Debt Rattle, April 3 2008

Field work US midwest, 1933

Ilargi: While Bernanke is in Washington, his minions are digging themselves into trenches on Wall Street. Given the close ties of firms like Goldman Sachs and JPMorgan to Fed ownership, this can’t be a pleasant feeling for the others, such as Merrill Lynch, Morgan Stanley and Lehman.

The Fed Hits the Street

For the first time in more than a decade, the Federal Reserve has set up shop inside brokerages to monitor their financial condition, perhaps the beginning of an expanded role for the central bank and additional regulation for Wall Street. The Fed's new role is tied to its recent decision to lend money to Wall Street firms. The central bank already loaned funds to commercial banks, but it also regulates them.

The expanded reach of the Fed comes amid criticism aimed at the Securities and Exchange Commission and its oversight of Bear Stearns Cos. before its collapse. The SEC traditionally has been the regulator of Wall Street firms. SEC Chairman Christopher Cox likely will face pointed questions when he testifies Thursday alongside other regulators before the Senate banking committee.

In recent days, criticism of SEC has mounted, with Sen. Jack Reed (D., R.I.), requesting that the Government Accountability Office review the SEC's enforcement program. On Wednesday, Sen. Charles Grassley (R., Iowa) asked the SEC's inspector general for an independent review of the agency's handling of a 2005 investigation into Bear's pricing of mortgage-related assets. The SEC staff intended to file charges, but ultimately the case was closed without the SEC's filing charges.

The Treasury Department's blueprint to modernize U.S. regulation of financial markets, which was published Monday, calls for increasing the Fed's role on Wall Street. It asked the President's Working Group on Financial Markets to consider recommending whether the Fed should to make its lending process more transparent; attach conditions to loans, such as collateral limitations; and conduct on-site examinations. The last already appears to be happening.

Fed staff is on site at Goldman Sachs Group Inc., Morgan Stanley, Lehman Brothers Holdings Inc., Merrill Lynch & Co. and Bear, which has agreed to be sold to J.P. Morgan Chase & Co. Each of the brokerages has disclosed that it has borrowed from the Fed since it temporarily opened its lending facility last month, while Merrill Lynch hasn't said whether it did.

---

Wall Street banks seek to ring-fence bad assets

Wall Street banks are working on plans to separate troubled assets from the rest of their businesses in an effort to ring-fence problems and restore investors’ confidence in the financial sector.

A number of US firms are looking to follow the example set by UBS, which this week put securities linked to US mortgages into a separate subsidiary with a view to eventually reducing its exposure to the troubled assets, which have been responsible for more than $30bn of losses so far.

The Wall Street banks’ plans, which are yet to be finalised, would enable banks to move at least some troubled assets off their balance sheets by selling large stakes in the funds to outside investors. Lehman Brothers, which has been forced to deny rumours about its financial health over the past few weeks, is believed to be one of the banks considering a spin-off, or sale, of some of its assets.

“We want to continue to move illiquid assets off the balance sheet,” Erin Callan, chief financial officer, told CNBC this week. The bank declined to comment further. Other banks hit by the credit crisis, including Citigroup, Morgan Stanley and Merrill Lynch, have said they want to take steps to shrink and de-leverage their balance sheets.

The planned creation of “bad banks” comes as US and European lenders are also discussing the creation of a common fund to buy devalued assets. According to people familiar with the matter, banks are discussing a joint proposal to regulators to set up a fund, which would absorb US subprime assets and other troubled securities, as a way of restoring confidence in the banking system and ending the pressure to recognise mark-to-market losses.

However, bankers say the prospect of a co-ordinated solution remain remote because of the difficulties in getting banks to agree on the terms and the scope of a common fund.

---

JPMorgan wouldn't have bought Bear without Fed: Dimon

JPMorgan Chase & Co chief executive Jamie Dimon said on Thursday that the bank would not have offered to buy Bear Stearns Cos if the Federal Reserve had not agreed to absorb billions of potential losses.

In prepared testimony to be delivered to the Senate Banking Committee, Dimon also said the transaction is not without risk for JPMorgan. He reiterated that if there is a loss on the assets pledged to the Fed, the first $1 billion of that loss will be borne by JPMorgan alone.

Bear Stearns chief executive Alan Schwartz said in separate prepared remarks that his company was not involved in the negotiations as JPMorgan sought to have the New York Fed loan up to $30 billion to JPMorgan, secured by certain Bear Stearns assets.

"While we at Bear Stearns had some understanding that JPMorgan was seeking this commitment, we were not directly involved in the negotiations between JPMorgan and the government," Schwartz said. He also said the run on Bear Stearns was initially just a lack of confidence and was not a lack of capital or liquidity.

---

Bernanke Defends Bear Stearns Rescue

Federal Reserve Chairman Ben Bernanke says the central bank moved to assist troubled investment bank Bear Stearns to protect the U.S. economy against severe consequences. Bernanke is the top witness at a congressional hearing Thursday to examine whether the Fed was justified in providing $30 billion to facilitate the sale of Bear Stearns Cos. to JP Morgan Chase & Co.

Bernanke says that given the exceptional pressures on the U.S. economy, the fallout if Bear Stearns had been allowed to fail could have been severe and far-reaching. The unprecedented actions to prevent the collapse of Bear Stearns were taken to protect the U.S. financial system and do not represent any kind of federal bailout, the Bush administration and Federal Reserve Chairman Ben Bernanke say.

Treasury Undersecretary Robert Steel told a congressional panel on Thursday that the administration supported the Fed's actions to provide a $30 billion loan to Bear Stearns last month to facilitate its sale to JP Morgan Chase & Co. because of the risks the collapse of such a large investment bank would have posed for the nation's financial system. "The failure of a firm that was connected to so many corners of our markets would have caused financial disruptions beyond Wall Street," Steel said in testimony prepared for a Senate Banking Committee hearing on the rescue.

Bernanke said Wednesday that even though the central bank is on the hook for $29 billion in the fire sale of Bear Stearns, the nation's fifth-largest investment bank, the Fed may end up making money. The issue of whether the central bank has exposed taxpayers to a possible bailout and how Bear Stearns could tumble so quickly to near insolvency were to be explored Thursday with Senate testimony from Steel and Bernanke, as well as officials from the Securities and Exchange Commission and the Fed's New York regional bank.

"When $30 billion of taxpayer money is placed at risk, it is our paramount responsibility to ensure that these actions were necessary and judicious," said Sen. Christopher Dodd, chairman of the Senate Banking Committee. In addition, the panel was to hear from the heads of Bear Stearns Cos. and JP Morgan. Bear Stearns is the most high-profile victim of a severe credit crunch that began in August and has forced some of America's largest financial institutions to declares billions of dollars in losses because of bad investments, many in the area of subprime mortgages.

---

Ron Paul grills Bernanke

---

U.S. Initial Jobless Claims Rose 38,000 to 407,000

The number of Americans filing first-time claims for unemployment benefits unexpectedly increased last week to the highest level since just after Hurricane Katrina in September 2005. Initial jobless claims climbed by 38,000 in the week that ended March 29 to 407,000, the Labor Department said today in Washington. The four-week moving average, a less volatile measure, rose to 374,500 last week from 358,750, Labor said.

The biggest housing recession in a generation, coupled with mounting losses in financial markets, is prompting companies to sack workers and consumers to slow their spending. The Labor Department may report tomorrow the U.S. lost jobs in March for a third month, according to economists surveyed.

"It is reflecting a fundamental weakening in the labor market," said Dana Saporta, an economist at Dresdner Kleinwort in New York. "People that are already unemployed are finding it more difficult to find new jobs. All of this data is consistent with a rising unemployment rate."

Treasury securities rose and stock market futures dropped following the report. The yield on the 10-year Treasury note fell to 3.54 percent at 9:32 a.m. in New York from 3.60 percent late yesterday. Stocks opened lower in New York.

---

George Soros Sees Additional Market Declines After Temporary Reprieve

Billionaire George Soros called the current financial crisis the worst since the Great Depression and said markets will fall more this year after a brief rebound. "We had a good bottom," Soros said yesterday in an interview in New York, referring to the rally in stocks and the dollar after JPMorgan Chase & Co. agreed to buy Bear Stearns Cos. on March 17.

"This will probably not prove to be the final bottom," he said, adding the rebound may last six weeks to three months as the U.S. moves closer to a recession. Last summer, worried about market disruptions that started with rising subprime-mortgage defaults, Soros, 77, returned to a more active role in managing the $17 billion Quantum Endowment Fund, whose profits pay for his philanthropic projects. Quantum returned an average of 30 percent a year before Soros started using outside managers in 2000 for much of his money.

He also decided to write a book, his 10th, "The New Paradigm for Financial Markets" (Public Affairs, 2008). Released today online, the book explains the causes of the current meltdown, a crisis he says has been in the making since 1980, and the trades he put in place this year to protect his wealth, much of it in Quantum.

Soros has bet on declines in the dollar, 10-year Treasuries and U.S. and European stocks. He expected foreign currencies to rise, as well as Chinese and Indian equities. The latter bet helped Quantum return 32 percent in 2007. Quantum's returns this year have ranged from up 3 percent to down 3 percent. The euro has climbed 7.5 percent against the dollar this year and the Japanese yen has gained 9.1 percent. These and other currencies may continue to strengthen, he said.

"There is an increasing unwillingness to hold dollars, though there's a lack of suitable alternatives," he said. "It's a period of heightened uncertainty." Federal Reserve officials dropped their benchmark interest rate 2 percentage points this year to 2.25 percent, and Soros doesn't see that they can lower the rate much further, given the weak dollar. "We are close to the limit," he said.

As for his wagers on developing markets, Soros hasn't abandoned his holdings in India, even with the 22 percent drop in the benchmark Indian index this year. "The fundamentals remain good," he said. He is less certain about what will happen to Chinese H shares, which trade in Hong Kong.

---

Ilargi: I wondered yesterday who would come to the rescue of Iceland’s economy and banks if they came under attack. The list just got shorter.

Iceland Can't Rely on Nordic Central Banks' Cash

Nordic central banks have no agreement to bail out banks in the region, Sweden's Riksbank said, rejecting suggestions that they may provide cash to Icelandic banks in the event of a financial crisis. A memorandum of understanding between the central banks "exists to allow the sharing of information, not to provide any lending facility," Mattias Persson, head of the financial stability department at the Riksbank, said in a telephone interview from Stockholm today.

Iceland's Prime Minister Geir Haarde on March 28 said the government and the central bank "could provide assistance" in the event of a bank crisis, adding they may seek "co-operation" with other central banks where the lenders operate. The island's three biggest banks, Landsbanki Islands hf, Kaupthing Bank hf and Glitnir Bank hf have combined assets equivalent to almost nine times the country's gross domestic product.

"I don't think anybody ever really thought they would step in and help, nor do I think that that's where we're going," said Ludvik Eliasson, an economist at Landsbanki. "The problem is more that the central bank can only provide liquidity in kronur whereas the commercial banks need liquidity mostly in other currencies, which is a very unusual situation." The central bank had foreign reserves of 182.8 billion kronur ($2.43 billion) at the end of February, compared with combined assets at the three biggest Icelandic banks of 11.4 trillion kronur.

The cost of insuring against default on debt issued by Kaupthing and Glitnir is the highest in Europe. The Riksbank and Finland's central bank rejected reports they would be required to bail out the Icelandic lenders if they ran out of funds, Helsingin Sanomat newspaper said today. Denmark's Nationalbanken said a lending facility between the countries' central banks had been dropped "a few years ago" and that the only accord between the banks is now the memorandum of understanding, according to departmental head Niels Christian Beier.

Fitch Ratings Ltd. and Standard & Poor's on April 1 put Iceland's credit rating on negative outlook, citing concern a global credit squeeze may limit access to funding, while a decline in the krona may hurt asset quality. Iceland's banks "can ride out the storm," Richard Portes, president of the Centre for Economic Policy Research, said on April 2. "Market funding is assured for the coming year; they have no toxic waste. Unlike virtually every other major bank in the world, the Icelandic banks didn't buy any of that garbage."

---

Ilargi: A New York Times piece on Citi, 10 years after the repeal of Glass-Steagall allowed it “diversify”. “Tough times yada yada, but strong yada yada.”

When Bear Stearns came down last month, I warned that Citi might be one of the next in line. That warning stands. I’m not sure it’ll be as easy for Citi to find outside capital as it was last time around. If you’re that big, you need BIG capital infusions. And if you fall, you fall harder. Just think gravity.

A Stormy Decade for Citi Since Travelers Merger

Mr. Pandit must move quickly. Citigroup is being battered by the troubles in the credit markets. So far, the company has taken more than $20 billion in write-offs, and in recent months has raised billions of dollars from foreign investors. Wall Street analysts expect Citigroup to disclose billions of dollars of new losses when it reports earnings this month.

Whatever happens at Citigroup, the aftershocks of the 1998 Citicorp-Travelers merger are still reverberating through the financial system. The deal paved the way for the repeal of the Glass-Steagall Act of 1933, the law that separated investment banks, which underwrite securities, and commercial banks, which accept deposits and make loans.

The end of Glass-Steagall ushered in an era of consolidation and integration within the financial services industry, with mixed results. Mergers between Wall Street and Main Street banks helped American institutions compete with foreign rivals. But the deals also fostered some of the financial innovations that many say contributed to the subprime mortgage crisis. The Bush administration’s plan to remodel the system regulating the financial industry has rekindled the debate over the government’s role in the markets.

In a brief interview last month after JPMorgan’s bid to buy Bear Stearns, the troubled investment bank, Mr. Weill said Citigroup, as a diversified company, could weather the storm better than old-fashioned Wall Street banks. Citigroup’s ability to raise capital “says a heck of a lot about the diversified model,” he said.

---

Lehman Stops Writing Mortgages in the U.K., S&P Says

Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm by market value, will stop writing mortgages at two U.K. units, Standard & Poor's said. S&P said in a statement today that the decision won't affect its ratings of debt securities sold by Lehman's Preferred Mortgage Ltd. and Southern Pacific Mortgage Ltd. units. S&P said it was reacting to "information from Lehman confirming that PML and SPML have ceased all mortgage origination."

HSBC Holdings Plc unit First Direct said today it too ended home loan sales. New York-based Lehman raised $4 billion from a stock sale yesterday aimed at quelling speculation it's short of capital amid the worst U.S. housing market in a quarter century. Last year's largest underwriter of mortgage-backed bonds closed its U.S. subprime unit and has said it will eliminate at least 3,750 mortgage-related jobs. London-based spokesman Mark Lane declined to comment on the U.K. business.

"It's another nail in the coffin for the subprime section of the market," said Ray Boulger, senior technical manager at mortgage broker John Charcol Ltd. "They had been pretty active even after some other lenders pulled their horns in."
London-based HSBC's online and telephone banking division suspended mortgage lending to new customers after a low-rate home loan caused applications to rise fivefold. The company received more applications than anticipated after other lenders withdrew products and increased the cost of loans, spokesman Rob Skinner said today.

Halifax, a unit of HBOS Plc, the U.K.'s biggest mortgage lender, is expected to pull its current home loan deals within days because it has received too many applications, the Times newspaper said on its Web site today. Halifax spokeswoman Heather Scott declined to comment.

The number of mortgage products in the U.K., including residential, landlord and subprime loans, has declined by 66 percent to 5,272 since July, according to Moneyfacts Group, the price comparison provider.

---

BayernLB Reports Record $6.7 billion in Writedowns

Bayerische Landesbank reported 4.3 billion euros ($6.7 billion) in writedowns from the subprime- market collapse, double its previous estimate and the biggest of any German state bank. Profit fell to 175 million euros last year from 989 million euros in 2006, the Munich-based company said in a statement today. Germany's second-biggest state-owned bank and its owners agreed to cover as much as 6 billion euros in possible losses from 24 billion euros in assets that will be shifted to a new finance affiliate.

The credit-market slump has forced Germany's state-owned banks to slash the value of investments by more than 11 billion euros and cost BayernLB Chief Executive Officer Werner Schmidt his job. Smaller competitor WestLB AG yesterday reported its first loss in three years after 2.01 billion euros in markdowns. "The main problem is no one can tell today how the market will develop in the future," said new CEO Michael Kemmer, who replaced Schmidt last month. The bank is unable to estimate how much more it will have to write down, he said.

BayernLB said in February it would write down 1.9 billion euros. Today's total includes 1.2 billion euros booked for last year and another 1.1 billion euros for the first quarter. It chalked up the remaining 2 billion euros in revaluation reserves, affecting the balance sheet rather than earnings.

The company has about 33 billion euros in asset-backed securities including 3.79 billion euros in investments backed by subprime mortgages, U.S. home loans to borrowers with poor credit histories. The bank announced earlier today that Chief Risk Officer Gerhard Gribkowsky was fired and will be replaced by management board member Ralph Schmidt.

---

EU gas, power prices to soar as coal in pits - UBS

The closure of European coal-fired power plants over the next few years will drive gas prices up sharply, pushing power and carbon emissions costs up and boosting profits for cleaner power generators, according to analysts from Swiss bank UBS.

Soaring coal prices and tightening environmental controls on power sector emissions will see European generators drop coal and burn an extra 75 billion cubic metres gas a year -- or all the gas currently used in Italy. "The outlook on hard coal and lignite power generation is pretty grim," UBS said in an analyst note on Thursday. "The spike in coal fuel costs and, most of all, the environmental constraints on hard coal and lignite will imply a fall in volumes from coal facilities."

UBS said because European utilities will have to meet much of the extra demand by buying more liquefied natural gas on an already tight global LNG market, wholesale gas prices across Europe could rise by 50 percent to $13-17 per million British thermal units, or 70-75 pence per therm within the next 5 years.

This could drive up wholesale power prices by more than 60 percent to as much as 110 euros per megawatt hour, while carbon emissions prices could more than double to 51 euros per tonne after carbon contraints intensify in 2012.

---

Muni Losses May Put Taxpayers on Hook for $7 Billion

State and local borrowers across the U.S. may pay about $7.2 billion more in interest over 10 years after municipal bonds lost 0.82 percent on average last quarter, their worst start since 1996, as a drop in debt prices pushed yields higher, according to a Merrill Lynch & Co. index.

The extra interest is based on the $90 billion of fixed- rate bonds borrowers typically sell this quarter and tax-exempt rates that now average about 0.3 percentage point more than Treasuries. Because of the tax benefits, municipals typically yield 0.5 point less than U.S. government debt, Bloomberg data show. Rates on municipal bonds have surpassed Treasuries for five weeks straight, the longest period in at least 17 years, according to Bloomberg data.

Top-rated, tax-exempt bonds maturing in five years yielded 115 percent of Treasuries on March 28, while 30-year municipal bonds yielded 114 percent, according to New York-based Bear Stearns Cos. During the past 10 years, five-year municipals yielded 78 percent of Treasuries on average. The weakness may continue through at least the third quarter as borrowers sell as much as $100 billion of tax-exempt bonds to replace auction-rate securities, according to Merrill.

The auction-rate market collapsed in February as dealers stopped bidding for bonds investors didn't want. Rates on bonds auctioned weekly averaged 6.72 percent as of March 26, up from 3.63 percent in January, according to a Securities Industry and Financial Markets Association index.

"Supply is overwhelming the demand for municipal bonds and it's going to stay that way for the foreseeable future," said Gary Pollack, who oversees $6 billion of municipal bonds as head of fixed-income trading at Deutsche Bank AG's private wealth management unit in New York.

---

Late Payments on Consumer Loans Highest Since 1992

Consumers fell behind on car, credit-card and home-equity loans at the highest level in 15 years during the fourth quarter, another sign the U.S. economy is slowing, according to an American Bankers Association survey. Payments at least 30 days past due increased across all eight categories of loans tracked, the Washington-based group said today in a statement.

Late loans climbed 21 basis points to 2.65 percent of all accounts in a consumer-loan index created by the group. "The rise in consumer credit delinquencies is consistent with a rapidly slowing economy," ABA chief economist James Chessen said in the statement. "Stress in the housing market still dominates the story, but it's a broader tale."

Lenders including American Express Co., the third-biggest credit-card network, and Capital One Financial Corp. doubled reserves for soured U.S. debt in the fourth quarter. Overdue bank-card accounts reached 4.38 percent in the quarter, according to the ABA, as the slowing economy made it harder for consumers to repay debt.

The overall increase was driven by late payments for car loans, which make up two-thirds of all closed-end consumer installment loans, Chessen said. Auto loan delinquencies rose to 1.9 percent from 1.81 percent. Overdue mobile home payments rose to 2.92 percent from 2.87 percent.

Federal Reserve Chairman Ben S. Bernanke acknowledged for the first time yesterday that a U.S. recession is possible because consumer spending, employment and homebuilding will deteriorate this year. The U.S. economy grew at an annual pace of 0.6 percent from October to December. Growth probably slowed to a 0.2 percent annual rate in the first quarter, according to the median estimate of analysts surveyed by Bloomberg News.

---

Americans Delay Retirement As Housing, Stocks Swoon

Millions of retirement-age Americans, stung by the recent economic pall, suddenly are having to reassess their plans -- with many forced to quickly change course. In February, the proportion of people ages 55 to 64 in the work force rose to 64.8%, up 1.5 percentage points from last April. That translates to more than an additional million people in the job pool, according to the U.S. Labor Department. The ranks of those 65 and over in the work force rose to 16.2% from 16% in the same time span -- meaning 212,000 more hands on deck. So far, the numbers for March continue to show a "sharp" increase, says Steve Hipple, a department economist.

While many Americans are still sitting on large gains from homes and stocks bought years ago, today's market turmoil is shaping up to be the most painful in decades. Nationally, house prices have fallen 10% or so in the past year. And the quarter ended Monday marked the worst period for stocks in 5? years, with equities off 15.5% from their October highs.

The double dip, affecting asset owners of every age bracket, is unprecedented in recent decades. In 1987, property and market values dropped in tandem -- but nowhere near the extent to what's happening now. To document similar conditions, "you'd have to go back to the era of the [Great] Depression," says financial historian Richard Sylla of New York University's Stern School of Business.

With their homes worth less, fewer people feel confident enough to retire, even if they plan to continue living in them. And unlike younger workers, they don't have years to make up for downturns in the stock market. As a result, they worry that their investments will diminish to the point that they won't have enough money to get through retirement.

According to economists and demographers, a huge exodus from the work force should be happening. The first of 78 million baby boomers, those born between 1946 and 1964, passed the 60-year-old mark two years ago. And 2008 was expected to be a banner retirement year, with the oldest boomers reaching 62 -- the earliest age for collecting Social Security. When the first boomer drew a benefit on Feb. 12, the Social Security Administration described it as the start of "America's silver tsunami."

The giant gray wave is still an inevitability. But it has run into a breakwall. Investment advisers and retirement planners at more than a dozen firms, including Charles Schwab Corp., Edward Jones and Merrill Lynch & Co., say they are seeing large numbers of older workers put off retirement as the housing and stock-market troubles have deepened.

A recent Schwab survey of 1,006 financial advisers indicated that nearly a quarter of their clients are considering working longer specifically because of the economic fallout of the past 12 months.

---

Unsold Homes Tie Down Would-Be Transplants

The rapid decline in housing prices is distorting the normal workings of the American labor market. Mobility opens up job opportunities, allowing workers to go where they are most needed. When housing is not an obstacle, more than five million men and women, nearly 4 percent of the nation’s work force, move annually from one place to another — to a new job after a layoff, or to higher-paying work, or to the next rung in a career, often the goal of a corporate transfer.

Or people seek, as in Dr. Morgan’s case, an escape from harsh northern winters. Now that mobility is increasingly restricted. Unable to sell their homes easily and move on, tens of thousands of people like Mr. Kirkland and Dr. Morgan are making the labor force less flexible just as a weakening economy puts pressure on workers to move to wherever companies are still hiring.

Signaling an incipient recession, nearly 85,000 jobs disappeared in the United States from December through February, and the Bureau of Labor Statistics is expected to announce on Friday that March failed to produce a turnaround in hiring. “You hear a lot about foreclosure and the thousands of families who are being forced out,” said Joseph S. Tracy, director of research at the Federal Reserve Bank of New York. “But that is swamped by the number of people who want to sell their homes and can’t.”

No government agency counts those who move for a job, either across state lines or just from one town to another in the same state. The Census Bureau, however, calculates how many people move across state lines for all reasons, and that number fell by a startling 27 percent last year, after climbing by almost that percentage for each of the previous three years.

With homes changing hands easily in a booming market, interstate migration reached 2.2 million people in 2006, excluding the effects of Hurricane Katrina. As the economy and home prices began to unravel in 2007, however, interstate migration plunged to 1.6 million people.

---

Paulson: Chinese Firms Threat to Reform

Influential Chinese companies that want to avoid competition are the biggest threat to more economic reform in China, U.S. Treasury Secretary Henry Paulson said Thursday. Paulson's comment echoed complaints by foreign investors that Beijing is trying to shield its companies by raising barriers to investment in insurance and other industries and hampering the foreign acquisition of Chinese corporations.

"I think the biggest threat to more reform in China is the strong domestic industry that doesn't want competition," Paulson told reporters as he wrapped up a two-day visit. The secretary lobbied Chinese leaders earlier to open state-dominated financial markets wider to foreign competition and cut tariffs on imports of environmental technology.

The American and European chambers of commerce accuse Beijing of violating free-trade commitments by blocking access to banking and other financial industries to shield Chinese companies. The government insists it is abiding by its agreements but says it wants to create national economic champions in oil, banking and other industries.

Beijing still welcomes foreign investment, and the total rose 38.3 percent in February from a year ago to $6.9 billion, according to the government. But investors complain that acquiring an existing company in China is more difficult than it has been in at least five years, due partly to opposition from Chinese competitors.

On Wednesday, Paulson said the U.S. credit crisis might be making Chinese leaders hesitant about further financial reform. He said Thursday they were closely studying the impact on Wall Street but said he did not want to speculate about how they might react.

---

McCain and Clinton Ads Spar Over Mortgage Crisis

Senators John McCain and Hillary Rodham Clinton released dueling advertisements Wednesday that highlighted how the housing crisis has come to dominate the presidential race, with Mrs. Clinton using a version of her red-phone commercial to question Mr. McCain’s ability to handle the souring economy.


In the advertisement, the Clinton campaign again portrays a family asleep in the middle of the night when the phone rings, meant to evoke a national crisis. The narrator then intones, “John McCain just said the government shouldn’t take any real action in the housing crisis; he’d let the phone keep ringing.”

Within hours, the McCain campaign released an advertisement on the Internet. It starts with images of the Clinton advertisement, with the narrator then commenting, “Hillary Clinton and Barack Obama just said they’d solve the problem by raising your taxes — more money out of your pockets.”

The advertisements highlighted how the two parties’ candidates have developed starkly different approaches to the housing meltdown, with Mr. Obama and Mrs. Clinton calling for billions of dollars in aid for distressed homeowners and Mr. McCain warning against costly federal intervention.

---

Eight Steps to a Trillion-Dollar Meltdown

The collapse of Wall Street investment bank Bear Stearns may be a watershed moment. Participant reports suggest that JPMorgan Chase came into weekend negotiations last month prepared to do a deal without Fed support. But after examining Bear’s balance sheet, which looks completely conventional, except for $46 billion of hard-to-value mortgage assets, Morgan apparently said, “Hell no!”

The $30 billion backup line of credit Morgan got from the Fed implies that they expect mortgage portfolio losses of some 70 cents on the dollar. Had Morgan recognized those losses, they could have forced comparable write-downs on a string of other banks. Bear’s default, in addition, could have triggered huge cash liabilities by thinly capitalized “bond insurers” and hedge funds that had guaranteed Bear’s debt. Many of the guarantors might have failed to have made good their guarantees. The Fed chose to pay up.

Analysts at Goldman Sachs recently estimated the total losses from this mess at $1.2 trillion, including nearly $500 billion at the banks. The cleanest solution would be for regulators to force banks to revalue their assets down to realistic levels in one fell swoop. (If the Fed and the Securities and Exchange Commission drive such a process, it might be accomplished within a single quarter.) The revaluations would almost certainly wipe out all or most equity capital at a number of the larger banks. Since it is unlikely that new private, nongovernmental capital could supply the entire shortfall, the federal government would have to act as the equity supplier of last resort.

But what about the homeowners who are stuck with mortgages they can no longer pay? Helping them will be simpler once their problems are untangled from the banks’ goal of protecting overpriced assets. A change in the bankruptcy laws, for example, could empower judges to convert excessive mortgages into market-rate rentals, which are usually much cheaper.
All current rescue proposals being floated in the U.S. Congress have the taxpayer buying up the loans the banks no longer want, absorbing the losses just as taxpayers did in the savings and loan crisis of the late 1980s.

As an equity investor, however, the U.S. government would get the same terms as other private investors, leaving the losses to fall on the shareholders and executives who either caused the debacle or allowed it to happen. Concerns about the government’s holding bank stock directly could be allayed by depositing the shares in the Social Security trust funds. As the banks return to normal operations, they would become quite valuable securities and probably greatly improve the system’s returns.

Bank shareholders and executives made extraordinary financial gains during the 2000s. Now that their Ponzi scheme has been exposed, they are demanding that the public absorb much of their losses, and the Federal government has been responding with huge showers of money. The Bear Stearns rescue demonstrates the need to draw a line. From now on, the banks, their shareholders, and their executives should eat their own losses. If that wipes out the capital of essential depositary institutions, the federal government should step in. Save the banks and help struggling homeowners, yes. But no more largesse for bank executives and sharehol

---

Rice Jumps to Record, Corn Near High as Demand Outpaces Supply

Rice climbed to a record and corn traded near its highest ever on speculation the 3 percent annual increase in global demand for cereals will outstrip supply as governments curb exports to prevent protests.

Rice, the staple food for about 3 billion people, rose 2.4 percent in Chicago trading today after doubling in the past year. Soybeans advanced for the third day and wheat gained. Crop supply has been reduced by drought in countries including Canada and Australia and a U.S. freeze followed by excessive rain last year.

"A lot of what we're seeing at the moment is not related to production, but the fact that a number of countries are implementing trade restrictions," said Darren Cooper, a senior economist at the International Grains Council in London.
China, India and Vietnam have cut rice exports, and Indonesia has reduced import tariffs to protect food supplies and cool inflation.

Rice in Chicago climbed 42 percent in the first quarter, more than all of last year's 33 percent gain. Record grain prices contributed to strikes in Argentina, riots in Ivory Coast and a crackdown on illicit exports in Pakistan. Rough rice for May delivery advanced to $20.26 per 100 pounds on the Chicago Board of Trade today after the United Nations' Food and Agriculture Organization said global exports will drop 3.5 percent this year as nations curb sales. It was at $20.225 as of 11:38 a.m. London time.

The World Bank estimates "that 33 countries around the world face potential social unrest because of the acute hike in food and energy prices," Robert Zoellick, the bank's president, said on the organization's Web site. For these countries "there is no margin for survival," he said.

---

Ilargi: NOTE: these guys "believe the U.S. economy will narrowly avoid a recession and recover in the second half of the year"

Ontario teetering on brink of recession: RBC

Ontario's economy has come to a halt, and even Alberta will feel the effects of a global slowdown this year, according to a new forecast. Like the United States, Ontario's economy is “on the brink of recession” in 2008, says Royal Bank of Canada in a report released Thursday morning. The drag on Ontario's exports will mean that Canada's biggest province will only eke out 0.8 per cent growth of its gross domestic product this year, the report says.

“The nationwide hit to Canada's exports will disproportionately affect Ontario because of both its heavy reliance on U.S. demand for its products as well as the unfavourable composition of those exports that are largely focused on automotive and forestry sector goods,” said chief economist Craig Wright. Ontario's job market is precarious, with public sector job creation holding up while the private sector slashes positions.

“Some slack emerging in the labour market confirms that the province is gearing down as companies trim their operations,” the report says. Still, the Ontario slowdown will likely be short lived, Mr. Wright added, because real estate is healthy, wages are rising, and the Bank of Canada is cutting rates to stimulate the economy. The Canadian economy as a whole is expected to show 1.6 per cent growth this year, propelled by high prices for natural resources.

Even so, the resource-rich provinces aren't expected to register the eye-popping growth rates of the past few years, RBC predicts. Alberta is forecast to grow 3.3 per cent in 2008, compared to 4.3 per cent last year. British Columbia will slow to 2.3 per cent in 2008 from 3.1 per cent last year. And Newfoundland will decelerate rapidly from 9.0 per cent in 2007 to just 0.5 per cent in 2008, mainly because of waning oil production, the report says.

Alberta's inflation is expected to stay high, at about twice the national rate, Mr. Wright warned. The RBC forecast for Canada and the United States is on the optimistic end of the spectrum. The bank's economists believe the U.S. economy will narrowly avoid a recession and recover in the second half of the year as the government's huge fiscal stimulus package and the effect of steep interest-rate cuts kick in.

---

Ilargi: The ABCP language is getting harder fast.

ABCP: "Who is going to jail here?"

The Purdy Crawford-led road show for commercial paper investors reached a dramatic crescendo yesterday as the rarely frazzled lawyer appeared to lose his cool, raising his voice to tell one angry questioner that more would be done for individual investors. Mr. Crawford faced his largest and most vocal crowd by far in Vancouver as he wrapped up the five-city cross-country tour he undertook to present to investors the plan his committee came up with to fix Canada's frozen $32-billion commercial paper market.

Many investors said it wasn't enough. One woman cried after telling Mr. Crawford she had to go back to work at age 65 because of her third-party asset-backed commercial paper investments. Mr. Crawford's breaking point appeared to come as Bill Galine, executive vice-president of Universal Uranium Ltd., lobbed in a number of questions, including "who is going to jail here?"

He asked Mr. Crawford why financial institutions shouldn't take care of retail investors, "the ones who are desperate and put their money in and didn't know the deal. Is that fair?" "That's what I've been trying to tell you all day, that that's what's going to happen," Mr. Crawford said, his voice loudly raised. "The reality is, we're talking about a top-up to the plan," he told reporters later. "I think it will go well."

While 100 cents on the dollar is "a big ask, you have to measure that against this going down the drain, and what flows from that in terms of potentially years of litigation," Mr. Crawford said. He is using "moral suasion" to convince institutions that sold the paper, such as Canaccord Capital Inc., to do more for their customers who have been stuck holding it. However, any top-up is not within the committee's control.

Mr. Crawford is working to sell investors on the merits of his committee's plan to fix the ABCP market, but he realizes the vote hinges largely on whether investors can squeeze additional help from Canaccord and others prior to the April 25 vote. He said yesterday that the date of the vote is flexible, and investors will be given enough time to consider any top-up that might come out. Canaccord has been working on a "relief plan" for its customers.

"You can't deal with what might be a top-up without understanding what's in the bottom," Mr. Crawford told reporters.
The current estimate is that roughly 1,800 retail investors hold the paper, and many of them bought it from Vancouver-based Canaccord. After the meeting, Mr. Crawford declined to say which way he thinks the vote will go. "They're very much saying … that if they don't get full recovery, they'll vote against it," he noted, but added he doesn't know how things will unfold when the chips are down.

At one point a questioner asked those who intend to support the plan to raise their hands, and fewer than 10 shot up in the air.

One investor said the expected total of the committee's fees, costs and expenses for the plan, including lawyers and advisers, is about $100-million, which could be the amount it would take to top up the smaller investors, who are believed to hold roughly between $300-million and $400-million of the paper.

---

ABCP holders threaten to sell votes to vulture fund

Retail investors in frozen ABCP raised the stakes Thursday in their showdown with institutional investors, as their lawyers threatened to sell individuals' votes in the $33-billion restructuring to a U.S. vulture fund. Law firm Juroviesky and Ricci, which is trying to lead a class action suit for individual investors holding asset-backed commercial paper, announced Thursday that it hired a consulting firm to solicit bids for ABCP from U.S. distressed debt funds.

If a fund steps up, it would represent each investor in a April 25 vote on the restructuring. The law firm said the vulture fund would “keep the process honest.” The ABCP restructuring committee, led by lawyer Purdy Crawford, has gone out of its way to keep vulture funds out of this process by freezing the market.

Individual investors want 100 cents on the dollar for about $330-million of paper that has been in limbo since August. The restructuring plan struck by some of the largest pension funds and financial institutions in Canada is expected to see the frozen paper initially trade at about 60 cents on the dollar, and see investors waive the right to sue.

Mr. Crawford has repeatedly promised a better offer for an estimated 1,800 retail investors, but has yet to make a formal offer. The potential arrival of a vulture fund heightens the pressure to cut a deal. In a press release, Juroviesky said: “We feel that there is an opportunity for a well-funded institutional fund, with a longer liquidity time frame, to extract more value … than what we have been offered to date, and to accordingly offer my clients an appropriate deal, including a percentage of any upside.”

The law firm said institutional ABCP holders “stand to lose approximately $22-billion if the restructuring fails, so there is some leverage there for a party whose threats to vote it down are believable.” The law firm hired consulting firm Blackmore Partners to gauge hedge fund interest in the ABCP portfolio.

---

Crawford faces fresh front in ABCP revolt

Even as retail holders of seized-up asset-backed commercial paper move closer to getting their money back, another key investor group are considering holding a proposed restructuring to ransom unless they get the same treatment.

Corporate holders of the frozen notes say they feel frustrated at the way the negotiations around the restructuring are progressing because while the big institutions and retail investors are to some extent being taken care of, they could be left facing the brunt of the losses."We are being caught in the middle," said Terry Chandler, chief executive of Redcorp Ventures Ltd., a junior mining company with about $91-million invested in ABCP.

Mr. Chandler said corporate noteholders such as Redcorp have been in "discussions" about banding together to get a better deal for themselves. "You do something for one group and not for everyone else," said the chief financial officer of another mining company. "I don't see how they can offer this deal [to retail investors] but not to the others."

He said unless corporate investors get the same treatment as other players, they will move to stop the restructuring of the $32-billion of seized-up ABCP from going ahead. "I think that could happen very quickly," he said.

On Wednesday, Purdy Crawford, the lawyer spearheading the workout, came the closest he has come yet to promising that the 1,800 retail noteholders will get their money back. At a meeting of ABCP investors in Vancouver, he said, "that's what's going to happen... I think there's sunshine over the hill for you."
Insiders reckon there are more than 200 companies that own the stricken notes, ranging from autoparts giant Magna International to tour operator Transat AT to Baffinland Iron Mines Corp. and more than a dozen other junior miners.

"There are a lot of corporations saying, what about us," said Colin Kilgour, an industry expert who is advising some of the noteholders. "You've got a situation that works for the mega-investors and the micro investors, but the guys in the middle, [the restructuring] is not doing much for them."

But getting their way could be a challenge. If the deal is to go ahead, it must win approval from a majority of investors. Since retail holders are by far the biggest group in terms of numbers, they will be the ones who make the decision at the end of the day.

---