Haynes roadster in Washington crossing Pennsylvania Avenue at 14th Street N.W.
Ilargi: Ah, the blessings of globalization... I made a list yesterday of countries known to be in deep financial trouble: Spain, Argentina, Pakistan, Ecuador, Ukraine, Hungary, Serbia, Latvia, Estonia, Lithuania, Romania, Bulgaria, Turkey and Switzerland.
Today, an article in the Independent adds a few more (it also misses some of mine). Hence, I’ll add these countries to the list: South Korea, Russia, Australia, Austria, Kazakhstan, Brazil, India, Indonesia and China.
Of course, as the list gets longer, the problems become more diverse in shape and form. I don't yet see, for instance, Russia or China in immediate danger, while Hungary, Latvia and the Ukraine certainly are.
Still, I also understand how fast events can take place, how rapid a banking system can be forced to its knees. There are gigantic amounts of debt that need to be rolled over and refinanced, and some of that simply won’t happen, while a lot of what will can only succeed at much higher interest rates.
For now, I hesitate to include countries like the US, the UK, Holland, Germany and France in my list, simply because there is so much wealth -old money- still left in these nations. But once more: once the equilibrium is far enough away, and oscillation takes over as the driving force, collapses can happen in a matter of days.
These rich nations have all thrown hundreds of billions of dollars at their banks, and if that doesn’t work, they are more or less staring at an empty toolbox. There will undoubtedly be additional rate cuts, but the last -global- one, two weeks ago, didn’t move anything or anyone; so why would it be different this time? If the same happens with the combined $3 trillion they have injected, then what? $30 trillion? No can do.
Holland today nationalized their last remaining bank, ING, for $14 billion (at least they cut all bonuses for managers). If I’m not mistaken, that means just about all commercial banks in the west are now state-owned. And that can have grave consequences: if the banks go belly-up, the taxpayer will have to cover their losses, an expense that will come on top of the bail-out costs.
For now, though, if I were a betting man, I would predict failures, state bankruptcies, in "lesser" nations. Pakistan counted on China for loans, and apparently the Chinese, after reviewing the books, have said "No way". Hungary obtained an $7 billion emergency loan from the EU, but it should be obvious that any country these days can burn through that sort of money in mere days. Just watch Iceland.
The US and EU might want to prop up the Ukraine, but they would insist on bringing it into NATO. Which is an absolute and total no-go for Russia. Then again, neither Kiev nor Brussels nor Washington wants a Moscow bail-out for the country. Financial check mate.
My litle betting man says perhaps Latvia is now the prime candidate to take the silver medal in bankruptcy behind Iceland.
There is a parallel thread developing throughout the western world, and likely beyond. All levels of government, from federal through states and provinces to communities, are invested in questionable banks and funds. And that will start to hit soon.
European lower-level authorities have billions of dollars invested in Iceland’s frozen banks, as well as Lehman subsidiaries and god knows what else. To date, all is quiet on that front, even though there’s no escaping the mighty rumblings beneath the surface.
Similarly, the state of California has better be praying with all its might; it will not survive much longer if the economy keeps tanking. A $20 billion deficit is looming, and it can’t even get the full first $7 billion in emergency funds. If -make that when- other states start announcing similar shortfalls, not the sky, but the bottom of the ocean is the limit.
A crude example of boon-doggled investments comes to light this weekend, and it will soon have many peers. LA County commuters will see services cut badly, because the transit agency has entered into lease-back deals through AIG, and must now pay up. 30 more transit agencies have done the same.
The global trickle down economy is soon coming to a town near you.
Which country will slither down the slippery slope next?
No country in the world remains unaffected by the Western banking crisis that has ensued. Even the most conservative, safe and responsible states are suffering a backlash.
Iceland, dubbed the biggest hedge fund in Europe as it rode the credit wave upon which we all surfed, is bankrupt. Its banks in crisis, the reverberations have been felt everywhere. Last week the contagion spread further. Financial institutions like the International Monetary Fund and the World Bank, along with domestic governments, have all forced to administer costly monetary sticking plasters to the world's financial institutions.
Estonia, Latvia and Lithuania
The Baltic states are in real trouble. With their public finances in disarray and growth rates rapidly slowing, many pundits are betting that one of these countries is likely to be the next state to suffer an Icelandic-style fate. Personal consumption, which once saw the capitals of these states littered with expensive cars, has slumped badly, due in part to a 40 per cent drop in property prices in Estonia, for example.
It's the first time that these former Soviet states have had to grapple with the problems of the bear economy and the portents at the moment don't look good. The latest crisis has shown the relative impotence of their administrations, with bigger Western European countries paying little attention to these marginal states. Agencies like Fitch have cut their ratings on these countries, making it more difficult for them to raise debt in the future.
The optimism of the Orange revolution that swept President Viktor Yushchenko to power in 2004 seems a distant memory. Ukraine, like Serbia, has been forced to go cap in hand to the IMF to borrow as much as $14bn to stave off a deepening of the financial crisis hitting the country. Like Hungary and other emerging economies, Ukraine's woes have come as foreign investors have pulled cash to place it perceived safer havens in the West.
Holders of the country's domestic currency, the hryvnia, which has lost a fifth of its value of late, have sought to switch to the US dollar. Like many of its neighbours, Ukraine is teetering on the edge of a bank catastrophe, while inflation in the former Soviet state is threatening to spiral out of control. The economic uncertainty is being played out against an increasingly fraught political backdrop, with President Yushchenko at war with Prime Minister Yulia Tymoshenko over early elections.
Kazakh President Nursultan Nazarbaev last month signalled his plans to dig the country out of the credit crunch by urging greater co-operation with Russia. Although he claimed that the country has financial reserves and oil growth – expected to reach 2.3 million barrels a day by 2015 – to survive the crisis, President Nazarbaev emphasised that future energy deals with Russia are vital for economic stability.
Last week he added that $50bn of financing for 45 major projects was secure, and that nearly $1.5bn had been raised to continue the government's housebuilding programme. The government also provides guarantees on savers' deposits of up to $41,700. Kazakhstan's central bank said that it would not allow any bank to default on foreign loans, including $15bn due for repayment next year. However, the Royal Bank of Canada ranked Kazakhstan as the joint second-riskiest country with Latvia, behind only Iceland. The government also had to help out its banks when they could not refinance $40bn of loans. Kazakh banks have watched their share prices tumble in recent weeks.
Last Wednesday Argentina's stock market fell by more than 12 per cent – its biggest one-day drop in a decade. What makes Argentina more vulnerable than most is that on top of the current crisis it still has to sort out problems going back to its 2002 debt default. "Holdout" banks including Barclays Capital and Deutsche Bank are still mulling a deal that could be scuppered by the current crisis.
Problems in the past also mean that Argentina will be heavily reliant on domestic sources of funding in the future. And it's a future that is looking increasingly vulnerable given the country's dependence on commodity exports, which are falling in price as global growth expectations recede. The country's president has put forward a protectionist plan to safeguard domestic firms against the vagaries of foreign competition and the financial crisis. It's unlikely to work.
Last Thursday, Europe's Central Bank took the highly unusual step of lending $5bn (£2.9bn) to Hungary's monetary authorities in an effort to kick- start the local debt market into life after it had ground to a halt. This was the first time the ECB had lent outside the eurozone. It did so because Hungary's banking system is in dire straits, with many predicting it will be the next Iceland. Rumours persist that the government will have to bail out the country's biggest bank, OTP.
Hungary's problems have come about because of the country's reliance on foreign exchange. For example, nearly 90 per cent of new household loans in Hungary during 2008 were made in foreign currencies, mainly in euros and Swiss francs. Its domestic currency, the forint, has plunged in value of late. The portents for Hungary don't look good. Standard & Poors, the ratings agency, is threatening to downgrade the country's debt rating, making it more expensive to raise money in the future. Hungary carries a very large current account deficit and a big external debt load. Growth prospects in the country are also grim.
Increasing prices in oil and gas have hit Turkey hard: its current account deficit for the first eight months of the year was 46.5 per cent up on the same period last year, reaching close to $35bn. Unemployment also rose to 9.4 per cent in August, though many economists think that figure underestimates joblessness in the country. The economy grew only 1.9 per cent in the second quarter – the poorest increase since the country's last recession in 2001 – and last week the Istanbul stock exchange fell to its lowest level in three years.
The country is not expected to fall into recession this time around. The International Monetary Fund (IMF) restructured the economy following the 2001 crisis and this should be sufficient to protect Turkey from another major downturn. However, the government is considering setting up a stand-by loan with the IMF, following a three-year $10bn facility that expired in May.
The economic crisis unfolding in Pakistan has spilled over into violence on the streets, with small investors in the domestic stock market having been wiped out. Last week angry protesters circled the Karachi exchange, stoning the borse and calling for more effective state action. Trading in the country has been curbed since restrictions were introduced in August. The government has promised to launch a fund to buy up ailing equities, although this has yet to materialise.
Panic is gripping the Russian economy. Nearly $1 trillion has been wiped off the value of listed companies in the country, while the stock market has regularly been suspended over the past few months. The government has already pumped more than $86bn into the country's financial system through short-term loans to banks. As with Ukraine, other forces beyond the credit crisis are at work too.
Russia's recent foray into Georgia spooked foreign investors, who pulled their cash out of the country in their droves. Institutional investment, on which Russian companies are so reliant for growth, has also dried up. Estimates suggest that more than $33bn worth of capital has fled the country in the past two months. The dwindling price of oil, which has halved in less than six months, and fears that global demand for the resource will tumble are also weighing hard on the country.
Last week the Brazilian stock exchange was suspended as equity values slumped by more than 10 per cent in a day. The value of the Brazilian real has also slumped against the US dollar in the recent crisis. Mining giant Vale and the state-controlled oil group Petrobras both shed more than 12 per cent of their value amid concerns that a protracted global economic slowdown would harm exports of Brazilian economies. And concerns about falling commodity demand could trigger further problems in Brazil – a country that has largely steered a safe course through the choppy waters of the crisis so far.
Korea's central bank will today unveil a package of measures to shore up the ailing economy. Confidence in the country is plummeting, with its stock market at a three-year low. The won, the Korean currency, is now at its weakest for 11 years. The regulator is under pressure to guarantee domestic deposits and bank debts in an effort to stave off mass outflows of capital abroad.
South Korea is also heavily reliant on funding from international lenders, with estimates suggesting that as much as 12 per cent comes from abroad. Another big worry for the Seoul administration is the extent of any slowdown in China's economy, which is one of South Korea's biggest export partners.
Last week Indonesia's authorities were forced to take up a $1.9bn loan from the World Bank to plug a hole in its finances. The country's stock market was recently suspended for three days amid concerns that the Bakrie conglomerate, one of Indonesia's biggest and most important companies, was set to go under. Indonesia recently introduced guarantees on bank deposits to stop a run on lenders. It also has one of the highest inflation rates in the Far East, with price growth in the country last month measured at more than 12 per cent.
Growth forecasts have been cut. The country's Economic Advisory Council estimates that gross domestic product will rise 7.7 per cent this fiscal year, which still sounds impressive until it is compared to the 9 per cent achieved in 2007-08. Industrial growth has been particularly hard hit, falling to a 10-year low of 1.3 per cent in August. Last year it was 10.9 per cent. The central bank has freed up more than $20bn to strengthen the country's struggling financial markets and has suggested that there could be further measures should stocks continue to fall.
The Santander banking group might have gobbled up Britain's Alliance & Leicester and the deposit book of Bradford & Bingley, but the company is atypical of an economy which is being propelled toward a deep recession. At the heart of Spain's problem is its property market. The boom times in Iberia have firmly ended, with defaults on property loans tripling in the past few months.
There are more than 800,000 properties in the country sitting unsold and that figure is expected to tip one million by the end of the year. Spain's 45 savings banks have arrears in excess of €25bn (around £20bn).
Last week Spanish authorities passed laws guaranteeing bank debt issued up to the end of next year, amid fears that the drying up of wholesale lending markets could worsen. The level of unemployment in Spain is one of the highest in the eurozone, while growth in the region is expected to slow to less than 1 per cent.
It might seem rather perverse to highlight China in a list of danger spots for the global economy, but comments last week from Tom Albanese, chief executive of mining giant Rio Tinto, that the People's Republic was "pausing for breath" sent shockwaves around the globe. The Chinese engine, for which other countries have provided the fuel for so long, is spluttering, with fears that it could grind to a halt much quicker than expected.
Latest growth estimates for the past year predict a fall to less than the double-digit numbers we've been used to. Coupled with that, Chinese officials are grappling with spiralling inflation, while fears are growing that domestic consumers won't be able to pick up the slack left by a fall in foreign demand. Last week Merrill Lynch's China chief said: "China is not big enough to pull other economies out of recession." True enough, but the ability of the Chinese economy to propel Western stock markets further into the mire shouldn't be underestimated.
Greed a deadly sin for the economy
On July 30 Hans Redeker, head of foreign exchange strategy at BNP Paribas, Europe's biggest investment bank, predicted: "The Aussie is going down, big time."
Back then - it already seems like a long time ago - the Australian dollar was sitting majestically at 97 cents to the US dollar, which was taking a battering. But the Aussie did, indeed, go down, big time. Within three months it had crashed by 33 per cent to US65.5 cents. Now Redeker has issued another warning to Australia. We'll get to that. But first, let's look at his track record.
December 2006: Redeker predicted a sharp recession in the United States, saying the condition of its housing market was worse than the experts were stating and the flow-on effects would be much worse than predicted. That was almost two years ago. He was right.
January 2008: He predicted the Aussie dollar was facing two years of decline, and expected to see it fall to 66 cents. He was right. He also predicted a rise in financial market volatility, higher inflation worldwide, higher interest rates in Asia, weakening demand for Australia's minerals exports from China, and a weaker sharemarket in China, all of which would drive down the Australian dollar. Since then, the Shanghai sharemarket has crashed 50 per cent from its peak.
October 2008: Two weeks ago Redeker repeated his claim that abundant foreign money had been available to Australia and too much of it had been spent on real estate, creating a speculative bubble: "The easy money went straight into real estate ?c Australia will now have to generate 4 per cent of GDP to meet payments to foreign holders of its assets. This is twice as high as the burden faced by the US."
After the Australian Reserve Bank slashed key interest rates by 1 per cent, Redeker also told London's Telegraph that he was concerned about what the Australian Government may do: "Yes, Australia has a fiscal surplus, but that does not offer as much protection as people think. If the Government boosts spending further, the current account deficit will spiral out of control."
And what has the Rudd Government just done? Boost spending.
There was certainly no discussion of the current account deficit spinning out of control, or Australia's excessive debt, when the Prime Minister, Kevin Rudd, launched his $10 billion economic stimulus package last week, nor any from the Opposition Leader, Malcolm Turnbull, who offered in-principle bipartisan support. It gets worse. Redeker continued: "There is a risk, however remote, that Australia could face some of the foreign funding difficulties we have seen in Iceland."
Iceland! Iceland was the most leveraged economy in the developed world when it became the first economy to be bankrupted by the credit crisis. You do not want to be mentioned in the same sentence as Iceland unless the discussion is fishing or blondes.
After quoting Redeker, the Telegraph's global business columnist, Ambrose Evans-Pritchard, weighed in with his own commentary: "The immediate problem for Australia's banks is that they gorged on offshore US dollar markets to fund expansion because the interest costs were lower. They were playing on a huge scale with leverage. European banks face much the same problem as dollar liabilities come back to haunt, but Australian lenders have pushed their luck even further."
Gabriel Stein, of Lombard Street Research, weighed in with this, after noting that Australian household debt had reached 177 per cent of gross domestic product, almost a world record: "It is amazing that in the midst of the biggest commodity boom ever seen they have still been unable to get a current account surplus. They have been living beyond their means for 10 years. What worries me is that productivity growth has been very low: they have been coasting after their reforms in the 1990s."
The global financial world is watching the Australian dollar because it holds a key to the great unanswered question of this uncertain era: will the global market punish a currency for its declining interest yield? Or will it reward a currency because of the soundness of its economy? Central banks are acutely interested in the answer.
Evans-Pritchard thinks the early signs are hopeful that the answer is the good one, that nations will be rewarded for having sound economies. But he does not believe Australia can escape the consequences of excess: "Australia has allowed its net foreign liabilities to reach 60 per cent of GDP during a decade-long boom, twice the level of the US. The country will, in effect, have to pay 4 per cent of GDP in the form of rents to foreign asset-holders as the bill for such extravagance falls due."
The bill is falling due. Earlier in the year Australians travelling in Europe would have paid about $1.50 for every euro spent. Today they need $2.10. The Aussie dollar is weak again, despite all the luck of the China boom. This raises a number of awkward questions. Did the lucky country became the greedy country? Did it fail to sufficiently embark on a program of nation-building during the resources boom?
Was most of the bonus redistributed as tax cuts, which were spent chasing bigger mortgages, bigger homes, new cars and general consumption, stimulating short-term economic growth but not enough on long-term productivity and higher savings? During 17 years of unbroken economic expansion and a 10-year commodities boom, it took a lot of people, borrowing a lot of money, taking a lot of unproductive risk, to get to where we are today: a nation with excessive debt and excessive vulnerability to external circumstances barely within our control.
British retailers fear worst Christmas for a generation
Homebase, Debenhams, Burton and DSG International, the electronics retailer, are all likely to show just how bad trading is on the high street when they report results this week. Analysts are now predicting the worst Christmas since the early 1980s as the public rein back spending as fears for job security grow.
Shares in DSG, which owns Currys, Dixons Online and PC World, crashed to 27p on Friday, a two-decade low, on fears that the retailer is at risk of breaching its banking covenants. The company is due to give a trading update on Thursday. Andrew Hughes, analyst for UBS, said on Friday: "We know its banking covenant is a fixed-charge cover on a revolving credit facility which it dips into around October." Mr Hughes said it is unlikely DSG will pay a dividend for the next two years.
John Baillie, Société Générale analyst, added: "It is all doom and gloom for DSG, whose falling share price reflects concern about its financial position. It has a poor balance sheet and cash flow, and is now a penny stock." According to Mr Baillie, the American electronics retail giant Best Buy will further damage DSG's sales when it enters the UK market with $1bn in disposable cash. "Best Buy represents a major medium-term threat and it has expressed its intention to be number one in the UK electronics retail."
Elsewhere on the high street, Debenhams, the second-biggest department store in the UK and part-owned by the troubled Icelandic Baugur group, has suffered a share price slump of 66 per cent to 31.75p over the year, although analysts expect it will reduce debt by £100m this year. Debenhams' like-for-like sales are down by 0.9 per cent, though that is better than rival M&S. Debenhams is likely to cut back its dividend as full-year profits, out on Tuesday, are expected to be down by 17 per cent.
The gloom comes after John Lewis reported last week that turnover at its 27 stores fell by 4.8 per cent week on week, while underlying sales at Waitrose were down by more than 3 per cent. Arcadia, the Topshop to Burton retail chain group owned by Sir Philip Green, is also expected to give a trading update this week. In another move, the sports retailer JJB, which announced a £10m loss in its half-year profits last month, has come under threat of a takeover by Sports Direct this weekend. Sports Direct bought 4.7 per cent of JJB shares after the markets closed on Friday and admitted it also owns 15 per cent of JJB through contracts for differences.
The Office for National Statistics has warned, ahead of its monthly report on Friday, that retail sales figures for September may not accurately reflect the state of UK high streets. So it will publish a margin of error in the figures. The warning is an admission that its retail sales data may not be a reliable guide to retail trends – something economists have long suspected. Moody's forecast of a 1.8 per cent year-on-year increase in sales for September is unlikely to show the real effects of market volatility and falling share prices on major brands.
Los Angeles County to cut commuter service as AIG deals go sour
The next potential victims of the nation's credit crunch: nearly 1.5 million people who ride buses and trains each weekday in Los Angeles County. Transit officials say riders could soon be facing serious service cuts. That's because the Los Angeles County Metropolitan Transportation Authority might have to quickly come up with hundreds of millions of dollars to pay investors under terms of deals it made involving American International Group, the troubled financial and insurance giant.
"I've lost a lot of sleep over this," said Terry Matsumoto, the chief financial service officer and treasurer for the MTA. He said it was "absolutely" certain the agency would have to cut service if the deals sour. The problem, Matsumoto said, could extend beyond the MTA to other large transit agencies that entered into similar deals between the late 1980s and 2003, when tax laws were changed to discourage such transactions. Among those is Metrolink.
The news comes at a tough time for the MTA. The agency recently lost $133 million in state funds, and declining sales tax revenues mean it will have less money to help keep its buses and trains rolling. Between the late 1980s and 2003, the MTA sold its rail equipment, more than 1,000 buses, a parking garage and maintenance facilities to investors that included Wells Fargo, Comerica and Phillip Morris in separate deals.
Lease-back deals are a common way to raise money in the corporate world. A manufacturer, for example, could sell its factory to investors and then lease it back. The manufacturer gets a large chunk of cash and the investors get a steady stream of lease payments as well as a tax break for their depreciating property. "It's a great way to get a shot in the arm in terms of cash without actually divesting yourself of your property," said Bill Holder, an accounting professor at USC.
Many of the nation's largest transit agencies participated in such deals. Among them are the San Francisco Muni system, the BART rail system in the Bay Area, the Chicago Transit Authority and the Washington, D.C., Metro system. Metrolink, the Southland's commuter rail agency, also sold most of its train cars and locomotives in four lease-back deals -- three of which involved AIG -- and made a $35.5-million profit as a result, said spokesman Francisco Oaxaca.
Metrolink, like the MTA, must now find another firm to replace AIG. "The potential is pretty horrendous across the industry," said James LaRusch, the chief counsel for the American Public Transportation Assn., a trade group for transit agencies. "It's typically going to impact the largest transit agencies," he said, "because they were the ones that had the kind of assets necessary to get into these kind of deals." LaRusch said about 30 of the largest transit agencies in the nation have some involvement in such deals.
"Any time you take money from the agency, you are going to cause a cutback in service," he said. In the case of the MTA deals, AIG provided $1 billion in loans to finance the transactions. The company, in return for fees paid by the transit agency, also guaranteed that the lease payments to investors would be made on time.
Things started to go downhill when AIG ran short of cash after running up billions in losses tied to the housing slump. Its credit ratings were slashed and the firm was on the verge of collapse last month when it was bailed out by the federal government. The lower credit ratings triggered a clause in the lease-back agreements that require the MTA to either find a new firm to guarantee the deals or reimburse investors for their down payments and lost tax benefits, a scenario that could cost the transit agency between $100 million and $300 million.
As a frame of reference, Matsumoto said that $100 million equals about 10% of the MTA's bus service. However, the MTA board has not yet discussed what cuts might be made. The MTA has not found a replacement for AIG, Matsumoto said. "With the current state of the markets, there are no people who are willing to provide a replacement for AIG at any price," Matsumoto said.
The agency has started talking to some investors in hopes of getting them to accept terms more favorable to the MTA, but Matsumoto said he doesn't know if investors are willing to renegotiate. Under a worst-case scenario, Matsumoto said, the bill could rise to $1.8 billion, more than half the MTA's annual budget for this year. "There is no practical way we could ever pay that back," he said.
The agency has met with congressional staffers and asked the U.S. Treasury Department for help, hoping to get a piece of the $700-billion bailout package recently approved by Congress. Some of that money is to be used to buy troubled assets. "They didn't tell us to go fly a kite; that's hopeful," Matsumoto said. "But I don't know how practical it is. We weren't talking to decision-makers."
MTA board member Richard Katz said: "The feds need to be concerned. If they bailed out the companies, they also need to bail out the public agencies impacted by the companies' actions." The credit crunch has eased a bit in recent days as interest rates for inter-bank loans have inched downward and short-term lending to corporations has picked up. But it's unlikely that conditions will improve fast enough to provide significant relief to the MTA.
Both Matsumoto and LaRusch said the Federal Transit Administration encouraged transit agencies to make lease-back deals as a way to make money. The MTA said it made about $65 million on the deals.
But an FTA spokesman disagreed. "FTA was not a cheerleader for these transit lease-back agreements," agency spokesman Dave Longo wrote in an e-mail. "We reviewed lease-back agreements submitted to us by transit agencies in terms of their compliance with federal transit law requirements. When we determined those agreements met the requirements, we approved them from that perspective."
Moscow supermarket shelves increasingly empty in Soviet era reminder
Russian shoppers have been served an uncomfortable reminder of the Soviet era after finding shelves in some Moscow supermarkets empty, a further sign that the woes of the financial markets have begun to affect the mainstream economy. For a generation of Russians who queued daily in the snow for the most basic of staples, the symbolism of a bare supermarket shelf is so powerful that it could potentially destroy the reputation of Vladimir Putin, the prime minister, as saviour of the world's largest country.
The shortages are not yet widespread. Even so, goods have begun to vanish from dozens of Moscow supermarkets over the past fortnight. At a branch of the supermarket chain Samokhval in southwestern Moscow, a handful of shoppers pushed their trolleys through empty rows of shelves that once groaned under the weight of imported wares. The deep freezes hummed, although there was nothing to freeze. Only a row of baked beans, a few jars of olives and sealed cupboards filled with vodka and cheap wine interrupted the void.
Unlike in the dying days of the Soviet Union, when the madcap policies of a bankrupt ideology inflicted deprivation across the country, today's shortages are very much rooted in modern Russia's enthusiastic embrace of capitalism. Samokhval, which has 60 outlets across the capital, is the victim of a credit crunch whose tentacles have spread to virtually all sectors of the Russian economy. With trust a commodity in short supply, distributors have been unwilling to refinance the chain's debts and have stopped supplying. Similar problems have affected Mosmart, which has 58 outlets and is also suffering from empty shelves.
The breadlines are unlikely to reform any time soon -- most supermarkets seem to be operating almost as normal -- yet such shortages seem extraordinary in a city that revels in its reputation as the world's most expensive. A consumer boom, built on runaway oil prices, has turned Russians into some of the world's most aggressive spenders. Yet the global financial crisis and investor jitters over Russia's increasingly aggressive foreign policy and its propensity to intervene in the private sector at the whim of the Kremlin have led to share prices tumbling.
The Moscow stock exchange's main indices lost over nine percent yesterday, and have fallen over two-thirds since touching all-time highs in May. So rapidly have events moved that many Russians are almost unaware of the meltdown. A government-ordered news blackout of the market's woes has helped perpetuate the ignorance, convincing many that it was only the West that was affected. Tabloids have run stories claiming that Britons are so short of cash they can no longer bury their dead. Despite the shortages, shoppers at Samokhval seemed either unconcerned or fatalistic.
"Life gets better, it gets worse," said Yevgenia Krasovskaya, a doctor. "Difficult times are followed by good times. Even if there is a little less now, what difference does it make so long as the basics are there? We've been through much worse than in the past." But Samokhval's checkout girls were more pessimistic. "We're worried," said Svetlana, who would not give her surname as her supervisor was lurking nearby. "The management tells us everything will be ok, but I don't believe it."
Putin May Use Credit Squeeze to 'Destroy' Oligarchs
Vladimir Putin came to power in 2000 vowing to destroy Russia's oligarchs "as a class." Within two years, he'd driven two into exile and imprisoned another. Now, he may use the global markets meltdown to finish the job.
The $50 billion that the prime minister and President Dmitry Medvedev have pledged to lend cash-strapped companies will extend state control over business leaders. Billionaires seeking bailouts -- including Oleg Deripaska, Russia's richest man, and Mikhail Fridman -- will have to give authorities veto power over their companies' financing decisions. "This will give the state more leverage over the country's biggest companies and main industries," said Chris Weafer, chief strategist at UralSib Financial Corp in Moscow. "In 2008, there is only one real oligarch: the state."
All this marks a reversal from a decade ago, when oligarchs bankrolled Boris Yeltsin's almost-insolvent government. As recently as April, Russia's 100 wealthiest citizens had a combined fortune equivalent to about a third of the economy, Forbes magazine estimated. The nation's 25 wealthiest businessmen have seen their worth shrink by $230 billion, or 62 percent, according to Bloomberg calculations. And Putin controls the strings on the biggest remaining purse -- $531 billion in government reserves, which he is doling out through state-run Vnesheconombank, or VEB, where he presides as chairman of the supervisory board.
The oligarchs made their fortunes in the 1990s, as the government moved corporate ownership into individuals' hands and state authority was weak. They subsequently loaned the government money to prop up Yeltsin in return for shares in choice assets, including OAO Norilsk Nickel, Russia's biggest mining company. Their support didn't prevent the government from defaulting in 1998 on $40 billion of domestic debt and devaluing the ruble.
Putin came to power as president less than two years later with the help of Boris Berezovsky, a businessman and politician in Yeltsin's inner circle who popularized the term "oligarch." Berezovsky's influence was chronicled in "Godfather of the Kremlin," by Paul Klebnikov, the Forbes Russia editor slain in 2004. A few months after taking office in July 2000, Putin told Mikhail Khodorkovsky, at the time Russia's richest man, and about two dozen other business leaders that their wealth was safe as long as they stayed out of politics and refrained from influencing national policy.
Berezovsky, now 62, became an early victim of Putin's anti- oligarch crusade. Berezovsky fled to London in 2001 in the face of Russian fraud charges he calls politically motivated. By the end of 2003, Putin had brought the nation's business leaders to heel. The most celebrated case involved Khodorkovsky. He was arrested and convicted of tax evasion and fraud. OAO Rosneft, the state-run oil company, took control of most of his OAO Yukos Oil Co., once Russia's biggest crude exporter.
The government now controls about 44 percent of oil production and all natural-gas exports. Khodorkovsky called the case against him retribution for political opposition to Putin, who denied that accusation. In the years that followed, the number of dollar billionaires swelled from a handful to more than 100, as prices for oil and other commodities surged to records and companies opened up ownership to passive foreign investors. Now, the tables have turned.
"The oligarchs are lobbying the government for access to state funds," said Alexander Lebedev, 49, a billionaire who owns 30 percent of state-run airline OAO Aeroflot. "It's not freely available to anyone who comes along." The attached strings are short. Central Bank First Deputy Chairman Alexei Ulyukayev said Oct. 1 that Vnesheconombank would gain the right to bar borrowers from seeking other loans "to avoid increasing the level of liabilities." The effect, according to Weafer: The state will "dictate" how companies invest and develop.
Vnesheconombank has received applications for more than $50 billion in loans, chairman Vladimir Dmitriev said on Oct. 13. The government has also pledged more than $13 billion to buy stocks and bonds through Vnesheconombank this year and next and $36 billion in emergency subordinated loans to other banks. State-owned companies and producers of oil, gas, metals and fertilizers will get most of the government money, said UniCredit SpA analysts Julia Bushueva and Elena Myazina in Moscow. Rosneft, chaired by Deputy Prime Minister Igor Sechin, may receive 47 percent of $9 billion in loans allocated to oil companies, the Kommersant newspaper reported Oct. 14.
With competition for government loans stiff, frozen credit markets also may force Russian companies to pay off creditors by selling assets to cash-rich investors, including the government, Bushueva and Myazina said. More than $363 billion of corporate and bank debt is due to be repaid by July 2009, a third to foreign banks, they said. Gazenergoprombank, a lender controlled by state-run Gazprom Group, said on Oct. 15 it will acquire all of Moscow-based Sobinbank. Vnesheconombank is in talks to buy Globex, a Russian bank that's having difficulties because of investments in real estate, Kommersant reported today.
Businesses caught in that potential credit squeeze include Deripaska's Basic Element, Fridman's Alfa Group, and Vladimir Yevtushenkov's AFK Sistema, Bushueva and Myazina said. Already this month, the value of Deripaska's stakes in Canadian auto-parts maker Magna International Inc. and German builder Hochtief AG sank so much that he ceded the shares to foreign banks that had accepted them as loan collateral.
The state's growing sway over oligarchs extends beyond how they run their businesses. Putin and other top officials met individually with about 50 of the country's wealthiest businessmen and ordered them "dump money into Russia's financial system" to prop up the sinking stock market, says a report by Stratfor, a U.S.-based risk advisory group. The initial injection of private funds, together with government measures sent the benchmark Micex Index almost 30 percent higher on Sept. 19 in a short-lived rally. Since then, the index has dropped 43 percent. "Going after their personal finances, especially money they hold abroad, is a whole new level of control," said Lauren Goodrich, a Stratfor analyst.
While the U.S. and European governments also are increasing oversight of their economies by buying stakes in financial institutions, growing state dominance in Russia threatens to increase corruption and reduce corporate disclosure, said James Beadle, chief investment strategist at Pilgrim Asset Management in Moscow. That view was echoed by Berezovsky, the businessman who fled to London. "This time, the corrupt bureaucrats will win," Berezovsky said.
Dutch prepare to pump $12 billion into ING
Dutch financial group ING is in talks with the Dutch government about a state-backed cash injection estimated to be worth up to 9 billion euros ($12.12 billion), the Sunday Times reported. The Netherlands' biggest listed bank, which said on Friday that it was about to announce its first-ever quarterly loss, is expected to announce a deal in the next 24 hours, the paper reported.
ING's Chief Executive Michel Tilmant was in talks with the Dutch central bank all day yesterday negotiating a deal, the Sunday Times said. Dutch public broadcaster NOS also reported that ING was working on a plan over the weekend to boost its capital position and that details could emerge on Sunday. ING declined to comment on the reports on Sunday. A spokesman for the firm said on Saturday that ING was considering several options to shore up its capital position, including taking government money.
As governments around the world have waded in with billions of dollars of state cash to help stabilize their banks, the Dutch government has set aside 20 billion euros to pump capital into its financial institutions.
ING said on Friday it expected to post a net loss of about 500 million euros ($674 million) for the third quarter, its first quarterly loss since the group was formed in 1991. That sent its shares to a 13-year low.
ING's results had initially proven to be more resilient through the credit crisis than many of its peers, such as Belgian-Dutch rival Fortis, which was broken up earlier this month, partly nationalized by the Dutch government and partly sold off to French rival BNP Paribas.
If ING were to make use of the Dutch government program, it would follow similar steps taken by several British and Swiss banks this week that also tapped emergency funding lifelines from their respective governments.
1 million barrel OPEC cut not enough
A crude oil production cut of even 1 million barrels per day at OPEC's upcoming emergency meeting is unlikely to reverse slumping prices in the short term, analysts said Sunday, amid mounting calls by several cartel members to take action to keep prices at the $80 per barrel level.
A decision by the Organization of Petroleum Exporting Countries to hold an emergency meeting next Friday clearly signaled the group's concern that the recent pummeling of crude prices would erode revenues needed to sustain government spending and weather broader fallout from the global financial crisis. The meeting had initially been moved up to mid-November, about a month earlier than scheduled, but was pushed to Friday as the oil price dropped below $70 per barrel.
Analysts said some key producers may be eying the meeting as the first step in reasserting control over the market, particularly as the cartel has argued that record rallies earlier this year were driven more by speculation than supply and demand. "What they really want to do is position themselves now in a situation where they can manage markets ... a lot more comfortably next year, and potentially for the recovery in 2010," said Raja Kiwan, a Dubai-based analyst with the Washington-based oil consultancy, PFC Energy.
Kiwan and other analysts expect the 13 member group, which produces about 40 percent of the world's crude, to slash production by at least 1 million barrels per day. OPEC is looking to buoy a market in which the price of a barrel of benchmark West Texas Intermediate crude has fallen about 50 percent from record highs of $147 in July on the New York Mercantile Exchange. Over a three day period last week, the November-delivery contract on the Nymex dropped $11 per barrel, rebounding slightly on Friday only on the back of OPEC's announcement of the emergency meeting.
But even that gain could be short lived, say some analysts, as the market factors in the anticipated cut ahead of the meeting. "In the very short-term ... OPEC will likely prove unable to significantly alter the prevailing market sentiment, particularly as crude traders look to equities as a barometer of global economic health (and hence oil demand)," said a recent PFC Energy report. That presents OPEC with a dilemma. If they announce too big a cut, they risk fueling the global financial crisis. But, cut too little, and $80 per barrel will be wishful thinking. Some OPEC officials have said prices closer to $100 per barrel are ideal.
"I don't think there's been this sense of urgency since the Asian financial crisis," said Kiwan, referring to the market collapse in Asia in the late 1990s. "I think those memories are still seared into the minds of (OPEC) ministers." Independent Kuwaiti oil analyst Kamel A. Al-Harami agrees. He argues that given such a delicate balancing act, disagreements are likely at the meeting between dovish Saudi Arabia and traditional price hawks like Iran. Even if the members agree on a production cut, 1 million barrels will not be enough and "there will be cheating on the quotas from day one," said Al-Harami, who served as former president of Q8, the retail arm of the Kuwait Petroleum Corp.
Al-Harami believes the group is being hasty in moving to cut production and believes they should hold off until at least the winter when demand for energy for heating picks up. But OPEC is making it clear that the time for waiting is over. Chakib Khelil, Algeria's oil minister and OPEC's current president, said Saturday that the cartel "is going to take the decision that favors keeping market prices stable." "There will be a reduction, and it is necessary that it's significant to establish balance between supply and demand," Khelil was quoted as saying by the country's APS news agency.
The stakes are high ? both for a meaningful production cut and for quota compliance, something on which OPEC has typically fared poorly. Over the past few weeks, the slide in prices has become more pronounced as the global financial crisis sapped demand for crude oil in the developed countries. The International Energy Agency, the U.S. Energy Information Administration and, most recently, OPEC have all lowered their forecasts for energy demand heading into next year. Such revisions, in tandem with the price drops, are particularly worrisome for some top producers like Iran ? the cartel's second largest crude exporter, which relies on oil revenue for about 80 percent of its government budget.
Iranian officials have repeatedly said crude at $100 seems fair. Others, including Qatar's oil minister and Venezuelan President Hugo Chavez, have pushed for levels closer to $80-90. Iran and Venezuela, in particular, have reason for concern because their production is heavier and more sulfurous and, as a result, sells at steep discounts to lighter crudes like the U.S. benchmark WTI. The OPEC basket, the weighted average of prices for crudes produced by OPEC countries, stood at $63 per barrel on Friday, according to Kiwan.
The Saudis have so far stayed quiet. But analysts said Riyadh is well aware that developing nations, in particular, will not be silent if presented with steep cuts that could undermine U.S. and European-led efforts to stave off a global recession and shore up financial markets. PFC Energy's Kiwan said while other cuts could follow the expected reduction of 1 million barrel per day, the immediate focus is on halting the price slide.
"One of the keys here is that OPEC is not judging its failure or success on the short-term," he said. "What it's hoping to do is provide fundamental support for recovery in the long-term," a plan which requires them to keep supplies tight going into next year. Ultimately, added Al-Harami, "the biggest player is Saudi, and what Saudi decides, the others have to follow."
Latin America feels the pinch of global economic crisis
The abrupt end of the worldwide commodities boom has stunned Latin American nations that had bet the farm on the idea that raw materials were a ticket to boundless prosperity in the globalized economy.
A galloping sense of insecurity has replaced the swaggering confidence that insatiable demand would keep prices up for products such as soybeans, copper, wheat and coffee. But commodities have tumbled in value in the wake of the financial meltdown. Some even fear that Latin America's most prolonged growth spurt in years could be over, ushering in an era of renewed austerity.
"We're sailing without a compass," said Nilson Wirth Monteiro, a consultant with Link Investments in Sao Paulo, Brazil, the epicenter of Latin America's largest economy. "There's no compass to indicate how commodities and global markets will behave." Leaders such as Brazilian President Luiz Inacio Lula da Silva initially boasted that their nations were inoculated against the "jazz effect" -- as Argentine President Cristina Fernandez de Kirchner mockingly dubbed the spreading crisis in an address at the United Nations.
But that early sense of insouciance has largely vanished. Credit has become extremely tight and earnings from commodity exports are tanking. Regional stock markets have followed Wall Street's nose-dive. Central banks from Mexico City to Santiago, Chile, have disbursed cash to bolster suddenly shaky currencies
Argentina, one of the world's leading producers of soybeans, corn and wheat, could lose as much as $6 billion next year in agricultural exports, according to one estimate. Many governments, including Brazil's, may have to rethink ambitious plans meant to improve infrastructure and reduce poverty.
"Latin American leaders have in a few days gone from preoccupation with the phenomenon happening elsewhere in the world to abject fear," noted the Washington-based Council on Hemispheric Affairs, in a report released Friday. "There is a growing nervousness that once again Latin America cannot escape the consequences of the globalized financial connections that run through the United States."
With prices down from record highs, alarmed farmers who covered vast tracts of pampas and rain forest in Brazil, Argentina, Paraguay and Bolivia with soybeans are wondering whether the boom has turned to bust. Anxiety has replaced the rural bluster. It has been a traumatic turn of events for an affluent rural class that had grown accustomed to reveling in soaring futures prices on their BlackBerries even as they navigated tractors through shimmering expanses of soybeans. "We don't know where we're headed," said Alejandro Giordani, a soy producer in Argentina's Santa Fe province. "We don't have any certainty about the price of soybeans, and that scares us, especially now in the planting season."
Commodities as diverse as beef from Argentina, iron ore from Brazil and zinc from Bolivia had reached new highs, sparked in part by sales to China and India. Now anxious producers cross their fingers in hope that the economic meltdown will not cause a free-fall in demand from Asia. "We know that millions of people will continue entering the formal economy in emerging economies like China and India," Giordani said. "That gives us some hope."
Some countries are clearly better prepared than others. Chile has socked away $20 billion in windfall export earnings from copper. Brazil has a highly diversified economy, with a huge domestic market and $200 billion in reserves. Countries such as Brazil and Argentina are much less intertwined with U.S. markets than Mexico and those of Central America, where U.S. trade and remittances from immigrants in the United States are economic pillars. Argentina's status as a chronic investment risk could actually work in its favor, because there is relatively little foreign money poised to flee.
"I think Argentina will be OK, as well as Brazil," said Mark Weisbrot, co-director of the Center for Economic and Policy Research in Washington, which released a study on the possible effects of a U.S. recession on Latin America that noted that in 2007 trade with the United States represented less than 2% of the gross national products of Argentina and Brazil. In contrast, U.S. trade in 2007 accounted for 21% of Mexico's gross domestic product, 15% of Venezuela's GDP (mostly from oil), and about 5% of the GDPs of Peru, Chile and Colombia.
"But," Weisbrot said, "everything depends on how badly the rich countries screw up and how much the world economy slows." The rampant uncertainty has put a halt, for now, to the prospect of unending good times through the exports of foodstuffs and minerals. "The mood is guarded, and there is a great apprehension in Brazil, just like in the United States, that the worst has yet to come," said David Fleischer, at the University of Brasilia. "Unfortunately, no one knows where the bottom of the barrel is yet."
Latin American nations edge away from U.S.
In a matter of weeks, a Russian naval squadron will arrive in the waters off Latin America for the first time since the Cold War. It is already getting a warm welcome from some in a region where the influence of the United States is in decline. "The U.S. Fourth Fleet can come to Latin America but a Russian fleet can't?" said Ecuador's president, Rafael Correa. "If you ask me, any country and any fleet that wants can visit us. We're a country of open doors."
The United States remains the strongest outside power in Latin America by most measures, including trade, military cooperation and the sheer size of its embassies. Yet U.S. clout in what it once considered its backyard has sunk to perhaps the lowest point in decades. As Washington turned its attention to the Middle East, Latin America swung to the left and other powers moved in.
The United States' financial crisis is not helping. Latin American countries forced by Washington to swallow painful austerity measures in the 1980s and 1990s are aghast at the U.S. failure to police its own markets. "We did our homework - and they didn't, they who've been telling us for three decades what to do," the man who presides over Latin America's largest economy, President Luiz Inacio Lula da Silva of Brazil, complained bitterly.
Latin America's more than 550 million people now "have every reason to view the U.S. as a banana republic," says analyst Michael Shifter of the Inter-American Dialogue think tank in Washington. "U.S. lectures to Latin Americans about excess greed and lack of accountability have long rung hollow, but today they sound even more ridiculous."
From 2002 through 2007, the U.S. image eroded in all six Latin American countries polled by the Pew organization, especially in Venezuela, Argentina and Bolivia. (The others were Brazil, Peru and Mexico.) People surveyed in 18 Latin American countries rated President Bush among the least-popular leaders in 2007, along with President Hugo Chavez of Venezuela and just ahead of basement-bound Fidel Castro of Cuba, according to the Latinobarometro group of Chile.
In three years of presidential elections ending last year, Latin Americans chose mostly leftist leaders, and only Colombia and El Salvador elected unalloyed pro-U.S. chief executives. In May, the prestigious U.S. Council on Foreign Relations declared the era of U.S. hegemony in the Americas over. And in September, Bolivia and Venezuela both expelled their U.S. ambassadors, accusing them of meddling.
Along with the loss in political standing has come a decline in economic power. U.S. direct investment in Latin America slid from 30 percent to 20 percent of the total from 1998 to 2007, according to the U.N. Economic Commission for Latin American and the Caribbean. The U.S. still does $560 billion in trade with Latin America, but in the meantime other countries are muscling in. China's trade with Latin America jumped from $10 billion in 2000 to $102.6 billion last year. In May, a state-owned Chinese company agreed to buy a Peruvian copper mine for $2.1 billion.
Other countries are also biting into U.S. military sales in the region. Boeing Co. is vying with finalists from France and Sweden for the sale of 36 jet fighters to Brazil. Venezuela's Chavez has committed to buying more than $4 billion in Russian arms, from Sukhoi jet fighters to Kalashnikov assault rifles. In April, Brazil and Russia agreed to jointly design top-line jet fighters and satellite-launch vehicles, and Brazil is getting technology from France to build a submarine. "Similar deals could have been made with the United States had it been willing to share its technology," said Geraldo Cavagnari, of the University of Campinas near Sao Paulo.
Last month, Russian Prime Minister Vladimir Putin offered to help Chavez develop nuclear power. Even Colombia, the staunchest U.S. ally in South America, isn't limiting its options. After expressing alarm about the Russian warships earlier this month, its defense minister, Juan Manuel Santos, promptly headed for Russia himself to discuss "better relations in defense." Chavez says he expects to hold joint Russian-Venezuelan naval exercises as early as November. Bolivia also is looking to deepen ties with Russia and Iran.
Although the Islamic republic's ambassador has yet to arrive in South America's poorest country, its top diplomat there announced recently that Iran will open two low-cost public health clinics. And while Bolivia's only announced Russian hardware purchase is five helicopters for civil defense, Moscow's ambassador told the Associated Press - after Bolivia booted the U.S. ambassador - that Russia has every right to help Latin American nations arm themselves. "We know of many historical cases of U.S. intervention in Latin American countries," said the diplomat, Leonid Golubev.
Thomas Shannon, U.S. assistant secretary of State for the hemisphere, wouldn't comment directly on whether the U.S. has lost influence in Latin America. But he added that there is no doubt that the U.S. still holds most of the military power in the Caribbean, and said it has no interest in reviving "Cold War rhetoric." Shannon also noted that overall U.S. aid to the region will reach $2.2 billion for 2009, to total more than $14 billion during Bush's presidency.
However, critics point out that roughly half that aid is for the military or counternarcotics, and that Washington sends more money annually to Israel alone. Even U.S. giving has been dwarfed by Chavez's checkbook diplomacy, which easily eclipses U.S. aid between outright gifts and discounted oil. His largesse has lured several longtime U.S. friends. Honduras' president, Manuel Zelaya, said last month that after pleading with Washington and the World Bank, he accepted $300 million a year from Chavez for agricultural investment to help fight rising food prices. "Allies, friends, did not help me when I asked," he said.
Costa Rica's president, Oscar Arias, says Venezuela offers Latin America about four or five times as much money as the United States. Costa Rica has become the 19th member of Petrocaribe, through which Chavez sells Caribbean and Central American nations cut-rate oil at very low interest. The diminished profile of the U.S. in Latin America comes after a history of welcomed influence dating back to President Franklin Roosevelt's "Good Neighbor" policy of the 1930s, which emphasized cooperation and trade over military intervention.
There have been major bailouts, such as Washington's $20 billion rescue of Mexico in the 1994 peso devaluation crisis. As former Assistant Secretary of State Otto Reich noted, "We are the assistance bureau of first choice for the region." But the U.S. has an ugly legacy of covert intervention in countries including Chile, Nicaragua, Guatemala and Cuba. Chile's center-left president, Michele Bachelet, was jailed and tortured by a U.S.-backed military dictatorship in the 1970s. She recently recalled telling Washington's ambassador to Chile an old joke: "Some say the only reason there's never been a coup in the United States is because there's no U.S. Embassy in the United States."
The United States has also long served as chief educator to Latin America's elite. Correa is among its presidents with a U.S. graduate degree - though that didn't stop him from accusing the CIA of infiltrating his military, or refusing to renew a lease for U.S. counterdrug missions to fly out of Ecuador. With the U.S. facing its own financial crisis, it's unlikely to be able to leverage economic influence in Latin America anytime soon. Sen. Barack Obama's senior adviser on Latin America, Dan Restrepo, acknowledges that his candidate is essentially proposing a symbolic shift in style - albeit adding a special White House envoy for the Americas.
"Barack doesn't see the United States as the savior of the Americas, but as a constructive partner," Restrepo told the AP. Reich, an adviser to Sen. John McCain who served three Republican presidents in the region, put it even more bluntly. "No matter who is elected in November, there is not going to be any money for Latin America," he said. "Latin Americans expecting financial resources, any kind of help from the United States, they are barking up the wrong tree."
Rebuffed by China, Pakistan May Seek I.M.F. Aid
President Asif Ali Zardari returned from China late Friday without a commitment for cash needed to shore up Pakistan’s crumbling economy, leaving him with the politically unpopular prospect of having to ask the International Monetary Fund for help.
Pakistan was seeking the aid from China, an important ally, as it faces the possibility of defaulting on its current account payments. With the United States and other nations preoccupied by a financial crisis, and Saudi Arabia, another traditional ally, refusing to offer concessions on oil, China was seen as the last port of call before the I.M.F. Accepting a rescue package from the fund would be seen as humiliating for Mr. Zardari’s government, which took office this year.
An I.M.F.-backed plan would require Pakistan’s government to cut spending and raise taxes, among other measures, which could hurt the poor, officials said. The Bush administration is concerned that Pakistan’s economic meltdown will provide an opportunity for Islamic militants to capitalize on rising poverty and frustration. The Pakistanis have not been shy about exploiting the terrorist threat to try to win financial support, a senior official at the I.M.F. said.
But because of the dire global financial situation, and the reluctance of donor nations to provide money without strict economic reforms by Pakistan, the terrorist argument has not been fully persuasive, he said. “A selling point to us even has been, if the economy really collapses this is going to mean civil strife, and strikes, and put the war on terror in jeopardy,” said the official, who declined to be identified because he was not authorized to speak to the news media. “They are saying, ‘We are a strategic country, the world needs to come to our aid,’ ” he said.
Pakistani officials said they had received promises from the Chinese to help build two nuclear power plants, and pledges for business investment in the coming year. But Pakistan had also hoped China would deposit $1.5 billion to $3 billion in its central bank, according to senior officials at the I.M.F. and Western donor countries. The infusion of cash would have helped with payments for oil and food as currency reserves dwindle, officials said.
Shaukat Tareen, the new Pakistani financial adviser who accompanied Mr. Zardari to China, began to prepare the public for an I.M.F. program on Saturday, saying for the first time at a news conference that if Pakistan could not stabilize its economy within 30 days, it “can go to the I.M.F. as a backup.” “We may have to go to Plan B,” he said.
Economic hardship has been mounting across Pakistan for several months. Electricity shortages have become so dire that even middle-class families in big cities have to ration supply, with power cuts for 12 of every 24 hours, with one hour on, and one hour off. Food prices have soared, making some basics, even flour, too expensive for the poorest to afford. No large-scale riots have occurred, but concern is mounting that such protests are not far off. The new government has reduced subsidies on fuel and food, and the central bank moved on Friday to ease an intrabank liquidity crisis.
In addition, new rules were imposed several weeks ago on the Karachi stock exchange to stop sell-offs. But none of those steps have stanched the crisis in confidence. The central bank’s currency reserves have dipped to $4 billion, enough to cover payments for oil and other imports for about two months. As it became clear over the past two days that the Chinese were not going to provide a cushion for Pakistan, the rupee slumped to a record low.
The thin results from the China trip were of little surprise to Western donors. Asked about the likelihood of Pakistan winning the direct cash infusion it was seeking, a senior Chinese diplomat was reported by Western officials to have said, “We have done our due diligence, and it isn’t happening.” “What we needed is $3-to-$4 billion,” said Sakib Sherani, a member of the government’s economic advisory panel and chief economist at ABN Amro Bank in Pakistan. That amount was necessary “to build confidence,” he said.
The central bank governor, Shamshad Akhtar, said in a telephone interview on Saturday, “We are very open to all kinds of financial support.” She added, “We’ve taken a lot of corrective actions, and we plan to take more.” But Zubair Khan, a former commerce minister and a critic of the government’s economic management, said confidence would improve once Pakistan arranged an I.M.F. rescue package. Mr. Khan said that the alternative would be the imposition of controls on imports and capital flows that could do long-term harm to the economy.
Meanwhile, the American financial crisis is also expected to hurt ordinary Pakistanis. Remittances from Pakistanis living abroad to their relatives in Pakistan were expected to be about $7 billion this year, about $3 billion of that from Pakistanis living in the United States. But those remittances are likely to dwindle, affecting real estate values in Pakistani cities and families who live in poorer rural areas.
Mr. Zardari had approached the China trip with considerable fanfare, saying he was looking forward to visiting a country that had enjoyed a warm relationship with Pakistan, particularly during the rule of his father-in-law, Zulfikar Ali Bhutto. His visit to Beijing followed a trip there by the chief of the army, Gen. Parvez Kayani, and came at a time when the relationship between Washington and Pakistan was strained over how to deal with the escalating threat from the Taliban and Al Qaeda.
Javed Burki, a former Pakistani finance minister, said China had provided $500 million in balance-of-payments support in 1996, when Pakistan was on the brink of default. He had flown to Beijing to ask for the money and his request was fulfilled. But those days are over, he said, because China is no longer inclined to grant cash outright without structural reforms from the receiving government, he said.
Sarkozy, Bush Call for Series of Summits on Financial Crisis
The leaders of the U.S., France and the European Commission will ask other world leaders to join in a series of summits on the global financial crisis beginning in the U.S. soon after the Nov. 4 presidential election. President George W. Bush, French President Nicolas Sarkozy and European Commission President Jose Barroso said in a joint statement after meeting yesterday that they will continue pressing for coordination to address "the challenges facing the global economy."
The initial summit will seek "agreement on principles of reform needed to avoid a repetition and assure global prosperity in the future," and later meetings "would be designed to implement agreement on specific steps to be taken to meet those principles," the statement said. European leaders have pressed to convene an emergency meeting of the world's richest nations, known as the Group of Eight, joined by others such as India and China, to overhaul the world's financial regulatory systems. The meetings are to include developed economies as well as developing nations.
"The first task is to stabilize the financial markets in our own countries," Bush said in welcoming Sarkozy and Barroso to the Camp David presidential retreat in rural Maryland. "Given that the world has never been more interconnected, it is essential that we work together because we're in this crisis together." He stressed that any steps to prevent future crises must maintain and strengthen the free-market system. "It is essential we preserve the foundations of democratic capitalism," Bush said.
Sarkozy and Barraso are pressing Bush for a G8 agenda that includes stiffer regulation and supervision for cross-border banks, a global "early warning" system and an overhaul of the International Monetary Fund. Talks may also encompass tougher regulations on hedge funds, new rules for credit-rating companies, limits on executive pay and changing the treatment of tax havens such as the Cayman Islands and Monaco.
Sarkozy and Barroso, in separate statements, welcomed Bush's offer to host the first summit. "We want to work hand in hand with the Americans to create the capitalism of the 21st century," Sarkozy said. "The meeting should be held rapidly, perhaps before the end of November. Since the crisis started in New York, maybe we can find the solution in New York." Barroso said an "unprecedented level of global coordination" is needed to address market instability. "The international financial system -- its basic principles and regulations and its institutions need reform. We need a new global financial order," he said.
U.S. Treasury Secretary Henry Paulson and French Finance Minister Christine Lagarde also attended tonight's meeting at Camp David. United Nations Secretary-General Ban Ki-moon today offered to host a summit at UN headquarters in New York City by early December. The leaders decided to pursue a series of summits because the task was too ambitious to be dealt with in a single meeting, White House spokesman Tony Fratto told reporters later.
It was "a reasonable expectation" that the first summit would be scheduled for November though "not necessarily" in New York, he said. Fratto didn't name a location and said there are numerous logistics hurdles in bringing together "a large number of countries in a very short time." He said it was "premature" to say whether a second summit would be held before Bush left office in three months.
British Prime Minister Gordon Brown is pushing for greater cross-border oversight of the global financial system. He has said each of the world's top 30 banks should be under the supervision of a panel of regulators from the countries where those institutions do business. "The reform of the international financial system is not only necessary to prevent a crisis happening again, it is essential to end the current crisis," Brown said on Oct. 16.
Bush, 62, has cautioned that any revamping must not restrict the flow of trade and investment or set a path toward protectionism. The G8 nations are Britain, Canada, France, Germany, Italy, Japan, Russia and the United States. The U.S. hasn't committed itself to the sweeping terms of Europe's agenda, White House press secretary Dana Perino said yesterday. "There are other countries that are going to have ideas, as well," she said.
Hong Kong Finance Chief Warns of More Challenges
Hong Kong Financial Secretary John Tsang warned of further economic challenges ahead for the city amid global financial turmoil, company closures and investment losses. "The financial crisis will have a considerable economic impact on the economy, and people in Hong Kong should be ready for the challenges," he told reporters today after officiating at a ceremony. "Still, Hong Kong's fundamentals and its system are healthy and our economy remains very strong."
Tsang's comments came after three Hong Kong retailers and a toymaker collapsed within two weeks and as tightened credit conditions make it more difficult for smaller companies to refinance debt. Hundreds of Hong Kong investors protested in the streets last week over losses on so-called minibonds guaranteed by bankrupt Lehman Brothers Holdings Inc.
"We expect Hong Kong's economic activity will be very slow but still outperform other counties in Asia in the next six months," said Kenny Tang, director of Tung Tai Securities Co. in Hong Kong. "China will contribute to Hong Kong's meager growth looking forward, and the city still has a solid financial basis, backed by its strong reserves and lack of foreign debt." Tai Lin Radio Service Ltd., a 60-year-old Hong Kong electrical appliance retail chain, was forced to close yesterday after accumulating HK$100 million ($13 million) debt.
U-Right International Holdings Ltd., operator of about 600 clothing outlets in the city and in China, had funds frozen after it was unable to meet a demand to pay HK$850 million of debt. Hong Kong's High Court on Oct. 6 appointed Deloitte Touche Tohmatsu as liquidator of the Hong Kong-listed company. Smart Union Group Holdings Ltd., a Hong Kong-listed contract toymaker, said yesterday the city's High Court appointed two liquidators to take control of its assets. The company closed two factories in China's Guangdong province, Shanghai-based National Business Daily reported.
"The retail industry is definitely one that will be severely affected by the ongoing crisis," Tsang said. "The health of small-to-medium-sized enterprises in Hong Kong is very important to us." The Hong Kong Association of Banks, which includes HSBC Holdings Inc. and BOC Hong Kong (Holdings) Ltd., agreed yesterday to a government plan to buy back Lehman's minibonds at market prices, after consumer allegations that sellers misrepresented the risks involved in the securities.
The Hong Kong Monetary Authority, the city's de facto central bank, said yesterday it referred to the Securities and Futures Commission 24 cases related to sales of the Lehman- guaranteed products. "We're very happy about the banks accepting our buyback suggestion," Tsang said today. "We will continue investigating some of the false-selling cases and establish a mechanism to facilitate dispute settlements between the banks and the investors."
South Korea Backs $100 Billion in Debt to Calm Markets
South Korea will guarantee $100 billion in bank debts and supply lenders with $30 billion in dollars to stabilize its financial markets. The government will provide tax benefits for long-term equity and bond investors, while the Bank of Korea will buy repurchasing agreements and government bonds to boost won liquidity, the heads of the finance ministry, central bank and financial regulator said in a statement from Seoul. Policy makers held an emergency meeting on Oct. 17 to hammer out the plan.
South Korea is struggling with Asia's worst-performing currency, a shortage of U.S. dollars and a stock market that has lost 38 percent this year. The guarantee on bank debts comes after Standard & Poor's said last week it may cut the credit ratings of the nation's largest lenders, which triggered the worst plunge in the won since the International Monetary Fund bailed the nation out in December 1997.
"They have to do that because the market was pushing them by attacking the Korean won," said V. Anantha-Nageswaran, chief investment officer for Asia Pacific at Bank Julius Baer (Singapore) Ltd., part of Switzerland's biggest independent money manager for the wealthy. "They know what the stakes are. The currency could completely careen out of proportion."
The government and state-run lenders including Korea Development Bank will guarantee as much as $100 billion of external debt taken up by Korean banks from Oct. 20 to June 30 next year, according to today's statement. The guarantee is valid for three years. South Korea joins countries in Europe, along with Hong Kong and Australia, in providing state backing to banks to help fund lending amid a global financial crisis.
"We will take similar measures to avoid placing domestic banks at a comparative disadvantage in terms of overseas funding and to allay fears in the financial market," Finance Minister Kang Man Soo told reporters in Seoul, at a press briefing with central bank Governor Lee Seong Tae and Jun Kwang Woo, head of the Financial Services Commission. S&P, in a report released Oct. 15, said South Korea's banks face a more than 50 percent chance the credit crunch could threaten their foreign-currency funding. Domestic lenders have $235.3 billion of foreign-currency liabilities, with about $32.7 billion due to mature in the fourth quarter, according to the Financial Supervisory Service.
"Korea is one of the few banking systems in Asia where domestic deposits are insufficient to fund loans," Moody's Investors Service said in an Oct. 16 report. That's forced them to rely on the wholesale market for about 44 percent of their total funding, with international markets accounting for as much as 12 percent, the ratings company said. Policy makers decided that a recapitalization of the nation's financial institutions or an expansion of deposit guarantees are "not necessary." Still, the government will "take proper actions" should the need arise, according to the statement.
To boost the supply of U.S. dollars in the domestic market, South Korea will provide the banking industry with $30 billion from its foreign-exchange reserves, according to the statement. The government had already promised to supply a total of $15 billion to small firms and the swap market, while the Bank of Korea said on Oct. 17 it will change rules in the foreign- exchange swap market to increase banks' access to funds.
The U.S. financial crisis is making it more difficult for companies worldwide to secure dollars as banks hoard cash to meet their future funding needs. South Korea's currency and swap markets are experiencing a dollar shortage as local businesses, which expect the U.S. currency to strengthen against the won, don't want to sell their dollars yet. "Providing dollar liquidity will stop the vicious circle of a shortage of dollars in banks and firms leading to a weaker won," said Lim Jiwon, a senior economist at JPMorgan Chase & Co. in Seoul.
Authorities will continue "smoothing" operations in the currency market to avoid "extreme volatilities," the statement said. To encourage long-term investing, the government will give tax benefits to investors who hold equity or corporate-bond funds for more than three years, today's statement said. The breaks include an exemption from taxes on dividends. South Korea's benchmark Kospi stock index has lost 38 percent this year, heading for its first annual decline since 2002. The measure plunged 9.4 percent on Oct. 16, the biggest one-day fall since September 2001.
South Korea will inject 1 trillion won ($767 million) in Industrial Bank of Korea, the nation's biggest lender to small- and mid-sized businesses, by transferring its equity stakes in the state companies. "The government has done what it can do at the moment to join global efforts to help stabilize the markets," said Seo Chul Soo, a fixed-income analyst at Daewoo Securities Co. in Seoul. "More steps may be needed if the global markets remain unstable."
Mark-to-market battle far from finished
The Financial Accounting Standards Board's final guidance on fair-value accounting released earlier this month won't end the heated debate surrounding the issue. The American Bankers Association is currently the leading critic, saying that fair value has exaggerated losses at financial institutions. On the other side, organizations such as the CFA Institute continue to argue such accounting provides investors with much-needed insight into valuing the assets of financial institutions.
ABA president and CEO Edward Yingling sent a letter to Securities and Exchange Commission chairman Christopher Cox last week asking the SEC “to use its statutory authority to step in and override the guidance issued by FASB.” The SEC had no comment in response to the letter but is currently working on a study looking at the effects of fair value, or mark-to-market, accounting on recent banks' failures as well as potential alternatives to the practice. That study, which was demanded by Congress as part of its $700 billion bailout legislation earlier this month, is due Jan. 2.
The Center for Audit Quality also wrote a letter to the SEC last week. In it, Cindy Fornelli, Executive Director of CAQ, expressed concern that the suspension of fair value isn't in the public interest. “For now, rather than use the power the SEC was granted to suspend FAS 157 [on fair value accounting], the organizations have continued to offer guidance in the changing market and provide clarification to reporting entities struggling to implement it,” said law firm Morrison & Foerster in a report last week. “Until the SEC releases its report in January 2009, fair-value measurements likely will remain a topic of discussion for those in the financial and accounting industries.”
In its new guidance, FASB issued an example of how to value securities in inactive markets and reminded preparers of financial statements that they needn't depend on market prices if they are deemed to be what an asset would fetch in a “distressed” sale or “forced liquidation.” Instead, they should merely take those prices into account along with what their internal models would suggest the price should be in normal markets. FASB went so far as to say that it is not appropriate to automatically conclude that any transaction price in times of market dislocation reflects fair value.
However, the board also stated that even in times of market dislocation, it isn't appropriate to conclude that all market activity represents forced liquidation or distressed sales. “What the FASB staff position does is clarify what was meant by the terms of FAS 157 with an overriding theme of "there are not hard and fast rules, you should use your judgment and be prepared to justify its use upon inquiry,'” Christopher Wright, managing director at Protiviti, said in an e-mail to Financial Week.
The ABA believes that FASB is refusing to recognize the realities of the current situation. The ABA asked the SEC to override the new guidance on fair value and replace it with guidance that clarifies that fair value in an illiquid market does not include forced or distressed sales at all, so banks could ignore those prices and rely exclusively on their internal models.
The ABA also asked FASB to provide guidance on “other than temporary impairment.” When a company decides to hold a security to maturity, it typically carries it at cost. But when the security has been impaired for longer than a temporary period, the company has to mark it to fair value. It's a principles-based standard within U.S. generally accepted accounting principles, the application of which requires a great degree of judgment.
“Determining whether impairment is other than temporary often requires the exercise of reasonable judgment based upon the specific facts and circumstances of each investment,” the SEC and FASB said in their clarifications on fair value released on Sept. 30. U.S. GAAP doesn't provide bright lines or safe harbors in making that judgment, they said, but added that rules of thumb that consider the nature of the underlying investment can be useful tools.
The regulators also noted that the greater an asset's decline in value, the greater the period of time until its recovery can be anticipated, and the longer that decline persists, the less evidence necessary to conclude that something other than a temporary decline has occurred. And because fair value measurements and the assessment of impairment may require significant judgments, “clear and transparent disclosures are critical to providing investors with an understanding of the judgments made by management,” the regulators said.
The ABA wasn't available for comment, but said in its letter that issues such as providing guidance on “other than temporary impairment” in an illiquid market need to be resolved so they can be implemented for third-quarter reporting. Several accounting experts have said third-quarter earnings may improve, thanks to the SEC and FASB allowing the use of internal inputs to value securities.
In a report published last week, Joyce Joseph-Bell, an analyst at Standard & Poor's, said there might be a short-term earnings boost through a mark-up for some previously written-down assets, “as values are based in greater use of intrinsic valuation assumptions.” That still may not be enough for financial institutions. The ABA also asked the SEC to temporarily suspend work by standard-setters on projects that would require fair value in any future standards.
Layoffs spreading across corporate America
Shock waves from the global financial crisis are now being felt in almost every corner of working America as companies press the eject button on increasing numbers of employees. While the ax has been falling for months in the financial and home-building industries -- where the current economic downturn started -- as well as the Detroit auto industry, makers of everything from soft drinks to water filtration systems have unveiled hefty rounds of job cuts in recent weeks as they brace for what some predict could become a long and deep recession.
In the past week alone, companies including PepsiCo Inc and Danaher Corp said they would lay off thousands of workers, while the state of Massachusetts disclosed plans to cut its payroll by 1,000 as it faces a tax shortfall. The situation is poised to worsen as the holidays approach and many businesses scrutinize budgets for the coming year. The sad truth is that Christmas layoffs are common in tough times.
"It's a fairly grim outlook," said Michael Goodman, director of economic and public policy research at the Donahue Institute of the University of Massachusetts. "I don't know of any sector of the economy that will be spared."
A four-week moving average of new U.S. government jobless claims last week hit its highest point in seven years. Ed Yardeni, chief investment strategist for Yardeni Research, is hoping that the U.S. government's $700 billion bailout package will slow the job cuts. "If this rescue plan doesn't work, then... you could see something much worse that could feel like a recession or a depression, with all sorts of people losing jobs," Yardeni said.
A survey of more than 100 chief financial officers and other senior executives -- conducted Wednesday -- found 56 percent expect to reduce payrolls over the coming year. A majority polled by CFO Magazine also predicted falling revenues and plan to cut operating costs by at least 5 percent.
Workers are scared. Some 47 percent polled last month by Workplace Options said news of the financial crisis made them fearful about job security, and 25 percent said they had begun scanning help-wanted ads or updating their resumes. "I'm being more conservative about spending -- I'm concerned," said Donald Gaunt, a 52-year-old construction worker from Smithville, Rhode Island, who said he has enough work to last through the end of this year but wasn't sure about 2009. "It hasn't been this bad since the early 1980s."
Workers in the financial sector, as well as those involved in home building and at the struggling Detroit automakers, have already been hit by round after round of layoffs. The failure of investment banks Lehman Brothers Holdings Inc and Bear Stearns Cos resulted in tens of thousands of people losing their jobs, but even banks that have survived the crisis, including Bank of America Corp and Citigroup, have cut head count dramatically.
General Motors Corp said this week that it would close plants in Michigan, Wisconsin and Delaware and cut more than 4,000 jobs. The cuts are spreading into other sectors:
- PepsiCo on Tuesday said it would cut 3,300 jobs, almost 2 percent of its work force, in a bid to cut costs.
- Danaher, which also makes Craftsman tools, said on Thursday it would lay off 1,000 workers and close 12 plants.
- Rockwell Automation Inc said it would lay off about 3 percent of its staff, or 600 people. That news came on September 30, the last day of the U.S. manufacturer's fiscal year.
- Textron Inc, the world's largest maker of corporate jets, said an unspecified number of jobs would be cut as it scales back its financial operation.
- Leggett & Platt Inc, which makes bed springs and store shelving, said it was cutting back hours at some factories and, in the words of Chief Executive Dave Haffner, "must move to reduce staff. We are already doing so." It did not disclose the number of jobs it plans to eliminate.
Temporary employment may also prove harder to find. Consumer electronics retailer Best Buy Co, which normally bulks up staffing in the holiday season, plans to cut seasonal hiring by as many as 10,000 workers this year after hiring about 26,000 in 2007.
"When we see job losses and rising unemployment, this does not just affect those who lost their job," said Lawrence Mishel, president of the partly labor-funded Economic Policy Institute think tank. "Wages grow more slowly when there's higher unemployment, so the downturn will be affecting most working families through reduced hours of work," said Mishel. "This is not something that affects a small part of the workforce."
With the pace of layoffs picking up, the cycle becomes a vicious one, pressuring consumer spending and hurting home values yet again. "As people lose their jobs, they cut back on their consumption, and people are less able to afford their mortgages, which are already strained," said Ron Blackwell, chief economist at the AFL-CIO, the largest U.S. labor federation. "And so people lose their houses, which continues to aggravate the financial problems. So it's reinforcing in that way and it's also spreading.
"This recession -- and I didn't see it this way a month ago -- is going to be global in scope," Blackwell said.
California Saved by Mom&Pop as Borrowing Rates 'Choke' Issuers
California, the biggest U.S. state borrower, raised $5 billion to avert a cash shortage by turning to the bedrock of the municipal bond market: its own taxpayers. California, a bellwether for state and local government debt, was able to boost its offering of short-term notes this week by 25 percent from $4 billion after a marketing campaign targeting individuals helped draw more than $3.9 billion of orders, an all-time high.
"Mom and Pop really came through," said Tom Dresslar, spokesman for California Treasurer Bill Lockyer in Sacramento. Demand from individuals helped California avoid asking for emergency help from the federal government, a prospect Governor Arnold Schwarzenegger said may be needed as the credit crisis gripping the world economy deepens. It also left the state less dependent on the Wall Street firms, hedge funds and other institutions that have retreated from the $2.66 trillion market, underscoring the growing importance of individual investors.
Households increased their municipal holdings to $912 billion at mid-year from $900.4 billion in the first quarter, according to the most recent Federal Reserve data. That gives them 34.3 percent of the market, making them the largest single group of investors. The interest by individuals contrasts with waning demand from institutional investors and decreased support from banks and securities firms beset by $660.8 billion in writedowns and credit-market losses since the start of 2007, according to data compiled by Bloomberg.
Municipal borrowers from Hawaii to Maine pulled more than 200 debt offerings totaling at least $14 billion since mid- September, when Lehman Brothers Holdings Inc. filed its record bankruptcy, Bloomberg data show. "The market's been virtually frozen," said David Joyner, head of the North Carolina Turnpike Authority in Raleigh, which shelved plans to raise $600 million to begin work on a toll road. "The cost of capital is beyond what we can afford at the moment."
Individuals are attracted to tax-exempt yields that rose to 6.01 percent this week on 20-year general obligation bonds, the highest since 2000, based on the weekly Bond Buyer 20 index. The yield is a record 1.77 percentage points more than Treasuries, compared with an average 0.67 percentage point less during the past two decades. "This is viewed as a historic opportunity for the individual investor," said Joe Darcy, who manages $5 billion in municipal bonds for Dreyfus Corp. in New York.
Individuals, known as retail buyers, also purchased almost four out of every five bonds that New York sold this week, according to a release from the city. The most populous U.S. city more than doubled the deal to $550 million after orders exceeded the amount of bonds available. Michael Bloomberg, New York's mayor, is founder and majority owner of Bloomberg News parent Bloomberg LP. Demand from retail investors helped Sarasota County sell $74 million of revenue bonds in September, said Richard Gleitsman, a debt service manager for the county.
"We sold 86 percent of those to retail," Gleitsman said in an interview. "There's still a market for retail sales because people are looking to park in high quality debt." California, seeking to lure this core audience, routinely runs radio and newspaper advertisements in major cities before debt sales, and last year started a Web site to aid individual investors. This week, ads featured Schwarzenegger, who said he purchased $100,000 of the notes that will provide needed cash for salaries and services until tax revenue arrives.
California was able to boost the size of its borrowing because of the demand from individual buyers, and lower the yield range on the debt by a quarter of a percentage point. More states and municipalities may begin to increase the period they sell bonds directly to individual investors to three days from one in response to waning institutional support for the market, said Fred Parkes, vice president of municipal finance at Toussaint Capital Partners LLC in New York. New York was the first to introduce a so-called retail order period about a decade ago, he said. "That experiment paid off remarkably well," said Parkes. Toussaint Capital Partners was one of the brokerage firms that participated in California's note sale.
California, which has more than $45 billion of general obligation bonds, still had to pay a yield of 4.25 percent on the notes due June 22, 2009, the most on record relative to Treasuries. "At those yields, the notes are a screaming giveaway," said Jim Lebenthal, known for promoting tax-exempt bonds in radio and television ads as founder of Lebenthal & Co. in New York. "If you can compare them to anything of a similar quality, they are irresistible." California's rate exceeded the 3.37 percent it paid last year on a similar, larger note sale, when Treasuries were yielding more.
"The good news" is the state got the deal done, said Paul Brennan, who oversees about $12 billion in municipal bonds for Nuveen Asset Management in Chicago. "The bad news is that it's at much higher yields than they had obviously contemplated just a few weeks ago." With investors wary of owning all but the safest U.S. government bonds, New York's cost of borrowing for 15 years increased 1.59 percentage points from its previous sale on Sept. 10, a week before Lehman's failure deepened the credit crisis that began last year.
Investors pulled almost $400 million out of municipal bond mutual funds during September, the first monthly outflow this year, according to AMG Data Services of Arcata, California. Redemptions accelerated this month, with fund outflows rising to $3.4 billion so far, including a record $2.3 billion in the week ended Oct. 15, the data show. "We are still in a situation of no buying and lots of forced selling," said Ron Fielding, senior portfolio manager at OppenheimerFunds Inc. in Rochester, New York, with $23 billion under management.
Wall Street firms had already been pulling back earlier in the year. Broker-dealers, which abandoned the $330 billion auction-rate market after being inundated with unwanted securities, cut their holdings of municipal bonds and notes 22 percent to $51.8 billion from a record $66.1 billion at the end of the first quarter, according to Fed data. Ohio and Boston-area agencies put off their plans to raise money for transportation projects this week, adding to the estimated $100 billion of capital-improvement bond issues shoved aside by market turmoil this year, according to Municipal Market Advisors, a Concord, Massachusetts-based research firm.
The Massachusetts Bay Transportation Authority, operator of Boston's mass-transit system, held off borrowing $350 million after investors demanded yields of about 6 percent, a full percentage point more than anticipated, said Jonathan Davis, chief financial officer. The bonds, rated AAA by Standard & Poor's, were intended to refinance debt, replenish reserves and pay for projects. "I just about choked when I saw the interest rate," Davis said. "We're hoping we'll see some downward pressure on interest rates in the next couple of weeks. It all depends on buyers coming back."
The Metropolitan Transportation Authority that runs buses, trains and subways around the New York City area had delayed the start of its latest revenue bond offering earlier this week amid rising costs. Underwriters led by JPMorgan Chase & Co. revived the deal yesterday, taking orders from retail investors. The final amount from them wasn't immediately available.
The bond sale was completed today with $550 million, $50 million more than planned at the beginning of the week. The authority, which also ran radio ads to promote the sale, offered 20-year tax-exempt securities rated A by S&P at a price to yield 6.75 percent, about 2.4 percentage points higher than benchmark taxable Treasury bonds.
The last time the MTA, operator of the largest mass-transit network in the U.S., sold fixed-rate transportation revenue bonds in early February, the agency offered a maximum yield of 4.86 percent on debt due in 2037. Even smaller municipal issuers able to harvest demand from individuals are likely to see similar jumps in their borrowing costs, said Matt Dalton, chief executive of Belle Haven Investments in White Plains, New York. "They're going to be shocked at the cost of funds," Dalton said. "They've been through a decade" of getting financing at around 3 percent to 4 percent "and that's over."
Community Banks Must Wait for Paulson Aid
Community banks that Federal Reserve Chairman Ben S. Bernanke calls a key link between financial markets and the U.S. economy face a longer wait for government aid than their bigger competitors. The Treasury is urging small and regional banks to contact their primary regulator for details on how to access $125 billion in funds -- half of a $250 billion sum set aside to recapitalize the nation's lenders. Five federal regulators plus the states, meanwhile, are waiting for more guidance from the Treasury.
"I don't think that when they rolled this out they understood there would be all these problems," said former Treasury official Wayne Abernathy, now an executive vice president at the American Bankers Association in Washington. "The sooner they can get the details out, the better." Treasury Secretary Henry Paulson's aides are working to standardize procedures for putting capital into thousands of banks of varying size, charter and health. The voluntary program will serve as triage for the banking system -- giving some institutions a lifeline of money, while rebuffing weaker ones.
Investors have responded optimistically to Paulson's bank rescue. Standard and Poor's Small-Cap Regional Banks Index of 37 small lenders rose 6.7 percent yesterday to 86.75 and is up 55 percent from a low this year reached on July 15. Shares Rally Shares of KeyCorp, the third-largest bank in Ohio, are up 36 percent since Paulson announced plans to buy equity stakes in banks big and small. Regions Financial Corp., Alabama's biggest bank, is up 30 percent. Zions Bancorporation, a Salt Lake City- based lender operating in 10 western states, is up 27 percent. "We are in the process of evaluating the requirements of the program for Key and our shareholders," said KeyCorp spokesman Bill Murschel.
Smaller banks must decide by Nov. 14 whether they want to participate in the Treasury program, said Camden Fine, chief executive of the Independent Community Bankers of America, a Washington-based group that represents lenders such as CountryBank USA in Cando, North Dakota, and Easton Bank and Trust Co. in Easton, Maryland. "Many banks can't step through the corporate hoops," Fine said. The "Treasury is willing to make some accommodation along that line, but we haven't heard definitively."
Fine said he anticipates the department will release more details next week, which may help with the decision. Some information about the plan is starting to emerge. The Treasury is making accommodations to allow privately held banks to participate and trying to find a way to help lenders that don't issue the kind of preferred shares that the U.S. wants to buy, Abernathy said. Treasury spokeswoman Jennifer Zuccarelli said the program is being assembled speedily. "Regarding smaller banks, we are working with the regulators to quickly establish details for participation in this program," she said.
The next step is out of banks' control, as the Treasury has to decide which applicants deserve the money. "There's going to be a sorting process as to the financial health of banks and thrifts," said University of Connecticut law professor Patricia McCoy, a former member of the Fed's consumer advisory council. "The ones that are either on the ropes or look like they might be on the ropes will not get capital infusions." Some community bankers said they don't have enough information yet to decide whether to participate.
Central Virginia Bank, a state bank that's part of the Fed system with about $500 million in assets, is in search of new capital to replace an $18 million investment in Fannie Mae and Freddie Mac preferred shares, said Larry Lyons, the bank's president and chief executive officer. "We're very interested," said Lyons, whose bank is based in Powhatan, Virginia. "We just have not had an opportunity to look at this thing in detail and look at what our other options are." For banks that intend to sign up, board approval will likely be required. For banks that are undecided, or those that don't normally issue the type of preferred stock the Treasury is buying, the administrative challenges are even greater. "It is complicated," Fine said.
Paulson earlier this week set aside $125 billion for "healthy" banks of all sizes, after persuading nine major U.S. lenders to accept another $125 billion in fresh capital. The Treasury says the big banks will get their cash in "days" to start lending again. Half of U.S. bank deposits are in those nine large banks, with the remainder spread across the country in smaller firms. Any delays by the Treasury in getting money to the local level threaten to slow economic growth in areas where job losses are mounting and consumer spending weakening.
When Congress was considering the rescue program, the Treasury secretary said he opposed capital infusions into troubled banks because it amounted to a sign of failure. With the credit crisis worsening and bank lending frozen, Paulson changed his approach. "It's an absolutely horrendous time to go out to the market and raise capital," Lyons said. "If things aren't too bad and too onerous in this Treasury proposal, we might consider doing that and then two or three years from now, we could go out and just raise capital in a normal fashion and pay that off."
AIG’s fire sale is sparsely attended
When the Federal Reserve bailed out American International Group last month, the support—in the form of an $85 billion loan—came with some major strings attached. With the credit markets frozen and the stock market taking roller-coaster dives, those strings are now strangling AIG.
AIG has since arranged for a second line of credit for $37.8 bilion. As of Thursday, the insurer had drawn down $82.9 billion, or two-thirds of the $123 billion available. Meanwhile, the company’s plan to pay off the onerous debt through asset sales—its only feasible means of raising capital—has not yielded a single deal. Under the terms of the original two-year loan, the Federal Reserve received a 79.9% stake in the insurer, and AIG will pay 8.5 percentage points over three-month Libor, an initial gross commitment fee of 2% of the total loan facility and a fee on undrawn amounts of 8.5% a year.
“Time is not on their side,” said John Ward, chief executive of Cincinnatus Partners, a private equity firm specializing in the insurance industry. “They’ve got to move quickly. It’s very expensive to keep that loan.” The company continues to hemorrhage money on credit default swaps tied to billions in bad mortgage bets. The bulk of the loan money has gone into meeting collateral calls and unwinding the securities lending program that put the company on the brink of bankruptcy.
Changes in the financial markets over the last few weeks have made it impossible to find viable buyers for AIG’s assets. “The underlying businesses that comprise the AIG franchise are good businesses, and they’re valuable well in excess of the $85 billion loan,” Mr. Ward said. “The challenge is getting the right suitors to the table in a market where everyone’s been wounded in the last couple of weeks.” Although most other big insurers have some exposure to collateralized debt through their investments, their balance sheets a few weeks ago appeared much stronger than AIG’s, since they did not originate deals like AIG did.
But insurers’ stocks have been pummeled in the broad sell-off that has been ongoing since CEO Edward Liddy’s announcement on Oct. 3 that AIG would sell assets. In the week immediately following the announcement, the stock prices of likely buyers Ace, Travelers and MetLife all fell by more than 20%. At the same time, debt availability, already tight, virtually disappeared.
MetLife raised $2 billion with an Oct. 8 stock issuance, but it sold shares at a discounted $26.50 each, just days after they had been selling for more than $40. MetLife said it would use the proceeds for general corporate purposes and potential “strategic initiatives.” “Given the credit markets right now, it’s difficult for insurance companies to get financing to do these deals,” said Andrew Colannino, vice president of property and casualty at A.M. Best.
Even as the credit markets eased slightly last week, equity markets remained volatile, recording their biggest plunge in decades Wednesday. On Thursday, Fitch Ratings revised its ratings outlook to negative from stable for 12 insurance and reinsurance sectors globally, and confirmed its negative outlook on six other sectors, including the U.S. life insurance sector. Ratings downgrades in September sparked the liquidity crisis that almost bankrupted AIG. “Some of the potential suitors [for AIG businesses] may have stumbled into some unexpected turbulence in the markets themselves,” Mr. Ward said.
Even though none of AIG’s rivals have acquired any of the company’s subsidiaries, they may still benefit by stealing market share or personnel, analysts said. “Anytime you have a situation like this, there’s going to be a strain on employees and policyholders,” Mr. Colannino said. “But AIG is doing everything it can to hold on to employees at this point. I haven’t heard of any mass defections yet. I am sure policyholders may be looking for alternatives” when their renewals come up.
AIG has not publicly put forth a timetable for the sales, but Mr. Liddy has said the company may sell more or fewer assets depending upon the prices they draw, its ability to “monetize” the value of securities in its financial products division and, possibly, its participation in the Treasury’s Troubled Assets Relief Program.
On Thursday, AIG appointed a new chief financial officer, David Herzog, to help oversee AIG’s plan to address its capital structure and pay down the credit facility. Mr. Herzog, 48, had been AIG’s controller since 2005. He replaced Steven Bensinger, who had served since May as AIG’s vice chairman of financial services and acting CFO. The management change followed a public uproar and threatened legal action by New York attorney general Andrew Cuomo over alleged improper bonuses and other payments to former executives.
Under the second lending agreement with the New York Fed, the Fed would borrow up to $37.8 billion worth of investment-grade, fixed-income securities from AIG’s domestic life subsidiaries in exchange for cash collateral. “It’s designed to provide liquidity to our securities lending program but give protection to the Fed,” said AIG spokesman Joseph Norton.
Another wild card: former chief executive Maurice “Hank” Greenberg, who has himself been rumored to be interested in purchasing some of AIG’s subsidiaries. Mr. Greenberg, also a major AIG shareholder, sent a letter to Mr. Liddy and AIG’s board last Monday proposing an alternative to the onerous terms of the original $85 billion AIG loan.
“AIG cannot pay off this loan from the proceeds of selling assets in this market, nor can it pay the annual interest rate from earnings,” he wrote in the letter, filed with the Securities and Exchange Commission. “As a result, thousands of jobs will be lost, pensioners will lose their savings and millions of shareholders will be disenfranchised. It is a lose/lose plan.” Instead, Mr. Greenberg wants to give the Fed non-voting preferred stock with a dividend of about 5.5% and a 10-year right of redemption at a 10% premium
Mr. Ward doesn’t expect the Fed or AIG will “take the proposal seriously.” “The proposal is not nearly as good for the federal government, which reached the agreement with AIG when it was on the brink of bankruptcy,” he said. “You can’t come in after the pressure is off and get the Fed to reconsider the terms.”
EU climate change push in disarray as Italy joins Iron Curtain revolt
Europe’s commitment to ambitious green goals became the latest victim of the global financial crisis yesterday when a growing number of EU countries rebelled, claiming that the plans were now too expensive. Plans for binding European legislation by December were dropped as the EU watered down the carbon dioxide blueprint that it had announced with a fanfare 18 months ago.
The revolt by eight countries, led by Italy and Poland, left the EU’s self-proclaimed mission to shape a global, postKyoto agreement on greenhouse gases in disarray. President Sarkozy of France, which holds the rotating EU presidency, led the way in appealing to all 27 countries to stick to their targets. But tempers flared at the quarterly European Council in Brussels, with Silvio Berlusconi, the Italian Prime Minister, clearly furious at the pressure being applied. During a stand-up row behind the scenes, he told Mr Sarkozy that the targets would crucify Italian industry.
“Our businesses are in absolutely no position at the moment to absorb the costs of the regulations that have been proposed,” Mr Berlusconi said later. Donald Tusk, the Polish Prime Minister, said: “We don’t say to the French that they have to close down their nuclear power industry and build windmills, and nobody can tell us the equivalent.” In an extraordinary break with EU protocol, both leaders said that they did not have to stick to the deal because neither had been in office when it was signed by their predecessors in March 2007.
The eight countries have the voting power to form a blocking minority, should they choose to do so. Under the original deal, EU countries would cut carbon dioxide emissions by 20 per cent from 1990 levels by 2020 – rising to 30 per cent if it encouraged global agreeement. Mr Sarkozy succeeded in preserving the overall goal but he faces an increasingly uphill task to hold various countries to their individual contributions.
The row erupted at the same time as Britain strengthened its policy. Giving his first speech to the Commons as Energy and Climate Change Secretary, Ed Miliband said that Britain would increase its target for reducing greenhouse gas emissions by 2050 from 60 per cent to 80 per cent. The target, which is to be written into the Climate Change Bill, brings Britain into line with scientific advice. Mr Miliband said that tackling global warming was too important to be watered down even in a recession. “In tough economic times, some people will ask whether we should retreat from our climate change objectives,” he said. “In our view, it would be quite wrong to row back.”
Where is my swap line? And will the diffusion of financial power Balkanize the global response to a broadening crisis?
Some emerging market central banks have noticed that they – unlike the Bank of Japan, Bank of England, Swiss National Bank and the European Central Bank – don’t have access to unlimited dollar credit through reciprocal swap lines with the Federal Reserve.
Peter Garnham of the FT, drawing on Derek Halpenny of Tokyo-Mitsubishi UFJ, observes:Analysts say the unlimited dollar currency swaps set up between the Federal Reserve and central banks have helped bring stability to currencies through alleviating institutions desire to purchase dollars in the spot market to satisfy overnight funding requirements. “In contrast, the lack of currency swaps put into place between the Federal Reserve and emerging market central banks has likely helped to exacerbate the pick up in emerging market currency volatility” says Derek Halpenny, at the Bank of Tokyo Mitsubishi UFJ.
Think of Korea. There is “a shortage of dollars in the Korean banking system” – and Korean banks (and the Korean government) are scrambling to obtain them. That is likely adding to the pressure on the Won. For all the talk about how the G-7 has lost relevance, in a lot of ways the recent crisis has reinforced the G-7’s importance. Banks in G-7 countries that borrowed in dollars have access to unlimited dollar financing from their central banks – dollar financing that comes from the fact that the main G-7 central banks have access to large swap lines with the Fed.
Banks in emerging market countries have no such luck. Korea is a highly developed emerging economy. In a lot of ways it already has emerged. But it isn’t part of the G-7 (or G-10) and doesn’t have a swap line with the Fed that allows the Bank of Korea to borrow dollars from the Fed by posting won as collateral. That means that it has to rely on its foreign currency reserves – and its government’s capacity to borrow dollars in the market – to support its banks. Unless, of course, Korea could draw on a set of East Asian swap lines, and effectively borrow from Japan and China.
The old global architecture for responding to financial crises had, in my view, two essential components: First, the major countries themselves were responsible for acting as the lender of last resort (and the bail-outer of last resort) to their own domestic financial system. Since the advanced economies banks’ had liabilities denominated in their own countries’ currency (US bank deposits are in dollars, British deposits are in pounds, and so on) this wasn’t hard.
And emerging economies had to turn to the IMF (sometimes reinforced with “second line” financing from the G-7) for dollar (or DM or pound or Euro) financing – whether to help meet their government’s own financing need, to help the emerging economies’ central bank provide a “hard currency” lender of last resort to its domestic financial system or to provide the emerging economy more foreign currency reserves to backstop its currency. And since emerging market governments often borrowed in dollars or euros rather than their own currencies – and since many emerging market savers held dollar or euro denominated domestic deposits – emerging economies often had a need for significant financing.
This financing though was never unconditional – and was never unlimited. The $35b the IMF lent to Brazil in 2002 and the $20-25b the IMF lent to Turkey in 00-01 seemed big at the time, but it now seems small. That architecture has been extended in one key way in the crisis: European and Japanese banks facing difficulties refinancing their dollar liabilities now have (indirect) access to the Fed. The availability of $450b in credit from the Fed allowed European central banks to lend dollars to their banks without dipping into their (comparatively modest) reserves.
Emerging market central banks generally haven’t been as lucky. Their ability to lend dollars to their own banks is still limited by their own holdings of dollar reserves, their ability to borrow reserves from the IMF in exchange for IMF policy conditionality and their ability to borrow dollars from other emerging market economies with spare dollar reserves. I am still trying to figure out how important a change this is – and to assess whether this new architecture makes sense for a global financial system that has changed fundamentally in some ways but not in others. At one level, the stark divide between banks regulated by a the G-10 countries — which now have access to the Fed as a lender of last resort, albeit indirectly — and the banks regulated by the rest of the world seems a bit anachronistic. The center of the world economy won’t always be in the US and Europe.
On another level, a higher level of cooperation is possible among countries with broadly similar political systems than among more diverse group of countries with different political and economic systems. Similar forms of government, broadly similar (though changing) conceptions of the state’s role in the economy and a standing political alliance* facilitate the kind of cooperation among G-10 central banks that we have seen recently. Korea could presumably be drawn into the club without changing its basic character – Korea is a US ally and a democracy. Iceland could too, if it patches up its relationship with the UK – though the risk that Iceland’s government now has more debt than it can pay makes accepting Icelandic collateral in exchange for dollars a bit more of a problem.
Adding emerging economies with different economic and political systems from the G-7 countries into the “swap line” club might fundamentally change its character. Among other things, the US and Europe basically agree that their currencies should float against each other — and that they should regulate (or, until recently, not regulate) their financial systems in fairly similar ways. There is another key difference between European banks’ need for dollars and many emerging markets’ need for dollars. European banks need dollars to finance their holdings of US mortgages and other US securities. If they didn’t have access to dollar financing, they would either have to borrow euros and buy dollars – pushing the dollar up (and hurting US exporters) or they would have to dump their US assets (hurting US banks holding similar assets).
By lending to European central banks who then lent to their own banks, the US kept some European banks from being forced sellers of risky US assets – and in the process putting pressure on US banks. The US wasn’t acting entirely altruistically. Emerging market banking systems by contrast often need dollar financing not to support their portfolios of US assets but to support their domestic dollar lending. And it is now clear that a broad range of emerging economies do need access to the international banking system to continue the kind of breakneck growth that they have experienced recently — and have been caught up in the recent “deleveraging” of the global financial system. The FT’s Garnham again:Analysts said emerging market currencies were being hit as foreign investors pulled money out of developing regions, driven by liquidity pressures from the credit crisis. “There seems little now that the authorities can do to reverse the process of deleveraging that is taking place with financial institutions all contracting their balance sheets at the same time,” said Derek Halpenny, at Bank of Tokyo-Mitsubishi.
Hungary is scrambling for euros. Ukraine’s government is scrambling for dollars and euros – both to back its currency and to cover the maturing foreign currency borrowing of its banks. Pakistan’s government needs dollars. Korean banks are scrambling for dollars. As are Russian banks. And Kazakh banks. And Emirati banks.
In many of the oil exporters, the government was building up foreign currency assets (reserves, sovereign wealth funds) while the private sector (including many firms with close ties to the government) were big borrowers from the international banking system. In the Emirates there is an added complication: Abu Dhabi was the emirate building up its external assets, while Dubai was the emirate doing the most borrowing. But across the emerging world, external bank loans have dried up – creating a scramble for foreign currency liquidity.
And emerging markets (and Iceland) are looking for help from a range of sources. Their own central banks’ reserves (Korea, Russia, the Emirates) – or the foreign assets of their sovereign fund (Russia, China, Qatar, Kuwait, perhaps Abu Dhabi).*** The IMF, which is clearly back in business. European central banks (Hungary borrowed 5 billion euros from the ECB, the Nordics swap line with Iceland — which was recently tapped for euro 400 million). Russia (if it lends to Iceland). Or China. Pakistan was certainly hoping that China would offer an alternative to the IMF; China though does not currently seem to be willing to hand Pakistan a sum that is equal to a couple of days of its reserve accumulation … .
This frantic activity suggests another potential change to the global architecture for responding to crises: the IMF no longer necessarily has a monopoly on hard currency crisis lending to the emerging world. It is now one player among many. That is a fundamentally a reflection of the increased reserves of many large emerging economies. China clearly has more dollars than in needs to maintain its own financial stability, which means that it is an alternative source of dollar financing. Russia may be too – though the large dollar and euro liabilities of Russian banks and firms implies that its own need for reserves could be quite large. It isn’t in as comfortable a position as China.
The diffusion of pools for dollar liquidity available to lend to troubled emerging economies seems at least to me to pose a fundamental issue for the G-7 countries that traditionally have been able to essentially decide on how the IMF’s funds are used among themselves: does the diffusion of financial power a major effort to bring the big emerging powers into the IMF’s fold – and thus to restore a de facto IMF monopoly on large-scale crisis lending? Or would the cost of any “deal” that would lead that countries like China and Russia and Saudi Arabia (which already has a large IMF quota) channel their lending through the IMF prohibitive?
The right answer isn’t clear to me. On one hand, granting the new players significantly more votes might make it next to impossible to build consensus in the IMF – and even a generous increase in the voting weights of key emerging economies might not be enough to convince them to channel their “crisis” lending through the IMF. China might not want to give up on bilateral lending in exchange for say 15% of the IMF’s voting shares. On the other hand, China hasn’t been keen to throw its reserves around over the past few weeks – preferring the safety of Treasuries to Agencies (or a dollar deposit in Pakistan’s central bank) – and might prefer conditional IMF lending to the risk of losing its funds …
For now it seems to me that the crisis likely has increased the gap between the G-7 (and G-10) countries and the rest of the world in a couple of key ways. Inside G-7 land, US banks could lend in euros (and European banks lend in dollars) secure that they had access to a lender of last resort – and the G-7 countries would still be in a position to offer hard currency loans to their “out-of-area” friends through the IMF. Outside G-7 land, countries would rely primarily on their own foreign currency reserves to cover the foreign currency liabilities of their banks – and potentially could use their own reserves to finance their crisis lending to other troubled countries.**
In some ways, that is a world where the gap between the G-7 countries and the rest would gets larger not smaller …
* Switzerland is an exception; it stands outside the “Western’ alliance but has access to the swap lines. But the Swiss have long been a big part of central bank cooperation – Basle and all.
** This leaves aside a key issue, namely the fact that countries outside the G-7 provide enormous quantities of unconditional dollar financing to the US through the buildup of their reserves. That reserve growth is partially a function of the need for countries outside the G-7 world of reciprocal swap lines to hold a lot more foreign currency – but it is also a function of these countries ongoing policy of pegging their currency to the dollar at an undervalued level. It also ignores the debate over whether sovereign funds investments in the US and European banks should be considered private investments for profit, or part of the global policy response to the crisis.
The Last Debt Orgy
Former Federal Reserve Chairman, Greenspan: 'We can guarantee cash benefits as far out and at whatever size you like, but we cannot guarantee their purchasing power' - February 15, 2005
It is very common among 'sound money' believers to entertain some kind of fascination with Greenspan who spoke out against 'irrational exuberance and 'infectious greed' at the end of the dotcom cycle as he now warns that ' the Fed is not a magic piggy bank'. For them, Greenspan will always be remembered as the engineer who has unleashed the Horsemen, calling for America's demise and the world by extension. The Maestro and his cheerleaders from around the planet should be very happy that the 'guillotine' has become an historical relic, because what is happening is, without a doubt, reminiscent of the events that led to the devastating hyperinflation and the bloody French Revolution.
Loose monetary policy and decades of faulty interest rates are the absolute main culprits. When interest rates fail to control the amount of debts, the opposite happens: it then increases the burden of debt inexorably. Just like printing too much money inflates prices while provoking currency devaluation. More money is then needed to purchase the same goods and services. This is an insidious process that corrupts many minds, from the top down. The top takes advantage of the bottom. And that is why the gap between the rich and the poor worsens, and the middle-class ends up being destroyed. As the above quote by The Maestro stipulates, the FDIC won't be able to do a thing when the USD will become peanuts -- eventually.
While it remains to be seen as to whether chaos and unrest will be witnessed, revolutions also tell us that nothing has changed under the sun and this alone should question us very deeply. Instead of resorting to violence how about starting to put faith in the idea that our neighbors are smart enough to grasp ECON 101, because if we don't, things are only going to become a lot uglier before they get better...
To start with, the TV broadcasts have once again done everything they could to hide a backdoor giga-bailout orchestrated by the Fed to keep the economy lubricated: the banks have borrowed a record $437.5 billion per day from Fed, Reuters attested candidly as of October 16. Let's also mention that the Fed announced a few day before that it would to provide broad access to unlimited borrowing. So what happens when one has to borrow $100 to honor $100 loan?
So, you can imagine where the irresponsible actions of the monetary elites are going to lead us, can't you? But this is nothing surprising from Helicopter Bernanke who has fervently pursued Greenspan' s task aimed at eradicating the cash-strapped middle-class in favor of foreign banks holding too many dollars, and which they were about to dump if anything was done. Ellen Brown, who monitors the situation closely, sums it up like this: FMae and FMac, along with AIG had to be bailed out to prevent the 1 quadrillion dollar derivatives from detonating - temporarily.
Furthermore and astonishingly, this also means that these $700B dollars were just a part of a political sponsored media circus to create a diversion. For the record, let's consider the Fannie and Freddie debacle: Barney Frank in 2003 said that Fannie Mae and Freddie Mac were not facing any kind of financial crisis... then we have Bill Clinton who asserted that Democrats resisted standards for two institutions... on the top of that we now have Obama who is a top recipient of Freddie and Fannie lobbies pushing for no-doc loans, nothing-down houses, equity-line hustles, phony appraisals, in short gleefully shaking the money tree in every direction they could.
By the way, did you know that as economic storm was brewing, Congressional Wealth grew 11% last year? While condoning any bailout is unethical for obvious reasons (it only makes matters worse and prevents from prosecuting the evil doers), we also have a classic case government failure. By now it should be obvious that these two lenders must go. More concretely, the American citizens are being tested and must show how far their resilience toward theft can go. Despite themselves they have become the facilitators of toxic and illiquid loans that have come home to roost. Do not count on the Newspapers facing historic debt burden to tell you the truth.Our government and its owners appear to be testing how much the American public will tolerate. A few years ago, no one could have imagined that the silent majority would quietly accept thefts of this magnitude from a government that stopped tiny payments to single mothers with poor children in the name of welfare reform because the program's $10 billion cost was breaking the federal budget. This isn't socialism, it's fascism. -- Sean Olender, sfgate.com
Last October 11, the Times.uk asserted that Lehman Brothers demise triggered the hugest corporate debt defaults in history as grave concerns as to whether Washington’s $700B bailout fund will be enough to avert a financial meltdown. It emerged that the Fed Bankers are anxious that if the Treasury is not able to accelerate the speed at which it launches its rescue scheme, it will have no effect. Of course, they know, they are just buying time. It is not without a reason that the IMF Warns of Global Financial Meltdown. As lawmakers and Wall Street Bigwigs are patting each other's backs, it should be useful to mention that Lehman CEO contributed heavily to Democrats - over Republicans nearly 5-to-1!
It is tempting to assume that human beings are a lot more clever nowadays but are they really so? What is left from the 'Industrial Revolution' and its ideology behind that compelled women to join the ranks of the work force, claiming that they would help the family enjoy an unprecedented wealth. Unfortunately this is not what has happened. The reality shows that the average working families are today in debts up to their eye balls and one of the parents often has two jobs. Due to inflation, nearly 30% of US families now subsist on poverty wages. Their children are burdened with student loans that will take 30 years to be repaid. What quality of life may a young couple into medicine expect today with loans topping half-a-million dollars?
The party is over for the borrow-and-spend culture, for an economy based 72% on consumer spending, nothing will never be the same, Peter Schiff concludes. America's $53 trillion debt problem is very real. According to Michael Hudson, writing in the May 2006 issue of Harper’s Magazine, are Americans unwilling to face reality. In the meantime, Wall Street banks in $70bn staff payout, or 10% of US government bail-out package while admitting that the bailout won't work as of Oct 18, 2008. So much for the 'brightest college degrees club' managing the planet - indeed!It’s clear that the government would like us to use the capital," Mr. Dimon said on a conference call with analysts on Wednesday. "If you are a bank that is filling a hole, you obviously can’t do that.
While Europe blames and curses America for the global credit crunch, it is ironic that European banks have turned out to be deeper in debt than their US counterparts, contends Evans-Pritchard on 10/5/08. Europe put $2.3 trillion on the line to protect the continent's bank. So much for an EU treaty called The Stability Pact as they are staring into the abyss and wondering who's going to bail out the Euro next? Probably not the UK: the Bank Of England unveiled £500B rescue package early this month.
On October 16, 2008, ECB went nuclear as EU leaders called for a 'civilized' capitalism. Cynically, World Bank President Mr. Zoellick confesses that the G-7 is not working. Indeed when debts are not kept under control, predictions and estimates are always wrong. Instead of getting back to the basics of ECON 101, Zoellick urged the creation of a new larger Group that would include China, Russia, Saudi Arabia and others to solve the world's economic problems. A New World Order!
Long time viewed as a financial Eden, Iceland too has gotten a taste of the 'kiss of death'. As the Icelandic krona is about to become history, Lawmakers have no other option left than contemplate an IMF bailout. To refresh your memory, the IMF is the same lender of the last resort whose advice plunged Mexico, Argentina, Russia ( which might go bust again) and lately Japan into financial turmoil. We can only wish Icelanders a lot of luck! As a matter of fact, indebtedness knows no boundaries (classes and cultures): early this month even Pakistan went under and as a result, is being threatened with a currency crisis. Pakistani leaders still hope to be able to borrow $10B from the bankrupt UK and US. Ireland, long time considered a taxation heaven for European firms, is currently undergoing a massive adjustment due to the bust of its housing bubble.
To make the matters worse, a columnist from the independent.uk asked if Switzerland could become the next Iceland... Thousands of miles away from Ireland, a bad omen suggests that Russia's Crash looks very similar to that of 1929, a Bloomberg columnist reported. Indeed, Russian equities this year have lost 67% so far. As you read this, the Indonesian President suspended the stock exchange indefinitely 'to prevent deeper panic' Delaying outcomes is absolutely senseless because at some point, we'll end up reaching an exponential threshold where conflicting interests and lies - will collide at once.With a flawed diagnosis of the causes of the crisis, it is hardly surprising that many policymakers have failed to understand its progression. Today’s failure of confidence is based on three related issues: the solvency of banks, their ability to fund themselves in illiquid markets and the health of the real economy. economist.com
Although (credit induced) financial plagues dot Mankind's history, the financial media often presents debt crises (ie: business cycles) as being facts of life. However, this didn't prevent them from lauding the housing mania at every level they could, as if this time was different. Would they all be suffering from amnesia? Please do your homework and google 'The Bubble That Broke The World' and you will discover the dreaded similarities between the roaring 1920s and today's. .. Flawed diagnosis? are they stupid or do they have a plan?
Ilargi: It’s safe to say that Jim Willie takes no prisoners.
Wall Street Monsters & Meat (You)
The tag team of JPMorgan as the monster and Goldman Sachs as its harlot represent a powerful pair that is more responsible for destroying the entire US financial system than 95% of the American public has any awareness. The colossus of JPMorgan is a monster, a predator, nurtured by pond scum. It has gobbled up Chase Manhattan, Manufacturers Hanover, Chemical Bank, Bank One, and more over the past two decades. Their profound presence in keeping the USTreasury Bond yields down can never be understated. They do so by managing 85% of the credit derivatives on the planet. They distorted usury prices, as in price of borrowed money, thus aggravating the LIBOR (London InterBank Offered Rate) market in a very visible manner.
The oblong usury prices have contributed mightily to the destruction of the USEconomy itself, created bubbles, killed jobs, and wrecked savings. The ugliest hidden activity for the JPMorgan monster is to manage the Bank of Baghdad, where they manipulate the crude oil price, where drug trafficking money is funneled from Afghan sales, under management by the USMilitary aegis (guys with no uniform stripes or markings). Maybe such illicit money offsets Credit Default Swap losses, making America strong for freedom and liberty.
Goldman Sachs is clearly the investment banking agent for the USGovt, given the privilege of insider trading in unspeakable proportions. They manage the Plunge Protection Team efforts to intervene in financial markets, making America strong for freedom and liberty. The new kid on the block is the FDIC. The Federal Deposit Insurance Corp is steering fresh meat into the corralled JPMorgan stockyards for slaughterhouse feeding. The label of harlot might be too kind, especially from the perspective of senior bond holders. But JPMorgan requires fresh meat (capital) periodically, thus making America strong for freedom and liberty. Nevermind the fires caused after its hearty meals and flatulence.
This article discusses the JPMorgan monster, its behavior, and teeth revealed. Robb Kirby (see his website, click HERE) often covers JPMorgan illicit behavior. This article discusses banking system realignments to destroy savings accounts owned by the people, and the Coup d'Etat just completed. The criminals on Wall Street have taken full control of the USGovt financial management, with blank check written by a thoroughly intimidated USCongress, deceived steadily and easily. Threats and intimidation are central to the successful coup. The Ponzi Scheme has been revealed, even as the frail and tattered Shadow Banking System has been revealed.
The key to the bailouts is its continued Top Down approach, which favors the Ruling Elite and denies all but crumbs to the people, who have been subjected to a foreclosure revolving door on mortgage loan assistance. Since nothing has been solved from this approach, a total systemic breakdown is assured, whose climax will be the current Administration and the Wall Street executives in charge of the criminal syndicate riding off into the sunset in retirement. Rome burns. Much more detail is provided in the upcoming October report due this weekend. The theme is this subset synopsis article is of criminality, deception, monster exploitation, market corruption, and the collapse of a failed system, whose crescendo represents the greatest financial crimes ever witnessed in modern history. Americans do it big! The proprietary Hat Trick Letter covers much more of recent events, interpretation, and analysis, but here, focus on impropriety.
THE MONSTER, ITS BROKER & HARLOT
JPMorgan will require fresh asset meat every several weeks in order to survive, but the process will result in a sequence of severely damaging CDSwap fires. Perversely, the FDIC is their investment banker agent. Two mergers of questionable nature highlight the altered role of the Federal Deposit Insurance Corp (FDIC), which no longer protects bank depositors or their investors, but rather serves JPMorgan Chase. When Bank of America merged with Merrill Lynch, a trend started, one that exposed private stock brokerage accounts. Officially they can be legally borrowed across subsidiary lines. The FDIC averted a failure of Merrill Lynch without the credit default implications. The other event was more blatant, as the FDIC steered Washington Mutual out of bankruptcy failure and into the JPMorgan slaughterhouse.
Inside its chambers, JPM gobbled up the WaMu deposits and benefited from ratio improvements. Senior bond holders were crushed, fully denied due process from bankruptcy. The FDIC has become an ugly investment banker lookalike, serving JPM and not the US public. The FDIC owns a pitifully small $45 billion in funds available for bank bailouts, at June count. When the dust clears a year or more from now, many multiples more will be necessary for many bank failures.
The path of JPMorgan growth into a FRANKENSTEIN took radical changes in course after both the failures of Lehman Brothers and recognition that Fannie Mae & Fannie Mae had to be taken over by the USGovt. To halt the run on their bonds, the USGovt acquired the entire F&F Cesspool. The impact hit the Credit Default Swap market immediately. AIG had been weakened one week earlier from the technical default of Fannie & Freddie, which resulted in broad CDSwap payouts. Ripple effects from the Lehman Brothers failure that followed were deep and broad throughout the system, killing AIG. The Wall Street central harlot (Goldman Sachs) advised the USGovt to assume full control and risk of AIG, as GSachs avoided $20 billion in sudden losses in the nick of time, a pure coincidence!
The entire episode with Wells Fargo bidding for Wachovia, in competition from Citigroup, is steeped in comedy with vampire stars. The grapevine in Washington and Wall Street passes word that the Citigroup versus Wachovia wrestling match was actually a sponsored backdoor bailout attempt to save Citigroup, not just Wachovia. Again, the FDIC was the matchmaker. My term has been 'Dead Marrying the Dead' which still holds true, since Citigroup has been dead for one year. Under the original Citigroup proposal, the FDIC had arranged for guarantees of $42 billion for Wachovia debt by the USFed. The new Wells Fargo deal enabled the US taxpayers to get off the hook. The reversal by the FDIC to serve the public has caused gigantic Wall Street problems, as Citigroup now finds itself in a position more perilous than anyone believed. This battle has flip-flopped once, and might again. Citigroup would probably have died if not for the USGovt purchase of bank stocks.
THE TEETH OF THE MONSTER REVEALED
JPMorgan is a monster predator at work, hidden from view. After the Fannie Mae experience, covering their giant raft of CDSwap contracts, making huge payouts, JPMorgan was close to a bankruptcy. They needed to feed off another bank, to consume private deposits and thus shore up the balance sheet. Lehman Brothers was let go to fail, but its failure would surely trigger a gigantic wave of credit market fires. The Lehman CDSwap resolution has cost roughly $300 billion, paying 91 cents per dollar of coverage on their failed bonds. The Wall Street Powerz permitted Lehman to fail, so as to prevent a JPMorgan failure, thus risking that the fires caused could be contained in CDSwap fallout. The irony is that JPMorgan undoubtedly suffered considerably from that fire in fallout. Now JPMorgan might need another Wall Street failure, for to consume another block of assets, but with yet another ensuing CDSwap fire. JPMorgan is a monster predator at work, soon hungry again. It might be eyeing Morgan Stanley. We might discover a failure in an unexpected place, like a big insurance firm, whose sector condition is not well advertised.
With each big bank failure, whether a commercial bank or investment bank, heavy damage is done to the system. The CDSwap destruction is mostly hidden, with large pillars burned out. We the people hear of the destruction only if and when a major bank fails as a result. No death, no news, however but with potentially significant hidden structural damage. As financial firms pay out vast sums on CDSwaps as in the Lehman case, and the Fannie Mae case, and the Freddie Mac case, the system bleeds capital. Lending suffers. The sequence corresponds to a powerful vicious cycle. JPMorgan will need more deaths to survive, but each death causes more deadly CDSwap fires. JPMorgan is a monster predator at work, which leaves fires on pathways where it last stepped. The best analogy is that CDSwap contract payouts from bond failures are like mini-Hiroshima events that might lead to a bigger such event. Ironically, to save JPM the financial system must destroy the shadow banking system centered in New York City, since Wall Street firms, plus Bank of America are at its center. The system lacks disclosure and transparency, just like Wall Street likes it.
Permit the pathogenesis to proceed further, and the majority of Western bank system must be burned in order to leave JPMorgan as prominent survivor to rule over a scorched empire. This process is a sick consolidation. The bank conglomerate is a major crime syndicate colossus, and center of the drug traffic money laundering, coordinated by security agencies, fully condoned by the US Federal Reserve itself. The AIG story is nowhere complete, the latest being their expensive parties. AIG has caused major complications, another monster that will resurface periodically at feeding time. Personally, my wish is to see the RICO law brought forward, at least to deposit the monster in a cage. In done my way, not a single additional USCongressional bill would be approved and granted for a bailout or rescue without rapid investigation, prosecution, turn to state's evidence, asset seizure, restitution, and imprisonment for dozens of Wall Street executives, starting with Hank Paulson.
STOCK MANIPULATION WITH DEEP MOTIVE
Few analysts, pundits, or anchors are aware of the mammoth conflict of interest involved with the USTreasury Bond sales required to pay for all the bailouts. JPMorgan, with the essential aid of Goldman Sachs, plot to bring down the DJIA index and the S&P500 index whenever the USTreasury conducts auctions or needs Congressional passage of key bailout bills. They have sold $194 billion of Cash Mgmt Bills (CMB) in the last two weeks, today $70B, tomorrow another $60B. The big stock declines seen recently work to the BENEFIT of the USTreasury and USFed as agent for auctions. TBill yields are down near zero, in case you have not noticed, with principal prices corresponding almost as high as the bond permits. The USGovt is conducting auctions for TBills at top dollar prices, when its credit rating should be caving in radically upon downgrades. These USTreasurys are destined to enter default at a later date, where the loss to foreign investors will be maximized. Most of the US public has savings dominated by stocks, with little in bonds. So the US public is being fleeced, coming and going, since even money markets contain toxic mortgage bonds. Look for the stock market decline to come to a surprising end when the USGovt has completed the majority of their planned emergency supply sales via auction.
The Wall Street tactics have recently turned more vicious and devious, actually creating volatility, producing fear for political purpose. They accuse hedge funds of driving up the crude oil price, rendering great harm to the USEconomy and US citizens. So they urged unsuccessfully the Securities & Exchange Commission to force hedge funds to reveal their speculative positions. The Wall Street thieves and conmen wish to learn details on hedge fund positions so as to target them illicitly. In a queer twist, JPMorgan has benefited from an interesting double kill. They exploit hedge funds, wreck them, then encourage them into the fold at JPM in brokerage accounts, where their private accounts are rendered vulnerable under the new USFed rules. JPMorgan is a monster predator at work, which is permitted to manipulate markets and clients with total impunity.
There is one more detail. Lest one forget, Goldman Sachs was exempt from the short rule restriction placed on a few hundred financial stocks traded. The reason had something to do with market stability and integrity assurance! Goldman Sachs clearly profited from the ups & down in the Dow and S&P500, lifting stocks after Congressional agreements, pulling them down before those agreements. JPMorgan and Goldman Sachs profit handsomely when the USGovt Plunge Protection Team pushes the stock indexes up with their usual methods. Of course JPM and GSachs are the managers of the PPT efforts. YES, IT IS TIME TO PUKE NOW!!!
HIDDEN USGOVT COUP BY WALL STREET
The USCongress has been subverted by intimidation and ignorance, maybe bribery. Regulators and law enforcement bodies are mere accomplices. The entire US banking system has undergone an unprecedented grand nationalize initiative, including the financial system, when considering the mortgage and insurance giants. The total bailouts are huge when put into perspective. This is a hidden coup, complete with deep fraud, corruption, and ruin for both prosecutors and whistle blowers. The USDollar is caught in the middle of a black hole scrambled with fraud. Paulson is the new Chancellor of US Inc, Bernanke the new Currency Lithography Manager, and Sheila Bair the Investment Banker (a la Goldman Suchs). Paulson assumes all powers over the financial state from the president, via the banking industry control. The government bailout redemption of $trillion past fraud closes the loop. Bernanke manages all efforts to use printed money for the purpose of buying worthless counterfeited and fraud-laced bonds, buying commercial bonds and posted collateral among businesses, as well as making printed paper products available to foreign central banks in relief of past fraud.
Bair will act as the director of slaughterhouse traffic for JPMorgan, which needs a steady supply of bank deposits to offset their destroyed balance sheet from continued credit derivative implosion, thereby betraying the chartered FDIC pledge to protect bank depositors and senior bank bond holders through liquidation procedures, with full recognition of expedience. Hail to the king, long live the king! The US public seems so dumbstruck that it cannot demand even full disclosure of the process, let alone private offshore bank accounts for the new leaders of the successful coup.
The coup formalizes a climax to a Ponzi Scheme. A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service bearing true value delivered. With the ongoing steadfast support offered by Alan Greenspan, they were able to maintain an incredible Ponzi scheme. They sold financial toxic waste products in the form of Mortgage Backed Securities (MBS), Collateralized Debt Obligations (CDO), Structured Investment Vehicles (SIV), Unidentified Financial Objects (UFO), and Credit Default Swaps (CDS). My favorite remains the UFOs. The corruption of politicians in Congress enabled the process, with relaxed guidance by the Financial Accounting Standards Board (FASB). The two key ingredients for the Ponzi Scheme are a mythological ideology and a high priest to endorse the game from a credible pulpit.
Alan Greenspan claimed legitimacy of the US banking system, blessed credit growth and fractional bank practices as beneficial, and praised risk pricing systems using credit derivatives as sophisticated. The high priest used to be Greenspan, but now a tag team has replaced him. Hank Paulson is the spearhead for the great coup of the US financial system. Usage of short restrictions rules has been key to both instilling instability at necessary times, and raiding hedge funds. USFed Chairman Bernanke swaps USTBonds for any piece of bonded garbage known to mankind. Mammoth placements of leveraged trades by Wall Street firms make for some of the most grotesque insider trading in US history.
DECEIT & INTIMIDATION
The lies, deceit, backroom pressure, and fleecing of the American public is deep. Take the Emergency Economic Stability Act. Most of the initial $250 billion outlay was not devoted to American bankers, but rather to foreign bankers, primarily in Europe and England, and to purchase preferred US bank stocks. The US public was not told about this redirection, which constitutes misallocation, misappropriation, and fraud. Tremendous backroom pressure was exerted at every step. The underlying assets involved in swaps do not even have to be US-based mortgage bonds. The formerly submitted Paulson Manifesto was revived in a power grab, complete with considerable infighting and squabbles, since Morgan Stanley was given favor. The usage of funds to buy investment stakes in the giant US banks is yet another direct Fascist Business Model tactic, assisting banks close to the power center, yet reeking with corruption.
The sickening irony is that they have no more money to disseminate and distribute. They cannot reveal their lies until they formally request more Congressional funds. Much discussion has come that the USGovt should adopt the Swedish model in the resolution of the current crisis. Not in a New York minute!! That would require heavy stock and bond losses, and more transparency of scum. Interestingly, the market discounts words as worthless, while bailout actions fail to produce even a positive reaction for a full day, until Monday last week when the Dow Jones Industrial index rose over 900 points. That was clearly Wall Street engineering a profitable short cover rally. Check S&P futures positions beforehand, if you can. The credibility of the USFed is close to being destroyed. On October 15, the same Dow Jones index fell over 700 points, almost 8%. Even the global rate cut was rejected by stock markets, a major insult.
Intimidation of the USCongress has been huge and powerful, similar to when the Patriot Act was passed in 2002. The Congress was actually threatened by martial law in the cities of the United States if the big bailout package was not passed two weeks ago! This was not reported on CNN or CNBC, but C-Span did cover it. The mobilization of the USArmy for civilian control is well known in the past couple weeks. See the Third Brigade back from combat duty in Iraq. This account came from Rep Brad Sherman of California. To achieve supposed financial stability, the nation succumbed to totalitarianism by Wall Street thieves, conmen, fraud kings, and criminals. Instead, the bailout only covered up $trillion fraud. My position has been very stable and consistent, that such tactics are typical characteristics of the Fascist Business Model. The state merges with the large corporations, who proceed to terrorize the citizenry after unspeakable protected corruption and theft. To object is to be labeled unpatriotic!
TOP DOWN SOLUTION FAVORS THE ELITE
The top-down approach used to date aids the wealthy bankers, while the homeowners are denied aid. That aid is promised but rarely arrives. The fundamental problem here is that billion$ are devoted to shore up insolvent banks, to redeem their worthless (or nearly worthless) bonds, and to give a giant pass to the executives. Trust has eroded throughout the system. Banks distrust each other's collateral. The result is that eventually the USEconomy will enter not a recession, not a depression, but a DISINTEGRATION PHASE. Despite Bernanke's studious efforts, borrowing from revisionist history, his liquidity is nothing more than bailouts at the top for the perpetrators of the housing bubble and mortgage debacle. The bank system benefits little inside the US walls of finance.
A bottom-up approach might have had a chance to succeed, but a top-down approach is a sham. To expect a top-down solution that actually relieves the housing inventory logjam is insane. That is like feeding a teenager with meals placed inside the human rectum, expecting nutrients to find their way to the rest of the body! The credit mechanisms do not travel upward within the pyramid, but rather in the downward direction, starting with a borrower, a good collateralized risk, and an underwritten loan, when plenty of lending capital is available. The US public has bought this stupid 'Trickle Down' philosophy for years, learning nothing. The USEconomy is on the verge of collapsing. Short-term credit is being denied at key supplier intermediary steps, soon to result in recognized disintegration.
The primary practical objective of this corrupt trio (JPM, GSax, FDIC) is to avoid Credit Default Swap fires, which would bring an end to their reign of terror. This USEconomic failure is in progress and is unstoppable. The 1930 Depression resulted after monumental credit abuse from the bottom up, as hundreds of thousands of people leveraged investments 10:1 with stocks primarily. The 2000 Depression will come after monumental credit abuse from the top down, as hundreds of big financial firms leveraged investments by 7:1 and 20:1 with bonds primarily. The most absurd of all is the CDO-squared, leveraging upon leverage. Total seizures have crippled the banking system. Short-term credit has largely vanished, as letters of credit are routinely not honored at ports in the United States. The panic will continue, especially when supplies dry up.
GOLD & SILVER AWAIT THEIR EXALTED STATUS
We are witnessing the disintegration cited in my recent forecasts. It is a systemic failure, marred by lost confidence and trust in the entire financial system. Expect foreigners soon to pull the rug from under the American syndicates in control. Several key meetings have already concluded, totally unreported in the US press, which occurred in Berlin Germany. Consider it the Anti-G7 Meeting. Implications are profound, and involved the Shanghai Coop Org tangentially, since its member nations possess so much new commodity supply. Consider it the Anti-NATO group. An important and powerful alternative financial system is soon to spring into action, including high-level bilateral barter. Those who expect the current US Regime to continue their financial terror are in for a big surprise.
Expect defaults in the COMEX with gold & silver, whose prices for paper vastly diverge from physical, to the anger of foreigners watching. They hold massive precious metals assets. Disparities now contribute to powerful forces, sure to break the current system. Grand systemic changes come. THE RESULT WILL BE A BREATH-TAKING DISCONTINUITY EVENT.
Ironically, the more inner anguish felt on the falling gold & silver prices, the closer we are to a new financial framework, with the USDollar relegated to a Third World role. A REPLACEMENT GLOBAL RESERVE CURRENCY HAS ALREADY BEEN DECIDED UPON. Its launch awaits the proper moment. The Americans are last to know, as usual. The US leaders are under the illusion of being in control!