood, Colo., in September. The Many Models of Mortgage Modification A number of different proposals have been floated to assist ailing borrowers and stop the flood of foreclosures. Here's a look. In a cram-down, a judge modifies a loan, often reducing principal so a borrower can afford it. Lenders hate it because they have to absorb the loss. Bankruptcy judges currently have the ability to modify certain personal loans and even mortgages on vacation homes, but they can not cram-down mortgages on primary residences. Even staunch opponents acknowledge that mortgage cram-downs for primary residences are likely to be as part of Congress's economic-stimulus package in early 2009. The National Association of Home Builders used to reject any bill with a cram-down provision outright. Now it is saying the measure is worth a look. President-elect Barack Obama and his incoming administration aren't disclosing details of the much-awaited foreclosure-prevention plans, but during the campaign Mr. Obama called for closing the loophole that prevents bankruptcy judges from restructuring mortgages on primary residences. Lawrence Summers, a top economic adviser of Mr. Obama, publicly voiced support for bankruptcy reform before his appointment. "To the extent that nothing else is working, bankruptcy cram-downs are becoming more likely," says Rod Dubitsky, head of asset-backed-securities research at Credit Suisse. The latest embattled foreclosure-prevention program is Hope for Homeowners, which was approved by Congress last summer and supposed to help 400,000 homeowners. Only 357 people have signed up so far for the voluntary program. The Department of Housing and Urban Development, which is administering the program, acknowledges that it has been encumbered by high fees and narrow eligibility requirements. Another government program, FHASecure, was intended to help 80,000 homeowners who had fallen behind on their payments after their adjustable interest rates reset. It has helped only 4,100 delinquent borrowers refinance since September 2007 and will stop taking new loan applications as of Wednesday. Mortgage lenders also are modifying tens of thousands of loans without government help. But often this hasn't solved the problem. A report last week by the Office of the Comptroller of the Currency and the Office of Thrift Supervision found that nearly 37% of mortgages modified in the first quarter of 2008 were 60 days or more delinquent after six months. "It is absolutely clear that voluntary modification is just not working," says Rep. Brad Miller, a North Carolina Democrat. "Every plan that Congress has passed, we do it and nothing happens." Mr. Miller intends to introduce a mortgage bankruptcy-reform bill Monday, the first day of the new session. Illinois Democrat Richard Durbin plans to introduce a similar bill in the Senate. Lenders warn that mortgage cram-downs will lead to higher interest rates and down payments, as banks seek to mitigate future losses from judicially imposed write-downs. They also are concerned that the reform measure would add to the losses they have already sustained from the housing crisis. "Our members have modified 2.8 million loans," says Francis Creighton, chief lobbyist of the Mortgage Bankers Association, which opposes cram-downs. "Could we do better? We are trying to do better." Proponents of bankruptcy reform say that previous modification efforts are falling short because they have focused on spreading out payment terms and forestalling delinquent payments. But that hasn't cured a big part of the problem: that one in six houses is now worth less than its mortgage. Only programs that reduce principal amounts are likely to restore equity to millions of homeowners, they say. "You have to deal with the systematic problem of underwater mortgages or you are not going to stop foreclosures," says Harvard University economist Martin Feldstein, who has proposed his own plan to help homeowners with negative equity in their homes, which involves mortgage principal write-downs and replacing part of the original mortgage with a new, lower cost loan. Proponents of bankruptcy reform also note that millions of troubled loans aren't being addressed by current modification programs because they were carved up and sold to investors as securities. Mortgage servicers have been reluctant to aggressively modify these loans because they have been unsure of their legal rights. The mere threat of mortgage cram-downs could break the standoff between mortgage servicers and mortgage investors, which has slowed aggressive loan modifications. Investors may be more willing to go along with industry-driven modifications when facing the threat that a judge could ultimately order the amounts of loan principals reduced, forcing them to eat bigger losses. "The servicers can argue we have to give this to the borrower otherwise they will get it in bankruptcy court," Mr. Dubitsky says. Lenders argue that loans modified by bankruptcy judges often have high rates of default on the new payment plans. "We should be working on keeping people out of bankruptcy not pushing people into it,'' says Mr. Creighton of the Mortgage Bankers trade group Bankruptcy reform is likely to be one of many proposals that Congress considers as part of comprehensive foreclosure-prevention effort. Another element is likely to be one that FDIC Chairman Sheila Bair has been proposing. Under her plan, the government and lenders would split the losses on modified loans that go into default. Some economists are urging the new administration to go even further. Mark Zandi, chief economist at Moody's Economy.com, proposes that the government subsidize the bulk of principal write-downs to the tune of $100 billion, about four times as much as Ms. Bair's program. —Nick Timiraos contributed to this article. Write to Michael Corkery at michael.corkery@wsj.com

The Undeniable Shift to Keynes

--There is a worldwide shif to Keyness which holds that fiscal spending is essential to fill up the gap left by persistent lack in demand during recession even for capitalist economies. --The resurgence of Keynes is a reversal of the orthodoxy that trumpets the virtue of free market approach and any efforts to use fiscal policy to manage economy is doomed to failure. --Only Germany is sceptical that fiscal policy will work and blame US for saddling a generation with heavy debt. --The consensus was set out in the communique that issued by the Group of 20 leading and emerging economies. --But fislcal spending also used to prove ineffective to stimulate domestic demand to rapid effects The undeniable shift to Keynes By Chris Giles in London, Ralph Atkins in Frankfurt and,Krishna Guha in Washington Published: December 30 2008 02:00 Last updated: December 30 2008 02:00 More than three decades have passed since Richard Nixon, the Republican US president, declared: "We are all Keynesians now." The phrase rings truer today than at any time since, as governments seize on John Maynard Keynes's idea that fiscal stimulus - public spending and tax cuts - can help dig their economies out of recession. The sudden resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the past several decades, which held that efforts to use fiscal policy to manage the economy and mitigate downturns were doomed to failure. Now only Germany remains publicly sceptical that fiscal stimulus will work. The new Keynesian consensus was set out in the communiqué issued by the Group of 20 leading industrialised and emerging economies in November, in which they vowed to "use fiscal measures to stimulate domestic demand to rapid effect" within a policy framework "conducive to fiscal sustainability". The incoming administration of Barack Obama is preparing a two-year fiscal stimulus package with a reported price tag of $675bn-$775bn, which many Washington-based analysts believe could swell to $850bn (£580bn, €600bn) or even $1,000bn - between 5 per cent and 7 per cent of national income. Gordon Brown, UK prime minister, told reporters in late December that if monetary policy was impaired - in large part because of problems within the financial system - "then governments have to use fiscal policy, and that has been seen in every country of the world". Launching France's fiscal stimulus, President Nicolas Sarkozy said: "Our answer to this crisis is investment because it is the best way to support growth and save the jobs of today - and the only way to prepare for the jobs of tomorrow." But not all policymakers have been so keen to jump on board what they see as a dangerous journey, not back to the theory Keynes laid out to combat a deep and protracted economic slump but to the failed fiscal fine-tuning of the 1970s, in which governments tried to maintain full employment at all times. Germany has voiced the strongest principled objections to large-scale fiscal stimulus packages. Peer Steinbrück, the finance minister, has complained about the "crass Keynesianism" pursued by Mr Brown, accusing him of "tossing around billions" and saddling a generation with having to pay off British debt. Jürgen Stark, an executive board member of the European Central Bank, who was previously vice-president of the Bundesbank, warned of a "substantial risk" of a repeat of the 1970s. "I really cannot see why discretionary fiscal policies, which have proven to be ineffective in the past, should work this time," he said. Jean Claude Trichet, ECB president, has taken a cautious stance, arguing in a Financial Times interview for countries to allow their deficits to rise in line with the so-called automatic stabilisers - such as higher unemployment benefits and reduced tax revenues during a recession - but warning that the prospect of future tax rises could reduce consumer confidence. "One might lose more by loss of confidence than one might gain by additional spending," he said. In the US, Lawrence Summers, the former Treasury Secretary now lined up to head Mr Obama's National Economic Council, said the fiscal stimulus will address the need to increase investment in energy, education, health and infrastructure as well as the need to stimulate the economy. Laurence Boone, a Paris-based economist at Barclays Capital, argued that large European countries fall into two camps. In one are countries with highly indebted consumers where housing markets have made a big contribution to economic growth in recent years - namely the UK and Spain. Here, fiscal stimulus packages were larger and focused on supporting consumers and housing. Elsewhere, especially Germany and France, stimulus plans were less ambitious and "are set to rely more heavily on public sector investment, especially in infrastructure, with little support to consumption", Ms Boone notes. The contrasting rhetoric is more exaggerated than the reality of the differing positions. In gung-ho Britain and France, for example, the planned fiscal stimulus is no bigger than in reluctant Germany. And in all three countries, reduced tax revenues and higher welfare state payments will contribute the vast majority of prospective higher budget deficits, not the discretionary measures introduced in recent months. The US stimulus package appears to dwarf the European efforts. But any fiscal stimulus has to be larger in the US to have a similar effect because more generous European social safety nets guarantee higher payments to the unemployed. Mr Trichet argues that these "automatic stabilisers . . . have perhaps twice as much influence . . . as a percentage of GDP in the euro area as compared with the US". But it is clear a worldwide shift towards Keynesian deficit financing has occurred this year. Partly this is the result of the credit crisis impeding the effectiveness of monetary policy, partly the fact that interest rates cannot be cut further in the US and Japan, and also partly because banks will not lend to many households and companies even if they want to borrow. But the move towards using fiscal policy as a means of boosting advanced economies still has limits, recognised by all those who experienced the 1970s. Unsustainable fiscal positions can destroy confidence. The US, which issues the dollar, the world's reserve currency, has more latitude than most. But even Mr Obama has been keen to stress his ambition to "get our mid-term and long-term budgets under control". Smaller countries with fragile currencies, such as the UK, are even more vulnerable to the effects of the confidence of foreign investors. The UK government announced a five-year government austerity package to reduce deficits from 2011 at the same time as its stimulus in an attempt to provide evidence of its longer-term good intentions. Continental European economies are bound by the stability and growth pact, limiting both budgets and debt. But the deterioration of the outlook for the global economy has been so rapid that addressing the immediate problems has overtaken consideration of longer-term consequences. This trend was first evident almost a year ago in January, when Dominique Strauss-Kahn, the managing director of the International Monetary Fund, stunned delegates at the World Economic Forum in Davos when he called for "a new fiscal policy [as] . . . an accurate way to answer the crisis". On the podium with him was Mr Summers. He remarked: "This is the first time in 25 years that the IMF managing director has called for an increase in fiscal deficits and I regard this as a recognition of the gravity of the situation that we face." Mr Summers now argues that the outlook has deteriorated further. With the prospect of the economy remaining weak and unemployment high for a protracted period, he believes spending on projects that continue beyond 2009 is justified. Critics said this was a convenient cover for spending programmes that the Democrats wanted anyway. However, many economists agreed with the argument. "The US economy needs not only a large package of fiscal stimulus in 2009 but one that provides substantial support beyond next year," said Ed McKelvey, an economist at Goldman Sachs. Economic remedy in a time of misery The essential idea of John Maynard Keynes's The General Theory of Employment, Interest and Money is that modern economies can suffer from a persistent lack of demand, consigning millions to what he argued is unnecessary unemployment and misery. Although capitalist economies contain forces to restore full employment, these are weak and in some circumstances can take far too long to work. It is therefore better for governments to stimulate economies suffering from a lack of demand by stepping in with cheap money and deficit-financed tax cuts or public expenditure increases.

Immelt Fights to Keep GE’s AAA as Cost of Cut Surges

Dec. 30 (Bloomberg) -- General Electric Co. Chief Executive Officer Jeffrey Immelt has good reason to fight for GE’s AAA credit rating. It’s never been more expensive for a company to lose the top ranking. The gap between bonds rated AAA and those three steps lower, at AA-, averaged a record 112 basis points in December as the credit crunch deepened, according to Merrill Lynch & Co. data. Before credit markets began unraveling 16 months ago, the difference averaged about 6 basis points. A basis point is 0.01 percentage point. GE and Toyota Motor Corp. had the outlook for their bonds lowered to negative by Standard & Poor’s this month. The number of non-financial AAA companies in the U.S. dwindled to 6 from more than 60 in the early 1980s, according to S&P. The loss of the highest ranking mattered less when the interest penalty was lower. In the current crisis, a downgrade may result in tens of millions of dollars in extra annual borrowing costs. “People look to Aaa companies as one level removed from the safety of the U.S. government,” said Benjamin Garber, an economist at Moody’s Analytics in New York. “There is a very high premium on the best-rated issuers.” In Europe, the spread between bonds rated AAA and AA- is 127 basis points, compared with 17 basis points in June 2007, before the onset of the credit crunch, Merrill Lynch data show. Seeking Safety The cost of a downgrade jumped because investors have fled stocks, mortgage securities and high-yield, high-risk corporate bonds after more than $1 trillion in bank writedowns and credit losses since January 2007 and the failure of Lehman Brothers Holdings Inc. in September. The highest-ranked company debt and Treasury securities have benefited most because they are considered the least risky. Fairfield, Connecticut-based GE has held S&P’s top rating since 1956, longer than any other company. An extra percentage point in interest would have cost $233 million more in annual payments on the $23.3 billion GE Capital Corp. raised in the U.S. bond market in this year’s first half, according to data compiled by Bloomberg. A downgrade is already factored into the prices of GE’s bonds and derivatives, according to Moody’s Market Implied Ratings service. GE’s bonds are trading as if the company were ranked five levels lower at A2, according to Moody’s. S&P gives an AAA stamp to Automatic Data Processing Inc., Exxon Mobil Corp., GE, Johnson & Johnson, Microsoft Corp. and Pfizer Inc. The McGraw-Hill Cos. unit considers Berkshire Hathaway Inc. a financial company and also rates it AAA. Moody’s Investors Service confers its equivalent Aaa on all those companies except Pfizer, which lost the designation in December 2006 following the failure of its cholesterol pill, torcetrapib. Best Returns Toyota is the only non-financial, non-government borrower outside the U.S. with an AAA ranking from either Moody’s or S&P, according to the ratings companies. Moody’s, S&P and Fitch Ratings also issued top marks to $3.2 trillion in subprime mortgage-backed securities at the root of the financial crisis, more than three-quarters of which were later downgraded. The only corporate rating category to give bondholders a profit this year was top-ranked debt, Merrill data show. AAA corporate bonds in the U.S. returned 4.8 percent, compared with losses of 6.7 percent for all investment-grade debt. Treasuries gained 14 percent, while the S&P 500 Index declined 41 percent. ‘Very, Very Few’ Investors may have fewer opportunities to invest in top- rated bonds as the number of qualified issuers dwindles, according to Craig Hutson, a Chicago-based senior analyst at bond research firm Gimme Credit LLC. “Longer term, there are going to be very, very few companies that will have a triple-A,” he said. About 0.2 percent of bonds worldwide with an Aaa rating default within 10 years, based on a Moody’s analysis of securities from 1983 to 2007. That compares with 0.5 percent of those ranked Aa2 and 1.7 percent of all investment-grade debt. Almost 32 percent of high-yield bonds defaulted within a decade, the analysis showed. Moody’s founder John Moody defined Aaa bonds in part as debt “of the highest class, both as regards security and general convertibility,” according to Moody’s Analyses of Railroad Investments in April 1909. The ratings company’s current official definition of Aaa is debt “judged to be of the highest quality, with minimal credit risk.” Falling Numbers The number of AAA issuers represents less than 0.3 percent of all 2,276 rated non-financial companies, down from 5 percent in the early 1980s, S&P analysts Diane Vazza and Jacinto Torres said in a Dec. 23 report. “The overarching reasons for the shrinking of this elite group over the years have been investors’ increased tolerance for risk and the shift of companies from adopting historically conservative financial policies to placing greater emphasis on shareholder returns,” they wrote. United Parcel Service Inc. was the last U.S. borrower to lose its AAA. Moody’s downgraded UPS two levels to Aa2 in December 2007, citing additional debt the world’s largest package-delivery company took on to exit a pension fund. S&P reduced UPS three levels to AA- the following month because of a share repurchase plan. “It has made very little difference,” said Norman Black, a spokesman for Atlanta-based UPS. “We changed the financial structure of the company precisely because it had become clear to us the AAA standard was not going to result in a big decrease in borrowing costs.” Coca-Cola Former Coca-Cola Co. CEO Roberto Goizueta gave up an AAA classification to finance hundreds of millions of dollars of investments in bottlers. The Atlanta-based company’s long-term debt-to-capital ratio surged from 5.48 percent at the end of 1981 to 26 percent in 1986, when ratings companies downgraded the soft-drink maker. It’s now labeled A+ by S&P and Aa3 by Moody’s. The loss of an AAA may be more costly for GE, whose financing arm relies on access to public markets. GE Capital would be rated A+, or four grades lower than its current AAA, without the support of its parent company, S&P said. As part of GE’s plan to maintain its AAA, Immelt is shrinking GE Capital to less than 40 percent of total profit next year, from about half in 2007. On Dec. 2, the company said it plans to issue about $45 billion in long-term debt in 2009, less than the $66 billion it has maturing, and to reduce commercial paper to $50 billion, below the $75 billion it said previously. AAA ‘Philosophy’ “I want to make it clear: The AAA is a philosophy of how you run the company,” Immelt said at an investor meeting on Dec. 16. “I think the AAA’s important.” S&P cut the outlooks for GE and the financing unit to negative on Dec. 18 as the recession deepened. GE has a 1-in-3 chance of losing its top grade within two years, S&P said. Since the reduction, GE’s 5.25 percent notes due in 2017 rose 1.3 cents to 101.3 cents on the dollar to yield 5.06 percent, according to Trace, the Financial Industry Regulatory Authority’s bond-pricing service. The spread over Treasuries has narrowed 22 basis points. The average AAA bond difference declined 24 basis points in the same period, Merrill data show. GE, the world’s biggest maker of turbines for power plants and jet engines, has raised about $12.5 billion globally in sales of bonds guaranteed by the Federal Deposit Insurance Corp. That’s allowed the company to “prefund” some of the $45 billion of GE Capital debt it plans to refinance next year at some of the lowest rates it has paid since 2002. Toyota’s Outlook Toyota, Japan’s biggest automaker, had its credit rating outlook lowered to negative from stable by both S&P and Moody’s this month as the recession cripples demand for cars worldwide. Toyota lost its AAA at Fitch on Nov. 26, when the New York- based ratings company cut the carmaker two levels to AA, citing the “ongoing turmoil in the global automotive sector.” The Toyota City, Japan-based automaker “will make efforts to have our outlook raised to stable again even under this external environment,” said Hideaki Homma, a company spokesman. “They’re going to suffer like every other automaker in the world,” said Hutson, who expects Toyota to eventually lose its top rating at Moody’s and S&P as well. To contact the reporter on this story: Bryan Keogh in New York at bkeogh4@bloomberg.net

GMAC to Get $6 Billion Aid Deal

--Fed invested $5 bil prf equity and $1 bil loan to stablized GMAC as its second part to support auto industry --GMAC hleped financed 80% of purchase of GM cars by dealers and its restricted lending resulted in 45% sales plunge in Oct. --The bailout for GMAC helped to ease auto issues and home mortgage strain. --The bailout is conditional that GMAC has to raise $30 bil by debt-equity swaping 75% of debt issued. By DAMIAN PALETTA and JOHN D. STOLL WASHINGTON -- The federal government Monday deepened its involvement in the U.S. automotive industry by committing $6 billion to stabilize GMAC LLC, a financing company vital to the future of struggling car maker General Motors Corp. In a sign the government's role in the industry could become open-ended, the Treasury Department said Monday it had set up a separate program within the Troubled Asset Relief Program, a fund originally designed to help banks, to make investments directed at the auto industry. A Treasury official said the new program didn't have a specific dollar limit. The Treasury purchased $5 billion in senior preferred equity in GMAC and offered a new $1 billion loan to GM so the auto maker could participate in a rights offering at GMAC. That loan comes in addition to the recent $17.4 billion emergency plan to rescue GM and Chrysler LLC. The move represents the second tranche of government aid that redounds to the benefit of giant private-equity firm Cerberus Capital Management, which owns Chrysler and, until these recent moves, a majority stake in GMAC. John Snow, a top player at Cerberus, was the Bush administration's Treasury secretary before Henry Paulson. In bailing out GMAC, Treasury officials aren't just stabilizing an auto-finance company but a major player in the housing market's boom and bust. GMAC played a big role in pushing riskier adjustable-rate mortgages. The collapse of the housing market put additional strain on GMAC. The difficulties of GMAC and Chrysler's financing arm, Chrysler Financial, are a big reason GM and Chrysler have suffered steep drops in auto sales and fallen into financial trouble in the past few months, said Michael J. Jackson, chief executive of AutoNation Inc., the country's largest chain of auto dealerships, in a recent interview. Both financing companies have been restricting credit as their own finances worsened. "Consumer credit is the jet fuel of the auto business," Mr. Jackson said. "The majority of consumers can't buy a car without getting a loan." GMAC finances about 80% the wholesale purchases of GM's cars by dealers world-wide. It has traditionally been the largest source of financing for the actual buyers of those vehicles once they reached the showroom. The car company said last month that a 45% sales skid for October was fueled by GMAC's restricted lending, which cost GM anywhere from 45,000 to 60,000 sales in the month. About 25% of GM vehicle sales were financed through GMAC last month, down from more than 40% a year ago. The move by Treasury is the second part of a two-step rescue by the government of GMAC. Last week, the Federal Reserve approved the finance company's application to become a bank-holding company, a move sought by other companies, too, to take advantage of new government programs aimed at stabilizing banks. The Fed's approval was conditional on GMAC raising new capital, which the company tried to do through a debt-equity swap that expired Friday. The company's goal was to raise $30 billion by converting 75% of its issued debt into preferred-stock holdings. Last week, less than 60% of bondholders had signed on and the offering had been extended four times. At the same time as the Treasury announcement Monday, GMAC said it had raised enough capital to satisfy the Fed's conditions. It wasn't clear whether the government's intervention prompted or followed GMAC's meeting the capital requirement. Cerberus bought 51% of GMAC in 2006. GM has a 49% stake in GMAC. As a result of the Fed's move, Cerberus must reduce its interest to a maximum of 14.9% in voting shares and 33% in total equity. It will do this by distributing its positions in GMAC directly to Cerberus investors. GM will transfer part of its stake in GMAC to a trust whose trustee will be approved by the Treasury. Treasury has now spent virtually all the first half of a $700 billion financial-market rescue package Congress approved in early October. Treasury Secretary Paulson said two weeks ago that the first half of the bailout fund was essentially spent and that Congress would soon need to release the second installment. The Treasury official who briefed reporters on the plan Monday wouldn't break down how all of the money had been allocated, but said "from a short-term cash-flow basis" the department hasn't exceeded the first $350 billion installment. It is "not fair to say we've overcommitted the 350" billion, he said. Treasury officials briefed members of President-elect Barack Obama's transition team on the new plan, a Treasury spokeswoman said. Treasury said GMAC would pay an 8% dividend as part of the $5 billion investment, which the government said was "part of a broader program to assist the domestic automotive industry in becoming financially viable." Treasury will receive warrants from GMAC, which will be additional preferred equity equal to 5% of the preferred-stock purchase that will pay a 9% dividend if exercised. Treasury's investment doesn't carry any direct requirement to lend any of the money. A similar lack of conditions for funds loaned to banks has been a source of criticism, especially among congressional Democrats who charge as a result that the bailout isn't working. As part of the deal, GMAC agreed to limit compensation on its top 25 executives including a ban on severance packages for the top five employees. The limits won't apply to executives at Cerberus. Cerberus spokesman Peter Duda said the firm had no comment on Treasury's investment. GM officials couldn't be reached. GMAC said in a statement that becoming a bank-holding company improved its ability to make consumer and business loans. "In particular, the company intends to act quickly to resume automotive lending to a broader spectrum of customers to support the availability of credit to consumers and businesses for the purchase of automobiles," the company said. As a federally chartered bank, GMAC can have its debt temporarily guaranteed by the Federal Deposit Insurance Corp. GMAC also could get access to the Fed's discount window for inexpensive, short-term emergency loans. —Neal Boudette and Sharon Terlep contributed to this article. Write to Damian Paletta at damian.paletta@wsj.com and John D. Stoll at john.stoll@wsj.com

Hard lessons on confidence

--No decoupling --US consumers had been irrational, now are being forced be to rational --US dollar remain the reserve currency --big government is not over yet --Confidence is a fragile commodity, hard to earn and easy to lose Insight: Hard lessons on confidence By Joseph Quinlan Published: December 29 2008 16:03 Last updated: December 29 2008 16:03 This year has dished out a number of painful lessons for investors. Here is a sample of what we have learnt: Lesson 1: Like it or not, we’re all connected. Amid the global market meltdown in 2008, one thing has become clear: the debate about global decoupling is over – and the “decouplers” lost. There was a great deal of chatter this year about various parts of the world being immune to a US recession. The “decouplers” were emboldened by robust growth prospects in emerging markets, and by the expectation that Europe could hold its own in the face of a US downturn. Reality, however, has been different. Heading into 2009, the global economy is in recession. The lesson is that in a globalised economy characterised by rising cross-border flows of goods, services and capital, everyone – more or less – sinks or swims together. Lesson 2: The US consumer is rational after all. The US consumer has long been considered one of the most indestructible forces on earth. For many US households, living beyond one’s means has been standard, supported by rising home prices, bulging credit card debt and minuscule savings. The bursting of the dotcom bubble, 9/11, soaring petroleum prices – none of these forces could slow the pace of consumer spending and the myth was perpetuated that nothing could keep American consumers from the shopping malls at weekends. The US consumer, however, is more of a rational beast after all. The consumer is in retreat owing to falling home values, shrinking retirement accounts and the prospects of rising joblessness. The good news is it’s high time for overleveraged Americans to take a break. But the bad news is that until an alternative source of demand emerges, a frugal US consumer spells trouble for many export-driven countries. Lesson 3: The US dollar is hardly a banana republic currency. It was not that long ago that many were writing it off. The greenback was toast, with many in the Middle East and Russia hoping to be paid in euros. The debt-laden US was a spent force, so went the verdict, with the falling dollar the emblem of US decline. Yet, not for the first time, the demise of the dollar has been greatly exaggerated. As the global credit crisis has spread, the attendant flight to quality has triggered a surge in demand for dollar-denominated assets. Despite Wall Street’s being at the centre of the world financial crisis, the dollar has risen this year against the pound, many emerging market currencies – and even the euro. The buck’s strength underscores the safe haven status of the dollar in times of turmoil. The simple truth is this: by design and default, the US dollar remains the world’s currency of choice. Lesson 4: Big government is far from dead. All talk about the “death of capitalism” is just that: talk. But there is little doubt the role of government – in the US and abroad – is set to become larger. The “commanding heights” of the economy are shifting away from the tenets of privatisation, deregulation and free markets and towards more public sector regulation and ownership. Just how big a role the public sector will play in the future remains unclear. It is this uncertainty that has investors on edge. To be fair, government participation is part of the solution to what ails the global economy. The global credit crisis would be even more severe without massive aid from the public sector. That is the good news. The bad news: big government could increase the cost of doing business and undermine the entrepreneurial spirit of many economies. Lesson 5: Confidence is a fragile commodity. The most valuable lesson of 2008 lies with just how precious a commodity it really is. Confidence is hard to earn, easy to lose. Once it is shattered, putting the pieces back together takes a great deal of time and trust. It is the lack of confidence in the global financial system that has driven the global economy into recession and brought the global financial markets to their knees. At present, banks still aren’t fully confident about lending to one another or to qualified borrowers. There is still too much mistrust hanging over the global financial system. Not until confidence is restored will the global economy find its footing and the world financial markets find a bottom.

美联储降息未降低香港融资成本

香港总需要密切注意美国的降息行动，因为港元钉住美元的联系汇率制度意味着香港货币当局必须追随美国联邦储备委员会(Federal Reserve, 简称Fed)的货币政策。每当贝南克(Ben Bernanke)降息调整他的利率杠杆时，流向香港的低息资金就会又一次为资本市场注入一针强心剂 但是，Fed降息使低息资金流向香港的作用似乎正在减小。在Fed这次降息之后，房地产买家等贷款人将无法获得低成本的资金，因香港的银行反而上调了贷款利率并紧缩信贷。 虽然香港金融管理局(Hong Kong Monetary Authority)上周已追随Fed降息100个基点，使隔夜贴现窗口利率降至0.5%，香港的主要银行却未对利率作出相应调整。 汇丰银行(HSBC)和渣打银行(Standard Chartered)都没有调整最优惠贷款利率。它们表示没有降息空间。 和央行不同，这些商业银行在决定利率政策时需要面对现实的业务问题。从银行业的基本原理来说，它们把存款人的钱贷出去，需要在收回时赚取利润。 面对已经接近于零的存款利率和不断加大的坏帐风险，银行能否保持盈利成为一个令人担心的问题。其实自9月份以来，香港实际住房抵押贷款利率一直在上升，因为各家银行都在控制信用风险。房地产专家指出，住房抵押贷款利率已从最优惠贷款利率下浮3个百分点升至最优惠贷款利率下浮1个百分点。 房地产咨询公司美联集团(Midland Realty)预测，住房抵押贷款利率低于最优惠贷款利率的所谓“负利率”现象在持续8年后料将于明年终结。他们预测，2009年房地产价格将再跌10%，因为房地产贷款将出现萎缩。 再退一步，银行还必须认真考虑吸引储户的问题。如果利率过低，储户的存款积 性就会降低。 也许这是一个巧合。上周香港金管局降息数小时内，笔者就收到一条短信息，说只要在花旗银行(Citibank)开一个帐户就能享受现金奖励和2.5%的利息。 存款的减少可能会危及银行的资本充足率。值得注意的是，汇丰银行上周股价大跌，因为分析师认为该行将不得不寻求新的融资，或减少派息，甚至两者兼而有之。 当银行资金来源吃紧，无论Fed是否降息，获得银行贷款都将变得更加困难。这意味着实体经济的各个部门都必须提高资金的利用效率。营运资金和现金流管理今年料将成为公司年报大书特书的内容。无论是存货管理还是压低供应商成本，提高资金效率将成为重要目标。 存款利率降至历史低点的另一个结果是使人们不愿意再谨慎的存钱。把闲钱存在银行获取微不足道的利息还不如拿出来做其他事情。就香港而言，赌博似乎是一个选择。 虽然经济滑坡，香港赌马场的营业额上周却达到了6年高点，在沙田国泰航空杯上下注的资金超过了10亿港元。 如果基金经理继续拿着现金等待金融危机结束，那他们也会遇到麻烦。客户可能会质疑，与其让基金持有现金还不如自己持有，还可以节省管理费。 值得注意的是，尽管坏消息一路传来，但自10月份跌至低点以来香港恒生指数现已反弹近40%。Citi Research数据显示，虽然大多数亚洲基金都不断面临赎回，香港基金却已连续两周出现资金流入；本月迄今为止，中国已成为亚洲地区表现最好的市场（以人民币计算）。 也许低利率正在使股市低收益率的相对吸引力上升。基金要准备2008年业绩报告，所以股市走高也可能有粉饰帐面的因素。 但这种资金流入对市场的推动作用可能仅此而已。公司信贷危机和股票估值明年或将发生冲突，如果上市公司像人们预期的那样减少股息的话。从现在的经济情况来看，总需要有些牺牲，那很可能将是股息。 在香港本地，一些公司已承诺不会通过裁员削减成本，很多公司已签署协议，承诺1年之内不会裁员。据说已有100家公司参加了这一计划，覆盖员工人数为5万人。 市场将更加关注2009年，上市公司业绩和资产负债表将受到审视。由于信贷料将继续吃紧，估计会有更多的公司和汇丰银行一样因增资问题而受到关注。 Craig Stephen

World Economy in 2009: Three priorities for recovery

--It is difficult to predict whether policymakers will prevent the recession turning into depression and lay the foundation for sustainable recovery --avoid deflation. this is important --shrink (?) / regulate (is better) the financial sector --global policy coordination, for instance not protectionishm. It is hard. World Economy in 2009: Three priorities for recovery By Wolfgang Münchau Published: December 28 2008 18:01 Last updated: December 28 2008 18:01 It is easy and difficult at the same time to predict the economy in 2009. It is easy to predict it will be an awful year for the US, Europe and large parts of Asia. The industrialised world will be in a deep synchronised recession. Global gross domestic product will probably contract also for the first time since the 1930s. There is not a great deal we can do to prevent this. The difficult part of the forecast is to predict whether policymakers will succeed in preventing the recession turning into a depression and lay the foundations for a sustainable recovery in 2010. What I can predict with near certainty is that policy will matter a great deal next year. We know that the current driving force behind this downturn is “deleveraging”. Overindebted households and undercapitalised banks are adjusting their balance sheets, building up savings in the first case and restricting lending in the latter. There is no chance of a sustained economic recovery until that process is almost complete. We are still some way from that point. For example, on my calculations it will take a total peak-to-trough decline in real US house prices of some 40-50 per cent to get back towards long-term price trends and for price-rent ratios to return to more sustainable levels. We are about half-way through this process. The good news is that most of the nominal adjustment will have taken place by the end of 2009 or early 2010. I am a lot less optimistic about the financial sector. While it is also reducing its leverage, it will not achieve a sustainable position quickly without a lot more government capital. But this would require deep restructuring and would take time. On the basis of this admittedly brief sketch, I arrive at three policy priorities for 2009. The first is for central banks to avoid deflation. If ever there has been a need for a central bank to target price stability, it is now. I mean this in the European sense of the term, meaning a small but distinctly positive rate of inflation, say 2 or 3 per cent annually. I assume that central banks will succeed in this endeavour, given the full power of policies deployed. I worry, though, that the US will try to raise inflation afterwards, which would reduce the real level of US debt but create massive distortions in exchange rates and financial flows and produce another global financial and economic crisis. The second priority is to shrink the financial sector. A disorderly collapse would be catastrophic, but it is neither desirable, nor possible, to maintain the financial sector at its current excessive size. Take the market for credit default swaps, an unregulated $50,000-$60,000bn casino that serves no economic purpose except to enrich its participants at massive risk to global financial stability. I would be in favour, as a matter of principle, of regulating any financial activity on the basis of its economic purpose. Since a CDS constitutes insurance from an economic point of view, we should treat it as such and subject it to insurance regulation (which would kill it of course). In particular, we should try to avoid the temptation to regulate too much in detail. This is a game regulators will lose. The financial sector is good at deploying existing instruments, and creating new ones, to circumvent any inflexible rule set. We should instead focus on breaking up too-large-to-fail banks and reducing the size of the financial sector in relation to a country’s GDP. In particular, we should not try to guarantee the obligations of a banking sector several times the size of our economies. Third, and perhaps most important, we need to co-ordinate the policy response at global level, since this is a global crisis with many global spillovers. What I would like to hear from US President-elect Barack Obama’s economic team is not a narrow-minded discussion about whether the stimulus will be $700bn or $850bn, or which programmes it will be spent on. What I want to know is how they intend to co-opt the Europeans and the Chinese into a joint strategy. What national governments should not do is blow even more money on infrastructure investments and on education. Whatever problem this is supposed to solve, it is a different problem from the one we need to solve right now. Nor do I see any real policy co-ordination, in which governments commit to policies they would otherwise not have considered. At present, in Europe at least, the co-ordination process works the other way round. Each government decides unilaterally what it wants to do. And then, at European Union level, they dress it up as policy co-ordination. It is not difficult to construct a plausible scenario of an economic catastrophe. Pick some of the following and you could end up with a depression that beats every modern record: a rise in global protectionism; competitive currency devaluations; a sterling crisis; social unrest in China, leading to political instability; a well-timed terrorist attack; continued refusal by eurozone leaders to co-ordinate; a payment default by a large sovereign in the eurozone; an acute emerging market crisis; continued lack of synchronisation of monetary policies, or a collapse of the CDS market. Obviously, the insolvency of a large global bank or the annihilation of the hedge fund industry would not go unnoticed either. Alternatively, we can try to keep the lid on the 2009 recession and lay the foundations for a sustainable but unspectacular recovery. This would be the best outcome. But for that we would have to recognise that the global economy is more than the sum of its parts. It implies that policymakers will have to smarten up, work together and start thinking outside the box. The trouble is this is not what they usually do.

Dow's Plan for Growth Threatened by Scuttled Kuwait Deal

--Kuwait scuttled a multi-billion dollar JV deal with Dow C amid fears that plunging oil price make the deal unatractive --the JV would have provided Dow with the access to low cost natural gas and money to close an aquisition deal --the decision by Kuwait might call off Dow's the acquisition deal for Rohm & Hass Co By JEFFREY BALL and CHIP CUMMINS Kuwait scuttled a multibillion-dollar joint-venture deal with Dow Chemical Co. that was set to take effect Thursday, potentially complicating the chemical giant's efforts to complete a huge acquisition. Dow said Kuwaiti officials informed the company on Sunday that the Persian Gulf country is scrapping a deal under which a state-owned petroleum company was to pay Dow $7.5 billion for a 50% stake in several chemical plants. Dow intended to use that money to help finance its $15.3 billion purchase of Rohm & Haas Co., which makes coatings and electronic materials. The decision by Kuwait's top petroleum-policy council to bail out amid fears that plunging oil prices had made the deal less attractive came less than a week before the deal was to become effective. Both Dow and the Kuwaiti company, Petrochemical Industries Co., or PIC, were also planning to collect $1.5 billion apiece from the joint venture, known as K-Dow Petrochemicals. Analysts have said for some time that if the Kuwait deal was canceled, it would call into question the Rohm & Haas acquisition, which is slated to close in early 2009. But Rohm & Haas said in a statement Sunday that a deal between Dow and Kuwait "is not a closing condition" for Dow's acquisition of the company. It said Rohm & Haas "continues to work diligently towards completing the proposed transaction with Dow in early 2009." In a conference call with analysts in October, Dow said it intended to tap various sources of funding to complete the deal, including a $13 billion bridge loan, $4 billion from other investors, and proceeds from the Kuwait joint venture. Dow, based in Midland, Mich., said in a statement that it is "extremely disappointed" with Kuwait's decision and is "evaluating its options" under the agreement it had with PIC, a subsidiary of Kuwait Petroleum. A Dow spokeswoman declined to comment on how the Kuwaiti decision might affect the planned Rohm & Haas acquisition. The unraveling of the joint venture is the latest sign of how roller-coaster energy prices are whipsawing the global economy. Dow announced the Kuwaiti joint venture about a year ago. At that time, soaring energy prices were forcing the company to search farther afield for affordable supplies of natural gas, which Dow consumes in huge quantities to make its chemicals. The joint venture would have helped provide Dow access to low-cost natural gas. But energy prices have cratered since then, leading countries such as Kuwait, with vast stores of oil and natural gas, to reconsider whether now is the best time to be undertaking big deals. Kuwait's decision is a setback to Dow, which saw the joint-venture deal as crucial to improving the company's long-term profitability. For years, Dow Chief Executive Andrew Liveris has been trying to reposition the company, moving it away from producing low-margin commodity chemicals and into the higher-margin specialty chemicals business. Kuwait's state news agency, Kuna, reported Sunday that the sheikdom's top petroleum-policy council decided to cancel the deal. According to Kuna, Kuwait's Deputy Prime Minister Faisal Al-Hajji Bukhadour said the project was a casualty of the "current dramatic changes in the global economy coupled with the recent unprecedented slide of the oil prices." Earlier this month, Dow renegotiated the deal and agreed to accept a total of $9 billion, including the money it was to get from K-Dow, about $500 million less than it originally planned. Mr. Liveris said that the reduced price reflected the turmoil in the chemical industry, as the global economic slowdown slashed demand for chemical products. One week later, Dow announced major cutbacks amid the weak economy. Mr. Liveris said the cutbacks were intended partly to preserve Dow's ability to execute the Rohm & Haas acquisition. He said the company was "looking at every possible mechanism" to protect that deal. Global deal making has generated problems before. In April 2007, Dow fired two top executives, accusing them of plotting to sell the company without authorization. The two had talked to investors in Oman, among others, about arranging a buyout, according to people familiar with the matter.

Discounts Not Enough to Revive Online Retail Sales

--online spending still held up, down 2% compared to 5.5% to 8% for retail as a whole. --online sales were fueld by discounters that aren't likely to continue. Online sales held up better than the rest of the retail market during the dismal holiday period, but the season is still likely to go down as one of the worst on record for the traditionally booming e-commerce sector. While online spending was down just 2% from Nov. 1 through Christmas Eve compared with a drop of 5.5% to 8% for retail as a whole, e-commerce strength wasn't widespread. Instead, it was clustered around several big-name Web sites such as Amazon.com Inc., Apple Inc. and Wal-Mart Stores Inc. Online sales were also fueled by discounts that aren't likely to continue. Overall, in a sector where sales have historically increased 20% annually, this is the first holiday season where online sales haven't grown. E-commerce sales were "not amazing by any stretch," says John Aiken, managing director and head of equity research for Majestic Research. Many traditionally strong ecommerce sites also ended up losing visitors in what is typically their busiest period. Internet auction site eBay Inc.'s traffic dropped 16% between early November and mid-December, while Best Buy Co.'s site experienced a 17% decline in visitor traffic, according to comScore Inc., which tracks Internet activity. The number of visitors to e-commerce Web sites during the period grew less than 1%, compared with growth of about 5% typically. A spokeswoman for eBay declined to comment. Best Buy didn't return a call for comment. What few winners there were online relied heavily on discounts and special promotions such as limited-time deals and targeted email offers to repeat customers this year, say analysts. Discounts were particularly heavy in areas like consumer electronics, where consumers downgraded to cheaper models of items like flat-screen televisions, says Mr. Aiken. "Consumers are hyper-price sensitive in this environment," he says, adding it isn't clear whether they will keep spending as the promotions taper off into next year. Mr. Aiken predicts that retailers will scale back their promotions after flushing out their fourth-quarter inventory and will instead become more cautious about stocking up on first-quarter inventory. Those that played the discount and promotions game won big during the season. Amazon.com, for one, on Friday said sales for the holiday season were its "best ever" due in part to promotions. The tactic helped boost the number of visitors to the site between early November and mid-December by 6%, according to comScore. "We were heads-down focused on providing customers low prices this year," says Craig Berman, a spokesman for Amazon. He declined to comment on how much sales grew or whether there was a corresponding jump in profit pending the Seattle company's quarterly earnings in January. Peter Cobb, co-founder of eBags, says the Denver, Colo.-based company also rolled out shipping promotions and deeply discounted "Web busters" to buoy sales this season. Despite a strong increase in overall traffic, holiday sales for the online bag retailer were flat from last year as the size of the average order declined, he says. Mr. Cobb described the trend as "OK given all that is going on in the financial markets." "The level of discounting we've seen is dramatic," says Andrew Lipsman, director of industry analysis at comScore. And with good reason: "We have seen spending roller coasters depending on whether there was discounting or not." For example, online sales in mid-November were down from 2007 but shot up 15% on Cyber Monday -- the first work day after Thanksgiving -- thanks in part to promotions for free shipping and substantial price cuts. Sales in the two full weeks preceding Christmas were also down from last year before spiking again the weekend before the holiday thanks to another wave of promotions, says comScore. Some online retailers are expected to continue slashing their prices next year to offset concerns that spending will dry up after the holidays. Target Corp., for example, is currently offering up to 75% off online on toys like a lifesize stuffed puppy and ping-pong tables and is offering free shipping on more than 30,000 items. The continued discounting push online comes as the number of visitors to Target's Web site between early November and mid-December fell 9% from last year, according to comScore. A Target spokeswoman says the Minneapolis company won't discuss holiday sales or other results until early January. Doug Anmuth, an Internet analyst at Barclays Capital, says continued discounting is likely to cut into online retailers' profit margins, accelerating the squeeze they are already enduring as e-commerce matures and competition increases. Apart from strong visitor growth at Amazon.com, Apple's Web site experienced an 8% increase in visitor traffic and Wal-Mart's Web site saw a 10% spike in traffic, according to comScore. ComScore's Mr. Lipsman says each of the sites is known for separating themselves from the field -- Amazon by offering some of the widest variety of goods, while Apple provides innovative products and Wal-Mart offers some of the lowest prices. An Apple spokeswoman declined to comment. A Wal-Mart spokeswoman says the company will release holiday sales figures in early January. Another Web site that saw a big increase in visitors was American Greetings Corp., which lets people send free online cards, among other services. In a year when consumers opted to spend less on gifts, the site saw a 47% spike in visitors according to comScore. An American Greetings spokesman declined to speculate on the reason for the increase. —Bobby White contributed to this article.

Jones Apparel Cuts Credit Line

Jones Apparel Group Inc. on Friday cut back its revolving credit facilities to $600 million from $1.25 billion to reflect its current financing needs. The stock through Wednesday was down 76% this year amid the slowdown in consumer spending, in particular for women's apparel firms like Jones. Jones reduced its $750 million credit line maturing in May 2010 to $600 million and terminated its $500 million line that was due to expire in June. The company didn't have any cash borrowings outstanding on the lines. Chief Financial Officer John T. McClain said Jones believed it was prudent to amend the credit facilities to allow "financial flexibility in the current uncertain economic environment." He added the company had a "significant" amount of cash on hand. The agreements were also amended to "provide Jones with greater flexibility," the company said without giving details. Fees and interest rates were increased to current market rates. Jones, along with other retailers and apparel makers, has been hurt by sharp drops in consumer confidence amid the global recession. Consumers have been cutting back their discretionary spending as they look to save money any way they can. The company's third-quarter net income tumbled 93% as sales fell amid its exit from moderate sportswear lines, the repositioning of its l.e.i brand and last year's sale of Barney's hurt results. Jones saw same-store sales rise at its retail outlets but decline rapidly at wholesale stores as department stores continue to suffer. --- CREDIT FACILITIES - Company 10Q, Q3 2008 (Oct) Prior to June 6, 2008, we had credit agreements with several lending institutions to borrow an aggregate principal amount of up to $1.75 billion under Senior Credit Facilities. These facilities, consisting of a $1.0 billion five-year revolving credit facility expiring in June 2009 and a $750.0 million five-year revolving credit facility expiring in June 2010, could be used for letters of credit or cash borrowings . On June 6, 2008, we amended these facilities. The terms and conditions of the credit facilities remain substantially unchanged, except for modification of the pricing provisions and certain covenants and reduction of the aggregate commitment under the $1.0 billion facility to $500.0 million. At October 4, 2008, $195.7 million of letters of credit were outstanding under the credit facility that expires in June 2009 and no amounts were outstanding under the credit facility that expires in June 2010. Borrowings under the Senior Credit Facilities may also be used for working capital and other general corporate purposes, including permitted acquisitions and stock repurchases. The amended Senior Credit Facilities are unsecured and require us to satisfy a minimum Interest Coverage Ratio, a maximum Covenant Debt to EBITDA Ratio and a minimum Asset Coverage Ratio (each as defined in the Restated Credit Agreements), and contain covenants limiting our ability to (1) incur debt and guaranty obligations, (2) incur liens, (3) make loans, advances, investments and acquisitions, (4) merge or liquidate, (5) sell or transfer assets, (6) pay dividends, repurchase shares, or make distributions to stockholders, and (7) engage in transactions with affiliates. At October 4, 2008, we were in compliance with all of our covenants. At October 4, 2008, we also had uncommitted unsecured lines of credit available for up to $106.6 million of letters of credit, under which an aggregate of $21.5 million was outstanding. At October 4, 2008, we also had a C$10.0 million unsecured line of credit in Canada, under which C$0.2 million of letters of credit were outstanding.

GMAC's Bonds Get a Bank Boost

--GMAC got the nod from Fed to become a bank-holding company --Its bonds, especially short term, gained significantly. Long term bond and CDS remained in distressed level --Fed's move complement its support financial auto markers By ANUSHA SHRIVAASTAVA and ROMY VARGHESE GMAC's bonds gained Friday, buoyed by the Federal Reserve's Christmas Eve approval of the auto-financing company's application to become a bank-holding company. GMAC got the nod even as the result of the lender's capital-raising plans, a key element in its transformation to a bank, remains uncertain. GMAC has extended the deadline several times for the note exchange and cash tender offers aimed at restructuring $38 billion in debt. The offers were due to expire Friday at 11:59 p.m. Eastern time. Gains in GMAC bonds were focused mainly on the short end, while longer-dated bonds and credit-protection costs, though improved, remain in distressed territory. That is a sign that, even with government backing, investors are still cautious on the lender's longer-term outlook. The Fed moves also complement support for the U.S. auto makers, with GMAC the primary source of loans for buyers of GM cars. "Why bail out the auto makers if you're going to let the biggest source of lending go under?" said Carl Kaufman, portfolio manager of the Osterweis Strategic Income Fund in San Francisco. Becoming a bank-holding company "certainly takes the pressure off them," Mr. Kaufman said of GMAC. But, "we still haven't answered all the questions." GMAC's 5.625% notes due May 15, 2009, were quoted at 94 cents on the dollar, 27 cents better on the day Friday, on seven trades, according to MarketAxess, an online trading platform. The only active issue on the long end, an 8% note due November 2031, jumped 15.25 cents to 44 cents. Investors' pessimism is also seen in GMAC's credit-default swaps. On Friday, the cost of protecting $10 million of GMAC debt for five years was at $2.55 million in up-front payments and a $500,000 annual premium. On Wednesday, ahead of the Fed's approval, investors had to pay about $4.3 million in upfront fees on top of the $500,000 annual premium. The swaps levels also reflect the challenges facing GMAC, owned by General Motors Corp. and private-equity group Cerberus Capital Management, even though it now has access to stable funding sources. As a bank-holding company, GMAC is eligible for government money under the Treasury's Troubled Asset Relief Program and can borrow short-term funds at the Federal Reserve's discount window, where the rate currently stands at 0.5%. The Fed's actions take some of the pressure of the debt exchange, which had struggled to attract sufficient investor interest. "With the primary regulator on board, the capital-raise machinations seem almost a moot point," wrote CreditSights analysts in a note. The Fed has set conditions in its approval of the bank status, such as restricting the stakes of GM and Cerberus and preventing any investor from controlling 5% or more of the voting shares or 7.5% of the total equity of GMAC. "Becoming a bank holding company is the best long-term solution to provide automotive and mortgage financing to consumers and businesses, including auto dealers," GMAC spokeswoman Gina Proia said late Wednesday. "As a bank-holding company, GMAC will be competitively positioned to serve our customers by having improved access to funding."

Continental Rift

SINCE 1904, when Prince Piero Conti managed to get a light bulb to flicker in an Italian lava field, geothermal power has depended on volcanic heat. The earth’s crust needs to be thin, with high temperatures just below the surface. Cold water is pumped down a deep borehole and returns superheated to spin a turbine. To power its tiny and now spluttering economy, Iceland has already made use of what scientists call volcanism. Fiery bits of the Philippines also run on geothermal power. So what about Africa? The continent’s lack of electricity is a big deterrent to foreign investors, as demand for power grows by 8% a year. Some experts think the Rift Valley, which stretches from the northern end of the Red Sea down to Mozambique, is ideal for generating geothermal power. This has many advantages. Geothermal power runs whatever the weather, making it ideal for providing the base power station of a national grid. It emits negligible carbon compared with fossil-fuel stations. Best of all, it offers indigenous power cheaply: east Africa sorely lacks west Africa’s oil or the potential for solar power in the Sahel, Africa’s wide belt just south of the Sahara desert. The United Nations Environment Programme, which has its world headquarters in Kenya’s capital, Nairobi, thinks the geothermal potential of the Rift Valley is 14,000MW, yet only 200MW is currently captured. Aficionados of geothermal power say it could provide 10-25% of the region’s energy by 2030. But the technology has snags. It would create few jobs, a fact that turns off many African politicians, who tend to like national projects to be labour-intensive. It disrupts pastoralists herding their cattle and can leak radon and other gases. Its start-up costs are as high as drilling for oil, and may be higher than for coal power stations. So the World Bank has set up a geothermal fund to underwrite exploration in east Africa. If the Kyoto treaty on carbon emissions is rewritten, Africa may get cheap loans and know-how to help install more geothermal power stations. Some 18 geothermal sites in the Ethiopian part of the Rift Valley and in the Danakil depression on the border with Eritrea and Djibouti have been identified. The Ethiopians hope for 440MW of geothermal power against their present energy capacity of 790MW. Geothermal could be an alternative to hydroelectric dams, which provide most of the region’s power but are vulnerable to drought. Djibouti has signed a deal with Iceland to build a geothermal plant near the Dantean furnace of Lake Assal, the continent’s lowest point. The project will also capture steam for use as water in the parched country. Kenya is Africa’s geothermal pioneer. Its Olkaria station outside Naivasha already produces 158MW. The government says it wants to raise its geothermal capacity to 576MW within a decade. That could make a big difference. Kenya already uses up all its 1,200MW capacity and is compensating for frequent power cuts by installing temporary diesel generators.

如日西斜、经济低迷、两战一恐、热冷亮暗

《中国评论》月刊12月号发表旅美教授谭中的文章“奥巴马时代的国际局势和中美关系发展”。作者以“如日西斜、经济低迷、两战一恐、热冷亮暗”这十六个字来形容美国新总统奥巴马面临的总形势以及他可能采取的对策。而中国也可以用“经贸互动、和谐利导、自顾顾他、人权应对”来应对奥巴马新政权。 　　作者认为，应该对奥巴马新政权采取欢迎态度，当然也不能掉以轻心，要警惕他作为“先天不足”的总统，处处对避嫌疑最为敏感，特别是在内政外交上遭到挫折的时候，有可能铤而走险。文章内容如下： 　　美国开始走下坡路 　　我用16个字“如日西斜、经济低迷、两战一恐、热冷亮暗”来形容美国新总统 奥巴马面临的总形势以及他可能采取的对策。 “如日西斜”是指美国已经越过她在国际形势发展的单极独霸“如日中天”顶点而随着抛物线的弧形下降。“经济低迷”是形容美国将会在一两年内、甚至更长的期间市场疲软、金融紧张、失业剧增而影响到全球的经济稳定与繁荣。“两战一恐”指的是美国一方面继续处于伊斯兰反美“圣战”恐怖的严重威胁之下，另一方面又背着军队在伊拉克和阿富汗两大战场消耗实力的沉重包袱而想找到退路。“热冷亮暗”是说国际局势既有热点、也有冷点，既有亮点、也有暗点，后冷战时期仍然有冷战因素干扰。 　　美国 单极独霸的“如日中天”地位已经呈现 “如日西斜”的大动向，肯定是无法扭转了。也正是这一无法扭转的势头而使得一年多来美国各种政治力量都无法阻挡“黑旋风” 奥巴马冲向白宫的进程。换句话说， 我们应该认识美国的式微和奥巴马的凸显之间的辩证关系： 　　（一）这次奥巴马胜选主要是对布什八年执政江河日下的反弹，特别是最近发生的“金融海啸”，使得美国人心思变，奥巴马手执“变”的魔杖而水到渠成。 　　（二）奥巴马是以民主党领袖的身份进入白宫的，是美国政治共和、民主两党轮流坐桩的例行发展，奥巴马代表的是哈佛大学、是芝加哥政派、是美国传统的上层士绅风度；他是黑白混血，他的皮肤颜色只是巧合，并不代表美国社会政治斗争的种族盛衰消长。 　　 （三）这次奥巴马的亮相和过去黑人领袖主动出来竞选总统有性质上的区别，是民主党中反对克林顿家族的统一战线势力有意识地把他这样一个皮肤黑色的政客捧出来变成希拉莉．克林顿重返白宫的拦路虎。这是一个精心策划的、既击退“布什——克林顿——布什——克林顿家族统治循环”，又防止任何共和党领袖出面延续布什败政的一箭双雕的阳谋， 奥巴马是这一阳谋的有效工具 。这样来看，奥巴马所代表的主要是美国内部政治的变数。 　　另一方面也要看到，奥巴马的凸 显 并不是孤立的、只限于美国内部的变化现象，奥巴马的上台和美国单极独霸的如日西斜是同一个发展动态，后者是因，前者是果。如果美国不是每况愈下，白宫是容不了黑皮肤的主子的。奥巴马入主白宫就是要为美国挽狂澜于既倒、扶大厦于将倾。换句话说，奥巴马执政是美国衰落的表现而不是她强盛的象征。奥巴马是美国政治史上的救火员，究竟是他能够把火扑灭，还是他被火烧得遍体鳞伤，那就不得而知了。 　　奥巴马能不能解决、以及如何解决美国“经济低迷”的问题是普遍关心的。去年出版了《休克主义：灾难资本主义的兴起》The Shock Doctrine: The Rise of Disaster Capitalism新书的加拿大籍著名激进经济学报人克莲Naomi Klein 从全球经济发展的总形势来看，认为以福里德曼Milton Friedman 为始祖的“芝加哥经济学派”所提倡的“market fundamentalism/ 市场原教旨主义”（即“free-market fundamentalism/ 自由市场原教旨主义 ”）以及由此兴起的“ Washington Consensus/ 华盛顿共识”（即由华盛顿操纵的世界银行与国际货币基金组织到发生经济危机的国家去推行“ shock therapy/ 休克疗法”，把企业私有化，削弱政府对市场与企业的控制等），已经走到“灾难资本”的绝境。 奥巴马不会有任何锦囊妙计，何况他的智囊团中就有“芝加哥经济学派” 坐镇。 　　当前美国经济的一大难题是：通用、福特和克莱斯勒三大美国汽车公司都有面临倒闭的危险，要求政府财政支援。这三家公司如果倒了，不但有三百万工人（等于芝加哥全市人口）失业，更会产生严重的“骨牌效应”，造成全国各行各业大失业。 现在“跛足鸭”国会的民主党人正设法动用政府（即纳税人交的）资金来帮助这些“白象”（财经累赘）企业苟延残喘，共和党人持反对态度。明年 一月奥巴马上台后就会左右为难。他如果让这些落后老厂自生自灭，必然会受到基本选民的咒骂；如果他拿纳税人的钱去帮它们苟延残喘，从长远来看不利于美国进步，和他自己提倡的“变”会背道而驰。 　　更深层次来看，在此危机时刻，奥巴马如何振兴美国在全球经济发展中的领先地位是最最关键的。共和党 人一直认为：小政府、大社会是美国的补品，政府少干涉经济，让资本家掌舵发展生产，美国才会有救。许多人认为，布什政权的错误就在把政府扩充得太大，手伸得太长，政府赤字无法弥补，才使泡沫经济破产。如果从这一思想逻辑出发，奥巴马和其他民主党领袖都主张加大政府的干涉力度，必然会增加开支、增加税收，资本家会抱怨，小资本家将无法生存。 　　也有人看法比较乐观。 今年诺贝尔经济学奖金获得者克鲁格曼Paul Krugman 在他《纽约时报》11月7日的专栏中形容 奥巴马当选是“进步政治哲学”的胜利，认为一个新的“新政”（指小罗斯福总统在1933至1936年间美国政府大力花钱“以工代赈”、使广大失业者生活无忧而度过资本主义世界“大萧条”的经济危机） 即将展开。估计这将会是牵动全局的一场经济、政治与社会的大运作，也有可能从根本上改变美国资本主义体制。 可是今天美国的经济问题比1930年代不知要复杂多少倍。 再有， 罗斯福“新政”的指导思想是“凯恩斯经济学”，现在早已过时。当时的经济学界是“凯恩斯经济学”统治，现在各种经济学理论太多，美国有数十位诺贝尔经济学奖和其他奖的获得者，却没有一个统一的、鹤立鸡群的经济理论。除非奥巴马在新政中创造出一个来，成为美国的万应灵丹。 　　奥巴马如何打国际牌 　　奥巴马执政必须尽最大的努力来应付 “两战一恐”，一方面尽快结束战争、减轻包袱；另一方面又要避免长敌人志气、灭自己威风而使得美国更安全、更不容易遭到以“基地”组织为首的伊斯兰反美“圣战”恐怖的暗算。奥巴马新政权如何解决“ 两战一恐”的疙瘩也是像经济问题一样复杂的难题。在“两战”问题上，奥巴马和他的阵营是主张尽早从伊拉克撤军而加大阿富汗战场的力度、对“基地”的残余势力穷追不舍的。不过，2007年初皮特勒奥斯 David Petraeus 将军担任伊拉克前线总指挥、实行“加油”计划以后，把日益恶化的战局扭转，已经出现使伊拉克局势逐渐稳定而伊战圆满画上句号的可能性，这就使得奥巴马一贯反对伊战的立场失去威力，奥巴马也被迫在竞选中把强烈主张早日撤军的呼吁降低声调。现在奥巴马已经当选总统，更没有必要玩伊拉克撤军这张牌，很可能是顺着布什政权的安排逐渐让国际力量与伊拉克本国的各种势力相互作用来实现和平。 　　奥巴马上台以后肯定会加大在军事、政治、经济上对阿富汗以及邻国巴基斯坦的关注与投入。在竞选期间，奥巴马不止一次地强调只要能抓获或击毙“基地”首领奥萨马．本拉登与其领导核心，他会不顾巴基斯坦的反对而到巴国领土上去进行军事运作，曾经引起巴国民意的强烈反应。奥巴马这一“鹰”性主张倒是先被布什政权接受，在穆沙拉夫下台以后，美国已经多次向巴国领土上的可疑目标进行袭击。在这种形势发展下，巴基斯坦“塔利班化”的危险加剧。当然，在伊拉克成功分化“抗美”势力的 皮特勒奥斯将军现在已经升任美国中区总司令并且开始把伊拉克的成功经验应用到阿富汗——巴基斯坦前线上来，估计会受到 奥巴马新政府的支持。奥巴马要解决“ 两战一恐”的疙瘩，必然会把军事、政治、经济运作的重心转移到阿富汗——巴基斯坦前线。 　　关于“热冷亮暗”， 奥巴马政权必须高智商地理顺布什政权造成的世界 “热冷亮暗”的混乱，要把国际的热点变冷、防止冷点变热，更要把死角上的暗点点亮。 奥巴马从布什政权接过来的国际局势是：伊朗问题既是热点又是暗点，本来既是热点又是暗点的朝鲜问题却逐渐冷却而有可能变成亮点，另外一个突出的问题是普京统治下的俄罗斯似乎正在摩拳擦掌要与华盛顿玩“ hard ball ”（强硬手段）。普京宣称20世纪的最大灾难是苏联解体，更显出他有恢复俄国超强地位的决心。这对奥巴马新政权是否形成一种挑战，奥巴马将如何应对也都是现在难以预测的。 　　对华政策将会顺势而为 　　奥巴马新政权的对华政策现在也很难说得准。奥巴马执政后的中美关系发展是很大的未知数。应该从三个角度来看问题 ：第一，自从尼克森改善美中关系以来，40多年形成了不以人事变动而转移的稳步前进的旋律，奥巴马政见比他的前任开明，估计不会逆水行舟。 　　第二，人们说，如果不是“911”使得美国把打恐当作战略的重中之重，后冷战时期中容不得对手坐大的美国是不会让中国这么轻快地向强国方向跃进的。这是一种 “攻击性现实主义”的逻辑，诠释布什政权的对华政策可能适合。看样子奥巴马新政府中克林顿时期的国际关系智囊将占优势，将会以“自由主义”指导思想代替“现实主义”思想。 第三，奥巴马的当务之急是要恢复美国经济，在这一点上，即使他不靠中国援助，也不敢把已经相互依靠很紧的美中经贸互联通拆散。换句话说，经贸关系仍将是中美关系的稳定剂。 　　11月初奥巴马和胡锦涛通了电话，感谢胡锦涛祝贺他当选。他在电话中说，中国是一个伟大的国家，中国的发展和成功符合美国利益。在当今国际舞台上，美中关系是至关重要的关系，发展美中合作不仅有利于两国，也有利于世界。美中关系面临很多发展机遇，希望双方加强合作，推动美中关系取得更大发展，造福两国人民。美方希望同中方加强在安全、气候变化、地区热点等问题上的磋商和协调，推动问题的解决 。 　　我们知道，奥巴马在外交关系上是很外行的，对中国也缺乏瞭解。上面这番话当然是智囊团告诉他应该怎么说的。其中“中国是一个伟大的国家”也许是他自己的口气。奥巴马是个思想开明的人，对美国的看法，可能不会像布什那样夜郎自大。但是也要看到，奥巴马由于是黑皮肤、是肯尼亚人的后代、名字听起来很不“美国”（常常有人把“奥巴马”和恐怖分子领袖“奥萨马”混淆），因此有很多先天的缺陷。他在内政方面会十分小心谨慎，但他在迎合“大美国沙文主义”思想方面却会大胆泼辣的。 他在竞选中，动不动就拿“中国”当作抨击共和党的代罪羔羊，大概是迎合美国失业工人对中国的埋怨情绪。 　　奥巴马时代中国的对策 　　针对这一情况，中国怎么来应对奥巴马新政权，我认为也可以用16个字“经贸互动、和谐利导、自顾顾他、人权应对”。“经贸互动”：——前面说过，经贸关系是中美关系的稳定剂，中国应该牢牢掌握这一点。有三个方面值得注意发展与进行调整 ： 　　第一方面是继续两国之间相辅相成、双赢双利的关系，在相当长一个时期内维持中国供应美国日常消费品以及美国供应中国高科技产品的双向贸易，中国要严格控制产品质量，增加透明度，也不要过早地在汽车与飞机行业开展中美竞争。 　　第二方面是大力扩大中国国内市场，尽快把生产与消费关系中的“自给自足”架势建立起来，中美贸易顺差中赢得的外汇应该多投到国内生产建设上，当然也应该继续鼓励外资，特别是美资来帮助中国搞活经济，增加就业机会。 　　第三方面是提高中国商业道德、管理水准、劳工生活福利条件，使中国经济运作逐渐提高到发达国家的品德与风度；停止这些年来“拼命三郎”式的不按照规律，不从长远角度计算“ cost and benefit/代价与利益”的发展作风。 　　“和谐利导”：——前面谈到的美国生性容不了“匹敌”，中国越是强大越是会引起美国惧怕，这是中国对美战略中必须注意、不能麻痹大意的。中国领导人提倡“和谐世界”应该不是说说而已，如果要付诸实施，就应该先从中美关系做起。在这一点上，倾向于“自由主义”的美国新总统 奥巴马应该比倾向于“攻击性现实主义”的布什总统更好对付。 中国领导人应该加强与奥巴马政权的核心人物接触，多些高层互访。奥巴马是个爱出风头的人物，多请他到中国来讲演。奥巴马还有一些华裔亲戚，应该打好统战关系。所谓“团结——斗争——团结”，“有理、有利、有节”，应该高智商地运用，避免针锋相对。人都是爱名誉、爱面子的，中国在宣传上要避免人身攻击。既然奥巴马思“变”，中国就可以顺水推舟去促“变”，使美国政治、外交变到和谐的方向上来。在这一点上，奥巴马和布什是两个极端的类型。布什的虚荣心不强，凡事从实际利益出发。奥巴马虚荣心强，喜欢把大道理挂在口上，可以投其所好，切忌使人恼羞成怒。 　　“自顾顾他 ” ：——四分之一世纪来，中国改革开放，把自己投入国际经济大循环中，找到了毛泽东时代所找不到的“致富之道”，这是一个聪明的办法。 可是，这样做也有过犹不及的弊病，也就是搭上了美国彩车（英文叫“ bandwagon ”），是一种寄人篱下、从别人那儿分点残羹剩饭的国际行为；不但不符合中国的民族自豪、自信精神，也对中国发展的长远利益有损。因此我认为应该强调“自顾”，特别是在当今世界经济危机的时刻，更应该把中国自己的尊严与基本利益摆在首位，然后再“顾他”。当然，采取这一战略，不必大肆张扬，多韬光养晦，少出“洋风头”，少到国际舞台上去“夸大国”。 　　“人权应对 ”：——要注意奥巴马与民主党人不但主掌白宫，而且在国会众、参两院加大了优势，几乎到了完全控制的程度。民主党人在“人权”问题上嘴巴大、手伸得长，这一点和布什时期不同，对中国会形成精神压力。奥巴马是提倡人权的，还有众议院议长佩洛茜，更是人权加反华。她在布什时代无法嚣张，在奥巴马时代就不同了。其实美国人权议论也不是那么可怕的。俗话说，“只叫不咬”。再有，中国有很多地方，主要是地方政府腐败，又对人民的抱怨与抗议进行打压，掩盖不住传到美国就变成“人权”问题了。解决这种“人权”问题釜底抽薪的办法是不隐瞒、不护短，政府和社会大力伸张正义，把腐败官员揭发、处分。中国没有“民愤”，美国也闹不出“人权”来。 　　前面已经谈到： 奥巴马入主白宫主要是美国国内发展出来的“挽狂澜于既倒、扶大厦于将倾”的补救办法，奥巴马执政是美国衰落的表现而不是她强盛的象征。总的来说，我们应该对奥巴马新政权采取欢迎态度，当然也不能掉以轻心，要警惕他作为“先天不足”的总统，像“凯撒大帝的妻子”那样，处处对避嫌疑最为敏感，处处要显示他“爱国”、顺从“主流”，特别是在内政外交上遭到挫折的时候，有可能铤而走险 。 　　从研究美国的角度来看，“黑”总统能进白宫，也说明美国是一个非常能动的国家，正像奥巴马所说：“在美国任何（奇迹）都可能发生”。有人已经道出美国社会结构发生根本变化，白人统治“ 流水落花春去也” ，这是很肤浅、不瞭解美国、没有经过深思熟虑的过早结论。我认为奥巴马是个“未知数”，和过去小布什那样的“ 已知妖魔 ”有很大的区别。奥巴马可能会是空前未有的好总统，也可能会是美国政治的灾难性的尝试。 如果是后者的话，这“黑”总统进白宫就会只是昙花一现，以后永远也不会再发生的。

China in 2009 - Year of the ox

--a storm is brewing: eco growth is faltering; the new middle class, a pillar of the party's support, is plunging into despondency --two uncertainties hang over China: one is the resilience of political strucure to stress; the other is how consumers will respond to crisis; --history suggests that periods of social turbulences are often accompanied by tension with the West. Dec 22nd 2008 From Economist.com Economic woes and key anniversaries portend trouble FOR China’s leaders, a perfect storm is brewing. Economic growth, which has helped keep the Communist Party in power, is faltering. The new middle class, hitherto a pillar of the party’s support, is plunging into despondency. The coming months are studded with politically sensitive anniversaries that will focus disaffected minds on the party’s shortcomings. Having endured a year of natural disasters, riots and the organisational nightmare of hosting the Olympics, the party sees little salve ahead. Of all the huge uncertainties that plague attempts to predict the progress of the global financial crisis, two in particular hang over China. One is the resilience of its political structure to stress of this kind. During the last several years of economic health, it has been hard to imagine anything that could dislodge the party. David Shambaugh of George Washington University, in a book published this year entitled “China’s Communist Party: Atrophy and Adaptation”, said the party had its problems and challenges, “but none present the real possibility of systemic collapse”. AP A better year behind than ahead?Those challenges, however, are now mounting rapidly. The head of the IMF, Dominique Strauss-Kahn, has predicted GDP growth could fall to as low as 5-6% next year, half the rate of 2007 and far lower than anyone would have thought possible just a few months ago. The other big uncertainty is how Chinese consumers will respond to the crisis. Chinese journalists say the state-controlled media were at first instructed to avoid stories even suggesting China might be affected. Then as the impact became increasingly obvious, with exports in November falling 2.2% year-on-year (the first such drop in seven years) and growing reports of factory closures and worker unrest, the orders changed. Now the media can acknowledge the impact, but are not to play it up. Keeping the middle class happy and willing to spend is as vital now in China as it is in any economy. But given China’s rudimentary social-security system and strong tendency to save even at the best of times, this could be particularly difficult. Among the most challenging periods for the leadership in 2009 will be a number of dates already ringed in their calendars. The Chinese new year on January 26th—but effectively spanning several days on either side of that date—is one of them. Migrant workers with nothing to do as their labour-intensive factories making products for Western markets turn idle are already beginning to drift back to their villages for the holiday. Growing numbers will find their pockets empty as cash-starved employers hold back wages. Some will likely stage angry protests. After the festival, millions will return to the cities and many will find no jobs waiting. Frustrations will mount. Early March will see attention focused on opposite ends of the country: Tibet and Beijing. The resentment that exploded in Lhasa on March 14th 2008 and spread rapidly across the vast Himalayan plateau has by no means subsided. March 10th 2009 is the fiftieth anniversary of the Tibetan uprising that prompted the Dalai Lama to flee to India. The significance of this date will make this period even more potentially unstable in 2009 than it was in 2008. The authorities will maintain intense security across Tibet and neighbouring areas. Any miscalculation could readily produce the same kind of disapproving Western reaction and Chinese nationalist counter-reaction that for a while this year cast a dark shadow over China’s diplomacy. Also in March, China’s parliament will hold its annual session in Beijing. These two-week events are normally rubber-stamp affairs, but this year economic woes are likely to fuel lively debate inside and outside the meeting rooms of the Great Hall of the People. Then comes June 4th, the 20th anniversary of the bloody suppression of the Tiananmen Square protests. Many younger Chinese express indifference to this episode, but older activists will still try to commemorate it. An inkling of their organisational ability was given this month with the release of Charter 08, a document signed by some 300 intellectuals calling for sweeping political reform. July 22nd is the 10th anniversary of the banning of Falun Gong, a quasi-Buddhist sect. The government has crushed Falun Gong with more persistent and ruthless determination even than political opposition movements (before 1999 Falun Gong had no discernible political views, but its members abroad are now virulently anti-party). The clampdown makes it extremely difficult to gauge the sect’s continuing support in China, but the anniversary will be a test of it. The authorities will try to put on a celebratory face for the 60th anniversary on October 1st of the communist nation’s founding. It might even stage a military parade through central Beijing (as it did for the 50th and 35th anniversaries). If so, expect more repression, particularly of Tibetans and Muslim Uighurs from the far west of China, whom the authorities see as the most likely groups to try to spoil the party. Optimists see some hope for the government amid this relentless series of potential flashpoints. It will be spending massively on infrastructure projects, and cutting taxes and interest rates to keep growth up. The World Bank’s president, Robert Zoellick, says China’s response to the Asian financial crisis in 1998 “built the basis for future growth”. It spent lavishly on infrastructure (particularly expressways) and weathered the crisis without any regime-threatening instability (although the middle class was then far smaller). This time, says Mr Zoellick, China’s stimulus package also features measures to encourage consumers, including more spending on social services. The World Bank’s prediction is for 7.5% growth. Several others say it could be around 8%—the level that officials often say is needed to keep employment stable. But if the optimists are wrong, China could be in for a bumpy ride. History suggests that periods of social turbulence in China are often accompanied by tensions with the West. Trade friction could exacerbate such problems if countries engage in tit-for-tat protectionism in misguided efforts to protect their industries. Chinese officials repeatedly stress the need to keep markets open, but some officials might still be tempted to devalue the currency in the hope of boosting exports (America wants China’s currency to move in the opposite direction). China’s President Hu Jintao and the prime minister Wen Jiabao are experiencing their most trying times since they came to power more than five years ago. More than ever, stability will be their top priority.

Nouriel roubini's view in 2009

The following is an edited transcript from a video interview with Nouriel Roubini, by Aline van Duyn . FT: What's in store for 2009? NR: It is going to be a year of economic stagnation and recession for most of the global economy with deflationary pressures . . . I expect a global recession and a severe one. FT: So you think next year will probably be the worst year? NR: Yes. I see a recession throughout 2009 . . . and maybe there will be return to positive economic growth by 2010. FT: What other policy actions do you think need to be taken? NR: Well, part of the answer is the degree of these policy actions. For example, in the US monetary policy right now is very aggressive . . . I believe the ECB is behind the curve . . . But also on top of everything else I think that we have to recapitalise financial institutions much faster, more aggressively in the US. We also need a plan to reduce the debt burden of households that are now distressed and bankrupt. FT: So it is going to cost the taxpayer a lot more? NR: The fiscal deficit in the US is going to be huge; at least $1,000bn in 2010; another $1,000bn in 2011. FT: Is there a risk that the capitalist system doesn't recover from this shock? NR: We are going to avoid the Great Depression and a severe recession even if there is a risk of protracted slow economic growth. So I don't think this is the end of capitalism, of market economies, but it suggests that really there are significant market failures, that markets don't self-regulate each other. FT: Are you advising the future Obama administration? NR: I am not directly advising the administration. I am, of course, in touch with a number of members in the economic team. FT: What could be the next shoe to drop? NR: There are many of them. I think the process of deleveraging is going to continue. You could have a thousand, if not more, hedge funds going bust all at the same time. Another source of stress is emerging market economies. There are about a dozen of them that are on the verge of a potential financial crisis: Latvia, Estonia, Lithuania, Hungary, Bulgaria, Romania, Turkey, Ukraine in emerging Europe . . . Pakistan, Indonesia or [South] Korea in Asia. Places like Ecuador that just defaulted. Argentina and Venezuela in Latin America. Some of these countries could get in trouble and there could be contagious effects to other financial markets in other emerging markets. This credit loss is going to spread from mortgages to commercial real estate, to credit cards, to auto loans, to leverage loans, to industrial and commercial loans . . . There are many sources of financial stress. FT: What is your outlook for the dollar? NR: There are different forces. In recent months the dollar was strengthening, partly because there was this flight to safety. Of course, also the bleak economic outlook in Japan and Europe implied the relative interest rates are becoming less bearish for the dollar, but looking ahead I see a dollar weakness. I see dollar weakness because effectively the Fed is easing money like crazy. FT: What is the outlook for markets? NR: I see another 15 to 20 per cent downside risk for US and global equities because in the next few months macro news and earnings news is going to be much worse than expected . . . I don't see this as being the bottom of the market. There is a bear market rally but, like the previous ones, it is going to fizzle out. So I am concerned about equities, I am concerned about credit, I am concerned about commodities falling another 15-20 per cent given a severe recession. I am still concerned about emerging market asset classes. I think that cash and cash-like instruments such as safe government bonds are still the safer bet for the next few months. Down the line towards the end of 2009, if we see the light at the end of the tunnel of economic recovery - if and when we see it - maybe it is time to go back into risky assets, but not in the short term. Mr Roubini is professor of economics at Stern School of Business at NYU and chairman of RGE Monitor.

Structural Flaws in Financial Markets

Banking and finance have flaws that arise from time to time: Dangerous Lending Practices: An untenable situation may exist when: short-term loans are continously rolled-over for long-term needs; too many loans are denominated in foreign currency; lending requirements are relaxed to boost profits; loans are supported by shaky collateral, like equities; or the supply of loan funds comes from abroad, subject to sudden curtailment. Over-valued Assets: When securities or assets that are important to the well-being of the financial system become over-valued — priced higher than justified by a commonsense appraisal of intrinsic worth — a sudden readjustment may occur, wiping out collateral and roiling financial markets. Overly-Complex, Non-transparent, Poorly Understood Systems: Whenever systems become too complex to understand or to adequately control, a danger exists. An example would be Soviet Russia which became dependent on centralized micro-management of an entire economy. Hedge funds, such as Long Term Capital Management show weaknesses of non-transparency and complexity. In the financial derivatives market, major banks act as insurers of derivative contracts, without adequate accounting or transparency. Overly-Rigid, Highly-Regulated Systems: Sometimes systems are entirely dependent upon the government maintaining and adjusting rules that are needed for continued operability. An example would be the Savings and Loan system in the United States that was predicated upon the government controlling interest rates among competitors. With the advent of money market funds, the government lost the ability to maintain these controls and the system failed. The Brazilian Miracle ended with relaxation of economic discipline and increased government corruption. Another example would be the tightly-controlled foreign exchange system that served Brazil well during the "economic miracle" of the 1960s and 1970s. When the government changed in 1980, giving rise to a corrupt democratic system, the strict rules and essential discipline could no longer be maintained and the economy collapsed, opening a decade of economic crisis. A safe system is one in which every reasonable test of what might go wrong has an adequate response.

The Collapse of the Indonesian Economy (1997)

In Indonesia, statistics published by the central bank (Bank Indonesia) showed clearly in 1997 that the banking system had an over-hanging dollar debt that would balloon out of control and throw the country into insolvency if the Rupiah were to decline sharply against the dollar. A pattern of using short-term dollar loans for long-term capital needs had been apparent for a decade as foreign banks aggressively sought to improve current earnings by putting loans to Indonesian businesses on their books. In many cases, borrowers had no connection with the export market nor any means of earning dollars to repay dollar debt. Many Indonesian businesses had come to depend upon renewal of dollar loans to stay in business. This dollar liability was largely unhedged. Bad advice from the World Bank and IMF contributed to the Asian crisis.Top officials should have understood the absolute need to defend the Rupiah against devaluation at all costs because devaluation of the Rupiah would automatically increase the debt of Indonesian companies, making hundreds of large Indonesia companies and banks insolvent. Unfortunately, neither the Minister of Finance, the governor of Bank Indonesia, the officials at the International Monetary Fund, or the World Bank, or the U.S. Treasury, or most international private bankers, seemed to be aware of this easily understood but extremely perilous situation. On August 14, 1997, Sudradjad Djiwandono, the governor of Bank Indonesia, announced to a conference of almost one thousand bankers and businessmen in Jakarta that the government would allow the Rupiah to float against the dollar. This policy was supported by the IMF and was seen as a way to avoid squandering currency reserves in a futile attempt to tie the Rupiah to the dollar. The Indonesian crisis could have been avoided in economists had understood the fatal weaknesses in the system. Some in the audience understood what this really meant, but most did not. The Rupiah continued to weaken, but only slowly at first, for relatively few grasped the seriousness of the situation. By the time the dollar-debt problem was generally known, it was too late — the Rupiah had fallen precipitously and the economy had spun out of control. Events had been triggered that were to lead to the fall of the thirty-year Soeharto government; riots, rape, mayhem, and death; unemployment, increased poverty, and interruption of the education of children; multi-billion dollar losses, and one of the worst depressions of the 20th century. The debt crisis of 1997 brought hard times to millions of Indonesians.All of this could have been avoided if economists and central bankers had understood the simple but fatal weaknesses in the system and had had the commonsense and gumption to take rapid, drastic measures in time to save Indonesian banks and industry. An excellent account of the Asian financial crisis is in Paul Blustein's 'The Chastening'. Further backgound on Indonesia can be found in Theodore Friend's 'Indonesian Destinies' and M.C. Ricklef's, 'A History of Modern Indonesia.' source: http://www.capital-flow-analysis.com/investment-tutorial/lesson_26.html

Generalized Institutional Failure

History provides many examples of generalized institutional failure. To mention a few: The reversal of progress of British imperialism and 19th century globalization as the result of extraordinary costs of World War I; The collapse of the U.S. savings and loan industry as a result of deregulation of interest rates; The collapse of the Brazilian economy in the 1980s and the end of the 'Brazilian Miracle' as a result of abandonment of foreign exchange control discipline; The prolonged U.S. Depression of the 1930s as a result of extraordinarily high taxes and tariffs, and government attacks on private property and capitalism. The institutional collapses of which we speak are not the fluctuations of business cycles, nor failures of single institutions, such as Barings or Enron, but rather massive shifts effecting millions of people, based on fundamental flaws in the system.

A BlackRock HY fund may be headed for Default

By Pierre Paulden Dec. 23 (Bloomberg) -- A BlackRock Inc. fund that invests in high-yield, high-risk loans may be headed for an event of default after debt prices tumbled, according to Moody’s Investors Service. Moody’s cut ratings on portions of BlackRock Senior Income Series III collateralized loan obligation, citing “deterioration in the market value of the underlying collateral pool.” The transaction “may experience an event of default,” that would force New York-based BlackRock to sell loans to repay the notes, Moody’s said in a statement today. Loan prices have dropped 29 cents on the dollar this year to 65.8 cents, according to Standard & Poor’s LCD, as banks and asset managers have been forced to sell holdings because of clauses in borrowing agreements that require them to raise money when prices drop below a set level. BlackRock asked investors, including the Oregon state pension fund, to commit more equity in October to a separate $3 billion fund after loan prices dropped. The BlackRock Senior Income Series III fund is a market value collateralized loan obligation that was raised in September 2006, according to Moody’s. A CLO is a type of collateralized debt obligation, an instrument that packages pools of debt and splits it into pieces with various ratings. These ratings are derived from the prices of the underlying loans. Moody’s graded $257.2 million of notes in September 2006, including a $217.1 million portion rated AAA. There is an unrated $52 million tranche that is repaid after other noteholders. Loan Values In September 2006, the Missouri State Employees Retirement System bought half of the so-called equity tranche of the BlackRock Senior Income Series 2006 CLO, Jim Mullen, the fixed- income director of the Missouri fund, told Bloomberg in 2007 Brian Beades, a spokesman for BlackRock, declined to comment today. Chris Rackers, manager of investment policy and communication for the Missouri pension plan, didn’t immediately provide a response. Mullen told Bloomberg in 2007 that the investment would pay off because Missouri had entered the market early. The investment didn’t require board approval and instead he relied on the fund’s 12-year relationship with BlackRock, he said. Mullen didn’t return a call for comment today. So-called leveraged loan prices were above face value in 2006 until problems with subprime mortgage securities caused investors to flee from all but the safest securities, triggering writedowns and losses globally in excess of $1 trillion. Moody’s downgraded $9.9 million of notes of the BlackRock fund one level to Ca, the second-lowest junk rating, according to the statement. The New York-based ratings company also downgraded $21.7 million of notes to one notch to C. The AAA portion is now graded B1, four levels below investment-grade, Moody’s said. PNC Financial Services Group Inc., the Pittsburgh-based bank that owns more than a third of BlackRock, arranged the majority of the safest part of the CLO, according to Bloomberg data. A PNC spokesman, Fred Solomon, said the bank has “minimal exposure.” The CLO paid down some of the top-rated bonds as loan prices fell, a process known as deleveraging, he said.

U.S. Woes Open Door for China

--US face the risk of be overtaken by China as the role model in economy and politics. --the meltdown in financial markets damanaged its economy and also tarnished it reputation and threatens its ability to extert infuluence around the global. --To the extent Chain suffer less overall, its relative strength will increase compared to US --more devloping countries will look to China's controled capitalism instead of US's unfettered capitalism. --The implication is more manapulation of tade and currency, prolonging US and global recession --The solution is to convince China to inlcude China into the international economic system used to be dominated by developed countries. Give China a large share in IMF. The new edition of Foreign Affairs magazine has a pair of articles about the global financial mess that carry these disturbing headlines: "A Weakening of the West," reads one, and "The Rise of the Chinese Model" the other. Those two pieces frame a serious but little-discussed strategic problem for President-elect Barack Obama. The meltdown in financial markets hasn't simply damaged the American economy. It also has tarnished the U.S. economic model, and threatens to reduce Washington's ability to exert influence around the globe. The "Anglo-Saxon brand of market-based capitalism" is under a cloud, Roger Altman, former U.S. deputy Treasury secretary and now chairman of Evercore Partners, writes in one of the Foreign Affairs pieces. "The U.S. financial system is seen as having failed." That can't be good for America's moral authority. Conversely, China stands to benefit from the mess in a couple of ways. In practical terms, because its financial system is far less exposed to the debt problems now ravaging the West, China simply will suffer less real economic damage. Sure, China will endure short-term hits from the decline in consumer demand for the goods its factories churn out. But to the extent it suffers less damage overall, its relative strength will grow. Having accumulated massive piles of foreign-exchange reserves, for example, China now can use that cash to make strategic investments that an economically flattened West simply can't. It will be better able to give aid to struggling nations, thereby winning friends there, and can keep up its pattern of investing directly in commodities and natural resources around the globe. At the same time it reaps practical benefits, China has an opening to expand its political sway. As developing nations watch the convulsions in world financial markets, they may well decide that China's model of a kind of centrally controlled capitalism is more attractive than the American model of unfettered capitalism. The danger is that the developing world starts to look to China for economic lessons, rather than to the West. Put it all together, and "I think it will mean greater influence for China," says Harold James, professor of history and international affairs at Princeton University and the author of the second Foreign Affairs article. These strategic risks will land directly in the lap of the new Obama team as it takes over next month. There are ways to minimize the damage to America's interests, but they will require avoiding the temptation to turn inward -- and, ironically, will require working more closely with China even while competing with it for global influence. The hardest part of the problem may be the intangible part -- the tarnish on the American economic model. Starting with Ronald Reagan's promotion of America as the "shining city on the hill," to the collapse of the Berlin Wall and communism, through America's rescue of Latin America in the 1990s debt crisis and on to the stock-market boom of recent years, the U.S. was leading a world-wide movement toward free markets, open trade and light government regulation of the economy. The spread of that model expanded American influence -- political as well as economic -- in places such as Central Europe and East Asia. More than that, it benefited the American economy by allowing for free movement of goods and capital. The danger now is that developing nations could turn instead to the Chinese model of government, with managed mercantilism as the favored approach. While that approach has worked for China, it also has produced global trade and currency imbalances that have made matters worse. Moreover, to the extent that developing countries might try to mimic China's manipulation of trade rules and currency values to protect their own markets, that would only prolong today's global slump and delay America's recovery. Faced with these risks, the Obama team has some advantages, of course. It should find it easier to execute a sustained policy of economic stimulus than will leaders in Western Europe, who are hobbled by the continent's fractured political system. And the mere arrival of a new president is an opportunity to re-establish American influence. Yet that alone can't eliminate strategic risks. Precisely because China is the main potential beneficiary of any American decline, limiting the damage likely will require convincing China that it will benefit more from a broad global recovery than from taking advantage of the West's short-term problems. Mr. James suggests that may mean trying to bring China more directly into an international economic system long dominated by the West. The Group of Seven industrialized nations would make a lot more sense as the place to discuss the world's economic woes if the group were expanded to include China, for instance. China also could be made a bigger participant in the International Monetary Fund, which would be a way to use Chinese surpluses to advance economic recovery in a way that benefits all, not just the Chinese. The biggest trick for the Obama team, though, will be to resist Americans' natural urge on the home front to turn inward at a time like this, becoming more protectionist and isolationist. That course likely would only worsen the consequences of the global problem -- and leave the field more open for China.