Ilargi: We are facing a big news day, with updates here throughout. Of course the main focus will be on the US, where Countrywide and Yahoo are under extreme pressure, down double digit percentages right of the trading bat.
We also keep a sharp eye on Europe, where things are-a-rumbling, especially in the UK, where the average homeowner is now losing $1000 every single week on the value of their properties. How long do you think that can go on? I’ll tell you what, that loss rate has yet to start for real, it will accelerate.
And let’s not forget Asia, including the Middle East, where dollar pegs and reserves make for multiple whammies of price rises with no end in sight, at a time when food is already through the roof.
Bank of America Should Skip Countrywide, Analyst Says
Bank of America Corp., the second- biggest U.S. bank, should abandon its $4 billion takeover of Countrywide Financial Corp. because the mortgage lender's loans will hurt earnings, according to Friedman, Billings, Ramsey & Co. Bank of America's proposed purchase of Countrywide, the biggest U.S. mortgage lender, may result in a writedown of as much as $30 billion, analysts led by Arlington, Virginia-based Paul Miller wrote in a note to clients.
Miller cut his rating on Countrywide to "underperform"from "market perform"and lowered his price target to $2 a share from $7. The lower price target "reflects a high probability that Bank of America renegotiates the deal,"the analyst said. Countrywide's credit rating was unexpectedly cut to junk on May 2 by Standard & Poor's, which cited doubt about whether Charlotte, North Carolina-based Bank of America will back the home lender's debt after a pending takeover is completed.
S&P made the cut two days after saying it might raise Calabasas, California-based Countrywide's ratings. The reversal squelched expectations among bond owners that their holdings would become more secure after Bank of America buys Countrywide, and renewed doubts about whether the stock-swap will be completed.
Ilargi: This looks remarkably simple to me: Microsoft has no choice, they're losing far too much ground to Google. Yahoo!, on the other hand, does have a second option: yes, Google. Expect a higher bid soon, Ballmer's posturing will be whistled back. They'll go upstairs with this one, and the verdict will be: no goal.
Yahoo is down 15% right now, and Microsoft is at about 0%. That last number tells the whole story.
Microsoft ponders Plan B
Microsoft showed its hand with the Yahoo bid and then folded. Now the software giant has to prove that in its gambit against Google there are some other cards to play. Other deals that have been bandied about by the pundits - Facebook or AOL are merely smaller pieces in a comprehensive online strategy. Whatever Microsoft's Plan B, C or D ends up being, the company is back to A as in alone.
While there is a lot to be made of Yahoo's 15% stock plunge in the wake of the failed deal, and the acrimony it may have caused big investors who saw Microsoft as a rich enough exit, the tale of Microsoft's stock has been informative.
Instead of a rally that many companies enjoy when they walk away from costly deals, Microsoft shares saw just an initial 2% gain Monday. This is not exactly a vote of confidence. Clearly, some investors have found a little comfort in Ballmer's disciplined ability to abandon a pricey move, but the solace is temporary.
Microsoft still has faces an unrelenting Google on nearly all business fronts. "A full recovery seems unlikely until Microsoft articulates a substantive, credible and new online strategy," wrote Bernstein analyst Jeff Lindsay in a research note referring to Microsoft's share value. "We believe simply returning to the original, pre-Yahoo strategy is likely insufficiently credible."
In a three-month campaign, Microsoft came within a few billion dollars of sealing a transformative deal that would have given the tech giant an online advertising operation second in size to arch rival Google. Yahoo co-founder and CEO Jerry Yang was reportedly looking for a purchase price of $37 a share and Ballmer, having raised the original $31 a share bid to $33, walked away rather than go any higher.
The $46 billion acquisition of Yahoo was seen by Microsoft and industry analysts as the single best strategy to address the shortcomings of its overall Internet business. But in the end, Ballmer said: "The economics demanded by Yahoo do not make sense for us."
Pursuing a hostile takeover through a proxy battle wasn't in the cards for Microsoft, as Fortune's Adam Lashinsky pointed out Friday. Given the big holdings of Yahoo insiders and the typically non-voting retail shareholders, the math for a majority vote didn't work in Microsoft's favor. But some Wall Street observers say they expect a few discussions to be started between some of Yahoo's large institutional shareholders and Microsoft, in an attempt to bring the two parties back to the table.
Ilargi: When Bank of America’s take-over of Countrywide was announced in January, I was sceptical. When they said it would take 6 months or longer, I figured they had no intention of closing the deal, that is was all done just to win some time before Countrywide would go TT-up. Karl at Market-Ticker suspects the BoA will first dump a lot of their toxic paper in Countrywide, before dropping it like a stone. In view of the criminal investigations, that option may be off the table. They make it much easier to walk away from the purchase altogether, though.
Bank of America may renegotiate deal to buy Countrywide
Bank of America Corp is likely to renegotiate its deal to buy Countrywide Financial Corp down to the $0 to $2 level or completely walk away from it, said Friedman, Billings, Ramsey, which downgraded Countrywide to "underperform" from "market perform."
Countrywide's loan portfolio has deteriorated so rapidly that it currently has negative equity and the proposed takeover of the company will be a drag on Bank of America's earnings due to the elevated credit expenses at Countrywide, analyst Paul Miller wrote in a note to clients. He cut his target on Countrywide's stock to $2 from $7.
Bank of America, which said in January it would buy Countrywide for $4 billion, said in a filing last week there was no assurance that any of the mortgage lender's outstanding debt would be redeemed, assumed or guaranteed. "Bank of America announced that it might not guarantee Countrywide's debt, which is most likely the first step in renegotiating the entire deal," Miller said.
If mark-downs on Countrywide's loan portfolio are less than $22 billion, then Bank of America can likely offset the adjustments with fair value debt adjustments and the difference between tangible equity and its purchase price of Countrywide, he estimated. "We estimate that if fair-value adjustments to the loan portfolio could exceed approximately $22 billion, this would increase the odds of Bank of America renegotiating the transaction or walking away," Miller said.
The analyst expects markdowns on Countrywide's $95 billion loan portfolio -- which includes $28 billion of option adjustable rate mortgages (ARMs), $14 billion of home equity line of credits, $20 billion of fixed rate second lien mortgages, and $19 billion of Hybrid ARMs -- to be material.
Angelo Mozilo's time as a free man is running low
Countrywide Toxic Mortgage investigations by the FBI, IRS and SEC heating up
Will Angelo go OJ on us soon? A white Ford Bronco with an orange man in the back headin to Mexico? Or will he pull a Ken Lay and just conveniently die?
Anyone who thinks the housing crash and mortgage meltdown is over is fooling themselves. The next great chapter is coming - The Arrest of Angelo Mozilo and the Fall of COUNTRYRON. And the charges against Countrywide that will come will give BofA a convenient reason to walk away from that moment of stupidity too as CFC goes bankrupt and folds up shop.
What's frustrating is that HP'ers knew what was going on for months and months, it was all just so OBVIOUS. And yet it took the government years to finally getting around to do something about it, after the real damage had been done.
Ilargi: Countrywide is not the only lender on the edge these days. How much longer will GM survive? No president will let them fail on their watch, so I'd say look for mid- December or early January, when there is a new president, but s/he hasn't been installed yet. That is the only way to limit the political fall-out.
ResCap May Not Be Able to Meet June Debt Obligations
Residential Capital LLC, the mortgage- finance company owned by GMAC LLC, said it may not be able to meet debt obligations unless it comes up with an additional $600 million by the end of June. ResCap, the eighth-largest U.S. residential lender in 2007, today began offering as little as 80 cents on the dollar to exchange or buy back $14 billion of bonds to extend maturities and stave off bankruptcy.
To finance the debt restructuring, ResCap is seeking a new $3.5 billion credit line from its parent GMAC, which is owned by General Motors Corp. and an investor group led by Cerberus Capital Management LP. "There is a significant risk that we will not be able to meet our debt service obligations, be unable to meet certain financial covenants in our credit facilities, and be in a negative liquidity position in June 2008," ResCap said in a filing to the Securities and Exchange Commission today.
Record U.S. home foreclosures have led to six straight quarterly losses totaling $5.3 billion, eroding ResCap's cash position and pushing it closer to violating loan agreements. ResCap said it's trying to amend the terms of those credit lines.
ResCap also wants GMAC to contribute $350 million of ResCap notes outstanding to the mortgage lender by the end of the month and give it $150 million more in borrowings under an existing credit facility.
Even if all those actions are successful, ResCap said today it will need "to consummate in the near term certain asset sales or other capital generating actions over and above our normal mortgage finance activities to provide additional cash of $600 million by June 30."
Wall Street, Lenders Face Subprime Scrutiny
Federal prosecutors are stepping up their scrutiny of players in the subprime-mortgage crisis, with a focus on Wall Street firms and mortgage lenders. Prosecutors in the Eastern District of New York in Brooklyn have formed a task force of federal, state and local agencies that will involve as many as 15 law-enforcement agents and investigators.
The U.S. attorney for the office, Benton J. Campbell, who supervises about 150 prosecutors, said the group will look into potential crimes ranging from mortgage fraud by brokers to securities fraud, insider trading and accounting fraud. Mr. Campbell said the "jury is still out" on just how much criminal activity the office might find, particularly on Wall Street, which saw a sudden decline in the value of securities backed by pools of mortgages last year. "There are market forces in play in that area, and that doesn't necessarily mean there is fraud".
The formation of the task force amplifies efforts already under way in Brooklyn, where prosecutors are investigating whether investment bank UBS AG improperly valued its mortgage-securities holdings, as well as the circumstances surrounding the failure of two hedge funds at Bear Stearns Cos., which collapsed last summer because of losses tied to mortgage-backed securities. UBS and Bear Stearns have declined to comment on these investigations.
Eastern District prosecutors also are investigating potential accounting fraud and false statements, among other things, by current and former executives of American Home Mortgage Investment Corp., a Melville, N.Y., mortgage lender that collapsed last year, according to people familiar with the matter.
Investigations into mortgage lenders, including American Home and other companies, are focused on whether officials made misrepresentations in securities filings about a company's financial position and the quality of its mortgage loans, including failing to disclose a rising number of loan defaults, or engaged in questionable accounting to hide losses. Prosecutors also are looking at whether companies doctored information about borrowers, such as credit histories, before making loans and selling those loans to banks or Wall Street firms, which packaged them into securities and sold them to investors.
Investigations by the Brooklyn U.S. attorney's office include some of the probes previously announced by the Federal Bureau of Investigation, of about 20 companies involved in subprime lending, or lending to borrowers with poor credit. The bureau didn't name the companies. The Justice Department, which oversees the FBI and local federal prosecutors' offices, including the Eastern District, declined to comment.
Prosecutors also are looking at ways in which lenders that originated loans may have defrauded Wall Street banks that funded those lenders. For instance, prosecutors are looking at whether some lenders, in violation of agreements they had with Wall Street firms, didn't pay back the firms after the lenders sold loans they originated directly to investors such as Fannie Mae and Freddie Mac, and then lied to the Wall Street firms about the status of the loans, said one person familiar with the matter.
Prosecutors also are investigating whether brokers at Wall Street firms lied to investors, orally or otherwise, by stating that their investments in vehicles known as collateralized-debt obligations were backed by, for example, corporate debt rather than assets such as subprime-mortgage loans, that person said.
Government Intensifies Mortgage Investigation
Federal agencies are intensifying a criminal investigation of the mortgage industry and focusing on whether some lenders turned a blind eye to inflated income figures provided by borrowers. The Federal Bureau of Investigation and the criminal division of the Internal Revenue Service have formed a task force to examine mortgages that were made with little or no proof of the earnings or assets of borrowers, a government official who had been briefed on the matter said Sunday.
The group also includes federal prosecutors in New York, Los Angeles, Philadelphia, Dallas and Atlanta, said the official, who spoke on the condition that he not be identified. The task force, which was established in January, stepped up its investigation in recent weeks as the financial industry disclosed billions of dollars in additional write-downs from bad mortgage investments. The latest inquiry is broader and deeper than a separate F.B.I. investigation of mortgage lenders that is also under way.
While the new task force is focusing on the role of mortgage lenders and brokers in low- or no-documentation loans, it is also examining how the loans were bundled into securities. “This is a look at the mortgage industry across the board, and it has gotten a lot more momentum in recent weeks because of the banks’ earnings shortfalls,” the official said.
In January, the F.B.I. began a wide-ranging investigation of 14 unnamed mortgage companies over their lending and business practices. Those smaller inquiries have tended to focus on local foreclosure schemes. That F.B.I.-led inquiry has since expanded to include several more firms. In March, the Justice Department and the F.B.I. began investigating whether the Countrywide Financial Corporation, the troubled mortgage giant, misrepresented its financial condition and loans in filings with the Securities and Exchange Commission.
Countrywide is also under scrutiny by California and Illinois; federal prosecutors in Sacramento; and the United States Trustee, the federal agency that monitors bankruptcy courts. The S.E.C., meanwhile, is examining stock sales by certain Countrywide executives.
Ilargi: The insanity bleeding out of the F&F terminal almost-corpse knows few limits. Much of their losses come from derivatives gone awry. That’s pure government backed gambling. To top that one off, the losses would have been much larger if they hadn’t been allowed to loosen their reserve requirements?!
If they hadn't been allowed to raise their bets, they would have posted renewed record losses. How sick is that?
More big losses expected from Fannie, Freddie
Fannie Mae and Freddie Mac, reeling from the deterioration in the U.S. housing market, will likely post steep losses for the first quarter, but the two largest home funding companies in the U.S. are expected to escape previous record losses. Slumping house prices and rising foreclosures, even for high-quality loans that comprise the bulk of business at the two federally chartered companies, have eroded their income.
Losses were likely tempered, however, after the two raised their fees and as the credit crunch drove many of their rivals to the sidelines. The first quarter, however, held no relief for housing. The Standard & Poor's/Case-Shiller home price index of 20 metro areas fell 2.6 per cent in February, for an annual drop of 12.7 per cent. Foreclosure filings surged 23 per cent in the first quarter, and were more than double a year earlier, according to RealtyTrac.
“It's probably the most challenging environment that they've seen in their histories,” said Moshe Orenbuch, equity research managing director at Credit Suisse in New York. Rising delinquencies and foreclosures have forced both companies to write down the value of mortgage assets they own and boost reserves to cover payment guarantees on bonds held by investors.
Fannie Mae, whose shares have tumbled 46 per cent over the last 12 months, will be first out of the chute when it reports first-quarter results on Tuesday. Freddie Mac, whose shares are down 54 per cent over the past 52 weeks, is scheduled to post its results on May 14.
Wall Street analysts see Fannie Mae reporting a $2.02-billion (U.S.) loss, $1.48 per share, according to Reuters Estimates. The projected loss compares with net earnings of $826-million, or 85 cents per share, a year earlier. But in last year's fourth quarter, the largest source of U.S. home funding had a record $3.6-billion loss. Sweeping losses on derivative contracts used to hedge its investment portfolio drove the downturn.
First-quarter derivatives losses are apt to be large for the two companies, given the difficulty they likely had in estimating their interest rate exposure at a time when the credit crunch whipsawed bond markets, analysts say. Freddie Mac is expected to report a $920.6-million first-quarter loss, or $1.22 per share, according to Reuters Estimates. In the year-ago quarter, it lost $211-million, followed by a record $2.5-billion loss in the final quarter of 2007.
Going forward, profitability will be helped by an agreement with their regulator, the Office of Federal Housing Enterprise Oversight, that loosened restrictions on how much capital the two lenders must hold. That freed Fannie and Freddie to buy up to $200-billion more mortgages. As part of the deal with their regulator, the companies also pledged to raise fresh capital. Analysts say it would be best for each to raise at least $10-billion of preferred shares or common stock, but they expect far smaller amounts initially.
Ilargi: THIS. IS. BAD. REAL BAD.
Pensions funds playing double or nothing at the crap table with your pension funds, it’s ridiculous. Never leave anyone in charge of your money.
'Dumbest Idea Ever' Used as Pensions Plug Deficits
Pension bonds are making a comeback, as states and cities from Alaska to Philadelphia bet they can use the proceeds to help fill deficits in their retirement funds and still generate a higher return than what they pay in interest. Officials may sell a record $35 billion of the securities this year after offerings declined since 2003, according to data compiled by Bloomberg.
Connecticut issued $2.2 billion of pension debt last month, paying an average rate of 5.88 percent on money state officials project will earn 8.5 percent when invested. With the economy slowing and states facing budget deficits that Standard & Poor's says will top $30 billion next year, officials are turning to the quick fix of borrowing even though the $50 billion of pension bonds sold produced mixed results for taxpayers. New Jersey sold $2.8 billion of the debt in 1997 and its pension gap has since ballooned to 10 times that amount.
"It's the dumbest idea I ever heard,"said New Jersey Governor Jon Corzine, the Democrat and former chairman of investment bank Goldman, Sachs & Co. "It's speculating the way I would have speculated in my bond position at Goldman Sachs."There are more than 100 public retirement systems in the U.S. managing a combined $2.3 trillion. The amount is $380 billion short of the funds needed to pay pensions over the next 30 years, according to the National Association of State Retirement Administrators in Baton Rouge, Louisiana.
While the systems earned on average 11.9 percent a year from 2003 to 2006, many of the pensions failed to make the contributions required to keep pace with benefits they promised, the Pew Center for the States, a nonprofit public policy research group, said in a December report. New Jersey's seven retirement funds have a combined deficit of $28.3 billion, up 14 percent from last year, according to state actuarial reports.
States also face a $381 billion liability for retiree health care and other benefits they've promised public employees, and have only set aside $11 billion to fund that commitment, according to the Pew report. "It's politically expedient to go out and borrow money,"said Robert Smith, president of Austin, Texas-based Sage Advisory Services, which oversees $5 billion in assets. "It's like taking a second mortgage on a house you haven't paid for yet."
Alaska lawmakers sent Republican Governor Sarah Palin legislation last month authorizing the sale of as much as $5 billion in pension bonds. Wisconsin Governor Jim Doyle, a Democrat, signed a law in March permitting Milwaukee County to borrow money to close a $406 million deficit. Puerto Rico issued $1.58 billion of debt in January, including $668 million of 6.15 percent, 30-year securities, and said it plans to sell an additional $5.4 billion over the balance of the year.
Issuers have little problem finding buyers for the bonds because they typically yield more than Treasuries and are backed by states and cities. Connecticut received more than $4 billion of orders for its $2.2 billion Aaa rated general obligation pension bond offering, according to state figures. The portion that comes due in 10 years pays interest of 4.75 percent, more than the 3.81 percent yield on Treasuries of similar maturity.
EU to weigh into debate on eurozone’s future
With the eurozone approaching its 10th anniversary, the European Commission is to unveil proposals this week on improving management of the bloc, running the risk of reigniting a simmering debate that sharply divides member states. The European Union's executive arm is to adopt a report on Wednesday taking stock of the euro and making proposals on how to improve the functioning of European economic and monetary union.
In May 1998, EU members agreed that the euro would be launched in January 1999 in eleven countries. Since then eurozone has seen its ranks swell to 15 members. Although the shared European currency has outgrown early growing pains, it still faces existential questions about how it can be better administered and who should do it. The commission aims to weigh into the debate by urging more economic policy coordination among eurozone members, while stopping short of calling for an "economic government" for the bloc, as French President Nicolas Sarkozy has proposed.
But rather than shaking up the eurozone's institutional and legal "architecture," the commission wants to see better application of policies that its leaders choose. In addition to recommending the continued "enlargement" of the eurozone, the report calls for "improving budgetary monitoring," according to a senior EU official who spoke on condition of anonymity.
The second proposal would be linked to "better monitoring of reforms that member states put in place" in order to see what their implications are for public finances. "After 10 years of economic and monetary union, we've got price stability, macroeconomic stability and what remains to be improved is economic flexibility, which is done with better monitoring of reforms," the official said.
While short on substance, the proposals should rekindle a simmering debate about the European Central Bank's independence and giving a bigger role to politicians in running the eurozone. France and Italian prime minister-elect Silvio Berlusconi have been hankering for just such a debate, much to the irritation of Berlin and some other smaller countries such as Austria and The Netherlands as well as the commission.
Europe Price Surge Persuades Politicians to Back ECB
The European Central Bank is winning Europe's political leaders over to its policy of focusing on fighting inflation even as economic growth slows. Politicians from France, Belgium and Luxembourg, who previously complained that the ECB paid too little attention to economic growth, have signaled increasing concern that inflation is eating away at voters' incomes.
"There isn't much appetite for having these inflation levels, whether you're the monetary authority or government,"Robert Barrie, chief European economist at Credit Suisse Group in London, said. "There's a recognition that inflation is too high and broader-based support for the ECB to do something about it."
The ECB has refused to follow the U.S. Federal Reserve and Bank of England in lowering interest rates after inflation surged since August, to reach a 16-year high of 3.6 percent in March. The bank argues that rising prices are a bigger threat to economic growth than the increase in credit costs resulting from the collapse of U.S. subprime mortgages.
The Frankfurt-based central bank is expected to leave the benchmark refinancing rate at a six-year high of 4 percent when policy makers meet in Athens on May 8, according to all 53 economists surveyed by Bloomberg News. The same day the Bank of England will probably leave its key rate at 5 percent after three cuts since December, a separate survey shows.
ECB President Jean-Claude Trichet said at a meeting of European Union finance ministers in Brdo, Slovenia, that he felt less isolated in his fight against inflation. "Those living on 300, 400, 500, 600, 700 euros can't live with runaway inflation,"Luxembourg Finance Minister Jean-Claude Juncker said at the same meeting, where demonstrators protested against price increases. He had opposed the ECB rate increases when they started in December 2005.
ECB to stay on high alert until inflation fades
The European Central Bank will stay on high alert for many more months while keeping its main lending rates stable, analysts believe, as inflation poses a bigger threat than signs of an impending slowdown in the 15-nation eurozone economy. A poll of 31 economists by Thomson Financial News and Agence France-Presse found all expected the ECB to maintain the monetary status quo when its governing council meets on Thursday in Athens.
"Despite a raft of weaker economic data, the ECB will maintain its benchmark rates given persistent dangers of inflation," analyst Stefan Muetze at Helaba bank said in a summary of the market's opinion. While the US Federal Reserve has slashed lending rates in the United States to 2.0 percent, the ECB has followed its own guidance and its main refinancing rate has been locked in at 4.0 percent since June.
The US economy is flirting with recession, while the economic situation in the eurozone is somewhat more robust, in the words of ECB president Jean-Claude Trichet. That said, some eurozone states are now hitting strong headwinds and would welcome easier lending conditions, particularly in Spain, where a severe housing crisis has hobbled an economy that represents 12 percent of the eurozone total.
Economic clouds are gathering over many of the zone's 320 million inhabitants, as shown by the eurozone confidence index in April that fell to a level last seen in August 2005. But ECB governors have been focusing resolutely on inflation, to the point of implying that eurozone rates could even rise if economic conditions warranted such action. From Bank of France governor Christian Noyer to his German counterpart Axel Weber, top ECB policymakers seize just about every occasion to complain of price increases and warn the bank was ready to "act if necessary."
In April however, inflation eased back to an annualised 3.3 percent according to a preliminary estimate by the European Union's statistics service Eurostat, after hitting a record 3.6 percent in March. The ECBs medium term target is just below 2.0 percent. Bank governors and directors are less concerned however by headline inflation, which has been pushed up by oil and food price hikes the bank feels is temporary.
They worry more about the consequences, in particular on wage negotiations. European unions have been demanding substantial pay increases for workers who have seen their purchasing power fall as a result of the energy and food price increases.
UBS May Cut 8,000 Jobs After $11.4 Billion Loss
UBS AG may cut as many as 8,000 jobs as it grapples with the biggest credit writedowns of any European bank and a 12 billion-franc ($11.4 billion) first-quarter loss. Switzerland's biggest bank, which had a 3 billion-franc profit a year earlier, is set to spell out plans for layoffs when it reports detailed results tomorrow. The company will probably say it's eliminating between 2,500 and 3,000 jobs in its investment bank, more than 10 percent of the division, two people familiar with the matter said May 2.
"UBS is scaling down investment banking,"including reducing trading bets and giving up off-balance sheet units, said Frankfurt-based Landsbanki Kepler analyst Dirk Becker, who advises clients to "reduce"holdings of UBS. It is "realistic"to estimate that the company will fire one tenth of its 83,000 employees overall, he said.
Writedowns at the Zurich-based bank after the U.S. subprime mortgage meltdown have swelled to $38 billion over the past three quarters, a result of building a debt securities business at the peak of the market. UBS rose 20 centimes, or 0.5 percent, to 37 francs by 9:01 a.m. in Swiss trading. It has lost 50 percent in the past 12 months, making it the fifth-worst performer in the Bloomberg Europe Banks and Financial Services Index of 59 stocks.
The Swiss bank got shareholder approval last month to raise 15 billion francs in a rights offer after receiving 13 billion francs from investors in Singapore and the Middle East in March. "They've got to do something to win back the trust of shareholders,"said Peter Thorne, an analyst at Helvea in London with an "accumulate"recommendation on the shares. "I wouldn't be surprised if it's more"than 8,000 layoffs, he said.
The world's biggest financial companies have announced more than $319 billion of writedowns and loan losses, with UBS in second place behind New York-based Citigroup Inc., which has written down $41 billion. Banks and securities firms have cut about 48,000 jobs in the past 10 months, including 15,200 positions at Citigroup and 5,220 at Merrill Lynch & Co.
UK house prices sliding by $1000 a week
Average home costs £8,136 less than in JanuaryHouse prices in the UK are dropping by almost £500 every week as the squeeze on consumers and the puncturing of the property boom drag down the cost of homes, Britain's biggest mortgage lender said yesterday.The Halifax said the average home price has fallen £8,136 since the start of the year reaching £189,027 - a fall of £479 a week.
In its monthly snapshot of the market, the Halifax said prices fell by 1.3% after a 2.5% drop in March - the largest single monthly fall since 1992. Despite price increases in the second half of 2007, the cost of a home is now 0.9% lower than it was at this time last year - the first annual decline since February 1996. Seema Shah, economist at Capital Economics, said: "The last time we saw two such large falls in consecutive months was during the depths of the housing market crash of the early 1990s, and even those falls fell short of the declines seen in the past two months."
Halifax said a squeeze on spending power and a fall in real earnings over the past year were among the factors behind the first year-on-year fall in prices since February 1996. Another factor was the rapid rise in prices seen in previous years, which have made properties unaffordable to many would-be buyers. Howard Archer, economist at Global Insight, said the downward pressure on prices was a consequence of "elevated house prices and modest real disposable income growth", and very tight credit conditions leading to markedly fewer and more expensive mortgages being available.
The Halifax survey followed other evidence this week of a marked cooling of the housing market. Two other surveys - from the Nationwide and Hometrack - also said it was the first time since the mid-1990s that house prices were down year-on-year. The British Bankers' Association said demand for mortgages fell to its lowest level since Labour came to power in 1997 and the Home Builders Federation said reservations of newbuild houses and flats have collapsed by two-thirds this spring.
"What is most concerning is that these house price falls have come with the economy only having registered a modest slowdown. With the economy and labour market set to weaken further, our forecast for a 20% fall in house prices by end-2009 is firmly on track," said Shah.
UK building society mortgage loans fall 68%
Mortgage lending by the UK's building societies has slumped by more than £1bn, according to new home-loans data. Building societies advanced net loans of just £580m in March, down from £1.8bn in the same month last year. The 68% decline means that building societies are scaling back lending as a result of the credit crunch even more severely than major mortgage bank rivals, such as Halifax and Cheltenham & Gloucester.
Societies are now lending to one in 10 would-be homeowners, compared with a traditional level of almost one in five. Bank of England data shows that the market for home loans shrank by more than 40% in March compared with the same month last year. But it also shows building societies reducing their share of net lending, which includes customers repaying their mortgages, at a faster rate than the overall market.
Analysis of the data shows how the market is changing to reflect the difficulties lenders are having in raising funds on the money markets. While gross lending in March, which includes all home loans, fell compared with a year ago, the share held by building societies was more robust at 15%, compared with 17% in March 2007.
But the net lending figures suggest that building societies are losing their customers at a faster rate than they are able to win new ones. They are also not retaining borrowers who are reaching the end of mortgage terms, either because their rates are uncompetitive or they are becoming more selective about who they lend to.
Clouds darken as new loans and property sales plummet
More evidence, as if it were needed, has emerged of the scale of the slowdown in the UK housing and mortgage market. The Bank of England said the number of new mortgages approved for house purchases in March fell to 64,000, down from 72,000 in February. This was the lowest level since January 1999, and was down 44 per cent on the figure for the same month last year.
The news followed hot on the heels of a statement from the British Bankers' Association (BBA), reporting a fall in new mortgages approved – down 46 per cent on the same month in 2007, and the lowest monthly figure since September 1997. Overall, there can now be little doubt that the UK housing market is in the doldrums and that prices are falling in many parts of the country.
The Land Registry announced on Monday that the number of properties being sold was 26 per cent down year-on-year. In the £150,000-to-£200,000 price bracket, usually dominated by first-time buyers, the slide in sales was even more dramatic – down 44 per cent year-on- year, according to the Land Registry.
Britons run scared of banks and stash their cash at home
Savers are becoming much more cautious, with one in 10 people thinking their money is safest under the mattress, a survey from Newcastle Building Society suggests. In light of the credit crunch and last year's run on Northern Rock, the number of people preferring to stash their cash at home has nearly trebled from 4 to 11 per cent. The figure goes as high as 15 per cent for those living in the Midlands and Wales.
In the past 12 months, the number of people investing in banks and building societies has fallen by 17 per cent, according to the research. A year ago, almost three-quarters of those surveyed would have considered banks or building societies the safest places to invest their money.
"These findings are a stark sign of the times, but they are also exacerbated by the hype over the credit crunch," says Wendy Lee at Newcastle. "Some savers now have an exaggerated view that investing their money with a building society or bank can be risky."
Confidence in banks has declined by 5 per cent over the past 12 months, with under a quarter of savers now considering them the safest home for their cash. And the number of people who are unsure where to go with their savings has almost doubled to 13 per cent. Another 19 per cent would choose not to invest with traditional financial institutions.
Green tax revolt: Britons 'will not foot bill to save planet'
More than seven in 10 voters insist that they would not be willing to pay higher taxes in order to fund projects to combat climate change, according to a new poll. The survey also reveals that most Britons believe "green" taxes on 4x4s, plastic bags and other consumer goods have been imposed to raise cash rather than change our behaviour, while two-thirds of Britons think the entire green agenda has been hijacked as a ploy to increase taxes.
The findings make depressing reading for green campaigners, who have spent recent months urging the Government to take far more radical action to reduce Britain's carbon footprint. The UK is committed to reducing carbon emissions by 60 per cent by 2050, a target that most experts believe will be difficult to reach. The results of the poll by Opinium, a leading research company, indicate that maintaining popular support for green policies may be a difficult act to pull off, and attempts in the future to curb car use and publicly fund investment in renewable resources will prove deeply unpopular.
The implications of the poll could also blow a hole in the calculations of the Chancellor, Alistair Darling, who was forced to delay a scheduled 2p-a-litre rise in fuel duty until the autumn in his spring Budget, while his plans to impose a showroom tax and higher vehicle excise duty on gas-guzzling cars will not take effect for a year.
He is now under pressure to shelve the increase in fuel duty because of the steep rise in the price of oil. The public's climate-change scepticism extends to the recent floods which inundated much of the West Country, and reported signs of changes in the cycle of the seasons. Just over a third of respondents (34 per cent) believe that extreme weather is becoming more common but has nothing to do with global warming. One in 10 said that they believed that climate change is totally natural.
The over-55s are most cynical about the effects of global warming with 43 per cent believing that extreme weather and global warming are unconnected. Three in 10 (29 per cent) of all respondents would oppose any more legislation in support of green policies, while close to a third of citizens (31 per cent) believe that green taxes will have no discernible effect on the environment since people will still take long-haul flights regularly and drive carbon-heavy vehicles.
Buffett Castigates Wall Street, Bankers on Blunders
Billionaire Warren Buffett castigated investment bankers, home lenders and regulators for letting the financial system spin out of control and causing a run on Bear Stearns Cos. that almost brought down more of the biggest banks. "Wall Street is going to go where the money is and not worry about consequences," Buffett said during a news conference yesterday, a day after his Berkshire Hathaway Inc.'s annual meeting.
"You've got a lot of leeway in running a bank to not tell the truth for quite a while."
Buffett and investing partner Charlie Munger also lambasted credit raters, bond insurers and policymakers for two days as a record 31,000 attended the annual affair in Omaha, Nebraska. In between scoldings, Buffett told investors more damage lay ahead and dropped hints about where Berkshire is looking for purchases abroad as the dollar falls.
"There's going to be more pain," said Buffett, who repeated that the U.S. is in a recession. Even after the Federal Reserve arranged JPMorgan Chase & Co.'s $2.4 billion rescue of Bear Stearns in March, "that doesn't mean the losses are over by a long shot." The world's biggest banks and securities firms absorbed at least $312 billion in asset writedowns and credit losses in the past 16 months after the collapse of the subprime mortgage market, comprised of loans to people weak credit.
"Both the regulators and the accountants have failed the rest of us terribly" said Munger, Berkshire's vice chairman. "If this were an Alice in Wonderland fable, you'd say it's too extreme. It wouldn't work as satire. Adults are not going to behave this way." Federal intervention saved New York-based Bear Stearns, once the fifth-largest U.S. securities firm, from bankruptcy in March after billions in subprime losses led to a run on the firm.
"If Bear Stearns had gone, the next day somebody else would have gone," Buffett said in an interview with Bloomberg Television at the start of the annual meeting. Buffett said he turned down an offer from an unidentified official to lead the rescue because Berkshire didn't have enough capital or time to assess the situation.
Buffett Hints at Targets for His Global Buying Spree
Billionaire Warren Buffett, whose Berkshire Hathaway Inc. is hunting for takeovers outside the U.S., said a subsidiary is "probably close"to a U.K. purchase. Buffett, speaking at a press conference today in Omaha, Nebraska, didn't name the target, describing it only as a "mid- size"company. He added that Berkshire will look at insurance units being sold by Royal Bank of Scotland Group Plc, the U.K. lender reeling from asset writedowns.
Buffett, Berkshire's chairman, embarks on a European trip this month to scout for acquisitions. With about $35 billion in cash to help pay for a purchase, Buffett has complained he can't find anything big enough to have an impact on Berkshire, whose market value tops $206 billion. He has been investing in China, Israel and the U.K. to spur profit growth after saying that worthy U.S. investments are scarce.
The U.K. rule that requires disclosure of holdings once a stake reaches 3 percent "messes up"his investment strategy, Buffett said. Buffett said he'd buy Swedish companies at the right price, adding that high costs thwart his desire to buy an entire company in Japan.
Asian currencies will rise in value against the dollar and the euro, which may influence decisions about acquisitions in China and Taiwan, he said. Currency controls may have curtailed the appreciation, Buffett said, adding, "you can't hold back the tide forever."Berkshire missed some opportunities to invest in India, he said.
U.S. in 'awfully pale recession,' Greenspan says
The United States has fallen into an “awfully pale recession” and may remain stagnant for the rest of the year, former Federal Reserve chairman Alan Greenspan was quoted on Monday saying. “We're in a recession,” Bloomberg news agency reported Mr. Greenspan had said in a television interview.
“But this is an awfully pale recession at the moment. The declines in employment have not been as big as you'd expect to see.” Last week a government report showed employers shed jobs in April at a slower rate than had been feared, providing some relief about the slowing economy. Mr. Greenspan doubted there would be an immediate recovery, saying stagnation for the rest of the year was the most likely outcome. “That's certainly the most benevolent scenario,” he said. “It's not all that far from being the most probable.”
The economy would not start turning around until home prices started settling and eased pressure on finance companies to write off mortgage-related losses, Mr. Greenspan said. Mr. Greenspan has said before that the economy is in a recession, although he also said at that time that it was too soon to say how deep or prolonged the downturn would be. His office could not be reached immediately for comment.
White House: No evidence of recession so far
The White House said Friday that there was no evidence so far that the U.S. economy had slid into recession after the government released an employment report showing only a small decline in jobs. n“The evidence of one isn't there so far,” White House spokesman Tony Fratto told reporters on Air Force One when asked about the prospects for a recession as President Bush headed to St. Louis for a speech on the economy.
The comment was in line with Mr. Bush's refusal to call the economic slowdown a recession and Mr. Fratto went further to criticize those who have said the U.S. economy was contracting. “There has been a lot of irresponsible chatter from Chuck Schumer and others,” he said, referring to the Democratic New York senator. “We've tried to be very transparent and clear.”
The Labor Department reported that 20,000 jobs were shed in April, far fewer than the 80,000 that economists surveyed by Reuters had anticipated would be lost. The U.S. unemployment rate fell to 5 per cent from 5.1 per cent in March. Asked if Mr. Bush was pleased that the decline was smaller than expected, Mr. Fratto said, “We couldn't possibly be cheered by a report that shows a decline in job creation.”
India may ban food futures to ease inflation
India may have to suspend trading in more food futures as political pressure grows for action to tame inflation, Finance Minister Palaniappan Chidambaram said. "If rightly or wrongly people perceive that commodities- futures trading is contributing to a speculation-driven rise in prices, then in a democracy you will have to heed that voice,"Chidambaram said in an interview with Bloomberg Television in Madrid yesterday.
Communist allies of Prime Minister Manmohan Singh want to ban futures trading in cooking oil, sugar and other commodities, saying speculators are driving up prices and fanning inflation. The government halted futures trading in wheat and rice last year and lentils in 2006 to check a surge in domestic prices of the commodities. "The pressure is to suspend a few more food articles,"Chidambaram said without identifying the products. "It may be politically wise to do that for a short period to see if it has any impact at all on inflation."
A panel formed by the government under economist Abhijit Sen to study the impact of futures trading on prices of staple foods, this month suggested maintaining the ban on rice and wheat. It didn't recommend extending the ban to other commodities, saying there was no conclusive evidence to suggest futures trading contributed to price increases. A futures contract is an obligation to buy or sell a commodity at a set price for delivery by a specific date. Online trading in commodity futures in India started in 2003.
Domestic traders and producing and consuming companies are the main participants in India's commodity exchanges, compared with the 13 million individuals who invest in stocks. Overseas funds aren't allowed to trade in India's commodity futures. Chidambaram said that India may have to live with "the current level of inflation for a few more weeks."
India's inflation accelerated to 7.57% in the week ended April 19, the fastest pace in more than three years as prices of food and manufactured products rose. 'If food prices continue to rise and demand is high, as it is in India today, then I am afraid we may have to live with the current level of inflation for a few more weeks,"he said. "We thought inflation had peaked at about 7.3%. We were surprised that it moved up to 7.57%."
Singh, who lost ground in eight state elections since the beginning of January 2007, wants to cool inflation to bolster his Congress party's chances of retaining power in national elections scheduled before May 2009. Inflation erodes the spending power of people, particularly in a country like India where the World Bank estimates half the 1.1 billion population live on less than $US2 a day.
China tells firms to brace for tough times
A Chinese government watchdog has warned major state-owned enterprises to brace for tough times given the likelihood of a worsening global economic slowdown, state media reported on Monday. Chinese state-owned enterprises (SOEs) must pay more attention to their financial position to avoid a potential capital crunch, the Economic Observer reported, citing Li Rongrong, director of the State-owned Assets Supervision and Administration Commission.
"Keep a close watch on your pockets and do not deplete yourselves," said Li, who talked at a recent meeting to senior executives from 150 SOEs directly controlled by the central government. Li said the SOEs, some of which have already flagged cash flow shortages, should better prepare themselves for tightening monetary policy lasting at least two years, according to the report.
The meeting was held after figures showed that combined profits of the major SOEs in the first quarter dropped 2.9 percent from a year earlier to 203.4 billion yuan (29.1 billion dollars), it said. Earnings at oil companies and power generators were worst hit, because of rising raw material costs and the government's central pricing system for oil products and electricity tariffs, it said.
Gulf inflation 'to surge past 9pc'
Inflation in Gulf countries will probably increase to at least nine per cent this year as rents and global commodity prices surge and falling interest rates spur lending, a poll showed.In Saudi Arabia and Oman, average inflation may more than double as the weaker US currency makes some imports more expensive, according to a poll of 17 economists and analysts.
"The Gulf-wide trend appears to be no relief from high inflation," said National Bank of Abu Dhabi head of research Giyas Gokkent, one of the analysts polled by Reuters. In Saudi Arabia, average inflation could hit at least a 30-year peak of 9pc, on average, compared with 4.1pc last year, the poll showed. Inflation in Saudi could jump to 9.9pc, up from 6.5pc at the end of last year.
"The possibility of double-digit inflation across the Gulf does not look too remote now and indeed in the first half of this year is clearly a period when price pressures have intensified," Gokkent said. Economists have at least doubled their inflation forecasts for Saudi Arabia, Oman, Bahrain and Kuwait since they were last polled by Reuters in December.
Since then, inflation in Saudi almost doubled in six months to 9.6pc in March, while price rises hit 11.1pc in Oman in February, more than two times the inflation rate just eight months earlier. Oman's average inflation rate will jump to a record 9.3pc this year, with inflation touching 11pc on December 31, the poll showed. It also highlighted rapid price growth in Bahrain, where inflation should more than double to 8.5pc by the end of the year and average 6.1pc.
"A boom in domestic demand, strong monetary growth, supply bottlenecks, rising international commodity prices and a weak dollar-pegged currency will ensure that inflation remains well-above historical levels," said Economist Intelligence Unit regional economist David Butter. Gulf states, excluding Kuwait, are constrained in their inflation battle by currency pegs to the ailing dollar, which drive up import costs and force them to track US interest rate cuts.
Asia Getting Fed Up With Bernanke's Rate Cuts
Chalongphob Sussangkarn knows a thing or two about volatile currency markets. Until February, he was the finance minister of Thailand, which over the last decade saw its currency plunge too low and surge too high. Yesterday, I bumped into Chalongphob at a Madrid hotel as he grappled anew with the vagaries of exchange rates -- this time as a consumer exchanging dollars.
"I should just get rid of these dollars before they fall even more,"joked the president of the Thailand Development Research Institute, as we exchanged U.S. currency for euros. Thailand's currency, the baht, has risen 16 percent against the dollar over the past 18 months, part of an Asia-wide trend. Hastening the dollar's slide is a Federal Reserve set on avoiding recession at all costs. On April 30, the Fed lowered its benchmark interest rate by a quarter point to 2 percent, the seventh cut since September.
While the Fed hinted it may be ready to pause, the amount of monetary stimulus in the pipeline is a growing threat to Asia. One immediate side effect is rising currencies, which poses challenges for Asia's export-dependent economies.
The bigger issue is that easy money is fueling global inflation. "With inflation running very high in most countries, the ability of central banks to reduce interest rates to offset the impact of the U.S. slowdown is going to be constrained,"says Subir Gokarn, Tokyo-based Asia-Pacific chief economist at Standard & Poor's.
Fed Chairman Ben Bernanke acts in the U.S.'s interest. Yet the Fed's cuts are adding ever more liquidity to global markets. While bad weather and the increased use of biofuels explain part of the run-up in food prices, rising oil costs are as a much a consequence of liquidity as demand. Asia is on the front lines of the phenomenon, especially with investors like Mark Mobius betting on more rate cuts. Mobius, who oversees $47 billion in emerging-market equities at Templeton Asset Management Ltd., says Bernanke may cut rates to 1 percent as U.S. housing foreclosures worsen.
Central bankers in Asia could be excused for feeling a bit, well, fed up by sliding U.S. rates. Their concern is over "hot money"flows of the kind that wreaked havoc in Asia a decade ago. Investors who had poured in amid rapid growth fled even faster at the first sign of trouble. Large amounts of the liquidity created by the Fed are heading Asia's way to tap its rapid economic growth.
The meltdown at Bear Stearns Cos. in March raised the stakes as the Fed stepped up its campaign of rate cuts. Asia was already awash in money thanks to the Bank of Japan. Even though Japan has been growing steadily since 2002, the BOJ's key lending rate is still a mere 0.5 percent. Excess liquidity is dovetailing with Asia's record buildup of currency reserves. China, Japan, Taiwan, South Korea and India hold a combined $3.5 trillion of reserves. There's increasing evidence that Asia's currency holdings are seeping into the money supply, adding to inflationary pressures.
In a perfect world, economists would be predicting aggressive rate increases in Asia. Yet with more that two-thirds of the world's poor living in the region, central banks may be reluctant to slam on the brakes. Timidity might be a mistake. Inflation is the real risk to Asia's long-term prosperity, not slowing U.S. growth. China's inflation has quickened to the fastest pace in 11 years, and consumer prices rises in Sri Lanka and Vietnam have exceeded 20 percent. Singapore's consumer price gains have reached levels not seen since 1982.
Russia's economic 'dead end'
When Vladimir Putin hands Dmitry Medvedev the keys to the Kremlin on May 7, he may be locking his presidential successor into an economic box. Russia is riding so high on rising oil and gas prices that it has little incentive to diversify beyond commodities. The energy industry produced more than two-thirds of the nation's export earnings and more than a third of the state's 2007 revenues, which totaled $US315 billion.
The government has ignored advice from the World Bank and other organizations to invest in other industries, start-up companies and infrastructure. Instead, the central bank has amassed $US530 billion in gold and foreign-currency reserves; Putin has put $US130 billion of that in a sovereign-wealth fund that would provide no more than a two-year cushion if energy prices fall.
''This route may lead to a dead end,'' Economy Minister Elvira Nabiullina said at a Finance Ministry meeting last month. ''We no longer have the advantages of a cheap ruble, cheap labor'' after a decade of average annual economic growth of 7% that pushed up wages and the currency, making Russia less competitive.
At the same time, the political system Putin, 55, created discourages changing course. Russia is, in effect, a one-party state, with Medvedev handpicked by Putin to become president, while Putin installed himself at the head of the United Russia party and has laid plans to become prime minister. Regional governors, once elected, now are Kremlin appointees, most of them United Russia members.
With a heavy boost from the state-controlled media, United Russia won December's parliamentary election with 64% of the vote; Medvedev, 42, won 70% in the March presidential vote. ''There's no prospect of dislodging the current political system because there are no democratic mechanisms in Russia,'' says Stanislav Belkovsky, a former Kremlin adviser who heads the Institute of National Strategy in Moscow. ''A change of regime can only come about if it collapses from within.''
There's little chance of that, because the party, with 2 million members, is dominated by elites who control much of the country's wealth and have a stake in the status quo. Russia's top 100 billionaires - including eight United Russia members in the parliament - have $US522 billion in combined assets, Forbes magazine says. They benefit from a business system beset by bribery and largely directed by government officials.
With Much Blood-Letting to Come, the U.S. Housing Finance System Needs Replacing
In much of the discussion about the collapse of the U.S. housing market, commentators have assumed that the massive run-up in property prices that preceded the subprime-mortgage meltdown were simply the result of a speculative frenzy that became a full-fledged market bubble. But that’s not the case at all.
You see, the bubble and subsequent crash were inevitable under the current system of housing finance. Fundamental changes must be made. Standard and Poor’s recently projected the likely future loss rate on the $650 billion of subprime-mortgage-backed securities that are still out in the marketplace. From that we can estimate the losses S&P is projecting on the actual mortgages themselves.
According to S&P, senior AAA-rated bonds will pay out about 60% of principal, junior AAA-rated bonds about 35%, AA-rated bonds about 5% and lower-rated bonds nothing at all. Since about 75% of subprime mortgage-backed securities were AAA rated, we can calculate that S&P thinks subprime mortgages will eventually return about 40% on the original principal amount. That’s a startling number.
If you had a portfolio consisting entirely of 100% loan-to-value mortgages, on which the appraisals were accurate but a large percentage of the borrowers had poor credit, and house prices were destined to drop between 20% and 25% over the next few years, you’d expect to lose 25% - or perhaps 30% - of principal, but still manage to keep 70% to 75% of your money.
When you had a foreclosure, there would be costs involved that increased your loss. On the other hand, some of the borrowers would be able to make their mortgage payments, leaving you with no loss at all. Thus, if subprime mortgages are expected to return only 40%, almost half of them must have had some fraud involved, either by the borrower, the mortgage broker or the appraiser.
Let’s now turn to actual housing prices. The S&P/Case-Shiller Home Price Indices of home prices in the Top 20 urban markets dropped a bigger-than-anticipated 12.7% in the 12 months that ended in February - the worst showing since the index debuted in 1991. What’s even more alarming, however, is that the decline is accelerating. In February alone, prices dropped 2.7% - the equivalent of a 28% decline if this rate persisted for the entire year.
That should have alarmed both homeowners with large mortgages and mortgage market participants - if prices were to drop 30% to 40%, instead of the generally expected 15% to 20%, even prime home mortgages would get in trouble and the losses would be appalling - in the range of multiple trillions of dollars. Since the first-quarter vacancy rate in U.S. housing - owner-occupied and rental - increased to 2.9%, the highest level in 50 years, we may indeed be approaching such a bearish scenario.
However, when you look at factors like the ratio of house prices to incomes, it becomes obvious that the problem is not the current drop, but the previous rise. Since World War II, the average house price was 3.2 times the average income. By 2006, however, the average house price had jumped to 4.5 times the average income. With house prices outrunning incomes in that way, mortgage financing was bound to become more and more risky, and a substantial drop was eventually inevitable - to take prices from 4.5 times income to 3.2 times would require housing prices to plunge 29%. And that doesn’t even consider the possibility that prices might overshoot on the downside.
Once again the media are filled with stories and images of unrest in Haiti, this time due to soaring food prices and pervasive hunger. In the United States and around the world, grain stocks have been depleted, energy costs have skyrocketed, and prices of food staples are inflated by increased use of grain to feed livestock in middle-income countries and supply ethanol plants.
Unpredictable weather is causing droughts and flooding in key grain-producing countries. Add to that the widespread deforestation of Haiti, and the result is a 50 percent increase in the price of food staples over the past year and countrywide shortages. Yet the current crisis is only the most recent in the hemisphere's hungriest country.
Food insecurity in Haiti has deep historical roots and can be tied to interventionist policies of foreign governments - from the brutal and slave-dependent sugar production that made Haiti France's richest colony to the current US practice of grain dumping. In the 1980s and 1990s, under pressure from international financial institutions and the United States, Haiti lifted tariffs that protected the livelihoods of its rice farmers, leaving local producers unable to compete with heavily subsidized US agribusiness.
The United States gave Haiti rice as "food aid." Such assistance is highly profitable for US producers but disastrous for Haiti's small farmers, and resulted in dramatic decreases in local production of this staple. In short order, the tiny country of Haiti became the fourth largest importer of US rice.
These stressors are not isolated to Haiti. Generous subsidies of agribusiness and shipping companies disguised as food aid have enormously deleterious effects on the local production of food and livelihood of farmers who live on a small economic margin. Acute shortages superimposed on chronic food insecurity are like matches on gasoline in countries like Haiti, where the large majority of people earn less than $2 a day and spend more than half their income on food.
It is past time for the United States, other donor governments, and large aid agencies to reexamine agricultural, trade, and aid policies to prevent more crises, and to work with local farmers and markets to assure lasting food security.
- First, nongovernmental organizations should stop buying surplus US grain at cheap prices, subsidized by US taxpayers, and then reselling it in developing countries for profit. Such programs undermine local production and local markets.
- Second, foreign aid for food security should be increased and separated from the US Farm Bill. The current linkage serves to tie the financial interests of the agricultural and shipping industries with aid instead of having assistance driven by an analysis of local needs.
- Last, the world's poorest countries must be released from their enormous debt to international financial institutions, most of which was incurred to support ruthless dictators and never reached the neediest. While President Rene Preval's government in Haiti struggles to calm and feed its population, it continues to remit over $1 million per week to service its debt.
Mogadishu rocked by food demonstrations
Thousands of Somalis protested in Mogadishu's streets today, angry at food traders refusing to take old currency notes that have been blamed for spiralling inflation, witnesses said. "The whole city is up in smoke," protestor Hussein Abdikadir told Reuters while rolling a tyre he said he was planning to burn in the Buulahubey neighbourhood of southern Mogadishu.
"Traders have refused to take old notes. Food prices are high and we have nothing to eat. We will protest until the traders agree to take the notes and sell us food," he said. The Somali shilling is valued at roughly 34,000 to the dollar - more than double what it was a year ago - and many blame counterfeiters who mint the notes for the fall in value.
That has been doubly compounded by sharply rising world food prices, leaving many in the largely lawless African nation of 10 million short of money to buy food, prompting several protests or riots in the past six months.