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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.




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?"


-------------

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

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 deri
ved 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.

L
esson 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
Article Tools Sponsored By
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 that sort of foothold on Wall Street.

And while we are focused on this week's one-year anniversary of the credit crunch, it is easy to forget that other anniversary we were marking last year - 10 years since the Asian financial crisis.

The irony of Asian money bailing out Western banks has not been lost on many in this part of the world.

A much bigger worry for many Asians, though, is the economic fallout of the credit crunch.

The US consumer is still the most important buyer for much of what industrialised Asia produces.

Japanese export giants like Sony and Nissan are already feeling the impact as Americans tighten their belts. And the weakness of the US dollar is only making Japanese goods less affordable.

In the "factory of the world", the manufacturing heartland of Southern China, they are also feeling the effects of weakening global demand, with plant closures and layoffs.

Not all export businesses are in panic mode, though. South Korean exports have been growing at their fastest rate in four years.

The likes of Samsung and Hyundai have long been poor relations to their Japanese arch-rivals. But they've been able to win new customers in emerging markets like Latin America, the Middle East and China.

According to one estimate, retail sales in China are growing by 20% a year. Perhaps that's been the biggest effect of the credit crunch - to underline how the shape of the world economy is changing.

INFLATION SOARS: SHILPA KANNAN IN DELHI

India started the year with experts talking about how the country was "decoupled" from the global markets. But now, three-quarters into the year, it’s clear that the problems are more complicated.

The country has been hit by three main worries this year - the impact of the global credit crunch, high oil prices and, more locally, rising inflation rates.

Inflation in India is running at a 13-year high, driven by the soaring cost of food and fuel. The country’s central bank has been aggressively increasing its key interest rate to try and control the rising inflation rates.

While some analysts have welcomed the move, some others feel higher interest rates could cause economic growth to slow further.

Indian labourer carries bag of rice in Delhi
The price of rice is a heavy burden for many Indians

The central bank has also repeatedly lifted the cash reserve ratio (CRR) - the level of minimum cash banks must keep in relation to customer deposits - in an attempt to discourage lending.

But manufacturers are already complaining that their profits have slumped as the price of raw materials is soaring, while consumers are simply not spending enough.

It has been a turbulent year for the markets as well. The Bombay Stock Exchange's benchmark Sensex has fallen more than 5,000 points and is now at last year’s levels.

But many global banks such as HSBC, GE Money and Standard Chartered are turning towards emerging markets like India and China to offset the global losses.

Many experts here feel the quality of credit is much better in India. But the global credit crunch has made institutions here more conservative, especially in consumer finance.

This is likely to hit Indian consumers, especially those looking to borrow to buy a new car or a new home.

Increasingly, there is rising public anger among the country's poor, who are the hardest hit by soaring prices.

In an effort to temper price rises, the Government has already cut import duties on edible oils and banned the export of pulses and most types of rice.

But with most of South Asia suffering from a food crisis, Sri Lanka and Bangladesh are looking to India for rice imports.

This is worrying the Congress-led government, as nearly a dozen states are going to the polls this year and general elections are due by next year.

CREDIT BOOM, NOT BUST: GARY DUFFY IN SAO PAULO

Not for the first time when it comes to economic indicators around the world, Brazil as a developing country is bucking the trend for a gloomy outlook.

Here, the news is less about a credit crunch and more about unprecedented opportunities for people to buy their own home or to purchase consumer goods that were previously out of reach.

International investment agencies and magazines have been quick to notice that Brazil has largely escaped the pain of the credit crunch, and have been pointing investors towards Latin America's largest economy as a safe bet.

Sao Paulo city centre
Brazil's economy has remained stable as other countries feel the strain

It is "business as normal" in Brazil, as one headline screamed. Foreign investors have taken note and are flooding into the country.

Newly-available mortgage finance has undoubtedly opened the housing market to younger home buyers who were previously excluded.

"I wouldn't have stood a chance to buy this flat five years ago," says Renato Guidolin, a 30-year-old graphic designer, who is about to close a deal on a new apartment in Sao Paulo.

"It is easier to get a mortgage. The economy is a lot more established, which I believe is making buying a lot easier - not only houses, but all sort of goods."

There is visible evidence in many parts of Sao Paulo of a booming housing market, with construction work on residential buildings continuing at a furious pace.

Sales seem to be happening at much the same speed - it often appears most apartments are sold before the work is completed.

TV is awash with advertisements for companies selling electronic goods offering long-term credit deals. Despite the final cost, many Brazilians are choosing to buy more expensive items which, for many in the past, would have been out of their reach.

All this is happening against the background of a much more secure economic situation in a country that used to be troubled by crippling inflation.

Brazil remains a country marked by great inequality, but the steadily-improving economy has moved many of its poorer citizens onto the lower rungs of the middle class.

There is certainly concern about the impact of rising food prices and Brazil is becoming a more expensive country in which to live - but for the moment, the mood is buoyant.

BANKING BUBBLE: ANDREW WALKER IN ABUJA

While the credit crunch has hit the European and US banking sector hard, in Nigeria the situation is exactly the reverse.

Banks are falling over themselves to lend money to people in ways that they have never done before.

Millions of Nigerians don't have an account, as in the past they lacked confidence in banks. They used to go under regularly, taking everyone's money with them.

But confidence has grown in banks since the government forced them to consolidate three years ago. Now there are fewer, stronger banks and they're expanding rapidly.

Even in some of the most remote villages, there are now branches with cashpoint machines.

Part of the boom was fuelled by bank share issues which were massively oversubscribed. Banks offered marginal trading loans to people to buy shares in other banks, prompting fears the stock market boom could turn into a bubble.

The Central Bank tightened regulations and banks have aggressively marketed personal loans instead. For the first time, individuals have been able to get loans and mortgages - albeit at interest rates of about 24%.

The lending market boom was fed by the government selling off thousands of houses it owned at knock-down prices.

Unlike Europe and America, the housing market in the capital, Abuja, is booming, with some investors rumoured to have made 400% profits on houses they bought from the government and sold on.

But in an economy that doesn't produce much except oil, it remains to be seen if the central bank can prevent future banking bubbles from bursting.




Shipping Costs Start to Crimp Globalization

NYTIMES
By LARRY ROHTER
Published: August 3, 2008

When Tesla Motors, a pioneer in electric-powered cars, set out to make a luxury roadster for the American market, it had the global supply chain in mind. Tesla planned to manufacture 1,000-pound battery packs in Thailand, ship them to Britain for installation, then bring the mostly assembled cars back to the United States.

But when it began production this spring, the company decided to make the batteries and assemble the cars near its home base in California, cutting more than 5,000 miles from the shipping bill for each vehicle.

“It was kind of a no-brain decision for us,” said Darryl Siry, the company’s senior vice president of global sales, marketing and service. “A major reason was to avoid the transportation costs, which are terrible.”

The world economy has become so integrated that shoppers find relatively few T-shirts and sneakers in Wal-Mart and Target carrying a “Made in the U.S.A.” label. But globalization may be losing some of the inexorable economic power it had for much of the past quarter-century, even as it faces fresh challenges as a political ideology.

Cheap oil, the lubricant of quick, inexpensive transportation links across the world, may not return anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Rising concern about global warming, the reaction against lost jobs in rich countries, worries about food safety and security, and the collapse of world trade talks in Geneva last week also signal that political and environmental concerns may make the calculus of globalization far more complex.

“If we think about the Wal-Mart model, it is incredibly fuel-intensive at every stage, and at every one of those stages we are now seeing an inflation of the costs for boats, trucks, cars,” said Naomi Klein, the author of “The Shock Doctrine: The Rise of Disaster Capitalism.”

“That is necessarily leading to a rethinking of this emissions-intensive model, whether the increased interest in growing foods locally, producing locally or shopping locally, and I think that’s great.”

Many economists argue that globalization will not shift into reverse even if oil prices continue their rising trend. But many see evidence that companies looking to keep prices low will have to move some production closer to consumers. Globe-spanning supply chains — Brazilian iron ore turned into Chinese steel used to make washing machines shipped to Long Beach, Calif., and then trucked to appliance stores in Chicago — make less sense today than they did a few years ago.

To avoid having to ship all its products from abroad, the Swedish furniture manufacturer Ikea opened its first factory in the United States in May. Some electronics companies that left Mexico in recent years for the lower wages in China are now returning to Mexico, because they can lower costs by trucking their output overland to American consumers.

Neighborhood Effect

Decisions like those suggest that what some economists call a neighborhood effect — putting factories closer to components suppliers and to consumers, to reduce transportation costs — could grow in importance if oil remains expensive. A barrel sold for $125 on Friday, compared with lows of $10 a decade ago.

“If prices stay at these levels, that could lead to some significant rearrangement of production, among sectors and countries,” said C. Fred Bergsten, author of “The United States and the World Economy” and director of the Peter G. Peterson Institute for International Economics, in Washington. “You could have a very significant shock to traditional consumption patterns and also some important growth effects.”

The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs. Big container ships, the pack mules of the 21st-century economy, have shaved their top speed by nearly 20 percent to save on fuel costs, substantially slowing shipping times.

The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tariff on trade. “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” the report concluded, and as a result “has effectively offset all the trade liberalization efforts of the last three decades.”

The spike in shipping costs comes at a moment when concern about the environmental impact of globalization is also growing. Many companies have in recent years shifted production from countries with greater energy efficiency and more rigorous standards on carbon emissions, especially in Europe, to those that are more lax, like China and India.

But if the international community fulfills its pledge to negotiate a successor to the Kyoto Protocol to combat climate change, even China and India would have to reduce the growth of their emissions, and the relative costs of production in countries that use energy inefficiently could grow.

The political landscape may also be changing. Dissatisfaction with globalization has led to the election of governments in Latin America hostile to the process. A somewhat similar reaction can be seen in the United States, where both Senators Barack Obama and Hillary Rodham Clinton promised during the Democratic primary season to “re-evaluate” the nation’s existing free trade agreements.

Last week, efforts to complete what is known as the Doha round of trade talks collapsed in acrimony, dealing a serious blow to tariff reduction. The negotiations, begun in 2001, failed after China and India battled the United States over agricultural tariffs, with the two developing countries insisting on broad rights to protect themselves against surges of food imports that could hurt their farmers.

Some critics of globalization are encouraged by those developments, which they see as a welcome check on the process. On environmentalist blogs, some are even gleefully promoting a “globalization death watch.”

Many leading economists say such predictions are probably overblown. “It would be a mistake, a misinterpretation, to think that a huge rollback or reversal of fundamental trends is under way,” said Jeffrey D. Sachs, director of the Earth Institute at Columbia University. “Distance and trade costs do matter, but we are still in a globalized era.”

As economists and business executives well know, shipping costs are only one factor in determining the flow of international trade. When companies decide where to invest in a new factory or from whom to buy a product, they also take into account exchange rates, consumer confidence, labor costs, government regulations and the availability of skilled managers.

‘People Were Profligate’

What may be coming to an end are price-driven oddities like chicken and fish crossing the ocean from the Western Hemisphere to be filleted and packaged in Asia not to be consumed there, but to be shipped back across the Pacific again. “Because of low costs, people were profligate,” said Nayan Chanda, author of “Bound Together,” a history of globalization.

The industries most likely to be affected by the sharp rise in transportation costs are those producing heavy or bulky goods that are particularly expensive to ship relative to their sale price. Steel is an example. China’s steel exports to the United States are now tumbling by more than 20 percent on a year-over-year basis, their worst performance in a decade, while American steel production has been rising after years of decline. Motors and machinery of all types, car parts, industrial presses, refrigerators, television sets and other home appliances could also be affected.

Plants in industries that require relatively less investment in infrastructure, like furniture, footwear and toys, are already showing signs of mobility as shipping costs rise.  Until recently, standard practice in the furniture industry was to ship American timber from ports like Norfolk, Baltimore and Charleston to China, where oak and cherry would be milled into sofas, beds, tables, cabinets and chairs, which were then shipped back to the United States.

But with transportation costs rising, more wood is now going to traditional domestic furniture-making centers in North Carolina and Virginia, where the industry had all but been wiped out. While the opening of the American Ikea plant, in Danville, Va., a traditional furniture-producing center hit hard by the outsourcing of production to Asia, is perhaps most emblematic of such changes, other manufacturers are also shifting some production back to the United States.

Among them is Craftmaster Furniture, a company founded in North Carolina but now Chinese-owned. And at an industry fair in April, La-Z-Boy announced a new line that will begin production in North Carolina this month.

“There’s just a handful of us left, but it has become easier for us domestic folks to compete,” said Steven Kincaid of Kincaid Furniture in Hudson, N.C., a division of La-Z-Boy.

Avocado Salad in January

Soaring transportation costs also have an impact on food, from bananas to salmon. Higher shipping rates could eventually transform some items now found in the typical middle-class pantry into luxuries and further promote the so-called local food movement popular in many American and European cities.

“This is not just about steel, but also maple syrup and avocados and blueberries at the grocery store,” shipped from places like Chile and South Africa, said Jeff Rubin, chief economist at CIBC World Markets and co-author of its recent study on transport costs and globalization. “Avocado salad in Minneapolis in January is just not going to work in this new world, because flying it in is going to make it cost as much as a rib eye.”

Global companies like General Electric, DuPont, Alcoa and Procter & Gamble are beginning to respond to the simultaneous increases in shipping and environmental costs with green policies meant to reduce both fuel consumption and carbon emissions. That pressure is likely to increase as both manufacturers and retailers seek ways to tighten the global supply chain.

“Being green is in their best interests not so much in making money as saving money,” said Gary Yohe, an environmental economist at Wesleyan University. “Green companies are likely to be a permanent trend, as these vulnerabilities continue, but it’s going to take a long time for all this to settle down.”

In addition, the sharp increase in transportation costs has implications for the “just-in-time” system pioneered in Japan and later adopted the world over. It is a highly profitable business strategy aimed at reducing warehousing and inventory costs by arranging for raw materials and other supplies to arrive only when needed, and not before.

Jeffrey E. Garten, the author of “World View: Global Strategies for the New Economy” and a former dean of the Yale School of Management, said that companies “cannot take a risk that the just-in-time system won’t function, because the whole global trading system is based on that notion.” As a result, he said, “they are going to have to have redundancies in the supply chain, like more warehousing and multiple sources of supply and even production.”

One likely outcome if transportation rates stay high, economists said, would be a strengthening of the neighborhood effect. Instead of seeking supplies wherever they can be bought most cheaply, regardless of location, and outsourcing the assembly of products all over the world, manufacturers would instead concentrate on performing those activities as close to home as possible.

In a more regionalized trading world, economists say, China would probably end up buying more of the iron ore it needs from Australia and less from Brazil, and farming out an even greater proportion of its manufacturing work to places like Vietnam and Thailand. Similarly, Mexico’s maquiladora sector, the assembly plants concentrated near its border with the United States, would become more attractive to manufacturers with an eye on the American market.

But a trend toward regionalization would not necessarily benefit the United States, economists caution. Not only has it lost some of its manufacturing base and skills over the past quarter-century, and experienced a decline in consumer confidence as part of the current slowdown, but it is also far from the economies that have become the most dynamic in the world, those of Asia.

“Despite everything, the American economy is still the biggest Rottweiler on the block,” said Jagdish N. Bhagwati, the author of “In Defense of Globalization” and a professor of economics at Columbia. “But if it’s expensive to get products from there to here, it’s also expensive to get them from here to there.”



Op-Ed Columnist
Texas to Tel Aviv         
NYTIMES
By THOMAS L. FRIEDMAN
Published: July 27, 2008

What would happen if you cross-bred J. R. Ewing of “Dallas” and Carl Pope, the head of the Sierra Club? You’d get T. Boone Pickens. What would happen if you cross-bred Henry Ford and Yitzhak Rabin? You’d get Shai Agassi. And what would happen if you put together T. Boone Pickens, the green billionaire Texas oilman now obsessed with wind power, and Shai Agassi, the Jewish Henry Ford now obsessed with making Israel the world’s leader in electric cars?

You’d have the start of an energy revolution.

The only good thing to come from soaring oil prices is that they have spurred innovator/investors, successful in other fields, to move into clean energy with a mad-as-hell, can-do ambition to replace oil with renewable power. Two of the most interesting of these new clean electron wildcatters are Boone and Shai.

Agassi, age 40, is an Israeli software whiz kid who rose to the senior ranks of the German software giant SAP. He gave it all up in 2007 to help make Israel a model of how an entire country can get off gasoline and onto electric cars. He figured no country has a bigger interest in diminishing the value of Middle Eastern oil than Israel. On a visit to Israel in May, I took a spin in a parking lot on the Tel Aviv beachfront in Agassi’s prototype electric car, while his sister watched out for the cops because it is not yet licensed for Israeli roads.

Agassi’s plan, backed by Israel’s government, is to create a complete electric car “system” that will work much like a mobile-phone service “system,” only customers sign up for so many monthly miles, instead of minutes. Every subscriber will get a car, a battery and access to a national network of recharging outlets all across Israel — as well as garages that will swap your dead battery for a fresh one whenever needed.

His company, Better Place, and its impressive team would run the smart grid that charges the cars and is also contracting for enough new solar energy from Israeli companies — 2 gigawatts over 10 years — to power the whole fleet. “Israel will have the world’s first virtual oilfield in the Negev Desert,” said Agassi. His first 500 electric cars, built by Renault, will hit Israel’s roads next year.

Agassi is a passionate salesman for his vision. He could sell camels to Saudi Arabia. “Today in Europe, you pay $600 a month for gasoline,” he explained to me. “We have an electric car that will cost you $600 a month” — with all the electric fuel you need and when you don’t want the car any longer, just give it back. No extra charges and no CO2 emissions.

His goal, said Agassi, is to make his electric car “so cheap, so trivial, that you won’t even think of buying a gasoline car.” Once that happens, he added, your oil addiction will be over forever. You’ll be “off heroin,” he says, and “addicted to milk.”

T. Boone Pickens is 80. He’s already made billions in oil. He was involved in some ugly mischief in funding the “Swift-boating” of John Kerry. But now he’s opting for a different legacy: breaking America’s oil habit by pushing for a massive buildup of wind power in the U.S. and converting our abundant natural gas supplies — now being used to make electricity — into transportation fuel to replace foreign oil in our cars, buses and trucks.

Pickens is motivated by American nationalism. Because of all the money we are shipping abroad to pay for our oil addiction, he says, “we are on the verge of losing our superpower status.” His vision is summed up on his Web site: “We import 70 percent of our oil at a cost of $700 billion a year ... I have been an oil man all my life, but this is one emergency we can’t drill our way out of. If we create a renewable energy network, we can break our addiction to foreign oil.”

Pickens made clear to me over breakfast last week that he was tired of waiting for Washington to produce a serious energy plan. So his company, Mesa Power, is now building the world’s largest wind farm in the Texas Panhandle, where he’s spent $2 billion buying land and 700 wind turbines from General Electric — the largest single turbine order ever. The U.S. could secure 20 percent of its electricity needs from wind alone.

But Pickens knows he’s unique. Unless, he says, “Congress adopts clear, predictable policies” — with long-term tax incentives and infrastructure — so thousands of investors can jump into clean power, we’ll never get the scale we need to break our addiction. For a year, Senate Republicans have been blocking such incentives for wind and solar energy. They vote again next week.

If only we had a Congress and president who, instead of chasing crazy schemes like offshore drilling and releasing oil from our strategic reserve, just sat down with Boone and Shai and asked one question: “What laws do we need to enact to foster 1,000 more like you?” Then just do it, and get out of the way.




I-BBC
Page last updated at
12:52 GMT, Friday, 18 July 2008 13:52 UK

Gas bills 'to top £1,000 a year'
Energy bills could rise by more than 60% within the next few years, a report for the UK's biggest domestic energy supplier Centrica has said.

It said annual average gas bills could rise from £600 to more than £1,000 early in the next decade.

Continuing high oil prices could lead to rises in the cost of both gas and electricity, it added.

The energy minister said predictions of huge rises were "mere speculation" and may not prove to be accurate.

But Malcolm Wicks told Channel 4 News: "Bills are likely to go up. Certainly that is the case. I agree with the person who said that the era of cheap energy is over."

'Two jumpers'

Centrica managing director Jake Ulrich warned that gas prices were likely to continue rising "for some time".

"I think it is going to hit people hard," he said.

"I do think we will see people change their behaviour, I think people will use less energy and I hate to go back to the Jimmy Carter days in the US, but maybe it's two jumpers instead of one.

"I think people will change the temperature they keep the house, they'll be more cognisant of energy waste, they'll buy better appliances."

Gas hob
The price of domestic gas is linked to the price of oil

Centrica Energy managing director Jake Ulrich warns that gas bills are set to rise

He added: "We're part of a world economy and I don't think we can rely on UK production or cheap gas, cheap energy of any sort any more.

"I think it's a reality not only in the UK but in Western Europe and North America. Energy is going to become relatively much more expensive in the future."

BBC News business reporter John Moylan says some people will wonder whether, by publishing the research, Centrica - which owns British Gas - is laying the groundwork for even steeper price rises in the years ahead.

The study - Under the Influence of Oil - was conducted for Centrica by Norwegian-based energy advisers Eclipse.

Eclipse managing partner John King said: "This report signals the significant change which the UK will go through over the next few years as the price of the UK gas market becomes influenced by factors across the globe."

Declining output

The report said that the link between crude oil prices and wholesale gas prices in the UK will get stronger over the next few years as dwindling output from North Sea makes the UK more dependent on imports.


"It looks like the era of cheap energy is over"
Duncan Sedgwick
Energy Retail Association


The UK must now compete with European countries for gas transported by pipeline or bid for tanker loads of liquefied natural gas in international markets where prices are correlated with oil.

"As recently as 2004 we were entirely self-sufficient, but by 2010, half our gas will come from somewhere else," Niall Trimble, managing director of industry consultants the Energy Contract Company, told the BBC.

Oil prices, which hit a record above $147 a barrel earlier this month, have fallen sharply this week to about $133 a barrel but are still twice as high as a year ago.

"The gas spot market has risen very, very sharply in the past year and the spot market is driven by oil," Mr Trimble added.

Price link

The prices of oil and gas have been linked historically because factories used to heat their premises using oil and gas together.

Oven
Half of the UK domestic gas supply will come from elsewhere by 2010

The contracts they signed for supply of fuel linked these two fuels to regulate price.

Suppliers say they are tied by the wholesale market, but consumer groups say the price link between oil and gas should no longer exist.

Energywatch described the link as "toxic" and said bills would fall significantly if they were decoupled.

"The government is right to say that the link to oil is a cause of the problems but wrong to say there is nothing that can be done," said Energywatch chief executive Allan Asher.

"The local impact is so catastrophic it should be leading the international drive to end the hugely damaging and entirely unjustifiable link between the prices of gas and oil.

"Rampaging oil prices are a serious and global contagion. That does not mean we should just take to our beds and hope that the fever will pass.

"Government can and should act in those areas where it can have an effect. Action to cut to the price link between gas and oil, action to improve the working of the domestic market, action to help those who can least afford to keep warm."

But the Energy Retail Association (ERA), which represents suppliers, said a reality check was needed, although it pointed out that assistance was available to customers who were struggling.

"Britain is no longer an energy island and we are much more exposed to the global energy markets than ever before," said ERA chief executive Duncan Sedgwick.

"It looks like the era of cheap energy is over."

Fuel poverty

The government estimates that 2.5 million households are in fuel poverty - defined as when more than 10% of household income is spent on fuel bills - but watchdog Energywatch says the figure is more than four million.


GAS PRICE RISES IN 2008
Npower: 17.2% rise in January
EDF: 12.9% rise in January
British Gas: 15% rise in January
Scottish Power: 15% rise in February
E.On: 15% rise in February
Scottish and Southern Energy: 15.8% rise in April

The consumer group says that 1,000 a day are being pushed onto more expensive pre-payment meters because they are getting into debt with utility bills.

If prices rise as much as this report predicts, that would make many more people fuel poor, campaigners say.

Rises of the scale suggested would put one in three pensioner households into this sector, according to Gordon Lishman, director general of Age Concern.

"It is totally unacceptable that because of price hikes, many older people may feel forced to cut back on their heating, which could put their health at risk," he said.

He said the government should introduce a fuel voucher scheme for the poorest pensioners and introduce mandatory social tariffs to ensure the poorest customers got the best deal.

Energy regulator Ofgem has been investigating the electricity and gas markets for households and small businesses since February.

It said it had no evidence of anti-competitive behaviour, but was responding to customer worries.




In 2009...
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.


In 2008...
Consumers finding more will buy less
CT POST
PAM DAWKINS
Article Last Updated: 08/05/2008 12:24:36 AM EDT

Economists define inflation as too many dollars chasing too few goods.  To an individual consumer, this means the cost to buy a lot of the goods they need is growing at a faster rate than the cost-of-living increases to their paychecks.

"There's a disconnect, and there's a feeling that you're getting poorer," said Peter M. Gioia, an economist and vice president with the Connecticut Business & Industry Association.

Inflation is one side of the economy the Federal Open Market Committee will seek to balance when it meets today. The other is economic growth, and they pull in opposite directions.

"I think they've got a real conundrum," Gioia said Monday. At its last meeting, Gioia said, committee members were more concerned with keeping inflation in check, but there's been some rough economic sledding since then, including in employment news.

"My guess is, they'll stand pat [on interest rates]," Gioia said, but Chairman Ben Bernanke will have a more contentious meeting to deal with than usual, and there could be dissenting votes, which is unusual.

Edward Deak, an economics professor at Fairfield University, also expects no change to the federal funds rate, which is what the Federal Reserve charges banks on overnight loans. This drives the prime rate, which determines the interest rates for a number of consumer loans.

Deak said he thinks the committee will leave its target for the rate at 2 percent today, and would not be surprised if it kept rates down for the rest of the year, because energy prices are declining.  Monday, the per-barrel price for crude oil fell $3.69, to $121.41 on the New York Mercantile Exchange.

The Federal Reserve's moves to add liquidity to the financial system by providing bailouts and loans to banks and other institutions put more money in than the economy can absorb, Deak said. But, he said, inflation would be worse if the Fed hadn't done this.

The thought among economists, Deak said, is inflation will subside going into 2009, as the housing market troubles get further in the past. He agrees with this in part, but cautioned it is impossible to see the future, including, for example, what might happen to energy prices.  A drop in commodity costs can quickly translate into lower prices, said Gioia, who expects commodities will either continue to grow slowly or drop rapidly. But the question, he said, is when this will happen.

Also Monday, the Commerce Department reported consumer spending dipped by 0.2 percent in June, after removing the effects of higher prices, the poorest showing since a similar drop in February.

The higher prices reflected a big surge in gasoline costs and helped to drive an inflation gauge tied to consumer spending up by 0.8 percent in June, a monthly increase that has been exceeded only once since 1981. This price gauge jumped by 1 percent in September 2005 after Hurricane Katrina shut down oil production along the Gulf Coast.

The big rise in inflation ate up a part of the billions of dollars in stimulus payments delivered during the month. Personal incomes rose by a tiny 0.1 percent in June following a giant 1.8 percent increase in May.

The Dow Jones industrial average fell 42.17 to 11,284.15. The Standard & Poor's 500 index fell 11.30 to 1,249.01, and the Nasdaq composite index declined 25.40 to 2,285.56. The Russell 2000 index of smaller companies fell 12.02 to 704.14.

"It is a monetary event," Todd Martin, of Todd P. Martin Economic Services in Fairfield, said of inflation.

Demand-pull inflation happens when there's too much money and not enough goods and services, Martin said. It happens, for example, when the global demand for oil increases and the supply does not.  The supply-shock type of inflation, he said, happens when a supply interruption drives prices higher, such as when oil prices rose after Hurricane Katrina interrupted production and distribution in the Gulf of Mexico.

Today's situation, Martin said, has a little bit of both types of inflation.

The generally rising price of oil — used in making as well as transporting products — has driven the cost of everything higher, Martin said, while the open-market committee has been cutting rates to bolster economic growth by making it cheaper to borrow money. But this can also result in higher inflation. As money flows to where rates are higher, Martin said, the value of the dollar sinks, and prices rise for imported products, including oil.

Martin also believes the committee will hold rates steady today, given recent economic data. Gross domestic product, the value of goods and services produced in the country, rose only 1.9 percent in the most recent quarter, while the overall inflation rate is about 5 percent. The U.S. Labor Department measures price changes through its Consumer Price Index, which uses the cost of a market basket of goods, including breakfast cereal, milk, rent, women's dresses, prescription drugs, new cars, pet products and haircuts.

The government takes out the cost of food and fuel in figuring its core rate of inflation because those prices are volatile; that rate is about 2.5 percent, Martin said.  But most people, he added, would probably argue their personal inflation rates are much higher. "It's all the T's," he said, "including tuition, taxes, transportation, telecommunications and [my] tummy."


U.S. Report Shows Spike in Energy Costs for Households in New York Region   
NYTIMES
By PATRICK McGEEHAN
Published: July 17, 2008

From May to June, the cost of residential energy use in the New York metropolitan region shot up by 10.8 percent, the biggest increase in any month on record, according to the latest report on inflation from the federal Bureau of Labor Statistics. The price of electricity, which rose more than 15 percent in that period, was the main driver of the overall cost of household energy.

Power bills have been rising fast in the region as utilities have passed on the surging cost of fuel. Locally, the price of fuel oil was more than 75 percent higher than in June 2007. Con Edison said last week that residential customers would be charged about 22 percent more this summer than last.

Over the past year, the cost of household energy has risen more than 18 percent, according to the report. The escalation of energy prices easily eclipsed the fast rise in the cost of food. Prices of groceries and other food consumed at home rose 6.4 percent in the past year, which was the largest change in any 12-month period since June 2004.

The overall rate of consumer price increases in the metropolitan area in the last 12 months was 4.5 percent. That was the highest annual rate of inflation in the region in almost two years but was lower than the national rate for the past year, 5 percent. From May to June, the local inflation rate was 1 percent.

In the metropolitan area, the only prices that have not been rising sharply have been for discretionary items, like clothing, household furnishings and entertainment, the report showed.

The price of clothing in the region dropped more than 5 percent last month and is down by more than 3 percent over the past year, a reflection of the weakening job market, said Michael L. Dolfman, the regional commissioner of labor statistics.

“When the job market is strong, people go out and buy some clothes, interview suits,” Mr. Dolfman said.

Rising rents also contributed to the surge in the cost of living. In the metropolitan area, rents rose 0.7 percent in June, about double the rate recorded in each of the previous seven months. Over the past year, rents have risen 4.8 percent, the report showed.



As I recall from the one college economics course that I took, when we didn't have enough gold to back the dollar, it would "float" - and my economics professor, a former advisor to Presidents, said "I don't want to be around when that happens."

Inflation coming - or is it here already? 

The buck doesn't stop here; it just keeps falling 
DAY
By TOM RAUM, Associated Press Writer 

Posted on Jul 6, 9:29 AM EDT

WASHINGTON (AP) -- Things in the U.S. sure are tough. Brother, can you spare a euro? Signs saying "We accept euros" are cropping up in the windows of some Manhattan retailers. A Belgium company is trying to gobble up St. Louis-based Anheuser-Busch, the nation's largest brewer and iconic Super Bowl advertiser.

The almighty dollar is mighty no more. It has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. The long slide is fanning inflation at home and playing a major role in the run-up of oil and gasoline prices everywhere.

Vacationing Europeans are finding bargains in the U.S., while Americans in Paris and other world capitals are being clobbered by sky-high tabs for hotels, travel and even sidewalk cafes. Northern border-city Americans who once flocked into Canada for shopping deals are staying home; it's the Canadians flocking here now.

Everything made in America - from goods to entire companies - is near dirt cheap to many foreigners. Meanwhile, American consumers, both those who travel and those who stay at home, are seeing big price increases in energy, food and imported goods. The dollar has lost roughly a quarter of its purchasing power against the currencies of major U.S. trading partners from its peak in 2002.

Since oil is bought and sold in dollars worldwide, the devalued dollar has made the recent surge in energy prices even worse for Americans, leading to $4 gasoline in the United States. Analysts suggest that of the $140 a barrel that oil fetches globally, some $25 may be due to the devalued dollar.

Further declines in the dollar will add to oil's appeal as a commodity to be traded.

Oil, suggests influential energy consultant Daniel Yergin, is "the new gold."

The limp greenback has had one big benefit to the U.S. economy: Since it makes American goods cheaper overseas, it has helped manufacturers who export and other U.S. based companies with international reach. Exports have been one of the few bright spots in an otherwise darkening U.S. economy.

Franklin Vargo, vice president of international economic affairs at the National Association of Manufacturers, welcomes the dollar slide, as do members of his organization.

"We can see that, when the dollar's not overpriced, that people around the world want American goods and our exports are going gangbusters now," he said.

He doesn't see the dollar as undervalued. He sees it as having being overpriced in the 1990s - and what's happened since as something along the lines of a correction.

Still, Vargo acknowledges the dollar's decline has brought a measure of pain to some consumers. "As the dollar has gone down in value, that has added to the dollar cost of oil. No question. So having the dollar decline is not unambiguously a plus. That's why we say there's got to be a balance there somewhere. What we want is a Goldilocks dollar. Not too strong, not too weak. But just right. And only the market can determine that," Vargo said.

Mark Zandi, chief economist at Moody's Economy.com, said expanding exports due to a weak dollar are "an important source of growth, but it doesn't add a lot to jobs, it doesn't mean very much for the average American household. For the average American, for the average consumer, these are pretty tough times."

The loss of the dollar's purchasing power and international respect has some experts worrying that the euro might one day replace the dollar as the so-called primary reserve currency. And that could trigger a dollar rout as foreign governments and international investors flee from U.S. Treasury bonds and other dollar-denominated investments.

Making matters worse: The gaping U.S. current-account deficit - the amount by which the value of goods, services and investments bought in the U.S. from overseas exceeds the amount the U.S. sells abroad - and the low levels of domestic savings means that foreigners must purchase more than $3 billion every business day to fund the imbalance.

Since roughly half of the nation's nearly $10 trillion national debt is held by foreigners, mostly in Treasury bills and bonds, such a withdrawal could have enormous consequences.

Yet Washington finds its options limited.

President Bush asserts longtime support for a "strong" dollar, and made that point again Sunday in a news conference in Japan with Prime Minister Yasuo Fukuda. "In terms of the dollar, the United States strongly believes - believes in a strong dollar policy and believes that the strength of our economy will be reflected in the dollar."

But not once in his presidency has the U.S bought dollars on foreign exchange markets - called intervention - to help prop up the greenback. There's no telling where the buck will stop these days, although for the past few weeks it seems to be in a holding pattern. Even as three Bush Treasury secretaries in a row spouted the strong-dollar mantra, the dollar kept tumbling against the euro, the pound, the yen, the Canadian dollar and most other major currencies.

The Federal Reserve could prop up the dollar by increasing interest rates under its control. Increased yields would make dollar-denominated investments more attractive to foreigners. But that could undercut the already anemic economic growth in a frail U.S. economy rocked by soaring fuel costs, falling home prices and rising unemployment - and the lowest reading of consumer confidence in 16 years.

The Fed must do a balancing act between keeping the domestic economy from going into recession and keeping inflation at bay.

Furthermore, no Fed likes to raise rates aggressively in a presidential election year. It seems more inclined to hold interest rates low for now to give financial markets time to recover from the housing meltdown and credit crunch. It did just that in its meeting on June 25, leaving a key short-term rate at 2 percent. The rate reached that level in April after a series of aggressive cuts that brought it down 3.25 percentage points since September. Those cuts helped ease the housing and credit crises - but drove the dollar further down.

In early June, Bush declared before his trip to Europe: "A strong dollar is in our nation's interests. It is in the interests of the global economy." That, plus a warning by Fed Chairman Ben Bernanke that the dollar's weakness was contributing to U.S. inflation, seemed to temporarily break the dollar's tumble. Presidents and Fed chairmen don't usually talk directly about the dollar and exchange rates - leaving that up to the Treasury secretary - and international bankers and investors took note of the high-level attention.

Over the past few weeks, the dollar has remained relatively stable, although it took a dip after the Fed decided to leave rates unchanged. The long slide may not be over.

Still, if the Fed moves to lift rates later this year, as some traders and investors anticipate, it could buttress the dollar and spur an exodus of speculators from the oil market - helping to both prop up the dollar and drive down oil prices. But few economists are sanguine that the economy will improve any time soon.

The other main tool to move the dollar - intervention in currency markets by buying dollars and selling other currencies - is risky.

It would take great sums of money to make any difference. The foreign exchange market is the largest in the world, with over $1 trillion traded each day. Seeing the U.S. trying to prop up the greenback by buying dollars could be taken as a sign of desperation and possibly trigger a renewed round of selling.

Furthermore, there has been little encouragement for such a strategy from finance ministers from the Group of Eight wealthy democracies - Japan, Britain, Germany, France, Italy, Canada and Russia plus the U.S.

Leaders of the eight countries were to meet in Japan beginning Monday, but the falling dollar was not even on the formal agenda. It's too touchy an issue, and the dollar's relative stability over the past few weeks makes it easier for world leaders to steer clear. "People will be talking about it in the corridors," said Reginald Dale, a senior fellow with the Center for Strategic and International Studies.

Treasury Secretary Henry Paulson has suggested that nothing is "off the table" including intervention. But Bush has made statements suggesting he intends to let market forces set exchange rates.

The dollar has fallen so far, it will be difficult to halt or reverse its slide.

U.S. efforts to persuade Saudi Arabia and other major oil-producing nations to increase their production - and help ease pressure on both oil prices and the dollar - have brought scant results.

"There's no magic wand," said White House press secretary Dana Perino. "It's not going to be a problem that we solve overnight."

The impact of the falling dollar is not always visible to the average consumer. Not like the big numbers on gas pumps that give stark evidence of price levels.

But imported goods, from fuel to cars from Japanese automakers and toys from China - are getting more expensive just as U.S. wages are either stagnant or falling.

American companies suddenly look cheap to acquisition-minded foreigners, particularly those based in Europe.

Belgian-based InBev's hostile bid for Anheuser-Busch is a recent example. It has bid $46 billion to acquire the company - a 30 percent premium above where Anheuser's shares traded before the June 11 proposal.

A successful acquisition by InBev would put the last remaining mass-market American brewer in foreign hands. InBev is based in Belgium but run by Brazilians. Anheuser-Busch, which brews both Budweiser and Bud light, holds a 48.5 percent share of U.S. beer sales. Anheuser-Busch rejected InBev's bid, but the Belgian brewer forged ahead, seeking to unseat Anheuser's 13-member board and take its offer directly to shareholders.

If the takeover goes through, it might open the floodgates to other foreign takeovers of American companies.

Some of the dollar's decline depends on hard-to-measure factors, like the psychology of foreign investors.

When the U.S. economy is weakening, many investors stay away. The slide of the dollar has coincided with a long period of relatively low interest rates.

And some of the decline in the dollar's global role "is due to the foreign policy failures of the Bush administration, not just to recent economic developments and policies," suggests Adam S. Posen, deputy director of the Peterson Institute for International Economics and a former economist at the Federal Reserve Bank of New York. In other words, some international investors unhappy with Bush's policy on Iraq or toward other parts of the world might not wish to invest in American companies or buy U.S. bonds.

Still, he argues that the euro is unlikely to replace the dollar as the world's main reserve currency, and that the euro may be at "a temporary peak of influence."

David Wyss, chief economist at Standard & Poor's in New York, says he envisions a day when the dollar and the euro will share billing as the world's reserve currencies.

He predicts that the dollar will remain roughly at its present levels "for a couple years." Still, he says, "We might not be done with this down leg."

Another big problem for the dollar is that the European Central Bank is likely to hike rates while the Federal Reserve stands pat, giving euro-based investments a bigger yield advantage.

"I could see more downward pressure on the dollar, over the course of the summer, not dramatically, if the ECB does raise rates," said Robert Dye, an economist with PNC Financial Services Group. "If it is one and done, pressure will be minimal. But if it's an ongoing pattern of rate increases, there will be more substantial pressure."

A euro now buys as much as $1.55 in the United States.

The dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted.  Paul Volcker, who headed the Federal Reserve from 1979-87, warned in April that the nation was in a dollar crisis, and that what is happening now reminds him of the early 1970s, when serious inflation erupted as economic growth stagnated.

Then, as now, a weak economy limited the Fed's options. The result was a spiral of rising prices and wages - until the Fed, led by Volcker, suppressed double-digit inflation with huge interest rate increases that pushed the economy into a steep recession in 1982. He recently criticized the current Fed as defending the economy and the market, instead of defending the dollar. Volcker said that will make defending the greenback much harder later.

Energy consultant Yergin, chairman of Cambridge Energy Research Associates, recently told the House-Senate Joint Economic Committee that oil had become "the new gold."

"Oil has become a storehouse of value - reflecting broad global economic trends and imbalances. At the same time, oil is increasingly seen as an asset by financial investors, an uncorrelated alternative to equities, bonds, and real estate," he said.

When the credit crisis broke last summer, the result was a sharp reduction in interest rates by the Fed. That, in turn, accelerated the fall of the dollar.

"Instead of the traditional `flight to the dollar' during a time of instability, there has been a `flight to commodities' in search of stability during a time of currency instability and a falling dollar," Yergin said. "There's a painful irony here: The crisis that started in the subprime market in the United States has traveled around the world and, through the medium of a weaker dollar, has come back home to Americans in terms of higher prices at the pump." 



Oil speculation could wipe out pensions; Investments in crude oil are producing phenomenal results now, but an about-face holds the potential for disaster 
DAY
By Matthew Perrone    
Published on 6/28/2008 
          
Washington - All those speculators getting the blame for driving up the price of oil these days - just who are they? For part of the answer, look in the mirror.

The retirement savings of workers across the country, entrusted to pension fund managers, are being plowed into one of the few investments that has delivered phenomenal returns in recent years.  For decades, futures contracts were mostly traded by commodity producers and the people who used the actual products, such as crude oil, corn and soybeans. Agreeing to a price today for a commodity to be delivered in, say, two months is a way to smooth out price fluctuations for those supplies.

But large investors faced with the threat of inflation have increasingly used them as protection against the falling dollar. That includes pension funds, along with investment banks, mutual funds and private hedge funds.  Research firm Ennis Knupp and Associates says $139 billion had been funneled into energy commodites, primarily crude oil, by the end of March - and it estimates more than half of that is from retirement money.

The investments have paid off. The Standard & Poor's GSCI index, which tracks a basket of commodities, is up 19 percent in the past five years, compared with just 9 percent for the S&P 500 stock index.

The risk is that if the remarkable run in oil and other futures markets reverses course, billions of dollars of retirement benefits could be wiped out.

”A pension fund is supposed to be investing money in secure, stable investments for the benefit of the people whose money they are investing,” said Dan Lippe, an energy analyst at Houston-based Petral Consulting Inc. “When we hit that wall and things start falling, they will fall very fast, and the pension funds that invested in commodities will see a tremendous loss of value.”

The retirement system for public employees in California, the largest in the nation, has $1.3 billion invested in commodities. Most of it tracks the S&P commodity index.  That's still just one-half of 1 percent of the fund's total $240 billion in assets, said Michael Schlachter, who advises the California pension fund. He said a collapse in oil or other commodity prices would have little effect on retirees.

Still, a growing chorus of experts is convinced retirement investments are enough to distort prices.  Billionaire George Soros, the airline industry and the International Monetary Fund are all pressuring Congress to curb speculation by large investors. Democrats in Congress say they hope to vote on restrictions by August.

”Your pension fund manager may be using your retirement money to drive up the price of oil,” said Rep. Bart Stupak, D-Mich., at a hearing earlier this week on speculation in commodities. “What would happen if pension fund managers decided to increase their commodity investment by another 20-fold?”

Speculators put money into commodity markets simply to make money on their investments - unlike commercial investors, who are actually buying or selling orders for physical goods.  Energy analysts say it's unclear what effect speculators have had on oil prices, which climbed briefly to a new record above $142 on Friday before falling back.

But Stupak and other lawmakers have already dashed off more than a dozen proposals to rein in commodity trading, including limiting how many contracts speculators can hold and closing loopholes that allow them to skirt regulations.

Sen. Joe Lieberman, D-Conn., proposed banning pension funds and other large investors from commodities altogether. He dropped the idea after vigorous opposition by an association of public and private pension funds.

Schlachter, who is also managing director for investment consulting firm Wilshire Associates, called the idea “horrendously bad.” He said pension funds should not be compared to Wall Street speculators, who assume huge risks every day to maximize returns.

”The pension plans we work with are using commodities only as a long-term hedge against inflation,” he said.

Unlike the stock market, where there are a limited number of shares for each company, futures markets have no limits on contracts available. As long as a buyer can find a seller for each contract, investment opportunities are virtually unlimited.  Critics say retirement funds that accumulate contracts are artificially driving up commodity prices. In the case of oil, that means higher gas prices and more expensive food and other goods.

”If they're going to be in the futures market they need to trade rather than take this buy and hold strategy,” said Michael Masters, portfolio manager of hedge fund Masters Capital Management. “That is the worst possible thing for the futures market.”

Masters and other experts told members of Congress this week that eliminating excessive speculation could drive oil prices down to about $65 a barrel, less than half the current price.  Retirement funds have suffered at the hands of the market before. In 2002, when the stock market swooned after the dot-com crash and 9/11, retirement assets dropped $7 billion, losing 8 percent of their value. 


Oil Prices Raise the Cost of Making a Range of Goods
NYTIMES
By LOUIS UCHITELLE
Published: June 8, 2008

Surging oil prices are beginning to cut into the profits of a wide range of American businesses, pushing many to raise prices and maneuver aggressively to offset the rising cost of merchandise made from petroleum.

Airlines, package shippers and car owners are no longer the only ones being squeezed by the ever-mounting price of oil, which shot up almost $11 a barrel on Friday alone, to $138.54, a record.

Companies that make hard goods using raw materials derived from oil, like tires, toiletries, plastic packaging and computer screens, are watching their costs skyrocket, and they find themselves forced into unpleasant choices: Should they raise prices, shift to less costly procedures, cut workers, or all three?

The Goodyear Tire and Rubber Company is trying to adapt. Its raw material of choice now is natural rubber rather than synthetic rubber, made from oil. To sustain profits, it is making more high-end tires for consumers willing to pay upwards of $100 to replace each tire on their cars.

These steps have not been enough, however, particularly now that the cost of natural rubber is also rising sharply, along with that of many other commodities. So Goodyear has raised the prices of its tires by 15 percent in just four months.

“Our strategy is to raise prices and improve the mix to offset the cost of raw materials,” said Keith Price, a Goodyear spokesman. “No one has predicted how long we can continue to do that.”

The sense that many companies may be hitting a wall is palpable. Corporate profits peaked last spring and have shrunk since then, Moody’s Economy.com reports, drawing on Commerce Department data.

The housing crisis and the weakening economy are big reasons, but oil prices are adding greatly to the pressure on profits as retailers fail to pass along higher prices to consumers. That helps to explain why expensive oil has not yet pushed up the inflation rate.

So far this year, the nation’s employers have been cutting jobs at an accelerating pace, particularly last month, when the unemployment rate jumped to 5.5 percent from 5 percent. But with the vise on corporate profits tightening and the price of oil continuing to climb, more dire action, including job cuts and higher prices, may be in store, economists say, although there is still room to avoid such steps.

“Companies came into this period with extraordinarily high profit margins,” said Edward McKelvey, chief domestic economist at Goldman Sachs, “and some of the surge in raw material costs will be absorbed by lowering those profits.”

Still, the prevailing attitude that the economy could just keep absorbing higher oil prices is being tested — for the first time in nearly 30 years. Adjusted for inflation, a barrel of crude is now more expensive than it was in 1980, the previous peak.

“The conventional wisdom a couple of years ago was that oil did not have that much leverage over the economy,” said Daniel Yergin, chairman of Cambridge Energy Research Associates. “But now it plainly does. People are suddenly paying much more attention to their energy costs and trying to figure out how to manage them.”

Goodyear has kept its head above water in part by passing along some of the higher prices to dealers. The dealers, however, have not been able to pass along all of those increases to consumers and are absorbing the difference in lower profits.

Since last spring, the average profits of the nation’s corporations — from behemoths like Goodyear to small neighborhood retailers — have declined at an annual rate of nearly 6 percent, government data show.

Even companies that have been performing well in the economic downturn are sounding notes of caution. Take Costco, the discount retail chain, which offers a wide array of consumer goods, food, wine, furniture, appliances, beauty aids and much more.

Costco’s profit was up in the first quarter, but James D. Sinegal, the chief executive, says he is “starting to be confronted with unprecedented price increases” for the merchandise that Costco buys to stock its stores. His first response has been to buy in extra large quantities so that he has stock on hand to carry him through subsequent price increases.

“We just made a big purchase of Tumi luggage,” Mr. Sinegal said.

Procter & Gamble finds itself in a similar predicament. For its fiscal year beginning next month, it expects to spend an additional $2 billion on oil-based raw materials and commodities. That is double last year’s increase, and it is carved from total revenue of just under $80 billion.

Price increases have helped to offset this cost. They have averaged nearly 5 percent for paper towels, bath tissues and diapers, all made with chemicals derived from oil, said Paul Fox, a company spokesman.

Natural oils have been substituted for ingredients made from petroleum; for example, palm oil now goes into a variety of laundry soaps. But like rubber, the cost of palm oil and other natural commodities is rising.

Trying to hold down raw material costs, Procter & Gamble has resorted to “compacting” a few laundry products, Mr. Fox said, so that the same amount of detergent fits into smaller and less costly containers made of plastic, which is derived from oil.

Still, the company’s operating profit edged down to 20.1 percent of revenue in the first quarter, from 21.9 percent in each of the two previous quarters. “That 20.1 percent was down, but it was an improvement on the advance guidance we had given for that quarter,” Mr. Fox said.

No business in America produces more of the oil-based ingredients that go into the nation’s products than the Dow Chemical Company, based in Midland, Mich. From Dow’s petrochemical operations come the basic ingredients of a wide variety of plastic bottles and packaging, including numerous containers once made of glass or tin.

Indeed, paint, computer and television screens, mobile phones, light bulbs, cushions, paper, mattresses, car seats, carpets, steering wheels and polyesters are all made with ingredients that Dow and other chemical companies refine from oil and natural gas.

Dow normally raises prices piecemeal. Last month, though, the surge in the cost of oil and natural gas, the company’s principal raw materials, produced a rare across-the-board price increase of as much as 20 percent.

“We have taken out head count, automated, been very diligent on cost control,” said Andrew Liveris, Dow’s chairman and chief executive, “but these surges in energy prices are just one surge too many.”

Dow’s sweeping price increases will probably have a domino effect, resulting in higher prices or, more likely, shrinking profits, analysts say. Constrained by the weak economy and fewer wage earners among their customers, the nation’s retailers have so far not been able to pass on to consumers much of the rising cost of products that depend on oil. The Consumer Price Index, minus food and energy, is barely rising.

“One of the surprises,” said Patrick Jackman, a senior economist in the consumer price division of the Bureau of Labor Statistics, “is that the oil price surges of the 1970s passed through fairly quickly into consumer prices, and this time that is not happening.”


No more "big box" development?
Do Gas Prices Mean Business Bets Are Off? 
New London DAY editorial
By Paul Choiniere    
Published on 6/8/2008 

After the state legislature recently approved “An Act Concerning Energy Scarcity and Security,” its chief supporter, Rep. Terry Backer, warned that the United States is “standing at the doorstep of a sea change in energy and our consumption of it.”

”Everything changes from here on out and we must be prepared,” said the Stratford Democrat.

Backer is among a group of “peak oil” advocates that contend oil production has or soon will peak while demand globally continues to rise. The result is the high oil and gas prices we have all seen, with outright shortages likely to follow, according to the peak-oil crowd.

The Act Concerning Energy Scarcity and Security requires the Office of Policy and Management to do some future planning that takes into account rising costs and potential supply disruptions.

But if “everything changes from here on out,” they certainly did not get the message in Lisbon, population 4,200, where construction of a second major “big box” development has started off Exit 85 of Interstate 395.

The trees already stripped away, earthmoving equipment is now at work flattening a hill to make way for the “Crossing at Lisbon.” Expected to open next summer, it will be built directly across Route 12 from the Lisbon Landing shopping center.

The major Lisbon Landing anchor stores are a Wal-Mart and Home Depot. Brian Grassa, director of development for Cedarwood Development Inc., said Crossing at Lisbon has commitments from Target and Best Buy as well as a Chili's restaurant. A Lowe's Home Improvement store is also potentially in the mix.

It appears the Akron, Ohio development company is confident that nothing is changing from here on out. Despite $4-plus per gallon gasoline and home heating oil, the developer and big boxers planning to open more stores in Lisbon are confident that folks will drive from the small towns scattered around northern New London and southern Windham counties to yet a second Lisbon shopping center. And, after paying for gas, that they will have enough money left to shop when they get there.

The fact that sales have nosedived for both Home Depot and Lowes does not appear to overly concern the developer. Nor does the reality that two large stores at Lisbon Landing will soon sit vacant. The Old Navy store closed up shop about a year ago. Linen's 'n Things is now running a going-out-of-business sale. Grassa pointed to financial problems for both chains nationally, not locally, for the closings. While true, both chains did keep outlets open elsewhere, but chose to shutter the Lisbon stores.

The reality that many people refuse to accept is that high energy prices are changing everything, Backer said. Disposable incomes are disappearing, credit cards are getting maxed and people are worried about affording enough gas to get to work and enough heating oil to stay warm in the winter, “not shopping for stuff they don't need,” Backer said.

Time will tell who is right. If the oil grows scarcer and more expensive, and if the economy falters as a result, there will be a lot of empty big boxes. But many seasoned business people continue to invest money, confident that consumers will continue buying.

Yet it does seem strange to me that while men stand on one side of Route 12 with signs alerting passersby of a going out of business sale, bulldozers on the other side of the road are making way for yet more stores. How much further can people in the area continue stretching their pocketbooks?

I guess we'll find out.


Agency Calls for ‘Energy Revolution’
NYTIMES
By JAMES KANTER
Published: June 7, 2008

BRUSSELS — The International Energy Agency, a group that advises industrialized countries, said Friday in a report that investments of at least $45 trillion might be needed over the next half-century to prevent energy shortages and greenhouse gas emissions from slowing economic growth.

Nobuo Tanaka, the agency’s executive director, called for “immediate policy action and technological transition on an unprecedented scale.”

Mr. Tanaka said the world would “essentially require a new global energy revolution which would completely transform the way we produce and use energy.”

The report sends a strong warning that the combination of growing demand for energy in countries like China and India, the dangers of climate change and the scarcity of resources are going to require huge shifts in the global economy. Countries will have to overcome objections to building nuclear power plants and to storing large amounts of carbon dioxide underground or beneath the ocean floor.

The report also described emissions-cutting pathways that broadly match the advice of some leading scientists who have recommended cutting emissions in half by 2050 as a way of avoiding devastating climate change. Environment ministers from the Group of 8 industrialized countries have backed a 50 percent target. The ministers said governments should endorse that target at a G-8 summit in July.

Among the International Energy Agency’s chief messages is that current policies are unsustainable with carbon dioxide emissions expected to rise 130 percent and demand for oil expected to rise 70 percent by 2050. Tanaka warned that oil demand could be five times the current production of Saudi Arabia by that time.

A crucial problem is that the rising cost of oil and gas is prompting a switch to coal, particularly in India and China. Coal is cheap and plentiful but its increasing use is contributing to the accelerating growth in emissions of carbon dioxide.

The International Energy Agency offers advice on energy policy to its 27 member nations, including the United States, Canada, Japan, Australia, New Zealand, South Korea and most of Europe. It recommended taking measures now that would ensure that carbon emissions are down to at least present-day levels by mid-century by, among other strategies, using energy efficiency measures and reducing emissions from power generation.

The agency also mapped out a second situation aimed at bringing emissions to half their current levels by mid-century by emphasizing technologies and strategies for “weaning the world off oil.” The agency estimated the cost of that process at $45 trillion, or 1.1 percent of annual global output, over the period to 2050. Investments of $100 billion to $200 billion would be needed each year over the next 10 years, rising to $1 trillion to $2 trillion each year in the coming decades.

To reach the goal of halving emissions, it said, among the most important measures would be equipping more than 50 gas and coal power plants each year with equipment to capture and sequester carbon dioxide. There would also be a need for 32 new nuclear plants each year, while the number of wind turbines would need to increase by 17,500 a year.

Other strategies included accelerating the development of solar electricity and so-called second-generation biofuels that do not compete with food for farmland.  The report acknowledged that numerous objections to these technologies would need to be overcome, in particular local opposition to building nuclear power plants and long-term nuclear waste repositories.

But the most difficult and costly step, it said, would be reducing carbon emissions from transportation at a time when the use of cars, airplanes and ships would still be growing rapidly but few technologies would exist to limit emissions from those sources.

Even so, Mr. Tanaka sounded an optimistic note, saying that although a global energy technology revolution “will be a tough challenge” it was “both necessary and achievable.”


Right near Benson Mines - and Star Lake! 
Revived Paper Mill Brings a Town Back With It
NYTIMES
By FERNANDA SANTOS
Published: June 5, 2008

NEWTON FALLS, N.Y. — Eight years ago, a paper mill closed in this remote corner of the western Adirondacks, taking with it more than 100 jobs. Most of the 75 houses in this speck of a hamlet a two-hour drive from Canada soon fell into disrepair, their frames thrashed by weather and hardship.

Some families moved wherever they could find work. Others were stuck with homes they could not sell and long commutes over desolate country roads. The nearest gas station closed, the local hospital struggled to fill its 20 beds, and the volume of mail at the one-person post office shriveled by half, as if the place had been given up for dead.

It is a familiar story: industry leaves, jobs disappear, hardscrabble town is left adrift. Not Newton Falls. As if in a fairy tale, the shuttered mill has come back to life, thanks to a healthy dose of luck, a longtime paper executive’s willingness to take a chance, and the unbending commitment of two men to the place where they had labored for two decades.

For eight months now, the mill has churned out an average of 200 tons of coated paper a day, or 2,000 feet per minute, 54 percent more than it did before it went dark. It runs 24 hours a day, every day, making paper that has been used in Jessica Seinfeld’s cookbook, Wal-Mart newspaper inserts, a work-wear manufacturer’s catalog and biology textbooks full of colorful diagrams.

The mill received close to 600 applications last summer for 77 jobs; 104 people work there now, up from 97 when it reopened. About half had toiled at the mill before it closed and left other jobs to come back.

Among them are Andy Leroux and Levi Durham Jr., longtime friends who have lived their whole lives in these parts. Many credit them with saving the mill — and, along with it, Newton Falls. While the mill was closed, Mr. Leroux and Mr. Durham lubricated machines, dusted crevices and corners, shoveled snow and occasionally called former co-workers to ask whether they would be willing to return were the mill to make paper again.

They also gave tours to prospective buyers. Those who seemed interested in reviving the plant — they were in the minority — found it heated in the winter. Those who wanted to tear it apart and sell the machines overseas did not.

“We had to do what we had to do to get our mill going again,” shrugged Mr. Leroux, 44, a third-generation mill worker.

Mr. Durham, 51, the first in his family to work there, added: “If you were there the day this place closed, you had people working their hearts out to make the best paper possible. We knew we had something special.”

The mill in Newton Falls was one of about 600 paper mills operating in the United States when it closed in the fall of 2000. Nearly 150 of them have closed since, according to Kenneth Patrick, an analyst with the Technical Association of the Pulp and Paper Industry, leaving holes in communities like Great Barrington, Mass.; Augusta, Ga.; and Lufkin, Tex. Many more, Mr. Patrick said, have merged in an effort to stave off competition from China, India and Latin America, where the cost of raw materials and labor is low and demand for paper is rising.

“It’s extremely unusual for a mill that had been shut down for a while to start up again,” he said.

The Newton Falls paper mill was profitable until its close, but its owner at the time, Appleton Coated of Kimberly, Wis., decided to consolidate its manufacturing operations closer to home.

The new owners, partners from Canada and the United States, said that the business was too young to turn a profit, but that it was expected to start making money before the year’s end.

Opened in 1894 by a family named Newton, the mill had several owners before Appleton, which spent tens of millions of dollars upgrading the plant before closing it on Oct. 23, 2000.

In the two years that followed, the mill’s blue-and-white concrete buildings remained dark and unheated. Pipes froze and cracked during ruthless northern New York winters. A roof caved in under several feet of snow.

When the mill closed, Mr. Leroux and Mr. Durham found jobs at another paper-making plant in the village of Deferiet, 44 miles west. Then that plant closed in 2001. For a while, Mr. Leroux did construction work on summer homes in the area, while Mr. Durham ran his father’s auto repair shop six miles from the mill, in the town of Fine.

Not a day would go by, they said, when they did not think about the Newton Falls mill.


One day, Mr. Leroux said, “we decided to stop thinking about our mill and actually do something to save it.” They approached the owner at the time and offered to maintain the mill, with the help of two other former employees, for $35,000 a year each.

That was in 2003.

For four years, Mr. Leroux, Mr. Durham and the two others worked 12-hour shifts tending to several interconnected buildings totaling 400,000 square feet on 4,000 acres. They would turn the machines on and off, oil them and replace defective parts, tracking maintenance work in log books.

When a light bulb burned out, they changed it. When too much dust gathered, they cleared it out with an industrial leaf blower. When snow accumulated on the roof, they removed it, sometimes in temperatures of 20 degrees below zero and winds gusting at 30 miles per hour.

“In our hearts, we never considered the mill closed,” Mr. Durham said. “To us, the mill was idle. There’s a difference between closed and idle.”

Meanwhile, a cadre of small-business owners, retirees, teachers and elected officials reached out to whoever they thought could help in a desperate bid to find a buyer.

“When we’d hear that someone was interested, we’d get their names and call them up and invite them over for a tour,” said Christopher L. Westbrook, director of a state forestry school nearby.

Mr. Leroux and Mr. Durham were in charge of the tours. They would look up potential buyers on the Internet in hope of determining their intentions, and listen carefully to the nature of their questions.

If a visitor seemed more attracted to the mill’s heavy equipment than to the operation as a whole, they turned off the heat or kept some of the lights off where machines were stored, forcing the visitor to inspect them with flashlights.

“We were doing cover-ups, yup,” recalled Mr. Leroux, who started in the mill’s boiler room and is now its vice president of operations.

“Whatever it took,” added Mr. Durham, who started as a machine operator and is now maintenance supervisor. “We didn’t want to see our mill sold piecemeal.”

In 2006, someone suggested that they reach out to Dennis L. Bunnell, who grew up in Buffalo and had once served as the mill’s president. After a series of meetings, studies and consultations, Mr. Bunnell and three partners joined with Scotia Investments, a family-owned holding company from Canada, to buy the mill for about $20 million.

They began making paper again on Sept. 7, 2007. The mill has a new name, Newton Falls Fine Paper, and a new mission statement: “Restore Newton Falls to its role as a dynamic force in the paper industry and the economy of the western Adirondacks.”

“All there is to a mill is machinery and people,” Mr. Bunnell said in an interview. “What makes a difference in this case is that the people who work here truly care about this mill.”

The paper made here comes from maple, birch and spruce trees. The fiber is bleached to keep the paper from yellowing when exposed to sunlight. It is then soaked, stretched, smoothed and steamed to remove the moisture in a 300-foot-long machine. The floor shudders and the machine whines, beeps and purrs as it spits out sheets hot to the touch. The air smells like candied popcorn.

Newton Falls lies in southern St. Lawrence County, within the town of Clifton, which has about 800 residents scattered over 150 square miles (the census does not keep track of the population of places as tiny as Newton Falls). It is 125 miles northeast of Syracuse, a solid seven-hour drive from New York City.

It is a picturesque place of rivers, lakes and a multitude of trees. Median family income hovers around $38,000, about $12,000 below the national median.

An iron-ore mill outside Newton Falls employed 1,200 people in its heyday, but it closed in 1978. Now the Newton Falls Fine Paper company is one of the largest private employers in the county.

Pay ranges from $15 an hour for jobs like packaging the paper for shipment to $22 an hour for maintenance crews, Mr. Bunnell said. Workers have medical and dental insurance and a 401(k) plan, many for the first time.

Raymond Fountain, director of the St. Lawrence County Office of Economic Development, said the mill “is a huge stabilizing factor in the community,” adding about $18 million a year to the economy, including a $4 million payroll.

Since the mill’s reopening, there have been modest improvements in and around Newton Falls, with the best news being that things have improved at all. The owner of a general store a mile from the mill expanded his business, and a motel that used to be open only during the summer is now open year-round.

On the quarter-mile stretch of County Road 60 linking Newton Falls to the mill, homeowners like Kimberly Provost are again investing in repairs: she recently bought an above-ground pool to replace the battered one that has sat for years in her backyard. A few doors down, Sylvia Bullock, whose late husband retired from the mill after 43 years, said the home she bought for $10,000 three years ago was recently assessed at $21,000.

“The mill and all the other positive changes you see here, I think they say something about the kind of people we are,” Ms. Bullock, 77, said from her newly built deck, the mill’s smokestack looming in the background. “We’re hard workers, we’re stubborn and even when it looks like the whole world is against us, we don’t give up.”


At Exxon’s Can’t-Miss Meeting  
NYTIMES
By JOE NOCERA
Published: May 31, 2008

There were storms around New York on Tuesday evening, and we sat on the runway for hours. I was heading to Dallas for Exxon Mobil’s annual meeting, which had become this year’s “can’t-miss” meeting, especially if you are a reporter.

For the first time ever, several members of the Rockefeller family were going to use the annual meeting to publicly criticize the company founded by their patriarch, John D. Rockefeller. His great-granddaughter, Neva Rockefeller Goodwin, the co-director of the Global Development and Environmental Institute at Tufts University, was planning to offer several shareholder resolutions concerning global warming on behalf of a handful of family members. A larger group of Rockefellers was backing a nonbinding resolution, put forth by the shareholder activist Robert Monks, calling on the company to separate the roles of chairman and chief executive. Meanwhile, Rex W. Tillerson, Exxon Mobil’s imposing C.E.O. (and, lest we forget, board chairman) was going to give a rare press conference after it was over.

Waiting for my plane to go wheels up, I pulled out The New York Review of Books; an article by the great physicist Freeman Dyson had caught my eye. It was a review of two books about global warming. Mr. Dyson argued that while there is clear scientific evidence showing that the concentration of carbon dioxide in the atmosphere has risen steadily, it does not necessarily mean that the end is nigh. Mr. Dyson talked soberly about the economic trade-offs involved in various solutions to cut carbon emissions, and agreed with the Yale economist William Nordhaus, author of one of the books under review, that some of the most radical solutions (especially some from Al Gore) would be “disastrously expensive,” and would damage the global economy.

Even more striking was his view that the science surrounding the havoc global warming would one day wreak on the planet was far from settled. He posed the real possibility that a low-cost solution would eventually manage the problem. He concluded that environmentalism had become “a worldwide secular religion ... holding that we are stewards of the earth”— which for the most part was a good thing.

“Unfortunately,” Mr. Dyson added, “some members of the environmental movement have also adopted as an article of faith the belief that global warming is the greatest threat to the ecology of the planet. That is one reason why the arguments about global warming have become bitter and passionate. Much of the public has come to believe that anyone who is skeptical about the dangers of global warming is an enemy of the environment.”

So bitter and passionate, it turns out, that global warming can divide families. Even the Rockefellers.



Last year was another fabulous year for Exxon Mobil. It made a record $40.6 billion in profits. It replaced its reserves, no easy task with oil so hard to find and extract these days. Its safety record was stellar. Its return on capital was an astounding 32 percent, another record. It spent $21 billion in capital investments while also paying out $36 billion on a combination of dividends and stock buy backs. It share price rose 22 percent.

You can argue, as many do, that this performance is nothing more than a case of holding out the umbrella while it rains money — that it’s all due to the dramatic run-up in the price of oil. But it’s a lot more than that. Exxon Mobil’s competitors are operating in the same environment, and they can’t touch its performance.

As he laid out the company’s results during a 45-minute speech that opened the annual meeting, Mr. Tillerson kept using the word “discipline.” “By maintaining discipline and rigor in everything we do” the company would continue to outperform the competition, he said, for instance. Discipline and rigor are indeed at the heart of the company’s engineering culture, and have a lot to do with why Exxon Mobil is so successful. When you’re spending literally billions of dollars building a refinery in China, as Exxon Mobil is, you can’t afford to be sloppy. “I wish our government were run as efficiently as Exxon Mobil,” said Fadel Gheit, an oil analyst with Oppenheimer & Company.

That discipline is drummed into Exxon Mobil executives very early — which gets at another characteristic of the company: it is extremely insular. Like most Exxon Mobil executives, Mr. Tillerson signed on in his early 20s and never left. And that bugs its critics. Many of those who spoke out against the company at the annual meeting — including Ms. Goodwin — talked about the need to bring “fresh perspectives” to the board. That, she said, was why she and other Rockefellers supported the resolution to bring in an independent board chairman.

“Their strength is that they are an inward-looking company with discipline,” said Mr. Monks, who has sponsored his independent chairman resolution for a half-dozen years. “Their weakness is that they are an inward-looking company with discipline.” He’s got a point; the same qualities that make Exxon Mobil the world’s best producer of oil and gas also cause it to be a terrible articulator of its own message. Its executives really only feel comfortable when they’re speaking to each other.

But let’s be honest here: gaining fresh perspective is hardly the primary reason the dissident Rockefellers got behind Mr. Monks’s resolution. The Monks proposal was a stalking horse for the issue that matters most to them: global warming. Most of the members of the family who are critical of Exxon Mobil are staunch environmentalists, who feel that “their” company should be doing more — much, much more — to help the world move to alternative sources of energy. Here they are on far shakier ground.


During his presentation to shareholders, Mr. Tillerson laid out Exxon Mobil’s core belief: despite climate change concerns, and efforts to come up with alternatives to oil, “there would be enormous growth in energy demand,” he said. And, he added, oil and gas would still supply over 60 percent of that demand in the year 2030. When it was her turn to speak, Ms. Goodwin passionately objected to that forecast.

Exxon Mobil’s projections “depend on two critical but untested assumptions,” she said, reading from notes. “First, developing countries will enjoy strong economic growth. And second, global consumption of oil and gas will significantly increase. This second assumption is wrong.” In her view, there was a high likelihood that new technologies would reduce the world’s reliance on oil and gas — and Exxon Mobil would suffer because of its stubborn refusal to spearhead new technologies back when it still had a chance.

What’s more, she added, if Exxon Mobil turned out to be right, and demand for oil and gas continued to grow for the next quarter century and beyond, that would bring about its own set of disastrous results — namely the environmental consequences of global warming. “It will cause weather disasters,” she predicted. “It will have a huge and harmful effect on the global economy upon which Exxon Mobil depends.”

What she and the other family members seem to really want is for Exxon Mobil to begin taking steps to transition away from the thing it does better than any entity in the world: find and produce oil. But where is it written that oil companies should be the ones to lead us into the promised land of alternative energy? The world doesn’t work that way. Transforming technologies will most likely come from innovators who have never set foot in an oil company, and don’t have an oil company’s baggage. Expecting Exxon Mobil to move the world to an oil-free future is a little like expecting buggy-whip manufacturers to invent the automobile.

What the Rockefellers were trying to do at the annual meeting is push Exxon Mobil toward their belief system — their global warming religion — and that is a place the company is unwilling to go. Its hard-headed view is that it is doing the most good for the most people by finding the oil and gas the world is going to need for the foreseeable future — and that global warming is not likely to lessen that need. Realistically, I find that notion difficult to disagree with.

As for Ms. Goodwin’s prediction of weather catastrophe, it could certainly happen. But it might not. We just don’t know enough yet. It would be lovely if we had new technologies that made the world much less reliant on oil but that’s not likely. India and China, just for starters, desperately need more energy to fuel their ambitions, and it is hardly fair to ask them to halt their economic progress — nor are they likely to do so. The best we can hope to do is dampen our need for oil — with such things as hybrid cars — by making, continual, small, practical breakthroughs. Believe it or not, Exxon Mobil has scientists working on precisely those kinds of practical breakthroughs.

In the end, most shareholders agreed with Exxon Mobil. And why not? If a company’s stock price is its report card, then Exxon Mobil is getting straight A. Ms. Goodwin’s primary resolution, calling for the company to produce a climate change report, got only 10.4 percent of the vote. Mr. Monks’s resolution got 39.5 percent — about the same as last year. The Rockefeller support made zero difference.

At his press conference afterward, Mr. Tillerson was asked about global warming. “My view is that climate change policy is so important to the world that to not have a debate on it is irresponsible. We don’t know everything about it. Nobody has this figured out. Anybody who tells you they have this all figured out is not telling you the truth. We have to understand that climate change policy, whatever it turns out to be, is going to hurt some people. But let’s at least have an open debate about it, so everybody knows what the facts are.”

Would that the Rockefellers had said something as sensible — and as disciplined — as that. Maybe next year.


Rockefellers Seek Change at Exxon
NYTIMES
By CLIFFORD KRAUSS
Published: May 27, 2008

HOUSTON — The Rockefeller family built one of the great American fortunes by s