Sunday, February 23, 3 AM. Newsboys selling on Brooklyn Bridge
"Nothing beside remains. Round the decay
Of that colossal wreck, boundless and bare
The lone and level sands stretch far away."
Ilargi: Remember the bans on short selling? In the US, 19 major financial institutions were protected from the practice. Now we see that many of them, though they never tire of knee-jerk denying, lose an aggregated $30 billion on shorts they bought on Volkswagen. But does it amtter anymore? They’ll just hold out their hands and get more of your money from the Fed and Treasury. Nice play by Porsche, though. Nice denial too.
As I said before, 'moral hazard' concerns have long since been thrown away with the bathwater of the meek and innocent. All it took was a few ass clowns shouting 'crisis' and Mayday. Jim Kunstler this week asked why we hardly ever see terms like 'fraud' and 'swindle' in the media. Well, because we have a crisis, of course. First things first. The Fed will lower interest rates to levels so low that banks get paid (even more) just to take money from the public trough.
Nobody wonders anymore whether it’s a good idea to try and 'save' bankrput and insolvent gambling houses. It’s a sort of shoot first, talk later mentality. And by golly, it works.
This is the disaster doctrine. The Chicago school, the IMF, the World Bank and the CIA have long since learned how to shock people into submission. They've practiced for years in Latin America, Africa and Asia, and it's time to bring the doctrine home to the world's largest economy. Which was always the intention.
We see it play out in the USA, where Hank Paulson has been handed anti-constitutional dictatorial powers after threatening Congressmen and Senators with hellfire, brimstone and ensuing lost elections.
We see it in all countries presently being forced to seek help from the IMF. Courageous Turkish prime minister Erdogan vowed never to give in to the demands the IMF links to its financial assistance, but with countries in all corners of the globe facing deep trouble, there is nowhere else to turn.
We know what havoc and destruction the IMF has left in its wake in the past 50 years. It forces countries to slash programs that help their poorest citizens, a loan condition that has literally killed many milllions of people in the second half of the 20th century.
Another IMF staple is 'economic reform', which is nothing but a different way of saying that US and EU companies must be given unlimited access to a country's resources, to do with what they please, and at criminally low prices.
Turkey’s prime minister is wise to resist, but as I said, he has no choice. The fate of many of the world’s developing economies is now in the hands of Cosa Nostra loan sharks with far fewer scruples and honor than Tony Soprano. These guys are the real deal, the ones best known for redesigning knee-caps and cement feet.
Also, Fannie Mae writes down $20 billlion in -tax deferred- assets. They were already worthless when Fannie and Freddie were taken over by the government, but it was a trifle inconvenient to say so at the time. Freddie Mac will soon come with similar losses. This means both companies will need new capital injections from the government. Yes, that means you.
And while you’re busy handing over your remaning cash, don’t forget that the Treasury, in your name, recently started pressuring them to buy an additional $40 billion in mortgages every month. Which lose value rapidly. The Case/Shiller home price index recorded yet another record drop for August. There are now plenty of places in California where prices are down 50% and counting. And you are buying the mortgages on these properties. How smart does that make you feel?
The US car industry went bankrupt at least a decade ago. I’ve long predicted that Detroit would be liquidated between two presidencies, in the November 4-January 20 window. Still, the option remains for the Bush gang to throw billions at the Fast Shrinking Three through Paulson's Roman dictatorship funds. Obama better be careful.
Making GMAC a bank holding company is a first insane step. They should get the doorman to throw General Motors’ subprime dealer and pusher out of the casino, not furnish more free chips, compliments of the house. They would too, if it were their money. It is not.
Update 2.30 PM EDT
Fed travels back in time 50 years, slashes key rates to 1.0%
The Federal Reserve slashed interest rates a half-percentage point to the lowest level in more than four years Wednesday as policymakers try to limit the pain of an economic downturn. Fed Chairman Ben Bernanke and his colleagues cut their target for short-term interest rates to 1%, lowest since June 2004. Before then, rates had not been that low since 1958.
While it is likely the Fed cannot prevent the USA from sinking into recession — most economists say we are there already — central bankers can try to make the downturn less severe. Lower interest rates should eventually encourage consumers and businesses to borrow money once the crisis in credit markets eases. That will help the economy recover as people buy homes, machinery, cars and other items, PMI Group chief economist David Berson says. "It may not be spent initially," Berson says. But "liquidity is always eventually spent when it has been added."
The Fed last cut interest rates in an unprecedented, coordinated move with central banks around the globe Oct. 8 as financial turmoil gripped near-frozen lending markets. Other central banks will likely follow the Fed's lead and cut interest rates again, predicts Mission Residential chief economist Richard Moody. China cut rates earlier Wednesday, for the third time in six weeks. Norway also lowered borrowing costs. "It is a global recession now," Moody says.
As is usually the case when the Fed cuts rates, savers will suffer. Rates on certificates of deposit, which have already been falling, will drop further. The average yield for a 1-year CD was 2.7% last week, down slightly from a week earlier, according to Bankrate.com. The average yield for a 5-year CD also fell slightly last week to 3.46%. Banks are seeing a flood of money from investors seeking sanctuary from the volatile stock market, and much of that money is making its way to CDs, according to Bankrate. That means banks don't need to offer high interest rates to attract money. Nonetheless, savers who shop around can still find competitive rates of 4% or more for 1-year CDs.
Many banks are eager to increase deposits because the credit crunch has dried up other sources of funds, says Greg McBride, senior analyst for Bankrate.com. "As long as the credit crunch persists, banks are going to remain hungry for deposits, and that will keep yields from falling too far," he says. While lower short-term interest rates usually benefit borrowers, this rate cut won't provide much relief for many credit card holders. Banks that issue variable-rate credit cards often set a "floor" for interest, and in some cases, their rates have already hit that floor. As a result, even those with good credit may not see their credit card rates decline.
Interest rates are just part of the arsenal that the Fed has been deploying to thaw credit markets and boost the economy. The Fed has opened so-called swap lines with foreign central banks, most recently with the Reserve Bank of New Zealand on Wednesday, to keep dollars flowing abroad. And the Fed this week started to buy corporate commercial paper, to lend short-term cash to companies to meet payroll and other immediate needs. The U.S. central bank has also provided financing for the rescue of insurer AIG and the sale of investment bank Bear Stearns.
The United States has not been in a recession since 2001, one of the shortest and shallowest downturns in history. Economists say this downturn will likely be longer and deeper, according to a USA TODAY survey last week. Recent data paint a dark picture. Wednesday, the government said although orders for long-lasting durable goods rose in September, the gain was led by a sharp rise in orders for aircraft, which are costly and can skew the overall number. A proxy for business spending, nondefense capital goods orders excluding aircraft, fell for a second consecutive month in September.
With such negative news coming in, some economists expect the Fed to cut rates again before the end of the year. Moody's Economy.com economist Augustine Faucher predicted another half-point cut in 2008 in a note to clients Monday. The Fed next meets Dec. 16.
Fed May Cut Rate to 1% in 'Very Aggressive' Response to Crumbling Economy
The Federal Reserve may lower its benchmark interest rate to 1 percent today and signal further reductions to levels unseen since Dwight Eisenhower was president. Tumbling commodities prices and weaker consumer spending are slowing inflation, which officials described as a "significant concern" at their last scheduled meeting in September. Tomorrow, the Commerce Department will probably report that the economy shrank at a 0.5 percent annual rate in the third quarter, the most since the 2001 recession, economists predict.
The Fed "will be very aggressive," said Mark Gertler, a New York University economist and research co-author with Fed Chairman Ben S. Bernanke. "Inflation risks are off the table" and "the issue now is how bad the recession will be." He predicted the benchmark rate will be cut by half a point today, matching the median forecast of economists surveyed by Bloomberg News. Bernanke and his team could push borrowing costs to zero by June if the credit crunch intensifies, Gertler said.
The Fed has already cut the benchmark rate from 5.25 percent in the past 13 months and created six lending programs channeling more than $1 trillion into the financial system. Banks are still reluctant to lend to each other and the Standard & Poor's 500 Index is down almost 36 percent this year, even after yesterday's surge. The FOMC is scheduled to announce its decision on rates at about 2:15 p.m. in Washington.
"The predominant concern will be inadequate growth," said former Fed Governor Lyle Gramley, now a Washington-based senior economic adviser for Stanford Group Co., a wealth-management firm. "If the economy shows additional signs of a deepening recession, I think the Fed will decide that the floor is not 1 percent." Gramley predicts that policy makers will again cut the main rate by 0.5 percentage point at their next scheduled meeting in December, pushing it toward levels last seen in 1958. "Zero is a possibility," he said.
U.S. stocks swung between gains and losses before the Fed decision. The Standard & Poor's 500 Index fell 0.6 percent at 10:47 a.m. in New York. Borrowing costs eased, with the London interbank offered rate, or Libor, for three-month dollar loans dropping 5 basis points to 3.42 percent. More evidence of weakness came today as orders for U.S. durable goods excluding transportation equipment fell in September, the government reported. The 1.1 percent drop in bookings of goods meant to last several years was less than forecast and followed a revised 4.1 percent decrease in August that was larger than previously reported.
European Central Bank President Jean-Claude Trichet said Oct. 27 he may reduce interest rates next week, citing ebbing inflation and "weakening demand." The ECB, Fed and four other central banks trimmed rates by a half point on Oct. 8 in an unprecedented coordinated move. After the emergency cut, the Fed signaled it may ease again, citing "weakening of economic activity and a reduction in inflationary pressures." Most of the FOMC's statement today will focus on the financial crisis, including tightening credit conditions, said Robert Eisenbeis, a former Atlanta Fed economist.
The statement will also note falling energy prices and express "less concern, as a result, about inflation," said Eisenbeis, chief monetary economist at hedge fund Cumberland Advisors Inc. in Vineland, New Jersey. Beginning today the central bank will probably cut in 0.50 percentage-point increments, stopping at 0.25 percent, he said. Fed policy makers face increasing evidence the economy is already in a recession. Consumer confidence plunged this month, with the Conference Board's confidence index hitting its lowest level since records began in 1967.
Payrolls fell last month by 159,000 for the biggest reduction in five years, according to Labor Department figures released on Oct. 3. Retail sales fell 1.2 percent in September, extending their decline to a third consecutive month for the longest slump in at least 16 years. "Sharply increasing unemployment" and other data indicate "the probability has gone up substantially" that the U.S. economy will begin to shrink, St. Louis Fed President James Bullard said Oct. 14.
The Fed cut the main rate to 1 percent in June 2003, leaving it unchanged for a year in response to concerns about deflation. Bullard and Dallas Fed President Richard Fisher have said the low rate stoked inflationary pressures. Rising prices have faded as a concern in recent months. Americans expect inflation of 2.8 percent over the next five years, the slowest pace in a year, according to the Reuters/University of Michigan preliminary index of consumer sentiment on Oct. 17.
Crude oil fell to a 17-month low on Oct. 27 amid heightened concern that a global recession will erode consumption. The price of oil has tumbled 56 percent since reaching a record $147.27 on July 11. With inflation abating, the FOMC may vote with no dissents. Fisher supported the last rate reduction after dissenting as recently as Aug. 5 out of concern about rising prices. "With the deterioration in economic conditions and the recent associated falloff in energy and many other commodity prices, I anticipate further dissipation of inflationary pressures," Atlanta Fed President Dennis Lockhart said Oct. 20.
Cutting rates too far may hurt the money market mutual fund industry by making it difficult for the funds to attract deposits profitably, said Vincent Reinhart, the Fed's chief monetary- policy strategist from 2001 until September 2007. "As the policy rate goes closer toward zero, rates get compressed and those business models are called into question," he said. If that concern is dispelled, the main rate "could go to 1 percent" while policy makers say risks are "tilted toward economic weakness," indicating they may further pare rates.
S&P/Case-Shiller 20-city home price index down record 16.6%
Home prices in major US cities posted record year-over-year declines in August, providing more evidence that prices may not have bottomed out yet.
The S&P/Case-Shiller 20-City Home Price Index released today fell for the 15th consecutive month in August, and the index is now down a record 16.6% from a year earlier. That year-over-year decline is in line with expectations from economists, many of whom were anticipating a record annual decline. The 10-city composite index also declined by a record amount, down 17.7% from a year earlier.
'The downturn in residential real estate prices continued, with very few bright spots in the data,' said David Blitzer, chairman of Standard and Poor's Index Committee. Blitzer noted that for the fifth consecutive month, every region reported negative annual returns, and both the 10 and 20-city indices have been in year-over-year declines for 20 straight months.
Despite the record decline, the survey noted that the August drop was moderate when compared to drops in prior months. Cities with the largest annual declines in home prices are Phoenix and Las Vegas, where prices have declined more than 30% over the past year. Other cities with declines higher than 25% are Miami, San Francisco, Los Angeles and San Diego.
Governors, mayors disagree on bailout package
Governors and mayors disagreed Wednesday, on whether the U.S. government should stimulate the economy by bailing out states with battered budgets. In testimony before the House Ways and Means Committee in Washington, Gov. David Paterson of New York and Mayor Douglas Palmer of Trenton, N.J. both called on Congress to provide a stimulus package, similar to but smaller than the recent $700 billion bailout for the finance industry.
"As part of a comprehensive second economic stimulus package, states need direct and immediate fiscal relief," Paterson said, urging Congress to pass a bill before adjourning for the year. The New York governor reiterated statements he made Tuesday: that his state faces a $47 billion deficit by 2012 because of overspending, the Wall Street meltdown and the recession. He repeated his projection that 160,000 New Yorkers will lose their jobs as a result of the recent downturn.
Paterson said that New York needs fiscal support for road, bridge and water projects, and that even an infusion of food stamps would help to bolster the economy. Mayor Palmer, who is the former president of the U.S. Conference of Mayors, said the Wall Street meltdown has had a "profound effect" on his city of Trenton, which relies heavily on support from the state of New Jersey, which is facing a $4 billion budget deficit. As a result, he said the city is cutting 10% of its workforce, including police officers and firefighters, but it still faces a potential 43% jump in its tax rate.
"In the words of the great poet John Lennon, 'Help! I need somebody!" said Palmer. "We need not only hope, but resources, to put people back to work." But Gov. Mark Sanford of South Carolina shot down the merits of supporting a proposed stimulus for cities and states from the National Governors Association, doubting whether it would work, and decrying the notion of putting the nation further into debt.
"In fact, if this $150 billion stimulus package is passed, this year's budget deficit could top $1 trillion - adding to the over $10 trillion national debt and making it 70% of a roughly $14 trillion economy," said Sanford. "That would be the highest level since the early 1950s when the nation was still paying down the accumulated costs of World War II." Rep. Charles Rangel, D-New York, chairman of the House Ways and Means Committee, supports the idea of a stimulus bill. He urged bipartisan support for "assistance for local and state governments, as we have been able to do with our banking and finance industry."
So far this year, the economy has shed 760,000 jobs nationwide and the unemployment rate is 6.1%, a five-year high. In an attempt to grease the skids towards economic recovery, Congress approved a $700 billion bailout bill earlier this month, in part to buy bad mortgage-related investment from Wall Street to free up lending and thaw the credit freeze.
Fannie Mae to Write Down $20 Billion in Deferred Tax Assets
Fannie Mae will write down about $20 billion of assets after being seized by the government last month, eroding its capital and increasing the likelihood the U.S. Treasury may need to inject cash into the mortgage giant. The company will "take a valuation allowance" that is "likely to be substantially all of the value of its deferred tax assets" as of Sept. 30, Fannie said today in a statement. The Washington-based company is scheduled to report earnings Nov. 7.
The use of deferred-tax assets and other accounting methods by Fannie and Freddie Mac to inflate their capital reserves was cited by regulators as one of the reasons why the government took control of the firms. Fannie Chief Executive Officer Herb Allison and Freddie CEO David Moffett, appointed by the government, have said they are revaluing all of their assets.
"Many companies have taken partial reserves against their deferred tax assets when they have profitability challenges and these guys did nothing," said Moshe Orenbuch, an analyst with Credit Suisse in New York. "They recognized the entire tax asset, which was certainly on the aggressive side." Fannie's $20.6 billion of deferred-tax assets as of June 30 accounted for almost half its $47 billion in regulatory capital, according to company filings. Freddie applied $18.4 billion in tax credits toward its $37.1 billion in regulatory capital in the second quarter, according to company filings.
Deferred-tax assets are created by previous losses and can be carried forward and applied against future earnings to lower a company's tax bills. Writing down the assets may indicate that Fannie sees little chance of returning to profitability soon. Accounting rules require a company to assess whether it can use the tax asset. If future earnings are in doubt, a company must consider reducing the value of the credits. "The issue of the deferred tax writedown has to do with whether you can reasonably expect to be consistently profitable," Orenbuch said. "Both Fannie and Freddie have challenges to their profitability and the steps the government is taking to reducing their fees would actually limit their ability to be profitable."
Fannie and Freddie own or guarantee at least 40 percent of the $12 trillion in U.S. residential-mortgage debt outstanding. They make money by buying home loans and mortgage securities, profiting on the difference between their cost of borrowing and the yield on the debt. They also guarantee and package loans as securities for a fee. Fannie and Freddie had combined net losses of $14.9 billion over four quarters as prices for houses tumbled and homeowners defaulted on their mortgages.
Fannie's decision for a writedown increases the likelihood Freddie will have to do the same. "Your ability to defend that position will go down with the fact that Fannie Mae's doing this," Orenbuch said. "The bigger question is Freddie because there the government will have to pony up some money." The Treasury agreed to inject up to $100 billion apiece into Fannie and Freddie to keep their net worth positive. Orenbuch said the change increases the chances that Treasury will need to make an immediate investment in Freddie.
Freddie's book value stood at $12.9 billion at the end of June, while Fannie's stood at $41.2 billion. Eliminating the deferred tax credits would leave Freddie with a negative book value of $6 billion and would cut Fannie's net worth in half, before factoring in other potential writedowns, Orenbuch said. Federal Housing Finance Agency Director James Lockhart told lawmakers last week that much of the companies' capital was based on "intangible assets" that didn't amount to actual cash that could be used in a crisis.
Examiners from the Federal Reserve, who helped FHFA review the companies' books, found that in addition to thin and low quality capital, the companies may have been understating their losses, Dallas Federal Reserve President Richard Fisher said last month. "When you look at temporary impairments and so on, we found that many of them might not be so temporary," Fisher said in response to an audience question after a Sept. 8 speech in Austin, Texas.
GMAC Seeks Bank Status for Rescue Funding
GMAC, the financing arm of General Motors, is in negotiations to become a bank holding company, a shift that would allow it to take advantage of the government's $700 billion financial rescue package, according to sources familiar with the matter.
Over the past few weeks, GM has been talking about the possible change of status with the Federal Reserve, according to the sources, who were familiar with the effort but not authorized to speak about it on the record.
Already facing a cash crunch, GM's position has been made even more problematic because of recent problems in global credit markets. Its own borrowing costs have risen, while its dealers and potential car buyers have found it more difficult to finance inventory and vehicle purchases.
"We are exploring a number of avenues with government to find a solution to the problem of constrained access to funding," said GMAC spokeswoman Toni Simonetti. She declined to comment on GMAC seeking bank holding status. Cerberus Capital Management controls 51 percent of GMAC, while GM owns 49 percent.
This opens up yet another possible avenue for GM to grab federal cash. GM has been in talks with Cerberus, which also owns an 80 percent stake in Chrysler, about merging GM and Chrysler. The idea would be to cut costs by streamlining operations of the two automakers, but analysts say a combined GM-Chrysler would need at least $10 billion to finance a merger.
Already, the Treasury Department is in negotiations to expand the rescue plan to include U.S. auto companies. Under a broad interpretation of the law that authorized the $700 billion financial rescue, Detroit's Big Three could become eligible for aid, said Treasury officials. As a bank holding company, GMAC could have its debt temporarily guaranteed by the FDIC, get equity from the Treasury's capital purchase program, and turn to the Fed for cheap, short-term loans.
Separately, GM today said its global sales fell 11 percent in the most recent quarter, citing weak U.S. demand. GM said it sold 2.11 million vehicles in the third quarter. The company posted a net loss of $15.5 billion in the second quarter and it has been burning through more than $1 billion a month.
GMAC Says Fed Grants Access to Commercial-Paper Plan
GMAC LLC, the money-losing auto finance and home-loan lender, said it was granted access to the U.S. Federal Reserve's new program to help unlock short-term commercial credit markets. "We did apply and we were approved to participate," Gina Proia, a spokeswoman for the Detroit-based company, said in an interview. Proia said the company can tap the Fed program through its investment-grade New Center Asset Trust unit, which issues asset-backed commercial paper and has a capacity of about $10 billion.
The Fed's Commercial Paper Funding Facility may help ease a cash squeeze at GMAC, the primary lender to customers of General Motors Corp. GMAC Chief Executive Officer Al de Molina said in an e-mail to employees this month that the company has "limited if any access to funding" for its mortgage and auto-lending units. The Detroit-based company racked up $5.4 billion of losses in the past year.
The Fed began buying commercial paper from companies yesterday to reduce rates, lure back investors and unlock the market, which seized up last month following the bankruptcy of Lehman Brothers Holdings Inc. General Electric Co., which sold debt to the Fed yesterday, Korea Development Bank and Morgan Stanley are among several dozen companies that have signed up for the program, which was announced on Oct. 7. Cerberus Capital Management LP, the New York-based buyout firm, owns 51 percent of GMAC and GM, the biggest U.S. automaker, owns the rest.
The Fed program is aimed at borrowers with the highest ratings. GMAC is rated junk by Standard & Poor's, Moody's Investors Service and Fitch Ratings, and both GM and GMAC have battled speculation about their survival. GM may face bankruptcy as the credit crunch drives down business, Standard & Poor's analyst Robert Schulz has said. GMAC in June had to arrange more than $60 billion of credit for itself as foreclosures put the firm's home mortgage unit on the brink of failure.
New Center Asset Trust purchases highly rated securities backed by auto loans and other assets from GMAC units, financing its activities by issuing asset-backed commercial paper. GMAC's paper issued through New Center Asset Trust is rated P-1 by Moody's Investors Service and F1+ by Fitch Ratings. A Federal Reserve spokesman declined to comment specifically on GMAC's participation. "We have made no exceptions to our program; we only accept A-1, P-1 or F1-rated paper," said New York Federal Reserve Bank spokesman Andrew Williams. "We don't comment on which firms are registered for the Commercial Paper Funding Facility."
GMAC said today it will halt new vehicle loans through its financial services unit in seven European countries. The company previously curbed auto loans in the U.S. to borrowers with credit scores of at least 700, making it harder for some customers to buy a car or truck. GMAC's Residential Capital LLC, the 12th-biggest subprime mortgage lender in 2006, has reported seven straight quarterly losses amid the worst housing market since the Great Depression. Since July, GMAC has sold its home-services unit, closed all 200 GMAC Mortgage retail offices and dismissed 60 percent of ResCap's staff. Proia declined to say if Minneapolis-based ResCap or any other GMAC units were receiving federal help.
Ford Motor Credit has registered for the commercial paper program, spokeswoman Brenda Hines said in an interview. Ford Credit won't provide any details until parent company Ford Motor Co. reports third-quarter financial results on Nov. 7, she said. Chrysler Financial Corp. has also applied under the program, according to a person familiar with the request who asked not to be named because the auto loan company's plan hasn't been made public. Cerberus also owns Chrysler Financial.
Ukraine central bank chief warns of looming default as parliament deadlock threatens IMF loan
Ukraine's central bank chief is warning that the nation's banks and corporations could default on their foreign debt if the country fails to receive a promised emergency loan from the International Monetary Fund.
Volodymyr Stelmakh says the failure to secure an IMF loan will lead to "a moral discreditation," and "the announcement of default." He says the issue is of concern to "every Ukrainian." Stelmakh spoke at a news conference Wednesday.
IMF mission head Ceyla Pazarbasioglu told reporters Wednesday that to get the loan Ukraine must maintain a prudent fiscal policy and launch structural reforms. Parliament needs to approve a series of bills for the country to do that, but it's been deadlocked for nearly two weeks due to a standoff between the president and prime minister.
IMF agrees to $25.1 billion rescue deal for Hungary
The International Monetary Fund, the European Union and World Bank have agreed to a $25.1 billion (£15.6bn) economic rescue package for Hungary to help it cope with the global financial crisis. The IMF said it had reached an agreement with Hungary for a $15.7 billion loan deal, while the European Union stood ready with an additional $8.1 billion in financing and the World Bank another $1.3 billion. The IMF's portion falls under a 17-month stand-by loan arrangement and could be approved by the IMF board in early November.
"The Hungarian authorities have developed a comprehensive policy package that will bolster the economy's near-term stability and improve its long-term growth potential," IMF Managing Director Dominique Strauss-Kahn said in a statement. "At the same time it is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets," he added.
The agreed financing by the IMF is more than 10 times Hungary's IMF quota, way above the limit of three times the quota for countries in trouble. Each IMF member is assigned a quota based on its size in the world economy, which determines its financial commitment to the fund, its voting power, and has a bearing on how much it can borrow from the global lender.
Strauss-Kahn said the core measures of the program should help improve Hungary's fiscal balance and strengthen its financial sector. "Specifically, the package includes measures to maintain adequate domestic and foreign currency liquidity, as well as strong levels of capital, for the banking system," he said. "Important measures in the fiscal area will reduce government- financing needs and ensure longer-term debt sustainability," Strauss-Kahn added.
Hungary's financial markets firmed on Tuesday on hopes of the imminent financial help from the IMF, but its Prime Minister Ferenc Gyurcsany warned the Central European country is likely to slide into recession next year. The country has been battered by the financial crisis because its banking system is heavily exposed to foreign financing at a time when investors are pulling back from developing economies worldwide.
Hungary Pays With Growth Prospects for IMF-Led Bailout Package
Hungary, which yesterday got the largest aid package of the global financial crisis, may pay for stabilizing its markets with a deeper recession, said Laszlo Andor of the European Bank for Reconstruction and Development. The government, which secured $25.5 billion in loans from the International Monetary Fund, the European Union and the World Bank, expects a 1 percent contraction next year, the first since 1993, as spending cuts and an emergency rate increase will stifle domestic demand and export markets falter.
"The aid package won't make Hungary immune to the real economy effects of the financial crisis," said Andor, an EBRD board member. "Where the IMF appears with its strict conditions, the requirement of consolidation inevitably leads to real economy and social consequences." Western Europe is on the brink of a recession, exacerbating problems for neighboring emerging economies, which were scorched by investors dumping riskier assets in a flight to safety. Hungary was forced to disregard growth prospects after its currency fell to a record and stocks plunged.
"A sharp economic slowdown, driven by declining foreign- currency credit flows to the private sector, tight fiscal conditions and weak external demand is unlikely to be avoided," Eszter Gargyan, an economist at Citigroup Inc. in Budapest, wrote in a note to clients. Emerging economies are turning to the IMF as investors, stung by losses in developed countries caused by the global financial crisis, sell riskier developing-market stocks, bonds and currencies. Ukraine and Iceland have received IMF financing, while Pakistan and Belarus have asked for loans.
Hungary's central bank last week raised its benchmark interest rate to 11.5 percent from 8.5 percent at an emergency meeting, the biggest increase in five years. Prime Minister Ferenc Gyurcsany pledged to cut pensions and public-worker wages to narrow the budget gap more than previously planned. The measures are thwarting an economic recovery after growth slowed to the slowest in 14 years in 2007 after Gyurcsany started cutting spending, jobs and raised taxes the previous year to narrow a record budget deficit. The government earlier expected growth to quicken to 3 percent next year.
This month, Hungarian assets were battered as foreign- currency borrowing by local companies, along with slower growth, a wider budget deficit and higher government debt than elsewhere in east Europe raised concern that the country may have difficulties in securing funding. The forint was the world's second-worst performer against the euro in the three months through the end of last week, behind the Polish zloty. The benchmark BUX stock index, which includes OTP Bank Nyrt. and refiner Mol Nyrt., lost 45 percent in that period.
Markets plummeted, with interbank lending and the local bond market frozen even after the European Central Bank agreed to a 5 billion-euro facility and the Magyar Nemzeti Bank started offering swap auctions and buying back debt to resuscitate trading. The government was forced to cancel several bond auctions because of a lack of buyers at levels it would accept, raising concerns about its ability to finance the current account and budget deficits.
"This package should be sufficient to restore confidence in Hungary's ability to finance its 2009 budget," Zsolt Papp, an economist at KBC Groep NV in London, wrote in a note to clients today. Markets were hit by the global financial crisis two years after Gyurcsany pushed through tax increases and cuts in public sector jobs and household energy price subsidies to narrow the widest budget deficit in the EU.
The government now aims to narrow the shortfall to 2.6 percent of gross domestic product next year from 5 percent in 2007 and an estimated 3.4 percent this year. Gyurcsany has pledged to meet all euro-adoption terms by the end of 2009. The IMF is providing a 17-month stand-by agreement to Hungary, which will be approved by the Fund's executive board next month. A stand-by agreement is a line of credit that doesn't necessarily need to be used. "It is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets," IMF Managing Director Dominique Strauss-Kahn said in a statement in Washington yesterday.
Investors shun Greek debt as shipping crisis deepens
Freight rates for shipping are crashing at the fastest pace ever recorded as banks shut off credit lines to the industry, precipitating a sudden crunch in world trade. The Baltic Dry Index measuring rates for coal, iron ore, and grains, and other dry goods plummeted below 1000 yesterday, down 92pc since peaking in June.
The daily rental rates for Capesize big ships have dropped $234,000 to $7,340 in weeks, leaving operators stuck with heavy losses on long leases. Empty ships are now crowding Singapore and other global ports. "It is extremely serious, " said Jeremy Penn, president of the Baltic Exchange. "Freight rates have never fallen this steeply before. It is telling us that world trade in raw materials has slowed dramatically. Shippers are having genuine difficulty obtaining letters of credit from banks," he said.
The shipping crisis is another blow to the City of London, which earned £1.3bn in foreign receipts from the industry last year. Maritime services employs 14,500 staff in the UK. It is also beginning to cause strains in Greece, where the yield spread between Greek 10-year bonds and German Bunds rocketed to a post-EMU record of 123 basis points yesterday. The upheavals on the bond markets came as Iceland was forced to raise interest rates 6 percentage points to 18pc by the IMF as a condition for its $2bn (£1.3bn) rescue package.
The draconian terms raise fears that the IMF will apply the same medicine to Hungary, Ukraine, Belarus, Serbia, as well as Pakistan and a long list of other countries that may soon need a bail-out. Critics says the Fund risks repeating errors it made in Asia's 1998 crisis when it imposed a one-size-fits-all contraction policy on the region, causing bitter anti-Western feelings and arguably making matters worse.
A deflationary strategy of this kind could prove counterproductive –or worse – if applied in enough countries simultaneously. It would defeat a key purpose of the rescues, which is to stabilise the global financial system. The Icelandic krona traded for the first time in a week, but dealers said it was changing hands at roughly 240 to the euro compared with the rate of 152 to the euro fixed by the central bank.
Ominously for Greece, this is the first time its debt has broken its tight linkage with Italian bonds – which traded at spreads of 100 yesterday. The markets are now clearly singling out the country as the most vulnerable of the EMU members. "This shipping slowdown is a worry for Greece, " said Chris Pryce, a director of Fitch Ratings, which downgraded the country's credit outlook last week. Fitch warned that Greece has a public debt of 92pc of GDP, leaving it no safe margin for fiscal stimulus in a downturn.
"Shipping has overtaken tourism to become the country's biggest industry. They get their finance from other countries, so I think there are going to be a lot of worried bankers in London," he said. Shipping specialists say the Royal Bank of Scotland and HSBC provide the lion's share of loans for both the bulk goods and tanker fleets, exposing these two banks to further potential losses.
Greek shipping families control a third of the global freight market for bulk goods, with operations split between London and Pireaus. Mr Pryce said Greek banks had expanded rapidly in the Balkan region and Turkey, with heavy exposure to Serbia and Macedonia. "They saw this as a growth region, but they may be thinking differently about it now," he said.
Michael Klawitter, a credit strategist at Dresdner Kleinwort, said the market flight from Greek bonds marked a dangerous moment for the euro. "There has been a massive widening of spreads. We are no longer having a theoretical discussion about the viability of monetary union. People are really concerned for the first time," he said.
"It is not surprising that they are looking closely at Greece. Greek banks have been buying all kinds of assets across the Balkans and they are heavily exposed to the housing market," he said. Greece has a current account deficit of 15pc of GDP, the highest in the eurozone. Investors were willing to turn a blind eye to this during the credit boom, but they have now become wary of any country with a deficit in double digits.
Mr Klawitter said Greece is not the only country in the eurozone that is coming under the microscope. "The spreads on what was once rock-solid Austrian debt have reached 90. Investors have started to look at the numbers and they realise that cross-border loans by Austrian banks to Eastern Europe are over 80pc of GDP, and that is really worrying in this turmoil. They have seriously begun to think that one – or several – East Europe an countries are going to fail to get their act together and go the way of Iceland," he said.
Germany says Pakistan needs IMF loan within week
Pakistan must secure a loan from the International Monetary Fund within a week, the German foreign minister said Tuesday, as the country scrambles for aid to avert a run on its currency and a default on its international debt. Without help, the fight against terrorism in the nuclear-armed nation could be complicated by out-of-control price increases, fewer jobs and rising public anger in the country of 160 million people.
German Foreign Minister Frank-Walter Steinmeier said Tuesday that Pakistan's problems were so urgent it had no choice but to seek an IMF loan. "I can only hope that the decision is taken quickly, because a loan in six months or six weeks will not help, but only if it is approved within the next six days," Steinmeier told reporters after talks here with Pakistani officials. "Then one can perhaps avoid the most difficult situation in Pakistan."
While Pakistan has already approached the IMF to help solve its balance of payments crisis, it has held out hope that it can raise about $5 billion from other lenders — avoiding an IMF austerity program. Steinmeier said Germany, Europe's biggest economy, and other countries were discussing a separate package of assistance for Pakistan to boost faltering economic growth. "That is the only way to stabilize the situation," Steinmeier said.
Pakistani Foreign Minister Shah Mehmood Qureshi said Steinmeier had been "very supportive" of Pakistan in talks with its foreign backers. He did not mention the IMF. High oil prices and dwindling overseas investment have left Pakistan with a yawning balance of payments deficit. The gap is draining its foreign currency reserves and pushing it toward a default on its international debt.
Pakistani officials had hoped to persuade allies such as the United States and Saudi Arabia, as well as institutions including the World Bank, to provide soft loans or accelerate pledged development aid. But with many governments preoccupied with the global banking crisis, Pakistan has received no firm public commitments of assistance. An IMF program would be politically unpopular in Pakistan because it likely will come with tough conditions.
The government insists it already has taken action to slash unsustainable subsidies on food and fuel — measures that hurt in a country where about three-quarters of the population live on no more than $2 a day. There is speculation that an IMF loan might come with demands to slash the government's own budget, including defense spending. In a sign of the times, the army on Tuesday halted work on a new general headquarters in the capital, saying it "shares the nation's quest for economic stability through a spirit of sacrifice."
'Financial Contagion' Spreading in Developing World
With a number of developing countries now turning to the International Monetary Fund for help, the IMF itself may need some assistance. British Prime Minister Gordon Brown says a number of countries must join forces to stop the spread of the "financial contagion."
It's been called the second wave of the financial crisis. First banks were having difficulty gaining access to much-needed liquidity. Now, though, a number of developing countries around the world have been hit hard as foreign currency has evaporated and the value of local currencies has plunged. They are frantically looking for help -- and the international institutions that provide such help may require additional funding themselves.
Hungary was the latest country to secure an international helping hand, in the form of a €20 billion ($25 billion) loan package agreed to on Tuesday. European Union governments are to supply €6.5 billion of the total with the International Monetary Fund on the hook for €12.5 billion and the World Bank throwing in another €1 billion, according to a statement released by EU finance ministers in conjunction with the European Commission.
In return for the emergency loans, Budapest commits itself to tightening up its budget policies, including a reduction in the country's overall debt as well as a commitment to balancing its budget. The help became necessary this month as the value of the Hungarian currency, the forint, has dropped by 20 percent against the euro in the last four weeks as a result of restricted access to hard currency. The forint's fall has made it difficult for Hungarians to pay back housing and other loans taken out in foreign currencies. Prime Minister Ferenc Gyurcsany said on Tuesday that he expects his country's economy to contract by 1 percent this year.
The loan comes as European leaders have begun pushing for the international community to make more money available to help stem the further spread of the financial crisis to more developing countries. French President Nicolas Sarkozy said on Tuesday that he plans to propose an increase in the amount of money the EU can make available to member states not in the euro-zone. He would like to see the maximum raised from the current €12 billion to €20 billion.
Earlier in the day, British Prime Minister Gordon Brown said that the IMF would likely need much more than the $250 billion it currently has available to help out countries in need. Brown didn't put a number on the potential shortfall, but he said "we must act now, we must set up the fund as quickly as possible." He indicated that countries with large currency reserves, like oil exporters and China, may be asked to take the lead. In pitching the idea, Brown also voiced concern that the "financial contagion" could spread to yet more developing countries. "It is in every nation's interest and in the interests of hardworking families in our country and every country that financial contagion does not spread," he said in London.
The assistance for Hungary comes just days after the IMF agreed to a $16.5 billion loan for Ukraine in an attempt to forestall a financial meltdown in the country. On Tuesday, however, the parliament in Kiev was unable to pass legislation required as a precursor to that loan. It remains unclear exactly what conditions the IMF has placed on the loan, but according to the Associated Press, draft legislation indicates that cuts to the social system and an increase in taxes may be coming.
Ukraine plans to take another stab at passing the necessary legislation on Wednesday. But the country remains in a political deadlock as President Viktor Yushchenko continues to battle Prime Minister Yulia Tymoshenko over new elections. A sharp reduction in global demand for steel -- an industry which accounts for 6 percent of Ukraine's gross domestic product and 40 percent of its exports -- has hit the country hard and has contributed to a collapse of the Ukrainian currency, the hryvna, as foreign currency inflows have dried up.
But Hungary and Ukraine are not the only countries in need of help from the IMF and the international community. Belarus may also be planning to ask for emergency aid. And Pakistan may ask the IMF for an emergency loan as well if it cannot find funding from its allies. Pakistan is eager to avoid the tough conditions the IMF would likely impose in exchange for such a loan. A statement released on Tuesday by the Pakistani Foreign Ministry said that President Asif Ali Zardari "underlined the government could ill afford financial assistance from the IMF with tough conditions," in talks with a British envoy.
German Foreign Minister Frank-Walter Steinmeier, in Pakistan on Tuesday, indicated that the country likely had little choice but to formally request help from the IMF. "I hope the decision will be taken soon. It won't help to have it in six months, or six weeks. Rather, we need it in the coming six days," Steinmeier said at a press conference in Islamabad.
Iceland too is looking for more money in addition to the $2 billion emergency loan it has already received from the IMF. The central bank in Reykjavik on Tuesday increased its key interest rate by a whopping 6 percentage points to comply with IMF conditions on that loan. The jump reverses a 3.5 percent cut made earlier this month and raises the rate to a record high of 18 percent in an effort to keep foreign currency in the country. Still, the country may need more help with Prime Minister Geir Haarde indicating that he is looking for an additional $4 billion. He told the Associated Press that he was hoping to get the additional funding from other Nordic countries.
VW shares halve as Porsche eases short squeeze
Shares in carmaker Volkswagen nearly halved on Wednesday after controlling shareholder Porsche took steps to ease a squeeze on shortsellers that more than quadrupled the stock in days. Porsche itself had prompted the meteoric rise in VW stock with its announcement on Sunday that it had effective control of 74.1 percent of VW, leaving less than 6 percent in the market.
"In order to avoid further market distortions and the resulting consequences for those involved, Porsche SE intends... to settle hedging transactions in the amount of up to 5 percent of the Volkswagen ordinary shares," Porsche said in a statement. "This may result in an increase in the liquidity of the Volkswagen ordinary shares," it added. Merck Finck's Robert Heberger said Porsche's counterparty in the options deal would probably have covered their position by buying VW shares, and could release some now that Porsche had settled some of the options.
The stampede to cover open short positions after Sunday's announcement vaulted VW's market value to 278 billion euros (221.2 billion pounds) and its shares to finish at a record 945 euros on Tuesday. Investors cried foul, and German securities watchdog BaFin said it would take a closer look at Porsche's dealings for signs of insider trading and market manipulation, but the company said again on Wednesday it had done nothing wrong.
Analysts at Commerzbank and Merck Finck estimated Porsche's strike price on its cash-settled hedges were around 100 euros per share, meaning Porsche could make 5.9 billion euros from selling 5 percent of its call options at a price of 500 euros. Although it stands to gain more than the value of all of its listed preferred shares put together, a Porsche spokesman denied speculation it wanted to "cash in" with the deal. German hedge fund association BAI said some funds might have been damaged by the squeeze, but that was inevitable in a market economy.
Aleksander Kluzniak, its chief lobbyist, said he saw no need for a regulatory clampdown on derivatives, such as a registry of hedging positions, just because the market was surprised by creeping takeovers like Porsche-VW and Schaeffler-Continental, which were facilitated by building up positions in cash settled options. "I doubt it would lead to the required results. New types of derivatives or trading techniques would emerge that were not subject to this regulation," Kluzniak explained.
Only 24 hours after peaking as the world's biggest company by market value, VW stock fell on Wednesday as low as 491 euros as the market exhaled in relief that Porsche was releasing a part of its hedge and alleviating the worst of the squeeze. The retreat in VW stock kept Germany's blue-chip DAX index in check despite-double digit percentage gains on other stocks after Wall Street clocked up its second best day's gain on Tuesday. Down 36 percent at 600 euros by 11:41 a.m. British time, VW's fall shaved off roughly 485 points from the index on Wednesday, meaning the DAX would otherwise be trading up nearly 11 percent were it not for the Volkswagen effect.
Deutsche Boerse, operator of the Frankfurt exchange, said late on Tuesday it would cut the weighting of Volkswagen shares in the DAX to 10 percent from Monday after VW's leap had distorted the index. Index provider Stoxx Ltd also said it would cut the weighting of Volkswagen shares in its main indexes and cut Volkswagen's free float factor to 0.3732 from 0.4963. Volkswagen shares touched 1,000 euros at one point, pushing its weighting in the 30 member-DAX index to 27 percent.
Shortsellers who rushed to close their positions after Porsche's announcement on Sunday were paying virtually any price to get their hands on the few remaining shares, even though Porsche insisted its announcement would allow short sellers to unwind their positions "without haste and without greater risk."
There was wide speculation about which investment companies had been caught out by the short squeeze, and many banking shares fell as a result. Hedge fund manager David Einhorn's Greenlight Capital suffered heavy losses from a VW trade, people familiar with his portfolio said on Tuesday. The fund declined comment.
Porsche in $20 Billion 'Sting'
The sports car giant Porsche has pulled off one of the greatest share killings of all time in a coup that has left some of the world's largest hedge funds nursing combined losses that could total $20bn (£12.6bn).
The vast sum was won and lost in bets on the share price of Volkswagen. While Porsche has been building a secret 74 per cent stake in its rival, the hedge funds have been betting that the shares will fall. The shares soared by 400 per cent in two days, leaving Porsche with a huge profit and the hedge funds – some of which are based in London – with losses that could drive them into bankruptcy.
City traders were stunned by the audacity of Porsche's move, although there is no suggestion that it broke German law or trading regulations. The sudden rise in Volkswagen's share price – from about €200 to more than €900 – was triggered by the announcement at the weekend of Porsche's share-buying. The hedge funds had short-sold the shares – in effect a bet that they would fall – and so were left huge losses by the rally.
The Volkswagen debacle is the latest blow for hedge funds. In the boom years, these investors made dramatic returns – often on behalf of pension funds – by taking huge bets on a variety of financial instruments. But they have been hit hard by the credit crunch, with markets moving against them and banks increasingly unwilling to lend them money.
Analysts at Morgan Stanley, the investment bank, last week estimated the global hedge fund industry could lose as much as $500bn in the value of funds under management in the second half of this year, with Europe worst-hit because of its reliance on short-selling. They thought they were on to a sure thing with Volkswagen, given the crisis in the global automotive industry. Last week, VW's shares tumbled by a third in two days, and hedge funds piled into short positions, expecting it to be the start of a longer-term collapse in the share price.
"Last week when VW came down 50 per cent some people thought it was going to crash," said one market participant. "Some funds just said, 'it'll go all the way now it has broken through so let's get in (with a short position).'" But they had not counted on Porsche's dramatic intervention. The maker of the iconic 911 and other sports cars had last year built up a 35 per cent stake in VW, but said at the time it had no plan to buy a majority of the maker of Golf hatchbacks.
Then in March this year Porsche's supervisory board gave the go-ahead to raise its VW voting stake to more than 50 per cent and thus make the world's third-largest car maker its subsidiary. But the company denied reports that it was interested in more control, saying this "overlooks the realities in VW's shareholder structure," adding the probability of gaining control of 75 per cent was "extremely low". Hence the hedge funds' belief that VW shares would fall still further – and the stunned reaction to Sunday's announcement that Porsche controlled 74 per cent of VW's shares.
The secretive nature of Porsche's share buying has raised eyebrows, but the authorities in Germany seem untroubled by the car-maker's tactics. German regulators said yesterday they were examining trades in VW shares, but not the role of Porsche.
"First of all we will check trades in shares of VW to find any points that refer to possible market manipulation or insider trading. We are looking at the whole process," said a spokeswoman for BaFin, Germany's financial markets regulator. "That is the first step. If we find points that might look like market manipulation or insider trading then we will launch a formal investigation."
"We vehemently reject the accusation of share-price manipulation," a spokesman for Porsche told Reuters, adding that the market seemed to have mixed up cause with effect. He said: "The ones responsible are those that speculated with huge sums of money on a falling Volkswagen share price." Porsche, with Wendelin Wiedeking at the helm, added that it would push for control of the company.
The hedge fund industry has seen huge growth over the past few years, with many ambitious young entrepreneurs, including Nathan Rothschild, opting to enter the sector. It also poached many senior investment bankers and private equity executives, attracted by the high returns and pay, and relative freedom of working for what are normally small firms.
Hedge funds thought they could outperform traditional investors by using increasingly exotic ways of investing their money. They also presented themselves as slight rebels, different from the staid financial establishment, often opting to set themselves up in Mayfair, west London, rather than the City or Canary Wharf. There will be those in Germany who will relish the discomfort of the hedge funds. In 2004, a German politician, Franz Muenterfering, described private equity firms and hedge funds as "locusts".
Banks spin over Volkswagen share surge
Shares in European and US banks swung wildly today amid rumours that they could be facing huge losses after betting mistakenly on a fall in Volkswagen stock. As the market value of the German carmaker rose sharply following the acquisition by Porsche of a 74.1 per cent stake, concern spread over banks' exposure to the surge.
Investors' nerves - already strained by a month of turmoil - suffered additional stress as Volkswagen shares closed up by 73.3 per cent, following a 146 per cent increase on Monday. The rise - which briefly made the manufacturr the world's most valuable company yesterday - was attributed to a scramble by banks and investment funds to get their hands on the 6 or so per cent of stock available on the market after Porsche's raid.
Societe Generale, the French group, was hit by the speculation as its shares tumbled in Paris for the second day in a row to close down 12.27 per cent at €33.33. The fall came despite SocGen's efforts to reassure markets that it had no skeletons in the cupboard - the third time this month that it has been forced to issue a statement in a bid to calm fears over its health. After its shares had slumped by 15.6 per cent on Monday, SocGen reiterated its forecast of a €1 billion net profit in the third quarter.
In the US, Morgan Stanley and Goldman Sachs, the investment banks, were also caught up in the latest wave of panic selling amid rumours that they, too, could be exposed to the Volkswagen short squeeze. A spokesman for Morgan Stanley denied the claims, and sources at Goldman Sachs said the group had no significant exposure.
But market jitters continued to undermine financial stocks, forcing authorities in Italy to suspend shares in UniCredit which fell 12.12 per cent to €1.55 and Intesa Sanpaolo whose shares dropped 9.31 per cent to €2.14. Many are thought to have borrowed Volkswagen shares in the belief the price would fall, betting that they could sell the stock, buy it back at a lower price and keep the profit - the practice of short selling. But the move by Porsche drove up the share price, leaving speculators with burnt fingers and forcing into a battle for the remaining free float sending Volkswagen stock even higher.
"All you would need would be to have shorted Volkswagen shares with too much leverage, and you'd be facing colossal losses," said a fund manager in Paris Christian Aust, an analyst at UniCredit, said: "What we have seen this week is definitely short covering. Nobody else would buy Volkswagen shares at those prices. It doesn't make any sense."
Morgan Stanley Makes Bid to Lure Deposits
Morgan Stanley, which was converted into a bank-holding company in mid-September, is making a big push to lure new deposits. The effort comes as deposits have increasingly been seeing a flight to quality, with customers moving their money out of banks they perceive to be weaker and into those they believe are stronger.
The company said it is already seeing increases in deposits, including $3 billion in certificates of deposit in the past four weeks at its Morgan Stanley Bank NA subsidiary. At the end of its fiscal third quarter, Morgan Stanley had $36 billion in deposits. But in a bid to win even more deposits, Morgan Stanley said it is starting a campaign with its 8,500 financial advisors to raise client awareness about its banking services. Another campaign is being launched to expand its business banking division. The company also has a number of new bank products planned to launch next year, including new savings and global currency accounts.
Morgan Stanley also said it would use its Swiss bank to help expand its international activities, and would also explore acquisition opportunities. The bank's latest moves come as its shares have fallen 44% since it became a Federal Reserve-regulated bank-holding company, showing investors continue to be fearful about the company's future. Rival Goldman Sachs Group Inc., which was also converted into a bank-holding company in mid-September, has seen a 28% drop in its stock since then.
The declines have occurred even though both firms have received $10 billion preferred equity investments and a guarantee on their debt issuances. Morgan Stanley is trading at around half its tangible book value, a measure of net worth that strips out intangible assets. Goldman trades at about one time.
In addition other worries, Morgan Stanley has been shaken by concerns that Mitsubishi UFG Financial Group Inc., one of its investors, overextended itself financially. Mitsubishi recently invested $9 billion in Morgan Stanley for a 21% stake in the company. Mitsubishi said Monday it would raise as much as $10.7 billion in capital.
UK business failures rocket as banks call in the receivers
Business failures have increased by 28pc in the past three months, with banks forcing more firms into insolvency. Estate agents, banking and financial services firms and media agencies were among the hardest hit as 16,591 businesses failed in the first nine months of the year, according to information group Experian.
In the last quarter alone, 6,000 businesses closed their doors with accountants warning that the failure rate is set to jump further over the next year. Banks in particular have become "more aggressive", with the number of receiverships, which are controlled by banks rather than company directors, rocketing 152pc this quarter compared with the same period last year.
Carl Jackson, head of business recovery at accountants Tenon, said: "If it's a hostile appointment it is more appropriate to use receivership than adminstration. Banks are now taking a much more proactive role in managing their underperforming loan book." Mr Jackson said the credit crisis and deterioration in trading conditions were beginning to take their toll on Britain's business stock.
"It sounds horribly doom and gloom, but the way things have gone over the last month to six weeks I think we are just at the beginning of this and that the level of insolvencies will increase over the next six to 12 months," he said. Experian said all regions of the UK saw an increase in the rate of insolvencies, with the City of London leading the way up 54pc, followed by Wales and Scotland. In England, outside of London and the South East, business failures were running at their highest in the North West, Yorkshire and Humber and the West Midlands.
Britain has devastated our economy, Iceland complains
An Icelandic minister launched an extraordinary diplomatic attack on the British Government as she issued a direct plea to MPs to help rebuild shattered relations between the two countries.
In a letter seen by The Independent, the Foreign Minister Ingibjorg Solrun Gisladottir condemned Britain's use of anti-terror laws to freeze the assets of Iceland's crisis-hit banks and protested that the language used by British ministers had caused "devastation" in her country.
Ms Solrun Gisladottir even accused the Government of provoking attacks on Icelanders visiting Britain by stoking hostility towards her country. "Icelanders as a nation have been tarred with the same brush and are suffering real abuse in some cases," she said.
Relations between London and Reykjavik have become so strained that Iceland's Prime Minister, Geir Haarde, is threatening to sue the Government for resorting to anti-terror legislation. Iceland's Kaupthing Bank has instructed a law firm to investigate the seizure of its UK subsidiary, Kaupthing Singer and Friedlander (KSF). Iceland's key interest rate was raised yesterday by a huge 6 per cent to a record 18 per cent in a bid to meet the requirements of a £1.28bn rescue loan by the IMF.
When the scale of Iceland's crisis emerged, Gordon Brown condemned the behaviour of its government as "totally unacceptable". Officials from both sides have sought a solution but Ms Gisladottir's letter confirms the gulf between the countries. Abandoning diplomatic niceties, she said: "We are doing our best to sort out the situation in talks with the UK Treasury. But we have been shocked by the measures taken by the UK Government. It has been very difficult for Icelanders to understand how anti-terrorist legislation can be used by a close ally and friendly neighbour. It makes no sense to see an Icelandic company listed next to al-Qa'ida and the Taliban on the Treasury website."
She said Mr Brown's actions had made business between the two countries "extremely difficult", adding: "It is my hope that we will be able to rebuild the very positive and long-standing relations between the UK and Iceland."
The Labour MP Austin Mitchell, who chairs the all-party British-Icelandic parliamentary group, urged David Miliband, the Foreign Secretary, to resolve the impasse. "Our government has been heavy-handed and abrupt in dealing with the Icelandic problem," he said. "We should have helped but we bullied and made the problem worse." The Icelandic government said that Britain had "set a tone that is difficult to get away from".
The Foreign Office insisted there were still strong ties between the two Nato allies but said anti-terror laws could be invoked when Britain faced a "threat to its financial security". The Chancellor, Alastair Darling, ordered the seizure of Icelandic assets after he became worried by emergency loans made to the island's banking system by Iceland and Sweden's central banks.
On 7 October, the Financial Services Authority seized Heritable, an offshoot of the Landsbanki bank. A day later it took control of Kaupthing, Singer and Friedlander and Landsbanki's assets in the UK. Mr Darling claimed the move was necessary to protect British depositors. He told the BBC that the Icelandic government had "told me they have no intention of honouring their obligations" – but Reykjavik has strenuously disputed this claim.
Kaupthing's case could involve a £2bn High Court damages claim against Mr Brown and Mr Darling for misfeasance in public office. Richard Beresford, a partner at Grundberg Mocatta Rakison, the firm of solicitors representing Kaupthing in the UK, said the main thrust of the lender's case was that Britain wrongly applied legislation introduced to nationalise Northern Rock to seize KSF's assets. He said this was only allowed under the Banking (Special Provisions) Act if there had been a "systemic" risk to Britain's banking system.
Russia begins to refuse credit cards in worsening global financial crisis
Several Moscow city centre restaurants are now refusing to accept cards in a move not seen since Russia's last financial crisis almost a decade ago.
Some automated teller machines at Sberbank, the country's biggest state-owned bank, have also stopped accepting cards from other banks. Several electronics and mobile phone stores said they no longer accepted credit card purchases.
Over the weekend, Aeroflot, the biggest Russian airline, announced it had stopped taking credit cards payments for flights except from a handful of banks.
China Cuts Interest Rates for Third Time in 2 Months
China cut interest rates for the third time in two months to stimulate growth in the world's fourth-largest economy after the global financial crisis curbed exports and production. The key one-year lending rate will drop to 6.66 percent from 6.93 percent, the People's Bank of China said on its Web site today. The deposit rate will fall to 3.60 percent from 3.87 percent. The changes are effective tomorrow.
China's expansion dwindled to 9 percent in the third quarter from 11.9 percent in 2007 and industrial production grew at the slowest pace in six years in September as export markets dried up. The Federal Reserve may reduce its benchmark rate today and the European Central Bank has signaled that it's poised for a similar move. "This cut was driven by the slowdown in the third quarter and the likelihood that the U.S. and other central banks will cut rates," said Xing Ziqiang, an economist at China International Capital Corp. in Beijing. "It isn't likely to have an immediate impact on China's economy; what's needed is more government spending."
Economic growth has slowed for five straight quarters. Signs of weakness span property, industrial production, export orders, and the 69 percent fall in the CSI 300 Index of stocks this year. The rate cut "shows that the government is pulling out all the stops to make sure that the gentle economic slowdown seen so far doesn't turn into something more serious," said Mark Williams, an economist at Capital Economics Ltd. in London.
Export orders dropped in the third quarter to the lowest level since 2005. Home sales plunged 55.5 percent in Beijing and 38.5 percent in Shanghai in the first eight months from a year earlier, according to the official Xinhua News Agency. Sustaining growth is the government's "first priority," Premier Wen Jiabao said Oct. 25. The government has raised export-tax rebates, cut costs for home buyers and pledged infrastructure spending to protect jobs and stimulate growth. A global slowdown is curbing demand for Chinese goods. The International Monetary Fund estimates that advanced economies will expand 0.5 percent next year, the slowest pace since 1982.
China cut borrowing costs for the first time in six years on Sept. 15, the day U.S. investment bank Lehman Brothers Holdings Inc. filed for bankruptcy. It followed up with another reduction on Oct. 8 as the U.S. Federal Reserve and five other central banks made emergency coordinated reductions to counter the financial crisis. Both cuts were accompanied by reductions in the proportion of money that banks must set aside as reserves. The central bank didn't reduce reserve requirements today.
The People's Bank of China has stalled gains by the yuan against the dollar since mid-July and eased annual quotas that limit lending by banks, to protect jobs and stimulate growth. The central bank ratcheted up interest rates when the government was trying to stop the economy from overheating. China shifted emphasis from fighting inflation to sustaining growth in July, when the Communist Party's top decision-making body, the Politburo, dropped any reference to a "tight" monetary policy. Consumer-price increases have slowed after reaching the fastest pace in 12 years in February.
"Beijing's shift to focusing on inadequate economic growth, rather than on excessive inflation, in July 2008 was the right call on their part," said Donald Straszheim, vice chairman of Roth Capital Partners, a U.S. investment bank specializing in emerging markets. Capital controls, a world record $1.9 trillion of currency reserves, and a fiscal surplus will help to buffer China against the financial crisis. The nation's growth, the fastest of the world's 20 biggest economies, underpins demand for the exports of its Asian neighbors and commodities from iron ore to soybeans.
Downturn Clobbers Public Pension Funds
The market downturn is ravaging public pension funds across the United States, with many state and local governments seeing more than 20 percent of their retirement pools swept away in the turmoil. Even before the financial crisis, many large pension funds already were considered to be inadequately funded, according to the Government Accountability Office. The losses could force some states and local governments to ask taxpayers to pay more into the funds or to demand more contributions from the police, teachers and other government employees whom the benefits cover.
Public pension funds dropped 14.8 percent in value for the year ended Sept. 30, according to Northern Trust, an investment company. The funds, which typically have most of their money in stocks, have probably dropped far more than that because the markets have dropped 20 percent more since then. "We expect this is going to be the worst year we've seen since we've been tracking the funds," said William Frieske, of Northern Trust Investment Risk and Analytical Services, which began watching the funds 14 years ago. "It's got all the hallmarks of a bad -- really bad -- year."
Virginia's retirement fund, for example, has dropped about 20 percent since July 1, plummeting from $55 billion to $44 billion. Most of that fund was invested in stocks. The California Public Employees' Retirement System has lost 20 percent of its portfolio since July 1. The Maryland pension fund was down 17 percent for the year ended Sept. 30, and with about 58 percent of the fund invested in stocks, officials are expecting further significant drop-off when October's market plunges are calculated in.
"We have losses," said R. Dean Kenderdine, director of the Maryland retirement fund. "We anticipate that the market is going to return as it always has. How long that will be is uncertain. "In the meantime, we will continue to meet our obligations to our beneficiaries," he said. Public pension funds pay for more than 27 million people, according to federal statistics. The funds are supported through a combination of taxpayer money, investment returns and employee contributions.
From 2000 to 2006, an increasing number of those funds have been inadequately funded to support future payments to retirees, according to the GAO. Twenty-seven of 65 large pension funds were inadequately funded as of 2006, the GAO reported. The shortfall stems from the market decline in 2001, an increase in pension benefits and a decrease in taxpayer contributions, pension administrators say. But some critics have said one of the problems is that many public pension funds unwisely project that their investments will return 8 percent annually on average -- when in fact, returns could be far lower.
The market plunge played havoc on the careful calculations actuaries make to ensure there are enough savings to cover future retirees. Roughly 60 percent of public pension funds are invested in stocks, according to the National Association of State Retirement Administrators. The impact of the recent market drop-off on state and local governments will probably be somewhat delayed, however. Many public funds do not recalculate what is necessary to replenish their funds until June 30. By then, the market may have recovered some.
Moreover, many funds recognize gains and losses over a five-year period, not straight away, to avoid reflecting the volatility of the markets. Earlier gains in Virginia's fund, for example, have helped balance some of the recent losses, officials said. "Pension funds are long-term and designed to ride out short-term volatility," said Keith Brainard, research director for the National Association of State Retirement Administrators. "As with all investors, public pension funds have taken a hit. But they won't have to pay out all of their money next year, either."
The Age of Prosperity Is Over
This administration and Congress will be remembered like Herbert Hoover.
About a year ago Stephen Moore, Peter Tanous and I set about writing a book about our vision for the future entitled "The End of Prosperity." Little did we know then how appropriate its release would be earlier this month. Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. This process is the topic of Nassim Nicholas Taleb's book "Fooled by Randomness."
When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.
No one likes to see people lose their homes when housing prices fall and they can't afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house's value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.
But here's the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.
If you don't believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they'll do with Wall Street. Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP. And this is just the beginning.
The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP. But this 50% number makes no allowance for anything resulting from the over $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets, or the $700 billion Troubled Assets Relief Program (TARP). Nor does the 50% number include any of the asset swaps done by the Federal Reserve when they bailed out Bear Stearns, AIG and others.
But the government isn't finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid -- and yes, even Fed Chairman Ben Bernanke -- are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn't increase work. And the stock market knows it.
The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan's tax cuts, Paul Volcker's sound money, and all the other pro-growth, supply-side policies.
Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the "retirement test" for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.
The stock market is obviously no fan of second-term George W. Bush, Nancy Pelosi, Harry Reid, Ben Bernanke, Barack Obama or John McCain, and again for good reasons. These issues aren't Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren't.
I was on the White House staff as George Shultz's economist in the Office of Management and Budget when Richard Nixon imposed wage and price controls, the dollar was taken off gold, import surcharges were implemented, and other similar measures were enacted from a panicked decision made in August of 1971 at Camp David. I witnessed, like everyone else, the consequences of another panicked decision to cover up the Watergate break-in. I saw up close and personal Presidents Gerald Ford and George H.W. Bush succumb to panicked decisions to raise taxes, as well as Jimmy Carter's emergency energy plan, which included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.
The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes! Then we have this administration's panicked Sarbanes-Oxley legislation, and of course the deer-in-the-headlights Mr. Bernanke in his bungling of monetary policy.
There are many more examples, but none hold a candle to what's happening right now. Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.
GM's Vehicle Sales Fell 11% in 3rd Quarter
General Motors Corp. said its third-quarter vehicle sales dropped 11% world-wide, the latest indication that growth overseas has stopped offsetting declining sales in North America. GM, marking its third straight quarterly drop, sold 2.11 million vehicles in the quarter. That pushed GM, until recently the world's largest auto maker by sales, further behind Toyota Motor Corp., which last week reported third-quarter global sales of 2.24 million vehicles, down 4%.
In North America, a slumping U.S. market and a consumer shift to smaller cars from trucks, on which GM depends for much of its revenue, are hurting the auto maker. Until this year, overseas growth had kept GM's total vehicle sales rising, but sales in Western Europe have slid and key emerging markets show signs of weakness as economic and credit turmoil hurt consumer confidence.
The global sales data underscore the challenges GM faces amid investor concerns that the company could face a cash shortfall as soon as next year. GM is scrambling to cut costs and sell assets, as part of a plan to add $15 billion in liquidity by the end of 2009, while talks continue about a possible merger with Chrysler LLC.
Third-quarter sales in North America fell 19% to 977,804 vehicles, while sales in Western Europe fell 12% to 459,219 vehicles. Weakness in the two regions, accounting for about 68% of GM's overall sales in the period, more than offset growth in other regions. Sales in GM's Latin America, Africa and Middle East business rose 3.4%, while Asia Pacific sales were up 2.6%. The sales weakness in Europe stems from many of the same factors -- housing-market problems, tight credit and waning consumer confidence -- that have weighed on U.S.sales in recent months. Several European auto makers in the past week have lowered their sales and earnings projections, owing to the sharp downturn in the region.
In North America, GM is reworking production plans to adjust to declining sales and shifting consumer preferences. The company plans to significantly scale back production of trucks and sport-utility vehicles in North America, boost capacity for hot-selling smaller vehicles and accelerate efforts to introduce fuel-efficient cars. For the first nine months of 2008, GM sold 6.65 million vehicles, down 5.8%, and Toyota sold 7.05 million, down 4%. Toyota cut its global sales target for this year in July and has also slashed its world-wide sales goal for next year.
Both GM and Toyota have played down the significance of the sales race playing out since last year's first quarter when Toyota passed GM for the first time. GM recovered the sales lead later in the year, but only by a few thousand cars and trucks. Analysts predict the U.S. auto industry is in for a bruising October, following a September that saw auto sales hit lows unseen since the early 1990s. Edmunds.com predicts U.S. auto sales will fall 30% this month from a year ago, with GM forecast to post a 40% drop.
US motor industry: The great breakdown
Why stop at the banks? Now governments around the world are pouring taxpayer money in to bail out loss-making financial institutions, it is getting harder to argue against subsidies, loans, guarantees and other forms of government assistance for other industries, too – particularly since the economic pain is now being felt far from Wall Street.
Which is why Rick Wagoner, chief executive of General Motors, the largest US carmaker, packed his suitcase for Washington and headed to the capital again this week. He is leading a lobbying push aimed at tapping taxpayers and staving off the bankruptcy of the loss-making company. GM's coffers are being depleted at a rate of $1bn a month, and will run dry by the end of next summer. Little wonder its shares have touched levels not seen since it emerged from the Great Depression.
GM – owner of the Vauxhall brand and Chevrolet, amongst others – is in the throes of merger talks with its smaller rival Chrysler, which is also haemorrhaging cash. The hope is a merger will save money, allowing them to close more factories and cut more jobs. The trouble is, things are so desperate they don't have the cash to write the redundancy cheques. They are asking for up to $10bn in low-cost loans to tide them over. So here we are, on the brink of Bail-out II: Detroit.
"US auto makers directly employ about 355,000 American workers and through related industries that are dependent on auto manufacturing and sales, the industry supports about another 4,500,000 workers in the US economy," says a begging letter to the Treasury by Congressman John Dingell, who represents Michigan, where GM, Chrysler and Ford are based. "The three provide health care to almost two million Americans and pay pension benefits to 775,000 retirees or their survivors."
It is the automotive equivalent of the "too-big-to-fail" argument Treasury secretary Hank Paulson used to justify taking equity stakes in banks. "I would be stunned if the government didn't respond," said David Whiston, auto industry analyst at Morningstar. "The political reality is that this affects Average Joes in battleground states such as Michigan and Ohio. And then there is the financial and economic reality."
A bankruptcy filing by one of the big three could lay waste to hundreds or even thousands of suppliers, and send unemployment soaring further in areas which are already amongst the most economically disadvantaged. It could also cause a nasty feedback loop. If suppliers collapse after the bankruptcy of one of the big three, the other two might face parts shortages and production stoppages that would tip them over the edge, too.
And behind all this, there is the question of what happens to those 775,000 pensioners. The federally-backed Pension Benefit Guaranty Corporation, which takes over the liabilities of collapsed companies, already has a $14bn black hole and would almost certainly need to be refinanced with taxpayer money if a bankrupt Ford, GM or Chrysler is added to its responsibilities.
How has Detroit got to this desperate state of affairs? The decline has been over two decades. Foreign rivals, notably Toyota, won a better reputation for efficiency and won market share as a result. The pension and healthcare bills of GM, Ford and Chrysler kept climbing, even as their market share fell, exacerbating their competitive disadvantage. The companies took on more debt to cover losses and Ford even mortgaged its logo two years ago to raise cash.
More recently, high fuel prices crimped demand for pick-ups and SUVs. And in recent weeks, the financial crisis has spun out of control. Sales worldwide went into a dive. GM is expected to say that its European operations, which were around break-even in the first half of the year, have plunged into the red in the third quarter. Asian sales, which had looked like a way out of the morass, have slammed into reverse gear and Russia is the latest emerging market where revenues have collapsed.
North American sales are down 13 per cent this year, and there seems little likelihood of improvement any time soon. With credit markets frozen, the auto loans that attract buyers are hard to come by. GMAC, General Motors' financing arm, announced yesterday it would stop offering loans in many Continental European countries, including Spain, which will squeeze sales further.
The closure of the credit markets has removed the option of financing the Big Three using private loans, if they could find them. Already, the automakers' debt is rated as junk, and Moody's, the credit rating agency, downgraded GM and Chrylser debt further on Monday – which will raise the cost of borrowing for the companies if and when the markets reopen. "The distress goes back a long way," said Mr Whiston, "but not having capital markets available to them immediately accelerates it."
In recent days, GM and Chrysler have announced thousands more lay-offs, this time white-collar. GM is also trying to raise cash by selling its Hummer brand, although potential buyers are finding it difficult to raise debt to fund a purchase. All the while, all three companies have been cutting production in the US and across the world. In the UK, for example, Ford began a 17-day closure of its Southampton factory, where it produces Transit vans, at the start of October, while GM extended temporary shut-downs at its plant in Luton.
But analysts fret that the decline in sales is always one step ahead of the decline in production, and the losses never seem staunched. For those who follow the auto industry, the main task now is to calculate the date when money runs out. For GM, it is around this time next year. Chrysler will run out by the end of 2009, too, while Ford looks able to hang on into 2010. Little wonder the focus is on raising emergency funds from the US government.
This month, Congress voted $25bn for low-cost loans to help the industry retool factories from SUV production to more forward-looking hybrid and electric technologies, and the first instalment of the bail-out looks likely to come from this fund – perhaps tied to a GM-Chrysler merger deal. In addition, some of the $700bn Wall Street bail-out fund could be earmarked for Detroit, if the Treasury decides to buy up parcels of car loans from the Big Three's financing arms. And both presidential candidates have pledged more subsidies for green technology that could be channelled to Detroit.
As Mr Wagoner continues his lobbying efforts, the details are up for debate in Washington. The principle long ago seems to have passed into consensus. Let the bail-out begin.
Bill Ackman Tries To Steady A Moving Target
Like many modern Wall Street tycoons, activist investor William Ackman made billions using shorts. Now he's losing his shirt. The 42-year-old founder of hedge fund Pershing Square Capital Management, which reportedly returned 22% net of fees last year, has seen the paper value of his newest fund essentially vanish in the past few months. The fund's only investment: dwindling discount retailer Target.
Ackman launched Pershing Square IV early last year with $2 billion in capital from investors including Leucadia, the publicly traded holding company of investment savants Joseph Steinberg and Ian Cumming. According to its 2007 annual report, Leucadia bought a 10% interest in the fund for $200 million. Ackman used the $2 billion to acquire a 10% stake in Target by buying up a slew of call options in addition to swaps and common stock.
He quickly began pressuring Target execs to sell the company's credit card business and some of its real estate assets and return the proceeds to shareholders in the form of stock buy-backs. Rumors of Ackman's stake sent Target shares soaring 6.8% in the days preceding his July 16 disclosure. But enthusiasm soon faded as the economic slowdown set in. Between July and the end of year, Target shares declined 28%, causing Leucadia to write down its $200 million investment by 43%.
This May, Target announced it had struck a deal with JPMorgan Chase to sell 47% of its credit card receivables for $3.6 billion, a victory for Ackman. Since then, however, Target has been in free fall, with shares declining 35%. This painful plunge may prove ruinous for the Pershing Square IV fund because it took its stake in Target (largely) via call options instead of investing solely in common stock. As of last July, Pershing's contracts gave it the right to acquire 79.2 million shares, or 9.3% of the company, at prices ranging from $34.63 to $53.12. Yesterday, Target closed at $32.69 a share.
At that price, the bulk of Ackman's options are under water, worth less than the cost of exercising them. Even worse: The firm's first batch of options expires in less than six months, forcing Pershing Square IV to buy millions of new options every quarter to maintain its position, while taking losses on old options sold near their settlement date. In a last-ditch effort to prop up Target's shares--and the value of Ackman's rapidly expiring options--Pershing Square announced this morning it will propose a transaction Ackman believes "will build long-term value" for Target and its stakeholders. The details of the plan will be unveiled Wednesday afternoon in New York. In early trading, Target shares popped 8% on the news.
Singapore DBS says Lehman-linked notes worthless
Singapore's DBS Group said 103 million Singapore dollars ($68 million) of structured notes linked to bankrupt U.S. brokerage Lehman Brothers Holdings are now worthless.
The notes, known as High Notes 5, were linked to the risk of a bankruptcy occurring to one of the reference entities, such as Lehman, DBS said in a letter to 1,004 investors posted on its Web site Tuesday. DBS said it valued the notes by calculating, "among other factors, the price of the reference obligation of the reference entity." The letter did not specify what the reference obligation was.
DBS said last week that 4,700 clients in Singapore and Hong Kong bought SG360 million ($239 million) in Lehman-linked structured notes from the bank. In Hong Kong, the total outstanding amount of the products sold by all banks is 20.2 billion Hong Kong dollars ($2.6 billion), while Singapore investors bought around $400 million.
DBS said last week it would pay up to SG80 million ($53 million) in compensation to investors who received poor service. Singaporean investors, some of whom were retired or not well-educated, have said bank officials did not properly explain the nature of the notes
Bankruptcy Fears Rise As Chrysler, GM Seek Federal Aid
As talks between General Motors Corp. and long-time rival Chrysler LLC continued over the weekend, a harsh reality has emerged: Without a merger and possibly an assist from the federal government, two of Detroit's Big Three auto makers could run out of cash within a year.
Though GM and Chrysler dismiss the notion, analysts and investors have begun to question whether one of the companies -- locked out of the credit markets and burning cash rapidly -- might have to seek bankruptcy protection. Such a filing could set off a chain reaction across the U.S. auto industry, choking off parts supplies to healthier Asian and European car makers and slamming thousands of local car dealers. It could also create a mess for the federal government, whose pension-guarantee program would be swamped by the addition of hundreds of thousands of retirees.
The auto makers and Michigan political delegations have proposed at least three plans in recent weeks to unlock federal cash for a merged GM-Chrysler, including seeking an equity investment from the government or unlocking funds from its Troubled Asset Relief Program, or TARP. GM and Chrysler estimate that a combined entity would need $10 billion in new equity to lay off workers, close plants, integrate the two companies and provide liquidity, according to several people involved in the talks or briefed on them.
"Without external intervention, from consolidation or government assistance, we expect GM to reach its minimum cash position in under 12 months," Deutsche Bank auto analyst Rod Lache wrote last week. In an interview, Mr. Lache added that Chrysler is also running dangerously low on funds. "We believe Chrysler is in the same position. It's either August 2009 or December 2009 they run out. Both have a limited runway."
GM and Chrysler said publicly this month that bankruptcy proceedings are out of the question. Auto-industry executives have long said that seeking bankruptcy-court protection would destroy the reputation and desirability of their products. Automobiles are typically the second-biggest purchase for a family behind a house, so buyers want to make sure the manufacturer will be around for the life of the vehicle to provide parts or honor the warranty. "We continue to hold the position that bankruptcy is not an option," said GM spokesman Steve Harris. Chrysler spokeswoman Lori McTavish said: "Bankruptcy is not an option for Chrysler -- it doesn't make sense for us."
Several people involved in the GM-Chrysler merger discussions say the companies have talked to federal officials about their proposed transaction. But there are no specifics yet about what role the government could, or will, play. There is no indication that Treasury, which oversees the TARP program, is currently considering proposals for anything but financial institutions. GM and Chrysler, through a network of 10,000 dealers, have combined U.S. sales of between $110 billion and $130 billion, a figure that approaches 1% of the U.S. gross domestic product. They employ an estimated 145,000 people in the U.S. at more than 110 assembly, stamping and parts plants. An additional 600,000 retirees depend on the two car makers for health care and pensions.
GM and Chrysler "are basically waiting on the government," said one person involved in the merger talks. "The three choices are bankruptcy, a big intervention from the government or some big deal like this that has massive cost-cutting possibilities," this person said. "That's it. And even the big deal may require government help." People familiar with the GM-Chrysler talks said over the weekend that the sides are also considering forming a new company that could include a third auto maker.
Talk of a GM-Chrysler merger began in September, following brief discussions between GM and Ford Motor Co., the third major U.S. auto maker. Cerberus Capital Management, a private-equity fund that owns 81% of Chrysler and 49% of GMAC -- GM's lending arm -- approached GM about swapping GM's 49% stake in GMAC for ownership of Chrysler. Such a merger would have been unthinkable in recent years because it would have only added more brands, dealerships and slow-selling models to GM's bloated structure. But with credit markets tightening and collapsing U.S. auto sales draining GM's cash, the auto maker is scrambling to keep itself afloat.
U.S. car and truck sales are down 13% through September this year. GM sales have fallen about 18%, while Chrysler's are down 25%. Ford's sales are down 17% so far this year. Ford's condition is not considered as grave as that of GM and Chrysler because it has more cash on hand. In the next 12 months, U.S. auto sales could sink to levels last seen during the early 1980s recession, according to several forecasts, when there were 70 million fewer Americans. Sales peaked at 17.4 million in 2000 and remained near 17 million for five more years. This year, 13.6 million vehicles are expected to be sold, and sales are expected to fall by another half-million vehicles in 2009, according to consumer-researcher J.D. Power & Associates.
Today, the Big Three have the capacity to build three million more cars and trucks than they currently sell -- about 10 plants' worth of idle capacity. "These are truly unimaginable times for our industry," Chrysler Chief Executive Robert Nardelli told employees Friday in announcing 5,000 new white-collar-job cuts.
Investors and vendors to the auto makers believe bankruptcy proceedings for one of the Big Three are as likely as not, judging by a range of financial indicators. GM and Ford bonds trade between 20 to 40 cents on the dollar. Investors have valued $9 billion worth of Chrysler debt at about $3.4 billion. On Thursday, Daimler AG, which owns 19.9% of Chrysler, wrote its investment in the auto maker down to zero. The GM-Chrysler plan would effectively scrap large parts of 83-year-old Chrysler.
Even people involved in the deal concede a tie-up would be risky because consolidation would have to take place quickly.
In a merged company, GM would take the driver's seat in product-development activities, say several people involved in the talks. It would retool several existing Chrysler products to base them on GM-designed vehicles, or kill some products outright, these people said. GM is expected to save Chrysler's popular minivans and Jeeps. GM could also sell certain vehicle lines, such as the profitable Dodge Ram, to an auto maker seeking entry into the U.S. light-truck market.
The human toll of such a move could be high. The companies would slash duplicated functions from engineering to marketing. One internal estimate predicts at least 40,000 jobs could be cut from the roughly 166,000 people employed by the two companies in the U.S., Canada and Mexico. GM's cash cushion has been eroding for some time. Each month, the company spends $1 billion more than it brings in. At that burn rate, GM could effectively run short of cash next summer, without even taking into account further sales declines.
The 100-year-old company has about $20 billion on hand today, but needs at least $11 billion to $14 billion of working capital at all times so it can keep paying its bills, GM has said. The company has been trying for months, without success, to raise at least $5 billion by selling assets, such as its Hummer brand, and by pledging unencumbered assets, such as profitable international operations, as collateral for loans. But lenders are reluctant to invest. GM debt, once considered the highest investment grade, has tumbled to low-rated, junk status. Many lenders approached to invest in a combined GM-Chrysler have also balked. One large private-equity investor said it would take too many years for the combined entity to realize a forecast $10 billion in annual cost savings. Meanwhile, this person said, it's safer to invest in the company's debt instead of its shares, because creditors get better protection than shareholders in the event of a bankruptcy filing.
When Cerberus purchased Chrysler in the spring of 2007, the capital markets were at full throttle. The firm basically bought Chrysler for free, in exchange for taking on its considerable debt. Cerberus expected that once Chrysler was private, the fund could build a smaller, stronger company with the ready help of debt investors. It hasn't turned out that way. In two years, Chrysler has fallen from third to fifth in U.S. auto sales. J.P. Morgan estimates it has $11 billion on hand. It uses $3 billion to $5 billion of that as working capital to meet payroll, pay vendors and pay other bills. Its monthly cash burn is estimated at $300 million to $400 million. That figure may grow as vehicle sales slow, suggesting that it could run out of money by late 2009. To conserve cash, Chrysler has halted certain new-product plans, a sign that it sees a deal with GM as the only path out.
The auto makers' huge obligations, meanwhile, are only growing as revenues and profits shrink. For decades, Detroit's Big Three have funded generous programs to take care of former workers and surviving spouses. GM says it provides health care and pensions to about 480,000 hourly and salaried retirees. Chrysler is obligated to support at least 125,000 hourly retirees and their spouses, plus tens of thousands more from the white-collar ranks. Between 2009 and 2017, GM has committed to pay out $64.14 billion in pension benefits to U.S. retirees. Chrysler has estimated it has $14 billion in pension obligations between 2009 and 2017, and $10 billion in health care.
The manufacturers hope to transfer much of these health-care obligations to a trust they have agreed to establish with the main union representing its workers, United Auto Workers. While the auto makers will have to provide billions of dollars to the UAW trust before it launches in 2010, the arrangement will allow them to reduce billions of dollars in annual health-care costs.
Detroit's pension funds have also been hit hard as stocks -- in which they are heavily invested -- have declined. By the end of the year, GM's massive pension fund could drop to a funding level that would trigger federal mandates that the companies inject more money. The fund has enough money to meet obligations now, but a J.P. Morgan report estimates that given the market's recent performance, the GM pension could be underfunded by $18 billion at the end of 2008. Privately held Chrysler no longer discloses its pension funding levels.
Inside the merger negotiations, the growing feeling is that a combined GM-Chrysler effort, while daunting in its complexity, may be the best way to bring federal money into the mix. Those people have proposed at least three possibilities for a federal role in the merger they say are being discussed in Washington. The first is to unlock some of the $25 billion from an energy bill passed last year that would compensate manufacturers for costs associated with new fuel-efficiency standards for the U.S. auto industry. It is not clear when the money would be released to auto makers. The manufacturers hope that some of the funds could be expedited to be used in this deal.
Another option would be for the government to take a stake in the entity, perhaps in the form of preferred shares, said several people involved in the talks. The Treasury took equity stakes in major banks earlier this month. It is unclear whether they would do the same for auto makers. A third option would be using the Troubled Asset Relief Program to buy up troubled auto loans from the companies' financing arms, GMAC and Chrysler Financial. Michigan Senators Carl Levin and Debbie Stabenow, among others, have been told that TARP could be used to buy up troubled auto loans, according to congressional records.
The idea of this option, say people studying the deal, is that the aid would provide relief to Cerberus, which owns Chrysler Financial outright and holds 51% of GMAC. Cerberus would then plow more money into the combined GM-Chrysler. Michigan lawmakers have pressed the Fed and Treasury to get involved. Last week, a congressional delegation headed by Michigan Rep. John Dingell sent a letter to Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson urging the pair to find money for U.S. auto makers.n "It is imperative that the government ensures that liquidity is restored so that the U.S. auto industry is able to function until normalcy is restored to credit markets," the letter said.
One of the biggest fears in Washington is how a bankruptcy filing by one or all of the auto makers would affect the federal agency that insures the retirement savings of almost 44 million Americans. The Pension Benefit Guaranty Corp. ended 2007 with a $14 billion deficit. Were GM to place its pension burden on PBGC, it would more than double the agency's current shortfall, a burden that could fall on taxpayers. The fate of many suppliers and other auto makers are also tied to the health of GM and Chrysler. According to industry research, 60% or more of the industry's suppliers make parts for all three major auto companies. If one car maker ceases to pay some outstanding bills it could crimp the operations at suppliers and, by extension, healthier U.S. and foreign car makers.
Lear Corp., a seat manufacturer, gets 29% of its $15.3 billion in annual sales from GM, but it is also a large supplier to Ford, Toyota and BMW. Magna International Inc., a Canadian manufacturer of interiors and instrument panels, does more than $3 billion in sales annually with GM and Chrysler, but also provides parts in Europe to auto makers like Volkswagen and Daimler.
"The fall of one is the fall of all. If, say, Chrysler files [for bankruptcy-court protection] and doesn't pay its suppliers, those suppliers would go down and Ford or GM won't get their parts, shutting down some of their plants," said Kimberly Rodriguez, director at Grant Thornton and an adviser to Ford senior management.
"It just can't happen," said Ms. Rodriguez, who lives in suburban Detroit with her husband and two daughters. "It would be tens of thousands of jobs lost and not just in Michigan." Last week, Michigan Gov. Jennifer Granholm began assembling a task force of cabinet officials who will build a contingency plan in the event of a merger, or if one of the Big Three seeks bankruptcy-court protection. A spokeswoman for Gov. Granholm said Sunday that the task force is talking to industry analysts and Michigan economic planners to develop a plan to deal with what could be massive job loss.
The temples of doom
The ruins lie silent and abandoned in the heart of the jungle; blocks of stone surrendered to the vines, which twist and writhe over temples, plazas and pyramids. Weeds and forest creatures have colonised the inner sanctums; mahogany and cedar trees swallow what once were roads, blotting out the sun. This is Tikal, the ancient Mayan city of northern Guatemala. There was a time when tens of thousands of people lived here. The architecture and urban planning - there are epic monuments, boastful inscriptions and even courts for playing ball games - embody boundless human confidence.
Today the only voices are of murmuring tourists, interlopers into a domain of spider monkeys and jaguars. "The imagination reels. There are reliefs, pyramids, temples in the extinguished city. The ... sound of flapping wings trickle into the immense sea of silence," wrote Miguel Ángel Asturias, Guatemala's Nobel laureate. Shortly after its apogee, around AD800, the Mayan civilisation, the most advanced in the western hemisphere, withered. Kingdoms fell, monuments were smashed and the great stone cities emptied. Tikal now stands as an eerie embodiment of a society gone wrong, of collapse. How it came to pass is a question that has long fascinated scholars. Titles such as Ancient Maya: The Rise and Fall of a Rainforest Civilization fill faculty bookshelves. It has also provided fodder for literature and films, most recently Mel Gibson's Apocalypto. There is a grim, irresistible appeal to this tale of central American oblivion.
Recent events have injected a jarring note into Mayan studies: a sense of anxiety, even foreboding. Serious people are asking a question that at first sounds ridiculous. What if the fate of the Maya is to be our fate? What if climate change and the global financial crisis are harbingers of a system that is destined to warp, buckle and collapse? No one is suggesting that vines will start crawling up the concrete canyons of Wall Street, or that howler monkeys will chase pin-striped bankers through Manhattan. Mayan kings who screwed up were ritually tortured and sacrificed with the aid of stingray spines to pierce the penis; an emphatic application of moral hazard. In our era, the only thing slashed is a bonus.
There are, however, striking parallels between the Maya fall and our era's convulsions. "We think we are different," says Jared Diamond, the American evolutionary biologist. "In fact . . . all of those powerful societies of the past thought that they too were unique, right up to the moment of their collapse." The Maya, like us, were at the apex of their power when things began to unravel, he says. As stock markets zigzag into uncharted territory and ice caps continue to melt, it is a view increasingly echoed by scholars and commentators.
What, then, is the story of the Maya? And what lessons does it hold for us? According to Diamond's thesis, this: the ancients built a very clever and advanced society but were undone by their own success. Populations grew and stretched natural resources to breaking point. Political elites failed to resolve the escalating economic problems and the system collapsed. There was no need for an external cataclysm or a plague. What did for the Maya was a slow-boiling environmental-driven crisis that its leaders failed to recognise and resolve until too late.
"Because peak population, wealth, resource consumption, and waste production are accompanied by peak environmental impact - approaching the limit at which impact outstrips resources - we can now understand why declines of societies tend to follow swiftly on their peaks," wrote Diamond in a 2003 article, The Last Americans: Environmental Collapse and the End of Civilization. The idea is expanded in his book Collapse: How Societies Choose to Fail or Succeed. The link between environmental, economic and political stress is clear, says Diamond. "When people are desperate and undernourished, they blame their government, which they see as responsible for failing to solve their problems."
A visit to the jungle ruins in the Yucatán peninsula, stretching from southern Mexico down to Guatemala, El Salvador, Honduras and Belize, is a humbling experience. There is sticky, sapping heat and squadrons of biting, stinging mosquitoes. The Maya were not a homogenous empire like the Inca or Aztecs but a series of squabbling kingdoms. The first settlements have been dated back to 1800BC but what is known as the "classic" period started much later, around AD250. The final period - zenith and collapse between AD750 and AD900 - is known as the "terminal classic".
Tikal, deep in the forest of Petén in northern Guatemala, was one of the Mayan capitals, a sprawling complex of limestone structures that was home to up to 100,000 people. Kings doubled up as head priests and political leaders. There were acropolises with hieroglyphs and pyramids with flat roofs from which astronomers and mathematicians mapped the planets and calculated calendars. The Maya accomplished all this without pack animals - no cows, mules or horses to heave and push, just human muscle - and with limited water, which forced reliance on rainfall. By AD750 there were several million in the region, most of them farmers. Monuments and palaces became ever grander as kings and nobles competed for glory. And then everything went pear-shaped. Archaeological records show monument building abruptly stopped, as did the boastful inscriptions. There is evidence that palaces may have been burned.
Most dramatically, the population vanished. Over a few generations numbers withered from millions to tens of thousands, maybe even just thousands. Most abandoned the cities and migrated north. The birth rates of those who stayed tumbled. (Mathematically, Russia's population decline is on a similar trajectory). By the time Spaniards clanked into southern Yucatán in the 1500s there was hardly anyone left. Today, lush vegetation has reclaimed Tikal, turning everything mossy and green, but the temples, the tallest pre-Columbine structures, rise high over the canopy. George Lucas used Tikal as the site for the rebel base in the first Star Wars film.
To explain the mysterious collapse some scholars posit an invasion, or disease, or shifting trade routes, or a drought. There is wide agreement, however, that a leading cause was environmental pressure. "The carrying capacity of the ecosystem was pushed to its limits," says Marcello Canuto, an anthropology professor at Yale. Lakes became silted and soils exhausted. Tilling and man-made reservoirs provided more food and water but population growth outstripped technological innovation. Complex and organised it may have been but Mayan society resembled a frog who stays in slowly boiling water, says Canuto. "Things were brewing within the system that were not picked up until too late." When the political elites did react they made things worse by offering greater sacrifices to the gods and plundering neighbours. "The kingdoms were interdependent and there was a ripple effect. They did not respond correctly to a crisis which, in hindsight, was as clear as day."
The environmental trouble built up over centuries and was partly concealed by short-term fluctuations in rainfall patterns and harvest yields. But when the tipping point came, events moved quickly. "Their success was built on very thin ice. Kings were supposed to keep order and avoid chaos through rituals and sacrifice," says David Webster, author of The Fall of the Ancient Maya. "When manifestly they couldn't do it people lost confidence and the whole system of kingship fell apart."
Which brings us to modern parallels. Webster, watching the season's first snowflakes through the window of his office at Pennsylvania State University, has been waiting for the question. Pinned to his wall is an old clipping about the fall of Enron Corporation in 2001. "That was the first tremor," he muses. "You know, human beings are always surprised when things collapse just when they seem most successful. We look around and we think we're fat, we're clever, we're comfortable and we don't think we're on the edge of something nasty. Hubris? No: ignorance."
Some anthropologists hesitate to make direct links between ancient and modern societies, deeming it out of academic bounds. Not Webster. "In common with the Maya, we're not very rational in how we think about how the world works. They had their rituals and sacrifices. Magic, in other words. And we also believe in magic: that money and innovation can get us out of the inherent limits of our system, that the old rules don't apply to us." He snorts.
This is a modish view these days but it was considered cranky luddism back during the 1980s stockmarket boom and the 1990s dotcom bubble. That was when masters of the universe bestrode Wall Street and Francis Fukuyama caught the triumphalist liberal economic zeitgeist with his book The End of History and the Last Man. That era, to borrow from Star Wars, feels a long time ago in a galaxy far, far away. Now Bear Stearns and Lehman Brothers are history and governments are taking over banks and propping up markets.
If traders and their mumbo jumbo about securitisation and derivatives resemble Mayan priests chanting in their temples then Bush and Gordon Brown are the hapless kings who egged them on rather than query the "magic". As chancellor, Brown blessed the conjuring. "In budget after budget I want us to do even more to encourage the risk-takers," he said in 2004. Now the frailty is revealed and instead of Gordon Gekko's "greed is good" we are hearing Shelley's Ozymandias: "Nothing beside remains. Round the decay/ Of that colossal wreck, boundless and bare/ The lone and level sands stretch far away."
Canuto sees an unhappy precedent. The Mayan kings who allowed their era's crisis to spin out of control were unfit to remedy it, not least because they were invested in the broken system. "The ones who caused the crisis are the ones you don't want trying to resolve it." Bush, by coincidence of timing, is on his way out but Britain's prime minister and other G8 leaders are hanging on.
Several commentators have argued that the financial crisis is but a squall compared with the ecological hurricane they say is coming.
A European study estimates deforestation alone is causing a loss of natural capital worth between $2 trillion and $5tn annually. "The two crises have the same cause," wrote George Monbiot in the Guardian earlier this month. "In both cases, those who exploit the resource have demanded impossible rates of return and invoked debts that can never be repaid. In both cases we denied the likely consequences." With ecology the stock from which all wealth grows, the financial and environmental crises feed each other, says Monbiot.
If so, the Maya offer an ominous glimpse of what may lie in store. "Their population growth was like driving a car faster and faster until the engine blew up," says Webster, the anthropologist. "Look at us. I'm 65. When I was born there were two billion people in the world, now we're approaching seven billion. That's extraordinary." Eventually pressure on scarce resources will overwhelm technology - and do for us as it did for the Maya. "The western conceit is that we can have it all - and call it progress," says Webster. His voice drops. "I'm glad I'm not 30 years old. I don't want to see what's coming in the next 40 to 50 years."
Armageddon, like hemlines, is prone to changes in fashion. It has been on a roll with films such as 28 Days Later, I Am Legend and Blindness, which posit a world grimmer than anything Hobbes envisaged. Cormac McCarthy's post-apocalyptic novel, The Road, was hailed as an environmental fable. "By day the banished sun circles the earth like a grieving mother with a lamp," he writes, before introducing baby-skewering cannibals. That too is being made into a film. Webster does not think things will get that bad. "Not like Mad Max," he says, managing to sound almost cheery. "But definitely unpleasant."
The gloom may be misplaced. Reports of capitalism's death have been exaggerated before and it has stubbornly survived Karl Marx, the Great Depression, world wars and oil shocks. And in contrast to the Maya, it is possible our technology will prevail over population and environmental pressures. Malthusian doomsayers have consistently underestimated the capacity of better irrigation, pesticides, new strains of crops and other technologies to boost food yields. The rate of population growth is slowing and human numbers are expected to peak at around 9.2 billion by 2050 before declining. That Asians are moving more and more to western-type diets and consumer baubles will strain resources, acknowledges the Economist. But don't worry: "There is no limit to human ingenuity."
If the gloomy environmental prognosis is correct, and global warming is set to wreak major havoc, what are the chances we will respond better than the Maya? Electing Bush instead of Al Gore suggests limited wisdom in picking kings, and emasculating the Kyoto treaty was perhaps as sensible as burning corn harvests to appease the gods. When Republicans chant, "Drill, baby, drill!" it is not much of a stretch to picture them, barefoot and in traditional huipil shirts, rooting for another sacrifice.
Nevertheless there are promising omens. Governments are beginning to assign monetary values to natural "assets" such as forests, a conceptual leap that could reinvent economics. The EU has set up a carbon-trading market to get industry to cut greenhouse gas emissions. The UN is pushing for a new climate treaty in which governments will pay tropical countries billions of dollars annually to leave their forests untouched. Ecuador has already requested $350m a year in exchange for leaving 1bn barrels of oil beneath its Amazon floor. "I believe the 21st century will be dominated by the concept of natural capital, just as the 20th was dominated by financial capital," says Achim Steiner, head of the UN environment programme.
Even so, would that be enough? Civilisations rise - and collapse - for many different reasons. If there is a simple lesson to be drawn from central America's abandoned ruins it is to protect the environment and control population growth, says Michael Coe, author of the seminal 1966 text, The Maya. "No civilisation lasts for ever. Most go for between 200 and 600 years." The Maya, Romans and Angkor of Cambodia lasted 600.
And us? "Western civilisation began with the Renaissance, so we're hitting 600 years," says Coe. "The difference is we have a choice whether to let things get worse or fix them. That's what science is about. But it takes will on the part of those who govern and those who are being governed." Coe, one of the world's leading experts on civilisation collapse, pauses. "To tell you the truth, I don't know if we have that."