GLOBAL BUSINESS (LINK TO FINANCIAL CRISIS PAGE):  INDEX TO THIS PAGE HERE; 
Not the same MBA degree your grandfather got!  Or your mother, either.  Housing crisis looming?  Food?  Gas?  Oil Supply?  Wall Street woes?   A.I.G.?


CAPTIONS TO PHOTOS/HOT LINKS, ABOVE (l. to r.):  Definitions of "arbitrageur" - e.g., "Credit Default Swaps" (a "synthetic" instrument) AND/OR "Collateralized Debt Obligations" or "CDO's" newly developed.  Link to NYTIMES Series here.  EU more here.  Municipal and County defaults coming?  Dollar downgrade?



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Analysis: Pension funds in new crisis as deficit hole grows
YAHOO
Reuters
By Natsuko Waki
5 September 2011

LONDON (Reuters) - Pension funds in developed economies are facing a new crisis as falling equities and tumbling bond yields widen their deficits, threatening the incomes and retirement dates of future retirees.

At the heart of their problems is a steady move by pension plans in the United States, euro zone, Japan and the UK to cut exposure to risk after the financial crisis.  But this "de-risking" may end up depressing their long-term returns from stock market investment and challenge the conventional wisdom that shares generate higher returns than bonds.  With weaker holdings and increased liabilities, companies will find it more difficult to fund existing pension schemes. They may cut new business investments as they use more cash to pay pensions.

For future pensioners, it means they will potentially face a lower retirement income and a longer working life -- or both.  This year has been a nightmare for many in the industry -- which controls $35 trillion, or a third of global financial assets -- and funding deficits are posting double-digit rises.

"We had a credit crisis and government bond crisis, and the third one we have is the pension crisis. This is the one where everything is going wrong and there's no obvious way out," said Kevin Wesbroom, UK head of global risk services at consultancy Aon Hewitt.

The sharp retreat in stocks through the summer has hurt them again by weakening their asset positions and threatening to erode stock market recoveries seen since the equity collapse surrounding the 2007-2009 credit crisis.  Even lower bond yields are proving to be a new headache.

"The real killer is liabilities are going up because in the flight to quality everyone gets out of equities and runs for cover in safe assets like government bonds, and yields are falling," said Wesbroom.

Many defined benefit(DB) pension plans -- where benefits are pre-determined -- pay a fixed stream of income to retirees.  The low-yielding environment makes it harder for the funds to meet these bond-like liabilities, forcing them to accumulate even more fixed income instruments to try to meet their obligations, creating a vicious circle.

FALLING YIELDS

Recent data on pension deficits highlight the plight of many pension funds.  In the United States, funding deficits of the 100 largest DB plans rose $68 billion to $254 billion in July, according to the Milliman Pension Fund Index. July marked the 10th largest deficit rise in the index's 11 year history.

Even if these companies were to achieve an optimistic annual return of as much as 8 percent and keep the current benchmark yield of 5.12 percent, their funding status is not estimated to improve beyond 93 percent by end-2013 from the current 83 percent.

Aon Hewitt estimates deficits of DB pension plans for FTSE 350 companies as of end-August rose 20 billion pounds from July to a 2011 high of 58 billion pounds. Their funding ratio stands at 89.8 percent, down from 94.1 percent three years ago.

The drop in the funding ratio is driven by a rally in the fixed income market. In Europe, the double-A rated corporate bond yield -- one of the benchmark rates used by regulators -- fell 300 basis points in the last three years to 3.55 percent, according to Barclays Capital.  The widely used rule of thumb is that a 50 basis points fall in the discount rate roughly results in a 10 percent increase in liabilities.

"Things look substantially worse now than they were during the credit crisis," said Pat Race, senior partner at investment consultancy Mercer.

In reaction to the past few years of an equity decline and volatility, many pension funds are indeed planning to buy more bonds, a move highlighted by Mercer's survey of over 1,000 European DB pension funds in May.

"Trustees do want to de-risk but financial directors have irrational desire to have equities. They are too wedded to equity markets," Race said.

"You still have massive uncertainties with a potential for another dip into recession. I don't see any reversion to days when equities are dominant part of DB plans."

JP Morgan's data shows pension funds and insurance companies in the United States, euro zone, Japan and UK bought $173 billion of bonds in the first quarter, boosting their bond buying for the third quarter in a row.  At the same time, they cut equity buying for a fifth quarter in a row, selling $22 billion of stocks in Q1.

In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.

EQUITY PREMIUM PUZZLE

Growing pension funds deficits on corporate balance sheets may make it more difficult for companies to access credit and discourage firms which are already hoarding cash from spending cash to expand business.

For wider financial markets, the giant industry's gradual move away from stocks could hit equity risk premium -- excess return of equities over risk-free securities which compensates investors for taking on the relatively higher risk.

This may reinvigorate an academic debate where some economic analysis suggests the equity risk premium should be small, in most cases less than half a percentage point, as opposed to the widely-used range of 4-6 percent.

Indeed, 10-year U.S. Treasuries gave higher total returns in the past 10 years on a rolling basis than world stocks. http://link.reuters.com/nyv53s

"The puzzle... is that for the past 20 years, there has been no net equity risk premium. With the recent sell-off in risk and the rally in bonds, I think there might have been a net premium on bonds," Stephen Jen, managing partner at SLJ Macro Partners, said in a note to clients.

"This has turned financial theory on its head, and managers of pension funds and sovereign wealth funds need to think about this very carefully."


FROM SILVER BLAZE
"...The curious incident of the dog in the night-time." 

Analysis: Global Inflation: The Dog That Doesn't and Won't Bark
NYTIMES
By REUTERS
Reporting by Alan Wheatley, editing by Mike Peacock
August 12, 2011

LONDON/NEW YORK (Reuters)- An anorexic under doctor's orders to put on weight might fret unnecessarily about getting fat one day.

Today's generally subdued inflation prompts similar worries. Surely the extraordinary steps central banks are taking to jump start growth will eventually push prices sharply higher, inflating away the debts hobbling the global economy?  To monetarists wedded to Milton Friedman's mantra that inflation is always and everywhere a monetary phenomenon, the bloated balance sheets of the Federal Reserve and other major central banks are so much dry tinder ready to catch fire.

"The Fed says long-term inflation projections are stable, but when I look at things I see money growth has gone way up, the dollar has depreciated even against weak currencies like the euro and now productivity growth has slowed. Those are not comfortable signs," said Allan Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh, Pennsylvania.  Only the sort of outcry from Main Street that prompted U.S. President Jimmy Carter to appoint Paul Volcker as Fed chairman in 1979 with a mandate to crush inflation could prevent prices from spiraling higher, he said.

"That message has to come from the public. We won't get it from the bond vigilantes and not from the Fed and not from this administration," said Meltzer, author of A History of the Federal Reserve.

Yet the solid consensus is that inflationary worries are misplaced given the dim outlook for growth that prompted the Fed this week to say it intended to keep short-term interest rates close to zero until 2013.

"When it comes to most of the developed world, there are no domestically generated inflationary pressures," said Richard Cookson, global chief investment officer at Citi Private Bank in London.

GUMMED-UP MONEY MACHINE

Cookson says many countries find themselves in the position Japan has been in for the past two decades: as the private sector pays down unsustainably high debt, consumers and businesses are loath to borrow and spend.  Under such circumstances, the mechanism whereby newly created central bank reserves are multiplied into loans and bank deposits breaks down. Moreover, cash is flowing through the economy much more slowly than usual, removing another potential generator of inflation.

At some point, the money multiplier will function normally once more, but not any time soon, Cookson said. "The problem is that it could take many years because balance sheets are so ravaged," he said.  With yields on conventional U.S., German and British bonds languishing at historic lows, markets seem to share the view that economic recovery will be gradual.

"I think the Fed correctly came to the realization that it is going to be a long slow slog, and long slow slogs generally don't generate a lot of inflation," said Michael Feroli, an economist with J.P. Morgan in New York and a former Fed staffer.

Harm Bandholz, chief U.S. economist at UniCredit Research in New York, said the Fed's easing, taken in isolation, could be viewed as adding to price pressures.

"But general inflationary pressure is not high in this type of environment of continued slow growth and deleveraging," he said.

SICKLY Labor MARKET

A weak U.S. labor market is Exhibit A in making the low-growth, low-inflation case.

So many Americans have given up the search for a job that only 58 percent of the working-age population was employed in July, a 28-year low.  Moreover, those in work saw their inflation-adjusted hourly compensation drop 1.2 percent in the second quarter from a year earlier, confirming the trend of real wage stagnation that has marked the U.S. economy since the 1970s.

Economists at Standard Chartered Bank said they expected the jobless rate, now at 9.2 percent, would still be at 8.5 percent at the end of 2012. "This means weak wage growth and low inflation pressure," they said in a report.  True, the spread between 10-year nominal and inflation-linked U.S. Treasury yields, a key indicator of inflation expectations, is much higher than in early 2009 when fear of deflation was raging at the height of the global financial crisis.

And gold, a classic hedge against inflation, scaled a record high this week and is up 24 percent so far this year.  But John Higgins, senior market economist at Capital Economics, a London consultancy, said inflation expectations were likely to recede as commodities lose altitude.

"What might trigger that is further signs of economic weakness and signs that inflation itself is subsiding," Higgins said.

Oil has fallen about $20 a barrel since April and copper, another super-sensitive barometer of global economic demand, fell to an eight-month low this week.  The retreat in key commodities partly reflects slowing growth in China brought on by steady monetary tightening.

This in turn has fanned expectations that China's own stubbornly high inflation, which touched 6.5 percent in the year to July, is close to cresting. [ID:nB9E7H902X] Indeed, economists at J.P. Morgan reckon inflation across emerging markets has probably peaked.  But that does not mean policymakers in developing countries can lower their inflation guard. Talk of currency wars has not gone away. Beijing for one has voiced anger that the Fed, with its latest easing, could once again export inflation by fuelling capital inflows and cheapening the dollar.

"The recent correction in global commodity prices could help to ease some of the inflationary pressure in the short run, but in the medium run loose monetary policy in the West may heighten imported inflation concerns," Jianguang Shen, chief China economist at Mizuho Securities in Hong Kong, said in a note.



A Rush to Assess S.& P. Downgrade of Credit Rating
NYTIMES
By NELSON D. SCHWARTZ and BINYAMIN APPELBAUM
August 6, 2011

WASHINGTON — A day after Standard & Poor’s took the unprecedented step of downgrading the credit worthiness of the United States government while offering criticism of the “political deadlock” in Washington, American lawmakers and political leaders overseas scrambled to assess the impact of the move on the already troubled world economy.

Democrats and Republicans both claimed to find validation for their policies in the decision by the ratings agency, which on Friday downgraded the nation’s long-term credit rating one notch, to AA+, even as the Obama administration and some of its allies questioned the significance of the decision. The administration mocked S.& P. for making a mathematical error, caught by the Treasury Department, that caused the company to delay its announcement of the downgrade for several hours on Friday. The administration noted that investors had flocked to Treasury securities in recent weeks as among the world’s safest investments.

Congressional leaders in both parties said that the announcement underscored the need for reforms — even as they disagreed about which reforms.

“Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground,” Speaker John A. Boehner, an Ohio Republican, said in a statement.

Senate Majority Leader Harry Reid said the decision should set the tone for a committee created last week to create a plan for reducing the federal debt by $1.5 trillion. He said it affirmed the need for the Democratic approach, which would combine spending cuts with tax increases.

The decision, he said, “shows why leaders should appoint members who will approach the committee’s work with an open mind — instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S.& P. are demanding.”

News of the downgrade reverberated across the world. Chinese leaders weighed in with a attack on the country’s free-spending ways while European officials voice skepticism of the rating agency’s rationale for the ratings decision.

China, the largest foreign holder of United States debt, said on Saturday that Washington needed to “cure its addiction to debts” and “live within its means,” just hours after the rating agency Standard & Poor’s downgraded America’s long-term debt. Though Beijing has few options other than to continue to buy United States Treasury securities, Chinese officials are clearly concerned that China’s substantial holdings of American debt, worth at least $1.1 trillion, are being devalued.

“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers.

While Europeans had girded for a possible downgrade, the news that Standard & Poor’s had actually yanked the United States’ AAA rating was nonetheless received with a degree of alarm in the corridors of power across the Continent. Finance Minister François Baroin of France questioned the move Saturday, noting that the figures used by Standard & Poor’s didn’t match those of the Treasury, and overstated the federal debt by about $2 trillion.

Standard & Poor’s defended its decision in a lengthy statement issued late Friday and deployed a spokesman onto national television to make its case. It described the decision as a judgment about the nation’s leaders, writing that “the gulf between the political parties” had reduced its confidence in the government’s ability to manage its finances. In its statement, the agency said the recent deficit-cutting that accompanied the raising of the debt ceiling “fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged.” It also said that “elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt.”

The downgrade puts new pressure on the super committee created by Congress to handle the next phase in deficit reduction. It could also lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for governments, businesses and home buyers. But many analysts say the impact could be modest, in part because the other ratings agencies, Moody’s and Fitch, have decided not to downgrade the government at this time.

Underlying the ratings decision, economists say, is he failure of the United States and Europe to make progress in resolving the fundamental problem, that their economies are weighted down by debtors who cannot afford to pay what they owe and creditors who cannot afford to walk away.

The great hope of governments on both sides of the Atlantic, and of many investors, was that renewed growth would resolve the problems, allowing some debts to be paid and others to be forgiven.

The oscillations of financial markets over the last few weeks, driven by jolts of grim economic news, suggest that this hope is starting to lose its hold on the imagination of investors.

The movements of markets are collective predictions about future prosperity. They are echoing now what some economists have been saying for years, that the debt crisis cannot be bypassed, and resolving it is a lengthy and painful process.

There is no surplus of economic strength to throw at the problem. The United States and Europe ran up great debts in the years of plenty, living well and promising to pay later, even as they made expansive promises to aging populations about future spending.

And there appears to be little confidence in the capacity of political leaders to perform the necessary work of allocating losses, either in the United States, where lenders are pitted against homeowners, or across the Atlantic, where lenders are pitted against the nations of southern Europe.

“The restorative forces of the economy are very weak and the immediate forces that will be in place are worsening the problem,” said Joseph E. Stiglitz, an economist at Columbia University. “We already know it’s not going to be a V-shaped recovery. I had said in my book that it would be more of an L-shaped, slow recovery. I think the answer now is a Japan-style malaise.”

The weakness of the American economy is most evident in the lack of jobs. Only 55 percent of working-age adults held full-time jobs in July, the lowest level in modern times. Some 25 million American adults want but cannot find full-time work, the government said Friday. The unemployment rate fell slightly, but mostly because 193,000 people stopped searching for jobs.

Consumer spending makes up 70 percent of the nation’s economic activity, and people without jobs spend less money. For more than a year the government has reported that the economy was expanding more quickly than employment, seeding hope that hiring would follow. But last week the government said in a new estimate that it was mistaken, and that the economy actually expanded at an annual rate of only 0.8 percent during the first half of the year — about the rate of population growth.

Kenneth Rogoff, an economist at Harvard University, said that forecasters had been consistently upbeat over the last year, only to be perpetually disappointed by the data. “This recession has been pulling away the football from forecasters like Lucy and Charlie Brown,” he said.

Liz Alderman contributed reporting from Paris, Jack Ewing from Frankfurt and David Barboza from Shanghai.


Contracts Cloud Who Has Exposure in Greek Crisis
NYTIMES
By LOUISE STORY
June 22, 2011

It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.?

No one seems to be sure, in large part because the world of derivatives is so murky, but the possibility that some company out there may have insured billions of dollars of European debt has added a new wrinkle to the sovereign default debate.

In years past, when financial crises in Argentina and Russia left those countries unable to make good on their government debts, they simply defaulted. But this time around, swaps and other sorts of contracts have become so common and so intertwined in the financial markets that there are fears among regulators and financial players about how a Greek default would play out among derivatives holders.

The looming question is whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default. If there were a single company standing behind many of these contracts, that company would be akin to the American International Group of the euro crisis. The American insurer needed a $182 billion federal bailout during the financial crisis because it had insured the performance of mortgage bonds through derivatives and couldn’t pay on all of them.

Even regulators seem unsure of whether a Greek default would reveal such concentrated risk in the hands of just a few companies. Spokeswomen for the central banks of both Europe and the United States would not say whether their researchers had studied holdings of such contracts among nonbank entities like insurance companies and hedge funds — and they would not say what would occur among large players if Greece or another European country defaulted.

Derivatives traders and analysts are debating just how much money is involved in these derivatives and what sort of threat they pose to markets in Europe and the United States. On the one hand, just over $5 billion is tied up in credit-default swap contracts that will pay out if Greece defaults, according to Markit, a financial data firm based in London. That’s less than 1 percent the size of Greece’s economy, but that is a conservative calculation that counts protections banks have in place offsetting their positions, and is called the net exposure. The less conservative figure, the gross exposure, is $78.7 billion for Greece, according to Markit. And there are many other types of contracts, like about $44 billion in other guarantees tied to Greece, according to the Bank of International Settlements.

The gross exposure of the five most financially pressed European Union countries — Portugal, Italy, Ireland, Greece and Spain — is about $616 billion. And the broader figure on all derivatives from those countries is unknown.

The pervasiveness of these opaque contracts has complicated negotiations for European officials, and it underscores calls for more transparency in the derivatives market.

The uncertainty, financial analysts say, has led European officials to push for a “voluntary” bond financing solution that may sidestep a default, rather than the forced deals of other eras. “There’s not any clarity here because people don’t know,” said Christopher Whalen, editor of The Institutional Risk Analyst. “This is why the Europeans came up with this ridiculous deal, because they don’t know what’s out there. They are afraid of a default. The industry is still refusing to provide the disclosure needed to understand this. They’re holding us hostage. The Street doesn’t want you to see what they’ve written.”

Regulators are aware of this problem. Financial reform packages on both sides of the Atlantic mandated many changes to the derivatives market, and regulators around the globe are drafting new rules for these contracts that are meant to add transparency as well as security. But they are far from finished and could take years to put into effect.

Darrell Duffie, a professor who has studied derivatives at the Graduate School of Business at Stanford University, said that he was concerned that regulators may not have adequately studied what contagion might occur among swaps holders, in the case of a Greek default.

Regulators, he said, “have access to everything they need to have. Whether they’ve collected all the information and analyzed it is different question. I worry because many of those leaders have said there’s no way we’re going to let Greece default. Does that mean they haven’t had conversations about what happens if Greece defaults? Is their commitment so severe that they haven’t had real discussions about it in the backrooms?”

Regulators aren’t saying much. When asked what data the Federal Reserve had collected on American financial companies and their swaps tied to European debt, Barbara Hagenbaugh, a spokeswoman, referred to a speech made by the Federal Reserve chairman, Ben S. Bernanke, in May in which he did not mention derivatives tied to Greece. And she said in a statement that the Fed had researched the “full range of exposures” at the companies it supervises — the banks — and is “monitoring the situation more broadly.”

At the European Central Bank, Eszter Miltenyi, a spokeswoman, said : “This is much too sensitive I think for us to have a conversation on this.”

On Wall Street, traders are debating whether the industry’s process for unwinding credit-default swaps would run smoothly if Greece defaulted. The process is tightly controlled by a small group of bankers who meet in an industry group called the International Swaps and Derivatives Association. .

The process is fairly well developed, but it has been little tested on the debt of countries. For the most part, Wall Street has cashed in on credit-default swaps tied to corporations’ debt.

Only one country has defaulted on its debt in the last few years — Ecuador at the end of 2009 — and its debt was so small and its economy so isolated that it was hardly a notable event.

For most purposes, determining whether a default occurred in a country’s debt falls to ratings agencies like Fitch and Moody’s. But for the derivatives market, a committee of I.S.D.A. makes the call.

If the committee decides there was a default, it passes the baton to Markit, which is partly owned by the banks. Markit holds an auction to determine the amount of value that has been lost on the debt, and that determines how much money is paid out to the parties that purchased the insurance.

Marc Barrachin, who runs the auctions, said there was no reason to worry about the process.

“We’ve had over 100 auctions since 2005,” said Mr. Barrachin, the director of credit products at Markit. “The process is very smooth, very well understood by market participants. I mean if you go back to 2008 right in the fall, in five days we had auctions for Fannie Mae, Freddie Mac and Lehman Brothers, and two weeks after that you had Washington Mutual. I go back to that period of stress and the orderly settlements of large amounts of credit derivatives, for names that were widely followed, were testament of the efficiency of the auction system.”

In the case of A.I.G., there was not an unwind process run by I.S.D.A. because A.I.G.’s contracts were tied to mortgage bonds. Those sorts of derivatives pay out money over time, whereas derivatives tied to a country’s debt pay out on one occasion: if a default occurs. That makes sovereign derivatives more similar to derivatives on corporate bonds and different in some ways from the situation at A.I.G.

But the smoothness of the process would be irrelevant if the risk were concentrated in just a few weak institutions.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, a boutique banking firm in New York, said the uncertainty around how a sovereign default would course through the derivatives market had greatly increased the price premiums banks were charging to put on new derivatives trades related to European countries.

“There is lack of transparency and visibility in these products, and that increases the risk,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, a boutique banking firm in New York. “For many people, even if the Greek can be unwound in an orderly place, people look at Greece, and they see the future of Portugal and Ireland and maybe even Spain.”

If Greece’s debt ends up leading to payouts on its derivatives, it may never be known who the beneficiaries are, since derivatives are private contracts. Some analysts suggest that some of the banks involved in financial transactions in Greece several years ago may have had early knowledge about the weakness of the country’s financial condition, especially since some of the banks helped mask that weakness using derivatives.


Watch that red ink

Bank Said No? Hedge Funds Fill a Void in Lending
NYTIMES
By AZAM AHMED
June 8, 2011, 8:55 pm Hedge Funds

Hedge fund managers have been called plenty of names.

Now, they can add another: local banker.

When Rentech, a clean energy business in Los Angeles, was rejected by its long-time banker last year, it asked a hedge fund for money instead. “You have to take what’s available at the time,” said D. Hunt Ramsbottom, chief executive of Rentech, which has since borrowed $100 million in this unconventional way.

With traditional lenders still avoiding risky borrowers in the wake of the financial crisis, hedge funds and other opportunistic investors are stepping into the void. They are going after midsize businesses that cannot easily raise money in the bond markets like their bigger brethren.

The support is critical in a recovery characterized by high unemployment and anemic growth. These middle-market companies, which generate $6 trillion in revenue a year and employ 32 million people in the United States, are borrowing billions of dollars from the hedge funds for product development, strategic acquisitions and even day-to-day operations like payroll and utilities.

But the lending force also poses a significant risk to the companies and the broader economy, given the unregulated nature of this shadow banking system.

These lenders of last resort typically charge interest rates that are several percentage points higher than banks. Loaded up with high-cost loans, borrowers could find themselves falling deeper into debt or worse, into bankruptcy. Over the last year, Rentech has borrowed from a group of funds, led by Highbridge Capital Management and Goldman Sachs, at an interest rate of 12.5 percent.

“On the one hand, the cost of money is more expensive than what some businesses might be used to,” Mr. Ramsbottom said. “On the other, if the money is not available, the cost is infinite.”

The lending activity is also stoking fears that speculative activities — like those that contributed to the crisis — are shifting from banks to loosely regulated firms that play by their own rules. While policy makers are moving to increase capital and other standards for banks to prevent another disaster, hedge funds and the like are not subject to the same oversight.

If firms load up on debt and the market goes into a tailspin again, the shadow banking system could implode and threaten the entire economy.

“These institutions are essentially servicing a part of the market where banks are not lending,” said Debarshi Nandy, a professor at York University’s business school in Toronto. “The million-dollar question is, Are we benefiting?”

Hedge funds offered a crucial lifeline for Rentech. The company is hoping to build a facility about 60 miles east of Los Angeles to transform yard clippings into fuel, enough for 75,000 cars. If it works, the project would represent Rentech’s first commercial success in its nearly 30-year history.

Unprofitable for decades, Rentech is a risky proposition for a traditional lender. While large corporations with healthy balance sheets can easily tap into the bond markets or borrow from banks, their smaller counterparts with shakier credit have fewer options.

Middle-market companies, with revenue of $25 million to $1 billion, do not typically sell bonds. And their main financing sources, specialty lenders like CIT Group and regional banks, have not fully recovered. Last year, debt securities focused on this segment stood at $12 billion, down from $35 billion in 2005, according Standard & Poor’s Leveraged Commentary and Data.

Hedge funds and other investors are flush with capital. Last year, Highbridge, which is owned by JPMorgan Chase, started a $1.6 billion fund that lends money to midsize companies. The private equity firm Blackstone Group started a $3 billion fund. Even FrontPoint, the firm hobbled by an insider trading investigation, has raised $1 billion for a lending fund and plans to double the size, according to a person with knowledge of the matter.

The concern is that hedge funds are looking for quick payoffs rather than long-term opportunities — and will bolt if there is trouble. A previous wave of money managers that jumped into lending after the collapse of Lehman Brothers in 2008 saw their loans sour. The firms, mainly smaller, fringe players, have since disappeared.

“The new funds rushing into direct lending now will learn the hard way that it is easy to make what appear to be sound loans as the economy is improving, but it becomes brutal to either collect the loans or foreclose when the downturn comes,” said Max Holmes, the founder of Plainfield Asset Management, whose lending-focused fund, once as large as $5 billion, is winding down.

Unlike their predecessors, players today say they are operating like community bankers, focusing on multiyear deals backed by significant collateral and capital. They are also locking up investors’ money for years rather than quarters. This can alleviate some short-term pressures.

“The people who last are those with a relationship-oriented business, not those who view it as a trade,” said Rob Ladd of D. E. Shaw, which manages $1.7 billion in lending strategies.

Stephen J. Czech of FrontPoint spent weeks researching Emerald Performance Materials. He scoured the chemical manufacturer’s financials, visited several facilities, and met with executives — all of which gave him the confidence to lend the company money.

Emerald used the loan to buy a European rival. “All types of financing were considered,” said Candace Wagner, Emerald’s president, but the company preferred the “flexibility and certainty” of FrontPoint.

Some who borrowed from hedge funds have not been so satisfied. Hedge funds have been lumped with payday lenders that charge usury rates. Plainfield has been accused of predatory lending in civil suits, and local and federal authorities have looked into the firm’s practices. Plainfield said it won or settled all of the suits and investigators closed their inquiries without taking action.

The creditors of Radnor Holdings, a disposable-cup company that defaulted on a roughly $100 million loan, claimed Tennenbaum Capital Partners charged excessively high rates as a takeover tactic, a strategy referred to as “loan to own.” After a protracted legal battle, the fund took control of Radnor in 2006, renaming it WinCup.

Tennenbaum did not return calls for comment.

Another worry is that funds will trade on nonpublic information they receive as lenders. A March study in The Journal of Financial Economics found a spike in investors betting against the shares of companies that took hedge fund loans. Businesses that borrow from banks did not experience the same activity, according to the authors, including Professor Nandy.

For Mr. Ramsbottom of Rentech, the benefits outweighed the risks. While the company could end up losing the profitable fertilizer plant it put up as collateral on the loan, Rentech can continue to pursue the clean energy venture.

“An entrepreneur will pay whatever,” he said, “to keep his business alive.”

No more NYSE guys
New York POST
By CHARLES GASPARINOO
Last Updated: 4:40 AM, February 11, 2011
Posted: 11:59 PM, February 10, 2011

The New York Stock Exchange's likely sale to Frankfurt Stock Exchange is a sad event for the country, which is losing an icon of global finance to the Germans -- including possibly the NYSE name, once one of the best-known brands in corporate America.

But the merger (slated to be announced on Tuesday, I'm told) is even sadder for New Yorkers. What little is left of our economic dominance as the "Empire State" has now been shattered by a deadly combination of global competition that is ruthless in picking winners and losers and the high taxes and vast spending of the New York nanny state.

Despite these burdens, the financial sector -- the big banks and investment houses and the NYSE -- managed to survive, providing plentiful jobs for blue-collar and back-office workers, as well as highly paid bankers and traders. But recent regulations, including those in the name of "financial reform," have imposed so many fees and costs on investment houses that operating in the New York area, with its high taxes on business and individuals, has become increasingly difficult even for the biggest big banks that still call New York their home.

In response, these institutions have either moved out of New York or transferred major chunks of their businesses to lower-cost areas -- or, as the NYSE is trying to do, simply sold to a larger, more competitive foreign player.

The saddest part of this sad story is that there appears little anyone can do, given the clueless crew in Albany. Consider: The state Assembly and its powerful public-union cronies are not only resisting Gov. Cuomo's much-needed spending cuts, but want to make it even more difficult for people who create jobs and contribute to what's left of New York's economy, by extending a "millionaire's" tax on the so-called rich.

The folly of this tax starts with its name -- only in New York do we count "millionaires" as people making a penny more than $200,000 a year, which is where this income-tax surcharge begins. Worse is its futility: It will be further incentive for people who make money and start businesses to pack up and go elsewhere, leaving the state with fewer revenues to close its endless budget holes.

There are many reasons why the NYSE needed to sell to the Germans. The business of matching buyers and sellers of stocks (the cornerstone of any exchange) is rapidly changing. The old brokers on the NYSE floor have been replaced by computers that do that function at lightening speeds.

The NYSE computer-trading system now competes with exchanges across the country and the globe. In fact, stocks -- including those listed to trade on the NYSE's "Big Board" -- don't even need to be matched by the NYSE computer, one of its remaining floor traders or at any exchange, for that matter: A firm like Goldman Sachs can simply bring buyers and sellers together on its own trading desk.

Meanwhile, in 2003, the guy who knew more than anyone else about how to run the NYSE, its former chairman Dick Grasso, was run out of town following the disclosure of his huge pay package -- despite everything he'd done to make the exchange one of the world's best-known brands. Since then, the symbol of New York's and the country's economic dominance has struggled under feckless management that gave away many competitive advantages.

But the biggest reasons why the exchange really didn't have a fighting chance to compete are economic: the high cost of doing business in New York, combined with the burdensome regulations that appear every time the markets crumble.

The costs to businesses from the Sarbanes-Oxley overhaul, enacted after the Internet bubble and the Enron scandal, didn't stop Bernie Madoff from stealing tens of billions -- but those burdens forced many firms to flee the NYSE and register their shares in places like Frankfurt.

The more recent Dodd-Frank overhaul has so many hidden costs and regulations, executives at the big banks still can't figure them out. With that, they've begun shedding such businesses as proprietary trading, in which a bank risks its own money to buy and sell stocks, even though these had little to do with the '08 financial collapse.

Put this all together, and the question isn't why the NYSE is giving up the fight -- but why it took so long.

19 September 2010 Last updated at 08:33 ET
China official rebuffs Geithner over yuan

An adviser to China's central bank has rebuffed criticism from the US over Beijing's exchange rate policy.  In a speech in Beijing, Li Daokui said China "will not appreciate the yuan solely because of external pressure".

His comments follow strong criticism in America that the yuan is significantly undervalued, damaging US exports.  Last week US the Treasury Secretary, Timothy Geithner, said he was considering ways to press China to let the yuan appreciate.

In June, after months of pressure from the US, China pledged to relax its grip on its currency.

But on Thursday Mr Geithner renewed the criticism, saying that the yuan's value was "essentially" unchanged because of "very substantial" intervention by authorities.

China denies keeping its currency artificially cheap, and has warned against foreign pressure over what Beijing regards as an internal matter.

Mr Li said: "China as it stands now is not Japan in 1985, it is not a country that completely relies on external demand."

That was a reference to a 1985 accord where Japan agreed to let its yen currency appreciate against the dollar.
Mobilising support

US manufacturers in particular have pressed President Barack Obama to do something, as a low yuan benefits Chinese exports and is a barrier to imports.

Since June the yuan has appreciated about 1.6% against the dollar and gained about 0.7% last week.

On Thursday Mr Geithner told a key committee of senators that he was examining what mix of tools would encourage China to let the yuan appreciate more quickly.

Mr Geithner said he would try to bring in other world powers to push China for trade and currency reforms, saying the US would use a G20 summit in Seoul in November to try to mobilise trading partners to get Beijing to let the yuan strengthen faster.

He said: "We are concerned, as are many of China's trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited."
'Currency manipulator'

Congress is pressuring the Obama administration to take a tougher stand with China over its trade practices.

Some members of the committee have called China a currency manipulator.

Senator Richard Shelby, the committee's most senior Republican, said, "There is no question that China manipulates its currency in order to subsidize its exports. The only question is: Why is the administration protecting China by refusing to designate it as a currency manipulator?"

How are world's economies doing summer 2010?
http://www.bbc.co.uk/news/business-10955199

We ask again, how does this relate to anything the Town of Weston is doing in O.P.E.B. project?
SEC accuses money manager of fraud
YAHOO
21 June 2010

WASHINGTON – Federal regulators have filed civil fraud charges against an investment adviser and his firm in connection with complex securities tied to mortgages during the housing market bust.

The Securities and Exchange Commission on Monday accused Thomas Priore and ICP Asset Management of fraudulently managing the securities in a way that cost investors tens of millions of dollars. The SEC also says Priore and the New York firm improperly reaped millions in fees and undisclosed profits at the expense of clients.

The allegations involve four multibillion-dollar collateralized debt obligations.

Wall Street firms packaged and sold C-D-O's tied to mortgages to investors at the height of the housing boom
Lawmaker: Local officials lost $1.7B due to Lehman
YAHOO
By ALAN ZIBEL, AP Business Writer
20 April 2010

WASHINGTON – A lawmaker says the collapse of Lehman Brothers cost 40 municipalities nationwide around $1.7 billion and devastated local services in a county she represents.

Rep. Anna Eshoo, D-Calif., is telling House lawmakers Tuesday that San Mateo County lost $155 million as a result of the Wall Street firm's meltdown in September 2008.

She says county officials were "not rolling the dice to optimize their dollars. They invested in the safest, most conservative instruments."

Lehman's collapse was the biggest corporate bankruptcy in U.S. history. It threw global financial markets into crisis.

The hearing will examine what led to the collapse of Lehman and will probe a bankruptcy examiner's report that the firm masked $50 billion in debt.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

WASHINGTON (AP) — The former chief executive of Lehman Brothers will tell House lawmakers Tuesday that he has no memory of an accounting maneuver that a bankruptcy examiner says the company used to mask its perilous financial condition.

Richard Fuld, Lehman's former CEO, said he has "absolutely no recollection whatsoever" of any documents related to the so-called Repo 105 accounting maneuver, according to testimony prepared for a hearing of the House Financial Services Committee.

Last month, an examiner appointed by the bankruptcy court to investigate the Lehman debacle issued a 2,200-page report finding that the firm masked $50 billion in debt.

Since the report came out, interest has grown on Capitol Hill among lawmakers seeking to find out if the accounting gimmick was widely used by Wall Street firms to hide their debt.

The government was unable to engineer a private-sector rescue of the failing firm or come up with some other solution. Lehman was forced to declare bankruptcy — the biggest in U.S. history — in the fall of 2008. That threw financial markets in the United States and around the globe into crisis.

Fuld, who hasn't appeared before Congress since October 2008, said in prepared remarks that the report "distorted the relevant facts" and that the accounting complied with standard practices.

"The result is that Lehman and its people have been unfairly vilified," he said.

The examiner, Anton Valukas, however, criticized the company and the Securities and Exchange Commission. Lehman, he said, "was significantly and persistently in excess of its own risk limits," he said in prepared remarks. The SEC, meanwhile, "was aware of these excesses and simply acquiesced."

In his report last month, Valukas disclosed that Lehman put together complex transactions that allowed the firm to sell "toxic" securities — mainly those made up of mortgages — at the end of a quarter. That wiped them off its balance sheet, avoiding the scrutiny of regulators and shareholders. Then the bank quickly repurchased them — hence the term "repo."

Treasury Secretary Timothy Geithner will testify at the hearing that Lehman's collapse highlights why the Obama administration's proposal to reform the financial system is needed. That legislation includes a mechanism to allow the government to safely wind down ailing financial companies whose collapse could take down the entire financial system and the broader economy.

"Lehman's disorderly bankruptcy was profoundly disruptive," Geithner said, according to prepared remarks. "It magnified the dimensions of the financial crisis, requiring a greater commitment of government resources than might otherwise have been required. Without better tools to wind down firms in an orderly manner, we are left with no good options."

Geithner's predecessor, Henry Paulson, is not appearing at Tuesday's hearing. In written remarks, he supported several pieces of the Obama administration's proposed financial reforms, without mentioning the bill itself.

"The government must have the authority to wind-down, and eventually liquidate, nonbank financial institutions in a manner that prevents harm to the system as a whole," Paulson wrote. "We sorely felt the need for this authority at the time of Lehman's failure, and, had we had it, I think the situation would have ended quite differently."

The chairman of the SEC, Mary Schapiro, also is scheduled to testify. She will say that after Lehman's rival Bear Stearns nearly collapsed two years ago in a government-managed sale, the SEC had little ability to prevent Lehman from going under.

She did, however, concede that the SEC "did not do enough" to oversee the five largest investment banks, even though it had authority over them since 2004. That oversight program, she said, was "insufficiently resourced, staffed, and managed from its inception."

Lawmakers are also likely to question Schapiro about the SEC's case against Goldman Sachs. The agency filed civil charges Friday against the venerable Wall Street firm, claiming the bank misled investors about mortgage-linked securities.

Federal Reserve Chairman Ben Bernanke, also scheduled to testify, said the central bank wasn't aware that Lehman used the accounting move. And even if the Fed did know, it wouldn't have changed the Fed's view that the company was in bad financial shape, according to Bernanke's prepared remarks.

Although the SEC was Lehman's chief regulator, the Fed began to monitor the firm after trouble surfaced in the financial industry.

Two Fed employees were placed at Lehman to keep tabs of the company's cash position and its general financial condition, Bernanke explained. Beyond information gathering, the employees had no authority to regulate Lehman's disclosures, capital standards, risk-management practices or other business activity, Bernanke pointed out.

More collapsing economies here.
Kaupthing Bank sign
Kaupthing was nationalised in 2008 (r)

Iceland arrests ex-chief of collapsed bank Kaupthing
Page last updated at 18:25 GMT, Thursday, 6 May 2010 19:25 UK

The former chief executive of the collapsed Icelandic bank Kaupthing has been arrested, authorities say.

Hreidar Mar Sigurdsson is suspected of embezzlement, trading irregularities, and other breaches of banking laws, the special prosecutor's office has said.

It is the first high-profile arrest since the country's financial collapse in 2008.

Mr Sigurdsson is being held by police until a bail hearing on Friday at the Reykjavik District Court.

Kaupthing, once Iceland's biggest bank, collapsed under a mountain of debt at the height of the country's banking crisis.

It was taken over by the government in October 2008, along with Iceland's two other biggest banks, Landsbanki and Glitnir.

Prosecutor Olafur Hauksson said Mr Sigurdsson was suspected of falsifying documents, embezzlement, breach of trading laws, market manipulation, and other laws.

Mr Hauksson was appointed by Iceland's post-crisis government to investigate any criminal activity in the lead up to the crash that has crippled Iceland's economy.

Britain's Serious Fraud Office is carrying out its own investigation into suspected fraud at Kaupthing, with a focus on the bank's efforts to attract British investors to its "high yield" deposit account, Kaupthing Edge.

And Mother Nature voted "no" as well...
Iceland votes 'no' to debt deal for collapsed bank
YAHOO
By GUDJON HELGASON and JILL LAWLESS, Associated Press Writers
March 7, 2010

REYKJAVIK, Iceland – Voters in tiny Iceland defied their parliament and international pressure, resoundingly rejecting a $5.3 billion plan to repay Britain and the Netherlands for debts spawned by the collapse of an Icelandic bank.

According to results released Sunday, just over 93 percent of voters said "no" in Saturday's ballot, while only 1.8 percent voted "yes," according to a count of all but 2,500 of the 143,784 votes cast. The rest were blank or spoiled ballots.

Britain and the Netherlands want to be reimbursed for money they paid their citizens with deposits in Icesave, an Internet bank that collapsed in 2008, along with most of Iceland's banking sector. Ordinary Icelanders say the repayment schedule was too onerous.

The overwhelming margin reflects Icelanders' simmering anger at bankers and politicians as the island nation struggles to recover from a financial meltdown. Some Icelanders set off fireworks in the center of the capital, Reykjavik, as the referendum results were announced.

President Olafur R. Grimsson — who sparked the referendum by refusing to sign the repayment deal agreed by Iceland's parliament — said Icelanders resented having to pay for the actions of a few "greedy bankers."

He said, however, the British and Dutch would get their money back eventually. The two countries have already offered Iceland more favorable repayment terms than the deal voted on Saturday.

"The referendum was not about refusing to pay back the money," Grimsson told the BBC. "Iceland is willing to reimburse those two governments, but it has to be on fair terms."

Iceland, a volcanic island with a population of just 320,000, went from economic wunderkind to fiscal basket case almost overnight when the credit crunch took hold.

After a decade of dizzying economic growth that saw Icelandic banks and companies snap up assets around the world, the global financial crisis wreaked political and economic havoc. Iceland's banks collapsed within a week in October 2008, its krona currency plummeted and a wave of popular protest toppled the government.

The new left-of-center government has been trying to negotiate a plan to repay $3.5 billion to Britain and $1.8 billion to the Netherlands as compensation for funds that those governments paid to around 340,000 of their citizens who had accounts with Icesave, an Icelandic Internet bank that offered high interest rates before it failed along with its parent, Landsbanki.

Last minute talks broke down last week, despite the debtor countries saying they had offered better terms for a new deal — including a significant cut on the 5.5 percent interest rate in the original deal.

That would have required each Icelander to pay around $135 a month for eight years — about a quarter of an average four-member family's salary.

Despite the referendum result, both sides said they were confident a deal would eventually be reached.

The Icelandic government said in a statement there had been "steady progress toward a deal" in the past few weeks, and Prime Minister Johanna Sigurdardottir said officials would resume talks with Britain and the Netherlands now that the referendum was over.

British Treasury chief Alistair Darling said his country was prepared to be flexible, and acknowledged it would be "many, many years" before Britain was repaid.

Many Icelanders remain angry at Britain for invoking anti-terrorist legislation to freeze the assets of Icelandic banks at the height of the crisis, prompting the worst diplomatic spat between the two countries since the Cod Wars of the 1970s over fishing rights.

Darling struck a conciliatory note Sunday.

"You couldn't just go to a small country like Iceland with a population the size of (the English town of) Wolverhampton and say: 'Look, repay all that money immediately,'" he told the BBC. "So we've tried to be reasonable. The fundamental point for us is that we get our money back."
Iceland braces for consequences of Icesave vote
YAHOO
By JANE WARDELL and GUDJON HELGASON, Associated Press Writers
March 6, 2010

REYKJAVIK, Iceland – A proposal to use taxpayer funds to pay off Iceland's substantial debts to foreign governments seemed likely to be defeated in a national referendum Saturday.  Opinion polls indicated that a strong majority intend to reject the $5.3 billion plan to compensate the governments of Britain and the Netherlands for money those governments paid out to depositors in their countries who lost savings in a failed Icelandic bank.

"I voted no," said Rognvaldur Hoskuldsson, a 36-year-old machine technologist, after casting his vote Saturday morning. "It makes no sense to say yes when the UK and Dutch have put a better deal on the table in talks this week. Also we have to send a message that these countries are not going to profit from this situation."

Many Icelanders who have been badly hurt by the country's financial collapse say they don't want to be bullied by larger nations seeking to profit from Iceland's severe economic problems.

A rejection of the deal because of the public backlash would create another obstacle on Iceland's difficult road out of a deep recession. A "no" vote could further jeopardize its credit rating and make it harder to access much-needed bailout money from the International Monetary Fund.

It could also harm Iceland's chances of being granted entry to the European Union.  Some voters seemed undecided even after the polls opened. Kristofer Hannesson, 27, said he was not yet sure but was leaning toward voting against the plan.

"I feel that I should go and vote no to send the message to the British and the Dutch that we, the innocent Icelandic public, are not going to let them walk all over us," he said.

Iceland has been desperately seeking a revised deal with its European creditors since President Olafur R. Grimsson tapped into public anger and used a rarely invoked power to refuse to sign the so-called Icesave bill into law in January, triggering the national poll.  At the heart of the dispute is the payment of $3.5 billion to Britain and $1.8 billion to the Netherlands as compensation for funds that those governments paid out to around 340,000 nationals with savings in the collapsed Icesave internet bank.

Britain and the Netherlands offered better terms last week — including a floating interest rate on the debt plus 2.75 percent, representing a significant cut on the 5.5 percent under the original deal hammered out at the end of last year.  The British say their "best and final offer has been turned down."

But Iceland continues to hold out for more, aware that any new deal must win substantial political and public support to avoid another veto by the president.

Locals largely view the deal both as intimidation by bigger nations and an unfair result of their own government's failure to curtail the excessive spending of a handful of bank executives that led the country into its current malaise.  Because of Iceland's tiny population, around 320,000, the original deal would have required each person to pay around $135 a month for eight years — the equivalent of a quarter of an average four-member family's salary.

That's a step too far for many ordinary Icelanders who resent forking out the money to compensate for losses incurred by potentially wealthier foreign investors who chased the high interest rates offered by Icesave.
There's also residual anger that Britain invoked anti-terrorist legislation to freeze the assets of Icelandic banks at the height of the crisis, prompting the worst diplomatic spat between the two countries since Cod Wars of the 1970s over fishing rights in the North Atlantic.

"I am going to say no on Saturday because it's not fair and justifiable that the Icelandic nation should pay for other people's mistakes," said Benedikt Mewes, 33, a cashier at the National Post Office in Reykjavik.

Officials within Iceland's Social Democrat-Left Green coalition government, whose authority is being challenged by the weekend poll, acknowledge the repercussions of a failure to settle the dispute.  Although the International Monetary Fund has never explicitly linked delivery of a $4.6 billion loan to the reaching of an Icesave deal, it is committed to Iceland repaying its international debt — the months taken to reach the original Icesave deal were responsible for holding up the first tranche of IMF funds last year.

There are also fears that Britain and the Netherlands will take a hard-line stance on Iceland's application to join the EU and refuse to approve the start of accession talks until an Icesave deal is signed into law.


Up, up and away?  For interest rates, that is...

Stock futures down after Fed rate hike
YAHOO
By IEVA M. AUGSTUMS, AP Business Writer
Feb. 19, 2010

The stock market headed for a lower open Friday after the Federal Reserve surprised investors by raising the interest rate it charges banks for emergency loans.

Markets around the world also fell as investors feared that the Fed's move will raise borrowing costs and slow the economic recovery. It has been widely expected that the central bank would begin pulling back on its economic stimulus measures. But late Thursday's quarter-point increase in the discount rate to 0.75 percent came sooner than expected.

The Fed said its action should not be seen as a sign that it will soon raise rates for consumers and businesses. But the stock market, which tends to trade on expectations for what the economy will be like in six to nine months, seems to be anticipating that rates will rise.

Asian stocks were down nearly 2 percent in earlier trading and the dollar, which is supported by higher interest rates, extended its advance. European markets were mixed.

Dow Jones industrial average futures fell 40, or 0.4 percent, to 10,335. Standard & Poor's 500 index futures dropped 6.30, or 0.6 percent, to 1,099.30, while Nasdaq 100 index futures fell 6.25, or 0.3 percent, to 1,814.50.

Whether the Fed can move slowly on future rate increases may become clearer when the Labor Department releases its consumer price report later Friday morning.

Economists surveyed by Thomson Reuters expect the CPI, which measures inflation at the consumer level, rose 0.3 percent in January, faster than December's 0.1 percent increase. They expect that core inflation, which excludes energy and food, will rise by a more moderate 0.1 percent in January, the same as in December.

A jump in inflation could put the Fed in a position of having to raise interest rates to fight the rising prices.

The report is expected at 8:30 a.m. EST.

Bond prices were mixed Friday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.80 percent from 3.81 percent late Thursday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.11 percent from 0.08 percent late.

The dollar rose against other major currencies. Gold and oil prices fell.

Overseas, Japan's Nikkei stock average fell 2.1 percent. In afternoon trading, Britain's FTSE 100 slipped less than 0.1 percent, Germany's DAX index was down 0.1 percent, while France's CAC-40 was up 0.3 percent.

Page last updated at 16:18 GMT, Friday, 29 January 2010
Davos 2010: Central bankers seethe behind closed doors
By Tim Weber, Business editor, BBC News website, in Davos

Davos 2010
The regulators are talking, but are the bankers listening?

Davos has a new blood sport: banker bashing.

Everybody at the World Economic Forum is tearing into them, from President Nicolas Sarkozy to investing legend George Soros.

It may be clean good fun (and a great spectator sport), but all the tough talk has a very serious edge.

Slowly, the outlines of a consensus are emerging for far-reaching reforms of the financial sector. The bankers here are fighting a rearguard action - seemingly without realising that they are making their situation even worse.

My colleague Robert Peston reported the astounding comments from a leading banker, suggesting that he and his colleagues can't possibly have been paid too much.

It's exactly these kind of comments that are goading regulators and politicians to get tough.

Angry central bankers

Central bankers don't do public tantrums.

But the measured tones of the European central bankers here in Davos barely hide how angry they are over what they see as being taken for a ride.

We wanted to see sensible behaviour by banks, but we didn't see it, so we need collective action
A European central banker

Look at the UK's 50% tax on bankers' bonuses, says one. "This was not designed to generate revenue, but to avoid it. But the banks still paid their bonuses. A better tax rate would have been 100%."

The bankers, he implies, clearly didn't get the message.

Backed by the G20, regulators are currently doing some detailed work on a global regulatory framework - looking at various options and the impact they will have. The framework is scheduled to be ready by the end of the year.

Over lunch, one of the top central bankers guiding the process promised us pretty comprehensive reforms. "The new world will look more like the 'new new', not the 'new normal'," he threatens.

He ticked off a list of potential changes, from new accounting rules to new counterparty arrangements to liquidity buffers.

The central banker particularly dwelled on a plan to introduce "capital requirement charges" to punish banks that don't save money for a rainy day.

Why such drastic action?

"The banks had a great year," he says. "The good results were only driven by the 'for free' insurance that the governments sold to them." But did the banks use the windfall to bolster their balance sheets? No, "everybody is putting it into bonuses and dividends".

And, turning slightly red, he says: "We wanted to see sensible behaviour by banks, but we didn't see it, so we need collective action."

Pitfalls

Bankers are quick to point out what could go wrong.

Too much regulation, too high taxes, and banks could not afford to lend any money at all, even if they would want to. It would be a certain way of choking any economic recovery.

The central bankers acknowledge that, and promise that all the new rules and regulations, the "de-risking" and "de-leveraging" of the banking sector would be slowly phased in.

Davos 2010
Everyone is getting a chance to vent in private

"This won't be a one-size-fits-all model," says one of them.

Politicians, too, see the benefits of being tough on banks.

A parade of politicians from around the world here in Davos has lavished praise on the principles (if not always the detail) of US President Barack Obama's plan to reform the banks.

The leader of the UK opposition, David Cameron, reiterated his support for a global financial insurance levy, to make sure it was the banks who would finance the next bail-out, not the taxpayer.

And he loves regulation too, promising to turn the Bank of England into the UK's centralised City watchdog, should his party win this year's general election.

The next catastrophe

Andrei Kostin, chief executive of Russia's VTB Bank, quotes Ronald Reagan: "The most terrible words in the English language are: I'm from the government and I'm here to help" - but acknowledged that the crisis proved this adage wrong.

Rather, says Jean-Claude Trichet, president of the European Central Bank, without government intervention the world would have faced a "catastrophe".

The complaints from bankers that poor regulation caused the crisis is like you have a massive fire, the fire brigade comes in and you blame them for flooding the house
John Evans, advisor to the OECD

"In my opinion," he says, "it is currently underestimated that we were very close to a full-fledged depression."

"We need to find a global solution" to fix the "fragile" global financial system, Mr Trichet argues, and warns that merely "local, national solutions" would be a "recipe for [the next] catastrophe".

Some bankers have got the message.

"The relationship between banks, government and society has changed irreversibly," says Peter Sands, chief executive of Standard Chartered bank.

"The bankers," he admits, "have not helped themselves at all. We've been simultaneously tone-deaf and shooting ourselves in the foot."

But he also warns that there is a trade-off between how safe we want to make the banking system, and how efficient and effective it can be to support the real economy.

Still, there's so much blame to go around, it would do more bankers good to accept some of it, says John Evans, who advises the OECD on trade union issues.

"The complaints from bankers that poor regulation caused the crisis is like you have a massive fire, the fire brigade comes in and you blame them for flooding the house."



Page last updated at 11:32 GMT, Sunday, 13 December 2009
Target in Whack a Banker game
Players have to hit pop-up bankers with a mallet
Bankers 'whacked' in arcade game

An arcade game that allows people to vent their anger at bankers has proved so popular the owner keeps having to replace worn out mallets.

Inventor Tim Hunkin introduced "Whack a Banker", which is based on the older "Whack a Mole" game, at his arcade on Southwold pier in Suffolk.

Instead of players hitting pop-up moles with a mallet, within a set time, the target is pop-up bald figures.

Mr Hunkin said the game was "proving very popular".

"I keep having to replace worn-out mallets," he said.

"The bankers are bald and all look the same because that's how I think people see bankers, as faceless."

Players, who are promised a "truly rewarding banking experience", pay 40p to hit as many bankers as they can in 30 seconds.

When a customer wins a voice says: "You win. We retire. Thank you very much to the taxpayer for paying our pensions."


Moody's US credit warning spooks world markets
YAHOO
By PAN PYLAS, AP Business Writer
Dec. 8, 2009

LONDON – European and U.S. stock markets fell sharply Tuesday after worse than expected German industrial production data and a warning from a leading credit ratings agency that the U.S. government needs to get its public finances in shape soon.

In Europe, the FTSE 100 index of leading British shares was down 90.20 points, or 1.7 percent, at 5,220.46 while Germany's DAX fell 105.61 points, or 1.8 percent, at 5,679.14. The CAC-40 in France was 54.10 points, or 1.4 percent, lower at 3,785.95.

On Wall Street, the Dow Jones industrial average was down 106.86 points, or 1 percent, at 10,283.25 soon after the open while the broader Standard & Poor's 500 index slid 11.43 points, or 1 percent, to 1,091.82.

Market sentiment, already subdued after U.S. Federal Reserve chairman Ben Bernanke said the world's largest economy was facing "formidable headwinds, was knocked further by the warning from Moody's Investor Services that the United States and Britain must get a grip on their public finances to avoid threats to their top triple-A credit ratings.

In an assessment of eight triple-A countries, Moody's Investors Services said the public finances in both countries are deteriorating considerably and may therefore "test the Aaa boundaries" in the future.

The Moody's report comes a day after rival Standard & Poor's warned Greece that it likely faced a credit rating downgrade and as skepticism grew about how Dubai World plans to restructure its debt.

"It's fair to say that investor sentiment has been rattled and concerns about sovereign credit risks have been escalating," said Neil Mackinnon, global strategist at VTB Capital.

"All in all, it's an unattractive brew for equities," he said.

In addition, a 1.8 percent fall in German industrial output in October, largely as a result of weaker production of machinery and cars, reminded investors that recovery in Europe's largest economy will be gradual. The consensus in the markets was for a 1.1 percent monthly advance.

Trading was expected to become increasingly volatile due to the upcoming year-end — many investors are looking to book profits made over the nine-month bull run as they settle down for the Christmas break.

The main piece of economic data this week will be Friday's U.S. retail sales figures for November, which will give an early indication into how the Christmas trading period has begun. The state of household spending in the U.S. is key for the global economic recovery — U.S. consumer spending accounts for around 70 per cent of the nation's economy.

Earlier in Asia, Nikkei 225 stock average lost 27.13 points, or 0.3 percent, to 10,140.47 while Hong Kong's Hang Seng dropped 264.44 points, or 1.2 percent, to 22,060.52.

The news that Japan was moving ahead with $81 billion in new stimulus spending did little to enthuse markets. The world's No. 2 economy grew for the second straight quarter in the July-September period, but falling prices have raised concerns about a cycle of deflation that could hinder the country's rebound.

Elsewhere, Shanghai's market lost 1.1 percent to 3,296.66 while markets in Australia and Taiwan fell about 0.1 percent.

Bucking the downward move, South Korea's key stock measure rose 0.8 percent to 1,627.78.

Oil prices fell along with stocks, with benchmark crude for January delivery down 86 cents to $73.07 a barrel. The contract fell $1.54 to settle at $73.93 on Monday.

Gold prices were down $16.20, or 1.4 percent, at $1,147.80 an ounce — way down on last week's record high above $1,225.

The dollar, meanwhile, gave up a large chunk of its recent gains against the yen, falling 1.3 percent at 88.34 yen. However, it was faring better against the euro, which was trading 0.4 percent lower at $1.4758.


CONTRASTS IN THE EMIRATES:  Dubai default coming?  Stormy weathe to rain on the parade?

Abu Dhabi gives Dubai $10 billion in surprise bailout
YAHOO
By John Irish and Thomas Atkins
Mon Dec 14, 2:02 am ET

DUBAI (Reuters) – Abu Dhabi bailed out neighboring Dubai on Monday with $10 billion in surprise aid for debt-laden Dubai World, driving stock markets higher, but Dubai said creditors still needed to approve a standstill on outstanding debt.

Dubai said $4.1 billion of the money received from Abu Dhabi was allocated to property developer Nakheel to repay its Islamic bond maturing on Monday. Nakheel said it would repay the bond over the next two weeks.

The excess funds would be used to help government-controlled holding company Dubai World, which has asked creditors to agree to restructure $26 billion of its debt, up until the end of April 2010, a Dubai government statement said.

"The (agreement is) on condition of the company being successful in negotiating a standstill previously announced with remaining creditors," a government source said in a conference call with journalists.

"The fund will also be used for the satisfaction of obligations to trade creditors and contractors and discussions with contractors will begin shortly," the source said.

Dubai's benchmark stock index led a surge on regional markets, jumping more than 10 percent, while Abu Dhabi rose 7 percent in early trading.

The move was the least expected of all options Dubai had on the table after requesting a standstill on $26 billion in Dubai World debt on November 25, alarming global financial markets and shaking the image of the emirate as a regional business hub.

Dubai's creditors, which include London-listed Standard Chartered, HSBC, Lloyds and Royal Bank of Scotland, along with United Arab Emirates lenders Abu Dhabi Commercial Bank and Emirates NBD, effectively have until Dec 28 to agree to the standstill, when the Nakheel bond's grace period ends.

"This is kind of above and beyond what people expected. It is a crucial and essential lifeline ... at a time when the markets really needed it," said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole. "That should bring in a lot of confidence. Basically Abu Dhabi is footing the bill.

"It will take time for the implications to unfold. I highly doubt this kind of money has no strings attached. There was no other choice for Abu Dhabi but to bailout Dubai, the federation would have been at stake."

Abu Dhabi is the largest member of the United Arab Emirates federation and a big oil exporter.

Sheikh Ahmed bin Saaed al-Maktoum, chairman of Dubai's fiscal committee, said Dubai's government would act at all times in accordance with market principles and internationally accepted business practices and the emirate would remain a strong and vibrant global financial center.

"Our best days are yet to come," he said in a media statement.

The yen fell sharply against other currencies on the news, while the dollar shot up to 88.90 yen and the euro also jumped to 130.43 yen.

U.S. S&P stock futures jumped 0.7 percent, reversing early losses, and European shares were also called higher. Hong Kong's Hang Seng index shot up 300 points in the last minutes of morning trade to finish in positive territory, while other markets across Asia also pushed higher.

BANKRUPTCY LAW, FUTURE DEBT IN QUESTION

Dubai also announced a new bankruptcy law that it said could be used in case Dubai World and creditors failed to reach an agreement on debt maturing in the future.

The Dubai government source said the law, which would be in effect from Dec 14, could allow Dubai World to file for bankruptcy if its restructuring was not successful.

Dubai has ring-fenced prized assets such as Emirates airline from the $26 billion debt restructuring of Dubai World.

The government source said the restructuring process could include asset sales, but they would be limited to Nakheel and Limitless, excluding Istithmar World assets, which owns U.S. luxury retailer Barneys, or its port operator DP World.

"Dubai will do asset sales and markets will be relieved, said Saud Masud at UBS.

"But we've still got $35 billion due in bonds, loans and repayment over the next couple of years, so this is only one thing. We've got almost 10 times this amount to come. The big question is how are they are going to do this next step?"

The government source said other government related entities such as Borse Dubai, which has $2.5 billion of debt maturing in February, and Dubai Holding, which has about $1.9 billion maturing in the first half of 2010, would be assessed on a "case by case basis" and the Dubai World deal was not an indication of future deals.
Dubai crisis jolts markets, but early fears ease
YAHOO
By STEVENSON JACOBS, AP Business Writer
November 27, 2009

NEW YORK – Dubai's debt crisis rattled world financial markets Friday, raising concerns that some banks could further tighten lending and hamper the global economic recovery.

The possible spillover effects from Dubai fed fears that international banks could suffer big losses if the debt-laden emirate is forced to default. That sent stock and commodity markets tumbling in New York, London and Asia as investors flocked to the U.S. dollar as a safe haven.

But earlier concerns that the crisis might trigger another major financial meltdown seemed to ease Friday after some analysts downplayed the risks for U.S. banks. U.S. stocks rebounded from their earlier lows as investors grew confident that the damage might be contained.

"I don't think the collateral damage is going to be that great," said Jeffrey Saut, chief investment strategist at Raymond James. "People will dig into this over the weekend, but I think balance sheets have healed enough to withstand a shock like this."

Still, the unfolding crisis in Dubai pointed to the vulnerability of the global economy despite recent signs of recovery.

A year after the global slump derailed Dubai's explosive growth, the city-state's main investment arm, Dubai World, revealed this week it was asking for at least a six-month delay on paying back its $60 billion debt. Major credit agencies responded by slashing debt ratings on Dubai's state companies, saying they might consider the plan a default.

In recent years, Dubai has expanded with ambitious, eye-catching projects like the Gulf's palm-shaped islands and the world's tallest skyscraper in hopes of becoming a tourist friendly and cosmopolitan Middle Eastern metropolis. In the process, however, the state-backed networks nicknamed Dubai Inc. have racked up $80 billion in red ink, and the emirate may now need another bailout from its oil-rich neighbor Abu Dhabi, the capital of the United Arab Emirates.

Following a rout in Europe, Asia's stock markets tumbled Friday, while the dollar hit a fresh 14-year low against the yen as investors piled into currencies perceived as safer. Crude oil at one point fell more than 6 percent.

With Dubai World hard pressed to pay its bills, banks could take the biggest hit, analysts said.

Heavyweight London-based lenders HSBC Holdings and Standard Chartered could face losses of $611 million and $177 million respectively, according to early estimates from analysts at Goldman Sachs. Both have substantial Middle East operations.

In Asia, Japan's Sumitomo Mitsui Financial Group, the country's No. 3 bank, could be exposed to Dubai World's indebted property arm to the tune of several hundred million dollars, according to a person familiar with the matter.

South Korea estimated the country's financial institutions have just $88 million exposure. Construction firms from Japan, Australia and South Korea behind Dubai's recent development boom also might be on the hook.

While most have the wherewithal to absorb any losses, Dubai's troubles could lead banks to reevaluate and scale back their lending. That could make it more difficult for companies to borrow money and hold down a world economy still emerging from the throes of its deepest recession in decades, analysts said.

Equally unsettling for investors was the uncertainty over which companies were exposed and how much money they might actually lose. European banks alone have $87 billion at risk in the U.A.E.

"It touched investors' sensitive nerves," said Cai Junyi, an analyst for Shanghai Securities. "The world is watching whether that will have any substantial impact ... Dubai World is just like a small window that might reflect another financial tsunami."

Emerging markets in the Middle East and elsewhere have attracted massive amounts of capital in recent years amid investor enthusiasm for regions with rapid economic growth. This year, financial markets in Asia and Latin America have vastly outperformed ones in the U.S. and Europe. But Dubai's woes could bring a temporary end to the promiscuous buying behind the boom, analysts said.

"I think it will make investors realize they need to be more discriminating about emerging markets," said Arjuna Mahendran, head of Asian investment strategy at HSBC Private Bank in Singapore. "In the longer term we have no doubt that things are going to recover."

HSBC declined to comment. Calls to Standard Chartered representatives were not returned.

Among other companies with Dubai ties, South Korean construction firms have about 40 projects there whose remaining work is valued at as much as $3 billion. South Korea's government expected the problems to have minimal impact.
Dubai debt difficulties hammer stocks
YAHOO
By Jeremy Gaunt, European Investment Correspondent
Thursday, Nov. 26, 2009 (Thanksgiving Day, U.S. - markets closed)

LONDON (Reuters) – Debt problems in Dubai struck financial markets hard on Thursday, sinking global stocks, lifting safe-haven bonds and driving the dollar higher.

Gold climbed to a new record high but fell back as the dollar rose. European shares had their worst daily loss in seven months.  Banking stocks came under particular pressure because of potential exposure to any bad debt in the Gulf, as did shares in European car companies, some of which are part-owned by sovereign wealth funds from the region.

Markets were trading without much input from the United States, where it was the Thanksgiving holiday.  Dubai said on Wednesday it wanted creditors of Dubai World and property group Nakheel to agree a debt standstill as it restructures Dubai World, the conglomerate that spearheaded the emirate's breakneck growth.  The announcement triggered widespread concern about the once-booming Gulf region's financial health, although some investors differentiated between leveraged Dubai and other more solidly wealthy emirates and countries in the region.

But the worries fed directly into a general nervousness in financial markets about the real state of the world economy at a time when investors are also seeking to lock in 2009 profits.

"The Dubai worries have played a major role in rattling market sentiment at a time when the U.S. is closed and we are not getting anything from anywhere else," said Peter Dixon, economist at Commerzbank.

"It is a day in which market uncertainty has been provoked again."

Others, such as Royal Bank of Scotland, said Dubai's bombshell meant investors would now have to "re-appraise the quality of sovereign support for state-owned entities in the region."

Dubai sought to ease some concerns about international port operator DP World (DPW.DI), saying its debt was not included in the restructuring.  But markets stayed nervous and the cost of insuring debt through credit default swaps around the Gulf rose.

EXPOSURE

MSCI's emerging market stock index (.MSCIEF) was down 2.1 percent, underperforming the broader all-country world index (.MIWD00000PUS), which was down 1.5 percent.  There were sharp losses in Europe, where the pan-European FTSEurofirst 300 index (.FTEU3) closed down a preliminary 3.2 percent, its biggest daily loss in seven months.

Banks were the biggest drag on the index, but the interlinking of world finance showed up elsewhere.

Shares in London Stock Exchange (LSE.L) fell as traders cited concern that Bourse Dubai held a substantial stake in the company.  Porsche (PSHG_p.DE) and Daimler (DAIGn.DE) also lost ground. Qatar Investment Authority holds a 10 percent stake in the former, Aabar Investments from Abu Dhabi and Kuwait own 9.1 percent and 6.9 percent stakes, respectively, in the latter.

"It (the Dubai credit issue) does bring to the fore that much of what we have seen in the markets really has been supported by liquidity," said Georgina Taylor, equity strategist, Legal & General Investment Management.

"It shows how vulnerable the market still is to newsflow," she said. "But it should be seen as a country-specific issue. It's not something systemic. It's about risk appetite."

Within the Gulf, regional bonds sold off and ratings agency Standard & Poor's placed four Dubai-based banks on negative outlook.

"Anything from Dubai or Abu Dhabi is getting absolutely hosed," a bond trader in London said. "There is massive pressure across the board, exacerbated by the thin liquidity."

Gulf markets were closed for Eid holidays.

DOLLAR RETURNS

The dollar gained sharply as investors shed riskier assets in the Dubai debt storm.

But the euro was also hit also when France's Economy Minister Christine Lagarde said that its strength against other currencies was hurting European exporters.  It hovered near the day's low of $1.4960, down 1.1 percent on the day.

The dollar index, a barometer of its performance against six major currencies, rose 0.9 percent on the day, up from a 15-month low.  Risk aversion also lifted the dollar off a 14-year low against the Japanese yen.

Euro zone government bond prices were sharply higher. The yield on two year debt fell 8 basis points.

Bund futures rose so high they broke out of a trading range that has been in place since June.

O.E.C.D. Sees Bumpy Path to Recovery
NYTIMES
By DAVID JOLLY
November 20, 2009

China has helped to pull countries in the Organization for Economic Cooperation and Development back toward economic recovery, but the path to sustained growth will be bumpy, the association said Thursday in a cautious assessment of the global economy.

“Growth in the O.E.C.D. area has resumed after the most virulent recession in decades,” the 30-nation association of free-market democracies said in its twice-yearly Economic Outlook.

“The upturn in the major non-O.E.C.D. countries, especially in Asia and particularly in China, is now a well-established source of strength for the more feeble O.E.C.D. recovery.”

But it noted that economic growth among its members would most likely “fluctuate around a modest underlying rate for some time to come.”

The countries that belong to the organization accounted for about 71 percent of global gross domestic product in 2007, according to the World Bank. Several of the faster-growing developing nations, including China, Brazil and India, are not members of the organization.

The Chinese economy, bolstered by easy bank lending and a stimulus package of 4 trillion yuan, or $585 billion, has been expanding at a strong pace in comparison with other large economies. The International Monetary Fund forecasts the Chinese economy will grow 8.5 percent this year.

While the economies in the O.E.C.D. are growing again, the combined gross domestic product of the member nations will still decline by 3.5 percent for 2009, the report said, recovering to 1.9 percent growth next year and 2.5 percent growth in 2011.

It said unemployment was expected to rise from 8.2 percent this year to 9 percent next year and then decline to 8.8 percent in 2011.

While the world economy has come back from the edge of the abyss at which it stood early in the year, the O.E.C.D. said, efforts to repay debts by households, banks, companies “and, eventually, governments” will keep downward pressure on economic growth. As a result, it said, “unemployment is set to move higher and already-low inflation will be under further downward pressure. It is only some time down the line that the recovery will become sufficiently strong to begin to reduce unemployment.”

The organization, which is based in Paris, noted that its projections could prove too optimistic if households sought to repair their finances more quickly than anticipated and that the forecasts might prove too modest if business investment were to rebound significantly.

It projected the U.S. economy would contract this year by 2.5 percent. But thanks to government stimulus efforts, improving financial conditions and export demand, a return to normal inventory levels and a more stable housing market, it forecast the United States would post growth of 2.5 percent next year and 2.8 percent in 2011.

“Employment should respond quickly to economic activity and unemployment may peak in the first half of 2010,” it said.

The Japanese economy is expected to shrink 5.3 percent this year, it said, and grow 1.8 percent next year and 2 percent in 2011.

“Japan is well positioned to benefit from strong growth in the rest of Asia,” the O.E.C.D. noted, but in the absence of renewed domestic demand, unemployment will remain high and deflation will linger in Japan.

The 16-member euro-zone economy is forecast to contract 5.3 percent this year, the O.E.C.D. said, and grow 1.8 percent in 2010 and 2 percent in 2011.

“With unemployment not set to peak before the end of 2010 or the beginning of 2011, household confidence is likely to be weak and sap the strength of the recovery,” the O.E.C.D. said. World trade will contract by 12.5 percent this year, it estimated, and trade will increase next year by 6 percent and by 7.7 percent in 2011.

With interest rates at or near historic lows in most member nations, the organization said monetary policy was appropriate for current conditions, and rates should move back to normal levels only “by the time inflationary pressures begin to be felt.” And it said fiscal measures to bolster demand should not be withdrawn in a manner that undermined output. Still, governments need to consider how they will end fiscal stimulus measures and raise interest rates toward normal levels, the report said.

“Well-articulated exit strategies will increase confidence that there is a way out,” it said, adding that it was “regrettable that so few exit strategies have so far been articulated.”

September trade gap widened 18.2%
Washington Times
David M. Dickson
Saturday, November 14, 2009

The U.S. trade deficit expanded in September by the most in a decade as rising imports of petroleum, autos and manufactured goods from China wiped out an otherwise impressive gain in exports, which reached their highest level since December.

The trade gap jumped 18.2 percent, widening from $30.8 billion in August to $36.5 billion in September, the Commerce Department reported Friday. It was the largest monthly imbalance since January but it remains well below the peak deficit of $65.9 billion in July 2008, when oil prices reached record levels just before trade flows collapsed around the world.

Some economists hailed September's significant expansion of overall U.S. trade activity, including both imports and exports, as further evidence that the deepest U.S. and global downturns since the Great Depression have turned the corner.

"The report was stunning in its description of an economy showing strong signs of recovery across the board," said Christopher Cornell of Moody's Economy.com.

"Exports have risen for five consecutive months, which reflects stronger growth in the rest of the world," said Jay H. Bryson, global economist for Wells Fargo.

Exports in September were up 2.9 percent to $131.9 billion, while imports climbed 5.8 percent to $168.4 billion.

"The trade figures signal a strong rebound in global trade," said Nigel Gault, chief U.S. economist for IHS Global Insight. "However, the widening deficit is a warning that as U.S. domestic demand increases, imports will bounce more than exports. That means that the trade deficit will keep widening, and that trade will be a drag on growth."

As a result of September's unexpectedly big increase in the trade deficit, Mr. Gault said the annual rate of economic growth for the third quarter will likely be revised downward from the initially reported 3.5 percent to 2.9 percent.

More than two-thirds of the increased deficit resulted from a $4 billion jump in the nation's monthly petroleum deficit, which reached $20.5 billion. Not only did the average price of imported crude oil increase from $64.75 per barrel to $68.17, but imports of petroleum rose from 10.9 million barrels per day in August to 12.1 million barrels per day in September.

"This month's trade report supports the hypothesis that rising oil prices are tied to increasing demand for crude oil from a recovering global economy," Mr. Cornell said.

Oil prices increased to $80 per barrel in October, signaling another big petroleum-related rise in the trade deficit ahead. Oil prices peaked near $150 per barrel in July 2008.

Auto imports increased by $1.7 billion in September as dealers restocked their inventories after the federal "clash for clunkers" program.

The monthly trade deficit with China, where President Obama will arrive Sunday for several days of meetings, increased by 9.2 percent, or nearly $2 billion, reaching $22.1 billion in September and $165.8 billion for the first nine months of 2009. The trade deficit with China is on track to exceed $200 billion this year for the fifth year in a row.

The September trade deficit with Japan, where Mr. Obama arrived Friday in his first stop on his Asian tour, declined slightly to $4.1 billion. The gap with Japan trails only China and Mexico ($4.6 billion). The merchandise trade deficit with South Korea, where Mr. Obama will visit next week, nearly doubled to $770 million in September.

"If President Obama really wants to create more good American jobs, he doesn't have to wait for the [jobs] summit he's planned upon his return from Asia," said Alan Tonelson of the U.S. Business and Industry Council, whose members mainly include family owned domestic manufacturing companies. "He can tell the Chinese and other regional leaders that he'll be acting unilaterally to slash America's massive job-killing Asia trade deficits with strong measures to combat the region's pervasive trade cheating."

Due largely to rising unemployment, which jumped to 10.2 percent in October, consumer confidence unexpectedly declined in early November, according to the Reuters/University of Michigan preliminary index of consumer sentiment. The index fell from 70.6 to 66, returning to its July and August level.

SEC sees evolution in insider trading
By Jonathan Stempel and Rachelle Younglai
November 6, 2009

NEW YORK (Reuters) – A top U.S. securities regulator said some funds may now view insider trading as a central tenet of their business models, rather than as a one-time opportunity for big rewards as sometimes happened in the 1980s.

Robert Khuzami, head of enforcement at the U.S. Securities and Exchange Commission, spoke on Friday, a day after the SEC, the Department of Justice and the FBI announced dozens of new charges in what was already the biggest hedge fund insider-trading scandal ever.

Investigators have been examining trading involving Galleon Group and a variety of hedge funds.

The SEC says it has uncovered $53 million of illegal profits through its investigation. Last month, the agency charged the billionaire Raj Rajaratnam, founder of the Galleon hedge fund firm, in connection with the probe. The Sri Lanka native also faces criminal charges.

"We are already seeing a significant expansion as to where this investigation is leading," Khuzami told reporters on Friday at a Practising Law Institute securities conference in New York. He declined to say whether others might be implicated.

Speaking more generally, Khuzami said that in recent years, more people who have set up hedge funds, a largely unregulated industry, may have done so after working at firms that lacked strong compliance oversight, or after leaving firms that did.

He also distinguished the current environment from the 1980s, in that some people may now be more likely to trade on advance knowledge of routine corporate information, such as earnings forecasts, rather than wait for more dramatic events such as mergers.

"A lot of insider-trading cases in the past tended to be more opportunistic: you had a particular announcement and someone with access to information and they traded on that," he said.

"Here, at least with respect to some of the funds, you see a much more systemic, concerted effort to cultivate sources of information within issuers and elsewhere as ... more of a business model approach, as a regular way of doing business."

That, he said, could herald more problems.

"I can't predict or tell you how widespread the conduct is," he said. "I can only tell you that the change in market structure represented by the rise of hedge funds, particularly operating in an unregulated sphere, and markets that are less transparent represent warning signs that this kind of misconduct may occur more frequently. And that is why we are focused on those areas."

Freddie Mac loses $7.8B in 4Q
YAHOO
By ALAN ZIBEL, AP Real Estate Writer
Feb. 24, 2010

WASHINGTON – Freddie Mac lost $7.8 billion in the final three months of last year, but the mortgage finance company didn't need a federal cash infusion for the third quarter in a row.

Freddie Mac, which has been controlled by federal regulators since September 2008, lost $2.39 a share, the company said Wednesday. The loss included $1.3 billion in dividends paid to the Treasury Department, which has an almost 80 percent stake in the McLean, Va., company.

The results were a marked improvement over the fourth quarter 2008 when Freddie lost $23.9 billion, or $7.37 a share.

During the most recent quarter, Freddie suffered $7.1 billion in credit losses and a $3.4 billion write-down in low income tax credit investments. That move "increases the likelihood" that the company will require more cash from the Treasury Department, the company warned in a regulatory filing.

Freddie Mac and its sister company Fannie Mae play a vital role in the mortgage market by purchasing mortgages from lenders and selling them to investors. Freddie Mac, for example, purchased or guaranteed about one in four home loans made last year and helped almost 2 million borrowers refinance.

For taxpayers, stabilizing the two companies has been one of the costliest consequences of the financial meltdown. Freddie Mac has received about $51 billion from taxpayers to date, and the Obama administration has pledged to cover unlimited losses through 2012.

The government projects the pair will tap a combined $188 billion by the fall of 2011, up from the current level of $111 billion.

Together, Fannie and Freddie own or guarantee almost 31 million home loans worth about $5.5 trillion. That's about half of all mortgages.

The two companies, however, loosened their lending standards for borrowers during the real estate boom and are reeling from the consequences. Nearly 4 percent of Freddie's borrowers have missed at least three payments.

"The housing recovery remains fragile," CEO Charles "Ed" Haldeman said in a statement. He noted the risks posed by high unemployment could lead to even more foreclosures.

For all of 2009, Freddie Mac lost $25.7 billion, or $7.89 a share, including $4.1 billion in dividends paid to the Treasury Department.
Freddie Mac posts $5 billion loss
By Al Yoon
Fri Nov 6, 7:00 pm ET

NEW YORK (Reuters) – Freddie Mac (FRE.N) (FRE.P), the second largest provider of U.S. residential mortgage funding, on Friday posted a loss of $5 billion in the third quarter and predicted it would need more government support amid a "prolonged deterioration" in housing.

Increases in the value of securities Freddie Mac held over the period helped buoy its net worth, however, erasing its need to tap government funds for a second straight quarter to stay solvent while continuing to buy and guarantee home loans.

Including a $1.3 billion dividend payment on senior preferred stock bought by the Treasury in previous quarters, Freddie Mac's third-quarter loss increases to $6.3 billion.

The home funding company's loss comes amid a rise in provisions for credit losses to $7.6 billion in the quarter, up 46 percent compared with the previous quarter, as delinquencies worsened on loans it guarantees. Provisions will remain high this quarter, it added.

"I would say we are just beginning to see the impact of the chargeoffs on their guarantee book," said Janaki Rao, vice president of mortgage research at Morgan Stanley in New York.

Its larger rival Fannie Mae (FNM.N) (FNM.P) on Thursday said it would need $15 billion from the U.S. Treasury after a whopping $18.9 billion third-quarter loss.

Results at Freddie Mac and Fannie Mae are widely watched as a barometer of the U.S. housing market since they own or back nearly half of outstanding mortgages.

The losses have presented a dilemma to Congress as it wants to protect taxpayers' money but is also counting on the companies to undertake foreclosure prevention efforts which are significantly adding to expenses.

In order to ease the terms of loans under the Obama administration's Making Home Affordable refinancing program, the companies must buy the mortgages out of securities, and write down their value. Seeking alternatives to foreclosures also means bad loans sit on their books longer.

Despite signs of recovery in home sales and prices, rising delinquencies and unemployment levels mean the housing market is still fragile, Freddie said. High unemployment, foreclosures and excess inventory will impede the recovery "for some time" and push house prices lower, the company said.

This means that Freddie Mac's survival will continue to depend on support from the government, which forced the company and Fannie Mae into conservatorship in September 2008.

Freddie Mac has taken $51.7 billion since then while Fannie Mae's draw will rise to $60.9 billion.

For Freddie Mac, "the positive net worth without the help from the Treasury is significant, but it is too early to say whether an end to conservatorship is ahead," Rao said.

Starting in 2010, the company will begin accounting for $1.8 trillion in mortgage-backed securities it guarantees on its balance sheet to meet new guidelines. This will increase interest income and interest expenses, and could have a significant negative impact on net worth, it said.

Shares of Freddie Mac were flat at $1.23 in light after-hours trading following the results.
Fannie Mae posts $18.9 billion Q3 loss, taps Treasury
YAHOO
November 5, 2009

NEW YORK (Reuters) – Fannie Mae, the largest provider of funding for U.S. home loans, on Thursday said it would again tap the Treasury to plug a net worth deficit after bad mortgages and foreclosure prevention efforts resulted in a $18.9 billion net loss in the third quarter.

Shares of Fannie Mae tumbled 7.1 percent after it reported results in extended after-hours trade.

Fannie Mae (FNM.P) (FNM.N) , which was seized by the government last year, said the quarterly loss stemmed from $22 billion in credit-related expenses, including charges on impaired loans it bought from mortgage-backed securities as it modified loans under President Barack Obama's foreclosure prevention plan.

The company also boosted its provision for credit losses in future quarters.

Fannie's regulator will request $15 billion from the Treasury under a senior preferred stock agreement, which will increase the total government support to $60.9 billion.

Bank chiefs urge UK's FSA to slow pace of change
YAHOO - MARKET WATCH
By Matt Turner
Nov. 1, 2009, 12:04 p.m. EST

Leading U.K. bankers have urged the Financial Services Authority to slow down its efforts to reform markets, according to documents seen by Financial News, which demonstrates the level of discomfort within the industry at the pace of change.

In letters to the U.K. market regulators chairman, Lord Turner, and its chief executive, Hector Sants, bank executives warned too little analysis had been conducted, and raised concerns that reform proposals would stifle business by suffocating banks with too much regulation. They also expressed fears that opportunities for regulatory arbitrage would be rife if the U.K. pressed ahead with reform before securing international co-operation.

Stephen Hester, chief executive of Royal Bank of Scotland (NYSE:RBS) , and his counterpart at Barclays Plc (NYSE:BCS) , John Varley, warned the FSA of the dangers of proceeding too quickly with changes to regulation.

Writing in a letter to Sants in the summer, Hester said: Little substantive impact analysis has yet been undertaken of the individual proposals, their aggregate impacts, or the extent to which they may duplicate (or cut across) each other. Varley, writing to Turner soon after, said: The review gives no overview as to how these will operate together as a congruent prudential regime.

He said he feared there was a danger of regulatory overshoot without sufficient co-ordination.

HSBC Holdings Plc (NYSE:HBC) Chairman Stephen Green drilled down into four topics covered in the review. One of the concerns he raised was that proposals for banks based outside Europe to operate as subsidiaries in the U.K. could see other countries retaliate with protectionist barriers.

The letters were part of submissions made by several banks in extensive feedback to the FSA's Turner Review and show the concern in the industry about some reform efforts. As well as Barclays, RBS, and HSBC, the banks that submitted feedback included Goldman Sachs Group Inc. (NYSE:GS) and JP Morgan Chase & Co. (NYSE:JPM) . Although the feedback was submitted in the summer, sources close to the banks confirmed they hadn't changed their positions.

The FSA, which released a summary of the banks' views on its Web site at the end of September but not the letters themselves, declined to comment beyond its statement at the time that the majority of respondents have offered clear support for its main recommendations. Its statement said: The strongest concern was the need for international consistency in formulation and implementation of the regulatory policy response to the crisis.

Some believe the banks may be trying to slow down much-needed reform. Tommaso Padoa-Schioppa, European chairman of regulation advisers Promontory Group, said: Banks that say reform is proceeding too fast are dragging their feet. It is another way of saying they don't want reform.

While most banks shared concerns that the FSA could act too fast, they differed in their positions on individual recommendations in the Turner Review, including proposals on bank capital and liquidity regulations, the potential introduction of a cap on leverage and the monitoring of systemic risk.

The revelations of the banks views come as the FSA on Monday prepares to host its second conference on the Turner Review in Westminster, with Deutsche Bank AG (NYSE:DB) Chief Executive Josef Ackermann and Swiss central banker Philipp Hildebrand due to speak. The FSA has to date issued codes on financial reporting and remuneration at banks, as well as last month finalizing rules on liquidity management. Last week it issued a discussion paper on how to regulate banks that are too big to fail. The proposals included calls for institutions to draw up living wills that would enable them to be wound down in an orderly fashion in the event of collapse.

Banks have until Feb. 1 next year to respond, after which new rules are likely to be implemented. All the banks and the London Investment Banking Association declined to comment beyond what was contained in the submissions.

Web site: www.efinancialnews.com

Page last updated at 15:34 GMT, Sunday, 1 November 2009

Across the pond, RBS to be "broken up" - how does that affect Stamford, CT operation?

High Street banks to be broken up
Chancellor Alistair Darling has confirmed that Lloyds, RBS and Northern Rock will be broken up and parts sold to new entrants to the banking sector.

He said there could be three new High Street banks in the UK over the next three to four years as a result.

But the chancellor said he would only sell parts of the banks when "the time is right", to ensure taxpayers get their money back.

There is speculation that buyers might include Tesco and Virgin.

'Clean sheet'

In order to boost competition, the banks' assets will only be sold to new entrants to the UK banking market and not to existing financial institutions.

The new banks will be standard retail operations concentrating on deposits and mortgages.

ANALYSIS
Joe Lynam, business correspondent
Joe Lynam, BBC business correspondent

As part of the stipulations of EU state aid rules, the UK was always facing the prospect of having to sell off at least parts of those banks which it bailed out last year.

Now it looks as if that sell off process is to begin in earnest.

Though the Chancellor says he has not yet decided which brands are to be hived off, RBS, Northern Rock and Lloyds Banking Group (LBG) will now be broken up in some form.

This means that individual brands within those banks, such as Cheltenham & Gloucester and the TSB (LBG), as well as Williams and Glyn (RBS), could be sold off.

The unanswered question now is whether the Treasury jumped or was about to be pushed by Brussels.

Mr Darling said this was the best way to ensure "proper competition and choice". He said having just "half a dozen big providers was not acceptable".

The new entrants would "have a clean sheet to come in and do things differently", he added.

The chancellor also said the government would be splitting up Northern Rock into two parts by the end of the year, with a view to selling off one part within the next three to four years.

The government had already said it wants to sell off the part of Northern Rock that holds savers' money, carries out new lending and holds some existing mortgages.

He also said the government was keen to divest some of its holdings in RBS and Lloyds.

The government currently holds a 70% stake in RBS and a 43% stake in Lloyds after last October's bail-outs.

'Unnecessary distraction'

BBC business correspondent Joe Lynam says the latest move represents "a gilt-edged opportunity for non-UK retail banks, especially from the US, to get a firm foothold in the highly profitable British banking market for as low a price as could be imagined a few years ago".

The Conservatives said the break up of the state-owned banks had already been "well trailed".

A spokesman added: "We have called for more competition in banking, and for government stakes to be used to strategic effect to that end."

The Lib Dems Treasury spokesman Vince Cable welcomed more competition in the banking sector but said there should be no urgency to the sales.

"We need to be careful that when these split-ups occur, the prime cuts are not offered to private investors and the scraps left to taxpayers," he said.

Treasury select committee chairman John McFall MP said the assets should not be sold off for less than their market value.

"It is important to ensure that we get taxpayer return for this bail-out. I'm relaxed about the timescale. I do not want to sell off [bank assets] at a cheap price, I don't want a fire sale," he told the BBC.

Peter McNamara, former head of personal banking at Lloyds TSB and managing director of the Alliance and Leicester, said that restructuring the banks in the current climate could in fact prove counter productive.

"Half the banks in the UK are suddenly going to be reorganised when you could argue their day job is to support industry and consumers during the recession. Without that support, we are more likely to have a steeper rise in unemployment," he said.

Intense discussions

The government needs permission to break-up the banks from European competition commissioner Neelie Kroes.

She has also set tough conditions on Dutch and German banks receiving state aid and is keen that should only be given in exchange for re-structuring and increased competition within the banking market.

Recent reports have suggested that Lloyds would sell Cheltenham and Gloucester, Lloyds TSB Scotland and Intelligent Finance - an online division of Bank of Scotland.

RBS is understood to be preparing to put its network of around 300 RBS-branded branches in England up for sale, under the Williams and Glyn brand they used until 1985.

According to a source close to the negotiations, RBS is also "near 100% certain" to be putting its insurance division back on the market, including Churchill, Direct Line and Green Flag.

There could be further divestments required of RBS, but these are not expected to include its extensive activities in the US, including its ownership of Citizens Bank.




Hedge funders grouse over Obama speech
Greenwich TIME
Neil Vigdor, Staff Writer
Updated 11:35 p.m., Tuesday, July 26, 2011

The toast of this suburban hedge fund hub four years ago, when Paul Tudor Jones II and George Soros opened their Rolodexes for him at a star-studded fundraiser in Greenwich, these days President Barack Obama is testing the loyalty of some of those very allies in the financial sector.

Insiders of the notoriously circumspect industry bristled Tuesday at the president's comments one night earlier during his televised speech to the nation on debt ceiling negotiations, when Obama questioned whether hedge fund executives are paying their fair share of taxes.

"How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries?" Obama said.

Obama was reacting to a House Republican plan to pare back the nation's $14.3 trillion debt.

The president's comments came on the eve of a major hedge fund networking event at the Indian Harbor Yacht Club, the next promontory over from where Obama campaigned in 2007 at the palatial waterfront compound of Jones.

"Do I think there could be buyer's remorse by the those people? Absolutely. Do I know that for a fact? You'll have to ask them," said Bruce McGuire, president of the Connecticut Hedge Fund Association.

The trade organization represents 50 hedge funds in Connecticut, which McGuire said has the third-highest concentration of hedge funds after New York and London.

"I think sometimes the hedge funds make for an easy target," McGuire said.

The White House press office did not return messages seeking comment from Obama's administration Tuesday.

Jones, an industry pioneer and founder of Tudor Investment Corp. in Greenwich, declined to comment Tuesday through a spokesman.

A message seeking comment from Soros was left at his eponymous New York City-based hedge fund, which announced Tuesday that it is closing itself to outside investors.

Under the Wall Street reform act crafted by former U.S. Sen. Christopher Dodd, D-Conn., and U.S. Rep. Barney Frank, D-Mass., hedge funds must register with the Securities and Exchange Commission by March 2012.

Exempt are hedge funds that exclusively manage the portfolios of associated family members, however.

Hedge funds, which invest in stocks, commodity futures, options and emerging market debt, are sophisticated investment pools that cater to high-net-worth individuals.

A number of people inside and outside the industry interpreted Obama's comments to be a reference to whether carried interest -- the profits earned by hedge fund managers -- should be taxed as capital gains at 15 percent or as personal income at up to 35 percent.

"Obviously, the president is just trying to highlight in the starkest terms that the Republicans have ruled out asking, as he pointed out, corporations and high earners to help solve the fiscal mess," said U.S. Rep. Jim Himes, D-Conn.

A member of the House Financial Services Committee who came into office with Obama in 2008, Himes was photographed with the then-Illinois senator at the Jones fundraiser in 2007.

"The vast bulk of Americans believe that the wealthy should contribute to solving our challenges here," Himes said. "A fair number of Republicans in Congress agree with that."

Himes favors taxing management fees as personal income, unless the fund manager puts their own assets at risk or is subject to having to give money back to investors as part of a performance-based incentive or "clawback" provision.

"Fees for managing other people's money should be taxed as ordinary income," Himes said. "If there are clawback provisions or, in the real estate world, you can be called on to provide contingent equity, there is an argument to be made that there is money at risk, and I have supported a blended rate between personal income and capital gains."

U.S. Sen. Richard Blumenthal, D-Conn., characterized the issue of hedge-fund taxation as a moot point with respect to the current debt ceiling negotiations.

The freshman declared his support for a deficit reduction plan crafted by Senate Majority Leader Harry Reid, D-Nev., which he said includes spending cuts to cover the amount of debt ceiling increases dollar for dollar with no new taxes.

"No one should be concerned about tax increases in the Reid proposal," Blumenthal said Tuesday. "Hence, the hedge fund tax and all of the other revenue-taxation issues are not really immediately on the table."

While Blumenthal said he opposes ethanol fuel subsidies for corn growers and giveaways to oil companies and corporations, Blumenthal stopped short of calling carried interest a giveaway.

"What I'm hearing from folks on Wall Street is we need to get this job done," Blumenthal said. "We need to raise the debt ceiling."

Blumenthal estimated that the number of telephone calls from his constituents has quadrupled since Obama's primetime speech, with many urging Congress to raise the debt ceiling.

"We're a week away from the precipice of economic disaster," Blumenthal said.

A spokesman for U.S. Sen. Joe Lieberman, a Connecticut Independent who caucuses with the Democrats, said that the retiring incumbent isn't ruling anything out.

"Senator Lieberman believes that all revenue proposals should be on the table as part of a comprehensive and balanced approach to reducing the deficit," Lieberman office spokesman Marshall Wittmann said.

Dan Mahony, a Wilton resident who runs Myrmikan Capital LLC, a New York City hedge fund specializing in investments in gold, said there is no doubt that Obama was referring to the carried interest debate in his speech Monday.

"All this stuff is theater," Mahony said, sipping on a Heineken at the Indian Harbor Yacht Club hedge fund networking event.

Mahony conceded that it's hard to argue with the president's point about hedge fund managers paying their fair share, however.

"He's correct," Mahony said.

Hanming Rao, chief investment officer of Global Sigma Group, a Stamford-based firm that acts like a hedge fund and specializes in equity index futures, said hedge funds don't deserve to be made a poster child what's wrong with the federal tax code.

"You single out hedge funds, and that's not fair," Rao said.

Himes said that the significance of the hedge fund industry is not lost on him.

"I'm certainly conscious that my district, like New York City and other areas, does derive a lot of its income from trading profits and carried interest," Himes said.
Goldman the goat
NYPOST
Last Updated: 4:35 AM, May 2, 2010
Posted: 12:18 AM, May 2, 2010

Former President Bill Clinton says he’s “not at all sure” Goldman Sachs “violated the law.” But try telling that to his fellow Democrats, let alone the Securities and Exchange Commission.

And to the Justice Department, which has jumped aboard the “get Wall Street” bandwagon by opening a criminal probe.

Looks like Dems, led by the bombastic Sen. Carl Levin, have found their campaign issue for the fall elections. And in Goldman Sachs, they found their bogeyman.

Indeed, Dems’ “blame the banks” demagogy, and wholly unjustified scapegoating of Goldman Sachs for the economic meltdown, even has Republicans running scared. Which might explain why the GOP ditched its filibuster of President Obama’s Wall Street overhaul after just three days.

Sure, Levin & Co. got a boost last week from the often-evasive congressional testimony of Goldman Sachs execs; the latter seem not to have learned from the PR debacle that grew out of last year’s cross-examination of US automakers.

But in between his sophomoric repeated repetition of a four-letter expletive from an internal Goldman Sachs e-mail — think “Howard Stern Goes to Washington” — neither Levin nor any of his colleagues made any real case against the firm.

And with good reason: What Goldman Sachs did in betting on subprime mortgage securities may sound unreasonable, but it’s really not. And it helped Goldman lose less money than other major Wall Street firms, some of which no longer exist.

Yet playing into, and even stoking, populist rage against “the bankers” neither explains why America went into deep recession nor does much to prevent a repeat.  Fact is, Wall Street was just one factor in the economic downturn; Congress itself deserves a fair share of the blame.

The subprime mortgage collapse was driven primarily by a three-decade bipartisan push for home ownership — whether or not prospective buyers could afford those homes or the pricey mortgages that financed them.  And it was made worse by congressional Democrats and federal regulators who turned a blind eye to growing instability at Fannie Mae and Freddie Mac, which guaranteed those mortgages.

If Congress truly wants to understand why the US economy collapsed, it would have to turn the mirror on itself — which is not likely to happen in an election year.  Instead, senators like Carl Levin sit in haughty moral judgment, mouthing crude gibes at easy targets.
Feds open criminal probe of Goldman
YAHOO
By MARCY GORDON, AP Business Writer
30 April 2010

WASHINGTON – Stepping up the pressure on Goldman Sachs two days after its executives were grilled and publicly rebuked by lawmakers, the Justice Department has opened a criminal investigation of the Wall Street powerhouse over mortgage securities deals it arranged.

The criminal inquiry follows civil fraud charges filed by the government against Goldman two weeks ago and as Congress pushes toward enacting sweeping legislation aimed at preventing another near-meltdown of the financial system.

The investigation by the U.S. attorney's office in Manhattan stems from a criminal referral by the Securities and Exchange Commission, a knowledgeable person said Thursday. The person spoke on condition of anonymity because the inquiry is in a preliminary phase.

The SEC brought civil fraud charges against Goldman and a trader in connection with the transactions in 2006 and 2007. The agency alleged the firm misled investors by failing to tell them the subprime mortgage securities had been chosen with help from a Goldman hedge fund client, Paulson & Co., that was betting the investments would fail. Goldman and the trader, Fabrice Tourre, have denied wrongdoing and said they will contest the allegations in court.

Word of the Justice Department action came a day after a group of 62 House lawmakers, including Judiciary Committee Chairman John Conyers, D-Mich., asked Justice to conduct a criminal probe of Goldman. "On the face of the SEC filing, criminal fraud on a historic scale seems to have occurred in this instance," the lawmakers, mostly Democrats, said in a letter to Attorney General Eric Holder.

SEC spokesman John Nester declined any comment on the matter, as did Yusill Scribner, a spokeswoman for the U.S. attorney's office in Manhattan.

Goldman spokesman Lucas van Praag said, "Given the recent focus on the firm, we're not surprised by the report of an inquiry. We would cooperate fully with any request for information."

The Justice Department move was the latest in a dramatic series of turns in the Goldman saga, which has pitted the culture of Wall Street against angry lawmakers in an election year, in the wake of the financial crisis that plunged the country into the most severe recession since the Great Depression of the 1930s.

At the Capitol Thursday, following days of failed test votes, the Senate lurched into action on sweeping legislation backed by the Obama administration that would clamp down on Wall Street and the sort of high-risk investments that nearly brought down the economy in 2008.

And two days earlier, a daylong showdown before a Senate investigative panel put Goldman's defense of its conduct in the run-up to the financial crisis on display before indignant lawmakers and a national audience. The panel, which investigated Goldman's activities for 18 months, alleges that the Wall Street powerhouse bet against its clients — and the housing market — by taking short positions on mortgage securities and failed to tell investors that the securities it was selling were at very high risk of default.

Goldman CEO Lloyd Blankfein testily told the investigative subcommittee that clients who bought the subprime mortgage securities from the firm in 2006 and 2007 came looking for risk "and that's what they got." Blankfein said the company didn't bet against its clients — and can't survive without their trust. He repeated the company's assertion that it lost $1.2 billion in the residential mortgage meltdown in 2007 and 2008. He also argued that Goldman wasn't making an aggressive negative bet — or short — on the mortgage market's slide.

In addition to the $2 billion so-called collateralized debt obligation that is the focus of the SEC's charges against Goldman, the subcommittee analyzed five other such transactions, totaling around $4.5 billion. All told, they formed a "Goldman Sachs conveyor belt," the panel said, that dumped toxic mortgage securities into the bloodstream of the financial system.

A collateralized debt obligation or CDO is a pool of securities, tied to mortgages or other types of debt, that Wall Street firms packaged and sold to investors at the height of the housing boom. Buyers of CDOs, mostly banks, pension funds and other big investors, made money off the investments if the underlying debt was paid off. But as U.S. homeowners started falling behind on their mortgages and defaulted in droves in 2007, CDO buyers lost billions.

It wasn't immediately known whether the Justice Department's inquiry also encompasses the five other transactions.

The investigation, even though at a preliminary stage, opens a momentous new front in the legal aftermath of the near-meltdown of the financial system.

The Justice Department and the SEC have previously launched wide-ranging investigations of companies across the financial services industry. But a year after the crisis struck, charges haven't yet come in most of the probes. In addition to fallen mortgage lender Countrywide Financial Corp. and bailed-out insurance giant American International Group Inc., the investigations also have targeted government-owned mortgage lenders Fannie Mae and Freddie Mac and crisis casualty Lehman Brothers.

Last August, a federal jury in New York convicted former Credit Suisse broker Eric Butler of conspiracy and securities fraud for his role in a $1 billion subprime mortgage fraud. But the swift acquittal in November of two former Bear Stearns executives in the government's criminal case tied to the financial meltdown showed how tough it can be to prove that investment bank executives committed fraud by lying to investors. The SEC sued the two executives in a civil suit, and that case is still pending.

The government must show that executives were actually committing fraud and not simply doing their best to manage the worst financial crisis in decades, some legal experts say.

The SEC civil fraud case against Goldman — even with the lower required burden of proof than in a criminal case — also could be difficult and faces pitfalls, in the view of some experts. To prove it, they say, the agency must show that Goldman misled investors or failed to tell them facts that would have affected their financial decisions. The greatest challenge, the experts say, will be boiling the case down to a simple matter of fraud: the issues involved are so complex that Goldman may be able to introduce enough complicating factors to shed some doubt on the SEC's claims.

Political intrigue has swirled around the SEC suit, meanwhile, as some Republicans have accused the agency of timing the April 16 announcement of fraud charges against Goldman to bolster prospects for the financial overhaul legislation while it was at a critical stage in the Senate.

The speculation was heightened by the revelation that the SEC commissioners approved filing of the charges on a 3-2 vote, along party lines, with both Republicans opposing the move.

SEC Chairman Mary Schapiro has insisted there was no connection between the timing of the agency lawsuit, which followed a monthslong investigation of the firm, and the push for the legislation in the Senate. Last week, President Barack Obama denied any White House involvement in the timing of the SEC case.

"We don't time our enforcement actions by the legislative calendar or by anybody else's wishes," Schapiro told a Senate Appropriations subcommittee on Wednesday. "We bring our cases when we have the law and the facts we believe support bringing our cases."
Goldman Sachs Messages Show It Thrived as Economy Fell
NYTIMES
By LOUISE STORY, SEWELL CHAN and GRETCHEN MORGENSON
April 24, 2010

In late 2007 as the mortgage crisis gained momentum and many banks were suffering losses, Goldman Sachs executives traded e-mail messages saying that they were making “some serious money” betting against the housing markets.

The e-mails, released Saturday morning by the Senate Permanent Subcommittee on Investigations, appear to contradict some of Goldman’s previous statements that left the impression that the firm lost money on mortgage-related investments.

In the e-mails, Lloyd C. Blankfein, the bank’s chief executive, acknowledged in November of 2007 that the firm indeed had lost money initially. But it later recovered from those losses by making negative bets, known as short positions, enabling it to profit as housing prices fell and homeowners defaulted on their mortgages. “Of course we didn’t dodge the mortgage mess,” he wrote. “We lost money, then made more than we lost because of shorts.”

In another message, dated July 25, 2007, David A. Viniar, Goldman’s chief financial officer, remarked on figures that showed the company had made a $51 million profit in a single day from bets that the value of mortgage-related securities would drop. “Tells you what might be happening to people who don’t have the big short,” he wrote to Gary D. Cohn, now Goldman’s president.

The messages were released Saturday ahead of a Congressional hearing on Tuesday in which seven current and former Goldman employees, including Mr. Blankfein, are expected to testify. The hearing follows a recent securities fraud complaint that the Securities and Exchange Commission filed against Goldman and one of its employees, Fabrice Tourre, who will also testify on Tuesday.  Actions taken by Wall Street firms during the housing meltdown have become a major factor in the contentious debate over financial reform. The first test of the administration’s overhaul effort will come Monday when the Senate majority leader, Harry Reid, is to call a procedural vote to try to stop a Republican filibuster.

Republicans have contended that the renewed focus on Goldman stems from Democrats’ desire to use anger at Wall Street to push through a financial reform bill.

Carl Levin, Democrat of Michigan and head of the Permanent Subcommittee on Investigations, said that the e-mail messages contrast with Goldman’s public statements about its trading results. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Mr. Levin said in a statement Saturday when his office released the documents. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

A Goldman spokesman did not immediately respond to a request for comment.

The Goldman messages connect some of the dots at a crucial moment of Goldman history. They show that in 2007, as most other banks hemorrhaged losses from plummeting mortgage holdings, Goldman prospered.  At first, Goldman openly discussed its prescience in calling the housing downfall. In the third quarter of 2007, the investment bank reported publicly that it had made big profits on its negative bet on mortgages.

But by the end of that year, the firm curtailed disclosures about its mortgage trading results. Its chief financial officer told analysts at the end of 2007 that they should not expect Goldman to reveal whether it was long or short on the housing market. By late 2008, Goldman was emphasizing its losses, rather than its profits, pointing regularly to write-downs of $1.7 billion on mortgage assets and leaving out the amount it made on its negative bets.

Goldman and other firms often take positions on both sides of an investment. Some are long, which are bets that the investment will do well, and some are shorts, which are bets the investment will do poorly. If an investor’s positions are balanced — or hedged, in industry parlance — then the combination of the longs and shorts comes out to zero.

Goldman has said that it added shorts to balance its mortgage book, not to make a directional bet that the market would collapse. But the messages released Saturday appear to show that in 2007, at least, Goldman’s short bets were eclipsing the losses on its long positions. In May 2007, for instance, Goldman workers e-mailed one another about losses on a bundle of mortgages issued by Long Beach Mortgage Securities. Though the firm lost money on those, a worker wrote, there was “good news”: “we own 10 mm in protection.” That meant Goldman had enough of a bet against the bond that, over all, it profited by $5 million.

Documents released by the Senate committee appear to indicate that in July 2007, Goldman’s daily accounting showed losses of $322 million on positive mortgage positions, but its negative bet — what Mr. Viniar called “the big short” — came in $51 million higher.  As recently as a week ago, a Goldman spokesman emphasized that the firm had tried only to hedge its mortgage holdings in 2007 and said the firm had not been net short in that market.  The firm said in its annual report this month that it did not know back then where housing was headed, a sentiment expressed by Mr. Blankfein the last time he appeared before Congress.

“We did not know at any minute what would happen next, even though there was a lot of writing,” he told the Financial Crisis Inquiry Commission in January.

It is not known how much money in total Goldman made on its negative housing bets. Only a handful of e-mail messages were released Saturday, and they do not reflect the complete record.  The Senate subcommittee began its investigation in November 2008, but its work attracted little attention until a series of hearings in the last month. The first focused on lending practices at Washington Mutual, which collapsed in 2008, the largest bank failure in American history; another scrutinized deficiencies at several regulatory agencies, including the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.

A third hearing, on Friday, centered on the role that the credit rating agencies — Moody’s, Standard & Poor’s and Fitch — played in the financial crisis. At the end of the hearing, Mr. Levin offered a preview of the Goldman hearing scheduled for Tuesday.

“Our investigation has found that investment banks such as Goldman Sachs were not market makers helping clients,” Mr. Levin said, referring to testimony given by Mr. Blankfein in January. “They were self-interested promoters of risky and complicated financial schemes that were a major part of the 2008 crisis. They bundled toxic and dubious mortgages into complex financial instruments, got the credit-rating agencies to label them as AAA safe securities, sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the financial instruments that they sold, and profiting at the expense of their clients.”

The transaction at the center of the S.E.C.’s case against Goldman also came up at the hearings on Friday, when Mr. Levin discussed it with Eric Kolchinsky, a former managing director at Moody’s. The mortgage-related security was known as Abacus 2007-AC1, and while it was created by Goldman, the S.E.C. contends that the firm misled investors by not disclosing that it had allowed a hedge fund manager, John A. Paulson, to select mortgage bonds for the portfolio that would be most likely to fail. That charge is at the core of the civil suit it filed against Goldman.

Moody’s was hired by Goldman to rate the Abacus security. Mr. Levin asked Mr. Kolchinsky, who for most of 2007 oversaw the ratings of collateralized debt obligations backed by subprime mortgages, if he had known of Mr. Paulson’s involvement in the Abacus deal.

“I did not know, and I suspect — I’m fairly sure that my staff did not know either,” Mr. Kolchinsky said.

Mr. Levin asked whether details of Mr. Paulson’s involvement were “facts that you or your staff would have wanted to know before rating Abacus.” Mr. Kolchinsky replied: “Yes, that’s something that I would have personally wanted to know.”

Mr. Kolchinsky added: “It just changes the whole dynamic of the structure, where the person who’s putting it together, choosing it, wants it to blow up.”

The Senate announced that it would convene a hearing on Goldman Sachs within a week of the S.E.C.’s fraud suit. Some members of Congress questioned whether the two investigations had been coordinated or linked.  Mr. Levin’s staff said there was no connection between the two investigations. They pointed out that the subcommittee requested the appearance of the Goldman executives and employees well before the S.E.C. filed its case.
Editorial:  After Goldman

April 22, 2010

After the government sued Goldman Sachs for fraud, a lot of politicians vowed to finally clean up the system. In an important committee vote on Wednesday, 13 senators — including one Republican for a refreshing change — approved a measure that would go a long way toward regulating derivatives, the complex instruments at the heart of the bubble, the bust, the bailouts and the Goldman case.

It is still not tough enough to avoid another catastrophe. While the bill rightly calls for most derivatives deals — currently private contracts — to be traded on regulated exchanges, it has too many loopholes. And it doesn’t ban the sort of excessive speculation that characterized the Goldman deal.

The taxpayers are gaining, but the banks — which make a lot of money on derivatives — are still way ahead.

The bill would allow too many trades to be done off the exchanges. Regulators would be able to police them, but there would be no ongoing investor oversight. There are carve-outs for certain corporate users of derivatives and for contracts tailored to unique purposes. The bill also would allow the Treasury secretary to exempt an entire type of derivative known as foreign exchange swaps.

Corporate pension funds that invest in derivatives would be subjected to less scrutiny than is required of many other investors. The financing arms of major manufacturers would also escape full scrutiny. All of that is going in the wrong direction.

Which brings us back to Goldman. A court will have to decide if the bank committed fraud. The Securities and Exchange Commission says that Goldman designed a derivative — a “synthetic collateralized debt obligation,” or C.D.O. — that would have a high chance of falling in value, at the request of a hedge fund client who wanted to bet against it. The S.E.C. charges that Goldman misled investors by not revealing the hedge fund’s role in selecting the investments. Goldman says it was not obligated to do so.

The current reforms being considered by Congress might at least have made Goldman think twice about that obligation. Both the agriculture and banking committees’ bills impose business conduct standards that would require dealers to disclose conflicts of interest.

It is not clear if the current bills would require synthetic C.D.O.’s to be exchange-traded. If they were, that would give investors a fighting chance to figure out the game. In addition to providing information about prices and volumes, exchange trading would subject derivatives to a full range of regulations, including disclosure and reporting requirements and stricter antifraud rules.

The bills also call for regulators to set adequate capital requirements for major dealers and participants so that there would be a cushion when derivative investments go bad.

What all those proposals don’t address is whether the type of derivative Goldman was selling should even be allowed to exist. The Goldman deal was nothing more than a bet on the mortgage market, in which one side was destined to win and the other to lose, without “investing” anything in the real economy. The C.D.O. did not hold actual mortgage-related bonds, but rather allowed the participants to stake a position on whether bonds owned by others would perform well, or tank. And that helped to further inflate the housing bubble.

That is not investing. It is gambling, and it is abusive. It has no place in banks that can bring down the system if they fail.

Yet none of the pending reform bills would ban abusive derivatives. Instead, regulators would be limited to gathering information about potential abuses and reporting their concerns to Congress.

The bill does say that the regulator cannot approve “gaming contracts.” But C.D.O.’s are often so complex that it may be difficult to figure out if they are, in fact, gaming or a threat to the broader economy.

Congress should ban both gaming and abusive derivatives. That would help clarify the difference between pure speculation and true hedging. It would start to restore what has been lost in the crisis: public confidence in the integrity of financial markets.
Goldman case likely to unleash torrent of lawsuits
YAHOO
By DANIEL WAGNER, AP Business Writer
17 April 2010

WASHINGTON – The fraud charges against Goldman Sachs & Co. that rocked financial markets Friday are no slam dunk, as hazy evidence and strategic pitfalls could easily trip up government lawyers.

Yet that hardly matters, experts say, because the allegations will kick off a new era of litigation that could entangle Goldman and other banks for years to come.

The charges against Goldman relate to a complex investment tied to the performance of pools of risky mortgages. In a complaint filed Friday, the Securities and Exchange Commission alleged that Goldman marketed the package to investors without disclosing a major conflict of interest: The pools were picked by another client, a prominent hedge fund that was betting the housing bubble would burst.

Goldman said the charges are "unfounded in law and fact." In a written response to the charges, the bank said it had provided "extensive disclosure" to investors and that the largest investor had selected the portfolio — not the hedge fund client. Goldman said it lost $90 million on the deal.

That doesn't contradict the SEC complaint, which says the largest investor selected the mortgage investments from a list provided by the hedge fund. And the fact that Goldman lost money has no impact on the fraud charges.

The charges will unleash a torrent of lawsuits, and likely signal that the government is prepared to file more lawsuits related to the overheated market that preceded the financial crisis, experts said.

"This is just the tip of the iceberg," said James Hackney, a professor at Northeastern University School of Law. "There are a lot of folks out there in different deals who played similar roles, and once it starts building steam, plaintiffs' lawyers will figure out this is where the money is and there should be a lot of action."

Among the legal action expected in the coming months:

• Class-action suits by Goldman shareholders who believe Goldman alleged misconduct made their stakes less valuable could come as early as Monday. Such suits are common when companies are accused of wrongdoing. Goldman shares fell almost 13 percent Friday as the bank lost $12.5 billion in market capitalization.

• Suits by investors who believe Goldman sold them on deals that were doomed to fail. The investors in the transaction at the heart of the SEC case could sue first, followed by others who believe their losses were similar.

• Possible criminal charges, if the SEC's civil case reveals evidence that meets the higher standard of "proof beyond a reasonable doubt." Experts said it's unlikely the company as a whole will face criminal charges, but evidence could emerge that would expose the Goldman executive named in the SEC complaint, 31-year-old Fabrice Tourre, to criminal prosecution.

• Charges by regulators about other mortgage investments at Goldman and elsewhere. SEC enforcement chief Robert Khuzami told reporters Friday the agency is racking up evidence on other deals in the overheated market that preceded the financial crisis.

Already the case has provoked legal questions from foreign governments, according to published reports. That's because the financial crisis forced many countries to bail out banks that lost money on investments arranged by Goldman.

German regulators are considering legal action against Goldman, newspaper Welt am Sonntag reported, quoting a spokesman for Chancellor Angela Merkel.

The charges would be on behalf of IKB Deutsche Industriebank AG — an early victim of the financial crisis that was rescued by the state-owned KfW development bank among others. IKB invested in the deal regulators are targeting.

The flurry of legal activity is likely to proceed separately from the SEC's case against Goldman, which experts said faces numerous pitfalls.

To prove its fraud case against Goldman, the government must show that Goldman misled investors or failed to tell them facts that would have affected their financial decisions.

The government's greatest challenge, experts said, will be boiling the case down to a simple matter of fraud. The issues involved are so complex that Goldman may be able to introduce enough complicating factors to shed some doubt on the government's claims.

"If you wanted to go after Goldman with a complaint that wouldn't stick, this would be perfect," said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm. "If you look at these products, almost all of them look like hoaxes because of the junk inside."

Legal experts pointed to the paucity of evidence in the government's lawsuit, which contains short excerpts from e-mails but lacks key information about what the various investors knew and what actions they took.

The quality of the evidence was not clear from the complaint, said Jacob Frenkel, a former SEC enforcement lawyer now with Shulman, Rogers, Gandal, Pordy & Ecker PA.

Frenkel said there's been an uptick in "cases where the government chooses select excerpts from e-mails as the basis for its allegations only to find the balance of the text or other e-mails prove otherwise."

For example, prosecutors last fall tried unsuccessfully to use a series of e-mails to convict two Bear Stearns hedge fund executives. They wanted to convince jurors that there was behind-the-scenes alarm at the hedge funds as investments in complex securities tied to mortgages began to slide.

The jurors were not swayed. After the verdict, some jurors told reporters they found the evidence against the two executives flimsy and contradictory. Others suggested the pair were being blamed for market forces beyond their control.

Goldman already has advanced a similar argument. "Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities" were in the investment pool, the bank said in a written response to the charges Friday.

That's part of a time-honored tradition of defusing accusations by bringing in details that may or may not be relevant, said James Cohen, a professor at Fordham University School of Law.

"Traditionally it's in the interest of the party that has Goldman's role to muddy the waters — it's rarely in their interest to have the picture as sharp as HDTV," Cohen said.

Several legal experts suggested Goldman and the SEC had reached an impasse over a settlement before the charges were announced. They speculated that Goldman was unwilling to admit that it allowed the hedge fund to create a portfolio of securities that was designed to fail because that admission could do irreparable harm to Goldman's reputation.

"Goldman could've easily paid a fine already," said John Coffee, a securities law professor at Columbia University. "So I don't think it's money they're fighting over."

The case has been assigned to U.S. District Judge Barbara Jones of New York. Jones is the federal judge who five years ago presided over the $11 billion criminal fraud case that toppled WorldCom Corp. and sent its former CEO Bernard Ebbers to prison for 25 years.

Page last updated at 20:53 GMT, Friday, 16 April 2010 21:53 UK

Goldman Sachs, the Wall Street powerhouse, has been accused of defrauding investors by America's financial regulator.

The Securities and Exchange Commission (SEC) alleges that Goldman failed to disclose conflicts of interest.

The claims concern Goldman's marketing of sub-prime mortgage investments just as the US housing market faltered.

Goldman rejected the SEC's allegations, saying that it would "vigorously" defend its reputation.

News that the SEC was pressing civil fraud charges against Goldman and one of its London-based vice presidents, Fabrice Tourre, sent shares in the investment bank tumbling 12%.

The narrative of what transpired, as set out by the SEC, is quite the financial thriller
Robert Peston, BBC Business Editor

Peston's Picks: Why Goldman may owe UK taxpayers $841m

The SEC says Goldman failed to disclose "vital information" that one of its clients, Paulson & Co, helped choose which securities were packaged into the mortgage portfolio.

These securities were sold to investors in 2007.

But Goldman did not disclose that Paulson, one of the world's largest hedge funds, had bet that the value of the securities would fall.

The SEC said: "Unbeknownst to investors, Paulson... which was posed to benefit if the [securities] defaulted, played a significant role in selecting which [securities] should make up the portfolio."

"In sum, Goldman Sachs arranged a transaction at Paulson's request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests," said the Commission.

Housing collapse

The SEC alleges that investors in the mortgage securities, packaged into a vehicle called Abacus, lost more than $1bn (£650m) in the US housing collapse.

The whole building is about to collapse anytime now... Only potential survivor, the fabulous Fabrice...
Email by Fabrice Tourre

Mr Tourre was principally behind the creation of Abacus, which agreed its deal with Paulson in April 2007, the SEC said.

The Commission alleges that Mr Tourre knew the market in mortgage-backed securities was about to be hit well before this date.

The SEC's court document quotes an email from Mr Tourre to a friend in January 2007. "More and more leverage in the system. Only potential survivor, the fabulous Fab[rice Tourre]... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!"

Goldman denied any wrongdoing, saying in a brief statement: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."

The firm said that, rather than make money from the deal, it lost $90m.

The two investors that lost the most money, German bank IKB and ACA Capital Management, were two "sophisticated mortgage investors" who knew the risk, Goldman said.

And nor was there any failure of disclosure, because "market makers do not disclose the identities of a buyer to a seller and vice versa."

John Paulson
John Paulson made billions of dollars in the financial markets

Calls to Mr Tourre's office were referred to the Goldman press office. Paulson has not been charged.

Asked why the SEC did not also pursue a case against Paulson, Enforcement Director Robert Khuzami told reporters: "It was Goldman that made the representations to investors. Paulson did not."

The firm's owner, John Paulson - no relation to former US Treasury Secretary Henry Paulson - made billions of dollars betting against sub-prime mortgage securities.

In a statement, Paulson & Co. said: "As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges."

'Regulation risk'

Goldman, arguably the world's most prestigious investment bank, had escaped relatively unscathed from the global financial meltdown.

This is the first time regulators have acted against a Wall Street deal that allegedly helped investors take advantage of the US housing market collapse.

The charges come as US lawmakers get tough on Wall Street practices that helped cause the financial crisis. Among proposals being considered by Congress is tougher rules for complex investments like those involved in the alleged Goldman fraud.

Observers said the SEC's move dealt a blow to Goldman's standing. "It undermines their brand," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a Goldman critic. "It undermines their political clout."

Analyst Matt McCormick of Bahl & Gaynor said that the allegation could "be a fulcrum to push for even tighter regulation".

"Goldman has a fight in front of it," he said.

Goldman drawn into insider-trading probe, WSJ reports
YAHOO
By Alistair Barr, MarketWatch
April 15, 2010, 11:33 a.m. EDT

SAN FRANCISCO (MarketWatch) -- Goldman Sachs Group Inc. is being drawn into the Galleon Group insider-trading investigation, The Wall Street Journal reported Thursday.

Prosecutors are examining whether Goldman (NYSE:GS) director Rajat Gupta shared inside information with Raj Rajaratnam, founder of hedge fund firm Galleon, from June 2008 to October 2008, at the height of the financial crisis, the newspaper said, citing unidentified people close to the situation.
Goldman director in Galleon probe

Ken Brown discusses a new development in the Galleon insider-trading case, namely prosecutors are examining whether a Goldman Sachs board member gave inside information about the firm to Galleon hedge-fund founder, Raj Rajaratnam.

Gupta, the former head of consulting firm McKinsey & Co., was a close associate of Rajaratnam's, the Journal said. See First Take on Goldman Sachs.

Goldman's name emerged in a government letter listing companies whose trading, by Rajaratnam and others in the Galleon case, the U.S. is investigating, the newspaper reported.

The March 22 letter said the government is scrutinizing trades by Rajaratnam and others in Goldman Sachs from June 2008 to October 2008, the newspaper said.

No criminal charges or other allegations have been filed against Gupta, and there's no indication that investigators are looking at his own stock trading, the Journal reported. Rajaratnam has pleaded not guilty to criminal charges in the biggest hedge fund insider-trading case ever pursued by U.S. authorities.

A Goldman spokesman told The Wall Street Journal that "Mr. Gupta is unaware of any examination of any such issue and has done nothing wrong."

Goldman shares edged up 4 cents to $184.96.

WE PROTEST
The government had no problem persecuting the owner of these houses on "insider trading" - long before anyone even whispered about the wrong-doing of the industry.  So how fair was that?

Galleon case reveals Wall Street's connections:  Commentary: Ties between elite, difficulty in proving insider cases
By MarketWatch
April 15, 2010, 10:43 a.m. EDT

NEW YORK (MarketWatch) -- Goldman Sachs Group Inc.'s role in the Galleon hedge fund insider-trading probe is great headline fodder, but the takeaways from the case shed light on an industry-wide issue.

Rajat Gupta, a current Goldman (NYSE:GS) director and former head of McKinsey & Co., is being examined by investigators for his role in Galleon trading in the firm's shares during the height of the financial crisis, according to a report Thursday in The Wall Street Journal. Read Wall Street Journal report on Goldman and Galleon.

Gupta hasn't been charged and the report clearly states his own portfolio isn't under review. Still, the widening probe of Galleon offers a rare look at the connections and difficulty regulators have when pursing insider cases.  

      --Wall Street's elite are extremely well-connected and because of that the environment is ripe for insider information to be passed. Gupta had a close working relationship with Galleon founder Raj Rajaratnam. Goldman traded with Galleon, and Rajaratnam was close to many at the bank. Gupta was invited to Galleon parties, underscoring how social circles play a role. 

      --Because of those connections -- both social and professional -- investigators have traditionally had a difficult time finding evidence information was passed. A cocktail party conversation or a phone call can be easily overheard and impossible to trace.  

      --Investigators are ramping up their techniques to pursue cases. The Galleon case relies heavily on wire taps, a method more used in pursing organized crime or terror suspects.

Whether Goldman had a role in the alleged insider trading or was just a bystander is something prosecutors will determine. But the Feds are employing more tools in trying to find out. If suspicions turn to convictions, Wall Street will feel the chill. Phone conversations and other communication could come with a question: who's listening?
Rajaratnam to provide SEC with wiretaps
YAHOO
Feb. 9, 2010

NEW YORK (Reuters) – Galleon hedge fund founder Raj Rajaratnam and co-defendant Danielle Chiesi, indicted in a sweeping insider trading case, must hand over wiretap evidence to U.S. market regulators, a judge ruled on Tuesday.

As many as 14,000 interceptions of phone calls were made in the criminal investigation involving Wall Street and Silicon Valley firms that was announced in October last year.

Lawyers for Rajaratnam, Chiesi and others accused in the probe had asked U.S. District Court Judge Jed Rakoff in New York to prevent use of the recordings from the criminal probe in the civil fraud trial scheduled to start in August.

But the judge said Rajaratnam and Chiesi, who were both indicted on charges of conspiracy and securities fraud in the criminal probe, had until February 15 to provide wiretap recordings to the Securities and Exchange Commission.

"The notion that only one party to a litigation should have access to some of the most important non-privileged evidence bearing directly on the case runs counter to basic principles of civil discovery in an adversary system," Rakoff's written order said in part.

While the SEC and criminal prosecutors often coordinate with each other, there are limits on the information they can share in parallel civil and criminal cases, which is why the defense was ordered to provide the material and not the prosecutors.

Prosecutors have described the case as the biggest hedge fund insider trading case in the United States.
Galleon's Rajaratnam free on bail
YAHOO
By Steve Gelsi, MarketWatch
Oct. 17, 2009, 3:07 p.m. EDT

NEW YORK (MarketWatch) -- Galleon Group founder Raj Rajaratnam has been released on $100 million bail on criminal charges in an alleged insider-trading scheme that federal prosecutors claim netted millions in illegal profits.

Rajaratnam, 52, who helped build Galleon into a major hedge fund managing $3.7 billion, was one of six people charged Friday with crimes related to the alleged scheme. The Securities and Exchange Commission also filed a civil complaint against him.

U.S. Magistrate Judge Douglas Eaton approved bail, secured by $20 million in cash and property, for Rajaratnam at an arraignment hearing late Friday. Rajaratnam was charged with four counts of conspiracy and seven counts of securities fraud in an alleged insider trading scam that netted at least $20 million.

Conviction of one count alone of securities fraud carries a penalty of up to 20 years in prison and a fine of up to $5 million, or twice the gross gain or loss of an illegal trade.

Eaton said Rajaratnam must limit his travel to a radius of 110 miles of New York City. Rajaratnam, a citizen of both Sri Lanka and the U.S., surrendered travel documents to the court, according to media reports.

A lawyer from the U.S. Attorney's office told the judge that Rajaratnam posed a flight risk.

"A court's going to learn there's a lot more to this case -- there is no way that this man is going to flee," Rajaratnam's lawyer, Jim Walden, told the judge, according to a published report.

Fellow defendant Anil Kumar of Saratoga, Calif., a director at McKinsey & Company, was released on a $5 million bond, according to reports

Mark Kurland, 60, of Mount Kisco, N.Y., a senior managing director and general partner at New Castle, was released on a $3 million bond.

Robert Moffat, 53, of Ridgefield, Conn. , a senior vice president at IBM and Danielle Chiesi, 43, of New York, a portfolio manager at New Castle Funds, were released on $2 million bond.

In California, Rajiv Goel, 51, a managing director at Intel Capital , the tech company's investment arm, posted $300,000 cash for bail.

Rajaratnam's lawyer did not immediately return a telephone call from MarketWatch on Saturday and representatives of the U.S. attorney's office couldn't be reached.

The SEC filed a civil complaint Friday alleging Rajaratnam tapped into his network of friends and close business associates to obtain insider tips and confidential news about corporate earnings or takeover activity at companies, including Google Inc. , the Hilton chain, which was taken private in 2007; and Sun Microsystems . See full story.

"What we have uncovered in the trading activities of Raj Rajaratnam is that the secret of his success is not genius trading strategies," Robert Khuzami, director of the SEC's Division of Enforcement said in a statement. "He is not the astute study of company fundamentals or marketplace trends that he is widely thought to be. Raj Rajaratnam is not a master of the universe, but rather a master of the Rolodex."

On Sept. 30, Rajaratnam was ranked as No. 236 on the Forbes list of richest Americans with a net worth of $1.5 billion.
   
Copyright © 2009 MarketWatch, Inc. All rights reserved.
Hedge-funder in stox-scam bust

By BRUCE GOLDING
Last Updated: 11:53 AM, October 17, 2009
Posted: 4:25 AM, October 17, 2009

This pirate is sunk.

The fat-cat founder of Wall Street hedge-fund giant Galleon -- one of the world's richest men -- looked more knee-buckling than swashbuckling as he and a crew of five investment and corporate big shots were charged with scamming $20 million in illicit booty through insider trading.  Raj Rajaratnam, 52, was arrested at his mammoth Upper East Side condo before he could flee to London, to where he had booked a flight after learning that a former employee had been "wearing a wire," a criminal complaint says.

"Raj Rajaratnam is not a master of the universe, but rather a master of the Rolodex," said Robert Khuzami, director of enforcement at the Securities and Exchange Commission.

"He cultivated a network of high-ranking corporate executives and insiders, and then tapped into this ring to obtain confidential details about quarterly earnings and takeover activity."

Magistrate Douglas Eaton set a $100 million bond for Rajaratnam -- whom Forbes recently listed as the world's 559th richest person with a net worth of $1.3 billion. He was expected to be released last night but was told he must come up with a "significant" amount of the cash by next week.  The feds said the Sri Lankan native was the ringleader of an insider-trading scam that included two former hedge-fund managers from Bear Stearns and executives from IBM and McKinsey & Co.

Officials called it the largest hedge-fund insider-trading case in history -- and the first time they had used wiretaps to go after dirty traders.  Manhattan US Attorney Preet Bharara said the busts should serve as a "wakeup call to Wall Street" that investigators are now going after financial crimes with the "same investigative techniques that have worked so successfully against the mob and drug cartels."

Rajaratnam's lawyer, Jim Walden, said his client is innocent and ready to fight the charges. He insisted prosecutors "misunderstand words like 'use your Rolodex'. . . because they don't understand the business."

The arrests came after a three-year probe prompted by an SEC tip about "suspicious" trading. That investigation was helped by a cooperating witness who had known Rajaratnam since the 1990s, court papers say.
The former employee approached the Galleon Management head in 2005 about going back to work for him, and Rajaratnam asked him to identify companies where he had an "edge," the filings say.  The witness passed inside information about Google -- info that netted Rajaratnam and Galleon more than $9 million in profits, the filings say.

The informant began working with the feds in November 2007 and investigators began tapping Rajaratnam's cellphone on March 7, 2008.  Other alleged members of the ring include Danielle Chiesi and Mark Kurland of New Castle Funds, a former Bear Stearns Asset Management hedge fund; Rajiv Goel, a director at Intel Capital, the investment arm of Intel Corp.; Anil Kumar, a director at consulting giant McKinsey & Co.; and Robert Moffat, a senior vice president at IBM.

Rajaratnam, Goel, 51, Kumar, 51, and Chiesi, 43, were charged with securities fraud and face up to 20 years in prison if convicted. Moffat, 53, and Kurland, 60, were charged with conspiracy to commit securities fraud and face up to five years in prison.

Moffat's lawyer, Kerry Lawrence, said, "He's shocked that he was charged with a crime and looks forward to resolving the case favorably."

Kumar's lawyer, Isabelle Kirshner, said her client was "distraught."

Additional reporting by Dareh Gregorian, Kaja Whitehouse and Post Wire Services

bruce.golding@nypost.com

Who's Who:

Raj Rajaratnam, 52
Rajaratnam is the richest son of Sri Lanka. His $1.3 billion fortune puts him at No. 559 on Forbes’ list of the world’s richest people, 236th among Americans.  Until his arrest, he was having a good year — his hedge funds in the Galleon Group had returned 20 percent.  After graduating from a prestigious Sri Lankan school, Rajaratnam studied engineering at the University of Sussex in England.  He moved to the US in 1981, enrolling in the Wharton School of Business at the University of Pennsylvania, where he got an MBA in 1983.  He began his career as a securities analyst and founded Galleon in 1997.  Rajaratnam, an Upper East Side resident, has given more than $100,000 to Democratic politicians, including Sen. Charles Schumer and then-Sen. Hillary Rodham Clinton. He also donated $30,800 to a PAC that backed President Obama last year.  He is a dual citizen of the US and Sri Lanka.

Anil Kumar, 51
Kumar, of Santa Clara, Calif., is a director at McKinsey & Co. Inc., a management-consulting firm. A top expert on outsourcing research work overseas, he’s accused of providing insider information about McKinsey clients.

Mark Kurland, 60
Kurland, of New York, is a general partner at New Castle Funds LLC, a top hedge fund. He was a top executive at the firm for years when it was part of Bear Stearns Asset Management.

Robert Moffat, 53
Moffat, of Ridgefield, Conn., is a senior vice president at IBM, where he’s worked for 31 years. He’s the chief of IBM’s systems and technology group and oversees its sales of computer hardware.

Rajiv Goel, 51
Goel, of Los Altos, Calif., is a director of strategic investments at Intel Capital, the investment arm of chip- maker Intel Corp. He provided inside information about Intel investments to Rajaratnam, the feds say.

Japan Bails Out Struggling Chip Maker With $1.7 Billion Package
NYTIMES
By HIROKO TABUCHI
July 1, 2009

TOKYO — In its first major industry bailout since the start of the global financial crisis, Japan said Tuesday that it had put together a package of $1.7 billion in public and private money to shore up a troubled chip maker, Elpida Memory.

By using public money to prop up Elpida, Japan hopes to salvage its only major maker of dynamic random access memory chips, or DRAM, considered vital to its electronics industry. The aid package also protects the nearly 6,000 workers at Elpida, which suffered record losses last year as the demand for semiconductors fell sharply.

But in using taxpayers’ money, the government also risks keeping feeble companies on life support, which ultimately could hurt Japan’s competitiveness, analysts said. Japan has set aside 2 trillion yen, or $21 billion, in public funds to aid companies hurt in the economic slowdown.

“It’s a fine balance,” said Shinichi Ichikawa, the chief equity strategist for Japan at Credit Suisse. “Japan has decided it must save Elpida for the sake of Japanese industry,” but “going too far means keeping zombie companies alive.”

The bailout follows similar moves in other countries. The United States has poured billions of dollars in taxpayer money into the automakers General Motors and Chrysler, while Germany has shored up the automaker Opel with taxpayer money.

Japan’s rescue plan comes during its worst recession since World War II. On Tuesday, the government said Japan’s unemployment rate rose 0.2 percentage points to 5.2 percent in May, the highest level in nearly six years.

The Japanese economy has contracted for 12 consecutive months, despite government efforts to jump-start growth with stimulus spending. Weak domestic demand and a dwindling population mean that recovery remains at the mercy of its struggling exporters, concentrated in autos and electronics.

As a maker of DRAM chips, which are used in PCs, Elpida is seen as especially important to the country’s electronics industry. Japanese officials fear that Elpida’s demise would force domestic manufacturers to rely on overseas rivals like Samsung Electronics of South Korea, the market leader.

Elpida is reeling amid an oversupply in chips that has caused prices to plummet and a collapse in demand. It suffered a 179 billion yen loss in the year to March, after a 24 billion yen shortfall a year earlier. Weaker players, like Spansion of the United States and Germany’s Qimonda filed for bankruptcy protection earlier this year.

“Elpida is Japan’s only DRAM maker, and it has been hit by extremely severe conditions amid the global economic slump, despite its superior technology,” the trade minister, Toshihiro Nikai, said Tuesday. “Securing a supply of DRAM is very important for Japan’s industry and livelihood.”

Elpida’s aid package of 160 billion yen includes 40 billion yen in public funds and loans from the state-run Development Bank of Japan, and 100 billion yen in loans from private banks, according to a statement by the trade ministry.

Taiwan Memory, a chip maker set up by the Taiwan government to reorganize the island’s own struggling chip sector, will also invest 20 billion yen in Elpida, the ministry said. Taiwan Memory had recently announced it would partner with Elpida to develop memory chips for cellphones.

Elpida’s bailout is the first under an emergency measure that makes public money available to businesses hurt in the global economic crisis, part of the economic stimulus plans championed by Prime Minister Taro Aso. Companies that accept public money are required to develop strategies to turn around their businesses in three years.

Elpida will use the bailout to invest in cutting-edge technologies, the company’s chief executive, Yukio Sakamoto, said.

“In the competitive DRAM industry, companies without the capacity to invest are sure to lose out,” Mr. Sakamoto told reporters after the rescue package was announced. The challenge for Japan is how to handle companies seeking public funding that are shouldered with woes that go beyond the financial crisis.

Another company, Pioneer, a long-struggling electronics maker, is expected to seek billions of yen in aid, for example. Excessive government intervention “hampers necessary consolidation and industry shake-out, sapping the nation’s industrial vigor,” the Nikkei, Japan’s largest business daily, wrote in a recent editorial. “The government fosters moral hazard if it extends a helping hand too readily.”

A Brief History of General Motors Corp.
NYTIMES
By THE ASSOCIATED PRESS
May 27, 2009Filed at 12:32 p.m. ET

As General Motors Corp. prepares to celebrate its 100th anniversary, some key events in the giant automaker's history:

Sept. 16, 1908 - General Motors Company founded by William C. Durant.

1909 - GM sells 25,000 cars and trucks.

1910 - Durant brings the Buick, Olds, Pontiac, Cadillac, Champion ignition, AC spark plug and other companies into GM. Sales rise 60 percent, but earnings lag. Durant is ousted by bankers as company sinks into debt.

1911 - Electric self-starter first appears on a Cadillac.

1916 - GM incorporated as General Motors Corp. Durant, after founding company that builds Chevrolets, regains control.

1917-19 - GM shifts most truck production to war effort.

1920 - Durant resigns, later files personal bankruptcy and dies running bowling alleys.

1920s - GM creates product policy aiming Buick, Pontiac, Chevrolet, Oldsmobile and Cadillac at five different groups of buyers.

1921 - GM accounts for 12 percent of U.S. car market.

1923 - Alfred P. Sloan named president and chief executive.

1925 - GM acquires Vauxhall Motors Ltd. of Great Britain.

1929 - GM acquires Adam Opel AG of Germany.

1937 - Violent sit-down strikes by GM hourly workers in Flint, Mich., shake company, lead to United Auto Workers representation.

1941 - GM market share grows to 41 percent.

1942 - Civilian auto production halted and plants turned to war effort.

1945-46 - Workers strike for 113 days.

1948 - First automobile fins unveiled, on a Cadillac.

1949 - After purchase of National City Lines of Los Angeles, GM accused of buying streetcar companies since 1920s and replacing them with bus systems. GM is convicted just once, of conspiracy in the Los Angeles case.

1953 - Air conditioning first offered, on a Cadillac.

1954 - GM's U.S. market share reaches 54 percent. Company makes 50 millionth car.

1955 - GM introduces Chevrolet V-8 engine.

1956 - Sloan retires as chairman.

1960 - Reacting to invasion of small European cars, GM introduces Chevrolet Corvair. Car later attacked by Ralph Nader, who wrote book ''Unsafe at Any Speed'' that led to congressional auto safety hearings.

1979 - GM's U.S. employment peaks at 618,365, making it the largest private employer in the country. Worldwide employment is 853,000. Decade features sales decline, recession, Arab oil embargo and gains by Japanese automakers.

1980 - Roger B. Smith named chairman. GM loses more than $750 million as car and truck sales plunge 26 percent.

1981 - GM consolidates truck, bus and van operations. Auto workers bash Japanese cars with sledge hammers. Company earns $333.4 million on $62.7 billion in revenue.

1983 - GM and Toyota Motor Corp. of Japan form joint venture to build cars at a GM-owned plant in Fremont, Calif. Smith announces Saturn project to fight Japanese cars. GM makes $3.7 billion.

1984 - GM overhauls North American organization; acquires Electronic Data Systems Corp., owned by Texas billionaire H. Ross Perot, for $2.5 billion. Earnings rise to $4.5 billion on revenue of $84.9 billion.

1985 - Company forms new Saturn Corp. subsidiary. GM acquires Hughes Aircraft Co. for $5 billion. GM makes $4 billion.

1986 - GM announces plans to close 11 U.S. plants. Employment grows to 877,000 as earnings fall to $3.9 billion. After infighting, Perot resigns from board and gets $700 million in severance.

1987 - GM and UAW reach contract prohibiting closure of a plant unless its product sales fall. Earnings rise to $3.6 billion.

1988 - Earnings rise to $4.6 billion and revenue hits $123.6 billion. Employment drops to 766,000.

1989 - GM complies with federal regulations and equips about 15 percent of fleet with driver's air bags, blames devices for boosting car prices. Profits fall to $4.2 billion.

1990 - GM and Saab-Scania AB of Sweden form joint venture to make cars in Europe. Smith retires as chairman, succeeded by President Robert Stempel. GM launches Saturn, takes $2.1 billion charge for four plant closings, and profits fall to $102 million as auto sales plummet.

1991 - Company loses industry record $4.45 billion. Stempel announces GM will close 21 plants over the next few years and eliminate 9,000 salaried and 15,000 hourly jobs in 1992, in addition to layoffs at shuttered plants.

1992 - Board strips some of Stempel's authority. Stempel later resigns, saying rumors about his future compromised his ability to lead. Jack Smith gets title of chief executive officer and outside director John Smale is named chairman.

1996 - GM spins off Electronic Data Systems as a separate company.

1997 - GM sells defense electronics business of Hughes Electronics to Raytheon and merges Hughes' auto parts business with Delphi Automotive Systems (now Delphi Corp.).

1998 - Strikes at two Michigan parts plants shut down almost all North American production.

1999 - Delphi is spun off as a separate company. GM purchases rights to the Hummer brand from AM General.

2000 - President Rick Wagoner replaces Smith as CEO. GM cuts 10 percent of white-collar employment.

2002 - GM spends $251 million on 42 percent stake in South Korea's bankrupt Daewoo Motor and names it GM Daewoo Auto & Technology Co. Stake later increased to 51 percent.

2003 - GM sells defense unit to General Dynamics Corp. for $1.1 billion and sells 20 percent stake in Hughes Electronics to News Corp. for $3.1 billion.

2004 - Last model year for Oldsmobile.

2006 - About 47,600 GM and Delphi hourly workers take buyout or early retirement offers. GM investor Kirk Kerkorian suggests alliance with Nissan and Renault, which GM's board examines and rejects; Kerkorian sells much of his stake. GM sells 51 percent stake in GMAC Financial Services to group led by Cerberus Capital Management LP for $14 billion.

2007 - GM loses $38.7 billion, including $39 billion third-quarter charge for unused tax credits. It's the largest annual loss in auto industry history. GM reaches historic contract with United Auto Workers that shifts billions in retiree health care expenses to union-administered trust. Company agrees to pay $33.7 billion into trust. Contract also lets company pay some new hires $14 per hour. U.S. market share is 23.7 percent. GM sells Allison Transmission to The Carlyle Group and Onex Corp. for $5.6 billion.

2008 - Gas prices hit $4 per gallon and truck sales plummet. GM announces plan to close four pickup and sport utility vehicle factories, plans to shed 8,350 jobs. Hummer brand put up for sale. By fall, executives begin asking congressional leaders for aid. GM and Chrysler talk about a merger, but talks die down as both companies' sales continue to fall on U.S. and worldwide recession woes. By December, GM tells Congress it needs $18 billion to stay afloat. It receives $13.4 billion, and racks up a $30.9 billion annual loss and burns through $19.2 billion.

2009 - The Obama administration takes over the Treasury. By February, GM says it will need a total of $30 billion. On March 31, President Barack Obama -- a day after firing CEO Rick Wagoner -- tells GM it hasn't done enough to restructure and gives the company until June 1 to make aggressive cuts. Chief Operating Officer Fritz Henderson takes over as CEO. Board member Kent Kresa becomes interim chairman. GM's Saab unit files for bankruptcy in Sweden. GM says it will sell off Saturn and will end the Pontiac line. Under the Treasury Department's orders, GM asks 90 percent of its bondholders to participate in a debt-for-equity swap to rid the company of $24 billion in debt for stock and a combined 10 percent stake in the company. By May, GM says it will end contracts with about 1,100 dealers. UAW agrees to job cuts, 14 plant closures, and a 20 percent equity stake in the company to cover retiree health care costs. Bankruptcy appears likely, as GM tries to get all parties to agree to new, leaner terms before June 1. Bondholders reject debt exchange offer, making bankruptcy filing almost inevitable. Government loans now total $19.4 billion.

Sources: Associated Press archives, Hoover's, General Motors Corp.
"G.M." stands for "government motors" but we ask, which government?
Debt Exchange Falls Short; G.M. Moves to Sell Units
NYTIMES
By CARTER DOUGHERTY and DAVID JOLLY
May 28, 2009

Bondholders at General Motors on Wednesday rejected an offer to exchange $27 billion in debt for a small amount of stock, as G.M. prepared for a bankruptcy filing that could come as soon as this weekend.  In Europe, the company moved to combine its main operations under the umbrella of Adam Opel, its German business, to simplify the sale of the unit.

In a statement about the bondholders, G.M. did not give vote totals for the tender offer, which began on April 27 and expired at 12:01 a.m. Wednesday. G.M. had required 90 percent of bondholders to agree to exchange their debt, said said Wednesday morning that the notes tendered were “substantially less than the amount required.”

Without approval, G.M. had said it would seek bankruptcy protection. But it made no announcement of its plans. The company said it had withdrawn its offer, and that its board would meet to decide further steps.

The company is expected to spend the next few days finishing its bankruptcy case. One important element before it files is securing the approval by the United Automobile Workers union of a new set of concessions.  Workers are voting on the proposal in meetings on Wednesday. It would form the basis of a labor contract between the union and the new version of G.M. that is expected to emerge from bankruptcy protection.

In Europe, the combination of G.M.’s businesses, which is contingent on Berlin’s approval, would help to “ring fence” the assets from a bankruptcy filing of the parent company, and would make German government and General Motors equal partners, a G.M. spokeswoman in Zurich, Karin Kirchner, said.

“The intention is to pool the Opel and Vauxhall assets under the Adam Opel unit,” Ms. Kirchner said. “We’re doing this in preparation for a trustee model that has been proposed by the German government.”The simplified structure could ease the way to the next step, which is expected to be a sale of Opel to either Fiat, the Italian carmaker, or Magna International, the Canadian auto parts maker, which is backed by the Russian lender Sberbank. The winning bidder will most likely be announced later Wednesday, the German finance minister Peer Steinbrück told journalists in Berlin.

Chancellor Angela Merkel and other top German politicians, including governors from states with Opel plants, were to meet with Fiat and Magna executives, as well as representatives of G.M. and the United States government.  Mr. Steinbrück said the interest expressed by a Chinese company, widely reported to be Beijing Automotive, might have come too late. Beijing Automotive officials could not be reached for comment and G.M. and the German government declined to further identify the Chinese bidder.

RHJ International, a Belgian-listed investment company, has also proffered a bid, but German officials have signaled that the Magna or Fiat bids were considered the most serious.

“The chancellor has to examine the offer by Magna very closely because in my opinion, as far as I’m informed, it’s the most realistic, the best offer,” said Peter Struck, the parliamentary leader of the Social Democrats, who, with the Christian Democratic Union of Merkel, form the governing coalition.  German state and federal governments have put together a loan guarantee package of 1.5 billion euros, or $2.1 billion, to pave the way for a deal for Opel.

As skepticism about Fiat’s offer has spread, Magna executives have mounted a campaign to assuage German officials in matters where its own offer had ruffled feathers.

For example, Magna’s bid initially foresaw the elimination of 2,200 jobs in Bochum, in northwestern Germany, a step that drew the ire of Juergen Ruettgers, the governor of North Rhine-Westphalia, where Bochum is located. Magna wants to cut 2,600 jobs in Germany overall.  Magna has since floated the idea of moving production of the Opel Astra, a line of small family sedans, from Antwerp, Belgium, to Bochum, allowing it to keep more positions there.

German officials said that Fiat stuck to its plans to keep Opel’s three assembly plants, but close the engine plant in Kaiserslautern.

The Magna offer would put 35 percent of Opel in the hands of Sberbank, a Russian bank, and include cooperation with GAZ, a Russian automaker. Oleg Deripaska, an ally of Prime Minister Vladimir V. Putin, is the controlling shareholder in GAZ.

Nelson D. Schwartz contributed reporting from Paris, Micheline Maynard from Detroit and Keith Bradsher from Hong Kong.


Metrics: Guccis or Gadgets?
NYTIMES
By HANNAH FAIRFIELD
September 7, 2008

When you have some extra cash padding your wallet, do you reach for the latest jeans or the sleekest new music player? Much of that decision, it seems, depends on where you live.  If you live in Greece, Italy or Egypt, you'll probably choose textiles over technology. Greeks spend almost 13 times more money on clothing as they do on electronics.

"Italians and other Europeans love fashion; the greatest designs in the world come from those regions," said Todd D. Slater, a retail analyst for Lazard Capital Markets in New York.

If you live in Australia or Taiwan, you might be more tempted by a new laptop computer or flat-screen television. Australians spend only 1.4 times more cash on clothes than they do on consumer electronics.

"Some areas in the Pacific Basin are technologically savvy, and clothing is very casual," Mr. Slater said. "In Australia, what else do you need besides a bathing suit and a pair of Uggs?"

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Editorial: Trade and Hard Times
NYTIMES
May 26, 2009

Foreign trade has been a potent force for good over more than half a century. It propelled Japan’s emergence from the ashes of World War II and helped it become an industrial powerhouse. It is the cornerstone of development strategies from China to Brazil. It is what links countries all over the world in a network of production that underpins global prosperity.

Today, trade is collapsing, one more casualty of the global financial crisis. That is especially bad news for countries that are dependent on trade for economic growth, including many developing nations that had nothing to do with the financial mess.

Exports from the United States declined 30 percent and imports 34 percent in the first quarter of the year from the previous three months. Imports into countries that use the euro from outside the area were down 21 percent compared with the first quarter of last year. At this rate, the World Trade Organization’s dire projection in March that global trade would decline 9 percent this year will soon start to look outright boastful.

The drop in trade is spreading economic weakness across the world, as one country’s drop in imports translates into a fall in exports, and production, in another.

Japan, whose economy depends heavily on sales to the United States, saw exports plunge 45.5 percent in March compared with March of 2008. In the first quarter, its economy contracted 15.2 percent at an annual rate, the worst performance since 1955. Exports from China and Brazil both fell 20 percent in the first quarter, compared with the year before. Mexico — linked tightly to the United States market through Nafta — saw exports collapse almost 29 percent while the Mexican economy contracted 21.5 percent at an annual rate, more than three times the rate of decline in the United States.

The main forces clobbering trade seem to be the fall in demand and investment that started in the United States and Europe, and the seizing up of trade finance, which funds up to 90 percent of the world’s merchandise trade, worth some $16 trillion.

The impact has been magnified by the far-flung nature of multinational companies’ production networks — where a factory in one country makes parts that are used by a plant in another country. As demand for their products has declined, the pain has moved across countries up the chain of production. The thawing of credit markets has helped resuscitate trade finance some. Governments of the 20 biggest economies agreed to nudge it along, ensuring $250 billion of trade finance would be available over the next two years. They should keep those pledges, and they may have to do more.

Protectionism also remains a serious danger. With voters insisting that politicians protect their own, many countries have already imposed new restrictions on imports. So far they have been relatively modest. But as unemployment continues to rise, the temptation — and the pressure — will grow. Earlier this year, the Global Monitoring Report by the World Bank and the International Monetary Fund noted that “a pattern is beginning to emerge of increases in import licensing, import tariffs and surcharges, and trade remedies to support industries facing difficulties early on in the crisis.”

Of particular concern are attempts by governments — including in the United Kingdom, the Netherlands and Switzerland — to ensure that banks bailed out by taxpayers favor domestic borrowers. While the Obama administration has not imposed similar requirements, there is pressure from Congress and the public to make American banks that receive TARP money lend primarily, if not exclusively, to American borrowers. That would be a mistake. One of the sure ways to prolong the global recession is to create even more barriers to global trade.


Dollar At 5 - Month Lows as Safe - Haven Luster Fades
NYTIMES
By REUTERS
May 29, 2009Filed at 2:09 p.m. ET

NEW YORK (Reuters) - The U.S. dollar fell to five-month lows against a basket of currencies on Friday as an advance in global equities and signs of an easing global recession drove investors to snap up higher-yielding currencies and riskier assets.

Global stocks rose and some equities markets posted 2009 highs, diminishing the safe-haven allure of dollar assets and sending the euro to a 2009 high against the dollar.

A government report showed the U.S. economy contracted in the first quarter slightly less than initially estimated, but the market had expected evidence of a shallower recession.

"The dollar is being slapped around," said Boris Schlossberg, director of foreign exchange research at GFT in New York.

Analysts such as Schlossberg noted that as global risk appetite increases, the dollar may start reacting negatively to lackluster domestic economic reports.

"The market is now getting realistic about this (U.S.) recovery," he said.

Other reports showed business activity in the U.S. Midwest contracted in May at a sharper rate than expected, while a measure of consumer confidence improved in May.

"There will be a recovery, but it will be tepid," Schlossberg added.

In midday trading in New York, the dollar index <.DXY>, a gauge of the U.S. currency's performance against six major currencies, was 1.4 percent lower at 79.400, having earlier hit 79.287, its lowest since mid-December.

It is now down more than 6 percent for the month, on track for its biggest monthly fall since 1985.

The euro was also heading for its largest monthly gain since December and struck its highest level this year against the dollar at $1.4166, according to Reuters data. It was last up 1.4 percent at $1.4121.

The Australian dollar is up more than 10 percent in May, on pace for a record monthly gain. It last traded up 1.6 percent at US$0.7980.

Month-end fixings by corporations and pension funds also pushed the dollar lower, traders said.

"We've hit some pretty significant technical levels recently in many currency pairs, which are all adding a bit of selling pressure on the dollar," said Jessica Hoversen, fixed income and currency analyst at MF Global Ltd. in Chicago.

HIGHER YIELDS

The dollar tumbled last week on concerns U.S. government debt may lose its top triple-A rating as a result of the rising debt levels needed to fix the economy and rehabilitate the financial sector.

Those worries, though still at the back of investors' minds, receded somewhat after Moody's Investors Service affirmed the country's credit rating and the U.S. Treasury was able to sell over $100 billion of government debt.

Now, adding further pressure on the dollar, South Korea's National Pension Service said on Friday it would reduce exposure to U.S. government bonds and equities in its five-year portfolio.

U.S. government bonds account for 83 percent of the pension fund's direct holdings of foreign bonds, which are currently worth $6.5 billion.

"Money is flowing out of the dollar," said Hoversen at MF Global. "There was a lot of institutional money sitting on the sidelines during the worst of the crisis that now is looking for (higher) yields."

The dollar fell 1.4 percent to 95.55 yen, due partly to selling by Japanese exporters but was well above a two-month trough of 93.85 yen marked last week.

The yen was sold against most currencies apart from the dollar, as investors favored the high-yielders.
Op-Ed Contributor
The Almighty Renminbi?
NYTIMES
By NOURIEL ROUBINI
May 14, 2009

THE 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.

At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.

If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

Retail Sales Drop Unexpectedly in April
NYTIMES
By THE ASSOCIATED PRESS
Filed at 10:25 a.m. ET
May 13, 2009

WASHINGTON (AP) -- Retail sales fell for a second straight month in April, a disappointing performance that raised doubts about whether consumers were regaining their desire to shop. A rebound in consumer demand is a necessary ingredient for ending the recession.

The Commerce Department said Wednesday that retail sales fell 0.4 percent last month. Many economists had expected a flat reading, and the April weakness followed a 1.3 percent drop in March that was worse than first estimated.  Retail sales had posted gains in January and February after falling for six straight months, raising hopes that the all-important consumer sector of the economy might be stabilizing. But the setbacks in March and April could darken some forecasts because consumer spending accounts for about 70 percent of economic activity.

The hope had been that consumers were starting to feel better about spending, helped by the start of tax breaks included in the $787 billion stimulus bill. Households had spent the fall hunkered down in the face of thousands of job layoffs and the worst financial crisis since the 1930s.

The latest retail data ''are yet another illustration that, although the worst is now over, there is still no evidence of an actual recovery,'' Paul Dales, U.S. economist with Capital Economics in Toronto, wrote in a research note.

While anecdotal evidence suggests some improvement in sales in recent weeks, ''to offset the plunge in wealth, the household saving rate still needs to double from the current rate of 4 percent,'' Dales wrote. ''With falling employment hitting incomes, this can only be achieved by a further retrenchment in spending.''

The jobless rate rose to 8.9 percent in April when a net total of 539,000 jobs were lost and 13.7 million people were unemployed, the Labor Department said last week.  Wall Street tumbled after the weaker-than-expected retail sales report. The Dow Jones industrial average lost about 130 points in morning trading, and broader indices also fell.

In a separate report, the Commerce Department said business inventories fell 1 percent in March, a decline that matched economists' expectations. It marked the seventh straight decrease, the longest stretch since businesses cut inventories for 15 straight months in 2001 and 2002, a period that covered the last recession.

Businesses are continuing to cut their stockpiles in the face of declining sales, a development that has intensified the current economic downturn. Still, the reductions in stockpiles held on shelves and in backlots eventually should help businesses get their inventories more in line with reduced sales. If that is the case, any strengthening in consumer demand should lead to increased production.

The April retail sales dip came despite a 0.2 percent increase in auto sales, which fell 2 percent in March. Excluding autos, the drop in retail sales would have been 0.5 percent, much worse than the 0.2 percent gain economists expected.  Sales outside of autos showed widespread weakness last month. Demand at department stores and general merchandise stores fell 0.1 percent and sales at specialty clothing stores dropped 0.5 percent.

Department store operator Macy's Inc. on Wednesday reported a wider loss for the first quarter due partly to restructuring charges. Still, the company expects to see an improvement in sales from its localization efforts beginning in the fourth quarter of 2009, and in the spring of 2010.  Liz Claiborne Inc. reported a first-quarter loss that was worse than Wall Street expected. The apparel maker said its quarterly loss swelled on restructuring charges and a drop in same-store sales stemming from lower consumer spending and an extra week of sales in the year-ago period.

Sales also fell in April at furniture stores, electronic and appliance stores, food and beverage stores and gasoline stations, according to the Commerce Department.

The performance at department stores and specialty clothing stores came as a surprise since the nation's big chain stores had reported better-than-expected results for April. Same-store sales, rose 0.7 percent last month compared with April 2008. It was the first overall increase in six months, according to the tally by Goldman Sachs and the International Council of Shopping Centers.

For April, some mall-based clothing stores saw their declines level off and Wal-Mart Stores Inc., the world's largest retailer, had reported its same-store sales rose 5 percent, excluding fuel, which beat expectations. Same-store sales, or sales in stores open at least one year, is considered a key metric of a retailer's financial health.  The chain store sales report last week showed that Gap, American Eagle and Wet Seal posted smaller sales declines at their established locations than analysts had forecast.  The Children's Place, T.J. Maxx owner TJX Cos. Inc. and teen retailer The Buckle saw bigger gains than expected. But luxury stores again were hard hit as their higher-end wares find fewer takers.

Consumer spending grew 2.2 percent in the first quarter of the year, after posting back-to-back quarterly declines in the last half of 2008.

Economists believe the overall economy, as measured by the gross domestic product, will show a decline of around 2 percent in the current quarter. That would represent an improvement from the steep declines of 6.3 percent in the fourth quarter of last year and 6.1 percent in the first three months of this year, the worst six-month performance in a half-century.

Global economy is worst since Depression, report says 
DAY
By Jeannine Aversa 
Published on 4/23/2009

Washington - The global economy is expected to lurch into reverse this year for the first time since World War II with appalling consequences for nations large and small - trillions of dollars in lost business, millions of people thrust into hunger and homelessness and crime on the rise.

And the pain won't stop this year, the International Monetary Fund declared Wednesday, for what it said was “by far the deepest global recession since the Great Depression.” To cushion the blow and head off further damage next year, the IMF is calling for more stimulus projects from the word's governments, including major spending for public works projects.

Even with many countries taking bold steps to turn things around, the global economy will shrink 1.3 percent this year, the IMF predicted in its dour forecast.

”We can be fairly confident that in 2010 or even 2011, economies will not be back to normal,” said IMF chief economist Olivier Blanchard. “Which means that governments should today basically think at least about contingent plans for infrastructure spending. ... Next year will be too late.”

In the U.S., President Barack Obama's $787 billion stimulus includes money for fixing roads and bridges and other infrastructure projects. IMF officials said there's room for Germany and other countries to do more in terms of fiscal stimulus, and the United States, too, has prodded the Europeans to ramp up efforts.

Without the help of countries' stimulative fiscal policies - such as tax reductions or increased government spending - the blow to the global economy would be even worse, Blanchard said: “We would be in the middle of something very close to a depression.”

Even the projected 1.3 percent drop could leave at least 10 million more people around the world jobless, some private analysts said.  Allen Sinai, chief global economist at Decision Economics, thinks the global decline will be worse - closer to 2 percent, which would mean 15 million to 25 million more people out of work.

”The global downturn guarantees that countries all over the world will be hit with extraordinarily high unemployment rates,” Sinai said. “And, with the tremendous number of unemployed people comes the possibility of political unrest.”

Also rising crime as millions more are forced into poverty and out of their homes, he and others said.

”By any measure,” the downturn is the deepest since the Great Depression of the 1930s, the IMF said in its latest World Economic Outlook. “All corners of the globe are being affected.”

All told, lost output worldwide could reach as high as $4 trillion this year alone, U.S. Treasury Secretary Timothy Geithner estimated in a speech Wednesday.

”The world economy is going through the most severe crisis in generations,” he said. “We each face somewhat different challenges and thus are not all in the same boat. But we are all in the same storm.”

Geithner did not mention any further commitments the U.S. might seek on Friday at meetings with other economic powers or during weekend meetings of the IMF and the World Bank in Washington. Analysts say those discussions are unlikely to produce any further major proposals.  Obama this week sent Congress a request for a tenfold increase in U.S. commitments to an emergency IMF loan fund, to $100 billion. That would represent the U.S. share of a $500 billion goal for the program. The European Union, China and Japan also have made pledges, but more donors will be needed to reach the goal.

The IMF's outlook for the U.S. is even bleaker than for the world as a whole: It predicts the American economy will shrink 2.8 percent this year, the biggest decline since 1946.

That's generally in line with the predictions of many U.S. analysts, who expect a figure in the range of 2.5 percent to 3 percent.  Besides trillions in lost business, a sinking world economy means far fewer trade opportunities for individual countries.

”This looks like the most synchronized recession in world history: We are all going down together,” said David Wyss, chief economist of Standard and Poor's.

”In a lot of previous recessions, smaller countries can use exports to pull out of the recession. But you can't do that this time because nobody is buying,” he said.

To get out of this global downturn, the United States - the world's largest economy - will need to lead the way, many analysts said.  Global powerhouse China is a big lever for restoring growth in Asia. But Sinai said, “For the world economy to recover, you need the U.S. to recover.”

The notion of “decoupling” - that the world economy was becoming less dependent on the United States for growth or better insulated from U.S. economic troubles - has been dealt a setback by the current recession.
The financial crisis erupted in the United States in August 2007 and spread around the globe. It entered a tumultuous new phase last fall, shaking confidence in global financial institutions and markets. Total worldwide losses from the financial crisis from 2007 to 2010 could reach nearly $4.1 trillion, the IMF estimated in a separate report Tuesday.

Among the major industrialized nations studied for Wednesday's report, Japan is expected to suffer the sharpest contraction this year: 6.2 percent. Russia's economy would shrink 6 percent, Germany 5.6 percent and Britain 4.1 percent. Mexico's economic activity would contract 3.7 percent and Canada's 2.5 percent.

Still growing, China is expected to see its expansion slow to 6.5 percent this year. India's growth is likely to slow to 4.5 percent.

The jobless rate in the United States is expected to average 8.9 percent this year and climb to 10.1 percent next year, the IMF said.

Next year, the IMF predicts the world economy will grow again - but just 1.9 percent. It said this would be consistent with its findings that economic recoveries after financial crises “are significantly slower” than ordinary recoveries typically are.

In 2010, the IMF predicts the U.S. economy will be flat, neither shrinking nor growing. Germany's and Britain's economies, meanwhile, will shrink by 1 percent and 0.4 percent respectively.

Other countries, such as Japan, Russia, Canada and Mexico, are projected to grow again. And China and India should pick up speed.

Credit Suisse Starts Shutting U.S. Offshore Accounts: Report
NYTIMES
By REUTERS
Filed at 8:29 a.m. ET
April 12, 2009

ZURICH (Reuters) - Swiss bank Credit Suisse <CSGN.VX> has started closing down the offshore accounts of U.S. clients who have not declared the money to the U.S. authorities, a newspaper reported on Sunday.

The Sonntagszeitung newspaper said the bank had about 2,500-5,000 U.S. clients with undeclared offshore accounts worth about 3 billion francs, without citing its sources.

The paper said Credit Suisse had started parting company with its U.S. offshore clients, giving them the option of moving their accounts to its CS Private Advisors subsidiary, which would report the accounts to the U.S. tax authorities, or writing them a check.

It quoted an unnamed Credit Suisse manager as saying the bank was only applying the new "zero tolerance" policy in individual cases for now but was considering a more general withdrawal from the U.S. offshore business.

Credit Suisse was not immediately available for comment on the article. Sonntagszeitung quoted a spokesman as declining to confirm the report, but noting the tougher approach of foreign authorities on offshore wealth management in recent times.

"CS sticks to all valid rules and regulations in various countries," a spokesman told the newspaper.

The move comes after rival UBS <UBSN.VX><UBS.N> said last year it would stop offering offshore services to U.S. citizens after U.S. authorities alleged that the Swiss bank has helped rich Americans hide money away from the taxman in Swiss accounts.

A newspaper reported earlier this year that Credit Suisse was writing to its U.S. clients holding Swiss accounts asking them to sign a form that would reveal them to U.S. tax authorities.

Options for Fannie, Freddie May Include ‘Wind-Down’ (Update2)
By Dawn Kopecki

May 11 (Bloomberg) -- Options for overhauling Fannie Mae and Freddie Mac, the government-run mortgage-finance companies, may eventually include liquidating their assets, according to an analysis released today by the Obama administration.

The Office of Management and Budget also projected today in its budget analysis for fiscal 2010 that the companies, which have received or requested $78.8 billion in aid since their federal takeover in September, will need at least $92.2 billion more. The Treasury Department doubled an emergency capital commitment for each company in February to $200 billion. The 2010 fiscal year ends Sept. 30, 2010.

Alternatives range from “a gradual wind-down of their operations and liquidation of their assets,” to returning the two companies to their previous status as government-sponsored enterprises that seek to maximize shareholder returns while pursuing public-policy goals, according to OMB’s analysis of President Barack Obama’s proposed federal budget.

“The last entities that are going to be set free will be Fannie and Freddie because they’re so key to the housing market,” said Bradley Hintz, an analyst at Sanford C. Bernstein & Co. in New York, in a phone interview today.

The companies are coming under increasing strain as the Obama administration leans on them to help refinance and modify loans at risk of foreclosure amid the worst housing market since the Great Depression, Fannie Mae and Freddie Mac have said in securities filings. The government-sponsored enterprises pose a risk to the economy, though the federal takeover and Treasury backing have “substantially reduced” that threat, OMB said.

‘Vital Parts’ of Economy

“The GSEs borrow huge amounts from various types of investors, and the health of the housing market critically affects the overall economic activity,” the budget office said. “Thus, financial trouble at one or more of the GSEs could unsettle not only the mortgage finance markets but also other vital parts of the financial system and economy.”

Fannie Mae and Freddie Mac may be nationalized, dissolved and broken up into several smaller companies, revamped as public utilities with the full faith and credit of the U.S. government or converted into insurers for covered bonds backed by U.S. mortgages, OMB said.

Washington-based Fannie Mae has booked seven consecutive quarters of losses totaling $86.8 billion as of March 31. McLean, Virginia-based Freddie Mac, which is expected to report its first-quarter results this week, has reported six straight quarters of losses totaling $53.8 billion as of Dec. 31.

Like many other U.S. financial institutions, Fannie Mae and Freddie Mac face “market risk, credit risk and operational risk,” according to the budget office.

Obama’s Housing Program

The companies play a leading role in Obama’s Making Home Affordable program to curb mortgage defaults. The government initiatives, announced in February, have yet to curtail the surge in foreclosures and delinquencies. A record 803,489 U.S. properties received a default or auction notice or were seized in the first quarter, 24 percent more than a year earlier, as employers cut jobs and temporary programs to assist homeowners came to an end, RealtyTrac Inc. said April 16.

Fannie Mae and smaller competitor Freddie Mac, which own or guarantee almost half of the U.S. residential mortgage debt, were seized by regulators in September because the two were at risk of failing and regulators feared that may threaten the health of the broader U.S. economy.

Treasury’s capital commitment for the companies expires on Dec. 31. While the companies won’t have to repay their federal aid by then, they won’t be able to borrow more unless Congress extends the date.
Makes AIG look like a piker!  Let's see, who do you think...may be the names are all Democrats this time?  From Chicago?
Fannie and Freddie Detail Retention Bonuses
NYTIMES
Cyrus Sanati and Peter Edmonston
April 3, 2009, 11:11 am; Updated at 12:25 p.m.

Just a few weeks after retention bonuses at American International Group became a national scandal, Fannie Mae and Freddie Mac, the two mortgage-financing giants that the government rescued last fall, have outlined plans to pay an additional $159 million in bonuses to retain employees in 2009 and 2010, on top of the nearly $51 million already paid out last year.

James B. Lockhart of the Office of Federal Housing Enterprise Oversight, which now oversees the two companies, disclosed the bonus programs in a letter to Sen. Charles Grassley, the ranking member of the Senate Finance Committee.

In the letter, Mr. Lockhart defended the payouts as a way to “keep key staff without rewarding poor performance.” (Download the full letter below.)

Lawmakers have harshly criticized some bailed-out companies that later offered bonuses to workers, and the House passed legislation this week that would seek to limit compensation and bonuses at such firms.

Last month, Mr. Grassley called on Fannie and Freddie to justify their bonus retention programs, and demanded they release the names and titles of any employee who received, or was set to receive, a retention bonus of more than $100,000.

Mr. Lockhart did not provide the names in his letter, citing “personal privacy and safety reasons.”

A spokesman for Fannie Mae declined to comment on the letter. Representatives for Freddie Mac weren’t immediately available for comment.

Fannie and Freddie lost a total of nearly $110 billion in 2008. Last month, the Treasury Department agreed to provide the two companies with up to $200 billion in additional capital, on top of the $200 billion in government funds already pledged to them.

Speaking about Fannie and Freddie on Friday, Sen. Grassley said in a statement provided to DealBook that “it’s hard to see any common sense in management decisions that award hundreds of millions in bonuses when their organizations lost more than $100 billion in a year.”

“It’s an insult that the bonuses were made with an infusion of cash from taxpayers,” he said. “Poor performance and at taxpayer expense do a lot of damage to public confidence and support for the economic recovery effort.”

Mr. Lockhart, in his letter, defended the bonuses as necessary for protecting the taxpayers’ investment.

“Keeping the enterprises operating at full speed was best for the housing markets and best for the economy, which clearly also made it best for the taxpayer,” he said. “And that would only be possible if we retained the Fannie Mae and Freddie Mac teams.”

Part of the retention packages were already paid out in 2008, the letter said. They consisted of $17.3 million to Freddie employees, with 19 employees receiving more than $100,000, and $33.5 million to Fannie employees, with 20 receiving more than $100,000.

The total bonuses at both companies is expected to be about $146 million in 2009, and $13 million in 2010, for a total of about $210 million.

The retention plans cover 4,057 employees at Freddie Mac and 3,545 employees at Fannie Mae, the letter said.

The government seized Fannie and Freddie last fall, to make sure that neither company would collapse because of the plunging values of mortgages that they owned or guaranteed.
Editorial: The Economic Summit
NYTIMES
April 3, 2009

In normal times we don’t expect a lot from summit meetings. But with the global economy imploding, leaders at Thursday’s meeting of the world’s top 20 economic powers had an urgent responsibility to come up with concrete policies to fix the global financial system and restore growth. They fell short.

The meeting certainly produced more than the usual photo ops and spin — and its participants did not go away yelling at one another as they have in the past. The leaders pledged to fight protectionism and to help badly battered developing countries and — putting their money where their mouths are — committed $1 trillion for loans and trade guarantees. The group also agreed to crack down on tax havens and, on a country-by-country basis, impose stricter financial regulations on hedge funds and rating agencies — necessary though insufficient steps to avoid a repeat of the current disaster.

Where they fell dangerously short was their refusal to commit to spend the hundreds of billions of dollars in additional fiscal stimulus that the world economy needs to pull out of its frighteningly steep dive. With consumer spending and business investment collapsing around the world, rich countries are the only ones that have the resources to do what is needed.

European leaders — most notably Germany’s chancellor, Angela Merkel — made clear going into the meeting that they were not going to give in on that issue. German politicians are historically afraid of touching off inflation with too much deficit spending. But inflation is not the danger Europe faces today, and German history should make them equally wary of the disastrous consequences of a new depression.

President Obama has rightly warned the Europeans that they cannot count on American consumer spending alone to drive a global recovery. But he apparently decided that a battle would be too destructive.

After years of watching former President George W. Bush hector and alienate this country’s closest friends, we were relieved to see Mr. Obama in full diplomatic mode. We fear, however, that this is not the time or the issue on which to hold back. If world growth continues to decline — and all signs suggest that it will — the president will have to take on this fight soon.

Stimulus spending wasn’t the only area of fundamental disagreements. The Europeans came to the meeting stressing the need for comprehensive cross-border regulation of financial markets, participants and products. Mr. Obama and his team seem more committed to domestic regulation than their predecessors — but fiercely resistant to the idea of a global regulator.

The group compromised with its call for more transparency and better early-warning systems for systemic risks. We suspect that it will take considerably more than that to reassure investors that markets are safe.

The world’s wealthy nations must come to a common understanding of the causes of this crisis and a common vision of the future role of financial markets. From there, they need to write new rules and regulatory regimes that address the real dangers. In the end, necessary regulation will not be transnational enough for European tastes and too binding for American tastes. When both sides grumble about the result, rather than praise it, you will know that progress is being made.

The British prime minister, Gordon Brown, declared at the meeting’s end that “this is the day the world came together to fight back against the global recession.” As host, he had to. To pull out of the current crisis, it will take a lot more than was done in London.

Geithner gaffe roils markets
Washington Times
Patrice Hill
Thursday, March 26, 2009

An unguarded comment by Treasury Secretary Timothy F. Geithner on Wednesday set off a sudden drop in the dollar and contributed to a chain of market-rocking events that included a setback in the stock market and a sharp uptick in interest rates.

Mr. Geithner appeared to lend his support to a proposal by China's central bank governor to replace the dollar as the world's reserve currency with a basket of currencies that would be managed by the International Monetary Fund. In an appearance before the Council on Foreign Relations in New York on Wednesday morning, Mr. Geithner raised eyebrows by saying that "we're actually quite open to that," only a day after both he and President Obama had vehemently rejected the idea and affirmed their strong support for the U.S. currency.

The dollar plummeted by as much as 1.3 percent against the euro within 10 minutes of his remarks. But then the greenback quickly recouped most of its losses after Mr. Geithner retracted his statement and said, "I think the dollar remains the world's dominant reserve currency." Later in the day, as concern weighed down the dollar again, White House spokesman Robert Gibbs chimed in to the now universal chorus from top officials that the administration expects the dollar to be the world reserve currency for "a long, long time."

But the damage may already have been done. By afternoon, a poor showing of buyers at a Treasury bond auction sent interest rates sharply higher, raising fears about the U.S. ability to sell a massive load of $2.5 trillion of debt this year. Buyers may have been spooked not only by the Treasury secretary's remarks but also by the unveiling of budget plans on Capitol Hill that would double the amount of debt the Treasury has to sell in the next five years to nearly $12 trillion.

"They are opening the spigots and flooding the market, and there is no end in sight to the deluge of supply" of Treasury bonds, said Louise Purtle, analyst at CreditSights.

"The poor communication from the Treasury Department has complicated the market for Treasuries," said Jeffrey Caughron, chief market analyst at the Baker Group investment firm.

The mounting worries about the debt also snuffed out a rally in the stock market that had been fueled by reports showing the U.S. economy may be stabilizing after a free fall this winter. The Dow Jones Industrial Average plummeted from a gain of nearly 200 points to a 108-point loss within minutes after Treasury announced the auction results. But by the end of a day of big swings in trading, muted optimism about the outlook for the economy had returned and enabled the Dow to eke out a 90-point gain.

The day of tossing and turning in global markets illustrated the risks for the Treasury secretary, who like his predecessors, has to be careful about what he says about the dollar as global markets follow his every word. It also shows the dangers for the United States as it goes deeply into debt to try to stimulate the economy out of a severe recession and rescue its ailing banking sector.

Mr. Geithner has tangled with markets before in his short two months in office, sparking a plunge in global stocks last month when he unveiled a bank cleanup plan that was vague and unconvincing, while spawning a nearly 500-point surge in the Dow on Monday when he offered a more detailed and credible plan.

James McCormick, Citigroup´s global head of foreign exchange, said he was surprised that Mr. Geithner expressed openness to the proposal by People´s Bank of China Governor Zhou Xiaochuan after acknowledging he had not read it. Mr. Zhou proposed creation of a "super-sovereign reserve currency" that is disconnected from any nation by increasing the use of special drawing rights at the IMF, a kind of currency the fund offers to its members.

"If I´m running the Treasury, I would want to have been briefed on that" before commenting on it, Mr. McCormick said. Markets have been particularly sensitive to any discussion of the Chinese proposal in the run-up to the Group of 20 meeting in London next week. IMF Managing Director Dominique Strauss-Kahn on Wednesday added his voice to the debate by calling the Chinese proposal "legitimate," although he said he doesn't expect the dollar to be replaced any time soon.

Investors were stunned by Mr. Geithner's remarks in light of a strong defense of the dollar given by Mr. Geithner and Federal Reserve Chairman Ben S. Bernanke on Capitol Hill on Tuesday. President Obama, in a Tuesday night news conference, also rejected calls for a new global currency in proclaiming that "the dollar is extraordinarily strong" because investors are confident in the ability of the U.S. to lead the world out of recession.

The value of the dollar is as important to global investors as it is to U.S. citizens, particularly those who buy Treasury bonds. Any fall in the dollar immediately erases some of the value of their holdings - a concern raised earlier this month by China, which is the biggest investor in Treasury bonds.

China and other investors recently have taken to worrying about whether the United States may debase its currency in its drive to address economic problems. Borrowing to counter the recession and finance the economic stimulus and bank bailouts is expected to peak at $2.5 trillion this year and start to decline under budget outlines offered by Mr. Obama and Congress. But investors worry about the lingering effects of the legacy of debt and the inflationary impact of the Federal Reserve's program to help finance that debt with $300 billion of Treasury bond purchases.

Apprehension about these matters is apparently what led to the Treasury's difficulty in selling $24 billion of five-year notes Wednesday afternoon.

To attract buyers, the Treasury had to pay interest rates that were significantly higher than its previous auction, touching off fears about the nation's ability to finance ever bigger loads of debt in the future.

It didn't help that Britain on Tuesday experienced its first failed bond auction in nearly seven years - a bad portent since Britain, like the United States, has gone deeply into debt to finance large economic stimulus and bank bailout programs. The poor showing came despite the Fed's move to help Treasury by purchasing $7.5 billion of the notes just before the auction.

But CreditSights' Ms. Purtle said the most serious problem the Treasury faces is the lack of buyers worldwide for its growing mountain of debt. In particular, countries like China and Japan that invested their trillions of dollars in export earnings in the Treasury market have been hit by plummeting exports, which means they have less money to invest in Treasury bonds, she said.

Also, nations that generated huge surpluses from exports of oil and other commodities, including Brazil, Russia and Saudi Arabia, were major buyers of U.S. debt during the commodity boom last year. But they now are earning much less on those commodities and have less money to invest, she said.

"Trade surpluses are being turned into trade deficits on the back of a global recession, and the funds simply aren't available to continue the purchases," she said.
Perhaps among the main global actors in the meltdown?

Switzerland Eases Its Stance on Bank Secrecy Rules
NYTIMES
By MATTHEW SALTMARSH
March 14, 2009

PARIS — The Swiss government bowed to pressure on Friday and agreed to exchange information on suspected cases of tax evasion, but it maintained that its principle of banking secrecy was intact...more.

9 March 2009

Wilting flower exports hit Zambia
By Steve Schifferes
Economics reporter, BBC News, Lusaka, Zambia

Watze and Angelique Elsinga grow roses for export
Watze and Angelique Elsinga grow roses for export

On the outskirts of Lusaka, Angelique and Watze Elsinga have been growing roses for export for the last 14 years.

But now the speed of the global downturn is forcing them to give up the business, threatening the livelihoods of hundreds of workers and their dependents.

The sudden collapse of the prices paid for roses in Europe, due to diminishing demand and oversupply, has made their business uneconomic.

And they are being forced to sell their farm as they can no longer keep up their loan payments to Barclays Bank, which is demanding immediate repayment.

Happy Valentine's Day
ENVIRO-FLOR ROSE EXPORTERS
Roses for export from Zambia
40m roses exported per year
7 hectares of greenhouses
189 workers employed
Total Zambia rose exports: 4,200 tonnes worth $40m in 2008
Total employment: 12,000

"It's a sad day," says Angelique Elsinga as she walks round her farm with its eight giant greenhouses - which produced 40 million roses for export last year.

"It's cheaper for us to destroy the roses now than send them to Europe."

They are shutting off the irrigation pipes in seven of those greenhouses, growing only for the local market and switching some of their production to vegetables.

The demand for roses - and the price - normally peaks at Christmas and Valentine's Day.

But this year was very different.

"We had to shut down production during the two weeks before Christmas, something we had never done before," said Watze Elsinga.

"And just before Valentine's Day, our suppliers told us not to send any more roses - their warehouses were full."

"We have never seen such low prices."

Sudden collapse
Abandoned greenhouses mark the collapse of the flower export market
Abandoned greenhouses mark the collapse of the flower export market

Yet just six months before, their business had seemed secure when they signed a long-term supply deal with a leading Dutch wholesaler, Blooms.

But in October, the company suddenly told them it was terminating the contract because of falling demand.

It was the first sign of the sharp slowdown that has gathered pace ever since.

"We have been surprised that this crisis has happened so fast," said Mr Elsinga.

"As growers, we cannot control either the prices we are paid, the exchange rate, or many of our external costs, even though we have managed to keep our own costs under control."

Social gains
CRUNCH TIME FOR AFRICA
School
World leaders will meet next month in London to discuss measures to tackle the downturn. See our in-depth guide to the G20 summit.
Only one African country will be represented at summit.
This week BBC World News and World Service Radio will be examining how Africa is coping with the crisis, with our blog and reports from the continent

Africa faces chill winds

For the Elsingas, who came to Zambia from the Netherlands 14 years ago, the farm was a social enterprise as well as a business.

They have constructed housing for their workers, and built a community centre and a school for 600 children on the premises.

And they have provided year-round employment for nearly 200 workers.

Now they will have to lay off all the workers at the rose farm, with only a few finding employment in the vegetable business which they hope to continue at another location.

Difficult conditions

According to Luke Mbewe, chief executive of the Zambia Export Growers Association (Zega), flower exporters in Zambia face more difficult conditions than their rivals in other African countries such as Kenya, Tanzania, and Uganda.

Flower exporters are dependent on a secure supply chain, with the fresh flowers kept refrigerated and disease-free as they are moved quickly from the farm to markets in Europe within 48 hours.

But in Zambia, transport costs are higher, because of the higher cost of petrol and jet fuel that has to be imported into this land-locked country.

And the lack of a substantial scheduled air freight service has meant that they have had to charter flights to take their flowers to market.

They have also faced problems with electricity supply, with Zambia's government-owned electricity company Zesco introducing rolling power cuts throughout the country over the past year.

The sharp drop in the value of the Zambian currency has raised the cost of fertilisers, fuel and other farm inputs.

Mr Mbewe says he knows of a number of other farms that have gone out of production, and he now fears for the future of the industry.

Economic hopes
Rupiah Banda
President Rupiah Banda wants to encourage economic diversification

Zambia remains one of the world's poorest countries, with more than 60% of the population living on less than $2 a day.

Now its prospects for economic growth have been dented by the decline in the world price of copper, which makes up 90% of the country's exports and provides thousands of jobs.

Zambia's President, Rupiah Banda, says that the way for Zambia to cope with the global recession is by diversification, moving away from dependence on copper.

But the problems of the flower industry show how difficult this could be.

To become competitive, Zambia's flower growers will need more, not less aid to improve infrastructure - either from the government or outside sources.

But it is still unclear whether any global measures to cope with the downturn, to be discussed at the G20 summit of world leaders in London in April, will reach the flower growers of Zambia in time.




World Bank Says Global Economy Will Shrink in ’09
NYTIMES
By EDMUND L. ANDREWS
March 9, 2009

WASHINGTON — The economic crisis that started with junk mortgages in the United States is causing havoc for poorer countries around the world, not only stifling their growth but choking off their access to credit as well, the World Bank said on Sunday.  In a bleaker assessment than those of most private forecasters, the World Bank also predicted that the global economy would shrink in 2009 for the first time since World War II. The bank did not provide a specific estimate, but bank officials said its economists would be publishing one in the next several weeks.

Until now, even extremely pessimistic forecasters have predicted that the global economy would eke out a tiny expansion but had warned that even a growth rate of 5 percent in China would be a disastrous slowdown, given the enormous pressure there to create jobs for its rural population. The World Bank also warned that global trade would shrink for the first time since 1982, and that the decline would be the biggest since the 1930s.

The report, released on Sunday, was prepared for a meeting next week of finance ministers from the 20 industrialized and large developing countries. It warned that the financial disruptions are all but certain to overwhelm the ability of institutions like itself and the International Monetary Fund to provide a buffer.  The bank, which provides low-cost lending for economic development projects in poorer countries, pleaded for wealthy governments to create a “vulnerability fund” and set aside a fraction of what they spend on stimulating their own economies for assisting other countries.

“This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis,” said Robert B. Zoellick, the World Bank’s president. “We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest.”

The bank said that developing countries, many of which had been growing rapidly in recent years, are being devastated by plunging exports, falling commodity prices, declining foreign investment and vanishing credit.

The impact of the global slowdown varies widely among countries, and the drop in prices for oil and other commodities has created both winners and losers, But as a whole, the bank said, the so-called emerging-market countries face a combined financing gap of at least $270 billion and as much as $700 billion over the next year or two.  The report detailed the variety of ways in which the global slowdown has hammered poorer countries in Latin America, Central Europe, Asia and Africa.

Central European countries like Poland, Hungary and the Czech Republic are hurting from diminished exports to western Europe as well as a severe credit crunch among major European banks, which have suffered huge losses on American mortgages and mortgage-backed securities.  East Asian countries are reeling from plunging global trade. Demand for cheap manufactured goods has plunged in the United States. That slump has hit many Asian countries both directly and indirectly, through plunging demand by China for raw materials and component products.

Lower commodity prices have caused great problems in many African and Latin American countries. The plunge in oil prices — 69 percent from July to December of 2008 — has boosted growth in poorer oil-importing countries but caused immense difficulty in poorer oil-exporting countries.  Brazil, an exporter of oil as well as many other commodities and manufactured goods, reported its first trade deficit in eight years as exports dropped 28 percent in 2008.

Under the “vulnerability fund” proposal, rich countries would set aside 0.7 percent of the money they spend to stimulate their own economies to help stabilize poorer countries.  Mr. Zoellick said the fund could then make the money available to countries through the World Bank, the United Nations or other international financial institutions like the International Monetary Fund.  He said the World Bank has the potential to triple its own lending in 2009 to $35 billion, even though that would still be a small fraction of even the most optimistic estimate on the shortfall facing poor countries.

Guess why everyone is having problems (our opinion)?
Germany Rejects Bailout Plan for Eastern Europe
By THE ASSOCIATED PRESS
Filed at 10:03 a.m. ET
March 1, 2009

BRUSSELS (AP) -- Germany rejected appeals Sunday for a single multibillion euro (dollar) bailout of eastern Europe, even after Hungary begged EU leaders not to let a new ''Iron Curtain'' divide the continent into rich and poor.

The swift, strong comments by German Chancellor Angela Merkel dampened hopes that leaders at Sunday's European Union summit could forge a unified stance to tackle the worsening economic crisis.  As Europe's largest economy, Germany has been under rising pressure to take the lead in rescuing eastern EU members, but Merkel insisted that a one-size-fits-all bailout was unwise.

''Saying that the situation is the same for all central and eastern European states, I don't see that,'' said Merkel, adding ''you cannot compare'' the dire situation in Hungary with that of other countries.

Hungarian Prime Minister Ferenc Gyurcsany, saying the credit crunch was hitting the eastern members hardest, had called for an EU fund of up to euro190 billion ($241 billion) to help restore trust and solvency in those nations.

''We should not allow that a new Iron Curtain should be set up and divide Europe,'' Gyurcsany told reporters. ''In the beginning of the nineties we reunified Europe, now the challenge is whether we will be able to reunify Europe financially.''

EU nations are all grappling with a worsening recession, compounded by a severe credit crunch that has left many EU countries looking ever more inward to protect jobs and companies from international competition. Those policies are now undermining the open market cornerstone on which the EU is founded.  Ahead of the summit, the leaders of nine countries -- Poland, Hungary, Slovakia, the Czech Republic, Bulgaria, Romania and the three Baltic states -- forged a common stand to pressure richer members in the 27-nation bloc to back up vague pledges of support with action.

Polish Prime Minister Donald Tusk said the nine leaders called for ''a spirit against protectionism and egoism.''

Hungary, Poland and the Baltic countries of Estonia, Latvia and Lithuania also want the EU to fast-track their bids to join the euro-currency, which could offer them a stable financial anchor. Latvia's government has already collapsed amid the economic fallout.  Other EU members, like Sweden, want to coordinate a Europe-wide bailout plan for car producers.

Prime Minister Mirek Topolanek of the Czech Republic, which holds the EU presidency, has called on his counterparts to act together.  A draft summit conclusion centered a commitment to ''make the maximum possible use'' of the EU's cherished free market ''as the engine for recovery.''

''(The EU) not want any new dividing lines. We do not want a Europe divided along a North-South or an East-West line, pursuing a beggar-thy-neighbour policy is unacceptable,'' Topolanek said.

The crisis has sorely tested solidarity among EU nations.  The Czech Republic has accused France of trying to protect its local car plants at the expense of foreign subsidiaries, while Germany rejected earlier calls to help bail out economies in Ireland, Greece and Portugal.  Sunday's talks are meant to restore a unified purpose and help prepare for the April 2 Group of 20 nations summit in London.  Once-booming east European economies have been hit hard by the economic downturn. As cheap credit dried up their export markets shrank, causing eastern currencies to sink and triggering more financial turmoil.

Gyurcsany said eastern EU countries could need up to euro300 billion ($380 billion), or 30 percent of the region's gross domestic production this year.

He warned that failure to offer bigger bailouts ''could lead to massive contractions'' in their economies and lead to ''large-scale defaults'' that would affect Europe as a whole. It could also trigger political unrest and immigration pressures as jobless rates soar, he said.

EU governments have already spent euro300 billion ($380 billion) in bank recapitalizations and put up euro2.5 trillion ($3.18 trillion) to guarantee loans of many banks in the EU and neighboring states.

On Friday, the European Bank of Reconstruction and Development, the European Investment Bank and the World Bank said they will jointly provide euro24.5 billion ($31.1 billion) in emergency aid to shore up the battered finances of eastern European nations.

http://www.aboutweston.com/landusechange.html

Simon Property Results Top Expectations
NYTIMES
By REUTERS
Filed at 9:48 a.m. ET
January 30, 2009
* Fourth-quarter FFO $1.86/share
* Board votes to pay dividend in cash and stock
* Sees full-year FFO $6.40-$6.60/share
* Stock down 1.2 percent
(Adds occupancy and sales details, CEO quote, investor quote, dividend and stock information)

NEW YORK (Reuters) - Simon Property Group Inc (NYSE:SPG PRJ) (NYSE:SPG PRF) (NYSE:SPG PRG) (NYSE:SPG PRI) (NYSE:SPG) , the largest U.S. mall owner and operator, reported a 6.5 percent increase in quarterly funds from operations on Friday, citing cost controls and curtailed spending on development.

Also, Simon's board voted to pay a quarterly dividend of 90 cents per share in 10 percent cash and 90 percent stock. The company, which had previously paid all-cash dividends, said the move would allow it to retain $925 million in cash in 2009.

"The retail environment has been and will continue to be challenging in the upcoming months, however, we are experienced in working through difficult economic cycles," Chief Executive David Simon said in a statement. "This decision is a reflection of our conservative stance on capital allocation and liability management and is not in response to the current retail operating environment."

But the move could temper some investors' interest in shares of Simon as well as of other real estate investment trust stocks.

"From a cash management standpoint I think it's good for companies to keep an eye on every piece of cash and be shepherding capital as well as they can," said Joseph Betlej, portfolio manager at Advantus Capital Management.

"But from the prospective of the REIT industry, there's a lot of investors that care about that dividend," he added, "and the idea that we're going to be paying these things now in stock lessens the attractiveness of REITs to the investing public, both retail and institutional investors."

At the end of the quarter, Simon had about $1.1 billion of cash on hand, including its share of joint ventures, and more than $2.4 billion of available capacity on its revolving credit facility.

For the fourth quarter, Simon's FFO, a performance measure for real estate investment trusts, rose to $540.5 million, or $1.86 per share, from $507.7 million, or $1.76 per share, a year earlier.

The latest results beat the average of analysts' forecasts of $1.85, according to Reuters Estimates. The results include an impairment charge of $21.2 million, or 7 cents per share for the write-off of certain predevelopment projects that have been abandoned as well as for a property in operation.

FFO removes from net earnings the profit-reducing effect of depreciation, a noncash accounting item. Under Generally Accepted Accounting Principles, Simon posted net income of $145.2 million, or 64 cents per share.

For 2009, the Indianapolis-based company said it expected FFO of $6.40 to $6.60 per share. Analysts have forecast $6.57, according to Reuters Estimates.

Simon has a stake in 386 malls and high-end outlet centers and shopping centers in the United States, Europe and Asia.

The consumer-led U.S. recession has rocked retailers, who have closed more than 6,000 stores. The dismal holiday shopping season failed to give a last-ditch boost, with sales in that period falling 2.2. percent -- the worst result since the International Council of Shopping Centers trade group began compiling such data in 1970.

Vacancies at U.S. regional malls in the fourth quarter rose to a decade high of 7.1 percent, according real estate research firm Reis Inc. (NASDAQ:REIS)

For Simon, occupancy at its U.S. malls fell 1.1 percentage points to 92.4 percent. Average rent at its mall stores rose 6.5 percent to $39.49 per square foot. For stores open more than a year, sales fell 4.3 percent to $470 per square foot.

At Simon's Chelsea Premier outlet centers, occupancy fell 0.8 percentage points to 98.9 percent and rent rose 7.7 percent to $27.65 per square foot. For outlet stores open more than a year, sales rose 1.8 percent to $513 per square foot.

Simon shares fell 1.2 percent to $43.93 in early New York Stock Exchange trade.

Madoff on this page;  also here and here.


New York real estate crisis?  GASB link - and even a Fairfield County connection!


Madoff: Had 'too much credibility' with SEC
YAHOO
By MARCY GORDON, AP Business Writer
Sat Oct 31, 2009, 6:26 am ET

WASHINGTON – As Bernard Madoff sat in jail a few months after pleading guilty to fraud, he sounded faintly boastful.

The only problem with officials at the Securities and Exchange Commission's Washington headquarters, he said, is that he had "too much credibility with them and they dismissed" the idea that he was scheming people out of billions of dollars.

A document released Friday details a prison interview conducted June 17 by the SEC inspector general in which Madoff says he had the impression that "it never entered the SEC's mind that it was a Ponzi scheme."

Madoff seemed convinced SEC staff did not suspect him, despite the agency's numerous probes of his business. He said in the interview that the SEC examiners "never asked" for basic records to corroborate his operations.

The disgraced financier also confided that he didn't bring an attorney with him when he testified in an inquiry by the SEC's enforcement division because he believed he didn't need one — and he was trying to fool the government investigators into thinking he had nothing to hide.

The details emerged in a summary of Inspector General David Kotz's interview with Madoff at the Metropolitan Correctional Center in New York, released along with hundreds of other documents related to Kotz's extensive investigation of the SEC's stunning failure to detect Madoff's fraudulent scheme for 16 years.

Kotz also issued a statement Friday saying his probe found no evidence to support Madoff's claim of having a "close relationship" with SEC Chairman Mary Schapiro, who previously headed the Financial Industry Regulatory Authority, the brokerage industry's self-policing organization. In the interview, Madoff called Schapiro a "dear friend," saying she "probably thinks, I wish I never knew this guy."

Like the SEC, FINRA made periodic exams of Madoff's brokerage operation, which functioned separately from his investment business hidden from regulators' view. An internal review by FINRA found a regulatory breakdown on the part of the organization in the Madoff case.

As the SEC inspectors carried out probe after probe of his business, Madoff said in the interview he was "worried every time" that he'd be caught. "It was a nightmare for me," he said. "I wish they caught me six years ago, eight years ago."

Madoff, 71, a former Nasdaq stock market chairman, pleaded guilty in March to charges that his secretive investment-adviser operation was a multibillion-dollar Ponzi scheme that destroyed thousands of people's life savings and wrecked charities. It was possibly the largest-ever Ponzi: the classic scheme in which investors are paid with other investors' money rather than actual profits on their investment.

He is serving a 150-year sentence in federal prison in North Carolina.

The new details from Kotz's inquiry came the same day as word that Madoff's longtime auditor is expected to plead guilty next week in a cooperation deal. Prosecutors told a federal judge in New York that accountant David Friehling was expected to offer a guilty plea at a conference Tuesday to revised charges that accuse him of securities fraud, investment adviser fraud, making false filings to the SEC, and obstructing or impeding administration of the Internal Revenue laws.

The charges carry a prison term of up to 108 years, though significant cooperation with prosecutors can bring leniency.

In his interview with Kotz, Madoff said the SEC never asked him about his tiny accounting firm. It seemed incongruous that, with more than $65 billion in private investments he claimed he oversaw for thousands of people, Madoff used what seemed to be a small-time auditor with a minuscule office in suburban New City, N.Y. Authorities say that Friehling appeared to have rubber-stamped Madoff's records.

Kotz's report of his investigation, made public in early September, painstakingly detailed how the agency's investigations of Madoff were bungled, with disputes among inspection staffers over the findings, lack of communication among SEC offices in various cities and repeated failures to act on credible complaints from outsiders forming a sea of red flags.

An inspection of Madoff's operation in 2003-04, for example, "was put on the back burner" even though the exam team still had unresolved questions, Kotz found.

Madoff's former finance chief, Frank DiPascali, is cooperating with prosecutors after pleading guilty in August to helping Madoff carry out his fraud. Madoff was asked in the interview whether he was concerned about DiPascali's testimony. His answer: "No, he didn't know anything was wrong, either."

Another View: The Government Is Madoff’s Biggest Winner

NYTIMES "Deal Book"
Andrew N. Lerman, a certified public accountant in White Plains, N.Y., argues that the biggest beneficiary of the Bernard L. Madoff scandal was the federal government through the taxes it collected. Mr. Lerman, who is working for several victims of the fraud, has spoken to several United States senators, including Robert Menendez of New Jersey and Charles Schumer of New York.
March 12, 2009, 9:30 am

Over the past two months, Congressional committees have held three hearings to address and investigate Bernard L. Madoff’s fraud. The overwhelming majority of these hearings have been focused on some of the lapses that may have taken place by government regulators and potential changes that were proposed to prevent frauds of this nature.

At the most recent hearing, Harry Markopolos, the now-famous whistleblower, provided his recounting of this historic scam: “There was an abject failure by the regulatory agencies we entrust as our watchdog.” In addition, he concluded “that the S.E.C. securities’ lawyers, if only through their ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed.”

He made several other condemnations as to the government’s failures. What should also be noted and has gone somewhat unnoticed is the fact that Mr. Markopolos had contact with the Securities and Exchange Commission no less than 50 times!

Unfortunately, the hearings have failed to address the depth and gravity of the tax problems created by the Madoff fraud. The single biggest beneficiary of the Madoff Ponzi scheme was and is the United States government. There is no simpler way to state it.

For what possibly could be decades, Madoff investors have been paying taxes to the Internal Revenue Service on the phantom dividends, interest and appreciation gains which were reported to them by Mr. Madoff. Thus, the government has probably received billions of dollars in tax revenue from defrauded investors.

The government cannot ignore the fact that, but for the failure of the S.E.C. to detect this fraud, it would have been deprived of this revenue stream. Federal regulators had the opportunity to stop this scheme and for whatever the reason, did not or were not able to. Should the government be the beneficiary of that?

The question for our lawmakers is simple. Can the government enact policy so that the victims of the fraud are treated fairly and equitably?

There are many technical and complicated tax elements that relate to the Madoff fraud. Suffice to say, there are significant and material questions, among many, that include the proper treatment of previously reported phantom income, the correct deductibility of theft losses, and from which year or years the losses may be deducted.

An administrative compulsion exists for the resolution of the above issues. There are potentially 10,000 or more victims and without a consistent filing procedure, the Treasury will be faced with up to 40,000 — 10,000 for each year — or more claims for 2005 through 2008. These may be subject to 40,000 or more audits, subject to up to 40,000 or more appeals and finally subject to 40,000 or more court cases.

Further, these claims may be filed taking several different technical positions. Does the Internal Revenue Service and our court system have the resources to handle this? Only by providing for an organized and uniform policy will this fiasco be avoided.

Where do we go from here? This can’t be left to a guessing game or chess game for lawyers, accountants and the I.R.S. There is no single right answer. Ambiguity leads to uncertainty and it is in the victims’ and government’s best interests for there to be clarity. The I.R.S. can’t be left to whistle past the graveyard, hoping that no one notices the potentially billions of dollars in taxes that it has collected over the decades on phantom income. The S.E.C.’s impact on this is now well-documented.

Without Congress and the Treasury Department proactively providing a clear and concise means for taxpayers to recoup their tax losses, a very real potential for absolute chaos exists, as the less fortunate, who have nothing left in their lives, would not know what to do or where to turn.

If it is not possible for some victims to be able to receive tax refunds until 2010 or thereafter, there is also the risk that we may have some personal tragedies that we will be reading and hearing about in the media.

We face many critical issues as Americans these days, and all are significant and important. It would be tragic for innocent, hard-working Americans who have been hurt by the Madoff scandal to be further hurt by to the lack of clarity and guidance in our tax system.

This is not about creating a Madoff bailout or recovery fund. It may not be reasonable to think that the government should restore the victims’ investment. Rather, the immediate priority should be to establish procedures and clarity so that victims may deduct the appropriate losses and the taxes that they paid can be refunded without delay.

Hey Ponzi: What’s Your Exit Strategy, Exactly?
NYTIMES
By Catherine Rampell
December 17, 2008, 11:33 am

I have never understood why someone would ever start a Ponzi scheme when, by definition, there’s no way to end it.

The scam works by bringing in new unwitting investors to pay off the old unwitting ones. Since there’s no actual investment involved — just a transfer of money backward, with some portion presumably pocketed by the Ponzi schemer — keeping the scheme going requires an endless supply of new investors. The schemer’s liabilities only get bigger as time goes on, and there’s no way to end the ploy. Other than jail, that is. Or death. Or perhaps faking one’s own death.

Take Bernard Madoff, who, it is said, concocted a $50 billion Ponzi scheme. How could he be financially sophisticated enough to (1) con some of the richest, most financially literate investors around, and (2) build a complex paper trail hiding his investments, but also be (3) financially unsophisticated enough not to realize there’s no way to end such a ploy?

I recently asked a few experts what such Ponzi perpetrators might envision their “exit strategies” to be. They generally fell into four categories:

1) Cut and run. This strategy is usually used by small-time crooks taking aim at lower- to middle-class investors.

These swindlers are the Harold Hills of the world. They walk into Rock Island with the intention of ripping everyone off, changing their identities, hopping back on the train, and then proceeding da capo in River City. (Unless they fall in love with a comely librarian along the way, of course.)

“There’s a certain type of sociopathy to many schemers,” says Mitchell Zuckoff, a journalism professor at Boston University and author of “Ponzi’s Scheme: The True Story of a Financial Legend.”

Few of the big-time Ponzi schemers go this route, though. This is because big Ponzi schemes are almost always based on exploiting the trust of a tightly knit social network. The victims are usually members of ethnic communities, elite country clubs, churches or other social hubs where people are unlikely to do their due diligence because they trust their friend, family member, clubmate or neighbor, and have seen others in the same social circle get rich through the proposed “investment opportunity.” In Mr. Madoff’s case, for example, the victims appear to be primarily rich Jewish investors, whom he met through elite groups like the Palm Beach Country Club. The Foundation for New Era Philanthropy, a notorious Philadelphia-area Ponzi scheme, preyed on Christian religious organizations and charities.

If you’re well-connected enough to create a large-scale Ponzi scheme, you’re probably too well-connected to be able to, or perhaps even want to, cut yourself loose.

Charles Ponzi himself had ample opportunities to disappear back to his Italian homeland unnoticed, Mr. Zuckoff said.

“He was bringing his mother over to Boston, from Rome,” he said. “He set her up here. He was canceling the honeymoon he’d planned to take to Italy with his new wife. He could have taken the money and run, but instead he chose to put down roots. He even invested in local banks.”

2) Turn (or return) the business into something legitimate. Unlike the schemers in #1, these Ponzi architects likely started out with some hope for legitimacy. They wanted seed money to kick off some brilliant investment idea. But then the “brilliant” idea falls through. They are then in the position of having to pay off initial investors. Rather than declare failure, they recruit new investors to pay off the old ones.

They may be stuck in a rut, but they have confidence (or perhaps, self-delusion) that they’re so clever that they’ll come up with another, better idea and strike it rich that way.

This was more or less Charles Ponzi’s strategy.

He had grand plans for arbitrage of international postal reply coupons, a sort of postage stamp that was recognized by post offices around the world. He planned to buy the coupons cheaply in Italy and then resell them in the United States at a several-hundred-percent profit. He couldn’t work out the logistics, though, and ended up collecting more and more “seed money” to finance his brilliant idea. Mr. Zuckoff said Ponzi eventually started looking for another brilliant plan but failed.

“He truly thought he could eventually turn around and go legitimate,” Mr. Zuckoff said.

As in Ponzi’s case, this exit strategy pretty much always fails because the schemers are looking for the big scalp — and there’s never an investment profitable enough to fill that deepening pocket of debt.

3) No exit. These schemers, usually from relatively humble backgrounds, are deeply insecure. They have felt like impostors their whole lives, whether in the country club or on the trading floor. They expect to be exposed for something, sometime, somewhere, which allows them to rationalize fraudulent behavior. They focus on denying and delaying the inevitable for as long as they can — and living well until they get caught.

“They have classic impostor syndrome issues,” said James Walsh, author of “You Can’t Cheat an Honest Man: How Ponzi Schemes and Pyramid Frauds Work … and Why They’re More Common Than Ever.” “It’s a classic case of overconfidence as a mask for underconfidence. It’s Freud 101.”

4) Get elected to Parliament. After scamming millions of Russians in the 1990s, Sergei Mavrodi promised his broke investors that he would get their money back with taxpayer funds if they elected him to the Russian Duma. He was, in fact, elected. And voilà, his election gave him parliamentary immunity from criminal prosecution.

Admittedly, this exit strategy has limited applicability. It didn’t even work for very long for Mr. Mavrodi, whose parliamentary immunity was revoked and who eventually landed in prison.

***

There is more overlap than the simple categories I’ve laid out here would imply; Mr. Ponzi, for example, had other run-ins with the law involving financial dishonesty, so it’s not as if he was exactly hell-bent on legitimacy.

It’s also hard to say, based on the limited information available, where within this array of strategies Mr. Madoff fell (assuming the allegations against him are true). He probably was banking on exit strategy #2, the turn (or return) to legitimacy.

Most Ponzi schemes last a year at most, experts say. (Charles Ponzi’s lasted just nine months.) This indicates that Mr. Madoff, who had been investing clients’ funds since at least 1960, probably started out legitimate or semi-legitimate.

“I don’t know the ins and outs of what happened here,” said Stephen P. Zeldes, a professor of finance and economics at Columbia Business School. “He may have initially had a few bad years, or a few bad quarters, and not wanted to tell that to investors,” Mr. Zeldes said. “Maybe he then pretended that returns were better than they were, thinking he could make it up some future years. Maybe he was thinking he could gamble a bit, get a good return, and no one would ever know.”

In other words, Ponzi schemers don’t necessarily start out as such, and as sophisticated as they are, they may not consciously accept the fact that they’re engaging in a Ponzi scheme. They fool themselves into thinking that the Ponzi scheme is merely a stop-gap measure to hide their losses until they (theoretically) come up with something brilliant.

“I don’t think he originally started thinking he was going to scam his investors,” says Utpal Bhattacharya, a finance professor at the Kelley School of Business at Indiana University who studies financial crime. “His original motive was probably to hide his losses.”

Top investors 'hit by $50bn con'

Some of the world's wealthiest private and corporate investors are reported to be victims of an alleged $50bn fraud by Wall Street broker Bernard Madoff.

Mr Madoff is alleged to have confessed to a huge Ponzi scheme (pyramid fraud).  Reports say the main owner of the New York Mets baseball team, Fred Wilpon, and former American football team owner Norman Braman are among the victims.  Others facing losses reportedly include French bank BNP Paribas, Japan's Nomura Holdings and Zurich's Neue Privat Bank.

Prosecutors say Mr Madoff, ex-head of the Nasdaq stock market, has described the fraud as "one big lie".

A federal judge has appointed a receiver to oversee Mr Madoff firm's assets and customer accounts, while the 70-year-old banker has been released on $10m bail.

Shares drop

Hundreds of people are thought to have invested with Mr Madoff, among them international banks, hedge funds and wealthy private investors - who are all trying to find out the cost of the alleged fraud. 

Spanish newspapers said the leading bank Santander had invested with Mr Madoff.

Bramdean Alternatives, a UK-based asset management company run by Nicola Horlick, saw its share value drop by over 35% after it revealed that nearly 10% of its holding was exposed to the New York broker.

One hedge fund, Fairfield Greenwich Group, said its clients had invested $7.5bn with the firm.

'Major disaster'

Lawyers for worried investors fearful that they had lost their savings, attended court on Friday for a hearing on the disposition of Mr Madoff's remaining assets.  The hearing was cancelled after an agreement was reached to appoint a receiver. 

Brad Friedman, a lawyer for some of the investors, said: "There are people who were very, very well off a few days ago who are now virtually destitute.

"They have nothing left but their apartments or homes - which they are going to have to sell to get money to live on," he told the New York Times.

One investor, Lawrence Velvel, 69, told the Associated Press that he and a friend may have lost millions of dollars between them.

"This is a major disaster for a lot of people. You work all your life, you finally manage to save up something ... lots of people are getting fully or partially wiped out."

'Pyramid scheme'

Mr Madoff founded Bernard L. Madoff Investment Securities in 1960, but also ran a separate hedge fund business.

According to the US Attorney's criminal complaint filed in court, Mr Madoff told at least three employees on Wednesday that the hedge fund business - which served up to 25 clients and had $17.1bn under management - was a fraud and had been insolvent for years, losing at least $50bn.

He said he was "finished", that he had "absolutely nothing" and that "it's all just one big lie", and that it was "basically, a giant Ponzi scheme", the complaint said.  He told them that he planned to surrender to the authorities but not before he used his last $200m-$300m to pay "selected employees, family and friends".

Under a Ponzi scheme, also known as a pyramid scheme, investors are promised very high returns on their investment, while in reality early investors are paid with money collected from later investors.

If found guilty, US prosecutors say he could face up to 20 years in prison and a fine of up to $5m.


Dire Forecast for Global Economy and Trade
NYTIMES
By MARK LANDLER
December 10, 2008

WASHINGTON — The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries forecast to plunge 50 percent.

The projections are among the most dire in a litany of recent gloomy prognostications for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty.  Even more troubling, several economists said, there is no obvious locomotive to propel a recovery.

American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side-effect of the crisis — has knocked the wind out of consumers in oil-exporting countries.

“The financial crisis is likely to result in the most serious recession since the Great Depression,” said Justin Lin, the chief economist of the World Bank, summarizing the projections.

The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year — a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.

“You don’t need negative growth in developing countries to have a situation that feels like recession,” said Hans Timmer, who directs the bank’s international economic analyses and projections. He predicted rising joblessness and shuttered factories in many developing countries.

The volume of world trade, which grew 9.8 percent in 2006 and an estimated 6.2 percent this year, will contract by 2.1 percent in 2009, the report said. That drop would be deeper than the last major contraction in trade: 1.9 percent in 1975.  Net private flows of capital to developing countries are projected to decline to $530 billion in 2009, from $1 trillion in 2007.

The loss of that capital will sharply constrict investment in emerging-market economies, the report said, with annual investment growth slowing to 3.4 percent in 2009 from 13 percent in 2007.

Several countries are also being hurt by the decline in the prices of oil and other commodities — a phenomenon the World Bank characterizes as the end of a five-year commodities boom — though the decline in food and fuel costs has relieved the pressure on people in other countries.

The sudden drop in capital flows poses a particular danger to oil exporters, some of whom have run up heavy debts.

“They’ll have to roll over that debt, one way or the other,” said Simon Johnson, a former chief economist of the International Monetary Fund. “That’s going to put a huge squeeze on these countries.”

Mr. Johnson said the calmer atmosphere in foreign markets belied the gravity of the situation. Spreads on credit default swaps — a common yardstick for whether a country’s government is in danger of default — continue to signal potential trouble for Ireland, Italy, and Greece.

The authorities in Greece are battling violent street protests in Athens and its suburbs, fueled in part by the deteriorating economy.

Reflecting what is by now conventional wisdom, the World Bank recommended that countries undertake large fiscal stimulus programs to cushion the downturn. The bank itself has committed up to $100 billion in aid to developing countries over three years.

If there is a silver lining amid the gloom, it is the relief that lower food and fuel prices mean for poorer countries. While the prices of almost all commodities have fallen sharply since July, they remain higher than in the 1990s, which the bank says should prevent future supply shortages.

As the World Bank’s experts struggled to find a historical analog for the slump, they said it had more in common with the Depression of the 1930s than with the severe recessions of the 1970s or 1980s.

“It is not just a supply shock,” Mr. Lin said. “It is not just a drop in demand; it is a lack of availability of credit.”

Deutsche Bank, in a forecast issued this week, was even more pessimistic. It said global growth would drop to 0.2 percent in 2009, with the United States, Europe, and Japan in recessions of roughly equal severity.

China, which grew 11.9 percent in 2007, will slow to 7 percent this year, the bank projects, and 6.6 percent in 2010, when the rest of the world is slowly recovering. “It’s not going to be the spark that reignites global demand,” said Thomas Mayer, the chief European economist for Deutsche Bank. “We’re almost in an air pocket, where we don’t have a new global driver of growth.”


The paradox of thrift
Analysis
By Steve Schifferes
Economics reporter, BBC News 
24 November 2008

Should we save or should we spend?

The gloomy economic news and the rapid fall in the value of houses and shares has worried many households.  With many having borrowed heavily during the boom, there may a strong temptation to pay off debt or save more for a rainy day - something which until now has not characterised the UK economy.

But if this happens, will the government's plan to boost the economy through greater spending work?

Paradox of thrift

According to the economist John Maynard Keynes, writing in the midst of the Great Depression in the 1930s, thrift may be a virtue for an individual, but not necessarily for the economy as a whole.

He argued that the more people saved, the more they reduced effective demand, thus further slowing the economy.  This was one reason, he pointed out, that a recession can become self-reinforcing.

Keynes also argued that, faced with slowing demand, businesses would not necessarily use the extra savings available in the economy to invest.  He wrote that "up to the point where full employment prevails, the growth of capital [investment] depends not at all on a low propensity to consume but is, on the contrary, held back by it."

And, in the Keynesian theory, as the slump in demand cascaded through the economy, the resulting slowdown would mean that everyone had less income - ultimately reducing the absolute amount of savings, even if people increase the proportion of their income they put aside.

As unemployment grew, investment would fall, whatever the level of savings.

Government help needed

But how can we persuade the reluctant consumer to spend, and the reluctant businessman to invest?

Keynes' answer was that it was only the government that could overcome the collective paradox that what was good for the individual would weaken the economy.  This is now the theory being embraced by the chancellor, who has abandoned his fiscal rules for the time being in order to pour money back into the economy.  And cuts in interest rates by the Bank of England are also designed to encourage businesses to continue to invest.

But the freeze in the credit markets is making these less effective, making the need for a cash injection into the economy stronger - at least according to Mervyn King, the governor of the Bank of England.

Spectre of deflation

There is another reason why the government wants to give a jolt to the economy now.  It is the fear that prices will actually start to fall as the slowdown gets going.

And deflation - falling prices - would certainly reinforce the paradox of thrift.

If consumers expect prices to drop further in the future, then they have an even stronger incentive to delay their purchases until later, when they can benefit from lower prices.  Deflation, especially in asset prices like houses, can be very long-lasting, as recent experience in Japan suggests.

So one reason the government may want to temporarily cut VAT now is to convince people that prices are going to go up later, thus encouraging them to spend.

Rational expectations

Will these measures work?

One reason Keynesian explanations of the economy fell out of favour in the last few decades was the rise of a new economic theory - rational expectations.

This argued that people were aware that any government borrowing would have to be paid back later. As a result they adjust their expectations accordingly, and do not spend as much as predicted.

Since this time, the government will be signalling its intentions to claw back the money it spends in future budgets, perhaps we will all save more to cover our future loss of income.

This theory may well apply to the financial markets, which are making the price of UK debt more expensive on the grounds it is likely to expand dramatically.

But the psychology of individuals may be different.

In the first place, some people may not be able save much whatever their expectations. Money that goes to pensioners surviving on the state pension, for example, may go straight into spending.

And some psychological research suggests that people do not "discount" very effectively in the long term.

So we may be under-estimating the attractiveness of spending even in the midst of a recession.

This, at least, has to be the government's hope as it embarks on its most audacious economic U-turn since Labour came to office in 1997.

U.S. Agrees to Raise Its Stake in Citigroup
NYTIMES
By ERIC DASH
February 28, 2009 In its most daring bid yet to stabilize Citigroup, one of the nation’s largest and most troubled financial institutions, the Treasury Department announced on Friday that it would vastly increase its ownership of the struggling company.

After two multibillion-dollar lifelines failed to shore up Citigroup, the government will increase its stake in the company to 36 percent from 8 percent.

As part of the deal, Citi will shake up its board so that it has a majority of independent directors, Richard Parsons, the bank’s chairman, said in a statement.

Under the deal, Citibank said that it would offer to exchange common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 a share, a 32 percent premium over Thursday’s closing price.

The government will match this exchange up to a maximum of $25 billion of its preferred stock at the same price.

In its statement, the Treasury Department said the dollar-for-dollar match with private preferred holders was intended to strengthen Citigroup’s capital base. The government of Singapore Investment Corporation, Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors have agreed to participate in the exchange, Citibank said in a statement.

Citibank also said that it would record a goodwill impairment charge of about $9.6 billion write-down because of deterioration in the financial markets.

The transaction, which does not involve putting more government cash into the bank, will not increase the amount of Treasury’s investment in Citigroup, the Treasury said. The portion of the preferred securities that are not converted to common shares will be placed into new trust preferred securities, Citi said, and with an 8 percent annual return.

The bank will also suspend dividends on its preferred shares and its common stock.

“This securities exchange has one goal — to increase our tangible common equity,” Citi’s chief executive, Vikram Pandit, said. “This transaction — which requires no additional investment from U.S. taxpayers — does not change Citi’s strategy, operations or governance. Our clients and partners will not be affected and will continue to receive the high level of service they expect from Citi around the world."

The Obama administration deliberately stopped short of securing a majority or controlling interest in Citigroup, but will probably come under intense pressure to take a much larger role in shaping the bank’s direction. Taxpayers, after pumping more than $45 billion into the bank, will now become Citigroup’s single largest shareholder.

The move is one of the most drastic steps federal officials have taken to prevent the collapse of an institution deemed “too big too fail,” as its downfall could send shockwaves through the global markets. The government also took a major ownership stake in the American International Group, and seized control of Fannie Mae and Freddie Mac last September. So far, none of those deals have worked out well.

The administration has tried to keep the banks in private hands and tried to stamp out talk of nationalization. But Citigroup’s plunging share price and its desperate need for capital made it almost inevitable the government would have to raise its stake.

The deal is expected to serve as a model for other financial institutions. Other major banks could find themselves in a similar position in the coming weeks if a new “stress test” shows they do not have sufficient capital, or the right amount of common stock, to appease regulators. Administration officials say they will convert the government’s existing preferred stock investments into common shares and, if necessary, make additional investments to stabilize the banks.

The Citigroup deal tries to address a potential shortfall of common stock, which investors and regulators now demand. With the conversion of preferred shares to common shares, the government’s stake will rise to 36 percent from 8 percent, giving taxpayers more risk, but more potential for profit if the company recovers.

Still it will severely dilute Citigroup’s existing shareholders.

Citigroup’s common shareholders include longtime investors like Saudi Prince Walid bin Talal and Sanford I. Weill, its former chairman, and many large asset management and pension funds that manage money for ordinary investors. For example, Fidelity Investments, which more than doubled its position in Citigroup late last year, has a stake of more than $1 billion.

By retiring the debt and issuing new shares of common stock, Citigroup can bolster it common equity position. So far, no preferred shareholders have agreed to swap their shares. And without the government alongside them, it is an even tougher sell because of fear their positions might get wiped out.
Feds to rescue Citigroup by pumping $20B into firm
New Haven Register
Associated Press
Monday, November 24, 2008 5:22 AM EST

WASHINGTON — The government unveiled a bold plan Sunday to rescue troubled Citigroup, including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions of dollars in risky assets.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stocks has been hammered in the past week on worries about its financial health.

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the three agencies said in a statement issued Sunday night. “We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks,” they said.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one — of $25 billion — in Citigroup in which the government received an ownership stake.

In addition, Treasury and the FDIC will guarantee against the “possibility of unusually large losses” on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

Citigroup is such a large, interconnected player in the financial system that if it were to collapse it would wreak havoc on already fragile financial and economic conditions. The company has operations in more than 100 countries.

Analysts consider Citigroup the most vulnerable among the major U.S. banks — especially after it failed to nab Wachovia Corp., which was bought instead by Wells Fargo & Co. That was a missed opportunity for Citi to gets its hands on much-needed U.S. deposits that would bolster its cash position.
Fund Managers See Need for Some Tighter Restrictions
NYTIMES
By LOUISE STORY
November 14, 2008

Five prominent hedge fund managers testified Thursday before a House committee that they supported tighter regulation of their industry.

The managers — Philip A. Falcone, Kenneth C. Griffin, John Paulson, James Simons and George Soros — all said they would support rules that required hedge funds to provide information about their funds to a regulator, provided the information was not divulged to the public.  Their support of greater disclosure represented a significant change for an industry that has historically fought more regulation.

But the managers, who were paid on average $1 billion last year, varied in their support of regulation. Mr. Soros, well-known for his liberal views, was the strongest supporter of rules to reign in the nearly $2 trillion industry. Mr. Griffin, the founder of Citadel Investment Group, was the most hesitant, stating that he would “not be averse” to such disclosure rules when asked if they were needed.

The hearing, held by the House Committee on Oversight and Government Reform, is part of a series of investigations in what caused the financial industry. Earlier on Thursday, two prominent academics testified that they believe hedge funds should face greater regulation.  The managers’ support for greater disclosure — though it would not be public disclosure — may surprise some peers. Hedge fund managers have generally shunned disclosure rules, and one manager successfully sued the government to block the Securities and Exchange Commission from requiring all hedge funds to register with the agency.

At the same time, the five disagreed over whether the tax treatment of their funds should be changed, and they disagreed on whether there should be rules about their use of leverage, or borrowed money.

Mr. Griffin, who has long indicated that his company will become a diversified financial services company, said that if hedge funds were pushed into a new “paradigm,” the rules must be made very clear.

“So long as I know what the rules are, I can conduct my business to be well within the lines,” Mr. Griffin said.

After the hearing, some lawmakers said witnesses had had made clear that hedge funds have the potential to cause risk to broader markets.

“All of them went on record in support of more regulation, all of them went on record in support of more transparency,” Representative Carolyn B. Maloney, a Democrat from New York, said.

It was less clear how the government would go about using additional disclosure from hedge funds. During the morning, Andrew Lo, a professor at the Sloan School of Management at the Massachusetts Institute of Technology, and David Ruder, a professor emeritus at Northwestern University School of Law, said hedge funds needed to disclose more information. But Mr. Lo went as far as suggest that the information should be public, while Mr. Ruder, chairman of the S.E.C. in the late 1980s, said it should be kept confidential.

Mr. Lo, who has studied hedge funds for a decade, said more information was needed for him to determine how much risk hedge funds brought to the markets.

“The fact is that we cannot come to any firm conclusion because we simply don’t have the data,” said Mr. Lo, who is affiliated with an asset management company that manages several hedge funds. “Additional transparency, even now, will provide some sense of what we’re likely to see over the next year or two.”

The House committee asked the five managers to provide information about their most highly paid employees, their fund’s financial returns and their holdings of some mortgage assets. The committee also wanted e-mail messages about the tax treatment of their compensation.  A spokeswoman for the committee said earlier this week that the five managers submitted the information, and that the committee was still determining what to release.

One witness, Houman Shadab, a senior research fellow at The Mercatus Center at George Mason University, said that more disclosure could be harmful.

“When that type of information is created by regulators it creates a false sense of security among market participants that these risks are being adequately monitored and managed,” Mr. Shadab said.

Another topic of the panel was the tax treatment of hedge fund managers’ earnings. Currently, part of their earnings is taxed as capital gains, which has a far lower rate than the income tax. Mr. Soros and Mr. Simons both supported forcing managers’ earnings to be taxed as ordinary income. But Mr. Griffin, Mr. Paulson and Mr. Falcone did not.

“You make a billion dollars, but your rate can be a as low as 15 percent,” said Representative Elijah E. Cummings, a Democrat of Maryland. “Is that fair?”

I-BBC
Now there are runs on countries
Robert Peston 23 Oct 08, 10:11 AM

The sickness afflicting the global financial economy has entered a new and worrying phase.

It started last summer with the closing down of big chunks of the wholesale money and securities markets.  Then we saw a succession of crises at individual banks, as institutional providers of funds withdrew their cash from banks they perceived as weak (culminating here in the nationalisations of Northern Rock and Bradford & Bingley, and the rescue takeover of HBOS).

In September the entire banking system was on the brink of total meltdown, because of semi-rational fears that almost no bank was safe from collapse.

And now we're seeing a massive flight of capital out of economies perceived to have been living beyond their means - either because they have a substantial reliance on foreign borrowings, or because they are net importers of good and services, or both.

Commercial lenders to these economies - banks, hedge funds, mutual funds and so on - want their money back now. That's driving down their currencies, pushing up the cost of borrowing for their respective governments and undermining the strength of their respective banking systems.  So they need financial help to tide them over - and with the global economy slowing down, those economies perceived as lacking the resources to cope on their own may need support for months and years.

Queuing up for the intensive care ward are Iceland, Hungary, Pakistan, Ukraine and Belarus, all of which are in discussions about accessing special loans from the International Monetary Fund, the emergency medical service for the global economy.  But there has also been a substantial withdrawal of capital from South Africa, Argentina and - most worrying of all - South Korea.

Let's put this into some kind of context.

The annual economic output of Pakistan, Hungary and Ukraine is something over $100bn each - which is not trivial but does not put them near the top of the rankings in terms of the size of their GDP.  However, the output of Argentina is well over $200bn and that of South Korea is around $900bn. In fact, South Korea is the 13th biggest economy in the world.  If you add together the GDPs of all the economies currently diagnosed with toxic BO by international investors you arrive at a sum that's not far off the economic output of the UK.

And the sums of debt involved are also fairly substantial. Hungary has external debt of more than $100bn, Ukraine has foreign borrowings of $50bn, while Pakistan's dependence on overseas funding is nudging $40bn.

As for South Korea, which hasn't requested formal help from the IMF, its foreign debt is nearer $200bn.  Now you may think this is all about remote countries, with no relevance to you. Well, that would be wrong. We're all connected.  It's been very fashionable for pension funds to invest in developing economies in recent years. If you're saving for a pension, you may own a chunk of South Korea or Argentina.

If you're very unlucky, your pension fund may have belatedly put some of your cash into one of the many hedge funds being royally mullered by the way they borrowed vast sums to invest in some of these emerging economies.

And of course the woes of these economies reduce their ability to purchase from abroad, which acts as a further serious drag on global economic growth.  Also the UK is being buffeted directly by international investors' re-awakened distaste for economies perceived to be too dependent on foreign capital or credit from institutions and companies.  What's happening to South Korea - where its currency, the won, has fallen 29% in the past three months, and shares have fallen well over 20% in a week - is particularly worrying for us.

South Korea is a great manufacturing and exporting nation. Its balance of trade is vastly healthier than the UK's.

But like the UK, South Korea's banks are dependent on wholesale funds that are being withdrawn because of fears that those banks face losses on imprudent deals (not lending to homeowners, as is the case in the UK, but currency hedges with local companies - see my note "Crisis is business as normal").

Of course, our banks - and South Korea's - are being shored up by massive financial support from taxpayers.  But if investors no longer think the UK's banks are at risk of collapse, they then look at our other vulnerabilities - such as public sector borrowing which is rising very sharply because of the costs of the bank rescues, dwindling tax revenues and the need to spend our way through the economic downturn.

They also look at our structural trade deficit and our huge reliance on financial flows generated by a City of London and a financial services industry that's shrinking fast.  As I've pointed out in a tediously repetitive way, the sum of all we've borrowed - the aggregate of corporate, personal and public sector debt - is equivalent to three times our annual economic output.  That's a vast amount of debt to repay - and it's all the harder to do so at a time when our most successful industry, financial services, is in some difficulty and the global economy is slowing down.

If international investors fear our credit isn't what it was and are selling pounds, we should hardly be surprised.

NEW YORK TIMES MUST-READ BUSINESS WRITERS' SERIES HERE.
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Global creditors end U.S. spending spree
Wasington Times
Patrice Hill
Sunday, October 12, 2008

The crash unfolding on Wall Street is not just the fall of once-mighty banks and corporations that took on too much debt, but the collapse of an American economy and lifestyle that for decades has been purchased with credit cards.

The nation's creditors - many of them foreign countries such as China and Brazil with ample economic needs of their own - reached a point this summer at which they were no longer willing to extend new loans in light of burgeoning default rates.

One of every 10 American homeowners has stopped making mortgage payments, and high-flying investment banks such as Lehman Brothers and Bear Stearns that peddled American debt around the world found themselves in bankruptcy and default.

The boycott by foreign lenders is forcing U.S. businesses and consumers to live more within their means, while political leaders frantically try to find ways to keep the financial sector alive without the free flow of an estimated $3 billion a day from abroad, analysts say. The spigot of foreign money in the heyday of the credit boom earlier this decade enabled everyone from Wall Street's best and brightest to college students with no income to easily obtain cheap loans.

"The party is over," said Peter Schiff, president of Euro Pacific Capital. "The current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow-and-spend culture that has all but defined us for a generation. ... The sooner we come to grips with this, the better."

The nation's increasing reliance on debt to grow and prosper is manifested in the current account deficits that have increased dramatically this decade. Those deficits show how much the U.S. collectively spends more than it produces and how much money is owed to the rest of the world. The federal deficit hit an unprecedented $812 billion in 2006, at the peak of the housing bubble, before declining to $738 billion last year as the housing market crumbled.

The huge external debt was financed for years with a flow of credit from abroad, but that suddenly shut down in July, when foreigners pulled $25.6 billion out of U.S. stock and bond markets, according to the Treasury's most recent figures on international capital flows. About the same time, Fannie Mae and Freddie Mac, former favorites of Asian investors in particular, started having trouble raising funds. The government later took over the mortgage giants as they became insolvent.

"We can no longer entice foreigners into lending us their available savings," said Mr. Schiff. "Given that we are already too loaded up on existing debt that we cannot realistically repay, who can blame them for not wanting to lend us more?"

With the abrupt shutdown of the credit spigot this summer, the housing and credit markets faced an outright crisis and easy loans all but disappeared. Consumer spending reached its biggest decline in years as banks - having difficulty raising funds - severely limited access to mortgages, home-equity loans and other kinds of credit.

"The day of reckoning appears to have arrived," said Stephen Stanley, chief economist at RBS Greenwich Capital, noting that scarcer credit is forcing Americans to save more of their income and spend less. One result is that the trade deficit is now dropping at a 25 percent annual rate, he said. "As Americans retrench, the structural imbalances that the world bludgeoned us about will shrink in size all too quickly."

Political and financial leaders always knew that the inevitable end of the great debt binge would be painful, forcing Americans to dramatically cut back spending and bringing on a long, deep recession that Mr. Stanley and other economists are predicting.

"We have warned for years to be careful what you wish for on this count," he said.

Laura Nishikawa, an analyst with Innovest, a credit-research group that is predicting a major rise in credit-card defaults, said consumers took on increased debt in recent years to finance middle-income and affluent lifestyles even as their wages were stagnating and savings were dwindling.

"The mortgage problem is, in fact, a symptom of a deeper crisis of deteriorated consumer financial health," she said.

Now, big banks like Bank of America, Citibank, JPMorgan Chase, Capital One and American Express - themselves hard-pressed to get loans in bank-funding markets - are reducing consumers' credit-card limits and home-equity lines and limiting credit-card-balance transfers, putting already pinched consumers into serious binds, she said.

"When they reduce credit availability, consumers won't have the ability to roll their debt over, and the issuers will essentially force customers into default," she said.

Consumers sank deeper into debt during the housing boom, when easy initial mortgage terms allowed them to buy bigger, more expensive homes and rapid appreciation opened the door to cash-out refinancings and home-equity loans that financed other spending.

"Millions of households have been operating just like hedge funds for a long time," said Brent Wilson, analyst with Reochronicle.com, a Web site tracking foreclosed homes, describing how ever-increasing debt financed the doubling or tripling of house prices in many areas that have now deflated.

"They borrowed ever-increasing amounts of money to finance an asset whose price depends on borrowing ever-increasing amounts of money. The financial profile of hedge funds and millions of households is almost identical," he said. Now, "the financial sector is on its knees, since they financed the speculation."

But the problem was not confined to real estate, he said. "The fact is that the whole economy to some extent has been operating like a hedge fund for a long time - households, corporations, state governments, Wall Street, cities" - all leveraging assets like real estate to finance a spending binge, he said.

"It looks like a long period of consolidation has set in," he said. "Many weaker companies will go bankrupt, many more banks will go under - with or without help from the federal government, stocks will probably be weak for some time."

Many analysts find it disconcerting and ironic that the solutions offered by the Treasury, Federal Reserve and Congress rely on massive issues of debt from the Treasury to try to save cash-strapped banks, homeowners and corporations.

The Treasury is about the only American entity that still has easy access to cheap loans as investors seeking safe havens pile money into Treasury bills paying close to 0 percent interest. The Treasury, already the world's biggest debtor, has been adding to its red ink at a prodigious rate to finance rescue programs that could drive the U.S. budget deficit to an unprecedented $1 trillion next year.

"The intention of all these daily federal interventions is to keep the credit spigots open, so Americans can go even deeper into debt to buy more stuff they can't actually afford," Mr. Schiff said.

"The sad reality is that we borrowed and spent our way into this crisis, and we are not going to borrow and spend our way out of it," he said. "Savings can't be magically concocted into existence by a printing press, but can only be created by consumers who spend less than they earn."
Armageddon avoided
I-BBC
Robert Peston 8 Oct 08, 04:42 PM

The symbolism couldn't be worse.

Gordon Brown commits £400bn of taxpayers' money - equivalent to about a third of our entire economic output - to rescuing the banking system.  And central banks from Asia to Europe to North America slash interest rates.  In other words, there's been a co-ordinated global attempt to prop up the financial system and save individual economies from a deep dark recession.

Yet the FTSE 100 plumbs new depths.

What on earth's going on?  Are we all doomed?  Well, the symbolism is a bit misleading, because the FTSE 100 is massively unrepresentative of the British economy.  The main reason it's fallen is because of sharp falls in the prices of giant mining companies that are listed on the London exchange.  So does that mean the FTSE 100 drop doesn't matter?

No, for two reasons.

First, one of the untold horror stories of the credit crunch is that it's wreaking havoc with the investments that underpin the value of millions of people's pensions.  Also, the reason for the fall in those mining companies is that there's been a further sharp drop in the price of commodity and energy prices.  Good news in a way, if it leads to lower household bills.

But the cause of those drops is a slowdown in economic activity throughout the world and the onset of recessions in several developed economies.

So what Gordon Brown and central banks have done today should stave off economic Armageddon - but it's probably too late to save us from months, or even years, of sluggish growth.
Wall Street Pulls Back Amid Credit Concerns
NYTIMES
By THE ASSOCIATED PRESS
Published: October 8, 2008
Filed at 9:23 a.m. ET

NEW YORK (AP) -- Wall Street headed for another volatile session Wednesday as investors doubted that an emergency interest rate cut would revive credit markets that have been stagnant for weeks.

Investors were initially encouraged after central banks including the Federal Reserve cut interest rates in a coordinated effort aimed at restoring confidence in the market and help end the global financial crisis. But their enthusiasm faded as they realized a rate cut doesn't guarantee that businesses and consumers will have an easier time obtaining credit anytime soon, and that the economy is still in jeopardy because of a lack of lending.

''With all of this occurring as a coordinated effort is showing that everybody out there is trying to fight this thing, and that should bring some confidence back to the market,'' said Scott Fullman, director of derivatives investment strategy for WJB Capital Group. ''But, the big question now is can the credit market open for business.''

The Fed noted in a statement that the market turmoil posed a further threat to an already shaky economy; it was joined in the rate cut by banks including the European Central Bank, Bank of England, The Bank of Canada, the Swedish Riksbank and the Swiss National Bank.

Dow Jones industrial average futures fell 290, or 3.04 percent, to 9,248. Standard & Poor's 500 index futures fell 36.80, or 3.66 percent, to 969.00, while Nasdaq 100 futures dropped 50.75, or 3.76 percent, to 1,286.25.

European indexes, which were down about 5 percent before the rate cut, pared some of their losses. In Britain, the FTSE-100 fell 1.43 percent, Germany's DAX dropped 2.55 percent, and France's CAC-40 dropped 1.95 percent.

In Asia, the Nikkei 225 closed 9.38 percent lower and Hang Seng tumbled 8.17 percent hours before the rate cuts were announced; their declines showed the extent of the worldwide gloom.

''The credit market is still tight, there's no money out there,'' said Todd Leone, managing director of equity trading at Cowen & Co. ''Everything the Fed is doing will eventually help, but people have to realize that it will take some time and that the economy is going to get worse during the next few months.''

Investors had been extremely anxious in recent days for a rate cut, and while the Fed had taken other steps this week to try to ease the stagnant credit markets, including buying commercial paper, the short-term debt used by companies, its moves weren't enough to stanch losses that have taken the Dow Jones industrials down 875 points in just two days this week.

It is very likely that stocks won't begin to recover for good until investors are certain the credit markets are functioning in a more normal fashion. But there are also severe economic problems including heavy job losses and high unemployment that will also need to show improvement.

Credit has all but dried up in the weeks after the failure of Lehman Brothers Holdings Inc. Banks have been reluctant to lend for fear they won't be paid back. That in turn has been stifling the economy, and led to the huge plunges on Wall Street in recent weeks.

Demand for short-term Treasurys remained high because of their safety; investors are willing to take extremely low returns just to have their money in a secure place. The yield on the three-month Treasury bill, which moves opposite its price, dropped to 0.53 percent from 0.81 percent late Tuesday.

Investors also bought up longer-term Treasury bonds, which don't draw as much demand in times of fear. The yield on the 10-year note fell to 3.48 percent from 3.51 percent late Tuesday.

The first third-quarter earnings reports are showing signs of strain on companies, and that is adding more uncertainty to the stock market. After the close Tuesday, Alcoa Inc. said it would conserve cash by suspending its stock buyback program and all non-critical capital projects. The aluminum company's earnings fell 52 percent.


Googling can find interesting things...

Obama puts out details of his derivatives-regulation plan;  Small nonfinancial firms would be exempt from posting margin when hedging
By Ronald D. Orol, MarketWatch
Aug 11, 2009, 5:48 p.m. EST

WASHINGTON(MarketWatch) -- The White House on Tuesday released the final piece of its reform plan for derivatives trading, including a provision that would require all of the complex financial instruments that are standardized to be traded on exchanges or on electronic-trading platforms regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission.

"We believe this proposal would help oversee the derivatives world and reduce their ability to hurt investors and investing public," said Michael Barr, assistant secretary of the Treasury for financial institutions.

The proposal, which is the final piece of the Obama administration's regulatory-reform plan, also sets up incentives to encourage traders and dealers of opaque over-the-counter derivatives to use clearinghouses, which are intermediaries between buyers and sellers, and exchanges for tailored derivatives that otherwise would have continued to trade in the opaque OTC market.

Those incentives include greater capital and leverage limits for traders and dealers that continue to trade specialized derivatives in the over-the-counter market.

Seeking to alleviate concerns by nonfinancial corporations that use derivatives to hedge operating risk, the Treasury proposal would exempt small firms involved in hedging activities. A number of these firms had raised concerns about the leverage costs.
AP Sources: 2 Boston Hedge Funds Closing Down
NYTIMES
By THE ASSOCIATED PRESS
Filed at 9:14 p.m. ET
June 2, 2009

BOSTON (AP) -- A pair of unrelated Boston-based hedge funds managing a total of more than $1.3 billion separately told investors Tuesday they're shutting down and returning investor cash because of recent disappointing performance.  Letters from Raptor Capital Management and Noble Partners LP that were obtained by The Associated Press say both firms plan to revamp their investment strategies and eventually offer new funds.

Noble Partners' George Noble told investors in his $550 billion Gyrfalcon QP and Offshore Funds that ''my performance over the past several months of 2009 has been the most professionally disappointing and personally frustrating'' of his nearly 30-year career.

''Whatever the reasons for our poor performance, the numbers speak for themselves and are simply unacceptable,'' Noble said in a letter to investors about the funds' 30 percent loss this year.

The closures were also confirmed to the AP by two people familiar with the situations. The persons spoke on condition of anonymity because they were not authorized to speak publicly on the matters. The Wall Street Journal first reported the closures online Tuesday afternoon.  James Pallotta, who heads the $800 billion Raptor Funds, told investors in a letter that his firm has returned an average of nearly 13.9 percent per year since the funds' inception in October 1993 through the end of last month. That compares with a 6.5 percent return over that period for the Standard & Poor's 500 index.

But the funds' performance this year has been ''roughly flat,'' he said.  Pallotta became a minority owner of the Boston Celtics professional basketball team, and split several months ago with longtime hedge fund partner Paul Tudor Jones of Tudor Investment Corp.  Pallotta said his Raptor Capital Management is suspending investor withdrawals and will begin returning investor cash in early July, starting with a cash payment of about 75 percent, followed by a process to eventually return the remainder.

Noble told his investors to expect 95 percent of their remaining capital returned by July 1. Meanwhile, an audit will be conducted so that the remaining cash can be returned ''as soon as expeditiously as possible thereafter.''

In his letter, Pallotta didn't offer details of the shortcomings that recent market volatility has exposed in his fund's investment strategy. But he wrote that in recent years he's become skeptical ''regarding the sustainability of certain aspects of the industry's structure and short-term focus.''

Noble said that ''the dynamics of the past year dictated a far shorter-term, more tactical approach.

''Although we managed to preserve capital in 2008, as the new year unfolded we became increasingly aware of the unsustainable nature of our overall investment process.''

The new strategy that his company hopes to devise ''will seek greater return consistency by reducing downside volatility, without eroding our core investment approach.''

The process will ''take at least several months,'' Noble wrote, adding that ''it is not appropriate or consistent with our fiduciary duties to retain outside capital during this time.''

The moves follow the closures of a record 1,471 hedge funds -- or nearly 15 percent of the industry -- in 2008, with half of them vanishing in the fourth quarter alone, according to Hedge Fund Research. The average hedge fund lost 18 percent last year, although not all hedge funds fared poorly.  Hedge funds, which are coming under increasing scrutiny because they are largely unregulated, are vast pools of capital that operate secretively and traditionally cater to institutional investors and very wealthy individuals. Hedge funds have grown explosively in recent years, luring an increasing number of ordinary investors, pension funds and university endowments.

Hedge funds can invest in nearly anything: commodities, real estate, complex derivative securities as well as ordinary stocks, assets of companies. Unlike government-regulated mutual funds -- the primary vehicle for retirement savings for tens of millions of Americans -- hedge funds can use techniques such as short-selling, or betting on falling stocks or markets to make a profit from downturns.
Pequot to close amid investigation: Once world's biggest hedge fund, Wilton company to shut its doors
The Advocate Staff
Posted: 05/27/2009 09:05:42 PM EDT

Wilton-based Pequot Capital Management, once the world's largest hedge fund company, will be liquidated by founder Arthur Samberg because a federal insider-trading investigation has cast a cloud over the firm.

"With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business as an investment adviser," Samberg wrote Wednesday in a letter to clients.

The Securities and Exchange Commission in January reopened a probe into whether Samberg's funds illegally profited by trading on inside information about Microsoft Corp.  Investigators learned of documents that show former Microsoft employee David Zilkha may have obtained confidential information in 2001 about the software maker. Zilkha left the Redmond, Wash.-based company that year to join Pequot.

"Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction," Samberg wrote in the letter, a copy of which was obtained by Bloomberg News.

Samberg, 68, plans to liquidate his main hedge funds and spin off others. The firm manages about $3 billion in assets, according to a person familiar with matter, down from about $15 billion in 2001 when the then-Westport-based company split into two parts. Andor Capital Management of Greenwich, the spun-off company run by former Pequot technology fund manager Dan Benton, shut down last year when Benton retired.

Pequot's assets had surged from $4 billion at the beginning of 1999 to $15 billion in mid-2001 when the break-up occurred. The firm caught the rise in technology shares and later rise in technology shares and later anticipated their decline, selling many short in a bet they'd fall. Pequot clients said growth stoked tensions between Samberg and Benton. Samberg wanted to limit the firm's size. Benton favored increased expansion and wanted greater control.

From 1991 to 2001, Samberg's funds returned 27 percent a year after fees, on average. Samberg started his flagship Pequot Partners fund in 1986. He was then part of Dawson-Samberg Capital Management Inc., a Southport-based money management firm founded in 1981.

Samberg added other hedge funds over the next dozen years and he spun off Pequot Capital in January 1999.

Pequot at its peak had 23 funds for domestic and offshore investors and more than 200 employees, including more than 60 analysts and 18 traders.

The number of employees affected by the shutdown was unavailable Wednesday evening. Marketwatch reported that Pequot would spin off its Matawin fund, run by Mike Corasaniti, and its Special Opportunities fund, overseen by Rob Webster and Paul Mellinger.

Jonathan Gasthalter, a spokesman for Pequot, declined to comment on the letter.
Hedge Fund Pequot Closing as Probe Back In Spotlight
NYTIMES
By REUTERS
May 27, 2009Filed at 9:08 p.m. ET

NEW YORK (Reuters) - Prominent hedge fund firm Pequot Capital told investors on Wednesday it will shut down because of a reopened government probe into possible insider trading.

"Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction," the firm's founder Arthur Samberg, long one of the hedge fund industry's best-known managers, wrote in a letter obtained by Reuters.

"With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business as an investment adviser."

In the past, Samberg and Pequot have denied allegations of insider trading.

The fund's closure is likely to reignite controversy over the firing of an SEC lawyer whose earlier probe into Pequot led him to request an interview with John Mack, who is now the powerful head of Wall Street investment bank Morgan Stanley.

The lawyer, Gary Aguirre, said he was fired because of his persistent requests for the interview.

Mack, a friend of Samberg, had worked at the Westport, Connecticut-based hedge fund firm from 2004 to 2005 before taking the Morgan Stanley position in the summer of 2005.

A Morgan Stanley spokeswoman declined to comment.

The SEC's Inspector General last year said there was a connection between Aguirre's firing and his efforts to interview the influential Wall Street executive in connection with the probe.

Pequot, which once invested $15 billion and most recently managed $3 billion, became the target of a Securities and Exchange Commission and U.S. Attorney's office investigation several years ago when investigators reviewed trades made by Samberg in Microsoft <MSFT.O> stock in 2001 by the Core Funds.

Although regulators and prosecutors brought no charges and closed the probe in 2006, the government reopened the matter in 2008.

Samberg told investors that the firm will spin off two portfolios and liquidate its Core Funds. Fund manager Mike Corasaniti will run the Matawin fund while Rob Webster and Paul Mellinger will lead the Special Opportunities fund as separate entities before the end of the year, Samberg said. Other investors will begin to get their money back by the end of next month.

Samberg's illustrious career has included growing Pequot into one of the world's most powerful hedge funds and being counted among industry leaders whose opinions could move markets.

The 68-year-old trader, who famously once had a basketball court built in his offices for his employees, started his career by focusing on stocks. He later moved into other areas.

Now he joins the growing ranks of shuttered hedge funds, a list that also includes his former partner, Dan Benton, who shocked investors by his decision to close down last year.

For years, Samberg's fund beat the broader stock market, and its recent performance would not appear to make a shutdown necessary. Since it was launched in 22 years ago, Samberg's fund earned a net annualized 16.8 percent while the Standard & Poor's 500 index returned 8.5 percent.

Last year hedge funds delivered their worst-ever losses of 19 percent last year.

Skittish investors including pension funds are especially nervous about problems like SEC probes right now and some industry analysts speculated that some investors were ready to pull money out.
Hedge Funds, Unhinged
NYTIMES
By LOUISE STORY
January 18, 2009

Chicago

LAST summer, Kenneth C. Griffin and his wife, Anne, hedge fund managers both, were so rich that they did something most wealthy couples don’t do until much later in life.  Still in their 30s, they hired a Ph.D. student in economics to help dole out their money to charities.  Fast-forward six months, and Mr. Griffin, who built the Citadel Investment Group into one of the largest hedge funds in the world, has seen the value of his funds plunge by roughly $10 billion — one of the biggest amounts lost in the hedge fund carnage last year.

He was down 55 percent while the average fund was down 18 percent. For Mr. Griffin, it is a failing as personal as they come. Sitting back in his chair, gazing uneasily at the skyline here, he points to a new patch of gray hair when asked about the toll of his losses.

“Last year was a dramatic year for the world’s largest financial institutions,” he says. “We were not immune.”

Mr. Griffin has basked in praise — whiz kid, wunderkind, the next Warren Buffett — ever since he began trading from his Harvard dorm room 20 years ago and then moved to Chicago to start his hedge fund. In recent years, his firm handily took in more than $1 billion annually.  But now, the whiz kid has lost so much money that it is unclear whether he can make it all back. That reality is playing out among thousands of troubled hedge funds drowning in losses.

Two out of three hedge funds lost money last year, and according to agreements with investors, their managers are supposed to recoup all losses before they start skimming fees from their profits again. That could take years.  And it’s unclear whether these traders, so accustomed to flush times, will stick it out long enough to make investors whole again.  Their decisions will reverberate beyond Greenwich, Conn., the New York suburb that is a haven for hedge fund honchos. Pension funds, endowments and charities — not just wealthy individuals — all invest in hedge funds.

Assets held by hedge funds surged to nearly $2 trillion as of the start of last year, from $375 billion in 1998, according to estimates from Hedge Fund Research, a Chicago firm. Along the way, hedge funds — once so few in number that they represented a boutique industry populated by a rarefied group of specialists — sprang up like kudzu.

Today, there are around 10,000 hedge funds, compared with around 3,000 a decade ago and just a few hundred two decades ago.  Little other than money unites hedge funds, which invest in areas as varied as bonds, aircraft and small-business loans. They even make bets on the weather.  What they have in common are lucrative fees: managers typically charge 20 percent of profits and 2 percent of total funds under management — the latter of which they earn regardless of performance.

The wealth and power of hedge funds, and those handsome fees, were predicated on what now sounds like a hollow promise: to make money year in and year out.  But the years of easy money are over.  Banks, pinioned by their own enormous mistakes and the economic slump, have cut back on hedge fund lending — essentially turning off a financial spigot that the funds relied upon to goose their returns.  Economic uncertainty makes it harder to predict market movements. And investors, burned by big losses in 2008, are either questioning hedge fund fees or simply avoiding putting more money into the funds.

The regulatory vise, meanwhile, is tightening around an industry that long enjoyed the freedom to trade and operate without the constraints imposed on more traditional firms.  On Thursday, Mary L. Schapiro, Barack Obama’s nominee to head the Securities and Exchange Commission, said during a confirmation hearing that she plans to more tightly regulate hedge funds as part of an effort to “bring transparency and accountability to all corners of the marketplace.”

Lawmakers are already considering new taxes and regulations that would require hedge funds to disclose more information about their secretive trading strategies.  Add it all up, and managing a hedge fund looks much less attractive than it used to.

“The magnitude of this current crisis and its effect on their business was a real shock for hedge fund managers,” said William N. Goetzmann, a professor who studies hedge funds at the Yale School of Management. “It will be a long-lasting effect because it’s caused customers to question the basic model.”

Mr. Griffin, fiercely competitive, says he is firmly in the camp of those trying to stay open. But he acknowledges that for several years, he will be working mostly for “psychic income.”

NOT everyone is rooting for Citadel. Call up nearly any hedge fund manager, and you will hear the stories about Mr. Griffin, now 40, poaching workers, landing a trade on the cheap and stalking wounded peers for deals. Mr. Griffin declined to comment on such stories.  His aggression has earned him admirers but has also created enemies. In the low-profile hedge fund industry, people shuddered at his brash claims that Citadel would become as powerful as investment banks like Morgan Stanley and Goldman Sachs.

His firm has become the fortress that many would love to see broken. Mr. Griffin knows that, but he chalks it up to his success. “Over the last 10 years we have been innovative and bold,” he says.

But in July, his magic touch deserted him. After reviewing the trading books at Kensington and Wellington, the two largest funds that Citadel manages, he decided to trim some holdings while bolstering an asset class he had traded since his early days: convertible bonds.  But the value of convertibles plummeted as banks, large issuers of such shares, went into a tailspin after the collapse of Lehman Brothers, the venerable investment bank.

Citadel made another large bet that the gap between corporate bonds and insurance bought on those bonds, known as credit-default swaps, would narrow. In essence, Mr. Griffin was betting that the economy would strengthen and that the price of insurance on debt would cheapen.  Others in the industry backed away from that particular gambit. Paul Touradji, who runs a fund associated with the veteran trader Julian Robertson, said his own digging indicated that more people would need to sell their bond positions than the number that were likely to buy in.

Still, Mr. Griffin stuck to his guns, even as his funds fell 16 percent in September. The loss put Citadel in the spotlight and generated speculation about its survival.

One day, the rumor was that Federal Reserve officials were trolling his Chicago headquarters; the next, that his funds were selling off troubled assets, or that banks were pulling credit. (Federal Reserve officials did in fact check up on Citadel. But since last spring, such inquiries have become routine at all large financial institutions. The other rumors were unfounded.)

Mr. Griffin says Citadel came under attack because it was a large and easy target — not because it was about to collapse.  By late October, Citadel was fighting for its life. At the end of the month, its funds were down an additional 20 percent and nearing 40 percent losses for the year. Mr. Griffin met with all of his employees and held a public conference call to reassure the world about Citadel’s financial footing.

Mr. Griffin calls that period “surreal” but says he never went to bed worried that Lehman’s fate would become his own. The difference with Citadel, Mr. Griffin says, is financing. He says he has arranged for credit lines at dozens of banks with durations as long as a year, buying him time. “Any firm that is a lasting, permanent institution goes through rough times,” he says. “In three years, they’ll write the story about how we came back, much like Goldman Sachs came back after 1929.”

Citadel, in fact, is different from many hedge funds that specialize only in trading. Mr. Griffin reinvested profits over the years into new service-based businesses. The management company, which is controlled solely by Mr. Griffin, also owns a firm that provides administrative services to other hedge funds, as well as the Citadel Derivatives Group, a major player in the options and stock markets. And Citadel recently hired a former Merrill Lynch executive to build a capital markets business, a mainstay of investment banking.

“Citadel is a diverse platform,” says Matt Andresen, who runs the Derivatives Group. “Our clients do not interact with the asset management side of the firm, and they’ve come to know us in an entirely different capacity.”

Mr. Griffin has full discretion over how much money he uses to subsidize his struggling funds. Last year, Citadel shouldered some of the funds’ operating costs, which are known to be among the largest in the industry.  At the same time, though, Citadel blocked investors in its two troubled hedge funds from withdrawing money at the end of last year. The company has told investors that they might be allowed to withdraw money at the end of March.

Mr. Griffin explains these decisions by saying that “it was the right thing to do,” because withdrawals by some investors might have disadvantaged other investors who remained in the funds. Citadel also canceled its holiday gathering because it was not “right,” he says, to celebrate last year.  But right and wrong in hedge fund land is a matter of debate. Industry veterans have been loudly criticizing fund managers who blocked investors from retrieving money. Leon Cooperman, for instance, who runs Omega Advisors, is suing another hedge fund, contending that it didn’t allow him to make withdrawals; he said his own fund would never block redemptions.

“You’d have to lower me into the ground before I’d put up a gate,” Mr. Cooperman says. “Clients deserve to be able to withdraw their money.”

Orin Kramer, another hedge fund manager, who also helps oversee the New Jersey pension fund, says that what bothers him most is that managers who are freezing their funds are still charging 2 percent management fees on money they have trapped.

“It’s like telling someone at a hotel that they can’t check out and then charging them for the privilege of staying,” Mr. Kramer says.

IN November, five of the country’s richest hedge fund managers filed solemnly into a Congressional hearing room to be grilled by lawmakers.  They made up a Who’s Who of their industry. In addition to Mr. Griffin, the group included James Simons, of Renaissance Technologies; Philip A. Falcone, an activist investor who has bought a large stake in The New York Times; John Paulson, who earned billions of dollars betting against mortgages before the crisis; and George Soros, the Hungarian trader who rode to fame on prescient currency trades in the early 1990s.

Unlike banks or brokerages, hedge funds do not have to reveal information on their financial condition to the government. That means the government has no way to know the value of funds’ assets, how much money they borrow, or even how many funds there are.  For years, the industry has argued that hedge funds should be allowed to operate under the radar because they serve sophisticated investors.  But by November, it had become apparent that too many hedge funds, crammed into too many of the same trades, had been forced to sell — and that they did not operate in some distant universe. Like mutual funds, they can roil the markets.

At the hearing, four of the managers surprised lawmakers and their peers by saying that more regulation of their business was needed.

Mr. Griffin was the lone holdout. He argued for private market solutions, but as the hearing proceeded, he conceded that he would “not be averse” to greater disclosure to the government, provided that it was not made public. He says now that he is working on providing more transparency to his investors.  Lawmakers proclaimed the day a victory.

“I believe there’s been a near-consensus that hedge funds can cause systemic risk,” said Representative Carolyn B. Maloney, a Democrat from New York and a member of the House Financial Services Committee.

Even without government intervention, the days of working behind a curtain may be ending. Investors are already demanding more information about hedge funds’ operations.  Eiichiro Kuwana, president of Cook Pine Capital, a firm in Greenwich, Conn., that helps wealthy people invest in hedge funds, says that investors once had so much money to invest that they became less circumspect — with many of them investing in hedge funds that refused to provide much information.

No longer.

“Why would I trust a fund with my money if they won’t trust me with information?” Mr. Kuwana says.

HEDGE FUNDS tend to close by choice; outright collapses are less common. Sometimes banks pull funds’ credit lines and managers are forced to shut down. But by and large, the end comes when a manager no longer sees a financial upside for himself or herself.  Few funds have actually shut their doors. The number of funds peaked early last year at 10,233, according to Hedge Fund Research, and fell just 4 percent during the year. And they still manage $1.6 trillion.

Of the funds that lost money last year, the average loss was 29 percent, according to estimates from HedgeFund.net, a research firm. It will take a few years of fairly robust gains — no easy feat in these markets — for funds to simply recoup those losses.  Until then, managers would earn only their 2 percent fee, chump change to most hedge funds. Some managers are already paying talented employees out of their own pockets to persuade them to stay, but it’s apparent that surviving this turbulence isn’t in the cards for scores of funds.

Mr. Touradji of Touradji Capital was one of the few managers to make money last year, up 13 percent. He says that most firms that call themselves hedge funds never really deserved the title.

“There’s any number of good violinists, but how many people are good enough to be considered to conduct the Philharmonic?” he says. “The whole concept of hedge funds was always and still is this very high bar, that you were never allowed to say it was a tough market. Come rain or shine, you were supposed to do well — even in tough markets.”

But he predicts a slow death for the poseurs. Hedge fund managers, he says, may behave like restaurateurs who keep the doors open long after losses mount, largely because they don’t want to work in someone else’s kitchen.  For his part, Mr. Griffin is not likely to be job-hunting any time soon.  While there is no way to calculate his net worth, it is thought to be at least hundreds of millions of dollars. In May, a monument to his riches will be unveiled at the Art Institute of Chicago. He and his wife donated $19 million for Griffin Court, part of a new modern wing that connects the museum to Millennium Park. And they are hoping they will have plenty of money for their Ph.D. graduate to give out by 2010.

As for Mr. Griffin’s troubled hedge funds, their survival will pivot on successful trading — they are up 6 percent this year — and on his willingness to use Citadel’s other units as a safety net.  Whatever happens, Mr. Griffin says he can handle the shakeout in the hedge fund industry. “It’s going to be fairly significant, “ he says, then pauses and grins. “It’s part of capitalism.”
What Crisis? Some Hedge Funds Are Gaining
NYTIMES
By LOUISE STORY
November 10, 2008

Bernard V. Drury is a rarity on Wall Street: a hedge fund manager who is making money rather than losing it.

While most hedge funds are sinking into red this year and unsettling the markets in the process, a handful of them are posting spectacular gains. Mr. Drury’s fund, for instance, is up 60 percent since Jan. 1.

How did he do it? Mr. Drury, a former grain trader, is not giving away his secrets. He relies on proprietary computer models to chart tides in the markets and to ride the prevailing currents.

But however smart or lucky the moneymakers have been, a few bad trades can end any hot streak. Despite Wall Street’s reputation as a place of big money and bigger egos, many of the winners are reluctant to boast, particularly given the gaping losses threatening some rivals.

“There’s going to be, naturally, a lot of forms of disillusionment with hedge funds,” said Mr. Drury, who opened his fund, Drury Capital, in 1992.

Indeed, gloomy talk of an industry shakeout is getting louder as returns at most funds sink lower. Over the last few months, some funds have been forced to dump stocks and bonds because their investors want their money back. Wall Street traders worry that another big wave of withdrawals in mid-November could further unsettle the markets.

All of which makes the big winners stand out even more. Hedge fund returns, on average, are down 20 percent. But one in every 50 funds is up more than 30 percent — an astonishing performance, considering the broad stock market is down even more than that.

Winners include trend-followers like Mr. Drury; market-spanning macro funds, which dart in and out of an array of markets and bet on everything from Apple Inc. to zinc; and niche players that are buying insurance policies or making loans to small companies.

Some of this year’s stars are familiar names on Wall Street. For instance, a fund managed by John Paulson, who reportedly was paid $3.7 billion in 2007 after betting against the subprime mortgage market, has gained nearly 30 percent this year in his largest fund, investors say.

But some of the other moneymakers are not well known, and could benefit as competitors close and investors look for new places to park their money. Hedge-fund traders who make a killing are often lionized within the industry. One good year can vault a small player to the big leagues.

But with so many funds down — only one in three has made any money this year — the price of admission to the winner’s circle has fallen. A showing that would have been considered dismal only a year ago is now viewed as a standout success. Traders even joke that down 10 percent is the new break-even. Actually making money is all the more rare.

“This year, anything north of 10 percent is spectacular,” said Pierre Villeneuve, managing director of the Mapleridge Capital Corporation, a $750 million hedge fund in Canada that is up 18 percent.

Other funds with big winnings include R. G. Niederhoffer Capital Management; Conquest Capital Group; MKP Capital Management; the Tulip Trend Fund, run by Progressive Capital; and funds run by John W. Henry & Company.

Never before have so many funds been down. In 5 of the last 10 years, fewer than 15 percent of hedge funds lost money. Even in the worst year, 2002, 31 percent finished down, according to estimates from HedgeFund.net, a unit of Channel Capital Group. This year, some 70 percent of hedge funds had lost money from Jan. 1 through the end of September.

To a degree, hedge funds are hostage to their stated investment strategies, and investors judge them accordingly. Funds that specialize in convertible bonds and stocks, for example, are among the worst performers this year because those markets have been hard hit in the financial crisis.

Losers include well-known traders like Kenneth C. Griffin, who runs the Citadel Investment Group; Lee S. Ainslie, head of Maverick Capital; and David Einhorn, the head of Greenlight Capital, who called attention to the troubles at Lehman Brothers before many others.

Still, funds that specialize in investment strategies that have suffered could come out looking good if they manage to post even modest gains. For instance, Exis Capital, a $150 million fund that trades stocks, is up 9 percent this year, even after the fund’s manager took their 50 percent fee, according to investors. The average stock fund, by comparison, is down 22 percent, according to estimates from Hedge Fund Research. In commodities trading, Touradji Capital Management is up 11 percent even as its competitor, Ospraie Management, was forced to liquidate a large fund.

At some hedge fund companies, this year’s performance is mixed. Trafalgar, a hedge fund in London, manages 10 funds. Three are down, but two — a volatility fund, and “special situations” fund — are up more than 20 percent, according to an investor.

Trafalgar declined to say what special situations it had pounced on. Volatility funds, a category that is broadly doing well, focus on trading options and try to profit when the markets swing wildly as they have lately.

Lee Robinson, co-founder of Trafalgar Asset Managers, said his firm’s success set it apart from competitors.

“Every investor is going to say, ‘What did you do in September ’08, what did you do in October ’08?’ and if you were down significantly, you’re going to have trouble raising money,” Mr. Robinson said. “The most important question is not, ‘How much money am I getting back?’ it’s ‘Do I get my money back?’ ”

Several managers who are doing well did not want to brag at a time when so many of their industry colleagues were struggling.

“You don’t do victory laps,” said Adam Stern, a partner at AM Investment Partners, whose volatility fund is up 6.75 percent this year. “It’s a very sad time for a lot of people. People worked very hard, and they’re losing a lot of money and net worth.”

Marek Fludzinski, one of this year’s winners, remembers what it was like to be a loser. Mr. Fludzinski, the chief executive of Thales Fund Management, was among the computer-loving quantitative fund managers who suffered in 2007, when his fund lost 8 percent. Investors immediately began asking for their money back, so Mr. Fludzinski shut the $1.6 billion fund and started anew.

Now his computer-driven fund, created in May, has grown to $350 million from $80 million in assets and is up 14 percent.

Mr. Fludzinski said the important factor in running a hedge fund these days was simply surviving.

“Don’t do something that will kill you,” said Mr. Fludzinski, who uses a database with 14 years of prices on thousands of stocks to try to spot patterns like the forced selling of stocks.

Marc H. Malek, a former UBS trader who manages $611 million, is up 44 percent in his macro fund. But even as new investors approach his company, Conquest Capital, the firm is also receiving redemption requests from investors who want their money back, Mr. Malek said. Investors are pulling cash from wherever they can.

A growing number of troubled hedge funds are temporarily refusing to give investors their money back by freezing their funds, in industry parlance. But others are profiting from the waves of panic that have convulsed the markets this year.

Roy Niederhoffer, founder of R. G. Niederhoffer Capital Management, whose more famous brother, Victor, made and then lost a fortune trading, is up more than 50 percent. To predict how investors will behave, Roy Niederhoffer, who majored in neuroscience at Harvard, delves into psychological research.

But Mr. Niederhoffer does not need much research to tell him that some investors chase winners. With his fund soaring, investors are piling on. His assets under management have climbed to $2 billion, from $700 million earlier this year.

Still, Mr. Niederhoffer is not planning any celebrations.

“The greatest danger at a time like this is hubris,” he said. He has banned fist-pumping victory poses on his trading floor.
Hedge Fund Results Seen Going From Bad to Worse
NYTIMES
By REUTERS
By Joseph A. Giannone and Svea Herbst
Published: November 7, 2008
Filed at 8:13 a.m. ET

NEW YORK (Reuters) - As brutal as September was for hedge funds, October was even worse.

Hedge fund industry trackers Barclay Hedge, Hedge Fund Research Inc and Hennessee Group LLC will report over the next few days just how poorly the $1.9 trillion industry performed last month. It was a period of plunging stock prices, frozen debt markets and fire-sales by banks scrambling to boost cash.

"You had one of the worst months in the equity markets that you had in decades. You add to that the ban on short selling, which destroyed convertible arbitrage, and the equity strategies were hurt badly," said Sol Waksman, founder of industry tracking service Barclay Hedge.

Some of the most successful names in the industry were hammered last month, as funds lost more money than they did in a September that featured the Lehman Brothers bankruptcy, the near collapse of American International Group <AIG.N>, and one of the steepest stock market drops ever.

David Einhorn's Greenlight Capital, lauded for predicting Lehman's financial woes, suffered heavy losses from a short position on Volkswagen <VOWG.DE> after the German carmaker's shares spiked. Greenlight, down 16 percent in the first nine months this year, is seen posting bigger declines for October.

Ken Griffin's Citadel Investment Group, down 15 percent in September, is seen dropping further in October. Lee Ainslie's Maverick Fund is expected to be down again after falling more than 19 percent in September.

Also stumbling is Goldman Sachs <GS.N>, which told clients the $7 billion Goldman Sachs Investment Partners fund has lost nearly $1 billion since its launch in January thanks to wayward bets on commodities, metals, energy and agriculture.

Earlier Thursday, shares of London-based hedge fund managers Man Group <EMG.L> tumbled 31 percent partly on fears the firm's Man Global Strategies fund would see more outflows. Man's total assets under management have fallen to $61 billion from $68 billion at the end of September.

The HFRX Global Hedge Fund Index, compiled by Hedge Fund Research Inc, had a negative 9.3 percent rate of return in October and through Tuesday was down 19 percent this year.

By comparison, the Standard & Poor's 500 Index fell 17 percent in October -- its ninth-worst decline ever-- and 32 percent for the year.

Still, the poor performance of hedge funds -- which charge high management and incentive fees -- shook up confidence in an investment vehicle that was supposed to protect clients by serving as a "hedge" against market swings.

Charles Gradante, co-founder of Hennessee Group, said hedge funds were down 7 percent in October, about 3 percentage points lower than they "should be." Usually, hedge funds fall about one-third as much as the overall market, he explained.

"They were down so much largely because of the volatility, and markets not acting on fundamentals but fear," Gradante said. Some of the hardest hit were those focused on emerging markets, Europe and convertible arbitrage, he said.

Not all funds suffered. Short-seller funds were up about 10 percent for the month.

Even so, fund managers were forced to deal with plunging markets, anxious clients pulling out their money, and wide-scale de-leveraging that put more pressure on asset values. All that plus a ban on short-selling.

"I would expect that redemptions by historical standards are quite high. Not a day goes by where we don't see that such and such a fund is putting up gates," said Barclay's Waksman.

Michelle Celarier, editor of Absolute Return, a magazine focused on the hedge fund industry, said it's too early to predict if the industry's October results lagged September.

Based on preliminary data, at least half of the funds that submit data to the magazine lost money in October. But with three of the five worst months in a decade recorded in March, July and September this year, it is clear hedge funds are suffering.

"I think we can predict September and October together will be worst back-to-back months that we've ever seen," Celarier said. And with redemption demands draining cash, "I don't see it getting any better anytime soon."
Investors Flee as Hedge Fund Woes Deepen
NYTIMES
By LOUISE STORY
Published: October 22, 2008

The gilded age of hedge funds is losing its luster. The funds, pools of fast money that defined the era of Wall Street hyper-wealth, are in the throes of an unprecedented shakeout. Even some industry stars are falling back to earth.

This unregulated, at times volatile corner of finance — which is supposed to make money in bull and bear markets — lost $180 billion during the last three months. Investors, particularly wealthy individuals, are heading for the exits.

As the stock market plunged again on Wednesday, with the Dow Jones industrial average sinking 514 points, or 5.7 percent, the travails of the $1.7 trillion hedge fund industry loomed large. Some funds dumped stocks in September as their investors fled, and other funds could follow suit, contributing to the market plummet.

No one knows how much more hedge funds might have to sell to meet a rush of redemptions. But as the industry’s woes deepen, money managers fear hundreds or even thousands of funds could be driven out of business.

The implications stretch far beyond Manhattan and Greenwich, Conn., those moneyed redoubts of hedge-fund lords. That is because hedge funds are not just for the rich anymore. In recent years, public pension funds, foundations and endowments poured billions of dollars into these private partnerships. Now, in the midst of one of the deepest bear markets in generations, many of those investments are souring.

Granted, hedge funds are not going to disappear. In fact, some are still thriving. Even many of the ones that have stumbled this year are doing better than the mutual fund industry, which has also been hit with withdrawals that have forced their managers to sell.

But the reversal for the hedge fund industry represents a sea change for Wall Street and its money culture. Since hedge funds burst onto the scene in the 1990s, they have recast not only the rules of finance but also notions of wealth and status. Hedge-fund riches helped inflate the price of everything from modern art to Manhattan real estate. Top managers raked in billions of dollars a year, and managing a fund became the running dream on Wall Street.

Now, for lesser lights, at least, that dream is fading.

“For the past five or six years, it seemed anybody could go to their computer and print up a business card and say they were in the hedge fund business, and raise a pot of money,” said Richard H. Moore, the treasurer of North Carolina, which invests workers’ pension money in hedge funds. “That’s going to be gone forever.”

As are some hedge funds. For the first time, the industry is shrinking. Worldwide, the number of these funds dropped by 217 during the last three months, to 10,016, according to Hedge Fund Research.

Even some of the industry’s most well-regarded managers are starting to retrench. Richard Perry, who until now had not had a down year for his flagship fund in more than a decade, has laid off some employees. Mr. Perry, who began his career at Goldman Sachs, is moving away from stock-picking to focus on the troubled credit markets.

Three other hedge fund highfliers — Kenneth C. Griffin, Daniel S. Loeb and Philip Falcone — have suffered double-digit losses through the end of September.

Steven A. Cohen, the secretive chief of a fund called SAC Capital, has put much of the money in his funds into cash, reducing trading by some of his workers.

Many hedge fund investors, particularly the wealthy individuals, are flabbergasted by their losses this year. The average fund was down 17.6 percent through Tuesday, according to Hedge Fund Research.

“You’re seeing a lot of shock, a lot of inaction, a lot of reassessment of where their allocations are and what to do going forward,” said Patrick Welton, chief executive of the Welton Investment Corporation, whose fund is up double-digits this year.

Many investors, Mr. Welton said, had hoped hedge funds would protect them from a steep decline in the broader market. But in many cases, that has not happened.

Now Wall Street is buzzing about how much money could be pulled out of hedge funds — and which funds might bear the brunt of the redemptions.

Funds have set aside billions of dollars in cash to prepare for withdrawals, and many prominent funds require their investors to leave their money in the funds for years. That could help relieve some of the pressure.

But because hedge funds are largely unregulated, they do not publicly disclose the identity of their investors or whether they have received requests for withdrawals. While it might make sense to pull money out of poorly performing funds, investors might also exit funds that are doing well to offset losses elsewhere.

Institutions — pension funds, endowments and the like — pushed into hedge funds after the Nasdaq stock market bust at the turn of the century. Many hedge funds had prospered as technology stocks crashed, leading these investors to believe they would in the future.

In Massachusetts, for instance, Norfolk County broached the issue with the state’s pension oversight commission, said Robert A. Dennis, the investment director of the commission. Mr. Dennis was impressed that hedge funds had fared so much better than the broader stock market.

Though Mr. Dennis says he recognizes the risks that come with selecting hedge funds, he thinks they remain a good investment. Next week, the state commission will vote on whether to allow some towns with pension funds below $250 million to invest in hedge funds, a move Mr. Dennis supports.

“Hedge funds are having a bad year, absolutely, but they’re still holding up better than stocks,” Mr. Dennis said. “Losing less money than another investment is, while not great, it’s still something to be at least satisfied with.”

But now that the days of easy money are over, some fund managers are throwing in the towel.

One manager, Andrew Lahde, was blunt about his decision.

“I was in this game for the money,” Mr. Lahde wrote to his investors recently. He made a fortune betting against the mortgage markets, calling those on the other side of his trades “idiots.”

“I have enough of my own wealth to manage,” Mr. Lahde wrote. He did not return telephone calls seeking comment.

And what wealth there has been. More than anything else, hedge funds are vehicles for their managers to take a big cut of profits. The lucrative economics of the industry is known as “two and 20.” Managers typically collect annual management fees equal to 2 percent of the assets in their funds, and, on top of that, take a 20 percent cut of any profits. Last year, one manager, John Paulson, reportedly took home $3 billion.

But with the industry under pressure, those fat fees are being questioned. Mr. Moore and other investors are starting to ask whether hedge funds deserve all that money. Mr. Griffin, who runs Citadel Investment Group in Chicago, plans to offer funds with lower fees.

More changes could be coming, including increased regulation. The House Committee on Oversight and Government Reform is scheduled to hold a hearing about regulation next month with five hedge fund managers who reportedly made more than $1 billion last year: Mr. Griffin, Mr. Falcone and Mr. Paulson, as well as George Soros and James Simons.
Will hedge fund investors cash in today?
Greenwich TIME
By Michael C. Juliano, Staff Writer
Article Launched: 09/30/2008 08:00:45 AM EDT

There's tension in the hedge fund industry as investment analysts said they expect many investors to cash in their holdings today after Monday's House rejection of a $700 billion bailout for the nation's financial system.

Many hedge funds consider Sept. 30 a quarterly redemption period when investors may cash in investments.

K. Daniel Libby, a senior portfolio manager for Select Access Funds of the Greenwich investment firm Sands Brothers, said he expects many investors to notify hedge fund operators that they are pulling their investments today so they can get out by year's end.

"For any hedge fund investor who has not reduced his risk to exposure up until now, they're definitely going to take the last opportunity now," Libby said.

Many investors will give their 90-day notifications, as required by many hedge fund operators, to sell their assets so they can make them liquid them by the end of the year instead of six months from now, Libby said.

"I think, on the margin, people are more likely to be redeeming," he said.

But other observers of the hedge fund industry, such as Steve McMenamin, executive director of the Greenwich Roundtable, an investment research firm, don't expect investors to back out today.

"I think some hedge fund investors would like to move to increase their cash positions to protect their capital and buy at the bottom," McMenamin said.

Joel Schwab, managing director of hedgefund.net in New York, said sophisticated investors probably will stay in hedge funds, which number about 300 in Greenwich.

"If anything, hedge funds are likely one of the better parts of their investment portfolios," Schwab said. "While going through their worst period ever, hedge funds are still doing a lot better than other investments."

The bailout failure may cause less experienced investors to panic and leave hedge funds, but the industry will do fine, Schwab said.

"Will that cause people to back out of hedge funds?" he said. "Absolutely, but it's hard to tell how many."

Despite the market uncertainty, Shariah Capital in New Canaan will invest $150 million in three hedge funds with the Dubai government.

Shariah-compliant strategies are designed for Islamic investors. The Quran doesn't allow a person to sell something he doesn't own, which rules out short-selling - a widely used strategy that enables hedge funds to post high returns even in bear markets.

Together, Shariah and Dubai have put $50 million in Toqueville Asset Management, which specializes in precious metals, coal and steel investors Zweig-DiMenna International, and Lucas Capital Management, investors in natural gas.

"We want to make it clear that we're investing in capital markets," said Eric Meyer, president and chief executive officer of Shariah Capital. "We're tying to look a bit longer term."

A Squeeze on Leading Fund Chiefs
NYTIMES
By LOUISE STORY
Published: September 30, 2008

Lee S. Ainslie, Louis M. Bacon and Daniel Loeb are some of the most successful hedge fund managers around. But even they lost big lately as the markets turned chaotic.

While their showing was better than that of the broad stock market, it nonetheless underscored how difficult this year had been for hedge funds — and how much pain might yet lie ahead. The average fund is down 10 percent for the year, as of last Friday, according to Hedge Fund Research, and much of those losses hit in September.

The news could not come at a worse time for the $2 trillion industry, which manages money for some of the largest pension funds, endowments and foundations. Many hedge funds ask investors to provide three months’ notice if they would like to take their money back. And for year-end withdrawals, the deadline was this week — meaning that investors were evaluating their hedge fund holdings just as lightning struck the markets.

“Some of the selling you saw in the stock market Monday was clearly hedge fund managers selling to be ready for redemptions,” said David Salem, chief investment officer for the Investment Fund for Foundations, which invests $8 billion for charity endowments.

Mr. Salem said he did not redeem a penny this week, but he believed funds would continue to suffer as others cashed out.

On Tuesday, RAB Capital, a British fund manager reportedly froze redemptions on its fund for three years, meaning that investors could not take money out until 2011. RAB, once a high-flying fund, has lost more than 54 percent of the value in one of its funds this year and double digits in others, according to HSBC.

The credit squeeze has affected hedge funds in some of the same ways that it hit banks. And now they face new rules from the Securities and Exchange Commission about short-selling, a trading tactic that many funds use to bet against stocks.

Maverick Capital, a hedge fund in Texas run by Mr. Ainslie, lost 11.4 percent in September. That put Mr. Ainslie, a disciple of the noted investor Julian Robertson, down 13 percent for the year, according to a report from HSBC that includes data through last Friday. Mr. Ainslie did not return phone calls seeking comment.

At least three funds run by Moore Capital, which is headed by Mr. Bacon, stumbled in the last couple of weeks. A spokesman for Moore Capital declined to comment.

Third Point Offshore, led by the activist investor Mr. Loeb, was down only 1.2 percent as of Sept. 12. But over the next two weeks, it fell to a 6.6 percent loss for the month. That leaves Mr. Loeb down 13.8 percent this year.

“Look, they’ve had their hands tied behind their back,” said Dick Del Bello, senior partner of Conifer Securities, a company that provides administrative support to hedge funds. “Look at what has happened to the market in the last two weeks. And they can’t play the downside?”

Many funds took their money out of the markets to try to avoid trouble. The cash-outs signal that some managers chose to lock in gains from the year, instead of taking additional risks. It also signals that some expect they will need cash on hand to pay for redemptions.

It is not only the troubled funds that could face withdrawals. Some investors may take money from funds that are performing well, simply because those funds have looser redemption policies.

“The investors who are rushing for the exits will do so where they can, not where they want to,” said Andrew Barber, a director at Research Edge, an investment research firm in New Haven, Conn.

Hedge funds employ a wide range of investing strategies, but it was those who invest in public companies that took the toll over the last few weeks. The value fund of Fir Tree Partners lost 10 percent last month, even though it was up 2 percent in mid-September. The last two weeks left the equity hedge fund down 17.7 percent for the year as of last Friday, according to HSBC.

Paul Tudor Jones’s Raptor Fund fell nearly 2 percent in September, putting its losses at nearly 12 percent for the year. It will be months before the impact is known from hedge fund redemptions on the markets. As investors take back their money, hedge funds sometimes must sell their positions, although they typically have months to do so.

While many investors will flee, some investors said they were willing to stick with veteran hedge fund managers.

“It would be very unwise to conclude that someone who has been demonstrably good at managing money for years has suddenly lost their compass,” Mr. Salem said. “The compass may just be malfunctioning in the current environment.”
ON THE HORNS OF A DILEMMA

Read full draft text (as of Monday A.M., September 29, 2008) here, courtesy of the New York Post.
True cost of the rescue
I-BBC
Robert Peston
20 Sep 08, 02:27 PM

The US Government has just admitted that the financial system was on the verge of total meltdown. And it's right. On Thursday, even blue chip companies were having difficulty rolling over their short-term borrowings.

Armageddon was minutes away - averted by Hank Paulson's plan to insure money-market funds and cut the gangrene out of the banking system.

The US Treasury Secretary is working over the weekend to nationalise around £450bn of banks' balance sheets - equivalent to a third of the British economy.

So, if anything, he was guilty of understatement when he conceded that the "financial regulatory structure is sub-optimal, duplicative and outdated".

However, on Friday - in reaction to all of that - stock markets were partying as though its 1999 again.

Hmmmm.

That doesn't feel like quite the right reaction to me.

Investors are probably right to conclude that one great source of stress will be lifted from the banking system, as and when Paulson sucks their toxic subprime loans, unsellable asset-backed securities, and radioactive collateralised debt obligations into a vast, lead-lined box financed by US taxpayers.

In the country that brought us Ghostbusters, he is styling himself as the Debtbuster.

And it's not all front: the risk of a calamitous, domino-effect, collapse of banks all over the world - and especially throughout the US - has receded somewhat.

That said, the devil will be in the detail of the mechanics of the rescue. What we don't yet know, for example, is whether Paulson's First Toxic Bank - as I shall christen his vehicle for buying the stinky housing loans - will pay the written-down price for the debt, the market price (which after Lehmans collapse is lower than the written-down price) or a discount to the market price.

This matters.

There is an argument that Paulson should pay a discount to the market price, to protect US taxpayers and soundly spank the banks and their owners.

However if he did that, banks' capital resources would be further depleted, which would further undermine their ability to lend to the rest of us. And it wouldn't do a great deal to reinforce the foundations of the creaking banking system.

But if he bails banks out at the price of this stuff in their books or above, well that would be an acknowledgement that an entire generation of banking executives had behaved wholly irresponsibly in their lending practices for years.

Arguably, they should all be sacked and thrown on to the mercy of a jobs market made all the less kind by their own recklessness.

Let's assume for now that Paulson finds a mechanism to extract the poison from the banks, without enfeebling them in the process. Can we all then breathe a sigh of relief and assume our economic prospects will improve markedly?

Sadly, I don't think so.

Banks, money managers, controllers of trillions of dollars on behalf of the cash-rich states of Asia and the Middle East have all had a painful lesson in the meaning of risk over the past fortnight.

They will for an extended period - possibly years - be less willing to fund our banks without demanding a significant increment in what the banks pay them. That'll increase the cost of money for all of us, which will make most of us feel quite a lot poorer for some time.

Also, you can kiss goodbye to the kind of financial creativity, innovation and competition that accelerated the growth of the UK and US economies over the past few years.

Our retail banks, commercial banks and investment banks will all be subject to much tighter regulation. Which will dampen their growth and their profitability.

Just the elimination of HBOS as an independent bank has removed from the scene a competitive thorn in the side of the other big banks which a few years ago shook them out of their torpor to the benefit of consumers and small businesses - for all that it's patently true that HBOS didn't properly appreciate the risks it was running in the way it financed itself.

The UK's unsustainable economic dependence on the City and financial services is coming home to roost.

The shrinkage of that sector may - just on its own - reduce economic growth by well over one percentage point over the coming year.

But, perhaps more significantly, the cutting down of finance into a smaller more regulated industry, and a semi-permanent rise in the perception of the risks of lending, will reduce the potential growth of the economy, probably for many years to come.

Even after the lean years are passed, and there may be a couple of them to come, subsequent recovery may be lacklustre. After the boom years, we may be entering the dismal grey years.

Painful Path To More Realistic Growth:
Growing home prices, and credit derived from the resulting equity, provided the illusion that increasing purchase power without increasing wage growth was sustainable. Income and buying became disengaged. 
Editorial
By The Day    
Published on 9/16/2008 

At some point the federal government had to say no. It could not continue saving every major investment corporation from its own bad decisions. That's not how a free market system works.

When it came to underwriting a plan to save Lehman Brothers, the government finally drew the line. Whether that line comes too late or too soon is impossible to judge until the current crisis plays out. And crisis is the right word.

After failing to engineer a government bailout or get help from fellow bankers, Lehman Brothers filed for bankruptcy Monday. At the same time Merrill Lynch, also on the point of collapse, agreed to sell itself to Bank of America for roughly $50 billion.

Combined with the demise of Bear Stearns earlier in the year, three of the five giants of Wall Street, the major independent brokers, will soon be gone, leaving only Morgan Stanley and Goldman Sachs. The carnage is unprecedented, the economic fallout incalculable.

Despite dramatic and controversial steps by the Treasury and Federal Reserve to address the crisis, it continues to escalate. The Fed took on billions of dollars in risky investments to make the sale of Bear Stearns possible before it collapsed. It has opened its discount window ever wider to provide liquidity to financial institutions, and lowered standards for the collateral it would accept. More recently the Treasury Department effectively nationalized the troubled mortgage finance companies Fannie Mae and Freddie Mac, leaving U.S. taxpayers essentially owning the bulk of the nation's mortgage market, and not a healthy market at that.

But the waves of institutional failures continued to crash on shore.

The government has done all it can, and arguably too much, to try and stop the current downward spiral. It appears the time has come to let the situation play out and find the true bottom.

Over the past decade the real wages of the middle class, when measured against the cost of living, have declined, yet consumer spending showed steady growth. Credit, combined with diminished savings, made that mathematical equation work. Growing home prices, and the credit derived from the resulting equity, provided the illusion that increasing purchase power without increasing wage growth was sustainable. Income and buying became disengaged.

Long-accepted standards for responsible lending and borrowing became passé. No longer did borrowers have to have sufficient income and a healthy down payment to obtain a home mortgage. This easy credit fueled housing sales, which drove up prices, which fed more reckless borrowing. But then the bubble burst. Housing sales plummeted, as did prices. Equity evaporated and foreclosures soared. And now the debt that backed all those derivatives, hedge funds and leveraged arrangements is not getting paid back and seeming untouchables, such as Lehman Brothers, are pushing daises.

The reaction of the stock market Monday was predictable - the Dow Jones industrial average sinking 504 points, the biggest single-day loss since markets reopened after the 9/11 attacks in 2001. With each prior bailout announcement the markets had risen, as if the need for government intervention was good news. On Monday it was as if a day of reckoning had arrived.

The resulting convulsions will likely lead to even tighter credit as commercial banks and securities firms seek to preserve capital and limit risk going forward. Tighter credit will likely slow the economy and deepen the recession.

Painful as that may be, the result will be a more reality-based economy, with purchasing and borrowing habits again tied to income.

Both Wall Street and Main Street are getting a tough, but inevitable, reality check.  
There Will Be Blood
NYTIMES
By Stephen Davidoff
September 15, 2008, 12:45 pm
         
Call it the Weekend That Changed Wall Street.

The upheaval of the past few days offers some lessons about the markets and how a financial crisis turns fatal. Here are a few that I’ve been thinking about.

Lesson 1: Perception Is Everything

In financial crises, your actual capital adequacy and liquidity does not matter. Both Lehman Brothers and Bear Stearns — and Lehman particularly — were felt to be adequately capitalized only days before their fall. But once people thought that the end was near, the trading stopped, liquidity dried up, and the capital fled.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate attorney at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. His columns are available at The Deal Professor blog.

Lesson 2: Uncertainty Is Death

Lehman’s unfortunate problem was that we have already gone through one round of capital market infusions. The infusions have left the investors, mostly sovereign wealth funds, deep under water. Now, with continuing uncertainty over the price of Lehman’s assets, no one wanted to get hit again and potentially be forced to invest even more months from now — or worse yet, lose more money. Had Lehman faced this problem earlier or later in the cycle, it might have avoided bankruptcy (though probably still lost its independence).

It is the old adage all over again: If you can’t price assets, you can’t buy them.

Lesson 3: Know When to Fold ‘Em

John Thain, the chief executive of Merrill Lynch, made the right move in selling his firm to Bank of America. He took a deal when it was on the table. A month from now, it might have been better, but the whispers were that Merrill would be next. And in a down market, whispers can kill.

Lesson 4: Sometimes, You Can Only Raise Capital When You Don’t Need It

Lehman issued $4 billion in preferred stock in April — the share offering was oversubscribed. Even then, though, people whispered that the capital raise was a sign of weakness, reflecting Lehman’s anemic balance sheet. This paradox helped bring about the death of both Bear and Lehman: They needed capital, but raising it only made people more concerned about their state.

It is a Catch-22 for which we have yet to find a solution. And that is why, even to the bitter end, Lehman didn’t access the Federal Reserve’s emergency loan facility. If it had, everyone would have assumed it was in trouble.

The whole conundrum supports raising the capital reserve levels for investment banks. Ultimately, Lehman, Bear, Merrill and their balance sheets couldn’t stand the predicament.

Lesson 5: But Be Careful When You Do Raise Capital

The clauses and terms you agree to can further inhibit financing. For example, Washington Mutual raised $7 billion from a consortium led by TPG. But there is an antidilution clause in that financing that resets the share price paid by TPG to any subsequent, lower share price paid in any further equity raised until October 2009.

This protects TPG from getting diluted out on its investment, but is now preventing WaMu from raising more equity unless TPG is included.

Lesson 6: Bankruptcy Is Not the End of The World (For Some)

In the end, Lehman only filed for Chapter 11 protection at the holding company level. The remaining companies below the holding company remain functioning. Some will be sold, some will be run off and Lehman may even try to emerge from bankruptcy. There’s only a slim chance of that, but substantial parts of Lehman will live on.

Lesson 7: The Sky Is Not Falling

Things are tough, but the economy is still in reasonable shape. All of these troubles at Lehman, Bear, A.I.G. and WaMu are attributable to the housing crisis. If we solve that, we will begin to emerge from the woods. While parts of the country are stabilizing, others appear caught in a declining feedback loop. It would help most if we found a floor on the housing decline. To the extent the government is the answer here, then this is where it should focus.

Lesson 8: Shorts Kill

Shorting is a necessary mechanic in our capital markets. But in financial crises, shorting, and the whispers it generates, can be deadly for financial stocks that exist on trust (see Lesson 1). In these times, we need limits on shorting of financial institutions.

I know the shorts will scream that this is a lynch mob, but it’s not. It is merely a confined and short-term limit on their activities over the next few months. In the interim, there will still be thousands of other shorting opportunities that the short-sellers of the world can use to feed their families.

Lesson 9: Moral Hazard Is an Overused Term

Don’t talk to me about moral hazard. The shareholders of Lehman had no more say in the operation of their company than in the case of Bear or Fannie Mae. If we are really going to stop moral hazard, we will meaningfully punish the people who took these positions and approved them (i.e., management). The step that the FHFA just, to block the exit packages of the chief executive officers of Fannie and Freddie Mac, was a good start.

Lesson 10: In Every Sad Moment, There Are Winners

Congratulations to Jon Marzulli at Shearman & Sterling for representing Merrill Lynch, as well as Robert D. Joffe at Cravath Swaine & Moore and Ed Herlihy at Wachtell Lipton Rosen & Katz who represented Bank of America. Weil Gotshal & Manges is representing Lehman.

These are nice, and well-deserved, assignments for them and the rest of the lawyers I missed giving a shout-out to. Get some sleep.

Lesson 11: Henry Paulson Runs the U.S. Economy

Not President George W. Bush, not Federal Reserve Chairman Ben Bernanke…

A note: For those who watch the Fed, it announced Sunday that it would take as collateral much riskier assets — including equities, junk bonds, subprime mortgage-backed securities and even whole mortgages — in exchange for emergency loans through the Primary Dealer Credit Facility.

In a day of big news, this is equally as big as the other events. Before, the Fed justified the facility by saying it would only take on safe assets. But now, the taxpayers are really going to be guaranteeing the balance sheets (and investments) of the financials.

In the end, I’m a bit sad today. Both Merrill and Lehman were great institutions and will be missed. I wish my friends there the best…

-----------------

About Steven Davidoff
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions. A former corporate attorney at Shearman & Sterling, he is a professor at the University of Connecticut School of Law and, during the academic year 2008-09, a visiting professor at the Michael E. Moritz College of Law at Ohio State University. His research focus is on corporate governance, regulation of hedge funds, mergers and acquisitions, and securities regulation. His prior scholarship is available on the Social Science Research Network

Professor Davidoff graduated from the Columbia University School of Law, where he was a Harlan Fiske Stone Scholar, and received a B.A. from the University of Pennsylvania, cum laude with honors. He has a masters in finance from the London Business School.

Multi-handed economist speak
Mounting sadness behind the happy headlines
Financial Times of London
By Tony Jackson
Published: May 24 2009 16:34 | Last updated: May 24 2009 17:04

One of the driving forces in economics, according to Robert Shiller of Yale, is the story we tell ourselves. We create happy versions of life in the boom times and sad ones in the bust.  It might be said the story is the product of events. But the process is circular. Events drive the story, the story drives our behaviour and our behaviour drives events.  Franklin Roosevelt grasped the point when he told the American people in 1933 that the only thing they had to fear was fear itself. So what is the story today?

On the face of it, a happy one. Equity markets are flying – most of the time, anyway. Investors are hurling billions of new money at the banks, including the most moribund ones.

The world’s fund managers, according to the latest Merrill Lynch survey, are positively bubbling. Their expectations for global growth and corporate earnings are at a five-year high, having been in the pits at Christmas. That mood is shared by the general public, in the US at any rate. Consider the University of Michigan’s survey of consumer sentiment, which asks people how they see things going over the next five years.  The reading hit a low last summer – though not as low as in the two oil shocks of 1973 and 1979, or even the recession of 1990. Since then it has rebounded very nearly to its long-run average.

That is striking on two counts. First, at the risk of seeming cynical, there is no reason to suppose the general public’s instincts are less trustworthy here than those of investment professionals. Second, it is the mood and therefore the behaviour of the general public that matters above all.  As Prof Shiller put it in a lecture at the London School of Economics last week, the central question now is whether we just got our confidence back. If so, logic suggests our problems should disappear.

Prof Shiller is not sure about that, nor am I. It strikes me the feel-good story could be modified by events, in the usual circular way. Equally important, there are other less cheerful stories running alongside it.

On the first point, it is instructive that the US popular mood should have started to revive as long ago as July. For it was not until September that most of the really big stuff happened: the collapse of Lehman Brothers, AIG and Washington Mutual.

On the other hand, it was already clear by July that the US government was going to bail out Fannie Mae and Freddie Mac. So it seems the public had already judged – correctly, on the showing so far – that the government would go to any lengths to shore up the system.  But there are other things which, though foreseeable in principle, could turn out unexpectedly grievous in practice. It seems clear that unemployment will worsen from here, the only question being by how much.

As to house prices, further evidence produced by Prof Shiller – an expert on the subject – reminds us of how far we are in unknown territory. The fall to date is without precedent. But so was the previous rise. In 1990, US house prices were in real terms roughly where they had been a century earlier. Then they almost doubled to the peak.

The picture in the UK is uncannily similar. Prof Shiller shows a chart comparing house prices in London and Los Angeles in the boom and bust. They are almost identical, with the grim proviso that UK prices have yet to fall nearly as far.

Fairness and corruption

That said, let us turn to some of the other stories around. A central part of Prof Shiller’s thesis, as set out in his recent book Animal Spirits, is that people’s mood and behaviour is affected by certain constants, of which we may focus on two: fairness and corruption.

The issue of fairness, particularly in respect of chief executive pay, is scarcely new. But it is when things go wrong that perceived unfairness makes people angry, and thus has consequences.

Two examples. First, in the US, the Securities and Exchange Commission has finally proposed that investors should be allowed to nominate directors. The chief investment officer of Calpers, a leading US institution, commented: “The credit debacle represents a massive failure of oversight.”

Second, Shell has had its directors’ pay package voted down. The oil company had missed targets that would have triggered bonuses, but proposed to pay them anyway.

Add to this the furore over abuse of the expenses system by UK Members of Parliament, and we get the impression of a much angrier and unhappier story than the headlines might suggest. Conceivably, we are past the worst. But it does not quite feel like it.

Copyright The Financial Times Limited 2009


So sorry...
British economists send apology to queen
CT POST
The Associated Press
Updated: 07/26/2009 09:33:19 AM EDT

LONDON—Sorry Ma'am—we just didn't see it coming.

A British newspaper reported Sunday that a group of eminent economists have apologized to Queen Elizabeth II for failing to predict the financial crisis.

The Observer newspaper reported that a letter has been sent to the Queen after she demanded, during a visit to the London School of Economics last November, to know why nobody had anticipated the credit crunch.

According to the newspaper, the letter says that says "financial wizards" who believed that their plans to manage risky debts and protect the financial system were infallible were guilty of "wishful thinking combined with hubris."

Signatories to the three-page letter include Tim Besley, a member of the Bank of England's monetary policy committee and historian Peter Hennessy.

The newspaper said the content was discussed during a seminar with a group of leading economists in June, including Nick MacPherson, a permanent secretary at Britain's Treasury, and Goldman Sachs chief economist Jim O'Neill.

"In summary, your majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole," the newspaper quoted the letter as saying.

Buckingham Palace declined to comment on the correspondence, but said the Queen often discusses current issues with experts. In March, Mervyn King became the first Bank of England governor to be invited for private talks at the palace.

"The Queen always displays an interest in current issues and is kept abreast of current issues. Obviously the recession is very topical," Buckingham Palace said in a statement.

Luis Garicano, a professor at the London School of Economics, said he had discussed the origins of the crisis with the Queen during her visit. He said she had asked: "Why did nobody notice it?"

The London School of Economics was not immediately available for comment, or to provide a copy of the letter.
As Financial Empires Shake, City Feels No. 2 on Its Heels
NYTIMES
By PATRICK MCGEEHAN
Published: September 12, 2008

Early last year, Mayor Michael R. Bloomberg and Senator Charles E. Schumer sounded the alarm that New York City was in danger of losing its status as the world’s pre-eminent financial hub to London. And that was before one of the biggest investment banks on Wall Street, Bear Stearns, collapsed and a second, Lehman Brothers, teetered on the brink of failure.

Now New York City officials and economists are worrying even more about the future of the city’s financial sector. New York City will surely remain a leading center of global finance when the current crisis is over, they say, but its days as the clear leader may be ending.

“This is the worst financial-services crisis of our lifetime,” and Wall Street is its epicenter, said Robert N. Sloan, who heads the financial-services executive recruiting practice at Egon Zehnder International in Manhattan. “You have major firms that have imploded or are at risk of imploding. It is a deconstruction — and a reconstruction to follow — of the financial-services industry as we know it.”

Many analysts point out that the resources of big financial companies were migrating toward London well before the current crisis. The banks reoriented themselves to capitalize on the rapid growth in Asia, “which left London as really the springboard to conducting business looking east,” Mr. Sloan said.

London’s ascendance threatens more than egos and bragging rights. Wall Street is widely regarded as the most important sector of New York’s economy. While it is not the biggest employer, it has provided about one-fourth of all the personal income earned in the city in recent years and about 10 percent of the city’s tax revenue.

Lehman Brothers alone could be the source of as much as $100 million in annual income tax in the city, estimated Marcia Van Wagner, a deputy city comptroller.

The rivalry became more heated after 2005, when companies making their first sale of stock raised more money in London than in New York. Although that shift may have been only temporary, it spurred American officials to call for regulatory changes to make Wall Street more attractive to foreign companies seeking to raise money.

Mayor Bloomberg and Senator Schumer used a study conducted at their direction by McKinsey & Company, a consulting firm, to argue that “if we do nothing within 10 years, while we will remain a leading regional financial center, we will no longer be the financial capital of the world.”

In a report issued this week, the World Economic Forum also ranked the United States just barely ahead of Britain in an assessment of global financial development. The report ranked the United States first for the size and efficiency of its banks but second to Britain when it came to investment banks, brokerage firms and other financial companies.

Nouriel Roubini, a professor of economics at New York University who was one of the study’s authors, said the two countries were quite similar in their strengths and weaknesses. Both, he said, are suffering in the current crisis and may deserve even lower marks for financial stability when it is over.

“This is a very severe economic and financial crisis where hundreds of banks are going to go bust,” Mr. Roubini said, adding that the damage would not be confined to the United States. “Swiss banks like UBS have lost as much as Citigroup,” he said.

Facing its biggest quarterly loss ever, Lehman, one of the six largest firms on Wall Street, said on Wednesday that it would unload many of its assets and shrink significantly. The firm, which employed more than 28,000 people at the start of this year, has lost about 95 percent of its stock-market value in less than two years.

Lehman’s throes, coming just half a year after Bear Stearns collapsed suddenly, rattled city officials who already were concerned about the depth and breadth of the damage on Wall Street. This year, banks and brokerage firms have announced 83,000 job cuts worldwide, and most of those were in New York.

“There’s going to be a lot of realignment of the financial sector, and this is just the beginning of it,” Ms. Van Wagner said. “We certainly seem to be going in the direction of fewer firms. It could be a smaller industry.”

But how much of New York’s loss will be London’s gain — or Hong Kong’s or Dubai’s — is a sensitive topic with the city’s officials and business leaders these days.

Foreign investors may shy away from investing in American companies and American markets, said Kathryn S. Wylde, the chief executive of the Partnership for New York City, an association of large employers. She was quick to add that global financial markets were linked and that the big Wall Street firms were also some of the biggest in other countries.

“It’s important to remember that Lehman is a London firm as well,” Ms. Wylde said. “This stuff hurts London just like it hurts New York.”

It is true that like the United States, Britain is suffering through a housing slump that has hurt its market for mortgages and other forms of debt, but New York firms pioneered and dominated the sales and trading of bundles of risky mortgages. The report Mayor Bloomberg and Senator Schumer released last year cited Wall Street’s dominance of the market for subprime loans as one that European banks could cut into by adopting “U.S.-style” lending practices.

Now, that subprime market is often called the sickest segment of the American financial market, and is a major cause of the current crisis.

London, on the other hand, has become a much bigger magnet for the sales and trading of various types of derivatives, securities that companies buy or sell to hedge against certain risks, such as fluctuations of interest rates or currencies. Some of those lines of business have remained profitable through the recent bond-market crisis.

And that has potentially strengthened London’s hand in its rivalry with New York: Indeed, the biggest Wall Street firms have moved entire derivatives-trading operations to London in the last several years.

Still, some city officials were loath to accept that Wall Street’s influence might be diminished by the disappearance or drastic downsizing of some of its most prominent firms, like Lehman.

Seth W. Pinsky, the president of the city’s Economic Development Corporation, said that city officials would do what they could to help Lehman but that the firm was grappling with some issues that were “outside of the scope and authority of the city government.”

He said he was unaware of any discussions between Lehman executives and city or state officials about what might be done to prevent a complete collapse of the firm. (On Friday, Lehman was courting buyers as its stock continued to fall.)

Mr. Pinsky said he would not speculate about Lehman’s prospects but added that after past periods of upheaval on Wall Street, new firms had emerged to replace those that did not survive. “New York remains the world’s financial capital, and we think the financial institutions in the city are sufficiently broad and deep that once we emerge from the current environment that New York will still be in the same position,” he said.


Freddie Mac official found dead in apparent suicide 
DAY
By MATT SMALL, Associated Press Writer    
Posted on Apr 22, 2009 8:38 AM EDT

WASHINGTON (AP) -- David Kellermann, the acting chief financial officer of mortgage giant Freddie Mac, was found dead at his home Wednesday morning in what police said was an apparent suicide.

Mary Ann Jennings, director of public information for the Fairfax County, Va., Police Department, said Kellermann was found dead in his Reston, Va., home. The 41-year-old Kellermann has been Freddie Mac's chief financial officer since September.

Jennings said that a crime scene crew and homicide detectives were investigating the death, but that there didn't appear to be any sign of foul play.

McLean-based Freddie Mac has been criticized heavily for reckless business practices that some argue contributed to the housing and financial crisis. Freddic Mac is a government-controlled company that owns or guarantees about 13 million home loans. CEO David Moffett resigned last month.

Freddie Mac and sibling company Fannie Mae, which together own or back more than half of the home mortgages in the country, have been hobbled by skyrocketing loan defaults and have received about $60 billion in combined federal aid.

Kellermann was named acting chief financial officer in September 2008, after the resignation of Anthony "Buddy" Piszel, who stepped down after the September 2008 government takeover. The chief financial officer is responsible for the company's financial controls, financial reporting and oversight of the company's budget and financial planning.

Before taking that job, Kellerman served as senior vice president, corporate controller and principal accounting officer. He was with Freddie Mac for more than 16 years.
S.E.C. Concedes Oversight Flaws Fueled Collapse
NYTIMES
By STEPHEN LABATON
Published: September 26, 2008

WASHINGTON — The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.

The S.E.C.’s oversight responsibilities will largely shift to the Federal Reserve, though the commission will continue to oversee the brokerage units of investment banks.

Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”

“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement on Friday, however, went beyond that by blaming a specific program for the financial crisis — and then ending it.

On one level, the commission’s decision to end the regulatory program was somewhat academic, because the five biggest independent Wall Street firms have all disappeared.

The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And in the last month, Lehman Brothers went into bankruptcy, Merrill Lynch was acquired by Bank of America, and Morgan Stanley and Goldman Sachs changed their corporate structures to become bank holding companies, which the Federal Reserve regulates.

But the retreat on investment bank supervision is a heavy blow to a once-proud agency whose influence over Wall Street has steadily eroded as the financial crisis has exploded over the last year.

Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations.

The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components.

The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan.

The investment banks favored the S.E.C. as their umbrella regulator because that let them avoid regulation of their fast-growing European operations by the European Union.

Facing the worst financial crisis since the Great Depression, Mr. Cox has begun in recent weeks to call for greater government involvement in the markets. He has imposed restraints on short-sellers, market speculators who borrow stock and then sell it in the hope that it will decline. On Tuesday, he asked Congress for the first time to regulate the market for credit-default swaps, financial instruments that insure the holder against losses from declines in bonds and other types of securities.

The commission will continue to be the primary regulator of the companies’ broker-dealer units, and it will work with the Fed to supervise holding companies even though the Fed is expected to take the lead role.

The Fed had already begun regulating Wall Street firms that borrowed money under a new Fed lending program, and the S.E.C. had entered into an agreement under which its examiners worked jointly with Fed examiners, an arrangement that is expected to continue.

The S.E.C. will still have primary responsibility for regulating securities brokers and dealers.

The announcement was the latest illustration of how the market turmoil was rapidly changing the regulatory landscape. In the coming months, Congress will consider overhauls to the regulatory structure, but the markets and the regulators are already transforming it in response to events.

Still, the inspector general’s report made a series of recommendations for the commission and the Federal Reserve that could ultimately reshape how the nation’s largest financial institutions are regulated. The report recommended, for instance, that the commission and the Fed consider tighter limits on borrowing by the companies to reduce their heavy debt loads and risky investing practices.

The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to file the required documents. And it found that the division had not adequately reviewed many of the filings made by other firms.

The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said.

The S.E.C. approved the consolidated supervised entities program in 2004 after several important developments in Congress and in Europe.

In 1999, the lawmakers adopted the Gramm-Leach-Bliley Act, which broke down the Depression-era restrictions between investment banks and commercial banks. As part of a political compromise, the law gave the commission the authority to regulate the securities and brokerage operations of the investment banks, but not their holding companies.

In 2002, the European Union threatened to impose its own rules on the foreign subsidiaries of the American investment banks. But there was a loophole: if the American companies were subject to the same kind of oversight as their European counterparts, then they would not be subject to the European rules. The loophole would require the commission to figure out a way to supervise the holding companies of the investment banks.

In 2004, at the urging of the investment banks, the commission adopted a voluntary program. In exchange for the relaxation of capital requirements by the commission, the banks agreed to submit to supervision of their holding companies by the agency.
U.S. Announces Takeover of Fannie Mae and Freddie Mac
NYTIMES
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By THE ASSOCIATED PRESS
Published: September 7, 2008

Filed at 11:34 a.m. ET

WASHINGTON (AP) -- The Bush administration, acting to avert the potential for major financial turmoil, announced Sunday that the federal government was taking control of mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac. (NYSE:FRE)

Officials announced that the executives of both institutions had been replaced. Herb Allison, a former vice chairman of Merrill Lynch (NYSE:MER) (OOTC:MERIZ) , was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp (NYSE:USB) , was picked to head Freddie Mac.

Treasury Secretary Henry Paulson says the actions were being taken because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.

"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," Paulson said.

Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie.

The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans."

The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.


Lenders Mulling New Offer In Alabama Debt Standoff
29 August 2008

BIRMINGHAM, Alabama (Reuters) - Alabama's Jefferson County and lenders pulled back from the brink of a threatened bankruptcy filing on Friday after the county proposed restructuring $3.2 billion of soured sewer debt.

Alabama Gov. Bob Riley, who this week entered the months-long talks, said in a news release that the county, which is home to the state's largest city, Birmingham, will be presented with a stand-still agreement against default through September 30 and that negotiations with lenders will restart next week.

A current stand-still agreement, which gives the county more time to negotiate, had been due to expire on Friday, and its expiration might have triggered what could have been the largest municipal bankruptcy filing in U.S. history.

"The county presented a proposal that provides for a restructure of the existing bond debt at lower, fixed interest rates over a longer term," Riley, a Republican, said. "Creditors received the proposal and agreed to respond next week."

The immediate issue among bond holders, insurers and the county turns on about $850 million of notes with interest rates that reset periodically and that defaulted earlier this year. The notes are held by banks, including Bank of America Corp <BAC.N> and JPMorgan Chase & Co <JPM.N>.

Bank of America had no immediate comment. JPMorgan Chase could not be immediately reached for comment. Several other lenders and insurers involved were either not available to comment or declined comment.

There is also about $2 billion of Jefferson County auction-rate sewer debt outstanding, with the rest of the $3.2 billion comprised of fixed-rate debt, according to Standard & Poor's.

"It's very positive if the county comes up with a solid plan and prevents bankruptcy," said Matt Fabian, a managing director at Municipal Market Advisors in Concord, Massachusetts. "All of the (debt) issuers in the state will suffer with higher yields if Jefferson County has to file for bankruptcy."

Jefferson County originally sold the debt to pay for upgrades to its sewer system, and its debt crisis began in early 2008 with credit ratings downgrades of municipal bonds insurers. Those ratings cuts throttled auction-rate markets and dramatically increased the interest costs for Jefferson County and many other issuers of auction-rate securities.

The interest on auction-rate debt resets through periodic auctions, typically held every seven, 28 or 35 days. That market seized up in February after Wall Street brokerages stopped supporting the debt, and investors demanded much higher interest rates from debt issuers.

A bankruptcy filing by Jefferson County over its sewer debt would be the biggest by a U.S. local government since Orange County, California, filed for protection in December 1994.

Such a filing, a rarity by a local government, would also make Jefferson County the latest casualty of the global credit crunch, hit by its exposure to the auction-rate securities market.

Jefferson County's sewer financing was also dogged by local scandal. The U.S. Securities and Exchange Commission sued three people, including Birmingham's mayor, for alleged fraud in connection with interest-rate swaps tied to the bonds.

The SEC alleged that Birmingham Mayor Larry Langford took more than $156,000 from bond dealer William Blount while Langford was president of the county commission after steering swap agreements in 2003 and 2004 to Blount's firm.

Riley, in his terse written statement, said: "The tone of the meeting was positive and constructive, and I remain willing to facilitate further progress towards a solution."

The talks occurred as Alabama officials braced for Hurricane Gustav, which is now in the Caribbean and next week may strike Alabama or elsewhere on the U.S. Gulf Coast as a powerful Category 3 storm. It has already killed at least 68 people.

I-BBC
 Page last updated at 23:13 GMT, Wednesday, 6 August 2008 00:13 UK  
Man studying share prices on screen
Not every country's economy has been affected by the credit crunch

Credit crunch: Around the world
One year after the start of the global credit crunch, the various regions of the world are experiencing a range of different market conditions.

Some countries are struggling to cope with economic slowdown and avoid recession, while others are virtually unscathed.

We asked BBC correspondents in key cities to tell us about the most important economic factors in their regions and to give us an idea of the local mood.

WALL STREET HOPES: GREG WOOD IN NEW YORK

A strange thing is happening on Wall Street. As the first anniversary of the credit crunch approaches, investors have stopped battering financial stocks and started buying them again.

Merrill Lynch building
Merrill's last set of write-downs were on Thursday, 17 July

The share price of Bank of America has nearly doubled in a matter of days. And it's not as though the news coming out of the US banks is getting any better.

Last month, Merrill Lynch announced another write-down, this time of more than $4bn, and the sale of all its investments backed by toxic mortgages.

According to veteran Wall street trader Teddy Weisberg, of Seaport Securities, "Merrill Lynch is crying uncle," American slang for giving up or surrendering.

But by confessing to the full extent of their losses, Merrill and other US banks may, at long last, have succeeded in drawing a line under the sub-prime debacle and moving on.


CREDIT CRUNCH: 9 AUGUST 2007
Short-term credit markets freeze up after French bank BNP Paribas suspends three investment funds worth 2bn euros
The bank cited problems in the US sub-prime mortgage sector
During the following months, US and European banks report losses totalling hundreds of billions of dollars
The European Central Bank pumps 95bn euros into the eurozone banking system to ease the sub-prime credit crunch
The US Federal Reserve and the Bank of Japan take similar steps

Mr Weisberg says: "The banks are telling us: Yeah, we've got problems. But they're under control and we're not going out of business."

The revival of financial stocks has been mirrored by a sharp fall in the oil price. Oil is no longer regarded by investors as a one-way bet. Demand in the US has fallen.

The market is now on red alert for any signs that China's appetite for oil may be faltering too.

And, despite some dire predictions, the US economy has not fallen into recession. It grew at an annual rate of nearly 2% in the second quarter, as exports boomed on the back of a weak dollar.

Confidence remains extremely brittle. Another banking collapse or renewed tensions over Iran's nuclear programme could break it in an instant.

But the mood on Wall Street has undoubtedly changed. It's not one of optimism. More a sense that - one year on - the worst of the credit crunch is behind us.

EUROPE'S FEARS: DUNCAN BARTLETT IN BRUSSELS

It is becoming apparent that the effects of the credit crunch on Europe may be even more profound than on the US.

The financial sector has been worst hit. Many major European banks had exposure to the US mortgage market and according to the Institute of International Finance, the European banking sector lost more money last year than American banks.

In Denmark and the UK, governments have stepped in to stop Roskilde and Northern Rock banks going out of business.

The real fear is that is that if one major European bank goes under, others will follow.

Peter Spencer, an economist at Britain's Item Club, speaks of the "virus-like" effect of the credit crunch. "We do not know how long the contagion is going to run," he told the BBC.

One result of the financial crisis has been a reluctance by banks to lend money to each other and to their customers.

European Central Bank
The ECB has been applauded for its response to the credit crisis

To counter this lack of liquidity, the European Central Bank (ECB) has poured massive amounts of money into the markets to prevent them seizing up altogether.

Many European countries now face the threat of recession, particularly the Irish Republic and Spain. Denmark is already in recession.

That is not entirely down to the credit crunch. Rising food and oil prices and falling house prices have all had an impact.

However, national governments as well as institutions such as the European Commission and the European Central Bank are finding it hard to respond.

In fact, they are appealing to the financial and business communities to help.

But those sectors have profound problems of their own and are finding it difficult to find the funds or the motivation to come to the rescue of Europe's faltering economy.

NEW WORLD ORDER: MATTHEW HEAVENS IN SINGAPORE

When Mizuho Financial admitted it had lost more than $6bn on investments in the US mortgage market, the Japanese bank earned the title of Asia's biggest sub-prime loser.

But just compare that to the more than $40bn written off by Citigroup, and more than $30bn apiece lost by Merrill Lynch and UBS, and you'll see how unscathed - relatively speaking - Asia's cautious bankers have been by the crisis.

In fact, in the financial world, you could say the credit crunch has shaken up the old order in Asia's favour.

Mizuho
Mizuho is Japan's second largest bank

Plunging stock prices on Wall Street mean the world's top two banks by market value - and three out of the top six - are Chinese.

Singapore's investment funds Temasek and GIC have used the turmoil to make massive investments in the Western banking sector.

They're now the biggest shareholders of Merrill Lynch and UBS. They are both sitting on big paper losses as values continue to fall, but they will tell you this was a unique opportunity to gain