Ilargi: Psychologists, evolutionists and others who study the human brain and behavior often claim that, as a species, we have learned to be very good at detecting liars in our midst. I have serious doubts.
As I said yesterday, and I don’t want to repeat it at length, Hank Paulson and buddies, as well as the OFHEO, knew things when they announced the Fred and Fan bail-out last week, that they didn’t divulge at the time.
You would think that should cause a lot of anger in Congress, but it’s utterly silent on that front, except for empty rhetoric about inconsequential details. They vote tomorrow on the plan, and it’s a shoe-in, that is sure to be accepted, not least of all because it’s made part of a larger housing rescue plan.
Still, Paulson argued on July 13 that the -blank check- bail-out was needed to make sure Fan and Fred could continue to execute their vital role in the US mortgage lending industry. Which, that much is true, would -in its present form- be dead without them (but why is that so bad, and for whom?).
Yesterday, we found out that Freddie’s financial situation is so bad that it has to cut its lending substantially; hence, the company won’t continue to play the very vital role that the bail-out is supposed to warrant. It can’t. And that’s just based on a handful of data Freddie spills voluntarily at this point; rest assured it’s all even much worse.
So much so, that not even a blank check can keep it from announcing it needs to cut its operations. And then today, the OFHEO states that Freddie's losses are much larger than was reported before. They must have had better things to do last week, when the release of the information could have embarrassed Hank.
Hank Paulson knew all this on July 13. But he didn’t say it. By announcing his "rescue" plan the way he did, and when he did it, he made sure the US taxpayer will have to fork over at least $1 trillion for Fannie and Freddie, in order to let them continue their business, while he already knew that the companies would never be capable of doing so.
The Congressional Budget Office tries to deflect the damage by claiming the whole scheme will cost the taxpayer "only" $25 billion, but that's nothing short of bizarre. It's not an outright lie, mind you: It could well be a realistic scenario, provided both US home prices AND average incomes increase 500% by next Tuesday. The question is: do they really believe their claim? And conveniently, nobody will ask that question.
Here’s a red hot sign that Paulson is not on the up-and-up: Last week, he kept on repeating till he was blue in the face that the OFHEO said Fannie and Freddie were well-capitalized. You know what he said yesterday about that? ”“Ofheo has told us one thing and the markets have told us another...."
Hank Paulson needs to be hooked up to a lie-detector. Preferably for the rest of his natural life.
What is so bad at Fannie and Freddie? Most of it, we don’t know yet. But here’s a grab bag of points just from articles posted below:
- Fannie and Freddie have combined debts of $1.5 trillion
- $217 billion in non-agency securities
- 9.2 percent of the companies' combined portfolio is made up of privately issued securities backed by subprime mortgages
- 5.8 percent of the portfolio’s is made up of Alt-A mortgages
- Freddie Mac has $24 billion of potential losses related to privately issued subprime and Alt-A mortgage securities
- They have over $2 trillion "worth" of contracts (Credit Default Swaps) with other institutions to hedge the risks behind the mortgages
Dead Stocks Rallying
Is the recovery for real? Or is it merely the result of one of those fabricated rumors that the SEC sternly has warned will be prosecuted to the full extent of the law? And, if it should prove the latter, do we risk jail time for perpetuating a false rumor by giving it currency in this sacred space?
What a conundrum! We were somewhat reassured after inferring from a scan of the dictum that only false rumors that cause stocks to go down -- not false rumors that cause stocks to go up -- are verboten by the powers that be. Which makes sense, we guess, since everybody loves a winner.
Still, what gives us pause and, more than that, makes us fidgety, is that several short sellers phoned us to report the upswing in the market (and we plumb forgot to ask whether any of them were guilty of naked short selling, although in their case the literal image that phrase conjures up is itself more than a little unsettling).
Rather weird, too, it strikes us, is that naked short selling -- that is, selling shares short before you've arranged to borrow them, as the SEC has mandated on the stocks of 19 key lenders including such impoverished beauties as Fannie Mae and Freddie Mac -- is already illegal.
An incorrigible cynic might be prompted to conjecture that Chairman Cox and his team of ferocious Chihuahuas are engaged in making a very public hullabaloo to cover up their shameful laxity in enforcing the securities laws.
In like vein, that same unreconstructed cynic might wonder if the agency, by promiscuously issuing subpoenas to virtually everyone on Wall Street who ever uttered the name Bear Stearns is not so much intent on pursuing a forensic autopsy as helping the staggering economy by throwing money around like an investment banker after his first bottle of wine, and enriching legions of lawyers.
Our timidity, not to mention our confusion, has been greatly furthered by the fingering by Washington of speculators for hiking the price of oil sky-high. Are the short sellers who drive stocks down the same knaves who drive oil prices up? Are they ambidextrous investors or two distinct species?
Wouldn't it prevent innocents like ourselves from being ensnared by these bad people if they were compelled to have identifying tattoos imprinted on their foreheads that marked them as naked short sellers, speculators or, heaven forbid, both?
But, forgive us this confessional digression. We're a journalist first and foremost. And journalists are fearless (within reason) and dedicated to speaking truth to power (especially when it doesn't cost them anything). So here goes: The stock market is rallying and the spirited rally has legs that could carry it onward and upward for at least another day. Toot the horns and bang the drum and shout hallelujah.
Even in the grisliest bear markets, sellers suffer an occasional spot of fatigue, draw a breath and take a time out. We strongly suspect that's pretty much the story here for equities.
As to oil, mindful of the potential erosion of demand that recession and obscene prices are likely to cause, we nonetheless have every confidence that Ben, with his helicopter, and Hank, with his bazooka, will continue to wreak havoc on the badly wounded dollar, one of the unintended consequences of which will be to bolster crude prices.
And not the least of the reasons we remain skeptical of the prospects for stocks is that it's a "it coulda been worse" market. Especially among the walking dead of the financials, the release of operating results awash in red ink were greeted by the cry "it coulda been worse," and their stocks momentarily came to life.
This tendency was also very much in evidence among banks and their kin that have weathered the credit storms and mortgage mess in comparatively decent shape -- like JPMorgan Chase, which reported a 50% drop in profits and whose shares promptly enjoyed a sharp gain.
The bank's top man, James Dimon, in releasing its lower earnings report, termed the economy weak and likely to get weaker and ventured that capital markets will remain under stress. He also warned that losses on prime mortgages (the cream of the crop that is turning sour, big-time) could triple.
Mr. Dimon, rather a class act in a field not abounding in them, gets high marks for his candor. As for the eager beavers who shrugged off his cautions and rushed to buy the stock, we give them an investment grade of "F," for frivolous.
And for all those hopeful souls who have been champing at the bit to buy because things could have been worse, we say stick around awhile; they will be.
Paulson Says Fannie-Freddie Rescue Needed to Stabilize Markets
Treasury Secretary Henry Paulson, trying to persuade Congress to approve his rescue plan for Fannie Mae and Freddie Mac, said that it will help stabilize financial markets, and that he doesn't anticipate using taxpayer funds.
"This is about not only our housing markets, but it's about our capital markets more broadly," Paulson said in an interview with Bloomberg Television in New York. "This goes well beyond the two institutions, Fannie and Freddie; it has to do with investors in the United States and investors all over the world."
In a speech earlier today, Paulson said Congress understands what's needed to address the U.S. housing downturn and predicted lawmakers will pass the bill this week to shore up confidence in Fannie Mae and Freddie Mac.
"I am confident they recognize the demands of the current situation, and will act to complete work on this legislation this week," Paulson said in the speech. "We must, in the short term, take steps to boost confidence" in the two mortgage companies, he said.
Paulson is trying to convince lawmakers to give him the authority to use taxpayer money, if necessary, to rescue the two companies. Ending a U.S. housing slump is the key to an economic recovery, he said in the speech.
Fannie, Freddie Books Inspected as Bush Pushes Paulson Plan
Bank examiners from the Federal Reserve and the Comptroller of the Currency are inspecting the books of the nation’s two largest mortgage finance companies, Fannie Mae and Freddie Mac, as the Bush administration prods Congress to approve a plan that would enable it to inject billions of dollars into the companies.
Treasury Secretary Henry M. Paulson Jr., in a meeting on Monday with reporters and editors of The New York Times, said the Fed and the comptroller’s office began combing the books of the two companies after their declining stock prices caused widespread anxiety in the market. The two companies guarantee or own almost half of the home mortgages in the United States.
The Bush administration is hoping they can be the engine that pulls the housing market out of its yearlong slide. Mr. Paulson emphasized that he still believed that the companies have an adequate cash cushion to withstand further declines in the housing market, and that he has no plans to use the new authority he seeks in the near term.
The financial condition of Fannie and Freddie is of keen interest to members of Congress, some of whom have expressed concern about approving a plan without a clearer understanding of the value of the possible losses from mortgage-related securities owned or guaranteed by the two companies.
Some lawmakers and critics are concerned that a further sharp erosion in housing prices could lead to more foreclosures than Fannie and Freddie could absorb without a large investment or loan from the government, which would involve committing taxpayer funds.
The financial health of the two companies is also important to the Fed and the comptroller because many of the banks they regulate hold Fannie and Freddie debt. Banks sometimes use those securities to help meet their own capital requirements. Mr. Paulson said he expected that the conclusion of the examination by the Fed and the comptroller would provide an important signal of confidence to the markets.
He also appeared on Monday on CNBC, the business news channel, and on Sunday on “Face the Nation,” the CBS talk show, as part of a campaign to win public support for the rescue plan for Fannie and Freddie and to bolster public confidence in the markets.
The main regulator of the two companies, the Office of Federal Housing Enterprise Oversight, or Ofheo, which the legislation would abolish in favor of a stronger one, has concluded that the companies have enough capital to withstand further losses. “Ofheo has told us one thing and the markets have told us another,” Mr. Paulson said. “I’d like as much input as possible.”
He added that the examination would “make the markets more comfortable” about the financial health of the companies. Mr. Paulson said it was important that Congress approve the rescue plan this week to reassure the financial markets. The House is expected to vote later this week, and the Senate could follow shortly afterward.
Mr. Paulson repeated his earlier comments that Congress should provide the administration with open-ended authority to make investments and loans to the two giant companies to send a strong signal to the markets that they have plenty of financial muscle behind them.
“The more flexibility we have on the credit facility, the more confidence you have in the market and the greater protection to the taxpayer because the less likely it will be used,” Mr. Paulson said. “Something like that shouldn’t have to be used. It’s like the Fed’s lender of last resort facility.”
He said it would be unfair to describe any possible loan to either institution as a bailout because, he said, they would have to post “strong collateral” that would protect taxpayers from losses. “These entities have good collateral,” he said. “There are mortgages being made today.”
In response to a question about how confident he could be that the collateral would be adequately valued considering the sharp and continuing decline in the housing markets, he said that the two companies were being examined by officials from the Fed and the comptroller’s office.
Fannie and Freddie have combined debts of $1.5 trillion. They own or guarantee more than $5 trillion in mortgages. They have contracts with other institutions worth $2 trillion more to hedge the risks behind those mortgages.
Fannie, Freddie To Record More Losses, Ofheo Says
Fannie Mae and Freddie Mac may need to record more writedowns after they expanded their purchases of non-guaranteed subprime and Alt-A mortgage securities just as other investors fled to safer investments, their regulator said.
The value of $217 billion of the so-called non-agency securities is falling as other financial firms write down their holdings, the Office of Federal Housing Enterprise Oversight said in its annual mortgage market report. Privately issued securities backed by subprime mortgages made up 9.2 percent of the companies' combined portfolio, while Alt-A represented about 5.8 percent, Ofheo said.
By investing "heavily" in private-label securities in 2004 and 2005, the companies "significantly increased their exposure to fair value losses from changes in market prices," Ofheo said.
Structured investment vehicles and securities firms, battered by $452 billion in asset writedowns and credit losses, were invested in similar securities and have contributed to the price swings that may lead to more losses at Fannie Mae and Freddie Mac under generally accepted accounting principles.
"To the extent that those institutions recognize fair value losses on their private-label portfolios under GAAP, Fannie Mae and Freddie Mac may have to do so as well," the Washington-based regulator wrote in the report.
Treasury Secretary Henry Paulson on July 13 asked Congress for the authority to extend credit and buy equity stakes in Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac if needed amid speculation that the government-sponsored enterprises don't have the capital to survive the biggest housing slump since the Great Depression.
Fannie Mae dropped 73 cents, or 5.2 percent, to $13.40 at 10:19 a.m. in Frankfurt, where 58,658 shares traded. Freddie Mac fell 3.4 percent to $8.45 with 20,686 shares traded. Fannie Mae has declined 65 percent this year, and Freddie Mac about 74 percent. Both traded at almost $70 a share in 2007.
Freddie Mac has as much as $24 billion of potential losses related to privately issued subprime and Alt-A mortgage securities that it now calls "temporary" as the company is assuming it can recover its investment when the debt matures, Credit Suisse analyst Moshe Orenbuch wrote in a July 16 research note.
Non-agency, or private-label, mortgage securities, once the most profitable home-loan debt for Wall Street, lack guarantees from Fannie Mae and Freddie Mac or U.S. agency Ginnie Mae. "The exposure at Freddie Mac is about twice that at Fannie Mae," Orenbuch said in an interview.
He said market conditions have deteriorated since Freddie Mac reported $18 billion in "temporary" losses from private label subprime- and Alt-A- mortgage securities.
U.S. on 'right path' to end of turmoil: Paulson
The federal government and the private sector are proceeding apace toward resolving turmoil in the nation's financial and housing markets, Treasury Secretary Henry Paulson said Tuesday.
"I believe that the United States is on the right path to resolving market disruptions and building a stronger financial system," Paulson said in a speech delivered at the New York Public Library. He's been in New York seeking to rally Wall Street support for his plan to throw Fannie Mae and Freddie Mac a financial lifeline.
Paulson asked the public to be patient as regulators and institutions work through the challenges. "Working through the current turmoil will take additional time," Paulson said. He said there would be more "bumps in the road," citing as an example the questions swirling the fiscal safety of Fannie Mae and Freddie Mac.
"I am well aware that financial market and housing challenges continue to concern America's families. Progress will not come in a straight line, and we need to remain patient as we work through these challenges," Paulson said. Paulson said that until the housing market stabilizes, continued stresses in the U.S. financial markets should be expected.
Experts have been pushing back their estimates of when the housing market will hit bottom. Home prices may fall further and may not begin to rebound for another year, some analysts said. Paulson again urged Congress to pass this week his proposal to back stop Fannie Mae and Freddie Mac.
The two companies need a world-class regulator, he said, adding that Federal Reserve must have a role in setting their capital standards. Amid calls heard in some quarters for Washington to take a hands-off approach, Paulson said he would rather not be in the position of asking for government funds to support Fannie and Freddie . "But I am playing the hand that I have been dealt," he said.
Ilargi: The Congressional Budget Office apparently recruits its employees primarily for their talent to tell straight-faced lies. Looking at the debts, losses and liabilities at Fannie and Freddie, how on earth could it even possibly be true that the eventual cost to the taxpayer of the rescue plan would top at $25 billion? Don’t forget, this comes at the same time that the OFHEO, F&F’s regulator, announces more losses for Freddie.
The CBO’s exact words: “ .. [the] rescue package ... will probably cost $25 billion").
What is that probability based on? Who’s done the risk assessment? With what sets of data? In view of the numbers that are available, I can think of only one reason to issue reports such as this: to lull people into a big sleep. And in a week or a month, they’ll declare that things have worsened for reasons that "could not be foreseen". And they will do so with straight faces.
Fannie, Freddie Rescue 'May Cost Taxpayers $25 Billion'
Treasury Secretary Henry Paulson's rescue package for Fannie Mae and Freddie Mac will probably cost $25 billion, the Congressional Budget Office said.
"There is a significant chance -- probably better than 50 percent -- that the proposed new Treasury authority would not be used before it expired at the end of December 2009," the nonpartisan agency, which provides economic and budget analysis for lawmakers, said in a report today.
Democratic lawmakers were seeking to determine the cost of Paulson's plan to offer emergency funding to Fannie Mae and Freddie Mac, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding. Paulson today said Congress understands "the demands" of the housing downturn and will likely approve this week his request to help the government- sponsored enterprises.
"We need to act in the short-term because the GSEs are vital institutions in our capital markets today and are vital to emerging from the housing correction," Paulson said in a speech in New York. Fannie Mae and Freddie Mac are among the "most interconnected of all global financial institutions," he said.
Paulson on July 13 asked Congress to grant the Treasury the power for 18 months to buy equity in Fannie Mae and Freddie Mac and expand their credit lines with the government after concern that the companies don't have enough capital sent the shares to the lowest in more than 17 years. Paulson also requested expanded powers for the Federal Reserve to oversee capital requirements.
The cost of the plan will depend upon terms of the credit, whether the companies have to put up collateral, pay fees or commit a portion of profit to the Treasury, said Marvin Phaup, a CBO economist for almost 20 years who retired in 2007 and is now a research scholar at George Washington University in Washington.
"This is a very very difficult thing to do and of course the political pressure will be great to make the cost estimate zero," Phaup said in a telephone interview last week. "You can make a reasoned argument that it will be zero with some probability, but of course, it's also with some probability it could be very costly to taxpayers."
Neither the Treasury nor the White House budget office has estimated publicly the cost of the bailout. Paulson has said the plan would restore investor confidence in the companies and thereby pose little cost to taxpayers. Lawmakers have negotiated with Paulson over the details, with the goal of putting the package to a vote in the House of Representatives tomorrow. The Senate would also need to vote.
The Federal Reserve is talking with the Office of Federal Housing Enterprise Oversight, the regulator for Fannie Mae and Freddie Mac, to determine whether the companies have enough capital to offset credit losses. "The Federal Reserve is working with Ofheo to get a better understanding of the issues facing the GSEs," Fed spokesman David Skidmore said. The New York Times earlier reported that the Fed and the Comptroller of the Currency are examining the books of Fannie Mae and Freddie Mac to evaluate their health, citing an interview with Paulson.
Paulson said the Treasury has no plans to execute the financial backstop plan, and added that before doing so he would consult with the Congress and the companies. Paulson said financial market turmoil will take "additional time" to be resolved and that progress "won't come in a straight line." "Until the housing market stabilizes further, we should expect some continued stresses in our financial markets," he said.
Ilargi: When Rome burned, Nero composed bad and meaningless music. As Paulson grabs a trillion of your dollars for his friends, Congress contocts bad and meaningless legislation.
New Regulator in Rescue Plan Spurs Debate
When the Treasury secretary, Henry M. Paulson Jr., orchestrated a rescue effort for the nation’s two largest mortgage finance companies last week, most of the attention was focused on the infusion of cash and credit that the government would provide.
But his plan also relies on the creation of a new regulatory agency to control the companies more tightly over the long term and to limit the risk they pose to the country’s financial system. Under the measure, Congress would lose some of its authority to oversee the companies, Fannie Mae and Freddie Mac, including the right to determine how much capital they must keep as a cushion against losses.
That role would shift to the new regulator, which would be called the Federal Housing Finance Agency; the director of the agency would be appointed by the president and confirmed by the Senate. While experts on the companies agree that the proposed regulator would be stronger than the existing one, housed in the Department of Housing and Urban Development, some contend that the legislation does not go far enough.
These critics say that the measure tilts in favor of the companies, even as it tries to strike a balance between promoting affordable housing — a primary mission of the government-sponsored mortgage giants — and setting limits on them to diminish the risks they pose to the world financial system. A new regulator, they say, would have significant new powers, but still less than bank regulators now have.
As a result, the companies, which have a reputation for retaining some of the most influential lobbyists in Washington, could continue to exploit those weaknesses to their advantage, these people say, potentially encouraging them to take on more risks that could ultimately require a taxpayer bailout.
“The new law will not give the regulator either the mandate or the capacity of a bank regulator,” said Thomas H. Stanton, an authority on the companies who has written several books on them. “The new law creates a cumbersome regulatory process to implement many parts of the bill,” he said, adding, “I’m afraid we will need to revisit the issue of the proper regulatory framework for the companies.”
Even Mr. Paulson, in a television interview on Sunday, conceded that tougher regulation was secondary to reassuring the financial markets of the fiscal health of Fannie and Freddie, which provide financing for roughly 80 percent of all new home loans in the country.
“You know, the second part of this is having a strong regulator with real teeth, with real responsibilities and powers,” Mr. Paulson said on “Face the Nation” on CBS. “And this is going to be key to putting us in a position where we can address the risks that they pose and that have been focused on. But our first priority today is the stability of the capital markets.”
There have been previous efforts to tighten regulations and establish more independent oversight of Fannie Mae and Freddie Mac, including a 1992 law that established the current regulatory framework for the companies. Congress and the White House have tussled for decades over which branch of government should control the companies. Now the Bush administration is urging lawmakers to act swiftly to calm jittery markets.
The legislation, which Congress is expected to approve as early as this week, would make it more difficult for the companies to intimidate or weaken the regulator by attacking its budget in Congress. Instead, they would be assessed fees directly by the regulator, just as commercial and investment banks are by their regulators.
Countrywide CDS out as Bank of America says no bond guarantee
The cost to insure the debt of Countrywide Financial Corp's home loan unit rose on Monday after Bank of America Corp's chief financial officer said the bank doesn't intend to guarantee Countrywide's debt.
Joe Price said on a conference call that "all I can say at this point is we don't intend to guarantee the public debt." He added that he understands the ramifications of not paying at maturity. Bank of America acquired Countrywide on July 1.
"The statement today should not be surprising," said Ricardo Kleinbaum, analyst at BNP Paribas in New York. "The market needs to come to terms with the fact that when financial institutions take over other financials, especially in a rescue, the decision to not guarantee does not imply that Bank of America will walk away from the liabilities," Kleinbaum said.
The cost to insure the debt of Countrywide Home Loans rose to 235 basis points, or $235,000 per year for five years to insure $10 million in debt, from 220 basis points, according Phoenix Partners Group. The swaps had earlier rallied from 258 basis points at Friday's close, according to Markit. Bank of America's credit default swaps are trading at 112 basis points, according to Phoenix.
"Today's statement was, I think, aimed at limiting damage to Bank of America's investors," as otherwise investors might have believed Bank of America would take on Countrywide's liabilities under any terms, said BNP's Kleinbaum. In a filing earlier this month Bank of America provided no guarantees on the debt, though analysts said a new organizational structure indicated the bank is likely to repay Countrywide bondholders at maturity.
Wachovia Has Record $8.9 Billion Loss, Cuts Dividend
Wachovia Corp., the U.S. bank that hired Treasury Undersecretary Robert Steel as chief executive officer two weeks ago, reported a record quarterly loss of $8.9 billion and cut the dividend by 87 percent. The stock fell as much as 12 percent in early New York trading.
The second-quarter loss of $4.20 a share compared with net income of $2.3 billion, or $1.23, a year earlier, the Charlotte, North Carolina-based company said today in a statement. The loss included a $6.1 billion charge tied to declining asset values.
The writedown and second dividend reduction in three months reflect Steel's response to setbacks including the Golden West Financial Corp. acquisition in 2006, which cost former CEO Kennedy Thompson his job after eight years. Wachovia has dropped more than 75 percent in New York Stock Exchange composite trading since it spent $24 billion two years ago to buy Golden West just as house prices were peaking.
"This is Steel's chance as the new guy to set the bar low so that he can increase the dividend going forward if their performance improves," said David Dietze, president and chief investment strategist at Point View Financial Services in Summit, New Jersey, which owns Wachovia shares.
Steel also said the company is moving to "sell selected non-core assets" and reduce the number of business customers who only use the bank for loans rather than other services. Wachovia shares have declined 65 percent this year, the second- worst performance on the 24-member KBW Bank Index behind National City Corp., Ohio's largest bank.
The second-quarter loss marks the first time Wachovia has posted consecutive losses in at least 20 years, data compiled by Bloomberg show. Wachovia's report follows the release of better- than-estimated quarterly results at JPMorgan Chase & Co., Bank of America Corp., Citigroup Inc. and Wells Fargo & Co.
Wachovia said July 9 that losses in the three months ended June 30 would be at least $2.6 billion, after $3.3 billion of losses on option-adjustable-rate mortgages. The loans let borrowers skip part of their payment and add the balance to principal. The bank said last month that it stopped offering the mortgages.
Declining house prices in California and Florida, which account for about 70 percent of Golden West's $121 billion of loans, have left 14 percent of the bank's option-ARM customers with zero or negative equity in their homes. Merrill Lynch & Co. analyst Edward Najarian estimated on July 9 that losses from the loans would total about $18 billion over four years, double those previously estimated by Wachovia.
The dividend was lowered to 5 cents a share from 37.5 cents, marking the second time this year that the quarterly payout was cut. The decision follows a month-long budget review led by David Carroll, head of the company's capital management group.
Profit at the division that includes retail, small business and commercial customers fell 23 percent to $1.12 billion. The bank set aside $765 million more for credit losses in consumer real estate and auto loans.
Ilargi: People like visuals, so why not reserve some space for this one? I hope allotting more power to the US government than the Fed is meant as a joke.
Pyramid of Greed
I’ve been reading a lot of articles on the Web these days with different groups blaming each other for the collapse of the housing market. It’s annoying.
The housing collapse and credit crunch are too big and too wide-reaching for it just to be the fault of one group. There was greed at all levels of what I’m terming the Pyramid of Greed.
From home owners maxing out their cash-out refis to real estate agents encouraging buyers to “stretch” to mortgage brokers manipulating W2’s the greed went up and up and up right to the office of the President.
So from now on, for those on this pyramid, please refrain from absolving yourself of any culpability in this mess. If you’re on this pyramid you played a part.
Never Have So Many Short Sellers Made So Much Money
Investors worldwide are betting more than $1 trillion on a collapse in stock prices.
Managers from William Ackman to Jim Rogers made a total of at least $1.4 billion in July with wagers against U.S. mortgage financiers Fannie Mae and Freddie Mac, data compiled by Bloomberg as of last week show.
Harbinger Capital Partners staked $665 million that U.K. mortgage lender HBOS Plc would drop and Sao Paulo-based hedge-fund manager Francisco Meirelles de Andrade's short selling of Cia. Vale do Rio Doce is also paying off.
More than $1.4 trillion of equities worldwide are now on loan, about a third higher than at the start of 2007, data compiled by Spitalfields Advisors, the London-based firm specializing in securities lending, show. Almost all of that is being used to speculate that shares will fall, according to James Angel, a finance professor at Georgetown University who studies short selling.
The global economic slowdown, $453 billion in bank losses and an explosion of funds that can profit from stock declines spurred the increase in short selling, helping send 22 of 23 countries in the MSCI World Index into bear markets.
"It's a huge amount of money," said Peter Hahn, a London- based research fellow for Cass Business School and a former managing director at Citigroup Inc. "Shorts have come a long way. They are getting into the mainstream, and long holders need to understand the shorts are not evil."
While U.S. and U.K. regulators tighten rules on short sellers amid concern they're accelerating more than $11 trillion in global stock losses this year, countries from Indonesia to India are opening up to the practice, which involves borrowing stock to sell it on the expectation it can be purchased at a lower price before paying back the loan.
Assets at so-called 130/30 and 120/20 funds, or those that are allowed to both hold stocks and short them, may climb to $2 trillion by 2010 from $140 billion in 2007, according to a study last year by Westborough, Massachusetts-based Tabb Group. Spitalfields estimates these funds may borrow an additional $600 billion by 2010.
Spitalfields was founded by Mark Faulkner and Bill Cuthbert in 2004 after careers in securities lending and investment banking at firms including New York-based Goldman Sachs Group Inc. and Frankfurt-based Deutsche Bank AG, respectively.
Short selling on the New York Stock Exchange rose to 4.6 percent of total shares last month, the highest since at least 1931, according to data compiled by Bespoke Investment Group LLC, the Harrison, New York-based firm that manages money for wealthy investors and provides financial research to institutions.
Wipe Out Shareholders
Short selling of Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, which own or guarantee about half of the $12 trillion of U.S. mortgages, surged before the shares plunged this month on concern they will require a bailout that would wipe out shareholders.
Fannie Mae tumbled 64 percent from the end of June, when so-called short interest stood at 138.7 million shares, through July 15, according to data compiled by Bloomberg and the NYSE. Freddie Mac sank 68 percent from the end of June through July 15 after short interest reached almost 83 million on June 30, the highest since at least 1991.
Even after a 90 percent rebound by Fannie Mae and a 75 percent surge by Freddie Mac in the final three days of trading last week, that would have left the shorts with a combined profit, excluding costs, of at least $1.4 billion from June 30 through July 15, the data show.
Ackman, 42, who oversees $6 billion at Pershing Square Capital Management LP in New York, said on July 15 he had short positions in both Fannie Mae and Freddie Mac. Rogers, 65, said on July 14 that he hadn't covered his short positions in Fannie Mae and would increase his bet if the shares were to rally.
"Short sellers are a very important part of the ecosystem of our financial markets," said Angel, a professor at Georgetown's McDonough School of Business in Washington. "The same way that lions go after a herd, they go after the weaker animals. The shorts will pick on a company where there's a legitimate controversy over its valuation."
European short sellers have also profited during the sell- off. The Euro Stoxx 50 Short Index rose 29 percent in the first half of 2008, the best performance since at least 1992. The Euro Stoxx 50 tumbled 24 percent in the period, its worst ever start to a year.
A slump in British banks helped spur the U.K. Financial Services Authority to impose rules on June 20 requiring firms to disclose short positions in companies that sell shares in rights offerings, when those positions exceed 0.25 percent of the company's stock. The FSA cited short bets on June 13 for "severe volatility in the shares of companies conducting rights issues."
Harbinger Capital, the New York-based hedge fund run by Philip Falcone, the former head of high-yield trading at Barclays Capital, disclosed a short position of 3.29 percent in HBOS as of June 20. Edinburgh-based HBOS has slumped 64 percent this year.
"The market is becoming a market for speculators rather than a market for investors," said Roger Lawson, London-based director at the U.K. Shareholders' Association. "These guys are making fat profits out of these market maneuvers. It should be restricted to a very limited level of market cap, otherwise it becomes market manipulation."
The U.S. Securities and Exchange Commission last week limited so-called naked short sales of Fannie Mae, Freddie Mac and brokerages. In such a strategy, speculators sell shares they haven't secured first. The decision comes amid an investigation of whether trading abuses contributed to the collapse of Bear Stearns Cos. in March.
James Chanos, president of Kynikos Associates Ltd., says the new rules won't deter most short sellers from making legitimate bets against companies.
"The SEC is trying to send a message -- I am again not quite sure what the message is," Chanos, a short seller and one of the first investors to raise questions about Enron Corp.'s accounting, said on Bloomberg Television from London. "I am just not sure that this was an issue at all for the equity prices of these companies."
The SEC's move "squeezed" some short sellers, forcing them to close positions they shorted earlier by buying the shares, Bespoke data show. Among Standard & Poor's 1500 companies, those with the highest short interest gained the most, rising 15.1 percent on July 16 and July 17, according to the firm's data.
Widespread earnings woes reflect consumer fears
The deepening plight of the American consumer has started to take a big bite out of corporate earnings.
A number of major U.S. companies who rely on consumer spending warned about their results on Monday evening, including credit card company American Express Co, Macintosh computer and iPod maker Apple Inc and cruise ship operator Royal Caribbean Cruises Ltd.
The breadth of the warnings, which also came from makers of chips and carpets, may signal that the credit crisis is quickly moving beyond housing and banks and into mainstream Corporate America.
"It's understandable that the U.S. consumer would be apprehensive with the circumstances -- weakness in housing, gasoline is up, the stock market is down and job insecurity," said Brian Gendreau, an investment strategist in New York for ING Investment Management Americas. "We may actually have a consumer-led recession -- which is rare."
The wrath of the credit crunch and housing collapse of the past year has largely been felt by middle- or lower-income people. But Monday's results reflected a broadening of fears. American Express executives said that even customers with solid credit scores were facing difficulties and even the very affluent have in some cases cut back discretionary spending.
Monday's bad news came from a wide swath of sectors and raised concerns about how strong two of the major consumer events will be this year -- back-to-school season and year-end holiday spending.
"If you look at energy prices and things like that, it's not any big surprise the consumer has been cautious," said Subodh Kumar, chief investment strategist at Subodh Kumar & Associates in Toronto. "It's a splash of cold water on the theory that earnings will bounce back quickly."
Is Mr. Fixit breaking Merrill lynch?
Say this for John Thain, he's making history at Merrill Lynch & Co. He's presided over the darkest era at the nation's biggest brokerage. We'll get to who is to blame in a minute, but first, a look at the latest bad news that has come on his watch.
Last week, a market that was fully expecting bad news from Merrill braced for grisly after-market quarterly results. The brokerage was supposed to take a big write-down of $4.5 billion to $6 billion. The loss was supposed to be near $1.91 a share, according to consensus estimates.
When the financials hit the wire Thursday, the results were much, much worse: $9.4 billion in write-downs, trading losses, a loss of $4.65 billion. The final blow was that not only had Merrill agreed to raid part of its rainy day fund -- a 20% stake in data provider Bloomberg L.P., to raise $4.5 billion in capital -- it would sell another subsidiary, Financial Data Services, for $3.5 billion.
When Thain agreed to become chief executive eight months ago, he knew there was going to be trouble, but this much? Though Citigroup Inc.had turned in bigger losses and write-downs by dollar amount in the past, its balance sheet is more than twice the size of Merrill's. In other words, Merrill is arguably the most battered firm in business since the banking crisis took hold.
It has lost $19.2 billion during the last year, and Moody's Investors Service estimates Merrill could be on the hook for another $10 billion pre-tax write-downs. More than 4,000 employees have lost their jobs. Thain, 53, who won kudos as head of the New York Stock Exchange and earned a reputation as "Mr. Fixit," wants to put the blame squarely on his predecessor.
Thain has been reminding the market that these problem assets are so-called legacy assets in that they are assets accumulated under former CEO Stanley O'Neal. "I did not create these CDOs," he said on a conference call. Thain has also suggested that people are making too big a deal about the asset sales.
"We have $1 trillion [on our] balance sheet. There are in fact other options. You guys never heard of FDS, and there are other options on our balance sheet." He's right. Still, Thain has made a couple of missteps and therefore should accept some of the responsibility for Merrill's misfortunes.
He's repeatedly misread the market. In January, he said the firm would not consider selling the Bloomberg stake or its 49% stake in institutional money manager BlackRock. In April, Thain said Merrill wasn't planning on raising more capital and didn't need more cash. OK, Merrill didn't. It sold $8 billion in assets instead.
Thain's biggest mistake may be the promise he made to foreign investors not to dilute their stakes when they pumped $15.5 billion into the balance sheet. Merrill would have to pay them cash or stock, if Merrill sold stock. This has kept Merrill from issuing new stock and looking around the store for things to sell.
Who will bite this bullet?
Nariman Behravesh, chief economist at Global Insight Inc. is throwing out some surprising research. The most interesting bullet points are:
- Q2′08 GDP in US is +2.5% (who would imagine!)
- Q4′08 is negative
- Q2′08 GDP in Eurozone is already going negative, by their estimates (wow!)
- US headline inflation will reach +6.5% sometimes during this year
- US headline inflation will be as low as below 1% sometimes in 2009
- Next major bank collapse will bring interest rates to 1.5%
Well, it’s hard to shock me with the predictions of sharp disinflation in ‘09, I’m in that boat, too. What’s interesting is that, apparently, Europe is falling into recession before we do. Yes, I was saying that we have been in recession since December, but nobody expected that the Spanish Inquisition will come with a stimulus package.
Our economy resembles a homunculus that is temporarily animated by more debt injections, as if we don’t have enough of that stuff already. But positive GDP is positive GDP, so the worst is delayed for now. My theory is that the true, deep recession in the US is impossible before we see a significant slowdown in China.
And the slowdown in China is impossible until Europe and Japan go into recession, because those are the huge export markets of Chinese goods. The recession in Europe must eventually trigger weakness in the Euro and/or reductions in imported goods. Europe is over 500 million people, so it will be the last shoe to drop.
Once China is hit hard the price of oil will drop like a stone, and this is why. US and China are the two major consumers of oil (I don’t have a handy link), but we are different. The demand in US is not very elastic. Those who need to drive will have to drive and the homes must be heated. We already reduced gasoline consumption by about 5% and it’s hard to squeeze out another 5%.
China is different, the oil demand there is extremely elastic. People drive mostly because they can, not because they have to. All the manufacturing and transport is export-oriented. Once exports drop, thousands of factories will close, a hundred million of people will lose jobs, and a good chunk of power plants will be stopped as well. Oil consumption may drop sharply and that will be felt.
The experiment with interest rates is quite interesting - the US Fed dropped rates sharply but the European CB did not. And now it seems that Europe is entering the recession with $130-$140 oil, while we will enter the recession later, when oil will be cheaper.
So to some extent Europe is the one to bite the bullet first, doing the hard job of slowing the global demand for imported goods. We already heard about fuel riots in several places in Europe. Did you hear about any fuel riots here, in the US? We’ll have our oil shock now and recession later. I think it’s much easier this way.
Fed’s Plosser: Raise Rates Sooner, Not Later
Federal Reserve Bank of Philadelphia Charles Plosser said the central bank should raise interest rates "sooner rather than later" to lower inflation and prevent price expectations from getting out of control.
"We will need to reverse course -- the exact timing depends on how the economy evolves, but I anticipate the reversal will need to be started sooner rather than later," Plosser, who argued against cutting interest rates in two Fed decisions this year, said in a speech today in King of Prussia, Pennsylvania. "It will likely need to begin before either the labor market or the financial markets have completely turned around."
Plosser joins Minneapolis Fed President Gary Stern, who also votes on rate decisions this year, in making the case for raising borrowing costs, a move Fed Chairman Ben S. Bernanke avoided discussing in congressional testimony last week. Record oil prices and rising food costs this year have increased investor expectations for the Fed to raise the benchmark interest rate.
"Monetary policy cannot control changes in the relative price of a key commodity, like oil or food," Plosser said in prepared remarks to a breakfast hosted by the Philadelphia Business Journal. "But it can help ensure that a relative price increase doesn't turn into a rise in overall inflation."
Stern, the longest-serving Fed policy maker, said in a July 18 interview that "we can't wait until we clearly observe the financial markets at normal, the economy growing robustly, and so on and so forth, before we reverse course." Investors expect the Fed to raise the benchmark U.S. interest rate at least a quarter-point by year-end, based on futures prices. The Federal Open Market Committee next meets Aug. 5 in Washington.
Plosser dissented from the Federal Open Market Committee's March 18 decision to lower the main interest rate by 0.75 percentage point. He voted against the April 30 move to cut the rate by a quarter-point to 2 percent. At the last meeting, June 24-25, he supported the decision to leave the rate at 2 percent, a pause after seven straight reductions.
Plosser, 59, a former professor and business-school dean at the University of Rochester in New York, has taken one of the toughest anti-inflation stances on the Fed since joining the central bank in 2006.
His position today is "not necessarily reflective" of the broader group of Fed policy makers, said Richard DeKaser, chief economist at National City Corp. in Cleveland, in an interview with Bloomberg Television. At the same time, "inflationary risks have risen," and "they want to start laying the ground for eventual rate hikes to come," he said.
Hedge funds’ $2 billion HBOS short killing
Hedge funds may have made more than £1bn from shorting shares in HBOS, whose £4bn rights issue faced intense pressure from investors betting on the share price falling.
Almost 15 per cent, or about 550 million, of the bank's shares are out on loan, according to Data Explorers. That stock will mainly be lent to funds who have sold the shares expecting to buy them back cheaper.
HBOS's last closing share price before the cash call was announced was 495.24p, but the shares plunged during the rights issue process. At the closing price of 264.5p yesterday, short funds who bought at the closing price before the cash call was announced on 29 April would have made 230.74p a share, or a total of £1.27bn.
Six funds have announced positions since the Financial Services Authority changed its rules to require the declaration of short holdings over 0.25 per cent for companies undertaking rights issues. The first and biggest position declared was Harbinger Capital's 3.29 per cent, which it built before 20 June, when the FSA's new rules took effect.
If the US hedge fund, run by Barclays Capital's former head of trading Philip Falcone, had bought its stake at the closing price before the rights issue, it would have made £281m by selling at yesterday's closing price. Using the same calculations for Lansdowne Partners' 0.58 per cent stake, also declared on the first day after the disclosure rule came in, would give the US fund a profit of about £50m.
Other investors to declare short positions of 0.3 per cent or less were Jabre Capital Partners, Meditor Capital Management and three separate Marshall Wace funds. Short sellers borrow shares they do not own and then sell them hoping to buy them back more cheaply if the price falls.
The practice has come under intense scrutiny during the credit crunch as financial stocks have come under pressure amid accusations of rumour-mongering and market manipulation. The FSA brought in its new rules after the shares of HBOS and other companies conducting or considering rights issues came under massive pressure.
Though fears were mounting about the housing market and the economy, the FSA said it believed there was market abuse by funds taking short positions and driving down the price. Morgan Stanley, one of the underwriters to HBOS's share sale, declared a 2.35 per cent short position in the bank yesterday.
The holding exceeded the FSA's threshold on Friday so more than 2 per cent was bought that day, probably as a hedge against the falling price of the shares. The FSA and US regulators have tightened rules on short selling because of fears that the practice is accelerating stock market falls.
More than $1.4 trillion (£701bn) of equities worldwide are on loan, about a third higher than at the start of last year, according to data provided by Spitalfields Advisors for Bloomberg. Roger Lawson of the UK Shareholders' Association said that short selling in rights issues left too much scope for market manipulation because it is known that a lot of stock, much of it unwanted, is going to come on to the market.
There is no suggestion that holders of any of the publicly disclosed positions is involved in market manipulation. "The market is becoming speculative and what is happening is that the big players are distorting the market. One of the ways of doing this is by shorting," Mr Lawson said. The FSA has proposed bringing in further restrictions on short selling and Mr Lawson said the regulator should go ahead with additional measures.
Bank of England's Mervyn King says banks must pre-fund savers scheme
Bank of England Governor Mervyn King has accused the Treasury of being "rather short sighted" by sparing Britain's lenders the cost of pre-funding the industry compensation scheme of savers.
In its recent consultation document, the Treasury retreated on earlier indications that it would demand the banks' fund the "deposit protection scheme" upfront.
Mr King, in evidence before the Treasury Select Committee, reiterated that he believed a cash pot was necessary, saying lenders should make "non-negligible contributions so that over 10 years [the scheme] would build up a fund of several billions [of pounds]".
He added: "I think it's rather short-sighted that the banks shouldn't put up money now. If you wait until there's a problem, that's a bad time to ask." The Treasury is drafting legislation to give it powers to introduce pre-funding "if considered appropriate in the future".
Under the current proposals, the taxpayer will take the first hit when compensating savers in a failed bank, with the funds to be clawed back from the industry after the event. Mr King said he believed "the important principle" was that institutions should "pay a contribution which reflects the riskiness of the bank".
"I don't think its a good idea to offer 100pc protection up to a level without an element of risk-based premia and some degree of pre-funding," he said. He added that the Treasury's proposals to raise the level of protection from £35,000 to £50,000 and offer a full guarantee was "very sensible".
Although banks have welcomed much of the Treasury's plans for reform of depositor protection, they have raised concerns about the Government's demand that compensation be at least partially paid out within seven days. Mr King acknowledged that lenders should be "given a period" to upgrade their systems to meet the requirement.
"I think they should be given a few years so as not to impose excessive cost," he said, citing the US, where bankers were allowed 18 months to get their systems in order. Banks do not have the ability to set up new accounts and transfer funds in such a short timescale at the moment. Setting up and transferring funds into a new account currently takes about four weeks.
Further illustrating the behind-the-scene struggles over reform of banking supervision, Mr King said that he "would have preferred a regime where the Bank would have had the power to pull the trigger [on a failing lender], but the Treasury decided to take a different course".
Tough year for US public pension funds
US public pension funds have had their worst returns in six years, losing an average of more than 4 per cent in the year to June 30, that puts them under even greater pressure to meet their growing liabilities.
The average plan's funded status has declined by close to 5 per cent during the year, taking it well below 100 per cent to be only 96 per cent funded, according to BNY Mellon. Until now funding had been improving, after five years of positive returns.
The 40 largest public pension plans had a median loss of 4.3 per cent during the fiscal year, according to data from Northern Trust, which will be released this week. That compares with a return of more than 17 per cent last year. This year's loss is close to the loss of 4.8 per cent in 2001, which was the worst for pension funds in the 11 years from 1997.
Smaller pension funds usually post lower returns than large ones, so the total national average is probably lower. The typical public pension fund has 60 per cent of its money in equities and almost every stock market index in the world fell during the 12 months to June. Some, such as Japan's Nikkei 225 and Europe's Stoxx 50, fell by more than 20 per cent, and the Standard & Poor's 500 fell by 13 per cent.
Fixed income, which typically accounts for a quarter of a pension fund, remained largely flat. Those funds that had big investments in commodities did slightly better, as their commodities paid off. However, federal lawmakers are holding hearings into whether pension funds should be restricted in their commodities investments, in case this adds to speculative fever in the asset class.
Calpers, the biggest state fund, invested more than $1bn into oil and commodities last year - its first such investment - and has seen returns of close to 70 per cent on the portfolio. However, that represents only a sliver of the fund's $240bn in assets. Calpers estimated it lost 2.4 per cent during the year to June 30, it said on Friday.
The poor returns come as the US Governmental Accounting Standards board met two weeks ago to begin changing accounting rules to make the pensions more accurately report returns and liabilities. Under the current system, the funds paint an overly optimistic picture of their finances, say critics of the system.
Even as pension fund returns shrink and liabilities widen, some state governments are giving their state employees higher pension benefits, further increasing the pressure on the funds and ensuring even greater liabilities. Most public pension funds have a fiscal year that ends in June.
Chrysler Needs to Refinance $30 Billion
Chrysler LLC is running into heavy new headwinds, this time from its financing arm, Chrysler Financial. The financing arm is likely to see its borrowing costs rise in early August when it rolls over about $30 billion of short-term debt backed by the loans and leases it makes. That, in turn, will make it harder for the company to offer low-interest loans to buyers and for dealers to hold inventory.
Bankers, led by J.P. Morgan Chase & Co., are pushing hard to persuade more than 20 banks to renew the $30 billion credit facility -- backed by car loans, leases and loans to dealers -- that was issued by the auto-finance company last year when it was carved out of the former DaimlerChrysler AG. The debt represents a sizable chunk of Chrysler Financial's $70 billion portfolio in working capital.
The higher financing costs could further complicate the attempt by private-equity firm Cerberus Capital Management LP to turn around the auto maker. It is unclear how much more Chrysler Financial will have to pay in interest costs, but people familiar with the situation said it would be well above the London interbank offered rate, or Libor, a common benchmark for such loans. Libor is now about 2.8%, and the spread is expected to be well more than one percentage point above that.
Pressures on U.S. auto makers are mounting amid a slumping economy and rising fuel prices. If Chrysler Financial's costs go up, the company will find it harder to help dealers offer cheaper leases, something needed to entice consumers who have lost their taste for many U.S. auto product lines. The company uses money from the financing to make retail car loans, fund leases and make loans to dealers who use the money to buy cars and fill their lots.
Traditionally, in order to offer car buyers cheap loans or leases, Chrysler the auto company pays the finance company to support those deals. If a car is sold to a customer at a 1.9% interest rate over 60 months, for example, and the finance company is borrowing that money at over 4%, Chrysler auto might pay the difference between 1.9% and 4%. The more Chrysler Finance has to pay for its credit, the harder it becomes for Chrysler to help.
The environment for selling short-term asset-backed debt like this has been troublesome since the credit crisis began last summer and most money-market fund managers began to shy away from most complex, structured debt. The Chrysler facility is called a conduit, an off-balance-sheet structured investment vehicle for issuing short-term debt to fund its longer-term loans.
The finance units of Ford Motor Co. and General Motors Corp. issue asset-backed conduit debt mostly in one- and two-month increments, and it typically trades at 0.30 to 0.50 percentage point above Libor, says one trader. Chrysler, like Ford and General Motors, has had trouble selling its large sport-utility vehicles by Jeep and Dodge as well as cars like the Sebring. The company reported a 36% decline in sales in June, compared with a year ago, according to Autodata Corp.
Emerging-Market Currency Rally Dies as Inflation Hits
The five-year rally in emerging- market currencies is coming to an end as central banks from South Korea to Turkey struggle to contain inflation, say DWS Investments and Morgan Stanley.
The 26 developing-country currencies tracked by Bloomberg returned an average 0.92 percent in the past three months, down from 1.63 percent in the first quarter, 8.2 percent for all of 2007, and 30 percent annually since 2003. For the first time in seven years, investors are less bullish on emerging-market stocks than on U.S. equities, a Merrill Lynch & Co. survey showed last week.
Confidence in the Indian rupee is weakening after inflation accelerated at the fastest pace in 13 years, stoked by soaring food and energy prices. South Korea's won will drop this year by the most since 2000, while Turkey's lira will reverse its biggest gain since at least 1972, the median estimates of strategists surveyed by Bloomberg show.
"There are some countries that suffer from weak institutions, where central banks have not been proactively fighting inflation and sentiment has deteriorated," said Nicolas Schlotthauer, a fund manager in Frankfurt at DWS Investments, which oversees about $400 billion. Schlotthauer said he expects the Indonesian rupiah and the Philippine and Colombian pesos to underperform emerging-market assets.
Food and energy prices account for more than 40 percent of inflation in India, Thailand and Turkey, compared with about 25 percent in the U.S., according to Morgan Stanley. Inflation exceeds targets in at least 19 emerging economies.
The developing-economy currencies tracked by Bloomberg strengthened an average 32 percent in the past five years, led by gains of 97 percent in the Czech koruna and 95 percent in Slovakia's koruna as those nations forged closer ties with the European Union. In Latin America, Brazil's real has surged 82 percent while the Colombian peso has climbed 60 percent since 2003 amid a boom in commodities.
Slovakia will adopt the euro next year, while the zloty will depreciate to 3.33 against the dollar by year-end from 3.22, according the median estimate of strategists surveyed by Bloomberg. In South America, the real will weaken to 1.70 by the start of 2009 from 1.59 and the peso will decline to 1,888 from 1,805, the surveys show.
Emerging-market and high-yield bonds are poised to fall this year for first time since 1999, a Merrill Lynch index shows. Investors prefer U.S. equities over developing economies' stock markets for the first time since 2001, according to Merrill's July survey of money managers who oversee $610 billion. A net 4 percent of investors said they were "overweight" emerging markets, down from 25 percent in June.
"It's going to be a more challenging environment for emerging markets as you're going to see less portfolio flows," said Koon Chow, a Europe, Middle East and Africa foreign- exchange strategist at Barclays Plc in London. "People are focusing more on the domestic fundamentals like fiscal and monetary policy credibility. In the past, there was less differentiation."
Fitch Ratings cut the credit outlooks in the past month on South Africa and India, whose currencies gained 74 percent and 18 percent in the five years through 2007. The South African rand slumped 9.2 percent this year and the rupee 7.7 percent as investors bet rate increases won't contain inflation and the countries struggled to boost growth and pull millions of people out of poverty.
The World Bank estimates that about half of India's 1.1 billion population survives on less than $2 a day, while 23 percent of South Africa's workforce is unemployed, the highest rate among the 61 economies monitored by Bloomberg. That limits the ability of their central banks to fight inflation through higher borrowing costs.
India's rupee will weaken 8 percent, its worst year in a decade, while the South African rand will lose 22 percent, its worst performance since 2001, the Bloomberg surveys show.
"The shock of higher food and energy costs has exposed the major shortcomings of emerging economies in controlling inflation," said Stephen Jen, chief currency strategist at Morgan Stanley in London and a former Federal Reserve economist. "I'm not sure emerging markets will respond to inflation shocks."
Ilargi: There have been better studies of Goldman’s power hunger, and the list of "missionaries" sent out into the world is far from complete, but let’s run it. This is from The Independent. NOTE: the Bank of Canada’s chief, Mark Carney, is also a Gold Man.
How Goldman Sachs took over the world
If there's something weird in the financial world, who you gonna call? Goldman Sachs.
The US government, involved in a firefight against the conflagration in the credit markets, is calling in another crisis-buster from the illustrious investment bank, this time Goldman's most senior banker to finance industry clients, Ken Wilson.
And so with this appointment, the Goldman Sachs diaspora grows a little bit more influential. It is an old-boy network that has created a revolving door between the firm and public office, greased by the mountains of money the company is generating even today, as its peers buckle and fall.
Almost whatever the country, you can find Goldman Sachs veterans in positions of pivotal power. The 61-year-old Mr Wilson has already proved influential in deals to recapitalise and reorganise some of America's listing banks.
At the Treasury he will advise on what the federal government must to do help the process, but he will face scrutiny from those concerned about the tentacles wrapping lightly around government from Wall Street's mightiest bank.
For the time being, bailing out Wall Street looks to be the same as bailing out the economy, but if those diverge there could be more questions asked about the influence of Goldman Sachs alumni on public policy.
George Bush picked up the phone this month, partly at the instigation of another Goldman Sachs alumnus, his Treasury secretary, Hank Paulson.
Together with Mr Bush's chief of staff, Joshua Bolten, there will be three Goldman Sachs old boys in major positions of influence in the White House – but the US government is hardly alone in finding the bank's executives to be attractive hirees.
They are well-credentialed, partly by design. From its beginning when the German immigrant Marcus Goldman began discounting IOUs among the diamond merchants of New York in the 1870s, Goldman Sachs has always known about the power of the network of influence. Goldman hires former politicians and civil servants, as readily as it supplies them.
And then there is simply the intellectual quality of the employees, many hired as much youngster men via a gruelling interview process, and then forged in the fire of 17-hour work days. With Goldman Sachs at the heart of Wall Street, and Wall Street at the heart of the US economy, few expects its power to wane.
Indeed, The New York Times columnist David Brooks noted that Goldman Sachs employees have given more money to Barack Obama's campaign for president than workers of any other employer in the US. "Over the past few years, people from Goldman Sachs have assumed control over large parts of the federal government," Brooks noted grimly. "Over the next few they might just take over the whole darn thing."
From his post as professor and director of global leadership at Tsinghua University in Beijing, the former Goldman Sachs co-chief operating officer John Thornton has become a highly-influential figure in the developing business and poltical inter-relations between the US and China. He was Goldman's boss in Asia in the mid-Nineties and remains well connected in the East and the West.
Wall Streeters joked about a Goldman Sachs "takeover" of the New York Stock Exchange. Hank Paulson, the Goldman boss on the NYSE board, moved to oust the chairman, Dick Grasso, and recommended the then chief operating officer of Goldman, John Thain, as Mr Grasso's replacement. Mr Thain modernised the exchange as demanded by Goldman, and Mr Thain's old Goldman deputy, Duncan Niederauer, is in charge.
The former co-chief executive of Goldman went into full-time politics in 1999, having lost the internal power struggle that preceded the company's stock-market flotation in 1999. He has been governor of New Jersey since 2006, having spent the previous six years in the US Senate. His 2000 Senate election campaign was then the most expensive ever in the US, and Corzine spent $62m of his own money.
For five years until 1999, Mr Bolten served as director of legal affairs for Goldman based in London, effectively making him the bank's chief lobbyist to the EU. The Republican lawyer aided George Bush's 2000 election campaign, helped co-ordinate policy in the White House and has been the President's chief of staff since 2006.
The man heading London's planning for the 2012 Olympic Games, Paul Deighton amassed a fortune estimated at over £100m during his two decades at Goldman Sachs, where he had been one of its most powerful investment bankers.
A US Treasury secretary under Bill Clinton, Mr Rubin could once again emerge as a powerful figure in Washington if Barack Obama wins the presidency, since he has maintained his influence on Democrat politics. Mr Rubin reached the second-highest rung at Goldman, becoming co-chief operating officer before joining the US government in 1993.
The ex-chairman of the BBC still has the ear of Gordon Brown, to whom he has been a good friend and informal adviser. He is married to the Prime Minister's aide Sue Nye. Mr Davies spent 15 years as an economist at Goldman. He was commissioned to report on the future funding of the BBC by Mr Brown in 1999. Two years later, he was poached to chair it.
This former Goldman trader is, without question, the most influential stock pundit in the US. Hectoring and shouting his investment advice nightly on his CNBC show, Mad Money, he routinely moves share prices. His primal scream against the Federal Reserve ("They know nothing") was a YouTube sensation last year, as the central bank refused to lower interest rates to ease the pain of the credit crisis on Wall Street.
Goldman provided a lucrative home to Robert Zoellick, the neo-conservative Republican, between the time he quit as Condoleezza Rice's deputy at the State Department in 2006 (having not secured the job he coveted as Treasury Secretary, when it went to Hank Paulson) and his appointment last year as head of the World Bank. At Goldman he had acted as head of international affairs, a kind of global ambassador and networker-in-chief.
The head of the Italian central bank is another example of the revolving door between Goldman and public service. Mr Draghi had been an academic economist, an executive at the World Bank and a director-general of the Italian treasury before joining Goldman as a partner in 2002. He is becoming a significant figure in the response to the credit crisis, chairing the financial stability forum of central banks, finance ministries and regulators.
Treasurer for the opposition Liberal Party, Mr Turnbull is one of the fastest-rising politicians in Australia. He was the aggressive advocate who took on and beat the British Government in the Spycatcher trial of the former MI5 agent Peter Walker, but he then pursued a career in business and ran Goldman Australia from 1997 to 2001, before jumping in to politics to serve as environment minister under John Howard.
Cometh the hour, cometh the man. President George Bush must be delighted he lured a reluctant Hank Paulson away from his $38m-a-year job as Goldman Sachs chief executive in 2006, just in time to deal with the Wall Street crisis that has engulfed the entire US economy. The bird-watching enthusiast had been a surprising choice as Treasury secretary, since his environmentalism was at odds with much of Bush's policy.
11 reasons America is the new top socialist economy
Welcome to the conservative's worse nightmare: The law of unintended consequences. Why? Nobody wants to admit it, folks, but the conservatives' grand ideology is backfiring, actually turning the world's greatest capitalistic democracy into the world's newest socialist economy.
A little history: The core principles of conservative economic ideology are grounded in Nobel economist Milton Friedman's 1962 classic "Capitalism and Freedom." Too late to stop President Lyndon Johnson's Great Society, those principles became the battle cries energizing conservatives since Reagan: Unrestricted free markets, free enterprise and free trade; deregulation, privatization and globalization; trickle-down economics and trickle-up wealth to an elite plutocracy destined to rule the new American capitalist utopia.
So what happened? Are you guys nuts? Hey, I'm talking to all you blind Beltway politicians (in both parties) ... plus the Old Boys Club running Wall Street (into the ground) ... plus all you fat-cat CEOs (with megamillion parachutes) ... and all your buddies scamming everybody else to get on the Forbes 400. You are proof of Lord Acton's warning: "Power corrupts and absolute power corrupts absolutely."
It's backfiring! You folks turned our America from a great capitalistic democracy into a meddling socialist economy. Still you don't get it. You're acting like teen addicts tripping on an overdose of "greed-is-good" testosterone while your caricature of conservative economics would at best make a one-line joke on Jay Leno. Here are 11 reasons your manipulations are sabotaging the great principles of leaders like Friedman and Reagan:
1. Dumber than a fifth grader with cognitive dissonance
Kids know what it means. They know most adults today can't see past the end of their noses. Liberals tune out candidate McBush for being lost in the past. Conservatives can't hear Obama without seeing that turban.
Cognitive dissonance simply means most brains cannot see past their own narrow ideologies.
2. Where did all the leaders go with their moral character?
Friedman's economics requires leaders of moral character. Did it run into Lord Acton's warning: "Power corrupts, absolute power corrupts absolutely?" Former Ford and Chrysler CEO Lee Iacocca said yes in "Where Have All the Leaders Gone?"
Friedman's great conservative principles have been commandeered by myopic ideologues whose idea of leadership is balancing the demands of self-interest lobbyists with the need for campaign donations.
3. Fed and U.S. Treasury adopted Enron accounting tricks
Bad news: Enron failed several years ago because of its off-balance-sheet accounting scam. The Fed's doing the same thing: Dumping Bear's $30 billion liabilities onto the taxpayer's "balance sheet." Next Treasury proposes adding $5.3 trillion more from Fannie Mae and Freddie Mac.
4. Deregulation creating new socialist housing system
Back in 1999 a Democratic president and Republican Congress were in love with a fantasy called the "new economics." Enthusiastic lobbyists invented the brilliant idea of dismantling the wall between commercial and investment banking: They killed the Glass-Steagall Act that was keeping the sleazy hands of short-term hustlers out of the pockets of long-term lenders.
Flash forward: We lost 85-year-old Bear Sterns and $32 billion IndyMac. Lehman's iffy. And 90 banks.
5. Trade deficits outsourced more of America's wealth than jobs
One look at Forbes lists of fat cats and you know the 21st Century doesn't just belong to Asia, it belongs to everyone but America. Why? Once again, remember Warren Buffett's famous "Farmer's Story" in Fortune: "We were taught in Economics 101 that countries could not for long sustain large, ever-growing trade deficits ... our country has been behaving like an extraordinarily rich family that possesses an immense farm.
6. Banking system in meltdown, minting penny stocks
The Friedman conservatives apparently understand Joseph Schumpeter's "creative destruction." Yet, our free-market ideologues can't seem to accept that America is now on the "destructive" downside leg of the cycle, in the economy, markets, trade, politics and, yes, sadly, even with their conservative ideology.
7. Ideologues preach savings, but still push spending
A core principle of conservatism is frugality, saving for the future. Grandparents raised me, struggled during the Depression, passed on strong ideals.Somewhere over the past generation conservatives forget frugality. This distortion peaked in 2003 when consumers were told to spend, not sacrifice, and fuel the economy even as government spent excessively on war. That was a clear breach of every conservative leader's position in earlier wars.
8. Warning, the market's under 2000 peak, losing money
Imagine you're on Jeff Foxworthy's fabulous show competing to see if you really are smarter than a fifth grader. Question: "If you put $10,000 in the market in March of 2000 when the Dow peaked at 11,722, how much money would you have today if the market's 10% under 11,722?" So you guess $9,000.
But then two fifth graders raise their hands: One asks if the CPI inflation rate should be considered? If so, maybe $5,000 is closer to the right answer.
9. Inflation and dollars: Is Zimbabwe the new model for the U.S.?
The Los Angeles Times ran a photo of a Zimbabwe $500 million bank note, worth $20 at noon, less at dinner. Why? Inflation's there is running 32 million (yes million!) percent annually. The German company printing their banknotes finally cut them off.
Things may be worse in America, psychologically. Our ideological obsession with "growth" is not working because there is too much collateral damage, namely inflation. Our dollar has lost substantial value to the euro because our dysfunctional leaders are convinced that a trade policy funded by debt makes sense.
10. Free-market health care failing 47,000,000 Americans
Big Pharma loves free-market conservatism and no-compete Medicare drug programs. Nobody else is happy. Taxpayers get stuck with the bill. "The Coming Generational Storm" tells us that without massive reforms and big lifestyle changes for taxpayers (especially retirees), within a couple short decades America's entitlement programs will eat up the entire federal budget. Medicare is the biggest cost item in your future, over $50 trillion in unfunded liabilities.
11. Conservative free-market policies inflated oil 300%!
Yep, oil inflated 300% in eight short years under the "leadership of two oil men." But, you can't blame them. We put the foxes in the henhouse, knowing full well "real" oil men love digging holes on the supply side, supporting ethanol subsidies and blaming speculators -- it's in their genes! Talk about cognitive dissonance; real oil men thrive on cowboy images of Marlboro Men in Hummers, Navigators and F-150 trucks.
Ilargi: I don’t really have space to do this article justice, but if you’re interested in the topic, you know what to do. I’ll have none of that "The Chinese are so bad" stuff, though. They are a soft bunch of Mother Teresa’s compared to the Europeans and Americans.
How China's Taking Over Africa, And Why The West Should Be Very Worried
On June 5, 1873, in a letter to The Times, Sir Francis Galton, the cousin of Charles Darwin and a distinguished African explorer in his own right, outlined a daring (if by today's standards utterly offensive) new method to 'tame' and colonise what was then known as the Dark Continent.
'My proposal is to make the encouragement of Chinese settlements of Africa a part of our national policy, in the belief that the Chinese immigrants would not only maintain their position, but that they would multiply and their descendants supplant the inferior Negro race,' wrote Galton.
'I should expect that the African seaboard, now sparsely occupied by lazy, palavering savages, might in a few years be tenanted by industrious, order-loving Chinese, living either as a semidetached dependency of China, or else in perfect freedom under their own law.'
Despite an outcry in Parliament and heated debate in the august salons of the Royal Geographic Society, Galton insisted that 'the history of the world tells the tale of the continual displacement of populations, each by a worthier successor, and humanity gains thereby'.
A controversial figure, Galton was also the pioneer of eugenics, the theory that was used by Hitler to try to fulfil his mad dreams of a German Master Race. Eventually, Galton's grand resettlement plans fizzled out because there were much more exciting things going on in Africa.
But that was more than 100 years ago, and with legendary explorers such as Livingstone, Speke and Burton still battling to find the source of the Nile - and new discoveries of exotic species of birds and animals featuring regularly on newspaper front pages - vast swathes of the continent had not even been 'discovered'.
Yet Sir Francis Galton, it now appears, was ahead of his time. His vision is coming true - if not in the way he imagined. An astonishing invasion of Africa is now under way. In the greatest movement of people the world has ever seen, China is secretly working to turn the entire continent into a new colony.
Reminiscent of the West's imperial push in the 18th and 19th centuries - but on a much more dramatic, determined scale - China's rulers believe Africa can become a 'satellite' state, solving its own problems of over-population and shortage of natural resources at a stroke.
With little fanfare, a staggering 750,000 Chinese have settled in Africa over the past decade. More are on the way. The strategy has been carefully devised by officials in Beijing, where one expert has estimated that China will eventually need to send 300 million people to Africa to solve the problems of over-population and pollution.
The plans appear on track. Across Africa, the red flag of China is flying. Lucrative deals are being struck to buy its commodities - oil, platinum, gold and minerals. New embassies and air routes are opening up. The continent's new Chinese elite can be seen everywhere, shopping at their own expensive boutiques, driving Mercedes and BMW limousines, sending their children to exclusive private schools.
The pot-holed roads are cluttered with Chinese buses, taking people to markets filled with cheap Chinese goods. More than a thousand miles of new Chinese railroads are crisscrossing the continent, carrying billions of tons of illegally-logged timber, diamonds and gold.