Ford Motor Co. building on Pennsylvania Avenue,
Metropolitan Methodist Church on C Street
Ilargi: If Wall Street were forced today to take a breathalyzer test and walk a straight line, it would lose its license and be locked up. I can't quite make up my mind if the Dow is simply as a drunk as a hippo or whether it’s fatally shot instead. Both is definitely an option. It’s been up 3% as well as down 3% so far today. And that's not even that crazy anymore these days. What General Motors is doing, however, still must be a rare event.
At one point this morning GM shares were down some 40%, only to be up 25% a few hours later. On the low, GM’s market cap had fallen to $1.25 billion, which got me thinking how the one time biggest company in the world announced an investment in Russia this week that costs more than that. And how it's looking for ten times its market cap in federal bail-out money. This no longer makes any sense at all.
The Big Three Geniuses have private-jetted home again after being cold-shouldered by Congress. But not before Ford CEO Alan Mulally managed to add a last dumb insult to his repertoire. When asked to forgo his pay for a year, Mullaly replied:"I think I'm OK where I am."
The man whose unchallenged brilliance brought Ford share prices all the way to $1.01 this morning, from last year’s high of $8.79, a loss of 88.5%, or $27 billlion in market cap, is in line this year to take home a check of $28 million, or the equivalent of 700 (!) Ford floor employees with a $40.000 take home pay. And his perks are way better too. How much sense does all that make? Maybe Mullaly is looking to be fired, who knows what severance pay is in his contract.
Meanwhile, it's getting increasingly clear that it will take a very long time before Detroit can even dream of selling enough cars to balance its books, let alone run a profit. Until they can do that, US taxpayers would have to pick up the tab for many billlions of dollars per year in losses. Unless Washington has a rare moment of lucidity.
Any money that would go to waste if Congress gives in to the Mullallies of the land could be much better used to provide Big Three employees (but not upper management) with at least some kind of pension and health care plan. Because the way it looks now, they're not getting much of anything. Under Chapter 11, a judge will ultimately decide who gets what, and who gets to keep which entitlements. Huge cuts in benefits for the poorest paid workers are a given in that situation, whether there is a restart or an outright bankruptcy.
The reasons car sales won't pick up in any foreseeable future are splashed all over today's headlines. Every single index and indicator for the economy is plunging downhill as if gravity quadrupled overnight. Over the next year things will get so desperately bad in America that the present discussions about propping up defunct enterprises will look as smart as picking your nose with a sledgehammer. On the upside, a nice home with a view in Detroit will soon cost about $10. And Mullaly can buy the whole town. But I doubt he'll stick around.
GM May Have Weeks, Not Months, Without Aid
General Motors Corp., the largest U.S. automaker, probably has weeks rather than months left before it runs out of cash without federal aid, said Jerome York, an adviser to billionaire Kirk Kerkorian and former GM board member. Chief Executive Officer Rick Wagoner "all but said" at congressional hearings in the past two days that GM can't continue to operate until a new U.S. administration takes over in January, York said in a Bloomberg Television interview today.
GM, Ford Motor Co. and Chrysler LLC should develop a detailed plan for sustained operations and present it to Congress as a condition of receiving support, with "chains" rather than "strings" attached, York said. U.S. lawmakers after hearing from Wagoner, Ford chief Alan Mulally and Chrysler CEO Robert Nardelli remain deadlocked on an auto-industry bailout. Democratic congressional leaders disagreed with Republicans and President George W. Bush's administration over how to provide $25 billion in aid to the three companies, with just two days left in Congress' lame-duck session.
Philly Fed index drops to 18-year low
Manufacturing conditions in the Philadelphia region deteriorated to their worst level in 18 years in November, the Federal Reserve Bank of Philadelphia reported Thursday. The Philly Fed diffusion index fell to negative 39.3 in November from negative 37.5 in October. The index had crashed last month from 3.8 in September.
Economists were expecting a continued slide in the Philly index to negative 40.0 in November, according to a survey conducted by MarketWatch. Earlier in the week, the New York Fed said its Empire state index fell to a record low negative 24.6 in November. The Philly Fed and Empire state indexes are seen as providing good clues about the national manufacturing index to be released in early December by the Institute for Supply Management. The ISM, in turn, is considered the best real-time gauge of the health of the economy. In October, the ISM manufacturing index plunged to 38.9, the worst reading since 1982.
Readings below zero in the Philly Fed diffusion index indicate contraction in activity. The index measures the breadth of economic activity across firms. In October, 49.7% of the companies surveyed said business was worse in November, 10.3% said business was better, and 33.3% said business was the same. Most of the subindexes fell further into negative territory, indicating contraction in the sector is picking up steam. Expectations for the next six months also declined in November. In another sign of weakness, the Labor Department reported initial jobless claims rose by 27,000 to 542,000 last week, a 16-year high.
In December, the new orders index fell to negative 31.4 from negative 30.5. The shipments index remained steady at negative 18.8. The employment index fell to negative 25.2 from negative 18.0. The average workweek inched down to negative 19.7 from negative 18.4. Inflation disappeared in November. The prices paid index fell to negative 30.7 from 7.2 in October. This is the first negative reading since 2003. The prices received index fell to negative 15.5 from 5.3. In a special question, companies reported that production would decrease in the fourth quarter and employment would fall over the next six months. Layoffs were the most frequently cited method of achieving the planned reductions.
Bond Risk Soars to Record as Markets Return to 'Crisis Mode'
The cost of protecting corporate bonds from default surged to records around the world as the prospect of U.S. automakers filing for bankruptcy protection fueled concern of more bank losses and a deeper recession. "Markets are back in crisis mode," said Agnes Kitzmueller, a Munich-based credit strategist at UniCredit SpA, Italy’s biggest bank. "There is fear in the market."
General Motors Corp., Ford Motor Co. and Chrysler LLC executives left Washington empty handed yesterday after two days of pleading with lawmakers for a $25 billion bailout. Credit markets have "significant" liabilities to the automakers raising the prospect of "continued writedowns," BNP Paribas SA analysts told investors today. Credit-default swaps on the Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings increased 35 basis points to a record 925, according to JPMorgan Chase & Co. prices at 10:09 a.m. in London. In Tokyo, the benchmark Markit iTraxx Japan index of investment-grade companies jumped 35 basis points to an all-time high of 330, Morgan Stanley prices show.
Stocks slumped worldwide and U.S. index futures fell ahead of a Conference Board report of leading economic indicators that probably fell for the third time in four months, economists said. U.K. retail sales slumped for a second month in October as rising unemployment and the financial crisis dissuaded shoppers from spending. Investors also face a "poisonous cocktail" of concerns over the collapse in value of mortgage-related assets in the U.S., Jeroen van den Broek, the Amsterdam-based head of credit strategy at ING Groep NV, wrote in a report today.
Treasury Secretary Henry Paulson’s decision to abandon plans to buy toxic mortgage assets has driven the price of the securities to record lows, triggering concern of more losses and writedowns at banks. "Anything’s possible in this market," said Mark Bayley, a director of credit at ABN Amro Holding NV in Sydney. "You’re seeing sellers of risk and very few buyers. The sellers are becoming more stressed and willing to accept very wide spread levels for corporate bonds." Credit-default swaps on the Markit iTraxx Europe index of 125 investment-grade companies rose 9 basis points to 183, according to JPMorgan prices. That’s above the record closing price for the index and close to the 195 basis point intra-day high set Oct. 27.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality; a decline signals the opposite. Contracts on Darmstadt, Germany-based Merck KGaA, the German maker of ImClone Systems Inc.’s Erbitux cancer drug, rose 55 basis points to 245, CMA Datavision prices show. A basis point on a credit-default swap contract protecting 10 million euros ($12.5 million) of debt from default for five years is equivalent to 1,000 euros a year.
Sumitomo Mitsui default swaps soared 40 basis points to 263 after Japan’s third-largest bank by revenue said yesterday it plans to raise capital by selling preferred shares. The nation’s banks are facing losses as this year’s 50 percent drop in the Nikkei 225 Stock Average erodes the value of their investments. The Markit CDX North America Investment-Grade index climbed in New York yesterday, closing 22 basis points higher at a record 247, according to broker Phoenix Partners Group.
Financials need at least $1 trillion more
The U.S. financial system still needs at least $1 trillion to $1.2 trillion of tangible common equity to restore confidence and improve liquidity in the credit markets, Friedman Billings Ramsey analyst Paul Miller said. Eight financial companies -- Citigroup Inc, Morgan Stanley, Goldman Sachs Group Inc, Wells Fargo & Co, JPMorgan Chase & Co, American International Group Inc, Bank of America Corp and GE Financial -- are in greatest need of capital, he said.
"Debt or TARP capital is not true capital. Long-term debt financing is not the solution. Only injections of true tangible common equity will solve the current crisis," he said in a note dated November 19. Currently, the U.S. financial system has $37 trillion of debt outstanding, he noted. Combined, these eight companies have roughly $12.2 trillion of assets and only $406 billion of tangible common capital, or just 3.4 percent, the analyst said in his note to clients. Miller said these institutions need somewhere between $1 trillion and $1.2 trillion of capital to put their balance sheets back on solid ground and begin to extend credit again, given their dependence on short-term funding and the illiquid nature of their asset bases.
Since the summer of 2007, Wall Street has been hammered by a sharp pullback in debt markets, which began with mortgage woes and escalated into a credit crisis, slowing economic activity around the world. The bulk of the capital will have to come from the U.S. government, Miller said. The government needs to take the initial steps to begin the process, and private capital and earnings can finish the job. "The quicker the government acts, the sooner the financial system can work through its current problems and begin to supply credit again to the economy," he said.
The U.S. government must declare a bank-dividend holiday and convert the TARP funding into pure tangible common equity to get the credit markets functioning. Also, the government should support a centralized CDS clearinghouse that backstops all transactions and eliminates the cross-default problem, the analyst said. Top U.S. financial regulators said on Friday they were working on developing a centralized clearinghouse for credit default swaps, the exotic instruments that have exacerbated the financial crisis of recent months. The weakened economy and global credit crisis had pushed the U.S. government into bailing out companies including insurer AIG, investment bank Bear Stearns, and mortgage companies Fannie Mae and Freddie Mac.
Regulators have also shown a willingness this year to intervene when banks appeared to struggle. They pushed Wachovia Corp into finding a buyer and arranged for JPMorgan to buy Washington Mutual Inc's banking assets after worried customers began to yank deposits. Miller, however, said it could take three to five years for the financial system to fix itself completely, with adequate capital and appropriately priced interest rate and credit risk.
JP Morgan: Fed will cut funds rate to zero
JP Morgan now looks for the Federal Open Market Committee to slash the rate to zero by January. Economist Michael Feroli said in a research note:
- "We now look for a 50 bps cut in the target fed funds rate at the Dec 16 meeting, followed by an additional 50 bps cut at the January 28 meeting."
- "The Fed then continues to conduct a zero interest-rate policy (ZIRP) for the remainder of 2009."
- "Deflation becomes more likely in an environment where labor market slack is building, and ongoing financial tightening is delaying the prospect that slack begins to get worked down."
- "Taking the target rate to 0 percent would not be costless for the Fed. One concern that has been voiced in the past relates to the effect on money market mutual funds. We do not think this cost is enough to constrain the Fed."
- "We don't believe going to ZIRP implies that the Fed cannot do more."
Leading Indicators in US Decline More Than Forecast as Recession Deepens
The index of leading U.S. economic indicators fell in October for the third time in four months as stocks and consumer confidence plunged, signaling a deepening recession. The Conference Board's gauge dropped 0.8 percent, more than forecast, after rising 0.1 percent in September, the New York- based group said today. The index points to the direction of the economy over the next three to six months.
Consumers and companies are cutting back as financial markets remain fragile, job losses mount and housing and manufacturing sink deeper into a slump. President-elect Barack Obama and Democrats in Congress are under pressure to push through another economic stimulus plan and give more aid to automakers. "The economic contraction appears to be worsening," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "The stock markets are plunging, people are retrenching and manufacturing activity is virtually falling off a cliff. The increase in layoffs can only worsen the economic downturn in the near term."
Another report showed manufacturing in the Philadelphia region shrank in November at the fastest pace in 18 years. The Federal Reserve Bank of Philadelphia's general economic index was minus 39.3 this month, weaker than forecast and the lowest reading since October 1990. Negative readings signal contraction. The leading indicators index was forecast to decline 0.6 percent, according to the median of 56 economists in a Bloomberg News survey, after an originally reported gain of 0.3 percent in September. Estimates ranged from declines of 0.2 percent to 1.2 percent.
Fed policy makers "generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009 and agreed that the downside risks to growth had increased," according to minutes of their Oct. 28-29 meeting released yesterday. Seven of the 10 indicators that make up the leading index are known ahead of time: stock prices, jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times. The Conference Board estimates the remaining three -- new orders for consumer goods, bookings for capital goods and the money supply adjusted for inflation.
Six of the 10 indicators in today's report dragged the index down, led by plunging stock prices, which subtracted 0.89 percentage point. The Standard & Poor's 500 index dropped 20 percent last month from September. First-time claims for jobless benefits subtracted 0.02 percentage point from the leading index. Earlier today, a Labor Department report showed initial jobless claims last week surged to 542,000, the highest level since 1992, and the total number of people staying on benefit rolls in the prior week rose to the most since December 1982. The confidence component took away 0.29 point. The Reuters/University of Michigan's index of consumer confidence fell in October by the most on record, and the gauge of expectations for six months from now, which economists consider a proxy for future spending, also declined.
Housing subtracted 0.35 percentage point. The pace of housing starts and building permits, a sign of future construction, both plunged to record lows in October, indicating the homebuilding downturn may extend into a fourth year. Lowe's Cos., the second-largest home-improvement retailer, reduced its full-year profit forecast following a slowdown in remodeling projects. "We expect continued, broad-based external pressures on our industry," Chief Executive Officer Robert Niblock said in a Nov. 17 statement. "We saw a decline in sales trends in the last week of October that continued into November as the overall economic outlook deteriorated." Supplier deliveries and bookings for capital equipment also subtracted from the index.
Money supply adjusted for inflation, which has the biggest weighting in the index, added 0.71 percentage point. The contribution to the index from money supply is the largest in seven years, the Conference Board said. The Fed and Treasury have injected billions of dollars into the financial system to unclog credit. New orders for consumer goods and interest-rate spreads also added to the index. The Conference Board's index of coincident indicators, a gauge of current economic activity, rose 0.2 percent, after decreasing 0.7 percent the prior month. The index tracks payrolls, incomes, sales and production. The gauge of lagging indicators rose 0.1 percent following a 0.3 percent gain in the prior month. The index measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit.
US weekly jobless claims surge to 16-year high
The number of U.S. workers filing new claims for jobless benefits rose by a larger than expected 27,000 last week to their highest level in 16 years, Labor Department data showed on Thursday, as a harsh economic environment forces employers to cut back on hiring.
Initial claims for state unemployment insurance benefits were a seasonally adjusted 542,000 in the week ended November 15 from a revised 515,000 the previous week. A Labor Department official said there were no special factors influencing the report. Analysts polled by Reuters had forecast 505,000 new claims versus a previously reported count of 516,000 the week before.
The four-week moving average of new jobless claims, a better gauge of underlying labor trends because it irons out week-to-week volatility, rose to 506,500 from 490,750 the week before, the highest since the start of 1983. Continuing claims were 4.012 million in the week ended November 8, the latest data available, up from 3.903 million the prior week and the highest since December 1982.
US Jobless Claims Approach Highest Level Since 1982
The number of Americans filing for unemployment benefits neared a 26-year high, and a gauge of the economy's future performance dropped, sending yields on benchmark Treasuries to record lows. Initial jobless claims climbed to a higher-than-forecast 542,000 in the week ended Nov. 15, the Labor Department said today in Washington. The Conference Board's index of leading economic indicators declined 0.8 percent, and a measure of manufacturing in the Philadelphia region fell to an 18-year low.
The U.S. stock market's benchmark index headed for its biggest annual decline on record, and yields on two-, five- and 30-year Treasuries posted historic lows as confidence in the economic outlook evaporated. The turmoil may intensify pressure on the Federal Reserve and incoming President Barack Obama's administration to take fresh steps to shore up the economy. "The economic contraction appears to be worsening," said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. "The stock markets are plunging, people are retrenching and manufacturing activity is virtually falling off a cliff. The increase in layoffs can only worsen the economic downturn."
First-time jobless claims last week were the highest since 1982, with the exception of a one-week jump in filings in July 1992 caused by temporary layoffs at General Motors Corp. The number of people staying on benefit rolls rose to 4.012 million, the most since December 1982, in the week to Nov. 8. Economists surveyed by Bloomberg News had anticipated a reading of 505,000 for last week, based on the median of 40 projections. Claims for the prior week were revised to 515,000 from 516,000. "This is a reflection of the level of caution that hit the economy in October," said Jonathan Basile, an economist at Credit Suisse Holdings Inc. in New York. He added that payroll losses, already totaling 1.2 million this year, will likely "get worse before they get better."
The Standard & Poor's 500 Stock Index fell 1.5 percent to 794.48 at 11:53 a.m. in New York, and at one point headed for an annual decline of 47 percent. Ten-year Treasury yields dropped to 3.18 percent from 3.32 percent late yesterday, and two-year yields slid below 1 percent. Companies are trimming staff as consumer spending is forecast to fall through at least March, according to economists surveyed by Bloomberg early this month. Banks, faced with mounting losses and write-offs as the financial crisis spread over the past year, have been sacking thousands of workers. Citigroup Inc., the fourth-largest U.S. bank, will eliminate 52,000 jobs over the next year, twice the target announced last month, as loan losses surge and the economy shrinks, the company said Nov. 17. The company's shares today reached the lowest level since 1994.
"We thought last year the bottom had been reached, but it hasn't," Citigroup Chairman Win Bischoff said in a conference in Dubai. "Most responsible companies are getting into a planning cycle with more pessimistic budgets than they have been in the past." Carmakers are also firing workers. Ford Motor Co. plans temporary shutdowns at nine North American plants this quarter, idling as many as 23,000 workers, as it slashes production after an 18 percent drop in U.S. sales this year, the company said Nov. 12. Forty-three states and territories reported an increase in new claims, while 10 reported a decrease. The unemployment rate among people eligible for benefits, which tends to track the jobless rate, rose to 3 percent, the highest since June 2003. These data are reported with a one-week lag. Initial jobless claims averaged 416,000 a week during the last recession, from March 2001 to November 2001.
The Federal Reserve Bank of Philadelphia's general economic index was minus 39.3 this month, weaker than forecast and the lowest reading since October 1990, from minus 37.5 in October, the bank said today. Negative readings signal contraction. The index averaged 5.1 last year. The deepening credit crisis and economic slump are forcing companies to trim payrolls, investment and production. Slowing global demand is weighing on manufacturing, which accounts for about 12 percent of the U.S. economy. "Manufacturers are getting hit by several different forces," Dean Maki, co-chief global economist at Barclays Capital Markets in New York, said in an interview with Bloomberg Television. "Exports are being hit pretty hard because the slowdown is heading abroad as well."
Six of the 10 indicators in today's Conference Board report dragged the index down, led by plunging stock prices, which subtracted 0.89 percentage point. The Standard & Poor's 500 index dropped 20 percent last month from September. The index was forecast to decline 0.6 percent, according to the median of 56 forecasts. The reading for September was revised to a gain of 0.1 percent, less than the 0.3 percent increase previously reported. The index is also made up of jobless claims, building permits, consumer expectations, the yield curve, factory hours and supplier delivery times, new orders for consumer goods, bookings for capital goods and money supply adjusted for inflation.
Housing subtracted 0.35 percentage point from the index in October. The pace of housing starts and building permits, a sign of future construction, both plunged to record lows last month, indicating the industry's downturn may extend into a fourth year. Lowe's Cos., the second-largest home-improvement retailer, reduced its full-year profit forecast following a slowdown in remodeling projects. Federal Reserve policy makers "generally expected the economy to contract moderately in the second half of 2008 and the first half of 2009 and agreed that the downside risks to growth had increased," according to minutes of their Oct. 28-29 meeting released yesterday. The economy contracted 0.3 percent in the third quarter and economists surveyed by Bloomberg forecast negative growth of about 1 percent for the next six months.
US Options Trading Collapses After Hedge Funds Fold
U.S. options trading slowed this month from a record pace after hedge funds collapsed and the biggest market swings since 1929 made equity derivatives too expensive to be used as insurance against stock losses. About 12.5 million contracts linked to shares changed hands each day in November on average, according to data compiled by Bloomberg. That’s 23 percent less than in October, the worst month for the Standard & Poor’s 500 Index since 1987, and 13 percent below the 2008 average, according to Options Clearing Corp., which processes all exchange-listed U.S. options.
Trading decreased as hedge funds suffered their worst back- to-back monthly declines in September and October, according to Hedge Fund Research Inc. Costs skyrocketed as the Chicago Board Options Exchange Volatility Index, the key measure of contract prices in the U.S., jumped to the highest level in its 18-year history in October. "It’s broader and deeper than anything that’s happened before," said Bill Brodsky, chief executive officer of the Chicago Board Options Exchange, the largest U.S. options market. "Our situation is as sound as we could wish it to be under these circumstances, but we’re part of the equity markets of this country and the equity markets have been knocked for a loop."
The slowdown follows a record for annual options trading spurred by the stock-market retreat, which erased more than $30 trillion in value since October 2007. Over 3.26 billion contracts have been traded on U.S. exchanges this year, already more than the full-year record of 2.86 billion set in 2007, according to Chicago-based Options Clearing Corp. The recent slump dims the prospects for exchanges and brokerages as investors shy away from trading equity derivatives and transfer holdings to cash to avoid more losses. "It’s a significant drop but it doesn’t surprise me," said Gary Katz, chief executive officer of the International Securities Exchange, the New York-based options market acquired in December by Frankfurt’s Eurex AG. "Firms are coasting to the end of the year and being very conservative in protecting what they have returned so far in 2008."
Options are derivatives that give the right though not the obligation to buy or sell a security at a set price and date. Hedge funds are largely unregistered pools of capital that cater to wealthy individuals and institutions and allow managers to participate substantially in profits from investments. They try to make money in rising as well as falling markets. The S&P 500 rose or fell at least 1 percent in 86 percent of October’s trading days, making it the second-most volatile month in its 80-year history, according to S&P analyst Howard Silverblatt. Only November 1929 produced bigger swings, he said. The CBOE Volatility Index, which averaged 17.54 last year, jumped to 89.53, its highest intraday level, on Oct. 24 and a record close of 80.06 three days later. It increased 91 percent in September and 52 percent in October. The measure, known as the VIX, tracks the cost of options linked to the S&P 500, which fell 17 percent last month.
The S&P 500 fell as low as 776.76, giving it a year-to-date loss of 47 percent. That would be the steepest annual retreat in the measure’s 80-year history. The VIX increased to 80.35. U.S. options volume was fewer than 10 million contracts on three days in November. That’s below the total trading during the holiday-shortened session of July 3, when exchanges closed early before Independence Day. "We’re going to see a pullback to more normal volumes," said Ed Boyle, senior vice president for U.S. options at NYSE Euronext, the world’s largest operator of stock exchanges. "It’s a big deal because it can hurt the revenue of exchanges and the ability of trading firms to profit." One reason for the decline is that investors have sold assets to protect against losses by moving money into cash, which reduces the need to use options to protect against drops in the underlying assets, said Jeremy Wien, who trades VIX options at Societe Generale SA in New York.
"People have fewer underlying positions to hedge," Wien said. "There are fewer and fewer people taking positions because they’re saying, ‘I just want to make it to next year.’" An estimated 700 hedge funds may go out of business by the end of the year, an increase of 24 percent from 2007, according to Hedge Fund Research. The Chicago-based firm’s Fund Weighted Composite Index fell 6 percent in September and another 6 percent in October. "Over the last 10 years, the amount of volume that was because of hedge funds really went up as they were getting bigger and bigger and trading more and more," said George Ruhana, chief executive officer of Chicago-based OptionsHouse LLC, the online brokerage unit of PEAK6 Investments LP. "Now their capital base isn’t going to allow them to trade as much."
GMAC Applies for Status as Bank, Begins Debt Swap
GMAC LLC, the largest lender to General Motors Corp. car dealers, has applied for status as a bank holding company so it can get access to the Treasury's $700 billion rescue fund for the financial industry. The lender also began an exchange offer for $38 billion of debt issued by the company and its Residential Capital home lending unit, Detroit-based GMAC said today in a statement.
Converting to a bank and swapping debt may help GMAC quell doubts about its survival. Losses at GMAC since mid-2007 reached $7.9 billion through last quarter, as home foreclosures pressured the mortgage unit and GM's auto sales plummeted to the worst level since 1945. "As a bank holding company, GMAC would obtain increased flexibility and stability to fulfill its core mission of providing automotive and mortgage financing to consumers and businesses," the statement said.
GMAC has been shut out of some credit markets and last month said it might raise "significant amounts of capital" as part of an attempt to become a bank holding company and swap some of its debt. Standard & Poor's said Nov. 7 that GMAC and ResCap were facing a "dire situation." The exchange of cash, preferred shares and new bonds for existing debt will increase GMAC's capital levels as it seeks bank status. GM sold 51 percent of GMAC to a group led by buyout firm Cerberus Capital Management LP in 2006, retaining minority control.
More than 100 lenders, insurers and financial companies have applied to the government for at least $65.8 billion in funds through the Troubled Asset Relief Program, according to data compiled by Bloomberg. Fifty-seven received preliminary approval for $51.5 billion, while 48 more awaited word on requests totaling at least $14.3 billion. The Treasury's $700 billion rescue plan for the financial industry, announced in October, includes $125 billion allocated to the nine largest U.S. banks and $125 billion originally earmarked for smaller regional lenders.
Some insurers and finance companies are planning to convert to banks to become eligible for the funds. Totals may be higher because disclosures of applications are voluntary, and some smaller institutions are omitted. GMAC said earlier this month that it sold a reinsurance business to Maiden Holdings Ltd. and agreed to sell two insurance units to the firm as it seeks to avoid a cash squeeze.
Citi shares in record slump, CDS spreads widen
Citigroup Inc. shares slumped a record 23% Wednesday and credit-default swap spreads on its debt widened after the bank took on more than $17 billion in assets from structured investment vehicles and shut another hedge fund. Citi shares slumped 23% to close at $6.40. The previous biggest one-day drop was 21.7% during the market collapse on Oct 19, 1987. CDS spreads on Citi were trading at more than 360 basis points during afternoon action, up from a 240 basis points yesterday, according to Phoenix Partners Group.
CDS are a common type of derivative contract that pay out in the event of default. When CDS spreads widen it means investors are willing to pay more for protection against defaults. A spread of 360 basis points means an investor buying $10 million worth of protection must pay $360,000 a year. Citi said it will purchase the final $17.4 billion of assets still in structured investment vehicles, or SIVs, that the bank advised.
SIVs sell short-term debt and use they money to invest in longer-term, higher-yielding assets. During the credit boom earlier this decade, these vehicles became a popular way for some banks to grow assets without adding extra stress on their balance sheets. But when the credit crunch hit, SIVs couldn't refinance their short-term debt. That forced banks including Citi and HSBC to take the assets onto their own balance sheets. In December, Citi said it would take $49 billion of assets from SIVs it advised onto its balance sheet to resolve concerns about how the vehicles were going to repay their debts.
The SIVs in question have been selling assets since then, and now have $17.4 billion left, Citi said Wednesday. Taking on this final chunk of assets will mean the SIVs have enough money to repay senior debt obligations that are maturing, the bank said. Citi estimated that it needs to provide $300 million in extra funding for the transaction to close. Citigroup CDS led an increase in counterparty credit risk in the derivatives market Wednesday, according to Credit Derivatives Research. The CDR Counterparty Risk Index, which tracks credit-default swaps on leading banks and brokerage firms, rose 12.3 points to 263.9 during midday action.
CDS spreads on Morgan Stanley, Bank of America, J.P. Morgan Chase and Wachovia were all wider by at least 15 basis points, CDR said. "Citigroup showed the greatest deterioration on news of hedge fund closures and SIV takeovers," David Klein, manager of CDR's credit indexes, said in an e-mail. Citi is shutting down a corporate credit hedge fund called Corporate Special Opportunities after it slumped more than 50% in October. "As with many other credit-based investment products, investment returns have been hurt by one of the most volatile periods for fixed income in history," a Citigroup spokesman said in a statement Wednesday.
In February, Citi suspended investor redemptions from the fund, which once had more than $4 billion in assets. The value of the fund's assets has now dwindled to less than $60 million, while its debt is about $880 million. That may leave investors with recoveries of no more than 10 cents on the dollar, according to the Financial Times. Citi lent the hedge fund money and bought assets with a notional value of $1 billion that it put in the fund, the FT reported. Losses for Citi could total hundreds of millions of dollars, the newspaper said.
Prince Alwaleed Buys More Citigroup Stock After Losing $13 Billion
The Warren Buffett of the Gulf is taking a bigger hit from the credit crunch than the original. Prince Alwaleed bin Talal was lauded by Time magazine as the Middle East’s answer to the Sage of Omaha after a 1991 investment in Citigroup Inc.’s predecessor helped make the Saudi billionaire one of the world’s five richest people. This year, Alwaleed’s investments aren’t keeping pace with regional benchmarks, let alone Buffett. His Riyadh-based Kingdom Holding Co. has slumped 63 percent -- more than Saudi Arabia’s Tadawul All-Share Index or Buffett’s Berkshire Hathaway Inc. -- wiping out $13 billion in value.
Kingdom Holding today said Alwaleed will increase his Citigroup stake, his largest holding, to 5 percent, even after the shares fell 77 percent since Jan. 1. "When people nail their colors to the mast in such an obvious way, if then it all blows up, then that’s very damaging to your reputation," said Ken Murray, chairman of Blue Planet Investment Management in Edinburgh, who says he shorted shares in Citigroup last year. Alwaleed and his companies are buying Citigroup shares because the prince believes they are "dramatically undervalued," Kingdom Holding said in a news release. The combined stake stands at less than 4 percent after recent share sales by Citigroup, Kingdom Holding said. "Prince Alwaleed is fully confident that Citigroup’s universal banking model and global franchise will make it a long- term winner in the financial services industry," Kingdom said. Citigroup shares rose 6.4 percent to $6.81 in pre-market New York after the announcement.
Like Buffett, Alwaleed, 53, built his fortune by investing in brand-name companies he considered were undervalued, including Apple Inc., News Corp. and Time Warner Inc. Forbes magazine estimated he was worth $21 billion in March, ranking him 19th among the world’s billionaires. A nephew of the late King Fahd bin Abdulaziz al-Saud, Alwaleed stands out among more than 2,000 Saudi princes because he’s made money. After earning a bachelor’s degree from Menlo College near San Francisco, he returned to the Persian Gulf and parlayed an inheritance of less than $1 million into a billion- dollar fortune in the 1980s, mostly through real estate investments, according to Riz Khan’s biography "Alwaleed: Businessman, Billionaire, Prince" (William Morrow, 2005.)
Alwaleed’s arrival as a celebrity investor came with the Citicorp stake, for which he paid the equivalent of $2.98 a share after adjusting for stock splits, acquisitions and spinoffs, according to Bloomberg calculations. In the decade through 2007, the stock averaged $42. Today -- after more than $13 billion of loan losses and subprime-related writedowns -- it’s still trading at more than twice what Alwaleed paid. Unlike Buffett, who for years drove a 2001 Lincoln Town Car, Alwaleed enjoys the trappings of wealth. His garage contains two of everything -- including a pair of Rolls Royce Phantoms -- as the prince buys a matching model for his bodyguards whenever he picks a new car, according to Forbes. Buffett paid $31,500 for the home in Omaha where he’s lived for 30 years; Alwaleed spent $100 million on his 317-room Riyadh palace.
And when Airbus SAS put the world’s biggest aircraft, the A380 superjumbo, on sale last year, Alwaleed was the first private customer to order one. That cost him $319 million, and fitting out the plane’s interior may cost "several hundred million" more, Airbus said. Also in contrast to Buffett, Alwaleed’s investments are underperforming in the credit crunch. The prince’s reluctance to exit positions may be one reason. "There are some assets I would never sell," he told the U.K.’s Independent newspaper in 2005, citing Citigroup, News Corp. and the luxury hotel group Four Seasons Hotels Inc. In another 2005 interview with Charlie Rose of the U.S. Public Broadcasting Service, Alwaleed outlined his criteria for buying stocks. "The return on investment in the coming five to 10 years has to be within our acceptable conditions," he said. That means "at least 20 to 25 percent" annual returns.
Few investors, including Buffett, are making that kind of money this year. Berkshire Hathaway fell the most in at least 23 years yesterday, dropping for the eighth straight day since reporting a 77 percent decline in third-quarter profit. Still, the stock has beaten the Standard & Poor’s 500 Index this year, falling 41 percent compared with a 45 percent drop in the U.S. benchmark. Those who bought Kingdom Holding shares when Alwaleed took his company public in a July 2007 initial share sale have lost 55 percent. The Tadawul index fell 45 percent in the same period. Alwaleed still owns 94 percent of Kingdom Holding. There’s every chance the prince will unearth fresh bargains in the current slump, says John Rossant, executive chairman of Publicis Live, which organizes World Economic Forum events in the Middle East and elsewhere.
When Alwaleed bailed out Citicorp in 1991, the New York- based bank "was very close to going bankrupt, the stock price was a fraction of what it is even today," says Rossant, who has worked with Alwaleed since the mid-1990s and calls the Citicorp investment "one of the smartest of all time." "You’ve got to think, if you look over the equity landscape today, that there are similar situations," he says. "If you’ve got capital now, and you have to assume that someone like Alwaleed does, he would stand to make a lot of money." Right now, he isn’t. Kingdom Holding has stakes in 15 publicly traded non-Gulf companies, according to its Web site. Only four have outperformed their national benchmark this year, according to Bloomberg data. Those four are among Kingdom’s smaller stakes: it owns 1 percent or less of Hewlett Packard Co., PepsiCo Inc., Walt Disney Co. and Procter & Gamble Co., according to the Web site.
Alwaleed’s larger holdings are faring worse. Kingdom holds 7 percent of New York-based News Corp., Rupert Murdoch’s media company, which has fallen 69 percent this year. Songbird Estates Plc, the majority owner of London’s Canary Wharf financial district, plunged 82 percent as tenants such as Lehman Brothers Holdings Inc. went bust. Alwaleed owns 21 percent of Songbird, according to data compiled by Bloomberg. Alwaleed is also one of two Middle Eastern investors racing to build the world’s first kilometer-high skyscraper in the Persian Gulf. On Oct. 13, Kingdom Holding announced plans for the Kingdom Tower, part of the $27 billion Kingdom City real-estate project in the Red Sea city of Jeddah.
Such attention-grabbing projects are under review throughout the Gulf, as oil prices plunge and borrowing costs rise. On Nov. 17, Nakheel PJSC, the Dubai-owned developer that’s Alwaleed’s rival to break the 1,000-meter barrier, announced it was "scaling back" some projects, without saying which ones. "Real estate is bound to correct downward, and a lot of projects are going to get delayed," says John Sfakianakis, chief economist at Saudi British Bank in Riyadh. "The region’s going through the final stages of what I call the ‘mine is bigger’ syndrome
Brent Falls Below $50, First Time Since 2005, as Demand Slumps
Brent oil, the benchmark that prices two-thirds of the world’s crude, fell below $50 a barrel for the first time since May 2005 as global energy demand slumped. Brent has crashed 66 percent from a record $147.50 a barrel on July 11 as the credit crisis spread through the global economy, cutting industrial output and consumer spending. The International Energy Agency expects world oil demand to rise at its slowest pace for 23 years in 2008 as the U.S., Europe and Japan face their first simultaneous recessions since 1945. Oil in New York fell 6.3 percent to $50.22 a barrel
"Prices are plunging down through $50 due to the serious economic slowdown, broad-based deleveraging and risk aversion," said Mike Wittner, head of oil market research at Societe Generale SA in London. "Demand growth in developed countries is contracting sharply." Brent for January settlement fell as much as 6.2 percent to $48.54, the lowest since May 25, 2005, today on London’s ICE Futures Europe Exchange. The contract traded at $48.54 at 1:47 p.m. London time. Oil’s decline has accelerated. Brent fell 33 percent in October, the most in one month since at least 1988, as fuel demand dropped. U.S. fuel use during the past four weeks averaged 19.1 million barrels a day, down 7 percent from a year ago, an Energy Department report said yesterday.
"Oil at $147 was purely a speculative bubble," Gareth Lewis-Davies, an analyst at Dresdner Kleinwort Group Ltd., said before prices breached $50. "It was cheap money chasing opportunities that were evaporating in other asset classes. What would bring it down further is any indication of demand growth being weaker than already dampened expectations." In the U.S., crude oil for December delivery fell as much as $3.40, or 6.3 percent, to $50.22 a barrel on the New York Mercantile Exchange. The contract traded at $50.59 a barrel at 1:42 p.m. London time.
BASF SE, the world’s largest chemical company, lowered its 2008 profit forecast for the second time yesterday and plans to idle 80 factories after customers in the auto, construction and textile industries reduced orders. U.S. crude oil supplies rose 1.6 million barrels to 313.5 million barrels last week, the Energy Department said yesterday. Stockpiles were forecast to rise 1 million barrels, according to a Bloomberg News survey of analysts. Brent first rose above $50 on Oct. 11, 2004 in the middle of oil’s six-year rally toward this year’s records. Prices climbed on the strength of oil import demand from emerging economies, led by China, the world’s second-largest oil consumer, after the U.S.
The IEA lowered its 2009 estimate by 670,000 barrels a day, or 0.8 percent, to 86.5 million barrels a day following weaker economic forecasts from the International Monetary Fund, it said in a monthly report last week. That’s the biggest reduction since 1996. The agency’s expectation that demand will expand next year remains more optimistic than those of some other analysts. Ian Taylor, chief executive officer of Vitol Group, said on Oct. 28 he expects a 1 million barrel decline in 2009. Wood Mackenzie Consultants Ltd. predicts a drop of 250,000 barrels a day. Oil prices may fall as low as $40 a barrel by April next year, Deutsche Bank AG said in a report yesterday. The Organization of Petroleum Exporting Countries potentially needs to cut production by 2.5 million barrels a day, to reduce output in an oversupplied market, the note said.
Iceland Gets $4.6 Billion Bailout From IMF, Nordics
Iceland got a $4.6 billion bailout from the International Monetary Fund and four Nordic countries to help resurrect the island's economy after the failure of its biggest banks and the collapse of its currency. The Washington-based IMF approved a $2.1 billion loan late yesterday. Finland, Sweden, Norway and Denmark will provide a further $2.5 billion, the Finnish Finance Ministry said in a statement today.
"The shock of the economic collapse has already hit Iceland, these loans will just reduce the extent to which the decline will draw out," said Lars Christensen, chief analyst at Danske Bank A/S. "But it is a substantial amount, and it's enough money to recapitalize the country's banks." The loan won't be enough to prevent the economy from contracting at least 10 percent next year, Christensen added. Iceland will use the money to stabilize the krona, shore up its banks and restore confidence, the IMF said. The country, which had the fifth-highest per capita income in the world last year, needs the financing to pay for imports and to create enough foreign reserves to support a free-floating currency.
"Iceland is in the midst of a banking crisis of extraordinary proportions," said John Lipsky, the first deputy managing director of the IMF, in a statement. It "is facing a severe recession, given the high debt level in the economy and significant dependence of the private sector on foreign currency and inflation-indexed debt." Approval of the loan dragged out after Iceland was unable to reach agreement with U.K. and Dutch officials on how to cover foreign deposits held at one of the island's bankrupt lenders, Landsbanki Islands hf. The country struck a deal ending that dispute on Nov. 16. Today's loan won't be used to repay depositors in the Internet unit, known as Icesave, Prime Minister Geir Haarde has said.
The U.K., Dutch and German government "will work constructively in the continuing discussions with Iceland to conclude agreements on pre-financing that enables Iceland to meet its obligations towards depositors shortly," according to a joint statement today. Icelandic Foreign Minister Ingibjorg Solrun Gisladottir has estimated the deposits at 640 billion kronur ($3.7 billion). The IMF said that $827 million of its loan would be made available immediately and the rest in eight installments of about $155 million, subjected to quarterly reviews. The agreement "gives us a solid platform for re-establishing the credibility which will be necessary in restructuring a viable Icelandic economy," Gisladottir said.
Haarde originally targeted financial support worth a total of $6 billion. In addition to IMF and Nordic support, Poland has agreed to lend $200 million and the Faroe Island has pledged $50 million. It is in talks to secure funding from Russia, Foreign Minister Alexei Kudrin said yesterday. Raising foreign reserves will allow the central bank to restore the currency to a free-floating regime, a necessary step to reviving the economy given its reliance on imports and capital inflows, according to Handelsbanken economist Thomas Haugaard. Imports made up 45 percent of gross domestic product last year, according to the statistics office.
Since the collapse of the banks last month, official trade in the krona has been limited to daily central bank auctions. The krona traded at 176 against the euro at the auction on Nov. 19, according to the central bank's Web site. That compares with an offshore rate of 215 against the euro, according to Handelsbanken. "They'll have to accept that there'll be a pretty significant pressure on the currency when they reintroduce a free float," Christensen said. Defense of the krona, which has lost about two thirds of its value since the beginning of the year, will be a priority for the central bank, the government said on Nov. 17. That means policy makers may raise the benchmark interest rate from the record 18 percent it was lifted to on Oct. 28.
Christensen estimates the krona will trade weaker than 250 against the euro once it's returned to a free float. "Sedlabanki assumptions of where the currency will stabilize look very optimistic," Beat Siegenthaler, chief strategist at TD Securities in London, said yesterday. "It's the credibility issue that's really, really crucial." A free float may "trigger a massive currency outflow," the central bank said on Nov. 3. The bank estimates that foreign investors hold about 400 billion kronur ($2.9 billion) worth of government-backed bonds.
The currency slumped after Kaupthing Bank hf, Landsbanki and Glitnir Bank hf collapsed under the weight of their debt last month. The country isn't guaranteeing foreign investor debt holdings at the banks, Prime Minister Geir Haarde said on Nov. 17. Since the beginning of October, the benchmark stock index has slumped 80 percent, while the yield on the 7.25 Treasury note due May 2013 has jumped 5 percentage points to 13.65 percent.
Iceland to get $10 billion as Europeans pitch in
Iceland secured pledges of support from European countries on Thursday to help the country rebuild a shattered financial system, boosting total aid after an IMF-led package to more than $10 billion. After weeks of delays, the International Monetary Fund approved a $2.1 billion loan late on Wednesday, the cornerstone of international efforts to rescue the North Atlantic nation. Iceland fell prey to the global financial crisis as its currency plunged and its financial system crashed last month under the weight of tens of billions of dollars of foreign debts incurred by its banks, three of which failed.
"The whole IMF package, which includes British and Dutch loans to the Icelandic deposit guarantee agency, is about $10.2 billion, out of which the Nordic countries' share is about a quarter," Finland Finance Ministry Under-Secretary Martti Hetemaki told Reuters. Iceland said it would receive $3 billion from Denmark, Finland, Norway, Sweden, Russia and Poland. The Faroe Islands, a tiny Danish territory, will chip in $50 million. Britain, the Netherlands and Germany issued a statement saying they would provide "pre-financing" to help Iceland meet foreign deposit obligations. The IMF, in a conference call on Thursday, estimated those obligations at $5-6 billion.
The first priority is to make the Icelandic crown a functional currency again so that the island can begin to trade more normally. Paul Thomsen, head of the IMF's Iceland mission, told the conference call: "As far as the value of the krona is concerned, I am confident that the krona is going to stabilise ... and soon start appreciating." The IMF loan had been held up due to an acrimonious dispute between Iceland and Britain and the Netherlands over how to repay savers with deposits in frozen Icelandic accounts. German savers also had money locked up.
Iceland announced a breakthrough in the conflict on Sunday, saying it would cover insured deposits in accordance with European law. Britain will lend Iceland 2.2 billion pounds ($3.26 billion), a British finance ministry source told Reuters. The Netherlands was working on assistance to help cover 1.2 billion to 1.3 billion euros ($1.5 billion to $1.6 billion) in Dutch deposits held in Icelandic accounts, a Dutch finance ministry spokesman said. Icelandic Prime Minister Geir Haarde expected rapid parliamentary support for the IMF deal. "I expect that this will be approved by the end of the day," he told state radio. But Icelanders are braced for a sharp economic contraction and thousands of the country's 320,000 people face the prospect of losing their homes and savings. Protests against the government have become a regular fixture in Reykjavik since the crisis erupted last month.
"The collapse of the banking system has inflicted severe dislocation on the economy and the conduct of international trade," Fitch Ratings senior director Paul Rawkins said. "It is imperative that the authorities move quickly to stabilise the currency and lay the foundations for economic recovery and a normalisation of financial flows." A spokesman for Swedish Finance Minister Anders Borg said a Nordic $2.5 billion loan to Iceland would be split roughly equally between Sweden, Finland, Norway and Denmark Finland's Hetemaki said the Nordic countries had not yet finalised details, including the share of each Nordic country.
According to Thomson Reuters data, Iceland's banks owed more than $60 billion in foreign debts when the crisis hit. Haarde said this week Iceland may need as much as $24 billion but estimated the most immediate needs at $5 billion. Germany, Britain and the Netherlands said they welcomed Iceland's commitment to meet its obligations and would work with the country on agreements to help it meet its obligations towards depositors. There was no immediate sign that the financial aid was helping the Icelandic crown, which is now barely trading on international markets and is worth less than 40 percent of its value at the start of the year.
World stocks hit 5-1/2 year low
World stocks hit 5-1/2 year lows and oil hit 22-month troughs on Thursday on worries over bank giant Citigroup and U.S. automakers, though they trimmed losses on an increased Saudi stake in Citi and a Swiss rate cut. Citigroup Inc shares tumbled to a 13-year low on Wednesday as investors questioned the survival prospects of the U.S. banking giant. But the shares rose in pre-market trading on Thursday after Saudi Prince Alwaleed said he had boosted his stake in Citigroup back to 5 percent from less than 4 percent.
The Swiss National Bank cut rates by 100 basis points on Thursday to a target range for 3-month Swiss franc Libor of 0.5-1.5 percent, joining central banks elsewhere who have cut rates sharply to boost their economies. "This move clearly signals that the SNB are concerned about deflationary risks. This joins them with the Fed and BoE who have also expressed similar concerns in recent weeks," said UBS analysts in a client note. The MSCI world equity index fell to 197.72, its lowest since May 2003, and was trading at 198.52 at 7:50 a.m. EST, down 2.04 percent on the day.
U.S. stock futures were down 0.79 percent and the FTSEurofirst 300 index of leading European shares was down 2.5 percent, after earlier hitting a 5-1/2 year low. U.S. automakers were also weighing on equities, with at least one among household names General Motors Corp, Ford Motor Co and Chrysler LLC at risk of bankruptcy if a last-minute bail-out plan fails. However, the dividend yield on the U.S. equity market is now higher than the 10-year US Treasury bond yield for the first time since 1958, Barclays Wealth said in a note.
"Absolutely everyone is concentrated on risks and fear rules," said Nick Purves, fund manager at Schroders. "You are now adequately compensated for taking that risk." Federal Reserve officials slashed economic growth forecasts through 2009 on Wednesday, with the lower range of the Fed's central tendencies forecasting the U.S. economy could shrink by 0.2 percent. Oil fell by more than $1.50 a barrel to 22-month lows at $51.95, as the slumping global economy hit demand.
Two-year U.S. Treasury yields hit record lows at 1.06 percent on expectations of a 50 basis point U.S. rate cut to 0.50 percent next month. Thirty-year yields hit their lowest since the early 1960s. Euro zone government bond yields hit their lowest since July 2005 at 2.095 percent. The dollar trimmed earlier losses but was down 0.27 percent to 95.65 against the safe-haven yen, and edged lower against the euro to $1.2547. Emerging markets suffered from falling commodity prices and global demand. The MSCI emerging equities index dropped 4.71 percent to 466.52.
GM, Ford, Chrysler Jet Out of Congress Empty-Handed
U.S. lawmakers deadlocked on a plan to bail out the Big Three automakers, leaving General Motors Corp. facing the prospect it could run out of cash before a new Congress can come to the rescue next year. Democratic congressional leaders disagreed with Republicans and President George W. Bush's administration over how to provide $25 billion in aid to GM, Ford Motor Co. and Chrysler LLC. Only two days remain in a lame-duck session to resurrect a compromise, though Senate Majority Leader Harry Reid said today Congress might return in December to finish its work.
"The desire is we complete all of our actions until we come back on Jan. 6, but that may not be possible," the Nevada Democrat said. "It may be necessary that we come back after Thanksgiving." Reid earlier suggested the situation was dire and refused to set aside time today to debate a compromise proposed by Senator Kit Bond, a Missouri Republican. Reid said Bond's plan hasn't been put in writing and the House of Representatives is about to adjourn. Bond and fellow Republican George Voinovich of Ohio insisted they weren't giving up on their proposal to speed up and broaden access to $25 billion already approved for fuel- efficient vehicle development that was a compromise.
"We've made great progress," Bond said. "We are down to the point now where wording challenges are about the only remaining things to deal with." GM fell 68 cents, or 24 percent, to $2.11 at 10:11 a.m. in New York Stock Exchange composite trading. The shares plunged 89 percent this year before today. Ford slid 19 cents, or 15 percent, to $1.07. GM's 8.375 percent bond due in July 2033 fell 3.8 cents to 15 cents on the dollar, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 55.45 percent. A Democratic plan to help the automakers with funds from the recently approved $700 billion bank-rescue package stalled in the face of Republican opposition and a Bush veto threat. It may be revived next year after President-elect Barack Obama takes office in January and Democrats install a strengthened majority in both houses.
GM Chief Executive Officer Richard Wagoner said automakers would like action before Obama takes over because a global credit crunch that has slammed sales in the U.S. is spreading to global auto markets. GM, the biggest U.S. automaker, said Nov. 7 it may run short of the $11 billion minimum cash it needs to pay its bills each month by the end of this year and will fall "significantly" short of that level by the middle of next year. The Detroit automaker burned through $6.9 billion in cash in the third quarter and had $16.2 billion on Sept. 30. Wagoner said yesterday he expects the automaker to slow its cash use to the $3.6 billion a quarter rate of the first half of this year.
"We're continuing to do everything we can to augment our cash position," Wagoner said in an interview yesterday after eight hours of testimony split between the U.S. House and Senate over two days. "We've been stretched to do stuff that we thought was very difficult and painful to do already this year," he said. "People are thinking every day of new ideas." Wagoner, Ford CEO Alan Mulally and Chrysler CEO Robert Nardelli left the Capitol after two days of appeals for help were rejected. The companies are seeking aid as industry-wide sales have plummeted to a 17-year low. GM this month said it lost $4.2 billion in the third quarter and almost $73 billion since the end of 2004.
Senate Republican leader Mitch McConnell of Kentucky urged lawmakers to let automakers shift the previously approved loans intended to promote fuel efficiency for day-to-day operations instead. "It is the only proposal now being considered that has a chance of actually becoming law," he said. White House spokeswoman Dana Perino endorsed the Bond- Voinovich plan yesterday. "If the Congress fails to act, the most logical interpretation would be that they don't agree that an additional $25 billion needs to be given to the auto industry," she said. Reid responded that the White House has authority to funnel the financial-rescue money to car companies without congressional action. "No one should be overly concerned if we are unable to reach agreement," Reid said in a statement. "It will still be up to the White House and the Treasury Department to take the steps that I believe are necessary."
"There will be a great deal of resistance in the House" to redirecting the fuel-efficiency loans without previously approved environmental safeguards, said House Financial Services Chairman Barney Frank, a Massachusetts Democrat. Wagoner wouldn't rule out shifting the previously approved funds to keep his company afloat. "It could work," he said. Representatives including Democrats Gary Ackerman of New York and Bradley Sherman of California criticized the auto chiefs for taking private jets to Washington to plead their case. "Couldn't you all have downgraded to first class?" Ackerman said. Added Sherman, "I don't know how I go back to my constituents and say the auto industry has changed." The auto chiefs didn't talk about their jet use in response.
Representative Peter Roskam, an Illinois Republican, challenged Wagoner and Mulally to forgo pay for a year, saying he understood Nardelli was agreeable to the idea. Wagoner said he had "no position" on that. Mulally said, "I think I'm OK where I am." The GM CEO got $14.4 million in compensation in 2007, including a salary of $1.56 million. Mulally received $21.7 million for 2007, including $2 million in salary. Wagoner said he recognizes the government will play a greater role in telling the automakers how to run their business in the future, if aid is approved. "Certainly at minimum they are going to want to look at your future plans and how are you delivering against those future plans as steward for the taxpayers," he said.
"In a certain way, being able to lay out the business issues as we see them, in some sort of setting where confidential data can be shared, I think people would understand our business and maybe that in the end would be helpful." The Canadian divisions of all three automakers have asked for loans or loan guarantees from that country's government, the Globe and Mail reported. Chrysler is seeking C$1 billion ($797 million) in aid, the newspaper said, citing people familiar with the discussions. U.S. federal aid for the Big Three would remove much of the urgency for tough restructuring decisions, said Representative Michele Bachmann, a Minnesota Republican. "It's easy to predict that you will be back at the taxpayers' trough in no time at the rate that money is being burned in Detroit," she said.
Carmakers are cutting production to cope with declining demand, including a 33 percent reduction in North American output by Ford this quarter. GM said today it's suspending production of cars and trucks in Thailand for a month and cutting 8 percent of the workforce there because of falling demand in Asia. Wagoner said the trip to Washington taught him that Detroit's plight isn't translating well outside the Midwest. "What I learned, I think we get out and tell our story pretty well, and then something like this happens and you say: 'Well geesh' it's like nobody knows what we did," Wagoner said in the interview.
"Well, then, it has to start with us. We have to do a better job, a more regular job, of keeping people update, listening to their concerns, trying to respond to them." Before calling it quits for the year, the Senate plans to approve a seven-week extension of unemployment insurance benefits that would cost around $6 billion.
Putin Pledges to Prevent Financial Collapse in Russia
Russian Prime Minister Vladimir Putin vowed to do "everything" to prevent the kind of financial crises that shook the country after the collapse of the Soviet Union. Putin unveiled new measures to counter the effects of the global economic crunch, including corporate tax cuts and higher welfare payments, and promised to defend the ruble.
"We'll do everything we can to prevent a repeat in our country of the problems of past years, the collapse of past years," Putin told the annual congress in Moscow today of the ruling United Russia party which he heads, broadcast live on state television. "We have amassed sizable financial reserves which will give us the freedom to maneuver, allow us to maintain macroeconomic stability." Putin, 56, is bolstering his public role in response to a global slowdown that has punctured Russia's 10-year oil-fueled boom, amid growing speculation that he may seek to return to the Kremlin as president next year.
Putin remains at the center of power after handing the presidency in May to his chosen successor, Dmitry Medvedev, 43. He may persuade Medvedev to step down, triggering snap elections that would enable Putin to reclaim the No. 1 post for as many as 12 years under a new six-year presidential term, analysts say. "Medvedev can announce that he isn't coping and it's better if an experienced political leader takes the reins again," said Leonid Sedov, a political analyst at the Levada Center research group in Moscow.
As the U.S., Europe and Japan slip into recession, the price of oil has fallen below $50 a barrel in New York from a July high of almost $150, hurting Russia, the world's largest energy exporter, which relies on oil and gas for two-thirds of its export earnings. Russia's economic growth will slow to 3 percent next year after average expansion of 7 percent a year since 1999, the year after the 1998 financial default, the World Bank estimates. Russia in August 1998 defaulted on $40 billion of debt and devalued the ruble, wiping out the life savings of millions of people overnight and pushing the government to the edge of bankruptcy.
Russia "won't allow a spike in inflation or sharp changes in the ruble's exchange rate," Putin said. Bank deposits are safe in Russia because 98.5 percent of all retail deposits are fully covered by a state guarantee, he said. Putin announced that the government will cut the tax rate on corporate profits by 4 percentage points in January, reduce taxes for small businesses and speed refunds of value-added tax. Unemployment benefits will rise next year to 4,900 rubles ($178) a month as "structural" labor-market changes loom, he said. Plans to inject funds into health and education and increase social spending under a long-term strategy until 2020 will not be abandoned, Putin said. Pensions will rise 50 percent by 2010, he added.
With Urals crude already $20 below the $70 average required to balance Russia's budget next year, the government is depleting its reserves, the world's third-largest. Already Russia has spent 24 percent, or $144.6 billion, of its central-bank stockpile since early August, mostly on a failed attempt to defend the ruble, which has lost more than 17 percent of its value against the dollar during that period. The ruble snapped a four-day drop after Putin's speech, rising 0.2 percent to 27.5657 per dollar by 2:40 p.m. in Moscow, from 27.6196 late yesterday. The tax cuts announced amount to 550 billion rubles, Finance Minister Alexei Kudrin said. Putin also pledged 50 billion rubles for the defense industry and 83 billion rubles for new housing.
The government has already pledged more than $200 billion in loans, tax cuts, delayed tax payments and other measures to boost liquidity in the financial system during the credit crunch. Russia's budget may have a 1 percent deficit next year, which will be the "peak" of the global crisis, and Russia will use its oil reserve fund to cover the shortfall, Kudrin said. Putin accused certain politicians of complacency inherited from the years of high prices, which he criticized as "absolutely unacceptable" in today's crisis. He didn't name any of the politicians he attacked. "This will inevitably lead to mistakes that will cost us the trust of the Russian people," he said in his speech. "In difficult circumstances, the real capabilities of public institutions become clear."
Putin will again take center stage next month by holding a live call-in show on national television. Putin has held a nationwide call-in every year since 2001, broadcast live and lasting several hours, with questions on a wide range of issues submitted by TV link-up, phone and Internet. The event dominated TV news coverage on the days it aired. Russia's lower house of parliament is close to approving a constitutional amendment that would extend the president's term to six years from four. The measure will probably secure final legislative approval by mid-December. It would allow Putin, who stepped down after serving two consecutive terms, the constitutional limit, to serve at least another 12 years if he again becomes president.
Markets wary of Irish debt as fresh rescue looms
Ireland's bank rescue has begun to unravel despite a blanket debt guarantee for the country's top lenders, prompting concerns that Europe's credit crisis may be entering a second and more menacing phase. The Taoiseach, Brian Cowen, told the Irish parliament yesterday that he was exploring "all options" to shore up the banks after the collapse of their share prices over recent days. While talk of a fresh bail-out has helped revive the battered stocks of Anglo Irish, Bank of Ireland and other lenders, it appears merely to have shifted the risk to the Irish state itself.
Michael Klawitter, a strategist at Dresdner Kleinwort, said the cost of insuring Irish sovereign debt through credit default swaps (CDS) has surged to 133 basis points. "The markets have begun to see a risk to the solvency of the Irish government. They are questioning whether it has the financial muscle to back up the guarantees," he said. This is a disturbing pattern across Europe as the global credit crisis drags on, with extreme cases in Iceland, Ukraine, Russia, Hungary and Latvia. There are fears that investors could start to shun sovereign debt in Western states where banks have outgrown the underlying economy.
Ireland is vulnerable because financial services make up 9.8% of GDP, including its 'Canary Dwarf' enclave of hedge funds. The liabilities of its lenders are twice Irish GDP. Britain, Switzerland, Belgium, Austria and Luxembourg are in the same boat. Mr Cowen said the original €440bn (£368bn) bail-out agreed in September had been successful in containing a liquidity crisis but had since been overtaken by events in the global markets. Officials from Ireland's treasury and central bank are scrambling to put together a new package, this time involving a direct infusion of money into the banks to raise core capital ratios to safer levels.
Dublin hopes to attract money from buy-out firms such as JC Flowers, but this is becoming ever harder as the Irish property crash plays havoc with the banks' asset books. The government may have to dip into its Pension Reserve Fund. Ronnie O'Toole, chief economist at National Irish Bank, said construction was in free fall, dropping towards 20,000 homes a year from 90,000 at the peak of the bubble. Retail property prices have fallen 33% and office prices have dropped 26%.
Ulster Bank gave warning that Ireland's economy will contract by 4% next year. As a member of the eurozone, Ireland cannot devalue or slash interest rates to cushion the downturn. Nor can it resort to a fiscal boost since the budget deficit is nearing 8pc of GDP. Dr O'Toole said Ireland had low debt, a young population and would "get through this".
Swiss National Bank cuts interest rates by shock percentage point
The Swiss National Bank made a surprise full percentage point cut in interest rates on Thursday, a third reduction in quick succession aimed at stopping the economy sliding into recession as the global outlook worsens fast. The SNB said it had lowered its target band for the 3-month Swiss franc LIBOR to 0.50-1.50 percent from a previous 1.50-2.50 percent range. The central bank would provide generous liquidity to bring the LIBOR rate down to the mid-point of the new range, or 1.00 percent, it added.
"International economic conditions have worsened appreciably, bringing a higher risk of a marked slowdown in economic activity in Switzerland next year," it said in a statement. Thursday's cut, which was announced three weeks before a regular quarterly review, takes Swiss rates to their lowest level since March 2006. The Swiss franc fell to its lowest level against the dollar since August last year after the cut, while euro zone government bonds gained and Swiss stocks pared some loses, with banks UBS and Credit Suisse limiting earlier heavy falls.
"This is completely unexpected. It's a bold move that the SNB must have deemed necessary," said Sarasin economist Jan Poser. "Their risk scenario must have become reality. At the last cut, they warned that there could be negative (economic) growth in 2009. This has probably become their best case scenario." Economic statistics in recent days have added to the case for monetary easing, including data which showed Swiss exports fell sharply in October, retail sales slowed in September and input price inflation eased in October.The move followed a 50 basis point cut on November 6, the same day as the Bank of England and European Central Bank lowered rates, and a 25 basis point reduction on October 8 which was coordinated with other central banks and was the SNB's first easing in five years.
Marc Ostwald, a bond analyst at Monument Securities in London, said the SNB move could herald similar action by the European Central Bank at its meeting on December 4 or even earlier. Fears about a Swiss recession have been mounting as exports are hit by the global economic trouble and by the higher franc, while its banks are struggling with the credit crisis. The SNB currently forecasts growth this year of 1.5-2.0 percent, but has warned that the economy could shrink in 2009. The financial sector accounts for nearly 15 percent of the Swiss economy and the country's largest bank, UBS, has made more writedowns than any other European bank, forcing the government into a major bailout package last month.
The three-month Swiss franc LIBOR had fallen to slightly below the SNB's previous target of 2.00 percent in recent days, giving the central bank leeway to move, although the markets had not expected such a big cut so soon. Interest rate futures jumped on the decision, pricing in another small cut by March, and Swiss stocks briefly pared some of their losses before falling deep into the red again, with the main SMI blue-chip index down 3.6 percent.
The Swiss franc had hit an all-time high against the euro on October 27 at 1.4301, adding an extra burden to the slowing export-dependent economy, but it dipped after the cut to 1.5288 per euro at 8:11 a.m. EST. Some analysts said the SNB could still cut again at its next regular review on December 11, although others said it was running out of ammunition. "I wouldn't put a big probability on another cut in December but it's definitely there, especially as the European economy is slowing quite sharply. Bad news is still in the pipeline," said Violante di Canossa, economist at Credit Suisse in London.
The central bank said on Thursday that inflation risks had eased sufficiently to allow it to move quickly, adding it would continue to monitor closely the situation on the money and foreign exchange markets. "As a result of the decline in the prices of raw materials and oil, price stability will be restored sooner than expected," the SNB said, adding it expected inflation to fall below its 2 percent target as early as the end of this year. Consumer price inflation has fallen from the 15-year high of 3.1 percent hit in July to 2.6 percent in October. After the cut, the SNB offered three-month and six-month franc funding at 0.15 percent.
Air France-KLM's quarterly profit slumps 96%
Air France-KLM, Europe's largest flag carrier, on Thursday reported a 96% drop in second-quarter profit as fuel costs surged and the value of hedges to protect against fuel and currency moves dropped. The airline also reiterated it expects to post an operating profit this year assuming no further significant deterioration in the operating environment but provided no detailed guidance.
Net income for the three months to Sept. 30 fell to 28 million euros ($35 million), or 0.09 euro a share, from a restated 479 million euros, or 2.31 euros a share, earned in the year-earlier period. Profit in the latest quarter was hit by a 373 million-euro charge related to the value of hedging instruments. It was also affected by the economic slowdown, the rise in the oil price and the weakness of the U.S. dollar, the company said. The fuel bill rose 35% to 1.61 billion euros. Excluding one-time items, adjusted earnings were 244 million euros. Sales climbed 3.2% to 6.7 billion euros.
"The deterioration in the economy has accelerated since the summer. Nevertheless, our flexibility has allowed us to respond rapidly to adjust capacity, enabling us to continue to maintain high load factors," chief executive Jean-Cyril Spinetta said in a statement. Airlines, which suffered from record-high fuel prices for the better part of the year, are now getting hit by the global economic downturn caused by the financial crisis. Although oil prices have come down significantly from their high of around $140 this summer, the decline is not enough to offset the drop in demand.
Last month Air France-KLM warned that it would be very difficult for it to meet its forecast of an operating profit of 1 billion euros this year because of slowing demand for air travel and the global economic downturn. On Thursday, Air France gave no new number but said it would post an operating profit. Air France shares fell 6.8% in Paris morning trading.
UK house-building slumps to record low
The number of new homes being built in England has slumped by a third during the past quarter to reach a record low, Government figures showed today. Around 22,200 new properties were started during the three months to the end of September, the lowest level recorded by the Department of Communities and Local Government since it began collecting data in 1980.
The figure was 33 per cent fewer than during the previous quarter and 48 per cent down on the same period of 2007. The drop in the number of properties being built by private developers was even more severe, with new housing starts diving by 55 per cent year on year. However, there was a 20 per cent increase in the number of homes being built by registered social landlords, compared with the same period of 2007.
A total of 4,790 properties were started by registered social landlords during the three months, although this was 18 per cent down on the previous quarter's 11-year high. DCLG said the number of new homes being built overall was now less than half the level recorded during the first quarter of 2006 when building levels peaked. At the same time, the rate at which new starts are declining doubled during the third quarter to a 48 per cent year-on-year drop, compared with a 20 per cent fall in the second quarter.
House-builders have been hit hard by the problems caused by the credit crunch, with the mortgage shortage leaving potential buyers struggling to raise the finance they need to buy a home. The problems have been particularly acute for first-time buyers, with lenders demanding increasingly high deposits, forcing many people to put plans to get on to the property ladder on hold.
Falling house prices have also led to many house-builders delaying starting new projects, with the sector shedding thousands of jobs. House-builders' share prices have plummeted amid concerns that the firms could breach their banking covenants, while they have also been forced to write down the value of their land banks. The DCLG figures showed that the number of new homes completed slumped for the third quarter in a row during the three months to the end of September, dropping by 10 per cent compared with the previous one to 33,300, the lowest level for six years.
On an annual basis, 126,700 properties were started in the 12 months to the end of September, 31 per cent fewer than during the 2005/2006 peak, while 154,300 properties were completed, 9 per cent fewer than a year earlier. The number of homes being started was lower in all regions of England apart from London during the third quarter, with large falls recorded in the South East, North West, West Midlands and Yorkshire and the Humber.
The downturn in the house-building industry makes it increasingly unlikely that the Government's target of having three million new homes built by 2020 will be met. Housing Minister Margaret Beckett said: "We have been clear about the scale of the challenge of our house-building targets in the current economic conditions, but now is not the time to row back on our long-term ambitions.
"At the same time we are taking action to help industry weather the downturn with a range of measures including buying unsold stock and bringing forward our investment for affordable housing, and we are continuing to look at what more we can do. "We need to be ready for when the recovery comes to press on with our programme to meet long-term demand for housing from first-time buyers, families on waiting lists and those living in overcrowded homes."
UK public sector borrowing nearly doubles in a year
The nation's public finances showed more signs of decline today after official figures revealed the worst October in 14 years. The public sector borrowed a net £1.4 billion last month - compared with a net repayment of £1.8 billion a year earlier, according to the Office for National Statistics (ONS). The gloom comes just days before Chancellor Alistair Darling is set to pile up further borrowing with a tax and spend give-away to kick-start the economy in Monday's Pre-Budget Report.
October is usually a strong month for tax receipts but this year was the first time since 1994 that net borrowing was recorded. The figures showed net borrowing since April soaring to £37 billion - almost double the £20 billion seen in the same period last year. October's figures gave growing evidence of the impact of the slowdown on tax revenues - even before the UK's recession is officially confirmed.
Income tax receipts were £1 billion below a year earlier, corporation tax revenues were flat and national insurance contributions dropped by £300 million. Overall growth in receipts was virtually flat although total current spending was more than £2 billion ahead of the previous year. The Government's current budget surplus was reduced to just £1 billion - compared with £4 billion 12 months earlier.
According to the Chancellor's March Budget, net borrowing was forecast at £43 billion over the whole year, although it currently stands at £37 billion with a full five months to go. Other factors such as the £2.7 billion paid to resolve the 10p tax row and a package of measures to help the housing market - including raising the stamp duty threshold - have added further pressure on the figures.
IHS Global Insight economist Howard Archer said the March forecasts had "long been blown out of the water". "The public finances showed further sharp deterioration in October, highlighting the impact of the sharp economic slowdown, markedly weak housing market activity and prices, rising unemployment and Government policy concessions. "Indeed, at the current rate of deterioration, the net borrowing requirement is on course to hit £67.5 billion in 2008/09, without taking into account any immediate stimulus actions that may be unveiled by the Chancellor on Monday," he said.
Treasury Chief Secretary Yvette Cooper acknowledged that the public finances were under pressure, but insisted the Government was right to increase borrowing in the short term. "The public finances have been affected by the global economic problems. Particularly tax revenues from the financial services are, of course, being hit heavily by the global financial crisis," she told BBC Radio 4's The World At One. "But I think it is right to increase borrowing to support the economy right now because we did cut debt while the economy was growing. That does allow us to increase borrowing now so that we can boost the economy."
She said that once the current problems were over, the Government would take action to rebuild the public finances. "Of course you have to make sure borrowing comes back down again as the economy grows. The Chancellor has said that you have to live within your means in the medium term."
The car jams are no easier on the east side of the Atlantic
While the collapse of America's largest car manufacturers continues to fascinate and appal in equal measure, relatively little attention has been paid to the dismal outlook facing the US auto giants' opposite numbers in Europe. Britain's car industry, for example, is in a desperate state, with sales down 23 per cent last month to their lowest levels since 1991.
As a result, British-based manufacturers from Land Rover and Mini to Nissan and Honda have announced plans for short-time working in recent weeks. The outlook is so grim that the Society of Motor Manufacturers and Traders and the Retail Motor Industry Federation are appealing for the same sort of assistance which is causing so much controversy in the US right now. Whether they will have any more success, however, is unclear.
The easiest way to help motor manufacturers would be for Alistair Darling to add their names to the groups for whom tax cuts are now being considered in Monday's pre-Budget report. The industry is lobbying hard for the abolition of the so-called "showroom tax", which will see vehicle excise duty rise dramatically in the first year of ownership for those buying the most polluting vehicles. It also wants Mr Darling to rein back on the car tax increases he previously announced. The lobbying may prove in vain. The Chancellor is committed to the tax increases on environmental grounds and, with a limited pot of money to share out – particularly if he, rather than the Prime Minister, decides on the quantum of tax cuts – it's an easy policy to cling to.
What prospect for the other hope of the car industry, that it might be given leave to apply for help from the Special Liquidity Scheme set up to help banks through their cashflow problems? There's no word yet from the Chancellor, but this doesn't really look a likely solution. Britain's car industry employs many more people – either in manufacturing or associated businesses – than is popularly imagined. Its collapse would cause serious damage to the economy. However, the risk of such a collapse is not the sort of systemic danger that prompted the authorities to step in when they feared the banking sector was on the verge of imploding.
Moreover, if the motor business gets help from the SLS fund, why shouldn't the other industries also suffering serious difficulties. Are the country's car showrooms any more deserving of help than, say, estate agents. What about the retailers going to the wall across the land? Note also that the European Commission yesterday fired a warning shot across the bows of EU member states considering bailing out their motor manufacturers.
Neelie Kroes, the EC competition commissioner, said there was no comparison between the car sector and banking, implying that attempts to prop up manufacturers might fall foul of state aid regulations. The European Investment Bank's offer of €25bn to help motor manufacturers develop green technologies – similar to the grants soon to become available in the US – is different, but that money is not available yet and, in any case, won't save the whole sector. For the time being at least, there is no breakdown truck speeding to the rescue of Europe's car industry.
Swedish Banks Shun Government Plan, Riling Ministers
Nordea AB, Svenska Handelsbanken AB and SEB AB, Sweden's biggest banks, are drawing fire from government officials for shunning the state's plan to bolster the financial system by guaranteeing their debt. The three banks, which dodged the worst of the global credit crisis, have yet to use the program, announced Oct. 20. Finance Minister Anders Borg, who met the banks today, has threatened "harsher" terms to get them to go along. Financial Markets Minister Mats Odell has called the banks "free-riders."
The lack of participation in the 1.5 trillion-krona ($187 billion) guarantee plan breaks with a Swedish tradition of consensus policies, where companies, trade unions and politicians typically cooperate. While banks say the plan may give the state too much clout over their strategy, politicians and business executives contend the program will make banks more willing to lend, thereby helping companies and stimulating economic growth. "If the banks do not participate voluntarily and cannot show that they can create liquidity in the system themselves, then the government must force the banks to join the system," said Anna-Stina Nordmark Nilsson, the chief executive officer of Foeretagarna, which represents 70,000 Swedish entrepreneurs.
Borg and Odell had a "good meeting" with the chief executive officers of SEB and Handelsbanken as well as representatives from Nordea, Borg told reporters. Among points discussed was how the program affects expansion plans and capital adequacy ratios, Odell and Borg said. "We have received some information that we have reason to consider," Borg said. "The turmoil is not over, we cannot isolate Sweden from it and we're traveling in dangerous and turbulent waters." Borg this week cut his target for Swedish economic growth for a second time in three months, forecasting a contracting economy and higher unemployment next year in a worst-case scenario.
Sweden's economy grew at the slowest pace in more than 11 years in the second quarter, and Borg said Nov. 17 that the financial crisis in Sweden is the worst since the early 1990s. The Swedish plan pledges state guarantees in return for a fee. Banks who sign up also have to freeze salaries for top management and temporarily suspend executive bonuses. Only Swedbank AB, Sweden's largest bank by branches, so far agreed to join. Avanza Bank became the first to say it does not plan to participate. "It would be good for the economy if we got a better functioning interbank market," said Cecilia Hermansson, chief economist at Swedbank. "Recessions are always a question of magnitude and if the rates on the interbank markets do not decline, the economy will be damaged."
The banks are evaluating the cost of the program and also what power the state may wield over their growth plans if they join. Nordea has already been forced to join Denmark's stability program, in which banks fund the rescue-package, and is also evaluating a system in Finland, and therefore needs to look at the total costs of the plans, spokeswoman Helena Oestman said. "Another point we have is the consequences of the restrictions involved in the Swedish plan regarding growth and expansion," Oestman said. "It needs to be made clear what kind of viewpoints the state may have on this and if it may interfere with matters such as growth and consolidation."
SEB is still analyzing details of the plan and will announce its decision once that evaluation has been concluded, spokeswoman Katja Margell said. Swedish banks have had their brush with government intervention before. In the early 1990s, Sweden guaranteed bank obligations against losses and established a $14 billion restructuring fund to provide failing banks with capital in return for equity. In addition to taking over Nordbanken AB, which today is part of Nordea, the government created a "bad bank" that bought troubled assets at a discount, while leaving financial institutions to manage their more-liquid holdings. The Swedish government owns 19.9 percent of Nordea.
Today, the bank's hesitance to embrace government aid is increasingly frustrating executives at mid-sized Swedish companies, who typically rely on bank credit to finance operations. Car dealer Bilia AB and oil company PA Resources AB raised capital from shareholders to limit their dependence on bank loans as lenders become reluctant to lend. "The whole credit market is strained and bond loans are completely out of the question," PA Resources spokeswoman Ann- Kristin Littorin said. "We wanted more alternatives than just to rely on one -- borrowing money from the banks."
Finance Minister Borg fanned public discontent with banks this month by urging Swedes to call their local bank and demand that lower interest rates are passed on to mortgage holders. Sweden's Riksbank cut the key lending rate twice last month. Banks in other European countries have been more willing to participate in state-engineered plans. In Denmark, some 130 banks will finance a 35 billion kroner ($5.9 billion) bill, which provides a state guarantee on deposits and interbank lending. France's six largest retail banks got 10.5 billion euros of funds by selling subordinated debt to the state.
Is TARP Really a TRAP?
The Treasury’s capital purchase program, the system for injecting capital into the nation’s banks, may look like a give away on the surface. But look a bit closer and there’s an interesting catch. TARP (Troubled Asset Relief Program), of course, went from being an asset purchase program to a capital investment program and therefore needs a new name.
Under the Treasury program, the government will invest $250 billion in the nation’s banks. A Treasury spokesperson says $158 billion has already been committed with another $92 billion to go. The hope is that new capital will get banks lending again. And many small banks, major small business lenders, are lining up now.
But here’s the rub: In section 5.3 of the agreement there is language that says if Congress wants to put new conditions or requirements on the banks, those new terms can be applied retroactively to banks who took the money. So in January if Congress wants to require banks that have received capital stop foreclosing on homes or up their lending activity, they can.
The American Association of Bank Directors sent a letter to Treasury Secretary Henry Paulson in early November asking that the government delete or modify the provision. David Baris, Executive Director of the AABD, says the Treasury has not responded to the letter. Bank consultant Bert Ely says that is going to give some bankers second thoughts.It is a blank check for Congress to put conditions on money that has already gone out. I think banks will go through the process, but the more they look at this they’ll decline it at the end.
Now, the program is aimed at investing capital in healthy banks. If that's the case and they don't really need the money, it's hard to understand why a bank would agree to a deal that could change over night. Guess we'll see how many banks sign on the dotted line once they read the fine print.
Ambac Pays $1 Billion to Settle $3.5 Billion of CDOs
Ambac Financial Group Inc., the second-largest bond insurer by outstanding guarantees, agreed to pay $1 billion in cash to cancel default protection on $3.5 billion of collateralized debt obligations, further freeing itself from the largest source of losses in its industry. The settlement will result in positive adjustments to the Ambac's mark-to-market and impairment reserves, and improve its standing in rating-firm models, according to a statement today from the New York-based company.
Ambac and rivals including Syncora Holdings Ltd. and FGIC Corp., after being stripped of AAA ratings because of their CDO guarantees, have been able to cancel some of their contracts on mortgage-tied CDOs at discounts to their projected losses. In some cases, the banks with the protection also have benefited, after marking down the guarantees to reflect the insurers' declining creditworthiness amid surging U.S. foreclosures. "My immediate focus as Ambac's new CEO is to restore confidence in our balance sheet through aggressive risk reduction," Chief Executive Officer David Wallis said in the statement.
After the deals, the company's guarantees on CDOs composed of asset-backed securities fell to $26.5 billion, Vandana Sharma, a spokeswoman, said in a telephone interview. She declined to name the counterparties on the canceled contracts. In August, Ambac paid Citigroup Inc. $850 million to extricate itself from a $1.4 billion CDO guarantee. Ambac's "exposures in the U.S. residential mortgage sector and particularly the related collateralized debt obligation structures have been a source of significant and comparatively greater-than-competitor losses and will continue to expose the company" to potentially greater-than-expected losses, Standard & Poor's said in downgrading the company earlier today.
CDOs repackage assets such as mortgage bonds and buyout loans into new debt with varying risks. The debt, much of which was tied to subprime-mortgage securities, has been the largest source of more than $966 billion of writedowns and credit losses reported since the start of last year by global financial firms. Ambac today fell below $1 a share for the first time since going public in 1991 after its insurance rating was cut three levels to A by S&P. The shares declined 38 cents to 76 cents as of 4:15 p.m. in New York Stock Exchange composite trading, though they rose as high as $1.09 in late trading. The shares are down 97 percent over the past 12 months. Moody's Investors Service cut Ambac on Nov. 6 to Baa1, two steps lower than S&P's current ranking, prompting the bond insurer to post collateral and terminate contracts by shifting cash from its guarantee unit to its investment division.
After Losses, Pensions Ask For a Change
Stung by outsize investment losses, some of the nation’s biggest companies are pushing Congress to roll back rules requiring them to put more money into their pension funds, just two years after President Bush signed a law meant to strengthen the pension system. The total value of company pension funds is thought to have fallen by more than $250 billion since last winter. With cash now in short supply for companies, they are asking Congress to excuse them from having to replenish the required amounts. Lawmakers from both parties seem receptive to the idea, and there was talk of adding a pension relief provision to the broad fiscal stimulus package Congress considered for this week’s lame-duck session.
Late Wednesday, several senators announced that they had reached agreement on a bill that would provide pension relief. Even if it is not completed this week, some Congressional leaders say they will seek support for a pension relief bill in January. "Congress needs to make the funding less volatile," said Representative Earl Pomeroy, Democrat of North Dakota, who has long been outspoken on pension issues. "I believe that taking this step will save thousands of jobs without costing the Treasury anything." The risk of giving companies a break on their required contributions is that some troubled companies may go bankrupt anyway, and the federal government will have to take over their ailing plans. Though the government insures traditional pensions, its insurance is limited. And when it takes over a plan, people can lose benefits.
Pension relief for companies would also expose the Pension Benefit Guaranty Corporation to greater risk. The federal guarantor is already operating at a deficit. Companies do not dispute the risks, but they say that when Congress tightened the pension rules it did not take this year’s unprecedented market turmoil into account. If companies are now required to put new money into their pension funds, they say, they will not have the cash needed for business investments and payrolls. "At a time when companies desperately need cash to keep their businesses afloat, the new funding rules will require huge, countercyclical contributions to their pension plans," a group of more than 300 companies, trade associations, consulting firms and labor unions wrote in a letter sent last week to the senior members of the House and Senate committees that deal with workplace matters.
On Wednesday four senators announced a measure for consideration by the full Senate on Thursday that would give companies more time to make up investment losses and sort out other problems. The bill was backed by Senators Max Baucus, Democrat of Montana; Charles E. Grassley, Republican of Iowa; Edward M. Kennedy, Democrat of Massachusetts; and Michael Enzi, Republican of Wyoming. The Pension Protection Act of 2006 was enacted in response to a string of big corporate bankruptcies and pension failures at the beginning of this decade. Federal law requires companies to put money into their pension plans on a regular schedule, but the bankruptcies revealed gaping loopholes that were allowing companies to go for years without adding money.
The 2006 amendments were intended to close some of the loopholes and make the pension system less risky. Until this year’s market disaster, most company pension funds had been making great gains. In 2002, the last low point for most pension funds, America’s 500 biggest companies reported an aggregate pension deficit of more than $200 billion, according to David Zion, an analyst at Credit Suisse who specializes in decoding pension numbers. Thanks to company contributions and strong investment gains, the group reported a pension surplus of $60 billion at the end of 2007. Data including this year’s losses will not be available until the next batch of annual reports, but Mr. Zion estimates that this same group has lost almost $265 billion since the beginning of the year. Results are likely to vary from one company to another because pension investment strategies can vary greatly. But Mr. Zion said he thought that of these 500 pension funds, more than 200 were now less than 80 percent funded, meaning they have less than 80 cents for every dollar of benefits promised.
The so-called funded ratio matters greatly because the new rules call for companies to bring their plans up to 100 percent funding in seven years, starting this year. The phase-in schedule expects them to be at least 92 percent funded this year, at least 94 percent funded next year and so on. Lawmakers wanted to reduce the Pension Benefit Guaranty Corporation’s exposure to the stock market, so they wrote the law to encourage conservative investing. The law does not specifically ban volatile pension investments, but if a company suffers losses big enough to throw it off the seven-year path to full funding, then it no longer gets seven years — it has to achieve 100 percent funding right away.
Some companies have started shifting away from equities, which can swing widely, but many others have not. Now those with mostly stocks in their pension funds seem likely to have tripped the penalty switch, by falling below this year’s required 92 percent funded ratio. As a result they will now have to shoot for 100 percent funding. The letter said the required contributions for next year are rising sharply. It cited one unnamed Florida company that contributed $673,000 this year and will be required to put in more than $15 million in 2009.
Many of the companies now calling for relief have sprawling, mature pension funds with obligations so big they can dominate the companies’ own financial performance. Mr. Zion has identified nine big companies whose pension obligations are more than five times the size of their single largest liability on their balance sheets; six have signed the letter: the NCR Corporation, I.B.M., Rockwell Collins, the ITT Corporation, Northrop Grumman and the Pactiv Corporation. The sponsor of America’s biggest corporate pension fund, General Motors, did not sign the letter. But Ford Motor and Chrysler did. The A.F.L.-C.I.O. has not yet taken a public stand on pension relief, but consumer advocates are expressing guarded support. "If they ask for something more than temporary, it’s not going to happen quickly," said Norman Stein, a professor at the University of Alabama who specializes in pension issues.
The Pension Rights Center, an advocacy group in Washington, said the financial crisis had clearly shown that defined-benefit pensions were superior to 401(k) plans, which make participants bear all the market risk. The center said it would make sense to encourage companies to keep offering pensions by giving them a break on their contributions — but only if they agreed not to freeze their plans. In a pension freeze, employees keep the benefits they have earned, but stop building up new benefits with additional years of work. Even a frozen pension fund still needs contributions, albeit smaller ones, and the companies seeking relief include those with both frozen and active plans. Companies urging relief that have already frozen one or more of their pension plans include 3M, Alcoa, DuPont, I.B.M., Nortel, Northrop Grumman, Verizon and Whirlpool, among others. The issue would be a flashpoint, Professor Stein predicted. "This is completely inappropriate for frozen plans," he said. "I can’t see any reason at all to give relief to frozen plans."
Wachovia, Golden West Investigated by Prosecutors, Regulators
U.S. prosecutors and the Securities and Exchange Commission are investigating Wachovia Corp.'s mortgage lending and disclosures to investors, U.S. Attorney Joseph Russoniello said. Prosecutors are examining whether Golden West Financial, the lender Wachovia bought for $24 billion in 2006, fraudulently pushed borrowers into expensive loans or altered paperwork to get them approved, Russoniello said in an interview yesterday. His office and the SEC are scrutinizing statements the banks made to investors about Golden West's loans, he said.
Wachovia was pushed by regulators in September to merge with a stronger bank amid mounting losses from $120 billion in payment-option adjustable-rate mortgages, mainly acquired in the purchase Oakland, California-based Golden West at the peak of the housing boom. Investigators may focus on how vigilantly managers monitored and disclosed defaults in the loan portfolio. "Individuals will be the focus," said Peter Henning, a former federal prosecutor and SEC lawyer now teaching at Wayne State University Law School in Detroit. "It will look at what they knew and when they said it."
Wells Fargo & Co., the seventh-biggest U.S. bank by assets, is buying Charlotte, North Carolina-based Wachovia for $14 billion after outbidding Citigroup Inc. last month. Wachovia has declined 88 percent in New York trading his year. Golden West co-founder Herbert Sandler, 77, wasn't available to comment, an assistant at his San Francisco-based foundation said. On Oct. 30, Sandler told Bloomberg Television: "I did not see how problems in the subprime market would roll into the mortgage market and then into the economy. It was not like we enriched ourselves."
Christy Phillips-Brown, a spokeswoman for Wachovia, SEC spokesman John Nester, and Julia Tunis, a spokeswoman for San Francisco-based Wells Fargo, declined to comment. Wachovia bought Golden West, its biggest purchase, as a way to expand into California and Texas, two of the fastest-growing housing markets. The lender gave Wachovia $62 billion in deposits and 285 branches, including about 120 in California. Former Wachovia Chief Executive Kennedy Thompson praised Golden West's lending in an annual report issued Feb. 28."With the benefit of hindsight, it is clear that the timing was poor for this expansion in the mortgage business," Thompson said in the report. "We have reconfirmed our opinion of the quality of the Golden West franchise, its underwriting and service model."
Wachovia officials in February said investors were exaggerating concern about home-loan defaults. Last month, Wells Fargo said losses from option-adjustable rate mortgages may reach as much as $26 billion in the next few years. "We are looking down, in terms of what borrowers were told, and we're looking up at what investors were led to believe," Russoniello said. He characterized the inquiry as preliminary. Wachovia's directors dismissed Thompson in June and in July named as CEO former Treasury undersecretary Robert Steel, who helped engineer the sale to Wells Fargo. "Ken Thompson was an innocent in a world that was a little more complicated than he thought," said Robert Gnaizda, general counsel at the Greenlining Institute, a public-policy group in Berkeley, California. "I think he strayed from his management model of not overpaying for acquisitions."
The Bush administration is under mounting pressure to hold companies and executives accountable for the subprime-mortgage crisis, which has pushed millions of people out of their homes and forced the government to bail out Wall Street. The SEC has opened more than 50 inquiries relating to credit-market turmoil, while the Federal Bureau of Investigation examines about 30 companies for possible accounting fraud in connection with subprime lending. It's unclear whether the probe of Wachovia is part of those tallies.
Peru's hot economy wracked by growing conflicts
Peru's president is seizing every opportunity at this week's Pacific Rim economic summit to sell his country as investment-worthy growth engine to visiting Asian business leaders. Despite the global downturn, Peru's recent economic boom could "convert the country into a refuge for foreign capital and a hub, a bridge" between Asia and other Latin American countries, President Alan Garcia told a forum on Tuesday.
Garcia, a bullish free marketeer, leads the region's fastest-growing economy. Peru has averaged 6.5 percent growth over the past five years, nearly two percentage points above the regional mean — winning investment grade status in April and signing a trade pact with the U.S. that takes effect in January. It was also expected to announce a trade deal with China on Wednesday. Yet Peru's main growth engine, mining, has been hit by falling prices, and Garcia's gung-ho efforts to attract foreign investment to the nation's budding oil industry have been sullied by a bribes-for-contracts scandal that cost seven Cabinet ministers their jobs last month.
Indigenous groups upset by the encroachment have occupied oil and gas installations in the Amazon and threatened to cut a natural gas pipeline. And just as 8,000 political and business leaders arrived for this week's 21-nation Asia-Pacific Economic Cooperation summit, resurgent leftist rebels killed three police officers and wounded two soldiers in separate attacks. Elsewhere in the countryside, two protesters were killed and 40 people injured as opponents of a planned sewage plant rioted. Garcia is a darling of international investors, but his approval rating at home is just 19 percent. Some 71 percent of Peruvians said they support free trade in an Ipsos-Apoyo poll released Sunday. The survey of 1,000 people in 16 cities had an error margin of 3.1 percent.
But the benefits of globalized trade — including cheap Chinese electronics and a flood of Chilean investment in retail and banking — have barely trickled down to the poor, who account for 40 percent of Peru's 22 million people. Peru now has two economies, one "developed and competitive, another depressed and lost in poverty," said Carlos Gonzalez, an economist at Peru's exporter's association. Conflicts largely pitting communities or social groups against the state or business interests more than doubled to 189 last month, up from 83 in January, according to government figures. Nearly half involve foreign oil and mining companies and tend to stem from complaints about pollution and infringements on communal land and water.
Militants behind such protests want to paint Peru "before the eyes of the world as a backward country with lots of conflicts," Interior Minister Remigio Hernani told Lima's largest newspaper, El Comercio. Peru is only minimally affected by the drug trafficking-related violence that deters investment in Mexico and Colombia. It has been years now since Peru was wracked by a leftist dictatorship that expropriated land and businesses from the rich in the 1960s and a Marxist insurgency that bloodied the country in the 1980s and 90s. But if Garcia doesn't now do a better job of reducing poverty, he risks a backlash that could thrust populist nationalist Ollanta Humala to the presidency in 2011.
Humala almost beat Garcia in 2006 and is close in his politics to the leftist presidents of Ecuador, Venezuela and Bolivia, who have also spooked foreign investors. Still, China, the most sought-after investor at this week's summit, might not be deterred. Its craving for natural resources has often left it blind to concerns like workers' rights and environmental protection — issues that got exhaustive treatment in the U.S. trade pact, said Nicholas Consonery, an analyst at the Eurasia Group in Washington, D.C.
Recycling industry hit by global slowdown
The global economic crisis is hurting a new sector of the B.C. economy: recyclers. Mairi Welman of the Recycling Council of B.C. says prices are dropping and the market is drying up for materials like plastic and scrap metal, which means the companies that recycle waste are having to rethink how they do business. "For certain materials, there is no market, so people who are collecting the recyclable materials just can't sell it to anyone," Welman told the CBC.
Some goods are fetching only a third of the price they did in September; some recycling companies are laying off workers and others have stopped collecting certain types of plastics altogether. Welman said the recycling council is holding a special meeting on Thursday with industry members to brainstorm about what to do next. "It could be everything, from Metro standing firm on the landfill bans, maybe even changing their tipping fees at the landfill so that it's more of a level playing field," she said.
"Or it could be Ministry of Environment or even more senior governments getting involved and helping to open up new markets, or provide storage," said Welman. The shrinking global demand has already hit one small B.C. community just north of Vancouver. Bill Carr of the Bowen Island Recycling Society said he's had to ask islanders to stop dropping off their mixed plastics like yogurt containers for recycling after the company told him last week it can't take any more.
"We've been asking, please could you hold onto the plastics, in your garage or at home or whatever until the situation changes and we can again start passing along the plastics we collect," Carr told the CBC. "It would seem that the global economy has impacted Bowen Island now," said Carr.
Ilargi: I've written extensively on the topic of Obama seeking advice from the wrong crowd. Reality is now seeping through to Bloomberg. It's ridiculous that people like Bob Rubin and Larry Summers are even considered as being worth listening to. Their only interest is in keeping their their friends in cushy seats. The system is dead and broken, and they'll be the last to admit it. That will cause a lot of pain on America's streets.
Obama Embrace of Wall Street Insiders Points to Politic Reforms
During the height of the financial crisis in late September, some of Barack Obama's campaign advisers pushed him in a conference call to distance himself from Treasury Secretary Henry Paulson. The former Goldman Sachs Group Inc. chief executive officer, they warned, was too close to President George W. Bush and Wall Street. Obama, 47, rejected the idea. At one point, he talked to Paulson every day for two weeks.
As the president-elect faces a once-in-a-century opportunity to remake the regulatory apparatus governing Wall Street, some of Obama's fellow Democrats and investor groups are urging him to bring sweeping changes to banks, hedge funds and executive pay. His closest economic advisers, men like Robert Rubin, Lawrence Summers and Paul Volcker, may recommend otherwise: go slow. If Obama takes their counsel, the 44th president, who succeeds Bush on Jan. 20, may not clamp down all that hard on a financial industry whose excesses have pushed the nation -- and much of the world -- into a recession. "This is a group of people that understands the markets, respects the free-market system and understands government has an important role to play," says Eugene Ludwig, a former U.S. comptroller of the currency who is himself an Obama adviser. "But there are limits on what government can or should do."
Both Franklin Delano Roosevelt in the 1930s and Ronald Reagan five decades later saw an economic crisis as an opportunity to make major changes. Roosevelt, in response to the Great Depression, created Social Security and federal deposit insurance. During the 1981-82 recession, Reagan set out to reverse the centralization of power in Washington that was at the heart of the Roosevelt revolution; he ushered in a quarter-century of deregulation. "Most politicians are incrementalists," says presidential historian Richard Norton Smith at George Mason University in Fairfax, Virginia. "Reagan was no incrementalist. He took advantage of the dire circumstances he inherited, and he saw them as justification for significantly, if not radically, different policies."
On the campaign trail, Obama regularly condemned the lack of regulation of the financial industry. "The last thing we can afford is four more years where no one in Washington is watching anyone on Wall Street," the candidate said during an Oct. 31 rally in Iowa. In his first interview since his victory, he struck a more moderate tone. "I think we have to restore a sense of trust, transparency, openness in our financial system," he told CBS television's "60 Minutes" on Nov. 16. "The answer is not heavy- handed regulations that crush the entrepreneurial spirit and risk- taking of American capitalism. That's what's made our economy great. But it is to restore a sense of balance." Even if Obama was tilting either toward state intervention or unfettered markets, he would now be likely to tack to the center - - in a country where a new economic shock arrives almost daily.
"How can you be an ideologue in an environment like that?" says Pablo Spiller, a professor at the Haas School of Business at the University of California, Berkeley. "The conditions are so dire, there is no way you can speak to one policy. Would you have imagined that Mr. Bush would have taken stakes in banks? The answer is no." A light touch by Obama in rewriting the rules for Wall Street would likely lead to a showdown with his own party. The Democrats strengthened their majorities in the November election by at least 20 seats in the House and at least six in the Senate -- backed by voters outraged over the $5.8 trillion plunge in the stock market from Jan. 1 through Nov. 4. "Obama and the whole party will be answering to a lot of people looking to make some dramatic changes," says Representative Scott Garrett, a New Jersey Republican and member of the House Financial Services Committee.
Executive compensation exemplifies all that's wrong with Wall Street for many Democrats, including Representative Henry Waxman of California. During an October hearing of the House Oversight and Government Reform Committee, Chairman Waxman lashed out at Richard S. Fuld for making what he estimated was $484.8 million since 2000 as head of now bankrupt Lehman Brothers Holdings Inc. Garrett says some Democrats are talking about imposing compensation caps with specific dollar amounts on banking executives. That's more severe than the tax penalties on severance pay and the ban on golden parachutes enacted under the $700 billion Treasury Department bailout in October. Obama himself has stopped short of calling for firm limits on paychecks. In May 2007, he endorsed annual, nonbinding shareholder votes on whether pay packages are appropriate. "Public discussion and debate over executive compensation packages would force corporate boards to think twice before signing over millions of dollars," Obama wrote to the Senate Committee on Banking, Housing and Urban Affairs.
In the president-elect's first press conference after his electoral college victory of at least 365 to 162 over Senator John McCain, he said the pay provisions in the bailout program would be reviewed to make sure executives at banks receiving taxpayer funds were not unduly rewarded. "This is going to be no honeymoon," says Donald Langevoort, a former Securities and Exchange Commission attorney who teaches securities regulation at Georgetown University in Washington. "People like Bob Rubin and others are well aware that we live in a global economy, and if you regulate too hard, you accomplish nothing and just watch economic activity move somewhere else. It's going to take a lot of political skill to navigate that clash."
The president-elect has monitored Wall Street's meltdown with the help of industry insiders in New York. During the campaign he regularly traded text messages with Robert Wolf, CEO of UBS Americas, a subsidiary of UBS AG; Timothy C. Collins, head of buyout firm Ripplewood Holdings LLC; and Mark Gallogly, managing partner of Centerbridge Partners LP, a private equity shop. On Sept. 14, as Lehman Brothers was imploding, Jason Furman and other advisers were on a senior staff call with Obama. Furman, 38, a Harvard University-trained economist who served as Obama's top economic adviser during the campaign, began explaining the bank's demise. "I started my briefing at square one, and he immediately cut me off and started asking a much more detailed set of questions, because he had spent the weekend on his own cell phone," Furman says.
Public Citizen, a consumer advocacy group in Washington, says Wall Street has gained a disproportionate influence over the new administration's regulatory agenda because its employees contributed so much to the Obama campaign -- a record $12.7 million compared with $8 million for McCain, according to the Center for Responsive Politics in Washington. Individuals working in securities and investment companies were the third-biggest contributor to Obama by industry, after the education and legal fields. Goldman Sachs employees gave $874,207 to him, the second-highest amount for any organization, behind the University of California. Rubin, one of Obama's closest economic advisers, was a proponent of deregulation as President Bill Clinton's Treasury secretary from 1995 to `99. Summers, a Harvard economist who worked under Rubin in the Treasury before replacing him as secretary, joined his boss in defeating an effort to rein in over- the-counter derivatives in 1998.
Brooksley Born, then commissioner of the Commodity Futures Trading Commission, wanted to examine regulating the derivatives, including credit-default swaps, saying they posed "grave dangers" to the economy. Federal Reserve Chairman Alan Greenspan and Rubin issued a rebuke, saying in a statement that they seriously questioned the scope of the CFTC's jurisdiction in this area. Summers called Born and said he was with bank representatives in his office and they believed that the regulation would lead to an economic crisis, according to a person familiar with the situation who asked to remain anonymous. Summers declined to be interviewed for this article. Summers and Rubin also helped secure passage of the 1999 Gramm-Leach-Bliley Act, aimed at spurring competition in banking. The law repealed the 1933 Glass-Steagall Act, which had prohibited commercial banks from offering investment and insurance services. Summers, 54, helped craft the legislation, and Rubin urged Congress to pass it and Clinton to sign it.
In 1999, Rubin left the Treasury to serve as a self-described consigliere at Citigroup Inc., whose CEO, Sanford Weill, had pushed for the repeal of Glass-Steagall. Freed to act as an underwriter, Citigroup became the second-largest seller of collateralized-debt obligations, which are packages of bonds and loans including mortgage-backed securities. The CDOs and CDSs, which act as insurance on debt, would contribute to $67.5 billion in writedowns and credit losses at Citigroup from 2007 through Nov. 17, 2008. Shareholders say Rubin, who has made $150 million at the bank, should've curtailed its exposure to subprime mortgages. "Rubin's fingerprints are all over this collapse," says Leo Gerard, president of the United Steelworkers. "My only hope is that some of these guys who helped cause this problem recognize the mess they made and accept some responsibility for fixing it."
Rubin, 70, said in June that he wasn't in a position to know details in traders' books. In November, he pulled himself out of the running for a job in the Obama administration. He didn't respond to a request for an interview. Summers, Rubin's former prot g , has his own baggage. He stirred controversy as president of Harvard, a post he took two months after resigning as Treasury secretary at the end of Clinton's term in 2001. Faculty members criticized his autocratic style and his comment that women may lack an aptitude for math and science. Summers resigned in 2006, after receiving a no-confidence vote by the faculty. He's now in contention to be Obama's Treasury secretary. "One problem with Summers is, he's a deregulator, which is not what the banks need right now," says Steffen Schmidt, a political science professor at Iowa State University in Ames, Iowa. "I would not choose him for Treasury."
Even with all of the clashing opinions within Obama's party, a consensus has built on several issues. One is the need to regulate CDSs. Democrat Barney Frank of Massachusetts, who's chairman of the House Financial Services Committee and the point person in Congress on Wall Street regulation, is seeking federal oversight of the derivative market. So is billionaire Warren Buffett, another Obama adviser. Rubin told Bloomberg Television in October that he wishes he had advocated for a clearinghouse for the swaps, which would have helped reduce today's turmoil. American International Group Inc.'s brush with bankruptcy in September was due largely to its holdings in the swaps. The Treasury has pumped $150 billion into the insurance giant to prevent a collapse that would further roil financial markets.
The Fed is seeking to become the lead regulator for clearing trades in the $33 trillion CDS market, according to people with knowledge of the proposal. The Fed, SEC, Treasury and CFTC are hammering out the framework for oversight of clearinghouses that would absorb losses should a dealer default. The most far-reaching idea to gain support from Obama advisers, Frank and Paulson is the creation of a super regulator to control risk -- although the form it will take is a matter of debate. The regulator might set requirements for holding capital in banks, hedge funds and private equity firms and try to prevent financial implosions that would disrupt global markets. Volcker, who served as Fed chairman from 1979 to `87, testified at a congressional hearing in May that the central bank would probably be the place to put a chief supervising regulator.
"We need more uniformity, and it looks like the Federal Reserve seems to be the logical candidate," Volcker, 81, said. The Consumer Federation of America says consolidating power in the Fed, which isn't accountable to Congress, is a recipe for lax oversight. Barbara Roper, head of investor protection at the federation, says the proposal is a spinoff of a blueprint that Paulson released in March. "The Paulson plan was conceived of as a way to `streamline,' which is code for `reduced regulation,"' Roper says. "You can't just assume that because Barack Obama is a Democrat that he's going to come in and fundamentally change that approach." Lynn Turner, who was the SEC's chief accountant under Clinton, says the Fed's poor regulatory record should disqualify it for an expanded role.
"The Federal Reserve had the power to stop banks from making the bad subprime loans but had adopted a policy encouraging cheap debt," Turner says. "They were supposed to supervise the lending by many of the banks now in trouble and yet seemingly did nothing. I wonder why when they didn't do the job they were supposed to be doing, one would give them even more responsibility." Lyle Gramley, a Fed governor from 1980 to `85, says the central bank considers itself best suited for the risk regulator job after bailing out Wall Street and would resist congressional efforts to create a new agency. "The Fed's going to fight that like a tiger," says Gramley, a senior economic adviser at Stanford Group Co. While Democrats and even some Republicans agree that hedge funds must be regulated, they differ on how strict those rules should be. Senator Charles Grassley, an Iowa Republican, said in October that he would reintroduce legislation to require hedge funds to register with the SEC. It would likely require hedge funds to submit to routine inspections and disclose the amount of assets they manage and their numbers of employees and investors.
Obama's counselors say they may recommend that the president- elect go even further by imposing rules on the amount of capital the firms must hold, according to an adviser familiar with the matter who asked not to be named. On Nov. 13, five billionaire hedge fund managers including John Paulson, James Simons and George Soros made an unprecedented appearance before Congress to defend their industry's practices. Thomas Davis of Virginia, the top Republican on the House oversight committee, said regulation was needed because institutional funds and public pensions now have a huge stake in hedge funds. "That means public employees and middle-income senior citizens, not just Tom Wolfe's `masters of the universe,' lose money when hedge funds decline or collapse," he said. While investor Philip Falcone said hedge funds should disclose more information to regulators, Kenneth Griffin, founder of Citadel Investment Group LLC in Chicago, disagreed with the call for controls. "We've not seen hedge funds as a focal point of the carnage," said Griffin, whose funds dropped 38 percent this year through Nov. 4.
Many Republicans warn that the drive to rein in the financial industry may go too far and inflict further pain on the economy. Representative Tom Price, a Georgia Republican, calls the government's bailout of banks and help for homeowners facing foreclosure an assault on capitalism. "It's a marked turn toward a nefarious ideal that problems can be solved by centralized decision making here in Washington," Price said before the financial services committee in October. "Moving ahead, Congress must be sensible. The end result must promote economic growth, not stifle opportunity." Obama may be planning more profound regulatory changes than his advisers have revealed so far, says Julian Zelizer, a history and public affairs professor at Princeton University in Princeton, New Jersey.
"If he surrounded himself with the left, it would be much harder to push regulation," Zelizer says. "Now he can claim the support of Summers or Rubin. They will offer him some support and cover from the financial community." Just by being elected, even before he sets foot in the White House, Obama has changed the course of history. And starting in January, he'll have a rare chance to overhaul a financial regulatory system that failed to prevent the worst crisis in decades -- if he chooses to seize the opportunity.
Ilargi: I've also addressed the subject of the power the 42.000 active members of the lobbying industry have in Washington. Tom Daschle, the newly appointed Obama Secretary of Health and Human Services, is a lobbyist for the industry he will now be supposed to regulate. Yeah, great pick. How sick does the sytem have to get before someone raises a serious alarm? Benito would be proud.
Lobbyist-Bashing by Obama Doesn't Dim Industry's Boom Forecast
Lobbyists Heather and Tony Podesta took over a Denver restaurant during the Democratic National Convention in August to host a party for lawmakers and other power brokers. Their guests wore Barack Obama buttons. The Podestas were wearing a label of their own: a scarlet "L." The tags were an allusion to President-elect Obama's demonization of lobbyists throughout the campaign, even banning them from raising money for him or making contributions. Now, with Obama ready to take office in January, lobbyists aren't quavering with fear. Many view the changed political landscape in Washington as a potential boon for their firms, which will be called upon to help clients navigate Congress and a new administration.
"We're not worried," said former Democratic Representative Vic Fazio of California, now a senior adviser at the law and lobbying firm Akin Gump Strauss Hauer & Feld LLP. "We will do well." Obama has a number of people affiliated with lobbying firms on his transition team, and yesterday, former Senate Majority Leader Tom Daschle accepted an offer to be secretary of Health and Human Services. Daschle, who will lead the new administration's effort to revamp the U.S. health-care system, works for Alston & Bird LLP. Daschle has been able to serve as an Obama campaign adviser because he wasn't registered as a lobbyist, though his firm earned $3.5 million this year lobbying for the health industry, including companies such as Woonsocket, Rhode Island-based CVS/Caremark Corp. and Birmingham, Alabama-based HealthSouth Corp. The health industry accounted for 60 percent of the firm's lobbying revenue during the first nine months of 2008.
Fazio and other prominent members of the influence-peddling community said the lobbyist-bashing by Obama, 47, and Republican nominee John McCain, 72, hasn't had a lasting impact. It is one thing to rail against lobbyists in a campaign and another to curb their influence in practice, they said. "Both men are sophisticated enough to know lobbyists play a vital First Amendment role in our governmental process," said former Republican Representative Robert Walker of Pennsylvania, now chairman of Wexler & Walker Public Policy Associates, a Washington lobbying firm. During the campaign, both Obama and Arizona Senator McCain criticized the influence of lobbyists and the interests they represent.
"When we come together, our voices are more powerful than the most entrenched lobbyists, or the most vicious political attacks, or the full force of a status quo in Washington that wants to keep things just the way they are," Obama said at a rally in Florida on Nov. 3, the day before the election. After winning, Obama announced that lobbyists would be prohibited from contributing to his transition committee, and that they couldn't serve as advisers on any issues where they had been paid to represent a company's interests. Even so, firms such as Walker's, which was paid $6 million to lobby in the first nine months of 2008, and Patton Boggs LLP, which received $29.8 million, report an increase in business from companies and other interest groups. With the election past, "people are a lot nicer to me," said Gerry Sikorski, a former Democratic lawmaker from Minnesota who runs the government section at Holland & Knight LLP, which was paid $11.1 million. "I know I'm not a better person today than I was Nov. 3." Lobbyists expect the demand to continue.
"People will want to hire knowledgeable and respected people in Washington who have a lot of insight and knowledge about the players and the ability to fashion appropriate outreach to decision makers," said Fazio, whose firm was paid $26.9 million to lobby during the first nine months of 2008, second only to Patton Boggs in revenue, according to the Center for Responsive Politics, a Washington-based research group. There also will be a new demand for Washington veterans who aren't registered to lobby but nonetheless wield influence because of their knowledge of the White House and Capitol Hill such as Daschle, said former Democratic National Committee National Chairman Joe Andrew. "What you will find is a return of the Washington lawyer, someone who is not a lobbyist but has legitimate substantive experience," said Andrew, who isn't registered to lobby, though his law firm, Sonnenschein Nath & Rosenthal LLP, was paid $5.1 million in 2008.
Still, the lobbying industry recognizes that it will have to function in a new environment. For one thing, lobbyists will face competition from the Internet, which Obama's campaign showed can be a powerful tool to generate grassroots support for candidates or issues. Lobbyists will be pressured to demonstrate that their position has broad support or to show why a lawmaker should support their client's position in the face of a grassroots uprising for the other side. "You're going to have traditional lobbying side by side with e-lobbying side by side with new transparency side by side with diverse groups and interests and causes," Sikorski said. "It'll be a new field for all of us to work in." Besides, said Nick Allard, a partner at Patton Boggs, lobbyist-bashing isn't a recent phenomenon. "Lobbyists have been around at least since the Garden of Eden, when the serpent persuaded Eve that knowledge was a good thing," Allard said. "Look at what reward the serpent got.'