Ilargi: I think today I’ll leave out my comments, so everyone can read about the ever more evident global economic collapse, and try to see the connection between that and the American celebration of Independence Day on the 4th of July.
What did these people then fight and die for? There can be little doubt that Thomas Jefferson would be appalled at what has become of the country he had such lofty hopes for. But he can no longer speak, and those that can, use his words for their own purposes, no matter how far removed they are from what he meant to say.
If today's world shows you one thing, it's that people still will surrender their independence for empty promises and shiny objects, for bread and circus, any day. If the past 200 years have taught us anything, it’s that we are a tragic species.
You think Jefferson would have bothered if he had realized that? Maybe he would have; maybe people, in order not to go raving mad, simply need dreams and hope, no matter how deluded, as a counterweight to their true nature.
The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants
Thomas Jefferson made that quote over 200 years ago and it has never rang more true than today. Never has there been a time in our history where our freedom has bee over shadowed by our burdens of debt and war, as it is now.
The time has come to unite in the streets of America as people, families and communities who must stick together, stand tall and keep fighting for what the fathers of our country did over 200 years ago. Equality, justice, and freedom for ALL!
Many Americans are far from free in the sense of their every day realities. Yes, free to pursue their dreams and to think. But how can someone pursue their dreams or think clearly, when they are living a daily nightmare? Trying to figure out if their kids and loved ones will have a home next month? Where are they going to live next? What school will their children attend? Will they lose their security clearances or jobs?
We are shackled by debt in our homes that are supposed to be our American Dream.
Our mighty government sold this to its people as the American Dream and then it was packaged by banks and then mass produced by Wall Street. Not for the purpose of facilitating our dreams. But for the sole purpose of profiting off of them and then binding us in unconscionable contracts secured by snake oil and fools gold.
We MUST, as American citizens, unite and put a stop to these corporations, banks and world leaders who have their best interests at heart and not the peoples. As Thomas Jefferson said some 200 years ago (some of my favorite quotes):
- I hope we shall crush in its birth the aristocracy of our monied corporations which dare already to challenge our government to a trial by strength, and bid defiance to the laws of our country. Thomas Jefferson
- I know of no safe depository of the ultimate powers of the society but the people themselves; and if we think them not enlightened enough to exercise their control with a wholesome discretion, the remedy is not to take it from them but to inform their discretion. Thomas Jefferson
- I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of them. Thomas Jefferson
- I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale. Thomas Jefferson
- If the present Congress errs in too much talking, how can it be otherwise in a body to which the people send one hundred and fifty lawyers, whose trade it is to question everything, yield nothing, and talk by the hour? Thomas Jefferson
- The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in government. Thomas Jefferson
- The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. Thomas Jefferson
The Economy? Words Fail Me.
Think you're worried about the economy? Phillip Swagel is a wreck. The assistant Treasury secretary for economic policy, Swagel came out for his monthly economic briefing yesterday, 90 minutes after the Labor Department reported that the country had shed jobs in June for the sixth straight month.
Does this mean the economy is worse than the Bush administration expected? "We shouldn't, in a sense, be surprised when the data are, are, soft," Swagel managed to say. Does the economy need another stimulus package? "I-it seems, you know, it seems like that's, that's enough, uh, enough."What might trigger another round of economic stimulus? "I don't, I guess I don't have an answer, I mean, you know, beyond saying we look at all the data and, um -- so, my usual line."
Okay, so it wasn't a strong performance. But let's cut Swagel some slack. He's a sharp economist (his PhD is from Harvard) and, in ordinary conversation, he suffers none of the speech difficulties that plagued him on the stage yesterday. His various roles in government, at the Council of Economic Advisers, the Federal Reserve and the International Monetary Fund, were too junior for him to deserve any blame for the current economic troubles.
But Treasury Secretary Hank Paulson, who was in London yesterday, and Swagel's other superiors in the Bush administration left him with an impossible task: appearing on camera to put a favorable and reassuring gloss on an economy that has gone to the dogs. Yesterday's report that 62,000 jobs were lost brought the total for the first half of the year to 438,000 jobs. Meanwhile, the Institute for Supply Management reported that its measure of the service sector had declined in June.
Stock markets, flirting with a bear market, finished another losing week. Oil pushed to a record high. Inflation and foreclosures are up, consumer confidence is down, and administration forecasts for a "strong pace of growth" in the second half of 2008 are look increasingly absurd. It was a hopeless spin assignment -- but Swagel, the administration's sacrificial lamb for the day, had to try. And so Swagel, bookish and bespectacled, entered the Treasury Department's briefing room with evident trepidation.
He nodded and offered smiles every which way. His heavy breathing, picked up by the microphone, could be heard in the back of the room. "Um, I'll start off as usual with a short statement and then, uh, take questions," he began. In his statement, he employed the great euphemisms of his profession: the economic "headwinds," the housing "correction," the credit-market "disruption." But, he offered, "the stimulus package will help support . . . spending."
A questioner asked about private forecasts, which, in contrast to administration forecasts, see a contracting economy through early next year. "You know, it doesn't look like it to us now, but obviously we'll have to see where we are at the end of the year," he answered. Might a second stimulus package be necessary? "Right now, the way we see it is the rebates that are already going out are big enough, and were timely enough, to make a difference and-and to support spending," he said.
Swagel was asked whether the energy shock and a longer-than-expected housing slump justify more federal action. He admitted that rising gas prices have pretty much offset the tax rebate checks, but this only proves, he said, that "the stimulus payments were timely and needed." Asked if he could reassure those who worry it's time to hide valuables under the mattress and get a shotgun, he chuckled and then ventured: "You know it's i-in a sense what -- I think what matters is it's worse than, it's worse than, it should be."
For a brief, joyous moment for the economist, it appeared he had exhausted all the questions, but as soon as Swagel got out "I hope everyone has a good holiday," another hand went up. The reporter asked if he saw any hope for economic revival in the new employment report. Swagel exhaled loudly. "No," he said, then sniffed and exhaled again. "You know, the data today, right, we had, wage gains were decent, but of course we know that overall inflation, uh, is going to fully offset and more those, uh, you know, those wage gains," he said. The unemployment rate remained at 5.5 percent, but "I don't . . . take any comfort from that."
Though still forecasting "modest but positive growth," he cautioned that "you're going to still see a weak labor market, so, um, yeah, so it's not, I don't expect to come out next month and, uh, you know, and have great news on the labor market, either." And with that, the Treasury official departed the room for what one hopes will be some much-needed calm
Spain, Ireland 'Thrown to the Wolves' After ECB Move
Jose Mauricio Rodriguez Montalvo rents a room from his sister to help her afford her basement flat in Madrid as mortgage costs soar. "She's crying over the Euribor," the 12-month money- market rate used to set Spanish mortgages, Montalvo, 28, said in an interview. "We're just praying it won't keep going up."
For homeowners in Spain and in Ireland, struggling to stay afloat amid the wreckage of a decade-long real-estate boom, those prayers are going unanswered. The European Central Bank yesterday increased its benchmark rate to 4.25 percent to fight inflation, pushing both economies a step closer to recession.
The two countries are particularly vulnerable to higher lending costs because their housing industries account for about 10 percent of their economies, twice the EU average. Montalvo's family has seen its monthly mortgage payment leap 50 percent to 2,080 euros since the ECB began raising rates in December 2005. "They have been thrown to the wolves," said Stuart Thomson, who helps manage $46 billion in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. `It's much easier to bring inflation lower if you're willing to have a recession in economies like Spain, Italy and Ireland."
The Irish economy contracted for the first time in more than a decade in the first quarter. Growth in Spain was the slowest in 13 years in the period, and economists surveyed by Bloomberg News see a 45 percent probability of a recession, or two consecutive quarterly contractions, within the next year. The ECB has more than doubled its key rate in less than two years under its mandate to control prices. Euro-region inflation accelerated to 4 percent last month, the fastest in 16 years, on soaring food and oil costs, even with growth slowing.
Trichet yesterday signaled further rate increases weren't imminent as he strikes a balance between taming inflation and not choking economic growth. Still, while he acknowledged some countries will be harder hit than others by the rate increase, he said the bank must serve the entire euro region just as the Federal Reserve sets policy for all 50 U.S. states. "If you concentrate on California or Florida, it is not at all like Massachusetts or Alaska," he said in an interview with Ireland's RTE radio. "It is the same in our case and we have to make a judgment what is good for the full body of the 320 million people" in the euro area.
Spain and Ireland make up less than 15 percent of the region's economy and their economies together are about half the size of Germany's. Growth in Europe's biggest economy accelerated in the first quarter to the fastest pace in 12 years and manufacturing was still expanding in June. Spanish industry contracted by the most on record. Spanish Prime Minister Jose Luis Rodriguez Zapatero has called on the ECB to be "flexible" in setting monetary policy.
The interest rate increase is "more bad news," said Joan Burton, finance spokeswoman for Ireland's Labour Party. "Many families are now faced with the very real prospect of negative equity, which has serious economic and social consequences." The Euribor has risen almost 30 basis points since June 5 when Trichet first signaled higher rates. That made new mortgages more expensive and will make existing ones costlier as 98 percent of Spanish home loans and around 80 percent in Ireland are on a variable rate. The jump in costs has sapped demand for housing.
Home starts in Spain plunged 70 percent in March from a year ago and dropped around 60 percent in Ireland. The slowdown prompted Dublin-based realtor Lisney to lower salaries by 10 percent for its 170 workers. The Irish unit of CB Richard Ellis plans to cut around a 10th of its workforce. "Transactions have dried up," said Guy Hollis, managing director of CBRE in Ireland. "It's not going to last forever, but we have to be prudent."
The building boom going bust is tarnishing a decade of gains. Ireland's economy has grown the most in the euro area since monetary union in 1999, while Spain created more than a third of new jobs in the region. After years of "inappropriately low" interest rates, Spain and Ireland are now feeling the "hangover," said Alan Ahearne, a lecturer at Ireland's National University and a former economist at the Fed. Irish banks including Allied Irish Banks Plc had their 2008 earnings estimates cut by Merrion Stockbrokers yesterday because of expectations for deteriorating credit quality.
The decade-long expansion does leave Spain and Ireland with resources to ease the pain of the slowdown. Zapatero's government will use a budget surplus of 2.2 percent of gross domestic product to finance 18 billion euros of measures to prevent defaults and aid unemployed construction workers. Ireland, with the second-lowest government debt in the euro area after Luxembourg, will maintain a 184 billion-euro infrastructure investment plan.
That may not be enough to buffer the hard landing. The Spanish downturn destroyed 75,000 jobs in the first quarter when the unemployment rate jumped the most in three years to almost 10 percent. Ireland's jobless rate rose to a nine-year high of 5.7 percent in June, according to figures published today.
"Central banks are paid to cause a recession now and then," said Fortis Investments Chief Investment Officer William De Vijlder. "Maybe it's a shock to put it like that, but that's reality."
Is global shipping slowing drastically?
A little nugget from my colleagues at Le Figaro, one of Europe's finest newspapers (which is luxuriously delivered to my desk every day). Jacques Saadé, the head of the French shipping giant CMA CMG, says the shipping cycle has turned with a vengeance.
"We're seeing ships leaving Asia that are not full. We are living through a real economic slowdown. It is a latent crisis that will take time to disappear. I don't see it getting better before the end of 2009." "America is importing less, so is Europe. After a record year in 2007, where we had more offers than we could take on our ships, traffic between Asia and Europe has now fallen to a 94pc occpancy rate," he said.
Mr Saadé, who has just ruled out a bid for Hapag-Lloyd, said the oil spike was a scam. "This boom is artificial. Only speculation can explain the run up in price. One way or another, governments must put a stop to this." He said fuel now made up 60pc of his shipping costs. "We're cutting the average speed of our container ships from 22 to 19 knots. It's our only possibility," he said.
Lloyds List said the shipping industry will know when the first Asian loads begin for the pre-Christmas season in a month as whether this is the start of a serious slump. The anecdotal talk is that the picture is deteriorating fast. Note too that the Baltic Dry Index measuring freight rates for coal, corn, grains and such has dropped 23pc over the last month. A false alarm?
The feds have come up with an exit tax!
Here’s a Yankee Doodle Doozy of an idea from the taxman: if you've had enough of the United States and choose to renounce your citizenship, you will now have to give up a large chunk of your assets. The same new tax also will hit foreigners who are living and working in this country legally - with a so-called green card - once they decide to return home. In fact, anyone who has $600,000 in assets and a lust for becoming a citizen of France, Italy or maybe an island in the Pacific should take note of this one.
Thanks can be given to a bill that passed Congress recently and was quietly signed by President Bush two weeks ago. Called the Heroes Earnings Assistance and Relief Act of 2008 (the HEART bill, for short), the main part of the new law deservedly gives benefits to soldiers. But the last part of the bill, under "revenue provisions," sticks it to anyone who no longer wants to live the American dream.
A hot button topic in recent years has been the fight against immigrants trying to get into this country. This bill now takes a hard line against emigrants - people trying to get out. Consider the tax an exit fee. Tomorrow, of course, is Independence Day, so I'm not, by any means, going to advocate that people should leave the US, no matter how difficult the economy might be right now or how intemperate the weather might become at times.
But just in case you have ever entertained that idea, Congress has just made it wise for you to reconsider. "This marks a dramatic shift in policy," said John Olivieri, a tax partner with New York law firm White & Case LLP. "This is a further extension of the US tax net."
The new law, bill JCX-44-8, reads like this: "In general, the provision imposes tax on certain US citizens who relinquish their US citizenship and certain long-term US residents who terminate their US residency. Such individuals are subject to income tax on the net unrealized gain in their property as if the property had been sold for its fair market value."
The first $600,000 of your assets are protected. But after that, the assets - including your house, car, the Dali painting your mother left you - are "marked-to-market," as they say on Wall Street. In other words, someone takes a stab at the value of your assets and then you are presented with a tax bill. Olivieri thinks this'll keep out people we want to work in this country.
"I wonder what the long-term implications are," he said. "It's onerous. You might have to come up with cash you don't have to pay taxes on gains that might never be realized. Will the world's talent decide they don't want to work in the US anymore?" So enjoy the Fourth of July. You and your money will be here for a while.
Nikkei slips for 12th consecutive session, nears 1954 losing string
Japan's Nikkei 225 index ended lower Friday to log its 12th straight decline and move a step closer to a losing string not seen on the Tokyo benchmark in 54 years. Elsewhere in Asia, markets were mixed, with Hong Kong stocks advancing on banks after Industrial & Commercial Bank of China predicted a strong half-yearly profit. Airline stocks dropped on soaring crude oil prices, while technology shares lost ground after the Nasdaq Composite dropped overnight.
The Nikkei finished the session 0.2% lower at 13,237.89, while the broader Topix index ended little changed at 1,297.88. The Nikkei lost nearly 8.5% during the past 12 sessions. Its longest losing string was 15 consecutive sessions in 1954, followed by 13 straight losses in 1949 and 12 in 1953. In Hong Kong, the Hang Seng Index rose 0.8% to 21,416.73, while the Hang Seng China Enterprises Index gained 0.8% to 11,231.60.
"The market is better today, but you could say that it's just a technical bounce. You can't read too much into this," said Howard Gorges, vice chairman at South China Brokerages in Hong Kong. "We don't have the same problems that America has, but an overall bearish sentiment about the world economy and slowing corporate earnings growth is sitting on top of the market right now."
Unidentified risks for UBS? And Merrill. And Citi.
Amid all this general market turmoil, lest we forget that it started - and is still continuing - as a severe banking crisis: this, on UBS, from Citi analysts:UBS has taken $38bn markdowns over 3Q07-1Q08 on problem assets, but still carries $83bn of identified risk exposures, which are likely to require further markdowns after renewed weakness in market prices and among monolines. We factor in SFr7bn markdowns for 2Q08.
And this, via Bloomberg , from Meredith Whitney:Merrill, the third-biggest U.S. securities firm, will probably lose $4.21 a share and write down $5.8 billion of assets. Citigroup will probably lose $1.25, compared with her prior estimate for a gain of 21 cents. She forecast Citigroup’s writedown at $12.2 billion.
Most of those writedowns are still coming from the usual culprits: asset backed securities, structured finance and of course, as we have laboured, monolines. (Whitney sees the latest monoline downgrades costing ML $2.5bn and Citi $3.6bn) And after that, it’s over for the banks? Not so, it seems. Citi analysts point out a number of “unidentified” risks for UBS on the horizon. For which, there is, of course, read across to the rest of the sector.
As the “real” economy continues to tank, a plethora of secondary factors will impact bank earnings, constrain expansion and curb business. Consider, for example - now that the crunch is beginning to impact non-financial corporates - the effect of drawdowns on credit lines. Discretionary drawdowns are threatening to further constrain bank balance sheets as companies behave conservatively, seek to hoard cash to cover liquidity positions and borrow as much money as is available to them. The below table from a recent BoA credit strategy report;
Then, of course, there’s nasties like PIK - payment in kind - bonds. Harrah’s was the latest company to “toggle” its PIKs yesterday; opting to pay the interest on existing bonds by… selling more bonds. In the words of Jeffrey Rosenberg at BoA:If 2007 was the year of subprime, 2008 should count as the year for everything else.
Negative equity threat spreading for UK homeowners
One in eight homeowners who took out a home loan since the start of last year are already in negative equity, with tens of thousands now exposed to financial trouble from falling house prices. An estimated 145,000 mortgage holders already owe more in mortgage payments than their houses are worth.
The research company CACI analysed the 1.2 million people who bought a home since the start of last year and calculated that one in eight are in negative equity. This figure could rise to as many as 360,000 by the end of this year if house prices fall by 20 per cent, as some economists fear is now possible.
Negative equity caused misery for thousands of families in the early 1990s. As house prices started to fall, they found themselves owing more on their mortgage than the value of their houses. In 1992 alone there 1.7 million households who found themselves in this predicament. Many were unable to cope and posted their keys back through the door of their mortgage companies.
Others were not given a choice and ended up with their lenders repossessing their properties. More than 75,000 homes were repossessed during 1992. Adam Sampson, chief executive of the housing charity Shelter, said: "Negative equity is unlikely to be as significant a problem as it was in the early 1990s.
"However, for any individual it will be a tragedy. Negative equity traps people in their existing house and denies them an opportunity to exit gracefully from the housing market." Negative equity in itself shouldn't cause home owners too many problems. It only causes serious problems when a family comes to re-mortgage their property, is forced to move home or if the owner can no longer meet their mortgage payments.
At that point they are forced to "crystalise their paper loss" as Mr Sampson describes it. As houses prices start to fall, the first to be hit by negative equity are those buyers that borrowed the maximum amount possible to get on the housing ladder, especially those that took out 100 per cent mortgages – worth the full value of the property.
For many home buyers these loans were the only way they could afford to get onto the housing ladder, and some lenders – led by Northern Rock – offered loans far in excess of the value of the property. During the early months of 2007 Northern Rock offered a very popular 120 per cent mortgage, which allowed people to not only buy the home but also pay for the fees, stamp duty and have money to redecorate the property without handing over a penny.
Though these deals were offered in far smaller numbers than in the late 1980s, 30,000 home owners have taken out 100 per cent mortgages since the start of last year, according to the Council of Mortgage Lenders.
A further 115,000 people took out mortgage deals of about 92 or 93 per cent, CACI estimates. This means that all of these people are now in negative equity, because house prices have fallen by more than 7 per cent since their peak last year, according to figures released by Nationwide building society this week.
Ed Stansfield, property economists at Capital Economics, warns that though not as many people hold 95per cent or 100 per cent mortgages as they did in the late 1980s, house prices could fall further than during the last house price crash. "It is not inconceivable that negative equity could be as widespread as in the early 1990s if house prices continue to deteriorate at this rate," he said.
At the start of this year the Financial Services Authority warned that there were over 1 million home owners were at a "high risk" of not being able to pay back their loan, because too many people had taken out mortgages that were too large in relation to their salaries. Since the peak in October last year, the average house price has fallen from £186,044 to £172,415, with house prices now falling for eight consecutive months, according to the Nationwide.
Since the start of last year a third of all home loans have been worth 80 per cent or more of the value of the owner's property.
British standard of living to fall for at least a year
Families will see their living standards fall for at least a year because of the credit crisis and soaring oil prices, the Bank of England has said. As economists warned for the first time that Britain was heading for a recession, the Bank's new deputy governor, Charlie Bean, admitted there was "not very much" the country could do in the face of global financial turmoil.
The boom era of the late 1990s and the early 2000s was over, he told the Commons Treasury committee. "Real living standards will have to grow less rapidly this year, and possibly part of next year, than was the case in the late 1990s and early 2000s," said Mr Bean, formerly the Bank's chief economist. "There is not very much that we can do about that as a nation unless we improve our productivity to offset it."
Leading retailers and house-builders disclosed that they were suffering badly from the credit crisis in "the most rapid and severe downturn" for two decades. Shares in Marks & Spencer, the bellwether of the high street, suffered their worst one-day fall in 20 years after news that sales fell by more than five per cent in the past three months.
The company said shoppers were cutting back spending substantially because of spiralling utility bills, food prices and petrol costs. Sir Stuart Rose, the executive chairman, said: "This is the most rapid and severe slowdown since the early 1990s. We are not in recession but that is a technical matter. It's about how the consumer feels that matters.
"You would have to be in your mid-40s to have experienced this. We've had unparalleled growth for 10 or 15 years and customers are going to have to ask themselves, 'what am I prepared to give up?'" In another turbulent day:
- Taylor Wimpey, Britain's second-biggest house-builder, said it was axing 900 staff after failing to raise enough cash from investors to shore up its finances.
- The Organisation for Economic Co-operation and Development predicted that unemployment would rise by 100,000 over the next two years to reach 1.8 million.
- Nicola Horlick, the City fund manager nicknamed "superwoman", warned investors to steer clear of the stock market for the next two to three years.
The respected think-tank Capital Economics predicted that a recession was a real possibility next year. "We have been more concerned than most forecasters about the outlook for the UK economy and, in particular, the prospect of an abrupt unwinding of the various imbalances that have built up over the last decade or so," it said.
"Recent news has suggested that things are likely to be even worse than we had previously thought, with a strong chance that the economy enters a technical recession." A recession is defined as two consecutive quarters of negative growth in gross domestic product. Most economists have been forecasting that the economy will slow later this year without actually going into negative territory.
Howard Archer, chief economist at Global Insight, said: "In my view the economy will stagnate, but it would not take much to tip it into a mild recession. House prices falling further, oil price climbing further, higher food costs eating into people's purchasing power – and all these are possibilities – could tip us into a recession."
Andy Bond, the chief executive of Asda, agreed that the unparalleled consumer boom of the last decade had come to an end, saying: "Reality is biting. People are now believing that they have to live on what they earn." Shares in housebuilders fell sharply after Taylor Wimpey, the country's second largest builder, announced it was axing 900 – the equivalent of a third – of its staff.
It has failed to raise £500 million from shareholders to help shore up its finances and its shares fell 42 per cent. Estate agents, mortgage brokers and retailers have all started to lay off workers. The OECD, the world's club of richest nations, predicted yesterday that UK unemployment would rise by 100,000 over the coming two years to reach 1.8 million.
Liberal Democrat Treasury spokesman Vince Cable said: "The OECD is rightly pointing out the economic reality that Gordon Brown and Alistair Darling refuse to acknowledge. "It is painful but almost inevitable that the perfect storm of rising prices, over-indebtedness and the credit crunch will lead to higher unemployment."
Moody’s resists lobbying on B&B rating
Early on Friday morning, Moody’s announced it was downgrading Bradford & Bingley’s credit rating from A3 to Baa1 – the lowest rating of a UK bank and among the lowest in Europe. The downgrade came just one working day before the shareholder vote on Monday that would have tied TPG, the US private equity group, into a deal to inject £179m of emergency funding and buy 23 per cent of B&B.
As soon as it became clear that a downgrading was in the offing, and knowing that such a move would allow TPG to walk away from the deal, interested parties – including the regulator – subjected Moody’s to a barrage of lobbying either to abandon or postpone the downgrading. However, Moody’s – which has in the past, along with other ratings agencies, been criticised for being slow to publish rating downgrades in previous crises – stood firm.
“We cannot abstain from a rating action because of the consequences,” said Johannes Wassenberg, managing director of EMEA banks. The agency also had to publish the downgrade to the market as soon as practicable, Moody’s added. The downgrade itself paints a bleak picture for Bradford & Bingley, reflecting “a substantial deterioration” in the bank’s asset quality and the expectation that this would weaken again.
A combination of the bank’s portfolio of self-certified loans, buy-to-let mortgages and the expected deterioration in the housing market makes the bank “weaker than its peers”, said Mr Wassenberg. Moody’s also said the bank’s liquidity and funding position remained under pressure given difficult market conditions and highlighted the pressure on the bank’s inherent financial strength.It acknowledged that the £400m injection, and its swift execution, was vital to maintaining the new rating. Without that, the outlook could be worse.
TPG's coldly calculated Bradford & Bingley move raises questions
It was late on Thursday and Bradford & Bingley once again had Britain's financial supervisors at the end of their tether. This time, though, they were having to deal with truculent and highly professional Americans who cared more about investment return than the stability of Britain's precarious financial system.
Texas Pacific Group, the US private equity house that one month earlier had parachuted in with £179m to help rescue the ailing buy-to-let lender, was considering pulling out of the deal. To the regulators, the ramifications were obvious and frightening. Without TPG, B&B's emergency £400m refinancing could fall apart and with it the lender's credibility. Visions of another run on a bank loomed all too large.
In an attempt to draw TPG into line, the regulators pulled out their big guns. Mervyn King, Governor of the Bank of England, and Hector Sants, chief executive of the Financial Services Authority, picked up the phone to TPG's founder David Bonderman in the US on Thursday evening. Pulling out jeopardised Britain's financial system, Bonderman was told in no uncertain terms. Would the billionaire owner of one of the world's largest private equity firms play such a dangerous game and risk soiling his reputation over a piffling £179m?
The answer that came back was a definitive "yes". In defiance of some of his European team, Bonderman decided the deal could not be justified on economic principles. Moody's, the credit rating agency, was preparing to downgrade B&B from A3 to Baa1 - increasing the bank's cost of funding by at least 10 basis points and triggering a clause that allowed it to pull out.
TPG sources argued that the firm had "fiduciary responsibilities to our own investors" and, following the downgrade, the investment no longer added up. With that in mind, Bonderman made his coldly calculated decision. Fortunately, the authorities had seen it coming and, having learned their lesson from Northern Rock, this time were prepared.
Sants had been keeping a close eye on B&B developments with his director of markets, Alexander Justham. They were acutely aware that the future of the TPG deal and rights issue rested with the credit rating agencies. When TPG was drafted into the capital raising by Goldman Sachs ahead of B&B's shock profits warning on June 2, the firm wrote into the contact a clause allowing it to withdraw in the event of two ratings downgrades.
The following day, Moody's downgraded B&B one notch from A2 and put it on watch for another. The clause applied equally to the investment banks underwriting the accompanying £258m rights issue at 55p a share, UBS and Citigroup. Conscious that B&B's rescue would hinge on the three parties all waiving their right to withdraw, Sants urgently set about seeking guarantees. UBS and Citi, already villified for threatening to pull out of the original £300m rights issue at 82p a share, provided the necessary assurances.
TPG, though saying it would back the deal as late as Wednesday, declined to provide a cast-iron guarantee. When, earlier this week, it became clear Moody's would downgrade B&B, Sants and Justham started work on a back-up plan. On Tuesday, with the help of B&B's discredited chairman Rod Kent, he contacted B&B's brokers, UBS and Citi. TPG would not guarantee its support for the deal, he told them, so could they arrange an alternative.
In the event, it was not difficult. The week before, in this endlessly shifting tale, B&B had received an approach from Clive Cowdery, who had consolidated closed life funds through his Resolution Group. He was proposing to inject £400m for a 49pc stake at 72p a share - on the face of it, a better offer than TPG's. Crucially, he had the backing of B&B's largest investors, Standard Life, Legal & General, Prudential and Insight, to provide the funding.
Cowdery's deal was rejected by Kent and the board, on the advice of Goldmans, because it did not provide the certainty that TPG appeared to offer. Ultimately, Cowdery might legitimately claim to have had the more certain deal. The same four institutions backing Resolution were contacted on Thursday and signed up to an alternative rescue, under which they replaced TPG at 55p a share if the private equity firm walked away. Yesterday, when TPG quit at the last minute, they stepped up.
TPG's move not only jeopardised the bank but humiliated Kent and Goldmans, both of whom championed the firm in the face of investor support for Cowdery's deal. Its withdrawal has inevitably raised questions. In its report, Moody's noted the rapid deterioration of assets on B&B's books compared with those in its securitisation vehicle, Aire Valley Master Trust. Contractual obligations with Aire's noteholders are triggered in the event of a ratings downgrade, requiring more mortgages or even cash be injected into the vehicle.
After June's downgrade, B&B had to move £2bn of mortgages into Aire, increasing the value of its assets from £11bn to £13bn. Aire now holds a third of B&B's entire mortgage book - apparently the better third. A second downgrade, in the words of one banker, would "make it more onerous for B&B to run the programme and would not be fantastic for long-term profits".
With house prices crashing, the economy flagging and analysts at Panmure Gordon estimating that B&B is worth no more than 20p a share, TPG may reflect that the reputational damage was worth it.
JC Flowers eyes bombed-out banks after Bradford & Bingley deal fails
The US private equity firm JC Flowers, which offered to buy Northern Rock last year, is looking closely at Britain's bombed-out banking sector with a view to swooping on weakened targets. The move comes after Texas Pacific Group walked away from its own deal to buy 23pc of Bradford & Bingley for £179m after Moody's downgraded its credit rating.
The dramatic turn of events forced the bank to fall back on four of its largest shareholders for capital. Last night shareholders said they wanted the bank to start the search for a new chairman to replace Rod Kent. Although the four institutions backing the new deal did not insist on his removal as a condition of support, one investor said "he has lost all credibility" and would have to go shortly.
Meanwhile, Flowers, which specialises in investing in distressed companies in the financial services sector and also made an approach to Friends Provident earlier this year, has been sounding out institutional investors. Flowers is seeking a way to work with large shareholders to recapitalise banks or other lenders by taking stakes in them.
The firm, founded by New Yorker Christopher Flowers, has been watching the situation for months and has stepped up its contact with investors as banks' share prices have fallen further and customers' arrears have risen. By bringing several financial services companies together Flowers could create a larger player which would be financially stronger and would provide opportunities to cut costs.
The Financial Services Authority has been looking at a potential "roll up" of smaller banks. The City regulator is in favour of the move in the hope that it would mean no more banks follow Northern Rock into nationalisation and B&B into an emergency capital raising. Possible candidates for a roll-up could include Alliance & Leicester, buy-to-let lender Paragon and subprime specialists Kensington Mortgages and Bank of Ireland-owned Bristol & West.
Some of these targets were already identified by Clive Cowdery, who made a proposal to inject £400m into B&B a week ago backed by financing from four of B&B's biggest shareholders. Mr Cowdery's plan - which was rejected by B&B - would have seen the entrepreneur use his investment in B&B as a springboard for a wider consolidation among banks. B&B rejected Mr Cowdery's advances after deciding it could not be sure about his financial backing.
Access to funds may not be a problem for Flowers, but the firm will have to overcome perceptions that as a US buy-out house, its only concern is to make money. The firm may face a uphill struggle after TPG pulled out of its deal with B&B days before shareholders had been due to vote on the proposal. Both the institutions and regulators are furious with TPG at its belated decision to pull out of the deal.
The private equity firm was described in the City as "camel spit" and questions were raised about whether it would now be able to strike any financial sector deal in either Britain or Europe. "Regulators across Europe will have been watching how they dealt with this," one City veteran said. "I'd say this would put them out of Europe." TPG will need FSA clearance for any future financial sector deal in the UK.
The four institutions backing the new deal, Standard Life, Legal & General, Prudential and Insight, will effectively sub-underwrite much of the enlarged £400m rights issue - the third time B&B's fund-raising has been altered. They are expected to sign up for about £100m of the £179m TPG had pledged. B&B's underwriters, UBS and Citi, will take responsibility for the full £400m and are expected to sub-underwrite much of the rest.
Investor institutions declared the arrangement a triumph for shareholder rights. The 67-for-50 rights issue at 50p, will see 828m new shares issued - 57pc of the enlarged equity. The rights issue compares with the previously agreed 55p-a-share issue to raise £258m. B&B said it would be posting a supplementary circular and prospectus "shortly" and has adjourned the shareholder meeting scheduled for Monday until the following week.
It expects to conclude the rights issue "in the second half of August". Panmure Gordon analyst Sandy Chen cut his target price for the bank to 20p, citing the "gauntlet" of "an emergency rights issue, more difficult funding conditions, and a rapidly deteriorating macro environment". B&B shares closed below the rights price at 50p, down 11p.
Dow Theorists disagree
When the Dow ended the trading session this past Wednesday 20.8% below its close of Oct. 10, it did more than officially confirm that we're in a bear market. Depending on which Dow Theorist one consults, Wednesday's action also set up the preconditions for a Dow Theory sell signal.
The Dow Theory, of course, is the oldest stock market timing system in widespread use today. Its author was William Peter Hamilton, who introduced it in a series of editorials in The Wall Street Journal over the first three decades of the past century. Crucially, from the point of view of latter-day disputes over its current meaning, Hamilton never codified his theory into a precise set of rules that could be mechanically applied.
In general, though, the outlines of the Dow Theory are straightforward. Hamilton argued that it is bullish if both the Dow Jones Industrials Average and the Dow Jones Transportation Average jointly reach significant new highs. Similarly, the market is likely to continue falling if both Averages jointly reach significant new lows. (Of course, it wasn't known as the Transportation average back then; it was the Dow Jones Railroad Average).
Potential turning points are signaled when only one of the two Averages reaches a new high or a new low--"non confirmations" in Dow Theory parlance. Unfortunately, these general outlines contain an incredible amount of ambiguity. Just take the current market forecasts of the three Dow Theory newsletters that are tracked by the Hulbert Financial Digest.
Consider first Jack Schannep, editor of TheDowTheory.com. Schannep differs from the other two Dow Theorists I track by allowing buy and sell signals to be triggered by smaller and shorter-term moves in the two Dow averages. On that basis, he argues that the Dow Theory went on a sell signal after the close on June 22 - well before the stock market's decline of this past week.
Consider next Richard Moroney, editor of Dow Theory Forecasts, whose most recent Dow Theory signal was a bullish signal triggered this Spring. In his latest issue, written after Wednesday's close, Moroney wrote that there are three different ways in which the Dow Theory could go at this point:
- Confirmed new highs. If the Industrials rebound to close above 13,058.20 and the Transports close above 5,492.95, the bullish primary trend would be reconfirmed.
- A breakdown below the March low in the Transports. With a close below 4,398.97 in the Transports, both the Industrials and Transports would be trading below prior significant lows -- and the validity of April's bull-market signal would have to be questioned.
- Failed attempts at new highs. If the market rebounds without achieving new highs in both averages, then both averages move below the lows reached in the current correction, the Dow Theory would shift to the bearish camp.
Though Moroney doesn't come out and say so in his latest issue, in prior issues he has said that, from a Dow Theory point of view, the primary trend is presumed to remain in force until a contrary signal is triggered. On that basis, therefore, Moroney must be considered bullish.
Finally, consider Richard Russell, editor of Dow Theory Letters. In many crucial respects, he agrees with Moroney's delineation of the key levels to watch in the two major Dow averages in coming weeks and months. However, in recent postings to his website, he has thrown a major kink into the works by suggesting that, far from confirming that a major bear market is in progress and presaging further market weakness, a close in the Transportation Average below its January low might instead signal that the market's decline is about over.
Here's Russell's rationale: "Sometimes a belated confirmation can signal that we're close to the end of a move. That's what happened during the 1932-37 bull market. In that instance, the Rails hit a high in June 1933 and then sold off while the Dow continued higher. Three years went by while the Rails stubbornly refused to confirm the rising Dow.
Robert Rhea (the great Dow Theorist) wrote that maybe when the Rails finally do confirm the Industrials, the bull market will be near its end. In July 1936 the Rails finally confirmed the advancing Dow. But the belated Rail confirmation did indeed occur near the end of the long advance. The bull market pushed a bit higher into March 1937 and then fell apart. Over the next year the Dow lost roughly half its value."
The bottom line? This stock market is as confusing from a Dow Theory point of view as it is from lots of other perspectives as well.
The Alphaville sandwich board: the end is nigh
A cavalcade of bad news hitting the market July 2- in the form of various analyst notes. The sense being that having spent months writing about the oncoming recession, we’re now actually dealing with it. S&P analysts noted that world equity indices lost $3 trillion in June. With only three of 52 actually up - all of them emerging.All of the developed markets fell in June, losing 8.18% for the month, 2.49% for the second quarter and 7.90% year-to-date.
Barcap equity strategist Tim Bond, meanwhile, is warning of a global financial storm. Oh, and the collapse of the Federal Reserve’s credibility thanks to an inflation shock. Bond expects the US headline figure to be 5.5 per cent by August.This is the first test for central banks in 30 years and they have fluffed it. They have zero credibility, and the Fed is negative if that’s possible. It has lost all credibility.
Global unemployment, meanwhile, has risen 9 per cent. And the Oil prices continues to soar; pushing countries to “tipping point” according to Dominique Strauss-Kahn. All eyes on Iran. In the UK, bellwether stock M&S has been trading down around 18 per cent all morning, while it’s a bloodbath in the housebuilding sector. Taylor Wimpey leading the pack, down 50 per cent. Barratt down 28 per cent. First corporate pains of a recession? David Owen at Dresdner Kleinwort thinks we’re “staring recession in the face” in the UK. As he notes:With house prices collapsing and manufacturing orders declining to their lowest level since 1998, can the UK avoid recession? Contrary to expectations, the saving ratio fell in Q1 from 3% to only 1.1%, the lowest figure on record. This helped keep the show on the road, but surely cannot continue, particularly with survey evidence now suggesting a marked deterioration in the labour market.
The economy is running on empty. And skip across the pond, for the subject of a Merrill Lynch note just through:…bankruptcy is not impossible if the market continues to deteriorate and significant incremental capital is not raised.
The company in question? General Motors.
Merrill Lynch in talks to sell Bloomberg stake back to NYC mayor
Merrill Lynch is in talks to sell its minority stake in financial news group Bloomberg L.P. back to New York City Mayor Michael Bloomberg, according to a published report on Friday. The New York Post, citing unnamed sources, said Merrill is looking to sell its 20% stake to a blind trust of the New York City mayor, who still holds about two-thirds of the media group that he founded.
The sale is part of a broader plan by cash-strapped Merrill to raise approximately $50 billion through an array of asset sales, the newspaper reported, citing bankers who have looked at marketing materials. The two sides are in active negotiations, sources said, though any deal could still fall apart. Merrill also is looking at ways to sell its 49% stake in investment manager BlackRock, the report stated.
A London-based spokesman for Merrill Lynch and Bloomberg spokeswoman Judith Czelusniak declined to comment. Merrill Lynch in 1981 helped provide the start-up funding for Bloomberg to launch the popular two-screened terminal that quickly made a name for itself in the fixed-income world. Merrill Lynch CEO John Thain has publicly discussed the possibilities of selling both the Bloomberg and BlackRock stakes.
Merrill's stake in BlackRock was worth $13 billion, while the firm's 20% stake in Bloomberg was probably worth $5 billion to $6 billion, Thain said during a conference call with analysts and investors on June 11. Thain said the BlackRock stake was "more strategic," while describing the Bloomberg stake as "just a very good investment."
"There are some liquidity restrictions on BlackRock and Bloomberg, but I don't believe that that would prevent us, if we decided to, from using either of them as means of raising capital," Thain said, according to a transcript of the call. "We definitely at least considered and particularly we considered the Bloomberg stake at the end of last year, about whether or not we wanted to sell that," he added.
Illinois attorney general advises homeowners to review Countrywide loans
I have been advising homeowners to do this for the past year online and I even started a company (Loan Safe Solutions) to assist attorneys and homeowners in reviewing their loan documents for legal violations.
Now, it appears that the Illinois attorney general feels that it is a great idea to have your current mortgage examined for federal, state and mortgage fraud violations. Otherwise known as “predatory lending.”
The Naperville Sun:The Illinois attorney general’s office is encouraging homeowners with a Countrywide Financial Corp. loan to seek professional help if they’re questioning the terms of their loan. Illinois Attorney General Lisa Madigan this week filed a lawsuit in Cook County Circuit Court against the nation’s largest mortgage lender and servicer, claiming the company used deceptive practices to lure borrowers into unaffordable loans. In Cook County alone, about 2,534 home loans originated by Countrywide have been foreclosed on from January 2004 to this month, according to the complaint.
Maybe I should give Madigan a call today and let her know that we are finding violations on 85% of Countrywide Home Loans and that in 90% of the loans we audit, the borrower has no clue that they have been victimized. Now, those are some alarming numbers that CANNOT be ignored.
More from the SUN:A spokesman with Madigan’s office said Thursday that consumers with a 30-year fixed mortgage should not be alarmed, but carefully reviewing all documents of the loan is recommended.
“Make sure you actually have that fixed mortgage,” spokesman Natalie Bauer said.
The attorney general’s office suggests homeowners with a subprime mortgage should contact a certified counselor approved by the U.S Department of Housing and Urban Development.
Corn could hit $10 as flooding may reduce output
Corn futures prices may rise to as high as $10 a bushel in the second half of the year if bad weather continues and if Midwest floods take a big toll on the crop. Analysts said it's still too early to tell how much the Midwest crops have been damaged, but they will be keeping a close watch on data from the U.S. Department of Agriculture as the government agency continues to assess the crop land.
A large loss of acreage could slash U.S. corn production and push next season's year-end stocks to the lowest level since just after World War II, some analysts said. If bad weather continues in July and August, corn prices could rise to $10 a bushel, said Shawn Hackett, president of agriculture futures brokerage Hackett Financial Advisors. "Then we would be talking about a corn supply crisis that would probably require some type of government intervention," Hackett said.
Futures prices for corn closed at an all-time high of $7.548 a bushel on Chicago Board of Trade on June 27. Prices were up 21% for June, jumped 28% in the second quarter and surged 60% in the first half of the year. An increasing use of corn for ethanol production, an expected drop in corn production, and the flooding in June are the major contributors of the price surge, analysts said.
Corn use for ethanol production is expected to reach three billion bushels this year, up nearly 50% from last year and accounting for about a quarter of total production in the U.S. Following the surge in the first half, "there may still be bullish reaction and higher futures prices" in the second half, as some production losses in the floods can never be recovered, said Elaine Kub, a grains analyst at commodities-information provider DTN.
Still, some analysts said corn acreage should have not dropped sharply. Rising corn prices have encouraged farmers to plant more corn, offsetting flood-damaged acres, they said. The optimists' views are supported by the latest acreage report released by the U.S. Department of Agriculture Monday. The report showed a surprising increase of 1.3 million acres in planted corn acreage. Following the news, corn prices slumped 4%. Futures ended Friday's trading down 0.4% at $7.46 a bushel.
The volatility is understandable, given that the USDA report was mostly based on surveys the USDA did over the first two weeks of June, before much of the flooding occurred. Some analysts referred to the report "obsolete" because it's not a full reflection of the extent of flooding damage. Hackett said he didn't change his view that corn prices could rise further.
Whatever the case, analysts agree that the number of corn acres will play a dominant role in second half's corn prices. Monday's USDA acreage report showed that farmers planted 87.3 million acres of corn this year, compared with 86 million the USDA reported in March. Corn growers are expecting to harvest 78.9 million acres, up 100,000 acres from March. To market analysts, the increase was unexpected. Hackett had expected corn-harvested area to fall by 1.8 million acres.
"The report is overlooking the abandonment figures that are likely to come in over the next few weeks," said Phillip Streible, senior market strategist at futures brokerage Lind-Waldock. But the USDA said it has conducted additional surveys in flood-affected areas during late June to determine the impact of flooding, and the surveys have been included in report. The USDA "has the best handle on the impact of this year's flooding on the crop at this time," said Jerry Norton, an economist at the USDA.
In an effort to more accurately assess the damage, the USDA said more surveys will be conducted in July, with the latest information to be included in its Aug. 12 crop production report. Corn is planted in springtime and harvested in the fall. Corn crops are still underwater in major corn producing states such as Iowa, Illinois, and Indiana, making it very difficult to assess the full impact of the flooding before farmers can have a close look at their crops, analysts said.
The floods are expected to reduce both acreage and yields. Shrinking acreage and falling yields could push year-end corn inventories to as low as 300 million bushels, down 80% from the previous year, Hackett projected. This would be the lowest inventory level the U.S. has seen since 1947. The USDA had already reported a sharp decline in corn inventories. Without fully considering the impact of flooding, it projected in early June that corn year-end stocks would fall to 673 million bushels, down 53% from a year ago and the lowest in 13 years.
But some analysts said that despite the flooding, corn production could still increase if more corn was planted. If the increase of 100,000 acres of harvested area the USDA reported materializes, with a modest estimate of 145-bushel-per-acre yields, production will rise as much as 14.5 million bushels.
Ireland fears recession as unemployment rises
Irish unemployment jumped to a nine-year high of 5.7pc last month, the Central Statistics Office reported, in the latest sign that Ireland is heading towards a recession. The rise follows confirmation earlier this week that Ireland's economy shrank by 1.5pc in the first quarter of 2008 - the first retreat in more than two decades.
Ireland's budget deficit nearly quadrupled in the first half of the year to €5.6bn (£4.4bn) and Finance Minister Brian Lenihan said on Wednesday he expected the economy to stall this year after growing 6pc in 2007. The common factor is a sudden reversal in the construction sector, a key plank in the Celtic Tiger economic boom that began in 1994 and finally petered out last year.
Property prices have dropped by about 10pc in recent months, driven by weakening consumer confidence and tightening credit following the US sub-prime crisis. More than a decade of price rises spurred Ireland to build upwards of 70,000 new homes a year, but economists expect less than half that figure to be built this year. Several developments have been suspended and developers have filed for bankruptcy.
The European Central Bank's decision to raise benchmark interest rates to 4.25pc on Thursday did not help, as Ireland's construction boom has left it vulnerable to higher lending costs - its housing industries account for about 10pc of its economy, twice the EU average.
Unemployment last rose this high in 1999, when 5.8pc of the workforce was jobless. But Ireland's jobs market has grown rapidly since the so-called Celtic Tiger economy delivered double-digit growth, putting Ireland among the richest nations in Europe.
During the boom times the country attracted more than 200,000 foreign workers who now fill the bulk of new jobs, particularly in shops, restaurants and pubs. The threat of a recession will be a headache for Irish Prime Minister Brian Cowen, who has faced a baptism of fire since he took office in May. Irish voters rejected the EU's Lisbon Treaty in June, plunging the 27-member bloc into institutional uncertainty.
Russia Presses U.S. Bank Over Money Laundering
The Russian government sought Thursday to make Bank of New York Mellon liable under United States racketeering laws for $22.5 billion in damages arising from a money laundering scandal that helped undermine the Russian economy in the late 1990s.
The appearance of a team of pastel-clad trial lawyers from Miami, representing Russia, capped a long effort to enforce civil liabilities here against the bank, which reached a settlement with the United States government in the case in 2005. As Russia’s economy collapsed in the late 1990s, capital flight was one of the contributing causes. And at that time, about $7.5 billion was improperly transferred out of the country through Bank of New York accounts to a shell company owned by the husband of a bank employee, Lucy Edwards.
Both Ms. Edwards and her husband were later sentenced to five years of probation, and the bank, which admitted lax oversight, agreed to pay $14 million to the United States. In a novel legal theory on choice of law, the lawyers — working on a contingency fee for the Russian Customs Committee — are seeking to apply the Racketeer Influenced and Corrupt Organizations act, known as RICO, against the bank in a Russian court. The bank argues that the statute of limitations for new legal suits against it has expired.
One of the lawyers for Russia, Steven C. Marks of the Podhurst Orseck law firm, argued that a new lawsuit was valid because the bank’s 2005 settlement qualified as a criminal admission of guilt, making it liable for civil damages. The case, being heard at Basmany Court in Moscow, has attracted the attention of prominent legal experts. Alan M. Dershowitz, the Harvard law professor, prepared an affidavit in support of the Russian plaintiffs, and a former United States attorney general, Dick Thornburgh, prepared one on behalf of the bank.
On Thursday, the court heard testimony from experts on whether it had jurisdiction to decide American criminal law, and whether the RICO statute could be applied outside of the United States. “I believe very strongly that in a time of globalization of banking and globalization of money laundering, it would be a terrible tragedy if RICO laws were confined to the United States border,” Mr. Dershowitz said in a telephone interview.
But Mr. Thornburgh said no foreign court should hear cases under the RICO statute, a 1970s law aimed at fighting organized crime that allows civil penalties for certain criminal acts. “Only U.S. courts can adjudicate RICO,” he said in an interview in Moscow. Bank of New York Mellon also contends that the improper wire transfers did not amount to a precursor crime under RICO, and that Russia’s claim to damages was not supported by evidence.
The bank says the Basmany Court’s decision will never be upheld outside of Russia. The same court heard the politically tinged bankruptcy case against the Yukos oil company, which ended in dismantlement of the company and was criticized for what some saw as judicial irregularities. Still, Mr. Dershowitz, arguing for the Russian customs agency, said the Bank of New York should observe the court’s ruling. “A great bank founded by Alexander Hamilton will not want to be perceived as running away from judgment,” he said.
The plaintiffs are arguing that the widespread harm caused to Russian people by the collapse of the Russian ruble should be considered in the damage calculation. In many other legal cases, officials in Russia and other countries have objected to applying American law to disputes outside of the United States.
The practice has drawn objections in several widely publicized cases, including Exxon Mobil’s dispute with Venezuela and Cuban exile suits against the island’s Communist government. In the Venezuela case, Exxon sued in United States, British and Dutch courts. Courts around the world, however, routinely apply other countries’ laws in contract disputes.
Bruce Marks, a Philadelphia lawyer who filed RICO claims against an aluminum conglomerate controlled by the Russian billionaire Oleg V. Deripaska, testified in court Thursday for the customs agency. Mr. Marks said that the American racketeering law could be applied in a foreign court, though no foreign court had yet passed judgment on such a case.
At one point, with the spires of Moscow’s skyline outside the courthouse window, Mr. Marks was drawn into a discussion of United States Supreme Court precedent on the question of whether civil damages could be sought under the RICO law even if the defendant had not been convicted of a criminal offense. He said it could, telling Judge Lyudmila Pulova that Sedima v. Imrex clarified that point.
In that case, decided by the United States Supreme Court in 1989, the court ruled that a fraudulent scheme, even one that is part of a legitimate company’s “regular way of doing business,” can establish proof of a racketeering violation. Steven Marks, the lead plaintiff’s lawyer, who is not related to Bruce Marks, specializes in airline crash cases that fall under international law. He had also represented the governments of several South American countries seeking damages from American tobacco companies.
In Russia, Steven Marks was authorized to seek damages on the cigarette claims with a 29 percent contingency fee. That agreement, with the Russian customs committee, was later extended to the Bank of New York case. Mr. Marks says his payment terms are not material to the case. He said the lawyers would seek to use the Russian court’s judgment to garnish Bank of New York reserves at central banks in some of the 90 or so countries where the bank does business.
The Struggles of Detroit Ensnare Its Workers
Their pickups and sport utility vehicles are not selling, and now General Motors, Ford Motor and Chrysler have to pay thousands of auto workers not to make them. With more than 15 of their assembly plants across the country set to be idled or slowed because of shift cutbacks, the Detroit automakers will temporarily lay off upward of 25,000 auto workers this summer and fall.
Because of their union contracts, G.M., Ford and Chrysler are obligated to pay workers more than half of their regular take-home wages, plus health benefits, with state unemployment benefits picking up a portion of the rest. Despite cutting more than 100,000 jobs since 2006 through buyouts and special retirement programs, the Detroit companies still cannot match their production capacity with their steadily declining market share.
Consumers are shifting to more fuel-efficient vehicles, if they are stepping into a showroom at all. New vehicle sales plummeted 18 percent in June, and Detroit’s share of the declining market fell to a combined 46 percent. Moreover, all three companies are losing money in North America and burning through cash reserves. On Wednesday, G.M.’s stock fell 15 percent after a Merrill Lynch analyst issued a report saying that “bankruptcy is not impossible” if the overall market continues to deteriorate.
Unlike many factories operated by Japanese manufacturers in the United States, Detroit’s plants are not flexible enough to switch their production to better-selling models. So while some G.M. and Ford factories are scrambling to build more cars, even paying workers overtime to meet demand, other assembly lines are shutting down. “It’s an unprecedented situation,” said Harley Shaiken, a labor professor at the University of California, Berkeley. “Despite enormous reductions in total employment, the market is forcing massive temporary layoffs.”
Detroit’s Big Three, it appears, can’t escape their past. Since the 1980s, the companies — by dint of their contracts with the United Automobile Workers union — have parked idled workers in so-called “jobs banks” where they received full pay while doing community service or simply clocking in. New contracts with the U.A.W. signed last year were supposed to pave the way for elimination of the jobs banks and make the companies more competitive on health care and wages for new hires.
In addition, the historic buyout and early-retirement programs were meant to better align, at enormous expense, the automakers’ workforce with demand for its vehicles. Even before this year, the companies had announced plans to close several plants. But the restructuring plans did not account for the huge drop in sales and the shift by consumers to smaller vehicles that have resulted from soaring gas prices and the weak economy.
“You have the demand for large vehicles dropping, combined with growing demand but limited supply of smaller vehicles,” said Jesse Toprak, executive director of industry analysis for Edmunds.com, an automotive-research Web site. “What you end up with is miserable sales numbers.” Rather than flood the market with unwanted trucks and S.U.V.’s, the Detroit automakers have announced broad, temporary layoffs on a scale unseen since the early 1990s.
“Instead of building vehicles and selling them at deep discounts, the companies are shutting the plants,” said Ron Harbour, managing partner of the consulting firm Oliver Wyman, which issues a widely followed annual report on auto manufacturing trends. “It’s painful, but it’s smarter than the alternative.” G.M. plans to send about 11,000 United States workers home on layoffs the rest of the year, some for weeks and others for months. It also has about 1,000 workers still on the rolls of jobs banks from plants long since closed.
Ford is idling about 5,000 of its hourly employees, in addition to the estimated 500 workers it has in the jobs bank. Chrysler, which has 300 people in the jobs bank, will lay off about 9,500 workers. There are also layoffs scheduled at plants in Canada and Mexico. Virtually all of the laid-off workers are at plants building slow-selling pickups like the Ford F-Series or big S.U.V.’s such as G.M.’s Chevrolet Suburban and Chrysler’s Dodge Durango.
Some of those workers will, over time, be moved to car plants that are adding shifts or otherwise increasing production. But the vast majority of the laid-off workers in the United States will stay at home and collect 95 percent of their average after-tax, take-home pay — about $816 a week, according to U.A.W. documents posted on the union’s Website.
Of that $816, the automaker pays about 55 percent and state unemployment covers the remainder. In G.M.’s case, the cost of supporting 11,000 laid-off workers averages about $1 million a day. “It is a very expensive issue, but it’s not the critical one for Detroit,” said Mr. Shaiken. “The reason these plants are going down is that some catastrophic decisions were made in the past to continue building so many trucks.”
The companies are trying to mitigate the impact of the production changes. Ford, for example, will cut a shift at its Missouri truck plant and almost immediately move the workers to a nearby factory making small S.U.V.’s. At a Kentucky plant that makes Explorer sport utility vehicles, Ford will slash production from two shifts to one. But rather than lay off workers, the shifts will start to alternate work weeks.
Still, the Detroit automakers are hamstrung by the inability of their factories to shift production from slow-selling vehicles to hotter models. Rivals such as Honda can quickly move from making an S.U.V. such as the Element in its Ohio plant to Civic sedans. “The key is they are able to change the mix of products to what is selling right now,” said Mr. Harbour.
While plants operated by G.M., Ford and Chrysler have markedly improved their productivity and lowered their worker rolls in recent years, they generally are confined to making variations on a single truck or car platform. The stunning drop in truck sales has forced the Detroit companies to make some hard decisions. Chrysler this week said it will close a minivan plant in Fenton, Mo., near St. Louis, and cut a shift at a neighboring factory that makes Ram pickups.
The double blow stunned workers. About 1,500 workers at the minivan plant will go on indefinite layoff in October, while 900 workers at the Ram factory will be idled in September. “It’s very scary,” said Joe Wilson, a 40-year-old worker at the minivan plant. “We’d been led to believe we’d have a future. Now they pull the rug out from under us.”
Mr. Wilson said that getting a paycheck for not working is hardly a relief when his job is disappearing. He was already cutting back on expenses, and had bought an old Ford Escort to save money on gas for his commute.
“It takes three weeks to get that first check and by then we owe everybody and their uncle,” he said.
Logic of off-coast oil drilling deeply flawed
Coastal drilling for oil is mindless, not only from a supply perspective but from an environmental perspective. The amount of oil to be found off our nation's coasts would be a trickle of what's needed to meet consumer demand -- and that's what the oil companies say! Yet, they and their supporters in Congress move forth trying to lay claim to new oil leases on land and sea.
The salvo waged by critics is that as it stands oil companies are using only about one-quarter of the leases they already have. The oil companies' response: "It takes a long time to drill." Exactly. About 20 years, in fact. Any oil to be had in Alaska, for example, wouldn't make it to us until 2028. And do you know what that would mean in terms of savings? The Energy Information Administration estimates the best-case scenario price drop would be about 1% per barrel of oil. One percent. Wow -- sign us up! That's about as good a savings as the gas-tax reprieve. Meaningless.
This all, mind you, is if the oil companies decide to send any Alaskan oil they may find our way. The reserves they already have there are mostly shipped to other countries. Sort of makes you wonder how in the name of national security and energy security (or any other phrase where they can work in the word security) this can all be justified. Speaking of security, it's rather curious but no one much speaks about the environmental security of all this offshore drilling talk in the context of the Supreme Court's ruling to halve the fine to Exxon for its Valdez oil spill.
Drilling creates hazards, and costs the economy dearly. Take a look at the local Alaskan economies that suffered because of the Valdez spill. Not a pretty picture. Now let's tackle climate change. Drilling for more oil that again the oil companies themselves admit is not a sustainable energy supply will eventually put more carbon dioxide into the atmosphere, whether through our tailpipes after the oil has been turned into gasoline or from our furnaces after we use it to heat out buildings and homes or from any other means for which it's burned.
According to the most recent International Energy Agency forecasts, consumption is set to rise 50% by 2030. That means we'll have to increase oil supply by that much to meet demand. It isn't going to happen. The oil companies are fooling themselves by coastal drilling and at the same time they are trying to con us into buying into their scheme. No more predictable oil supply, folks, no more business. Profits tumble.
Now imagine if an oil company such as Exxon Mobil with all of its infrastructure and distribution (i.e. gas stations) announced a plan where it would wean itself off petroleum supply while at the same time staging in an alternative sustainable energy supply. Not a "We're exploring...," or "We're investing...." No, this would be a "This is how we are going to do it so by 2030 we'll be supplying you with a 100% different source of energy." Its long-term prospects would be massive. Its market value would shoot through the roof and not be questioned.
It would endear the $3 trillion or so of socially responsible investment dollars out there. And it would serve as a model for change, for the future. It would become the Google of energy. Instead, oil companies are acting like cigarette companies just before they took their long, long fall amidst fines and court cases: staring down the face of warnings and trying to make us believe a newfangled cigarette (read supply of oil) will save them. Newsflash: The barbarians are already at the gate
India's Inflation Accelerates to Fastest in 13 Years
India's inflation accelerated to the fastest pace in more than 13 years, strengthening the case for the central bank to increase borrowing costs this month. Wholesale prices rose 11.63 percent in the week to June 21, after gaining 11.42 percent in the previous week, the government said in a statement in New Delhi today. The median forecast of 16 economists surveyed by Bloomberg News was for an 11.47 percent increase.
Faster inflation has eroded the popularity of Prime Minister Manmohan Singh's government, which is struggling to survive as its communist allies consider withdrawing their support over a nuclear deal with the U.S. A nationwide truckers' strike may have added to inflation. "Miseries don't come alone," said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor's. "The political disharmony, inflation and the truckers' strike have disrupted the smooth functioning of the economy."
India's 10-year bonds fell for a fifth day, pushing yields to the highest in seven years. The Bombay Stock Exchange's Sensitive Index pared gains to 0.25 percent as of 12:00 p.m. today, after rising as much as 2.2 percent earlier. The Reserve Bank of India, which next meets to review rates on July 29, last month raised its benchmark interest rate twice to a six-year high of 8.5 percent and lifted its cash reserve ratio to 8.75 percent, to prevent money supply in the banking system from fanning inflation.
Soaring energy, food and commodities prices are pushing up inflation around the world and forcing central banks to raise borrowing costs amid slowing economic growth. Sweden and Indonesia raised their benchmark interest rates yesterday, as did the European Central Bank. China has increased its cash reserve ratio to a record 17.5 percent.
More than 4 million heavy and light commercial vehicles stayed off the nation's roads for two days this week to protest against taxes and rising fuel costs. The strike ended late yesterday after the government decided to roll back an increase in toll tax and promised not to raise the charge for one year, said Charan Singh Lohara, president of truckers' union. The government increased retail fuel prices on June 4, pushing inflation to more than double the central bank's year- end target of 5.5 percent.
Rising prices have caused Prime Minister Singh's Congress party to lose ground in nine of 11 state elections since January 2007. Singh faces elections in six more states this year and national elections by May 2009. To contain inflation that has tripled in the past seven months, the government yesterday banned exports of corn after restricting overseas sales of food items including wheat, rice, cooking oils and pulses. India had earlier banned cement exports and imposed a tax on outgoing shipments of steel products.
"Inflation is likely to hit 13 percent in a month," Joshi of Crisil said. The Reserve Bank may raise the repurchase rate by 25 basis points in the July meeting and increase the cash reserve ratio, depending on the liquidity in the system, he said. Rising energy costs have fanned inflation in India by making transportation, manufactured products and food items more expensive. Fuel, power and electricity prices rose 16.2 percent in the week ended June 21 from a year earlier. Food costs, including bread, salt, cooking oil and tea, jumped 14.6 percent.
Crude oil prices touched an all-time high of $145.85 a barrel on July 3, raising concern India's import costs will surge. The South Asian nation relies on overseas crude to meet three-quarters of its needs. The government may revise today's preliminary wholesale- price estimate in two months after receiving additional data. The commerce ministry today raised its inflation estimate for the week ended April 26 to 8.27 percent from 7.61 percent.
$52 Billion Bell Canada Buyout Is Postponed
Private equity buyers apparently salvaged a record $52 billion deal for Bell Canada on Friday by postponing its closing date until later this year and canceling dividend payments. The consortium of banks that had agreed to provide about $34 billion in financing for the acquisition were demanding changes to lending terms made a year ago before the current credit market crunch.
The deal was originally scheduled to close on Monday, but that deadline was extended because of the talks with the banks, as well as a legal issue. Because the deal is structured under a unique Canadian court process, repricing the agreement to alleviate the lenders’ concerns would have been difficult and time consuming.
The new agreement, however, effectively reduces the purchase price by about $2 a share by moving the closing date to December 11 and halting dividend payments to holders of common shares. “Basically, the money will stay in the company,” said William J. Fox, the executive vice president of communications for Bell, which is based in Montreal.
Mr. Fox declined to estimate the increase in the company’s cash position that will come from canceling the dividend payments. On Monday, Bell announced that it was deferring its second quarter common share dividend payments and it estimated a savings of about 294 million Canadian dollars (about the same in United States funds.)
The savings from canceling two additional dividend payments as well as other cash generated by the company over the coming months will effectively reduce the purchase price by about $1.5 billion. That increased cash position will make the four banks, Citigroup, Deutsche Bank, Royal Bank of Scotland and the Toronto-Dominion Bank, less anxious about the massive lending commitment, and the delay will also give them more time to syndicate their loans. An unknown portion of the savings will be also passed along to the lenders.
“The signing of the financing and credit agreements and the resolution of issues involved in funding this transaction are the essential milestones to closing with both the purchaser and the lenders,” Michael J. Sabia, the chief executive of Bell said in a statement. “I think everyone will see this as being positive,” said Deborah Allan, a spokeswoman for the lead purchaser, the Ontario Teachers Pension Plan. The other main buyers include Providence Equity Partners, Madison Dearborn Partners, and Merrill Lynch Global Private Equity.
As originally planned, the buyers will pay 42.75 Canadian dollars a share for the company. Mr. Sabia, who was scheduled to leave the company when the transaction closed, will now step down on July 11. He will be replaced by George Cope, a former executive Telus, a rival of Bell based in Vancouver, who now heads the Bell telephone operations in Ontario and Quebec.
The purchase, the largest leveraged buyout to date, was announced just over a year ago. But it ran into a second unexpected hurdle in addition to the credit market squeeze. Current bondholders launched a legal challenge to the deal which was only settled in Bells favor by the Supreme Court of Canada last month. Under the terms announced on Monday, the buyers agreed to increase the fee they will pay if the takeover fails to 1.2 billion Canadian dollar, from 1 billion Canadian dollars. “It speaks to the commitment of the purchase group,” Mr. Fox said.