Organ grinder on the streets of New York's Lower East Side
Ilargi: Dear Barack,
After seeing you flash by inescapably in the media every single day for what feels like the past 800 years, I am inclined to give you the benefit of the doubt, despite my deep and profound mistrust of the American corporate political theater.
That said, I haven’t so far for a moment had the idea that you have a full and firm grasp of what happens in the nation's economy. Mind you, it's obviously possible that you are hiding what you truly know, since you can't get elected on what is perceived by voters as an overly pessimistic message.
But, if you'll excuse me, for now I’ll go with my instinctive notion that you don’t really understand the state of the US financial system. By that I mean that you seem to have the idea that it is possible to revive the economy if only you adopt a set of tax measures, throw in a bag-full of mortgage relief for those worst hit, and create jobs in fields that people label 'sustainable' and/or 'the foundation of tomorrow’s economy'.
The thing is, Y O’Bama, that these notions miss that elusive target named 'reality' by a mile and a half.
Your task will be far more formidable than I think you realiize. It's not Franklin D. Roosevelt that you should look at for an example, it's not about turning the economy around, this is not the 1930‘s. The problems you will soon face are much worse than the ones he dealt with.
If you're looking to find a presidential role model for what you are about to face, you need to go back much further in history. You have to look at Abraham Lincoln for guidance. Your most daunting task is not turning the economy around. You will be remembered in history as the man who either did or did not save the Republic.
This is not about the economic system, but about the legitimacy of the entire political foundations the United States is based on and stands for, from the Constitution the Founding Fathers wrote, to the American Dream that has today been hijacked by the likes of Hannibal Cheney and Angelo Krueger.
If you don't understand this, if you think you can get by simply with a few nods here and a couple of cuts there, you not only put at risk your own career and perhaps your life, you put at -enormous- risk the survival of the United States of America as a going concern.
In the next 11 weeks, from November 4 to January 20, you need to make sure a number of drastic measures are implemented by the government of Dick Cheney. You can't wait until you have been inaugurated, because that would put all the negative vibes that are the result of 30 years of failed policies on your head. Don’t even think of taking that risk.
You will need to demand that ALL companies in the US that can't survive on their own two legs, will be allowed and made to fail. You cannot save some taxpayers’ jobs at the expanse of all other taxpayers. The diseased parts of the economy will have to be cut out.
Yes, that means 95% of all the banks. You can, no, must, assess their health status by forcing them to drag all their off-balance sheet and Level 3 assets into the open. You can't base a vibrant and healthy future economy on assets that have no value. All parties in the world of finance know this, even if they don’t tell you so.
Their actions speak loud enough: they refuse to trade with each other. Therefore, all bail-out plans have to be halted, and yes, the existing Paulson cabal plans have to be reversed. Sure, the losses will be staggering, so much so that the entire system will shake on its foundations. Still, there is no other option available to you. Every single day that the toxic assets are allowed to fester further in their foul-smelling vaults, the losses rise exponentially.
There is a saying in certain European countries that says ‘Soft healers make stinking wounds’. Don't fall into that trap, Y O'Bama. Show the nation that you're a man.
Other than the banks, you must demand that all support for Detroit's Big Shrinking Stinking Three be withdrawn. All of it. If they can't survive, you have to read them their last rites. They have been bleeding billion of dollars in losses for decades now, while on life-support, and their situation is worsening fast. Allow them to pass away with dignity. But do it prior to January 20. Don't allow Shrub to put the chain of losing millions of jobs around your ankles.
A huge amount of people in executive positions will have to go. Before Christmas. Fannie and Freddie regulator James Lockhart is number one. SEC head honcho Christopher Cox is number two. Robert Zoellick needs to be kicked out at the World Bank. The list truly is endless. Get on it.
And no, don't give them bonuses and free passes. Evreybody who’s been making decisions the past 20 years, whether at private institutions or in government positions, must be held against the light, and, if found wanting, dragged into a courtroom. it's the only way to restore the trust in the republic, both domestically and in the eyes of trading partners abroad.
It’s better for all involved, including the culprits, to do it according to the letter of the law, and at home, better than sit back and wait for the inevitable backlash that will rise up with pitchforks here and cluster bombs abroad. As long as people like Alan Greenspan, Angelo Mozilo and Hank Paulson, just to name a few, are allowed to roam free, without answering for what they've done, the trust of the people in the republic and its president will continue to erode at exponential speed.
Clean up the rotten mess the country has become, before others volunteer to do it for you.
The survival of the republic is in your hands, Y O'Bama. I urge you to look back at what went through Lincoln's head when he was confronted with the threat of its demise, and what he decided to do to prevent it. No use being afraid of the reactions, it will be an awfully hard ride no matter what you choose. Might as well have the courage to do what must be done.
You are the last chance America has to come clean, to cleanse its foul and festering wounds, to purge its conscience, and to wash these sins off its hands. If you don't do it, Barack, if you fail to muster the courage, you will likely be the last president.
May a deity of your preference guide your decisions.
GM October sales down 45%, Ford drops 30%
General Motors' October U.S. sales plunged 45 percent and Ford's dropped 30 percent, as low consumer confidence and tight credit combined to scare customers away from showrooms. The results released Monday — along with a 23 percent drop at Toyota and a 25 percent decline at Honda — are strong indications that sales for the industry as a whole may perhaps be the worst in 25 years. Detroit-based General Motors Corp. said its light trucks sales tumbled 51 percent compared with the same month last year, while demand for passenger cars fell 34 percent.
The results were less severe at Ford Motor Co., which said its Ford, Lincoln and Mercury car sales were off 27 percent, while light truck sales for the three brands were down more than 30 percent. Overall, GM sold 168,719 vehicles, down from 307,408 in the same month last year, while Ford, including its Volvo brand, sold 132,278 light vehicles last month down from 189,515 in the same month last year. Mike DiGiovanni, GM's executive director of global market and industry analysis, said the credit crisis and financial market turmoil are affecting the industry to a "frightening" level.
If GM's sales were adjusted for population growth, October would be the worst month of the post-World War II era, he said.
"Clearly we're in a very dire situation," he said. Despite the steep drop, GM's total was enough to keep it ahead of Toyota Motor Corp. for the No. 1 U.S. sales spot. Toyota sold 152,101 vehicles, down from 197,592 in October 2007. The drop included a 34 percent decline in light truck demand, while car sales fell 15 percent. Honda Motor Co. sold 85,864 vehicles as its truck sales fell 29 percent. But sales of cars from its Acura luxury division rose 6 percent.
Ford officials said on a conference call with reporters and industry analysts that as bad as October sales were, it's probably not the bottom. Emily Kolinski Morris, the company's senior economist, said that because automobiles are more durable, people can wait without buying a new vehicle until they feel more confident in the economy. "The answer to when we will start to come out of that trough lies in when the economy comes out of that trough," Kolinski Morris said.
Poor sales in the last three months are expected to equal dismal third-quarter earnings for the struggling automaker. Ford is scheduled to release its financial results Friday, and the down sales raise the possibility of further plant closures or shift cuts. Ford has said it will continue to reduce production to match consumer demand. Sales of the company's F-Series pickup trucks, traditionally its top seller, fell 16 percent in October. The company began selling a new version of the pickup last month and has announced plans to add 1,000 workers at its Dearborn Truck Plant in January to handle what it expects will be increased demand.
Some industry analysts are predicting a seasonally adjusted annual sales rate in October of 10.8 million or less, down from 16.1 million a year ago. If the rate drops below 10.83 million, it would be the worst sales month since March 1983, according to Ward's AutoInfoBank. The closely watched figure indicates what sales would be if they remained at their current rate all year, with adjustments for seasonal fluctuations. After reeling from a 32 percent drop in September sales, Toyota launched zero-percent financing on almost all of its models prompting analysts to speculate that it could post better-than-average sales as a result.
But, like at Ford, the vast majority of Toyota models still posted double-digit declines. Notable exceptions included sales of the Corolla, which rose 6.1 percent, and the Sequoia sport utility vehicle, which posted a 21 percent gain. Meanwhile, GM's financing arm, GMAC Financial Services, said it was tightening its lending standards to require a credit score of at least 700, potentially shutting out some buyers.
Analysts said GM's employee pricing incentives in September could have pulled in buyers who would have waited to purchase cars, further reducing GM's October sales. The Associated Press reports unadjusted auto sales figures, calculating the percentage change in the total number of vehicles sold in one month compared with the same month a year earlier. Some automakers report percentages adjusted for sales days. There were 23 sales days last month, two less than in October 2007.
Revenge of the Left across the world
Whatever the exact result of the US elections tomorrow, we must assume that the whole governing machinery of Washington and the state capitols will soon be hostile to laissez-faire thinking. It is not just that the Democrats will win a crushing victory in both houses of Congress, perhaps reaching the 60-seat Senate threshold that lets them steam-roll legislation. It is also that the incoming class of 2008 is of a new creed. Many no longer believe – or actively reject – the free trade and free market catechisms.
As commentator Markos Moulitsas put it in Newsweek: "The big question is, will Democrats nationwide simply 'win' the night–or will they deliver an electoral drubbing so thorough that it signals the utter rejection of conservative ideology and kills the notion that America is a 'center-right' country?" he said. No matter that statist policies were responsible for this global crisis in the first place. It was Western governments that set interest rates too low for too long, encouraging us all to abuse credit.
It was Eastern governments that held down their currencies to pursue mercantilist trade advantage, thereby accumulating vast foreign reserves that had to be recycled. Hence the bond bubble. This is the deformed creature known as Bretton Woods II. Protectionist Democrats are right to complain that the game is rigged. Free trade? Laugh on. But at this point I have given up hoping that we will draw the right conclusions from this crisis. The universal verdict is that capitalism has run amok.
In any case the damage caused as credit retrenchment squeezes real industry is likely to be so great that Barack Obama may have to pursue unthinkable policies, just as Franklin Roosevelt had to ditch campaign orthodoxies and go truly radical after his landslide victory in 1932. Indeed, Mr Obama – if he wins – may have to start by nationalizing the US car industry. For those who missed it, I recommend Edward Stourton's BBC interview with Eric Hobsbawm, the doyen of Marxist history.
"This is the dramatic equivalent of the collapse of the Soviet Union: we now know that an era has ended," said Mr Hobsbawm, still lucid at 91. "It is certainly the greatest crisis of capitalism since the 1930s. As Marx and Schumpeter foresaw, globalization not only destroys heritage, but is incredibly unstable. It operates through a series of crises. "There'll be a much greater role for the state, one way or another. We've already got the state as lender of last resort, we might well return to idea of the state as employer of last resort, which is what it was under FDR. It'll be something which orients, and even directs the private economy," he said.
Dismiss this as the wishful thinking of an old Marxist if you want, but I suspect his views may be closer to the truth than the complacent assumptions so prevalent in the City. To those who still think that business can go on as normal now that EU taxpayers have had to rescue the financial system, I can only say: what will happen to London if EU exchange controls are imposed, or if leverage is restricted by draconian laws – as demanded by the German, Dutch, and Nordic Left? Does the UK still have a blocking minority under EU voting rules to stop a blitz of directives that could shut down half the activities of the City – or the 'Casino' as they say in Brussels? I doubt it.
Who thinks that the three key Commission posts – single market, competition, and trade – will still be held by free marketeers when the new team comes in next year? In Germany, Oskar Lafontaine's Linke party now has 23pc support in Saarland on a Marxist pledge to nationalize banks and utilities. Needless to say, the Social Democrats (SPD) are shifting hard Left to protect their flank. "The rule of the radical market ideology that began with Margaret Thatcher and Ronald Reagan has ended with a loud bang," said Frank-Walter Steinmeier, Germany's foreign minister and SPD candidate for chancellor next year. "We need a comprehensive new start, so we can reestablish our society on fresh foundations. People who create value, not locusts," he said.
France has its own Gaullist version on this, seizing on the crisis to launch the most far-reaching strategy of state intervention since the 1970s. "Laissez-faire, c'est fini," said President Nicolas Sarkozy. "We will intervene massively whenever a strategic enterprise needs our money." Such language can now be heard daily across Europe. It can only intensify as the fall-out from the EU's €1.8bn trillion (£1.4 trillion) bank rescue becomes clearer, and as Europe's elites discover that their own banks are the most leveraged in the world and have played their own Wagnerian part in Gotterdammerung. European and UK banks are five times more exposed to emerging markets than US banks. They alone hold the collective time-bomb of $1.6 trillion (£990bn) in hard currency loans to Eastern Europe – now starting to detonate in Hungary, Ukraine, Romania, and even Russia.
At some point, Europe's political class will face the awful truth that their own credit bubbles are just as bad – and perhaps worse – than the excesses of US sub-prime property. As that occurs, the shock will move by degrees from revulsion to political rage. Professor Hobsbawm, who spent his youth watching Hitler's rise in Berlin, has a warning for those who think this will help the Left in any recognizable form. "In the 1930s, the net political effect of the Depression was to enormously strengthen the Right," he said. America was the great exception, as it may prove to be again. I for one will take the enlightened "socialism" of Barack Obama any day over the Hegelian broth nearing the boil in Europe.
U.S. ISM Manufacturing Index Drops to 26-Year Low
Manufacturing in the U.S. contracted in October at the fastest pace in 26 years as the credit crisis deepened and companies reduced orders. The Institute for Supply Management's factory index dropped to 38.9, worse than anticipated by economists surveyed by Bloomberg News and the lowest level since September 1982, the Tempe, Arizona-based group reported today. A reading of 50 is the dividing line between expansion and contraction.
The report raises the risk that the current economic slump will be deeper than the last two recessions in 2001 and 1991 as the credit drought and weakening sales force businesses to retrench. The drumbeat of dire news has focused voters' attention on the economy ahead of tomorrow's presidential election. "Manufacturing is definitely in a deep recession right now," John Lonski, chief economist at the Moody's Capital Markets Group in New York, said in an interview with Bloomberg Television. The ISM index was projected to drop to 41, according to the median of 75 economists' forecasts in a Bloomberg News survey. Estimates ranged from 38 to 48.5.
Spending on construction projects dropped 0.3 percent in September, a smaller decline than forecast, as work on manufacturing plants and utilities helped offset declines in homebuilding, a report from the Commerce Department also showed. Private residential projects declined 1.3 percent in September, while federal spending had the biggest drop since February 2007. The purchasing managers' gauge of new orders for factories decreased to 32.2, the lowest level since 1980, from 38.8 the prior month. The production measure fell to 34.1 from 40.8. The index of prices paid dropped to 37 from 53.5. Energy prices have plunged from their peaks in July, when a barrel of crude oil reached $147.
The employment index decreased to 34.6 from 41.8 in August. The economy has lost more than three-quarters of a million jobs so far this year. Orders from overseas have weakened as economies abroad falter. ISM's export gauge dropped to 41, the lowest reading since records for this component began in 1988. "That beacon of light from overseas economies has basically burned out," said Brian Bethune, chief U.S. financial economist at IHS Global Insight in Lexington, Massachusetts. "We're now at the weakest point of the cycle in terms of the U.S. economy." As financial markets imploded in the last two months and the Bush administration led a massive bid to rescue credit markets, Democratic candidate Barack Obama took the lead in polls over Republican rival John McCain as voters perceived the Illinois senator would be better able to address economic concerns.
The seizing up of credit markets since mid September has worsened the outlook. Companies are cutting back on investments and hiring as consumer spending in the third quarter plunged by 3.1 percent, the biggest decline in 28 years. GMAC LLC, the lender partly owned by General Motors Corp., is telling some GM dealers it will no longer provide financing to buy vehicles because of its own reduced funding, according to letters sent to the retailers. "Turbulence in the markets reduced our access to funds and increased the cost of funds where available," GMAC Chief Executive Officer Alvaro de Molina said in a letter sent Oct. 21 to the California New Car Dealers Association. "In response, we adjusted our credit policy to reflect the reduced level of funding availability."
The economy shrank at a 0.3 percent pace in the third quarter, with spending on equipment and software declining at a 5.5 percent rate, the biggest drop since the first quarter of 2002. Economists surveyed by Bloomberg forecast the economy will shrink at a 0.8 percent rate in the fourth quarter. In a bid to avert the downturn from becoming the worst recession in the postwar era, the Federal Reserve last week cut its key rate a half point to 1 percent, matching a 50-year low. "Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports," the Fed said. "Downside risks to growth remain."
Credit Cards In The World of Taxpayer-Owned Banks
"meet the new boss. Same as the old boss." -The Who
The American people ponied up $700 billion to supposedly bail out some big banks on Wall Street. So far, we have not seen the banks what banks are supposed to do, lend people money. Instead they are doing the thing that Wall Street raiders do, take over other companies. PNC and Fifth Third were the first banks to make deals, backed by taxpayer dollars. Bush and Paulsen encouraged bad behavior in their bailout bill. They gave big banks money and tax incentives to gobble up small banks. They made sure that their buddies on Wall Street were taken care of.
Most big banks didn't need bad behavior encouragement. They've been able to do harmful things long before the government started subsiding them. Some of the biggest abuses come in the way that banks have handed out credit cards. Now that I, like every other American taxpayer, indirectly owns part of the Wall Street banks, I want to talk to them about how they have been acting. What I want to do is to throw credit card companies off every college campus. Is it any wonder that the banks needed a $700 billion bailout? What kind of business gives huge lines of credit to students who don't have jobs?
I always thought that you had to have a job to get credit. Not anymore. I have a college student in my household. He has minimal income, no assets and big student loans. However, the credit card companies love him. He gets ten times more mail than I do. All of them "pre approved" credit cards. All go straight in the trash. It's bad for the college students to run up debt before they have jobs. Its bad for the nation to have a generation of college graduates paying off high interest credit cards instead of saving money to buy houses and cars.
Giving cards to college students couldn't have been that great of a business or the banks wouldn't have needed a bailout. I saw an article in the New York Times that said that credit cards were the next problem area for the banks. DUH! We've had years of students, people coming out of bankruptcy and people with no income getting tons of credit cards. Usually with interest rates and fees that would make a loan shark blush.
Since they are getting multi million dollars bonuses, executives at Wall Street banks should have figured out what most of us know. Broke people don't pay loans back. You can charge them all the interest and fees that you want. If they don't have any money, they are not going to give any to you. Especially if you are an unsecured debtor like a credit card. People will make an extra effort to hang on to secured debts, like their houses and cars. The credit cards will be last in line.
We are now in an economy where a lot of people who were barely hanging on will get closer to the edge. You see people losing their jobs or going from high paying jobs to minimum wages. You see people who counted on the value of their house or 401k plan being suddenly disappointed. We see a lot of people worried about feeding their families and keeping a roof over their heads. When it comes to feeding your family or paying your credit card, the family is going to win every time. I hope the banks factored that reality in before the came up with the $700 billion figure. They might want to hang on to some of that taxpayer cash instead of using it to buy other banks.
As bad as people are projecting, it will get worse. Recent events will change how people feel about debt. People who got stuck with high interest credit cards aren't going to be in a hurry to pay them off. Even if they can. Banks had two things going for them in collecting credit card debts. They could shame people by embarrassing them in front of their neighbors and they could threaten to hurt their credit scores. It's going to be hard for a bank that was bailed out by taxpayers to shame anyone into anything. Since people with good credit can't get loans, there is no incentive for someone with bad credit to even bother. They can default on their debt and make the banks come after them.
I've tried to collect from someone who was determined not to pay me. It was expensive, time consuming and I never did get all my money. Try multiplying that by a few million people. That is what the big banks are going to be dealing with. From a moral standpoint, I want banks to clean up their act in the credit card department. Since many of the bankers work for me, and the rest of the American taxpayers, I'd like to protect my investment by making sure the credit card issuers get out of the stupidity game. I can't afford to give them another $700 billion.
World trade grinds to a halt as letters of credit vanish
The credit drought is undermining international trade in goods and raw materials with savage increases in the cost of funding for exporters. At the same time, buyers of goods are being denied access to letters of credit - the banking instruments that are the nuts and bolts of global trade. HSBC, a leading trade finance bank, has said that the cost of guaranteeing a letter of credit, a routine instrument used for payment of goods, has doubled.
Concern is growing in the shipping industry that business is foundering because of failures in trade finance, and Pascal Lamy, director-general of the World Trade Organisation, has given warning that the credit crunch is affecting global trade, particularly in the emerging markets of Brazil, India and China. He said: “Trade finance is being offered at 300 basis points above the London Interbank Offered Rate and even at this high price, it has been difficult for developing countries to obtain.” Mr Lamy has called a group of trade finance banks, including HSBC, Royal Bank of Scotland, JPMorgan and Commerzbank, to a meeting on November 12 with the IMF and World Bank to consider the trade finance problem.
Lack of trade finance is having a disastrous effect on shipping. In a report issued on Friday, Maersk Broker, a subsidiary of the Danish shipping group, blamed logjams in the banking system for the slump in the dry bulk cargo market: “Banks’ refusal to offer letters of credit has resulted in very few fresh cargoes reaching the market, which is adding to the owners’ woes.” A collapse in the trade of raw materials such as grain and iron ore, after years of frantic activity, is causing havoc. The Baltic Exchange Dry Index, which measures the price of voyages and the cost of chartering vessels, has plummeted. Rates for the largest transporters, known as Capesize, peaked in May at $230,000 a day. It is estimated that the daily cost of running the ships, including depreciation, is about $15,000 but at the end of last week, rates had fallen to $5,982 a day.
According to HSBC, there has been a surge in customer requests for trade tools that can guarantee payment. Stuart Nivison, an executive in the bank’s trade finance division, said companies that two years ago might have been happy to deal on the basis of simple orders from customers are now insisting on documentary credit. Anxiety about payment was pushing companies to ask for greater security, Mr Nivison said, and in such transactions, fees were soaring. He pointed to a recent case of a shipment of industrial equipment from Britain to India, where the confirmation and discounting of a letter of credit, which would normally cost 0.5 per cent of the value of the goods, had risen to more than 1 per cent. “These are big moves and reflect the nervousness in the market. People want to be sure they are paid,” Mr Nivison said.
Distrust of banks is compounding the problem. “We have received requests to guarantee the credit of top-tier banks and we have also seen cases of exporters in China saying to their UK buyers which banks they will or will not accept,” Mr Nivison said. He added: “Trade finance is the oil that keeps the wheels of commerce going. Without it, everything grinds to a halt.”
Bernanke Push for Lower Rates Drives U.S. Yields Up
Even as Ben S. Bernanke cuts borrowing costs to 50-year lows, taxpayers will likely be paying ever increasing interest rates on U.S. debt. The next president may find foreign investors, the biggest creditors to the U.S., unable to absorb a growing supply of Treasury bonds as the financial crisis prompts nations to invest in their own banks and currencies. That would drive up yields just as a widening budget deficit pushes borrowing needs to a record $2 trillion, according to estimates by Goldman Sachs Group Inc. and Wrightson ICAP LLC.
"It's hard to see how demand for Treasuries is going to keep up with supply once the risk aversion trade subsides," said Tony Norris, who oversees $10 billion in international strategies as chief investment officer and senior portfolio manager at Evergreen International Advisers in London. "There's going to be pressure on yields to rise." Treasury Secretary Henry Paulson may already be overwhelming investors with short-term obligations sold to finance the initial portion of a $700 billion bailout package. Rates on six-month bills rose last month to 0.56 percentage point more than the December futures contract for the Federal Reserve's target rate for overnight loans between banks. The gap was the largest in at least 20 years and compares with an average of minus 0.09 percentage point.
Yields rose even as the Fed slashed its target rate to 1 percent from 2 percent, and San Francisco Fed President Janet Yellen said policy makers may bring the benchmark closer to zero. Banks and financial institutions around the world have taken about $855 billion in writedowns and losses since the start of 2007 as subprime mortgage defaults in the U.S. infected the global economy, according to data compiled by Bloomberg. Two-year note yields ended last week at 1.57 percent, up from the month's low of 1.32 percent on Oct. 8, while 10-year notes climbed to 3.97 percent from 3.4 percent.
The Treasury will announce its quarterly borrowing needs on Nov. 5. The U.S. may sell a net $388 billion of bills, notes and bonds this quarter, up from $178.4 billion last quarter and $33.4 billion in the same period of 2007, according to a quarterly survey by the Securities Industry and Financial Markets Association released Oct. 31. "This year's financing needs will be unprecedented," Anthony Ryan, the Treasury's acting undersecretary for domestic finance, said Oct. 28 at a Sifma conference in New York. For much of this decade, the U.S. has been able to count on foreign investors and central banks to funnel a growing pile of reserves into Treasuries. Investors outside the U.S. hold $2.74 trillion of Treasuries, or 52 percent of the $5.22 trillion in marketable debt outstanding, according to the government. That's up from $1.09 trillion, or 33 percent, in 2000.
U.S. long-term interest rates would be about 1 percentage point higher without foreign government and central bank buyers, according to Professors Francis and Veronica Warnock at the University of Virginia in Charlottesville, who have performed research on the subject for the Fed. Foreign official purchases of Treasuries fell by more than half in August, to a net $4.8 billion, from $10.1 billion in July, and an average of $7.5 billion in the preceding 12 months, according to the Treasury Department. Japan, the top holder, sold a net $7.5 billion.
"The U.S. Treasury Secretary is trying to convince other countries, including China and Japan, to buy its government bonds," said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., the nation's biggest stock underwriter. "This is the first time a developed country needs help from developing countries to ride out its crisis." Treasury spokeswoman Jennifer Zuccarelli declined to comment. The International Monetary Fund's World Economic Outlook forecast last month that global growth will weaken to 3 percent in 2009, from 3.9 percent this year and 5 percent in 2007. That would mean a world recession under the fund's definition.
"Some of these foreign governments now are a little bit worried they need to prop up their own financial systems and potentially deal with their own deficits, so taking the money and shipping it off to the U.S. isn't as attractive as it used to be," said Jamie Jackson, who oversees government and agency debt trading at RiverSource Investments. The Minneapolis-based firm manages $93 billion of fixed-income assets. France, Germany, Spain, the Netherlands and Austria committed $1.8 trillion to guarantee bank loans and take stakes in their lenders. Nations such as Japan, China, and Saudi Arabia still have incentives to buy Treasuries because the securities serve as a repository for their dollar reserves. China's foreign-exchange reserves rose to $1.91 trillion in September, the most of any nation.
"Demand will never disappear -- they have to manage their foreign reserves," said Tsutomu Komiya, an investment manager in Tokyo at Daiwa Asset Management Co., a unit of Japan's second-largest brokerage. Still, "everyone is talking about supply. Yields will tend to go up," he said. Demand for U.S. government securities soared in September as the bankruptcy of Lehman Brothers Holdings Inc. drove investors to the relative safety of government debt. Rates on three-month bills plunged to 0.02 percent, the lowest since the 1940s, and 10-year note yields declined to a five-year low of 3.246 percent.
At the same time, the three-month London interbank offered rate in dollars, or the rate banks charge each other for loans, soared to 4.82 percent on Oct. 10 from 2.82 percent on Sept. 15. The extra yield investors demand to own investment-grade U.S. corporate bonds instead of Treasuries rose to a record 6.18 percentage points last week, according to Merrill Lynch & Co.'s U.S. Corporate Master Index. Last week's rise in yields suggests efforts by governments and central banks to bolster confidence may be working, alleviating the need for Treasuries. The Treasury has sold $755 billion in bills this year outside of its regularly-scheduled sales to support bank-lending programs.
Three-month Libor fell to 3.03 percent last week from 4.82 percent on Oct. 10. Corporate borrowing in the U.S. commercial paper market surged the most on record after the Fed began buying the debt directly from issuers, pushing rates on overnight debt to 0.35 percent, the lowest ever. At current sizes, Treasury's sales of notes and bonds would raise less than one-fifth of the $1.95 trillion the government may need to borrow in fiscal 2009, according to Jersey City, New Jersey-based Wrightson, which specializes in government finance. The U.S. has sold about $687 billion in notes and bonds this year, almost 20 percent more than in all of 2007. Treasury said last month it will expand auctions. It already said it may revive sales of three-year note and hold more frequent sales of 10- and 30-year securities.
While central banks will continue to show "good participation" in the Treasury market, "the sheer magnitude of the amount of money the U.S. is going to have to borrow means that yields will likely go higher," said Richard Bryant, a Treasury trader at New York-based Citigroup Global Markets Inc., one of the 17 primary dealers required to bid at Treasury sales. "The numbers are staggering." One result is the next president will face bigger deficits than any predecessor. The totals may be bigger under Barack Obama than John McCain because the Democratic presidential nominee is more open to spending on programs such as infrastructure, said Mitchell Stapley, who oversees $22 billion as chief fixed-income officer at Fifth Third Asset Management in Grand Rapids, Michigan.
"Grading on a scale of 0 to 100 -- 0 being less supply, 100 being a whole lot more supply -- both candidates are both probably 75 and above," he said. Obama, 47, leads Republican presidential nominee McCain, 72, by an average of 6.9 percentage points in national polls. Polls released this week showed the Democratic candidate with leads ranging from three points in a Fox News survey to 13 points in a CBS News poll. "At some stage, such a large increase in issuance may lead to a sharp sell-off in U.S. Treasuries and the U.S. dollar," said Shinji Kunibe, a senior money manager who helps oversee $847 billion globally at the Tokyo branch of JPMorgan Asset Management.
More Utility Bills Go Unpaid
Utilities are becoming more aggressive about collecting money from delinquent customers, leading to a surge in service shutdowns just as economic woes are pushing up the number of households falling behind on bills. The utilities say they are under pressure to clean out accounts that are weighing down their books at a time when their stocks are being hammered and earnings growth has slowed. Meanwhile, the increasing number of homes left without power -- which could rise as economic pain deepens -- is beginning to worry some consumer advocates and regulators.
In Pennsylvania, PPL Corp. increased shutoffs by 78% in the first three quarters of the year compared with the same period a year earlier. Shutoffs at electric utilities throughout the state increased by 20% in that period. George Lewis, a spokesman for PPL, based in Allentown, Pa., said the utility had been somewhat lax in the past but decided this year to "reverse the trend and prevent people from getting further in debt" by cutting them off sooner. About 3% of the company's residential accounts have been disconnected for delinquency.
In Memphis, Tenn., the city-owned utility that supplies electricity, natural gas and water to residents cut off 38% more people in the first eight months of the year, or 69,743 electric accounts, versus the same period in 2007. The utility raised electricity rates 20% this year, reflecting increased wholesale power costs for energy. Chris Stanley, a spokesman from the company, Memphis Light, Gas & Water, said the number of accounts owing more than $900 that were 90 days or more past due was up 148% to 1,766 accounts as of Oct. 28. The increased number of shutoffs has attracted the attention of some regulators. Dian Grueneich, a member of the California Public Utilities Commission who has responsibility for low-income programs, has begun asking utilities to furnish information on shutoff criteria. She wants commission staff to "take a look and make sure it is being applied fairly."
One bright spot is that many utilities will have more money to distribute next year to poor customers through the Low Income Home Energy Assistance Program. Congress boosted the program's funds for the current fiscal year by 78% to $5.1 billion. Many utilities are trying to get the word out that people should apply because eligibility rules have been expanded, allowing people with higher incomes to qualify. State regulators say they have noticed that power shutoffs have moved up the economic chain. "We're seeing an uptick in middle-class people who have never been in this situation before," said Eric Hartsfield, director of the customer-service division of the New Jersey Board of Public Utilities. New Jersey's biggest utility company, Public Service Enterprise Group Inc., said it saw a 10% increase compared with the year earlier in uncollectible natural-gas accounts, and slightly less on the electric side, in the third quarter. "We've been diligent in our shutoff activities," said PSEG Chief Executive Ralph Izzo.
Rising delinquencies are occurring across the country. In New York, the amount of money utilities are owed on accounts at least 60 days past due jumped 22%, to $611.3 million in September compared with a year earlier, according to regulators. Michigan has experienced a nearly 39% increase in electricity disconnections this year compared with last, according to statistics filed voluntarily by utilities with state regulators. The rise comes as utilities are finding it more difficult to fund their operations. Northeast Utilities, which owns electric and gas utilities in New Hampshire, Massachusetts and Connecticut, is carrying about $15 million of unpaid bills currently, up from about $11 million this time last year and about $8 million in 2006. "We're putting more resources into collecting on accounts now," said Chief Financial Officer David McHale.
In the third quarter, PECO Corp., a Philadelphia utility, racked up an additional $37 million of bad-debt expenses from unpaid bills compared with the third quarter of 2007, bringing its total unpaid balance to $56 million. The company has put in place a new service-termination strategy this year that for the first time assesses credit risk, and pulls together other information used as a basis for decisions. "We ask how old, how big and how risky" an account is when prioritizing disconnections, said Denis O'Brien, president of PECO, a unit of Chicago-based Exelon Corp. The number of shutoffs could rise further, as new technologies such as digital meters make it easier for utilities to cut off late-paying customers.
Digital meters allow power companies to do things remotely that previously required sending out work crews. For example, utilities can take meter readings wirelessly and switch a customer's power off or on without having to send a crew to a house. They also can use a "service limiter" feature to cut power flows to a trickle until customers pay up. Utilities are installing millions of these meters across the U.S. Southern California Edison, a unit of Edison International of Rosemead, Calif., currently disconnects late-paying customers owing as little as $30, but that could drop lower in the future. That usually would be a money-losing proposition, because it requires a crew to be sent out to disconnect service manually. But the company is in the process of installing 5.3 million digital meters, at a cost of $1.63 billion, which will allow remote, wireless shutoffs, making it economical to take action even for tiny amounts owed. In a recent filing with regulators it said it could adopt "rigid enforcement" of payment rules in the future for those owing less than $30. It hypothesized it could cut off an additional 129,000 people a year.
Lynda Ziegler, senior vice president of customer service at SoCal Edison, said the utility doesn't have enough wireless meters to support a policy change yet. She added that notification requirements mean it still could take nearly three months to sever a delinquent account. But she said the utility may seek authority from the Public Utilities Commission in the future to act more quickly or to convert certain customers to prepaid service because "one of the struggles people have is catching up when they get behind." The ease with which utilities can use digital meters to cut off service has alarmed some consumer advocates. "Just because you can do it doesn't mean you should do it," said Irwin Popowsky, head of the Office of Consumer Advocate in Pennsylvania. "From my perspective, they're creating a reason to not have smart meters."
Fed, IMF moves raise questions
Moves by the Federal Reserve and International Monetary Fund to make dollars available quickly and without conditions to a select group of emerging markets raise questions about the impact on those left out of the schemes.
The initial response was very positive, with a broad-based rally across emerging market stocks and bonds, as investors took the view that more support for emerging markets in general was good for all of them. But there were some signs of differentiation in the currency market between those that now have access to Fed dollars — Brazil, Mexico, South Korea and Singapore — and those that do not.
Meanwhile, experts expressed lingering concerns that by throwing a protective cordon around some emerging economies, the Fed and the IMF could aggravate the challenges facing those outside the new magic circle. "If you create a class of emerging markets that are really protected and close to the developed countries there is a danger that the second-class citizens are marked out more clearly," says Simon Johnson, a former chief economist at the IMF.
Raghu Rajan, another former IMF chief economist, says there is now a division between "those inside the club and those outside the club" — although he believes the negative effects on those excluded will be limited. The hazard that helping some countries might hurt others is an international variant of the problem created when governments rushed to rescue their banks, fuelling pressure on non-bank financial institutions.
Policymakers call it the "boundary problem" and it is a recurring dilemma as authorities around the world ramp up their efforts to curb the credit crisis. The Fed and the Fund are creating two protective walls to shield emerging markets in need of dollars. Within the inner wall are the four nations that are receiving US$30 billion each from the Fed. The Fed says they are "systemically important" and "well-managed". They resemble the core banks at the centre of bank rescue plans. Within the outer wall are the emerging markets eligible for large rapid loans from the IMF under its new no-strings-attached lending programme.
The IMF has not named countries eligible for these loans, but the list would include the four backed by the Fed, the Czech Republic, Chile plus possibly Poland and some Asian nations. Other emerging markets will still be eligible for IMF bail-outs, but on an ad hoc basis. The enhanced differentiation between markets changes their relative riskiness. The question is whether it could even make some outside the boundaries more vulnerable than before.
This is what happened to non-banks excluded from bank rescue plans. Auto finance companies and insurance firms are now asking to be treated like banks, even if they have to become banks in the process. There are differences. The new international lines of defence resemble a set of concentric circles rather than the binary division between banks and non-banks. No nation is explicitly excluded from aid and the US$120 billion from the Fed means there is now more money available overall. Moreover, nations do not compete with each other in the way that banks and insurance companies do. There is a "public good" in the form of system stability.
Still, concerns remain. Exclusion from the new facilities may be seen as signalling unsustainable policies, or a lack of international support. With almost US$50 billion committed to bail-outs, and US$100 billion notionally set aside for new no-strings loans, the IMF will have only US$100 billion left for all other cases. Moreover, emerging economies compete for private capital. Changes in relative standing can lead to portfolio shifts that could result in some countries losing in absolute terms — just as the bank rescue pushed up the cost of Fannie Mae and Freddie Mac debt.
Michael Hugman, a strategist at Standard Bank, says: "There is always a danger, particularly in the current market environment, that any intervention . . . will have negative effects on those countries excluded from the new facility."
Bernanke's Fed Chasing Down the Global Infection
The first interest-rate cut in seven years had to be traumatic for Bank of Japan staffers. Not only did it undo years of struggling to lift borrowing costs from zero, but few investors seemed to care. The indifference is partly attributable to the tardiness of the 0.2 percentage point move, which lowered the BOJ's benchmark rate to 0.3 percent.
The bigger reason was the U.S. Federal Reserve. The Fed's half-point rate cut to 1 percent last week came two days before the BOJ's move, and it surprised no one. What shocked many was a decision to provide $30 billion each to the central banks of Brazil, Mexico, Singapore and South Korea. The internationalization of the Fed has been unfolding for years. From Seoul to Santiago, investors often care more about what happens in Washington than they do about actions taken by local monetary authorities. The central bank has 12 districts across the U.S., yet the last 15 years have seen the creation of de facto spheres of Fed influence around the globe.
Consider Oct. 29 as the day the Fed formalized the arrangement by creating areas 13, 14, 15 and 16. The Fed's decision to expand efforts to unfreeze markets in emerging nations raised eyebrows in Asia, eclipsing its rate reduction and that of the BOJ. The International Monetary Fund also announced an emergency loan program that almost doubles borrowing limits for emerging economies and waives demands for austerity measures. That, too, surprised many observers.
The IMF signaled that it will move faster with aid than in the past. It also showed the urgent need for an overhaul of the global financial order well before a Nov. 15 meeting of 20 industrialized and developing nations in Washington. Five years from now, Fed Chairman Ben Bernanke will be regarded either as brilliant or reckless for so directly reaching around the globe. At the moment, it looks like an innovative and bold step. Already, it's done more to stop the bleeding in markets than have officials in, say, Seoul.
It's one thing to accept euros, yen, pounds or Swiss francs in these kinds of "liquidity swap facilities." It's quite another to accept emerging-market currencies. The Fed is bestowing its "Good Housekeeping" seal on economies that are following responsible policies yet are feeling the brunt of the credit crisis. This activity raises a number of questions about what U.S. authorities are up to. Here are three relevant to Asia.
One, is the Fed playing geopolitics? Since the U.S. created the problems oozing around the globe, it should help others deal with them. That's especially true if the U.S. wants to have any friends a year from now. The Fed had already created similar swap lines with the European Central Bank and monetary authorities in Australia and New Zealand. It is now extending the courtesy to "four large systemically important economies" in the developing world.
"There is another signal being sent: Being a friend of the U.S. still matters," Marc Chandler, global head of currency at Brown Brothers Harriman & Co. in New York, wrote in an Oct. 30 report. "Venezuela, Argentina and Russia, for example, are unlikely to be thought of as likely candidates for a similar swap program with the Fed. Over time, who is regarded as a friend of the U.S. may impact valuations."
Two, is the Fed helping the IMF or undermining it? It's more the former than the latter. In recent weeks, Iceland approached Russia for loans before going to the IMF, while Pakistan sought help from China. With $1.9 trillion of reserves, China might easily supplant the role of the IMF and U.S. Treasury in Asia. Those overtures, even if unsuccessful, didn't go unnoticed by U.S. officials. Many observers wonder if they were among the catalysts behind the Fed's and IMF's actions last week.
"It has been fashionable to argue that the crisis would increase China's financial influence, as China sits on a ton of foreign exchange and potentially offered an alternative source of foreign-currency liquidity," Council on Foreign Relations economist Brad Setser in New York wrote on his blog last week. And yet that hasn't happened. The U.S. and Europe moved quickly, at least by the standards of governments, to help a broad range of countries. "China's rise, in effect, contributed to a change in the political climate that helped to lift some of the political constraints that in the past limited the IMF's scope," Setser argued.
Third, how does the Fed turn off this new spigot? An international precedent clearly has been set, one that may create even greater expectations next time there's a crisis. For all its troubles, the dollar is still the world's reserve currency, and central banks in Beijing, Tokyo, New Delhi, Taipei and Seoul hold mountains of U.S. notes. If the dollar plunges because the Fed cuts rates further, those holding U.S. currency also may expect Fed bailouts. Only time will tell if Bernanke created an international monster here. For the time being, Asia's emerging markets are all too happy to accept the Fed's seal of approval.
Effectiveness of AIG's $143 Billion Rescue Questioned
A number of financial experts now fear that the federal government's $143 billion attempt to rescue troubled insurance giant American International Group may not work, and some argue that company shareholders and taxpayers would have been better served by a bankruptcy filing.
The Treasury Department leapt to keep AIG from going bankrupt on Sept. 16, and in the past seven weeks, AIG has drawn down $90 billion in federal bailout loans. But some key AIG players argue that bankruptcy would have offered more structure and greater protections during a time of intense market volatility. Echoing some other experts, Ann Rutledge, a credit derivatives expert and founding principal of R&R Consulting, said she is not sure how badly the financial system would have been rocked if the government had let AIG file for bankruptcy protection. But she fears that the government is papering over the problem with a quick fix that was not well planned.
"What we see now are a lot of games by the government to keep these institutions going with a lot of cash," she said. "This is to fill holes in companies' balance sheets, and they're trying to hold at bay the charges that our financial system is insolvent." The deal that the Treasury and the Federal Reserve Bank of New York pressed upon AIG was intended to stop any domino effect of financial institutions falling because of their business ties to AIG. The rescue allowed AIG to provide cash to huge banks and other players who had invested in rapidly souring mortgages insured by the company.
Early this year, investors had begun privately demanding that AIG pay off its billion-dollar guarantees. But in mid-September, when the demands for cash reached a public crescendo, AIG had to admit that it didn't have enough cash on hand to meet the obligations. In the first weeks of its federal rescue, AIG has used the loan money to post collateral demanded by these firms, sources close to those deals say. "No one else benefits," former AIG chief executive and major shareholder Maurice R. "Hank" Greenberg wrote to AIG's current chief executive on Thursday. "Unless there is immediate change to the structure of the Federal loan, the American taxpayer will likely suffer a significant financial loss."
Another concern is that in this depressed market, AIG, and the taxpayers that now own 80 percent of the company, will lose coming and going. The company may be forced to borrow additional federal funds for rising payouts to counterparties. Neither the government nor AIG is releasing information about the specific amounts paid to individual firms, but numerous credit experts say that the value of those mortgage assets is probably declining every week. That means AIG has to pay a higher price as part of its guarantees. The company also may be forced to sell many more assets at low, fire-sale prices. As part of its loan deal, AIG was to sell some assets -- valued at $1 trillion before the crisis -- to raise cash to pay off the loan.
AIG's Financial Products division is the primary villain in the company's free-fall. It made tens of billions of disastrously bad bets on mortgage investments but may not have carefully hedged those bets or properly estimated its risk. The company's rapid burn of $90 billion also suggests that it grossly undervalued its obligations to counterparties in a worst-case scenario. In February, internal notes show, board members discussed a growing dispute between AIG Financial Products and Goldman Sachs about the value of those assets when Goldman called for AIG to post collateral. AIG's chief financial officer warned of "Goldman's acknowledged desire to obtain as much cash as possible." But AIG's external accountants warned that it was they who alerted management to the dispute, not AIG Financial Products, and that the division was not properly considering the market in its pricing.
Rutledge warns that because there has been no public disclosure of AIG's payments to counterparties, it is impossible to know whether the pricing it is using now is proper. The Federal Reserve and its advisers have acknowledged privately that things are not going according to plan. As AIG has rapidly eaten through the loan money, the Fed has twice expanded its original $85 billion bailout -- which itself was the largest government bailout of a private company in U.S. history. Earlier last month, the Fed reluctantly gave AIG $38 billion more in credit for securities lending to try to keep the firm from drawing down its first Fed loan too quickly.
Then on Thursday, the Fed agreed to let AIG borrow $20 billion from a larger commercial paper bailout fund it had set up days earlier for all institutions that lend money to each other. If the company had filed for Chapter 11 bankruptcy protection, AIG could have frozen the crippling collateral calls, and shareholders would have had a chance at recovering some value from the company's 80 percent drop in stock price from earlier this year, said Lee Wolosky, a lawyer for AIG's largest shareholder, Starr International. "AIG is nothing more than a pass-through being charged 14 percent interest," Wolosky said. "Company assets are eroding on a daily basis; asset sales have not begun and can only be at fire-sale prices in the current market. "
But David Schiff of Schiff's Insurance Observer said he could not see how bankruptcy would have been a better solution. "The point isn't to save AIG; it's to save the U.S. financial system. I think they were afraid to find out who else goes under if you let AIG fail," he said. "But right now, no one knows if this is going to work."
Wall Street’s Great Heist of 2008
The Wall Street Journal published a front-page article Friday reporting that the nine biggest US banks, which have received a combined $125 billion in taxpayer funds as part of the $700 billion bailout authored by Treasury Secretary Henry Paulson and passed by the Democratic Congress, owed their executives more than $40 billion for recent years’ compensation and pensions as of the end of 2007. This means that nearly a third of the public funds given to these banks will ultimately be used to increase the private fortunes of a handful of multimillionaire Wall Street executives.
This revelation, the result of an analysis of the banks’ corporate reports by the American financial elite’s own chief organ, provides a stark exposure of the social interests that are being served by the government bailout. More generally, it provides an instructive insight into class relations in America. It has already been widely reported that the banks are refusing to use their government windfalls to resume lending to other banks, businesses and consumers—the ostensible purpose of the cash injections—and are, instead, hoarding the money for the purpose of acquiring smaller and weaker banks.
The so-called economic rescue plan is, in fact, a plan to effect a rapid consolidation of the US banking system, resulting in the domination of the economy by a few mega-banks, which will be free to set interest rates and lending standards as they see fit. Far from opposing this development, Treasury Secretary Paulson and the Federal Reserve Board are encouraging it. They deliberately designed the bailout to place no restrictions on how the banks use their taxpayer money and then enacted changes in the tax code to give banks acquiring other banks a huge tax break.
As the Journal explains, the minimal restrictions on future executive compensation stipulated in the bailout bill do not affect deferred payments to executives accumulated over previous years. Since such deferred payment accounts are commonplace in the banking industry and are the preferred means by which top executives build up nest eggs in the hundreds of millions of dollars, those who are primarily responsible for the financial disaster and, in many cases, the ruin of their own companies, will emerge from the crisis richer than ever.
As the Journal puts it: “The deferred-compensation programs for executives are like 401(k) plans on steroids.” At some of the banks that have received government handouts, the newspaper notes, the total amounts previously incurred and owed to their executives exceed what they owe in pensions to their entire work forces. The newspaper notes that at Goldman Sachs, formerly headed by Paulson, “the $11.8 billion obligation primarily for deferred executive compensation dwarfed the liability for its broad-based pension plan for all employees. That was just $399 million.”
Goldman received $10 billion of the $125 billion doled out to the biggest banks. JPMorgan Chase, which was granted $25 billion, owes its top officers $8.5 billion. Citigroup, another $25 billion recipient, owes $5 billion, and Morgan Stanley, which got $10 billion in taxpayer money, is in debt to its top executives to the tune of $10 to $12 billion. A separate article in the same issue of the Journal amplifies this picture of parasitism and criminality. Headlined “Securities Firms Tackle Pay Issue,” it deals with discussions among the top executives of Wall Street firms such as Goldman Sachs, Morgan Stanley and Merrill Lynch over the advisability of paring down their traditional multimillion-dollar year-end bonuses in the face of growing public outrage.
The article notes that since the start of 2002, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns have paid a total of $312 billion in compensation and benefits. It estimates that these firms have also paid out $187 billion in bonuses, for a grand total of $499 billion. Much of this staggering sum—more than five-and-a-half times the total income of the firms—has gone to the top echelon of executives. The latter three firms have either disappeared or are in the process of being taken over. Bear Stearns was bought out by JPMorgan Chase last March in a deal subsidized by the government in the amount of $29 billion; Lehman Brothers filed for bankruptcy in September, and Merrill Lynch has agreed to sell itself to Bank of America in a government-brokered agreement.
While the bank executives were awarding themselves tens of millions in salaries and bonuses, their companies were being run into the ground. Since the start of 2007, for example, Merrill Lynch has had net losses of nearly $20 billion, or virtually all of the profits it made from 2003 to 2006. CEO John Thain took in $83 million in 2007. Now, thousands of Merrill employees are being laid off to cut $7 billion in costs as part of the takeover by Bank of America. The events of the past two months have brought into sharper focus the naked power exercised by the American financial aristocracy over society and the state. All of the various schemes devised in response to the near-collapse of the financial system have had one thing in common: they proceed from the need to uphold the interests of the most powerful banks and the richest of the rich.
The combination of impotence, servility and duplicity of Congress and its Democratic leadership is being mercilessly exposed. Charles Schumer, the Democratic chairman of the Joint Economic Committee, said this week in regard to the banks’ refusal to use the government money to extend new loans, “There’s not much we can do other than jawbone.” Christopher Dodd, the Democratic chairman of the Senate Banking Committee, blustered, “The intent here certainly wasn’t for healthy banks to buy healthy banks—it’s infuriating.”
Dodd, it would seem, is shocked to learn that the bailout plan he adamantly supported is being used to serve the narrow self-interest of the bankers. Even if one makes the implausible assumption that this veteran of Washington politics and favorite of Wall Street is not being disingenuous, that does not alter the fact of his utter prostration before the real power brokers in America. Nothing is permissible that impinges on the basic prerogatives of the financial oligarchy, no matter the cost to the American people. On critical matters regarding the class interests of the ruling elite, the people have no say. There is a ruling class in America. The administration, Congress, the courts—all of the agencies of the state—are, behind the trappings of democracy, instruments of its domination.
Some say economic rescue plan has drifted off course
After a bruising battle to get it through a doubting Congress, the Bush administration’s $700 billion Wall Street rescue plan has morphed into something else entirely. The Emergency Economic Stabilization Plan — signed by President Bush on Oct. 3 — ostensibly began as a plan to purchase distressed mortgages and other bad assets. However today it involves the government taking direct equity stakes in banks, and at least one bank used the money to buy a rival.
The taxpayer money also is expected to be used to buy stakes in life insurance companies, and may soon even go to help two struggling Detroit automakers merge. In short, what once was disparagingly referred to as a bailout for Wall Street now looks like a broader bailout of all sorts of troubled businesses. Some lawmakers and outside analysts question whether that is serving the public interest as intended — or whether it is becoming a taxpayer-financed giveaway to favored firms.
“I could say I told you so,” said Rep. Joe Barton, a Republican from Texas, who helped lead a revolt against GOP leaders and sunk the $700 billion plan on its first pass. “It was so open-ended, and we put so little accountability into it — they can basically do whatever they want to with the money.” Lawmakers in both parties worried when the Treasury Department announced Oct. 14 that $250 billion of the $700 billion plan would be used to inject cash directly into troubled banks. That pushed Treasury’s previous emphasis on purchasing troubled mortgage assets to the back burner.
Some $125 billion was used to take equity stakes in the nine largest U.S. banks, and now lenders across the nation can ask, through Nov. 14, for more. At least a dozen other banks have done so. Rep. Barney Frank, the House Financial Services Committee chairman, who shepherded the legislation through Congress, disagreed that the plan has morphed beyond its original intent. “Buying equity was always in the plan,” the Massachusetts Democrat said. Still, a Nov. 18 hearing is expected to look at some of the developments that are troubling other lawmakers.
Among them is the fact that Pittsburgh-based PNC Financial Services used some of its $7.7 billion in taxpayer money to purchase Cleveland-based lender National City for $5.8 billion on Oct. 24. That raised a question: Did the taxpayer money spur more lending, as the plan was intended to do, or did it just let one strong bank, PNC, get stronger by absorbing a weaker rival? Some experts think that’s just fine. “I think it is very positive if it’s a healthy bank buying a weak bank, and it’s an all-stock deal,” said Bert Ely, an expert on banking regulation. PNC’s purchase of National City was in the taxpayer interest because it promoted needed consolidation in the banking sector, he said.
However, on the same day as the PNC deal, the American Council of Life Insurers confirmed that Treasury was considering giving cash to some big insurance companies whose failure could pose risks to global finance. Yet another concern is that banks that receive cash from the government were allowed to continue to pay dividends to shareholders. That raises the prospect that taxpayer money will be funneled not to new lending but to well-heeled investors who buy bank stocks. That’s unlikely, the Bush administration insists.
Ed Lazear, the chairman of the White House Council of Economic Advisers, said Thursday that it’s in banks’ own interest to lend. “So if they take that money and simply pay interest on it or pay dividends on it and don’t lend it out and make money themselves, that’s not a very good position for them to be in,” he said. Now, in perhaps the bailout’s strangest twist, reports last week said that negotiations to merge General Motors and Chrysler hang on the government providing cash injections into the carmakers’ auto-financing arms. For that to work, the auto-finance arms first must convert themselves into commercial banks to be eligible for taxpayer loans.
It’s all a far cry from Treasury’s sales pitch of September — that the rescue plan would provide a two-for-one, rescuing banks and homeowners in one fell swoop. “It really highlights that if you are not working from a set of core principles, you can drift,” said Vincent Reinhart, a former top Federal Reserve director from 2001 to 2007 and now a senior fellow at the American Enterprise Institute, a conservative research group. “And this rescue package has drifted.”
Nobel Winner Aumann Says Bernanke, Paulson Steps 'Not Smart'
Robert J. Aumann, the Israeli economist who won the 2005 Nobel Prize in economics, said the steps taken by Federal Reserve Chairman Ben S. Bernanke and U.S. Treasury Secretary Henry Paulson to save financial markets "weren't smart."
"The intervention by the regulators to save the U.S. economy will lead to further bankruptcies of banks and insurance companies," Aumann said at a rabbinical conference in Jerusalem yesterday. "They are only encouraging institutions to take more uncalculated risks." The crisis in the financial markets was caused by the incentives provided to managers of banks and other financial institutions that caused them to act to their own benefit and not the banks', he said. Bonuses were given on the basis of loan sales, without considering who the borrowers were, he said.
More than 100 of the world's biggest banks and securities firms have posted about $685.4 billion in asset writedowns and credit losses because of the financial turmoil. A month ago, Congress approved a $700 billion rescue package that gave the Treasury wide authority to buy and guarantee assets to prevent a U.S. financial collapse. Aumann, who won the Nobel Prize for his work on game theory, said there is "no financial crisis" in Israel. The Israeli government's decision not to intervene in the financial markets was correct, he said.
European, U.S. banks suffer as recession becomes reality
Profits evaporated at leading banks on Monday and authorities worldwide pressed on with efforts to temper a recession that policymakers said had become reality for much of the globe. The European Commission said the 15-nation euro zone was in a technical recession and economic growth would come to a virtual standstill next year. It called for co-ordinated action.
In Jerusalem, Richmond Federal Reserve Bank President Jeffrey Lacker said the U.S. economy was contracting. Data last week showed it shrank at a 0.3 per cent annual rate in the third quarter, its sharpest squeeze in seven years. “I think it's definitely a recession at this point. How deep, how steep, and long it's going to be is uncertain,” said Mr. Lacker, who will become a voting member of the Fed's interest rate-setting committee next year.
French bank Societe Generale reported an 83.7 per cent drop in third-quarter net profit. Net profit fell to €183-million ($234-million U.S.) with losses from the collapse of U.S. bank Lehman Brothers and other writedowns costing it €1.208-billion in pre-tax income. Germany's second-biggest bank, Commerzbank, said it would take an €8.2-billion capital injection from the state and another €15-billion to secure refinancing. It posted a third quarter net loss of €285-million. Britain's biggest home lender HBOS Plc raised its hit from the value of risky assets and bad loans to over £5-billion as its takeover partner Lloyds TSB predicted a sharp fall in profits.
Lloyds stepped in to buy HBOS in a government-brokered deal after HBOS was hit by the crisis and concerns about its exposure to Britain's weakening housing market. Illinois-based Midwest Banc Holdings Inc. posted a $159.7-million third-quarter loss, and said it had got preliminary approval to receive $85.5-million of new capital in the form of preferred stock, to be issued to the U.S. Treasury. Washington, Berlin, Paris and London have all offered to inject capital into their banks to prevent systemic meltdown.
French Prime Minister Francois Fillon was quoted by Le Figaro newspaper as saying that if banks did not use the money to lend to businesses, then the government could take direct stakes in them, as Britain has. The credit crunch, which stemmed from a collapse in the U.S. housing market, has prompted banks to clam up on lending to each other, businesses and households for over a year now. Interbank lending rates fell, extending last week's decline, reflecting ongoing central bank efforts to add liquidity rather than banks lending to each other.
Banks deposited a record €280-billion with the European Central Bank on Monday rather than making it available to peers. While trillions of dollars in bailouts may have averted a banking collapse, the economic outlook is grim, prompting governments to put together fiscal stimulus packages to ease a recession born of the worst financial crisis in 80 years. “The horizon that this forecast offers is dark ... recession is a real risk,” EU Monetary Affairs Commissioner Joaquin Almunia said after the European Commission forecast euro zone growth of just 0.1 per cent next year. A technical recession is defined as two successive quarters of contraction. Official data supported Mr. Almunia's prognosis.
Euro zone manufacturing activity sank in October to a record low. The Markit Eurozone Purchasing Managers Index slumped to 41.1 – the lowest in the survey's 11-year history. Berlin aims to safeguard one million jobs with pump-priming measures to be agreed in cabinet on Wednesday, by spending more than €30-billion. South Korea announced plans to pump an extra $11-billion into its economy next year. Finance Minister Kang Man-soo said economic growth could fall to its lowest in more than a decade without the stimulus, which will need approval by parliament. Policymakers will gather again to plot their next moves.
Euro zone finance ministers meet in Brussels to discuss reform of institutions that manage the global financial market and bodies such as credit rating agencies, accounting rules-setters, banks and their management. And finance chiefs from the “Group of 20” nations gather in Brazil later this week to prepare for a U.S.-hosted Nov. 15 summit of world leaders to chart a way out of the crisis. “The leadership America has shown ... has been vital to the co-ordinated rate cuts and the international co-operation we have seen which will lead to the meeting of international leaders on November 15. That leadership will and must continue,” British Prime Minister Gordon Brown said in Abu Dhabi.
Central banks will also put their shoulders to the wheel. Following rate cuts from the Fed, China and Japan last week, the European Central Bank, Britain and Australia are expected to cut interest rates by at least 50 basis points this week. The efforts to buoy the world economy encouraged some investors to shop for bargains after world stock markets fell 20 per cent in October alone, their worst month ever. The MSCI index of stocks in the Asia-Pacific region outside Japan rose 5.9 per cent, European shares were flat and U.S. stock futures pointed to a higher start on Wall Street.
The economic upheaval has relegated Tuesday's U.S. presidential election to little more than a footnote for financial markets. Investors have factored in a victory for Democrat Barack Obama, who leads in opinion polls.
EU Says European Economy Probably Already in Recession
The European Commission said the region's economy probably entered a recession this year and will stagnate in 2009, increasing pressure on political leaders to collaborate on measures to tackle the financial crisis. Economic growth in the euro area will slump to 0.1 percent next year, the worst performance since 1993, the Brussels-based commission said today. It also estimated that gross domestic product will shrink for three consecutive quarters this year and cut its forecast for full-year 2008 growth to 1.2 percent from 1.3 percent previously.
Euro-area finance ministers meet today to try to overcome the worst financial crisis since the Great Depression. While France and Germany led European governments in committing a combined $1.7 trillion to protect the region's banks, and the European Central Bank now offers unlimited loans in an attempt to get credit moving, there has been no unified government response. Chancellor Angela Merkel last week proposed a 50 billion-euro ($64 billion) package to revive the German economy.
"A recession in 2009 seems now unavoidable," said Jacques Cailloux, chief euro-area economist at Royal Bank of Scotland Plc in London. "Today's new GDP forecast of 0.1 percent for 2009 by the European Commission still looks too optimistic to us." Economists at BNP Paribas and Citigroup Inc. also said the EU remains overly optimistic, with both predicting the euro area will shrink next year. The EU partly acknowledged this, saying its forecasts are subject to "considerable uncertainty and downside risks."
European manufacturing contracted at a record pace in October and faster than initially estimated, according to separate figures published today. Figures last week showed that executive and consumer confidence has dropped to a 15-year low. Stocks and the euro pared gains after today's reports. The euro was at $1.2838 as of 13:43 a.m., compared with $1.2898 earlier, while the Dow Jones Stoxx 600 was up 0.3 percent at 222.66, paring an earlier gain of 1 percent. European 10-year government bonds advanced, with the yield on the German bund, Europe's benchmark government security, falling 5 basis points to 3.84 percent.
The commission said GDP in the euro region will probably contract by 0.1 percent in both the third and fourth quarters after shrinking 0.2 percent in the second quarter, pushing the region into a recession, defined as two straight quarters of contraction. Paris-based L'Oreal SA, the world's largest cosmetics maker, last week cut sales and profit forecast for the third time in less than four months. Deutsche Lufthansa AG, Europe's second-biggest airline, lowered its earnings forecast. "The economic horizon has now significantly darkened," European Economic and Monetary Affairs Commissioner Joaquin Almunia said in today's report. "We need a coordinated action at the EU level to support the economy similar to what we have done for the financial sector."
Government measures to tackle the economic fallout from the credit crunch have so far been piecemeal, with governments including Italy, France and Germany planning their own tax breaks or stimulus packages. The EU in late October pledged to present a recovery plan this month and EU leaders are scheduled to meet this week to coordinate their position before a summit of world leaders hosted by President George W. Bush on Nov. 15. French President Nicolas Sarkozy has been pushing for a unified action and that is "a goal the president never gave up on," French Finance Minister Christine Lagarde said today in an interview. "So I'm not going to give up on it either."
In addition to flooding markets with cash, central banks across the world have also begun slashing interest rates to limit the economic impact of the financial crisis. The European Central Bank is set to cut its benchmark rate this week for the second time in less than a month after the U.S. Federal Reserve lowered its rate to match the lowest level in a half-century. Policy makers in Japan, India and Norway have also cut borrowing costs. The Irish, Spanish and U.K. economies will all contract next year, while Germany, Europe's largest economy, France and Italy will stagnate. For 2010, the EU sees the overall euro-area economy expanding by 0.9 percent.
Coupled with the drop in oil prices, the slowdown will cool inflation, which may ease to 2.2 percent in 2009 from 3.5 percent this year, the EU said. It will also push the euro region's unemployment rate to 8.4 percent next year from 7.6 percent this year. EU countries' budget deficits are likely to widen, with the euro-area average forecast to increase to 1.8 percent next year, which would be the biggest since 2005. Growth is "at a standstill" in many European economies, Almunia said. "The economic situation is exceptionally uncertain."
Trichet Extends ECB Power, May Cut Rates at Fastest Pace Ever
Jean-Claude Trichet is extending the European Central Bank's powers just as it gears up for what may be the fastest round of interest-rate cuts in its 10-year history. President Trichet has pushed the central bank's reach into the euro region's neighboring economies as they struggle to cope with the financial crisis, and has approved record lending to banks. Economists predict the ECB will slash its benchmark rate, currently at 3.75 percent, to 2.5 percent by April after reducing it for the second time in a month on Nov. 6.
"The ECB is at times playing the role of lender of last resort for the whole European financial system," said Guillaume Menuet, a senior European economist at Merrill Lynch & Co. in London. "Its mandate is being implicitly expanded." While Trichet's remit applies just to the 15-nation euro region, the absence of an institution charged with financial stability across the 27-member European Union created a vacuum the ECB is trying to fill. In the past three weeks alone, it gave a 5 billion-euro ($6.4 billion) loan to Hungary, set up currency swaps with Denmark and Switzerland and increased its lending to euro-region banks to more than $1 trillion.
Hungarian Prime Minister Ferenc Gyurcsany said on Oct. 28 he's lobbying EU leaders to allow the ECB to provide liquidity outside the euro area. ECB Executive Board member Lorenzo Bini Smaghi said on Oct. 31 the bank stands ready to help "other" eastern European countries that are "asking for our help." The Hungarian, Polish and Czech stock indexes all fell more than 24 percent last month. Economists expect more rate cuts from the ECB as it tries to cushion an economy hurtling toward a recession. The central bank will probably cut its key rate by a half point this week, taking it to 3.25 percent, according to the median of 50 forecasts in a Bloomberg News survey. It will deliver another 75 basis points of easing in the following five months.
Consumer and executive confidence in the euro region's economic outlook plunged by the most since at least 1985 in October, the European Commission said Oct. 30. "The ECB is only too well aware that extended, deep recession is now the major danger facing the euro-zone economies," said Howard Archer, chief European economist at IHS Global Insight in London. The Bank of England will probably also cut its benchmark by 50 basis points, taking it to 4 percent, according to a separate survey. Trichet and other policy makers are still trying to ease strains in financial markets that are crippling the global economy. Europe's corporate debt markets endured their worst month on record in October and the gap between the yields on 10- year German and Italian government bonds widened to 1.27 percent on Oct. 31, the most since 1997.
The ECB has responded by ramping up lending to cash- strapped banks, offering unlimited funds. The central bank said on Oct. 21 that lending to financial institutions jumped to a record, surging 68 percent from the first week of September. That may create problems for the ECB as the risk of possible collateral losses grows, says Natacha Valla, a former ECB economist and now at Goldman Sachs Group Inc. in Paris. "They have challenges for the future in having a balance sheet of unprecedented size," said Valla. "The have to know how to deal with such a balance sheet, how much capital they have to hold, what it means for risk management. There is a whole set of questions that now have to be answered."
The ECB isn't the only European institution trying to guarantee financial stability. The EU said on Oct. 29 it's ready to contribute 6.5 billion euros to an International Monetary Fund-led rescue package for Hungary, and European governments coordinated efforts last month to shore up the region's banking system. Still, some economists and politicians say the ECB's pivotal position at the heart of the financial system should be more formally recognized.
Hungary's Gyurcsany said on Oct. 28 he wants EU leaders to allow the ECB to accept local government bonds as collateral for foreign-currency swaps, saying "it is extremely important from Poland to Hungary to have these repo facilities in place." "My dream is that the ECB gets a financial stability mandate, which is not the case so far," said Valla. "The ECB really has demonstrated it can fulfill such a mandate."
ECB May Follow as Fed, BOJ, India 'Shocked' Into Cuts
The Reserve Bank of India's surprise interest-rate cut ended a week of reductions that spanned the globe from Beijing to Washington, with more to come next week in Europe and Australia. The Indian central bank's action today followed a Federal Reserve decision to reduce U.S. borrowing costs to match the lowest level in a half-century. The Bank of Japan yesterday cut its benchmark rate for the first time in seven years and China pared its key rate for a third time in two months. Central banks in Norway, Slovakia, South Korea, Taiwan, Israel and across the Middle East also eased credit.
Policy makers are fighting to avert a prolonged recession in the global economy as the credit crisis enters its 15th month and spreads beyond industrial countries. Officials are signaling more cuts are likely and the European Central Bank and Bank of England both set policy on Nov. 6. "This was the week central banks got shocked into action," said Stuart Thomson, who helps oversee $46 billion in bonds at Resolution Investment Management Ltd. in Glasgow, Scotland. "They have been surprised by the sudden slump in economic activity, but still have a long way to cut."
India's central bank today pushed its repurchase rate down for the second time in two weeks, taking it to 7.5 percent from 8 percent. BOJ Governor Masaaki Shirakawa yesterday cast the deciding vote to reduce the key overnight lending rate to 0.3 percent, the lowest in the industrial world, from 0.5 percent. Shirakawa acted after Japan's Nikkei 225 Stock Average this week slumped to its lowest since 1982. The bank slashed its growth forecast for the year ending in March to 0.1 percent from 1.2 percent predicted in July, and may bring interest rates to zero as it promised to promote "accommodative financial conditions."
Fed Chairman Ben S. Bernanke and his colleagues are also signaling they may cut their benchmark rate further after lowering it to 1 percent as "downside risks to growth remain." The economy contracted by the most since 2001 in the third quarter and Fed Bank of San Francisco President Janet Yellen said on Oct. 30 that rates may head to zero if economic pain persists. "We could, potentially, go a little bit lower than" 1 percent, Yellen said in Berkeley, California. "We would do it because we are concerned about weakness in the economy."
The financial crisis last month spread from industrial economies such as the U.S. and Japan to engulf emerging markets that had been the world economy's last remaining source of strength. Now, policy makers in those economies are easing monetary policy too. India reduced rates today and also shrank the amount of deposits that lenders need to set aside as reserves by 1 percentage point to 5.5 percent.
The People's Bank of China on Oct. 29 reduced its one-year lending rate after economic growth slowed to 9 percent in the third quarter from 11.9 percent in 2007 as export markets shrank. Elsewhere in Asia, South Korea slashed its rates by a record 75 basis points in an emergency shift and rates also fell in Taiwan and Hong Kong. Oil-producing nations are also resorting to lower rates after the price of crude dropped by half from a July record of $147.27 per barrel. Norway's central bank cut its benchmark by a half-percentage point for the second time last month. Saudi Arabia, Kuwait and Bahrain, which tend to shift their interest rates in line with the U.S. to maintain currency pegs to the dollar, also followed the Fed in cutting.
Not all central banks are easing. Iceland this week unexpectedly raised its main rate to 18 percent, the highest in at least seven years, as it battles a currency crisis and possible hyperinflation with the help of the International Monetary Fund. Central banks are going beyond interest-rate policy to confront the unprecedented crisis with unconventional measures. The Fed on Oct. 29 agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore to unfreeze money markets, the first time it has extended such measures to emerging nations. Meantime, the ECB gave Denmark access to 12 billion euros.
Economists forecast that the onset of a recession in Europe will force the ECB and the Bank of England to lower their benchmark rates on Nov. 6 by a half-point to 3.25 percent and 4 percent respectively. Both will cut to 2.5 percent by the middle of next year, according to median forecasts in two surveys. That would be the fastest pace of easing in the ECB's history. "If the economy cools, then rates have to come down rapidly so one doesn't risk falling behind the curve," ECB council member Axel Weber said on Oct. 30. Bank of England policy maker David Blanchflower said Oct. 29 that rates must drop soon and "significantly" to stave off the threat of deflation.
Australia's central bank may also cut rates on Nov. 4, after lowering them by 1 percentage point to 6 percent last month, the biggest reduction since 1992. At JPMorgan Chase & Co., economists are predicting their global interest rate measure will fall to 2.16 percent next year, the lowest since it was first devised in the mid 1990s, from 3.21 percent yesterday. They estimate the global economy will contract in the current and subsequent quarters. "Rate cuts are going to be pretty broad," said Joseph Lupton, an economist at JPMorgan who previously worked at the Fed. "The idea has solidified pretty sharply that the world economy is going to fall pretty hard here and some good old- fashioned monetary easing is in order."
WTO calls trade meeting on credit shortage
The World Trade Organization has summoned leaders of top banks to find new ways to finance the global exchange of goods and services, which faces a slowdown because of the tight credit constraints caused by the financial crisis. WTO chief Pascal Lamy will chair the gathering in Geneva on Nov. 12. World Bank President Robert Zoellick, IMF Managing Director Dominique Strauss-Kahn and representatives of Citigroup Inc., Commerzbank AG, JPMorgan Chase & Co., and HSBC Holdings are among those invited.
The rapid expansion in global trade in the past years has been a key driver of economic growth. But over 90 per cent of trade transactions involve some form of credit, insurance or guarantee – financing that has become increasingly difficult for importers and exporters to secure amid the current crisis affecting global markets and banks. The WTO said demand for trade financing is exceeding supply in some places around the world because of a capital liquidity shortage and increased needs for other forms of bank credits. The gap could affect the reliability of goods and services moving around the world.
Brazil recently complained at a WTO meeting that exporters from developing nations were struggling to get the necessary financing despite being among the most credit worthy. This is either because of heightened risk perceptions, that have created more stringent requirements by banks, or a simple lack of funds in the system. In a letter to invitees, Lamy said the meeting of about 15 leaders would review how the international market for financing trade is faring, and look at ways to improve the availability of funds at affordable rates for developing countries.
The WTO said key international players need to figure out how to ensure a sufficient supply of capital for traders looking to cover risks such as the bankruptcy of commercial partners, damaged or delayed deliveries, transportation problems or sudden shifts in exchange rates. Trade finance is among the most secure forms of finance because it is usually short-term, but during recent economic crises it has been harder to find willing lenders, the WTO said.
Recession will hit UK hardest, says European Commission
Britain will suffer a deeper recession than any other mature EU economy, with a contraction of 1% next year and only 0.4% growth in 2010, the European commission said today. The EC's latest half-yearly forecast predicts UK unemployment will rise from 5.3% in 2007 to 7.1% in 2009 — which would bring the number out of work to about 2.25 million.
It expects the budget deficit to jump to 5.6% next year, which would be around £80bn, and 6.5%, or £94bn, in 2010. Government debt is forecast to rise by more than 15 percentage points to more than 60% of GDP in 2010-11. The figures would break stability and growth limits set by the EU's stability and growth pact. The bleak EU forecasts blow a hole in the government's assertion it has been running the EU's model economy for the past decade. Britain's contraction will be worse even that that of Ireland, which is forecast to shrink 0.9% in 2009 but recover to 2.4% growth in 2010. Ireland's budget deficit is forecast to be higher, at 6.8% of GDP in 2009 and 7.2% in 2010.
Only Estonia and Latvia are expected to suffer deeper recessions in 2009, contracting 1.2% and 2.7% respectively. Germany, France and Italy, the eurozone's three biggest economies, are expected to stagnate. Presenting his "dark" forecast, Joaquín Almunia, economic and monetary affairs commissioner, said it was highly uncertain and volatile given the fragile state of global financial markets. He indicated tension had eased in inter-bank lending after the co-ordinated stabilisation plans adopted by governments in recent weeks.
But he insisted the EC would stick to its revised stability and growth pact, with the UK expected to receive a warning early in the new year. The UK is already in the so-called excessive deficit procedure but cannot be sanctioned as it is not part of the eurozone. Senior EC economists said: "The central outlook (for Britain) envisages a marked fall in private consumption in 2009 and 2010, driven by more restrictive borrowing conditions and lower household wealth." Presenting a bleak picture of falling housing prices, falling living standards and rising joblessness, they said: "The heightened unemployment risk is also likely to prompt increases in savings from their currently very low level."
The EC is forecasting a gradual recovery in the eurozone and most of the rest of the 27 EU member states in the second half of next year but this is unlikely in Britain until 2010, with business investment shrinking until the end of 2009. Inflation is likely to fall to 1.2% in 2010. The forecast comes ahead of this week's expected decisions by both the bank of England and European Central Bank to cut interest rates by up to 0.5 percentage points as governments adopt fiscal stimulus packages to help lead the way out of recession across Europe.
UK manufacturers face 'brutal' conditions
British manufacturers are facing "brutal" conditions according to the latest report on the sector which revealed a fall in business for the sixth month in a row in October, adding to the expectation that the Bank of England will cut interest rates aggressively on Thursday. The closely watched manufacturing Purchasing Managers' Index (PMI), which combines orders and output levels in British factories, was 41.5, a slight improvement on September's record low of 41, but still well below the 50 mark which indicates no change.
Roy Ayliffe, a director at the Chartered Institute of Purchasing & Supply which produces the report said: "Conditions for UK manufacturers remained brutal in October, as the turmoil in the world's financial markets showed no signs of abating. Purchasing managers in the sector have now reported six consecutive months of decline in production, endorsing industry reports that the UK is now technically in recession." The October figure was slightly better than expected, but economists said that because manufacturing activity fell at its second fastest rate after September since the survey started in 1992, this provided little comfort.
Howard Archer, chief economist at Global Insight, said: "The best thing that can be said about the October manufacturing purchasing managers' survey is that it was not quite as dire as feared. Nevertheless, this is still an extremely weak survey across the board that does little to dilute fears that the UK could suffer an extended, deep recession." Manufacturers were hit from both sides as domestic demand remained depressed and new export orders slumped to levels last seen in the immediate aftermath of 9/11.
Employment within the sector contracted sharply last month, adding to the expectation that the rate of unemployment will continue to rise in the UK overall in the coming months as the country enters recession. The PMI survey reinforced the belief that inflation will come down sharply in the short-term, increasing the Bank of England's scope to make further aggressive interest rate cuts after its 50 basis points emergency cut last month. The output prices index, which reflects the prices charged by manufacturers for their goods, retreated to a nine-month low in October as the downturn in demand restricted their ability to raise prices. The prices manufacturers had to pay for their raw materials fell to a 39-month low as a result of a sharp fall in oil and commodity prices.
Economists are expecting the Bank's Monetary Policy Committee to reduce rates by at least 50 basis points at its November meeting on Thursday, and possibly by as much as 100 points to 3.5pc. Responding to the PMI survey, Paul Dales UK economist at Capital Economics, said: "Overall, there's nothing here to prevent the MPC from cutting interest rates aggressively on Thursday. We've gone for a 75 basis point cut, but it could easily larger."
U.S. rejects GM's call for help in a merger
The Treasury Department has turned down a request by General Motors for up to $10 billion to help finance the automaker's possible merger with Chrysler, according to people close to the discussions. Instead of providing new assistance, the Treasury Department told GM on Friday, the Bush administration will now shift its focus to speeding up the $25 billion loan program for fuel-efficient vehicles approved by Congress in September and administered by the Energy Department. Treasury officials were said to be reluctant to broaden the $700 billion financial rescue program to include industrial companies or to play a part in a GM-Chrysler merger that could cost tens of thousands of jobs.
But it remained unclear whether the officials were also seeking to avoid making any decision that would conflict with the goals of a new presidential administration. The Democratic candidate, Senator Barack Obama, has said in recent days that he supports increasing aid to the troubled auto companies, while Senator John McCain has not said whether he would support aid beyond the $25 billion. While GM and Chrysler continue to talk, no deal is expected until the government clarifies its role, if any. Potential investors in the deal have been hesitant to back the merger without federal assistance.
GM's chairman, Rick Wagoner, had lobbied Treasury Secretary Henry Paulson Jr. to provide emergency aid to the auto companies under the bailout program to stabilize the financial markets. The Bush administration is still considering a range of options to aid the Detroit automakers, which are losing billions of dollars and rapidly depleting their cash reserves, said auto industry and administration officials, who did not want to be identified because of the sensitive nature of the discussions.
The first step is to get the Energy Department to expedite the release of the $25 billion in low-interest loans for GM, Chrysler and the Ford Motor Company. Beyond that, the administration is also bringing the Commerce Department into discussions about channeling additional aid to the automakers. With auto sales deteriorating to their lowest level in 15 years, Detroit's traditional Big Three are struggling to stay solvent and avoid bankruptcy. The deepening troubles led GM into merger talks in September with Chrysler's majority owner, the private equity firm Cerberus Capital Management, and the request to the Treasury Department for assistance.
Auto industry executives and analysts said over the weekend that the loan program is essential to retooling plants and developing vehicles that meet more stringent government fuel-economy mandates. Getting the loans will allow GM, Ford and Chrysler to redirect money already budgeted for cleaner cars to other capital needs. "The auto companies are clearly running out of cash, and badly in need of more liquidity," said David Cole, chairman of the Center for Automotive Research in Ann Arbor, Michigan "Releasing the $25 billion in loans is a necessary first step." The Detroit companies employ more than 200,000 workers in the United States and provide health care and pensions to more than one million Americans. The companies are also a lifeline to thousands of dealers and countless suppliers.
Support for aiding the industry is growing among political leaders in states with heavy automotive employment. Last week, the governors of Michigan, Ohio, New York, Kentucky, Delaware and South Dakota wrote a letter to Paulson and the Federal Reserve chairman, Ben Bernanke, urging "immediate action" to assist the industry. "While all sectors of the economy are experiencing difficult times, the automotive industry is particularly challenged," the letter said. "As a result, the financial well-being of other major industries and millions of American citizens are at risk."
Cerberus, which bought Chrysler last year for $7.4 billion, has been unable to reverse a steady decline in the fortunes at the company, the smallest of Detroit's Big Three. While overall auto sales in the United States are down 12.8 percent this year, Chrysler's sales have fallen 25 percent, mainly because of its focus on gas-guzzling sport utility vehicles and pick-up trucks. Cerberus has had discussions with the Japanese automaker Nissan Motor and its French partner, Renault, about bringing Chrysler into their international automotive alliance. But people familiar with the discussions said Cerberus is now focused solely on a potential GM deal.
The depth of the Big Three's problems will become even more evident this week with the release of October sales figures and third-quarter earnings announcements by GM and Ford. Industry sales fell 26.6 percent in September, but October's totals could be even worse. The auto research Web site Edmunds.com forecasts that sales of new vehicles during the month will drop nearly 30 percent from the same period last year.
GM-Chrysler Merger Talks to Intensify After Election
General Motors Corp. merger talks with Chrysler LLC may intensify this week as the companies wait to see whether the U.S. will provide financial aid to help complete the deal, people familiar with the matter said. GM and Chrysler LLC owner Cerberus Capital Management LP still support the combination, and discussions haven't stalled during government negotiations, said the people, who asked not to be identified because the negotiations are private.
GM and Chrysler, pressing for an agreement as a slumping economy and a freeze on auto loans push industry sales toward a 15-year low, don't expect to make significant progress on government aid until after the U.S. election, the people said. Combining the companies would require $10 billion to $12 billion in additional cash to mesh operations, Citigroup Global Markets Inc.'s Itay Michaeli said in a note to investors on Oct. 20.
Financing and a union agreement remain the two biggest hurdles for the merger, people familiar with the talks said. The United Auto Workers union has hired former GM adviser and Morgan Stanley auto analyst Stephen Girsky to assist the union in the talks with GM, Girsky confirmed in an e-mail. Government loan guarantees might help stabilize the companies, Barack Obama, the Democratic presidential nominee, said in an interview last week on NBC's "Nightly News With Brian Williams." Obama leads Republican Senator John McCain by almost 7 percentage points in the Real Clear Politics average of national polls.
Obama said he would meet with the chiefs of GM, Chrysler, Ford Motor Co. and the United Auto Workers union to develop a plan for an industry overhaul should he win the election, according to a transcript released by NBC. Cerberus has favored an agreement with Detroit-based GM since the talks started because it would enable the private equity firm to reduce its exposure to manufacturing, people have said. Secondary talks with Nissan Motor Co. about an alliance are on hold pending the GM talks, the Detroit News reported Nov. 1, citing people familiar with the talks.
General Motors rose 4.1 percent to the equivalent of $6.03 in German trading as of 10:24 a.m. in Frankfurt. The stock dropped 14 percent over the last two trading days in New York, extending the decline this year to 77 percent. GM, Cerberus and Auburn Hills, Michigan-based Chrysler have declined to comment on their talks. GM has lost almost $70 billion since 2004, while Chrysler, the third-largest U.S. automaker, indicated its first-half loss exceeded $1.08 billion. Ford's deficits since 2005 total $23.9 billion.
Automakers including GM, the biggest in the U.S., are eligible for $25 billion in low-interest government loans to retool plants, while auto lenders may get funding from the $700 U.S. billion bailout of the banking system. The companies and their supporters want to speed plans to dispense the money and ease rules on its use. GM Chief Executive Officer Rick Wagoner has personally lobbied for aid to help combine GM with Chrysler, people familiar with the discussions have said. GMAC LLC, which is 51 percent owned by Cerberus and 49 percent by GM, has already succeeded in getting government assistance.
The finance unit was one of several companies that were granted access to the Federal Reserve's new program designed to ease access to short-term commercial paper. GMAC said it is also seeking permission to become a bank holding company to gain access to more of the federal funds. Treasury Secretary Henry Paulson wants any funding for GM to come from the low-interest loans that will be distributed by the Energy Department, not the banking-system rescue, people familiar with the matter have said. The Energy Department said last week it is still writing rules for the loans.
Ford would expect "parity" should federal aid flow to a GM-Chrysler tie-up, Executive Vice President Mark Fields told reporters Oct. 30 in Dearborn, Michigan, where the company is based. GM and Chrysler may also need a new agreement with the UAW for union-run medical trusts before the money-losing automakers can complete a merger, people familiar with the matter have said. The need to negotiate such issues gives the union leverage over the outcome, the people said.
UAW President Ron Gettelfinger said Oct. 14 in a Detroit radio interview he wouldn't support a GM-Chrysler merger that eliminated jobs, a result analysts have said is likely because the two companies are losing market shares and may have to pare some of their 11 brands. Accounting firm Grant Thornton predicted last week that 12,000 union jobs at Chrysler may be eliminated by the merger.
Circuit City to Close 155 Stores, Cut U.S. Workforce
Circuit City Stores Inc., the unprofitable electronics retailer, will close 155 U.S. stores and renegotiate leases on some of its remaining 566 U.S. locations to conserve cash. The closures will reduce the company's U.S. workforce by 17 percent, Circuit City said today in a statement.
The global financial crisis is restricting credit, making it more difficult for manufacturers to supply Richmond, Virginia-based Circuit City with the merchandise it needs to get through the holiday season, the company said.
Circuit City has posted six straight quarters of falling sales. The retailer hired FTI Consulting Inc. and replaced its chief executive officer after losing customers to Best Buy Co. and Wal-Mart Stores Inc. Circuit City is closing stores in 55 metro areas and will exit 12 of those markets altogether.
"Since late September, unprecedented events have occurred in the financial and consumer markets causing macroeconomic trends to worsen sharply," CEO James Marcum said in the statement. "The weakened environment has resulted in a slowdown of consumer spending, further impacting our business as well as the business of our vendors."
Germany Plans Stimulus Program to Boost Economy
The German government plans a two-year program of investments and incentives to provide a 50 billion- euro ($64-billion) boost to the slowing economy hit by the freeze in global credit markets. "Measures to safeguard companies' financing and liquidity are provided by funding investments worth slightly more than 20 billion euros," according to a joint paper by the economy and finance ministries obtained by Bloomberg News. They "will encourage investments and orders by companies, private households and municipalities totaling about 50 billion euros."
Chancellor Angela Merkel said yesterday the government will enact "broad" measures to bolster the economy. The government has so far been divided on whether to offer tax cuts or boost spending, and the Cabinet will discuss the package on Nov. 5. "History shows that economic stimulus packages aren't a panacea," said Joerg Kraemer, chief economist at Commerzbank AG. "Taking into account what we know now, the measures will alleviate the looming recession but won't stop it." Germany last month slashed its 2009 growth forecast for the 2.6 trillion-euro economy to 0.2 percent, compared with a 1.7 percent estimate for this year.
The paper, dated Oct. 31, suggests the government is seeking to fund measures with increased borrowing and "accept cyclical revenue shortfalls or higher expenditures to the full extent." The government will fail to meet its target of balancing the federal budget by 2011 because of the "changed economic environment," the document said. Chancellery spokesman Hanns-Christian Catenhusen confirmed that the government is working on a stimulus package but declined to comment on details. Economy Minister Michael Glos, a member of Merkel's Bavarian sister party, the Christian Social Union, favors tax cuts to spur growth. Social Democratic Party Finance Minister Peer Steinbrueck has rejected the need for a "broad" stimulus package.
"A broad-based, economic stimulus program financed through debt would only burn taxpayers' money," Steinbrueck said last week. "After a couple of years, at the latest, middle-income people would have to pay for it through higher taxes." Merkel plans to meet top representatives of German industry and labor unions immediately after the cabinet has decided about the measures, aiming to gain support for the package.
Among the participants will be Dieter Hundt, president of the BDA employers' federation, BDI industry federation chief Juergen Thumann and the head of Germany's DIHK chamber of industry and trade Ludwig Georg Braun as well as German DGB labor union federation head Michael Sommer, Steinbrueck and Glos, ZDF television reported. Possible stimulus measures include a two-year tax break on purchases of cars with lower-than-normal carbon-dioxide emissions, greater tax relief on household repairs and funds for improving the energy efficiency of buildings, according to the document.
Reuters and Dow Jones Newswires reported on the stimulus plan document yesterday, without saying where they got the information. The Cabinet already has agreed to a cut in unemployment- insurance contributions, the provision of subsidized loans to stimulate private-sector investment, and a higher tax-free allowance for parents, Steinbrueck said last week. Increased housing subsidies for low earners and tax deductions from health- insurance contributions were also agreed on, he said.
Portugal Invests $5.1 Billion in Banks to Boost Capital Ratios, Denies Any Problems
Portugal's government said it will invest as much as 4 billion euros ($5.1 billion) in the country's banks to lift their capital ratios and keep them from competing at a disadvantage with foreign rivals. The government will offer to acquire preferred, non-voting shares in the companies, Finance Minister Fernando Teixeira dos Santos said today at a press conference in Lisbon.
The goal is to push the Tier I capital ratios of the nation's banks to at least 8 percent from the current average of 7 percent, Teixeira dos Santo said. The government would hold the shares for three to five years. "This doesn't have to do with any weakness in the banking system, but rather it's for the system not to fall behind those in other countries," the minister said.
European governments last month said they're willing to invest in banks to increase the flow of loans and limit the impact of the financial crisis. Germany said it will invest as much as 80 billion euros to increase its banks' capital levels, and France said it could invest up to 40 billion euros. Spain said Oct. 13 it may buy preferred shares in banks, though it said none of them needed it at that moment.
If Portuguese banks operate at lower capital levels than foreign competitors, they could become vulnerable to takeovers, Teixeira dos Santos said. Portugal doesn't oppose foreign takeovers in principle, but "we wouldn't want that to happen just because we weren't paying attention and didn't take the necessary measures," Teixeira dos Santos said. The government won't interfere in the management of the banks in which it buys shares, Teixeira dos Santos said, though it may "have a word to say" on dividends and executive compensation.
Portugal's biggest banks are state-owned Caixa Geral de Depositos SA, Banco Comercial Portugues SA, Banco Espirito Santo SA, Banco BPI SA and the Portuguese unit of Banco Santander SA.Teixeira dos Santos also said the government will seize Banco Portugues de Negocios SA, a closely held bank, after it neared collapse following the disclosure of hidden bad debts.
Caixa Geral, the country's biggest bank, will take control of BPN, as the bank is known, reporting to the government soon on whether it plans to keep it, sell it entirely or sell some assets, the minister said. "It's a very specific case, which doesn't have to do with the general financial situation and the financial difficulties taking place across Europe," Bank of Portugal Governor Vitor Constancio said at the press conference.
After a new board took over at Lisbon-based BPN this year, it informed the Bank of Portugal of "hundreds of millions of euros" in hidden loans, Constancio said. Taking those loans into account, the bank no longer met minimum solvency ratios, he said. BPN tried to sell assets, Constancio said, adding the financial crisis made it difficult to find buyers, leading the government to intervene. The lender had 8.03 billion euros of assets and 213 branches as of the end of 2007.
Teixeira dos Santos said the government acted when BPN was at a point of "imminent failure to make payments." The government, led by Socialist Prime Minister Jose Socrates, will seek parliamentary legislation to allow it carry out the takeover. The Socialists have a majority in parliament.
Huge IMF bailout for emerging economies
The International Monetary Fund (IMF), backed by central banks in the US and Europe, has taken drastic steps over the past week to prop up so-called emerging economies around the world from Asia to Eastern Europe and Latin America. At the beginning of the month, the IMF predicted that the emerging economies would continue to grow at more than 6 percent even as the US, Europe and Japan slid into recession.
Now many of these countries are confronting economic turmoil—hit by shrinking export markets and slumping commodity prices as well as the global credit crunch. Foreign investors have withdrawn money to seek safer havens and to deal with cash shortages at home, causing currencies and stock markets to collapse dramatically in vulnerable emerging markets. The Institute of International Finance in Washington estimates that more than $20 billion has flooded out of emerging market stock exchanges in the third quarter. The benchmark MSCI emerging markets index hit a four-year low on Tuesday, falling by 45 percent since September 15, before bouncing back later this week following the announcement of IMF plans.
Writing yesterday in Der Standard, IMF managing director Dominique Strauss-Kahn said that the emerging economies "aren't just facing falling exports and tumbling confidence... They're the latest victims of a financial crisis that started in the United States and spread to Europe and is now moving beyond Europe's borders." The drying up of global credit had dealt "a heavy blow" to these countries, he explained, warning of widespread payment defaults, protectionism and banking controls. "That will set not only these countries, but the entire world economy back years," he wrote.
The IMF is in the process of finalising emergency packages for Ukraine ($16.5 billion) and Iceland ($2.4 billion). Hungary joined the list on Tuesday, with the IMF unveiling a $25 billion joint rescue with the World Bank and European institutions. Pakistan, Belarus and Serbia are in talks with the IMF over emergency funding. All of these packages come with onerous conditions, including the slashing of public spending, which will exacerbate the political turmoil in each of these countries. It is not, however, just the weakest economies that are vulnerable. The IMF announced a new program on Wednesday worth up to $100 billion to shore up the finances of countries considered to be structurally sound. Known as the Short Term Liquidity Facility, it would allow countries to draw three-month loans up to a fixed limit with no strings attached.
To qualify for such loans, a country would have to demonstrate what a senior IMF official termed "a good track record" and guarantee that it would continue "strong policies". In other words, only those countries that already meet the IMF's stringent economic criteria will be given access to the new facility. In a parallel move, the US Federal Reserve announced on Wednesday that it would provided currency swaps of up to $30 billion to four countries—Brazil, Mexico, South Korea and Singapore—an indication of those countries that will qualify for an IMF loan without strings. Previously the Fed has only extended currency swaps to central banks in Europe and other developed economies.
All four countries have been hard hit by the global financial crisis, which has effectively cut off their access to the international capital markets. In South Korea, share values and the won have been plunging amid growing concerns about the stability of the banking sector. Commenting on Brazil, the Wall Street Journal wrote on Thursday: "In recent days, Brazil's financial capital of São Paulo has been awash in speculation that the plunging currency and lack of dollar financing could spur a wave of corporate defaults that might even bring down key parts of the financial system... Even healthy companies are finding it difficult to obtain dollar-denominated financing they need to do business."
The IMF and Fed announcements produced a resurgence in currencies and shares in emerging markets. The South Korean won, which had fallen by over 30 percent against the US dollar this year, rose by 10 percent on Thursday. The Hungarian forint, the South African rand and the Brazilian real have all risen by more than 5 percent since Tuesday. The MSCI emerging markets share index has soared by over 24 percent since its low on Tuesday. In the present highly volatile markets, these gains could rapidly evaporate. Moreover, the division of countries into what the Wall Street Journal termed "an A-list of nations that qualify for loans without strings, and a B-list for everyone else" could be deeply destabilising.
One reason for the flight of capital from the emerging economies was the announcement of huge rescue packages in the US and Europe, making those markets more attractive. Now the financial umbrella has been extended to a select few countries on the "A-list", which places a question mark against those countries not included. As Michael Hugman, a strategist at Standard Bank, told the Financial Times yesterday: "There's always a danger, particularly in the current market environment, that any intervention... will have negative effects on those excluded from the new facility." As the newspaper noted: "Exclusion may signal unsustainable policies, weakness or a lack of international support."
Those countries on the "B-list" forced to seek IMF emergency funding will be compelled to impose tough austerity measures. The conditions applying to the deals with Iceland, Ukraine and Hungary have not been made public, but the impact is already evident. Iceland was forced to lift interest rates by 6 percent this week to a crippling 18 percent—just two weeks after dropping the figure by 3.5 percent to stimulate the economy. Brian Coulton, managing director at Fitch Ratings, told the Financial Times: "Putting up interest rates means they are going to go through the mother of all recessions, but the key is stability." By many estimates, the economy is expected to contract by up to 10 percent, with inflation reaching more than 20 percent and unemployment at 8 percent.
The Ukrainian bailout has intensified the country's already bitter political divisions. After repeated delays, the parliament passed the final piece of legislation changing banking regulations yesterday—243-0 with the opposition abstaining. The hrvynia hit a record low of 7.2 to the US dollar on Wednesday after the government, at the IMF's insistence, ended the currency's trading band. The stock market is down more than 70 percent this year and the country is expected to plunge into recession next year. Steel production, which accounts for 6 percent of gross domestic product (GDP) and 40 percent of exports, is already down by 30 percent.
Hungary will be compelled to slash government spending on top of cutbacks and tax increases that have already been made. Bonus payments to retirees and public sector employees could be among the first targets. According to the Financial Times, a budget surplus and a cut in consumption of 3.7 percent is under discussion in official circles. The verdict of the public is summed up in the widely circulating phrase—"the black soup is yet to come". The economy is expected to grow by 2 percent this year and to shrink by up to 1 percent next year.
The list of vulnerable economies extends well beyond those immediately in discussions with the IMF for emergency funding—that is, Pakistan, Belarus and Serbia. According to BusinessWeek, emerging markets owe some $4.7 trillion in foreign-denominated debt, up 38 percent over the past two years. Eastern Europe in particular has been awash with cheap credit. High levels of foreign-denominated debt has left many of these emerging economies with high trade deficits and badly exposed to the global credit crunch.
Low-interest loans denominated in euro, yen and the Swiss franc were made available in Eastern Europe not only to banks and businesses but for home mortgages. As the value of the local currencies has plummeted, financial institutions, companies and individuals have been left with steeply rising repayments. In Romania, Hungary and Bulgaria, more than half of all debt is foreign denominated. All three could move into recession, joining the tiny Baltic states. The financial crisis in Eastern Europe will in turn impact on major European banks. Rating agencies recently lowered their outlooks to "negative" for the three biggest foreign lenders—Italy's UniCredit and Austria's Erste Bank and Raiffeisen International.
Neil Shearing, analyst at Capital Economics, told Associated Press this week that Romania, Estonia, Latvia and Bulgaria were all possible candidates for IMF emergency funding. He also pointed to Turkey, widely regarded as a success story, saying that it needed nearly $190 billion in foreign financing in 2008. "A recent visit to Istanbul convinced us that Turkey is much closer to calling on the Fund for financial assistance than many in the market believe," he said.
Financial crises could quickly exhaust the IMF's resources, which stand at about $200 billion plus access to an additional $50 billion. The IMF is already committed to about $50 billion in emergency bailouts and $100 billion for its new Short Term Liquidity Facility. As former IMF chief economist Simon Johnson, told the Financial Times on Tuesday: "Maybe if the IMF had $2 trillion it could be a serious global player. But $200 billion can go very quickly. There is a lot of countries in the same position as Ukraine, and you only need to add one or two of the really big countries to use it up."
Whatever the immediate outcome of the financial storms, the deepening recession in the US, Europe and Japan will have a devastating impact on many of the emerging economies as markets for their exports shrink. The contraction of the US economy in the third quarter announced on Thursday will reverberate throughout Asia, Europe and Latin America in the form of an economic slowdown, factory closures and mass layoffs.
Bitter fruits of IMF bailout
Pakistan will have to cut its defence budget by 30 per cent in the next four years if it agrees to the IMF conditions for a bailout package now being discussed in Dubai between the two sides, a document containing the IMF conditions seen by this correspondent reveals.
Under extremely tough conditions, Pakistan would get $9.6 billion from the IMF during the next three years at a mark-up rate of 16.7 per cent per annum, reveals the document. The IMF funding will not be rescheduled, says the document. Pakistan would also furnish to the IMF 48 hours before signing the funding agreement details of all loans it got under the bilateral and multilateral arrangements.
The document says that if Pakistan accepted the IMF funding, it would have to reduce the defence budget by 30 per cent between 2009 and 2013 gradually and would reduce the number of posts entailing pension in the government and semi-government departments from 350,000 to 120,000. “The IMF will propose taxation structure under package of reforms in the Federal Board of Revenue and Rs50 billion increase in the current target of revenue under the head of general sales tax,” the document says.
“Imposition of the agriculture tax will be made mandatory at the rate of seven per cent on wheat production and 3.5 per cent on other crops,” it maintains. The proposals say that the Federal Board of Revenue (FBR) would submit quarterly report to the Islamabad office of the IMF for the monitoring and analysis of revenue collection as direct and indirect taxes. The IMF would propose changes wherever it wanted, it adds. The document says the IMF representative would be part of the FBR administrative structure and offices of the fund would be set up in all the provincial headquarters to monitor the general sales tax collection at the provincial level.
The proposals also say that six IMF directors and two World Bank directors would monitor preparation of the federal budget in the finance ministry. They would give budget proposals and the Pakistan government would be obliged to comply with all these proposals. “The Pakistan government will have to provide details of loans it got from all other lenders, including China, 48 hours before signing the funding agreement with the IMF and 25 per cent of the government assets pledged as securities for such loans will be the property of the IMF,” the document says.
The IMF intervention in the affairs of the central bank (State Bank of Pakistan), provision of the details of foreign exchange reserves and remittances as well as flow of foreign exchange through other commercial banks are among other strict conditions to be entailed by the IMF funding. No IMF or Pakistan government official was available to comment on these conditions despite several attempts by this correspondent.
China's Purchasing Managers' Index Drops To Lows Not Previously Seen
China's Purchasing Managers' Index slid to a record low in October, confirming that the economy of the so-called world's factory is now decelerating. Two international surveys measuring the PMI independently corroborated the evidence of a cooling Chinese industrial economy.
According to a survey complied by securities firm CLSA, China's PMI fell to 45.2 in October, its third consecutive drop, from 47.7 in September, as new orders and exports, as well as pricing power, were squeezed by the global financial crisis. "The very sharp fall in the October PMI confirms that China is more integrated into the global economy than ever. Chinese manufacturers are seeing their order books cut, both at home and abroad, as the world economy falls into recession," said Eric Fishwick, CLSA's head of economic research, in a report released Monday. "Costs are falling but so are output prices. The coming 12 months will be difficult ones for manufacturers, China included."
The PMI is a composite index based on new orders, inventory levels, production, supplier deliveries and the employment environment, designed to measure overall conditions in the manufacturing economy, with any reading below 50.0 indicating a contraction compared to the previous month.
CLSA's survey showed that new orders received by Chinese manufacturing firms fell at the steepest rate in the series' history, to 43.8 in October, from 45.8 in September and 49.4 in August, reflecting sluggish demand conditions and an uncertain economic outlook. Staffing levels in the Chinese manufacturing sector also fell at a series record pace in October, indicating that manufacturers have begun to lay off workers in response to stuttering demand and deteriorating economic conditions.
China has yet to release its own offical PMI data. In a second study conducted by Morgan Stanley, China's PMI plunged to 44.6 in October, from 51.2 in September, also a record low since Morgan Stanley's index was launched in January 2005. "In our view, the October reading reconfirmed the message conveyed from the quarter 3 data package that China's economic growth has turned into deceleration as an ebbing tide lowers all boats amid an upcoming global recession," the brokerage said.
Morgan Stanley predicted that softening external demand and the moderation of domestic investment as a consequence of the global financial crisis would further weigh on production and make manufacturers turn cautious, which will likely be reflected in further constraints on industrial value added and declines in the Producer Price Index in coming months.
China's manufacturing juggernaut feels pain of global slowdown
China's manufacturing juggernaut came to a shuddering halt last month, with output falling at the fastest rate since figures began to be recorded. The purchasing managers' index produced by the CSLA brokerage from a survey of 400 manufacturers gave a reading of 45.2 for October, its lowest since it was created in 2004, and a full 2.5 points down on September. The overall output index stood at 43.4, down from 46.7. The CLSA report mirrors the government's own figures, released on Saturday. A reading of 50 is neutral.
It confirms the delayed but strong reaction in China to the credit crisis. Its financial system has held up, largely insulated by government controls on the currency and the banking system, but it is being badly hit by the collapse in consumer confidence in its key export markets. The prime minister, Wen Jiabao, warned that the outlook was grim in an article in a Communist Party theoretical magazine at the weekend. He said the challenge was to ensure continued fast economic growth in the face of a worldwide downturn, domestic inflation and fluctuating oil prices.
"To judge from international experience, it is very difficult to maintain high growth and low inflation over the long term," he wrote. "These unfavourable factors have already and will continue to affect our country. There are also many pronounced problems in domestic economic activity." Economists are warning that three million migrant workers may be laid off as factories continue to close in the east coast's manufacturing heartlands. Government leaders worry about the effect on social stability, the Party's prime concern.
In one example, striking taxi drivers in Chongqing, the fastest growing major city in China - and the world - have been smashing the windows of colleagues who "scabbed", local police reported. The striking drivers say fares have not been allowed to rise as fast as fuel prices. One significant result of Mr Wen's concern is that the central bank has loosened banking policy and tightened currency policy, with the yuan stopping its rise against the dollar. The artificially devalued yuan-dollar exchange rate has been held by some analysts to partial blame for the global financial imbalances that led to the credit crisis.
On the other hand, the yuan is not falling against the rising dollar either, meaning it is gaining value fast against the euro and the pound for the first time in recent years. Elsewhere in Asia, stock markets today continued their recent partial recovery from record falls over the past month. Hong Kong's Hang Seng Index rose 5.1pc in early trading - ironically led by mainland bank stocks, following Beijing's move to relax lending limits..
Brazil, Russia, India and China See No Relief Even as Rally Lures Stock Bulls
Forget last week's record 20 percent gain in emerging-market stocks. Hard times are ahead for equities in Brazil, Russia, India and China, some of the world's biggest money managers say. Even with developing-nation shares trading at their cheapest levels in a decade, financial crises in Hungary and Pakistan that required international rescue packages and concern that economies from Turkey to Argentina are also teetering prompted investors to pull out of emerging-market funds at a record pace.
RBC Capital Markets cut its estimates on Oct. 23 for 2009 economic growth in Brazil to 2.5 percent from 4 percent and Russia to 4 percent from 6 percent. That may undermine analysts' forecasts for a 14.5 percent increase in earnings at a time when the global credit crunch seized up lending from Sao Paulo to Seoul and a slump in 24 of 25 developing-nation currencies last month inflated the costs of repaying dollar-denominated debt.
"I'm not brave enough to jump on to the bandwagon," said Franz Wenzel, deputy director for investment strategy at Axa Investment Managers, which oversees $655 billion in Paris. "We have seen the first dominos to fall with Hungary and Turkey, and we might see other shoes to drop." As bank losses and writedowns tied to the collapse of U.S. subprime mortgages grew to more than $680 billion and the American economy began to shrink, investors pulled a record $40 billion from emerging-market stock funds this year, including $7.1 billion last month, according to EPFR Global, a Cambridge, Massachusetts-based fund research firm.
Forced sales by hedge funds and other money managers that piled into emerging-market stocks exacerbated the decline, which wiped out all the gains generated by developing countries this decade, said Andrew Milligan, head of global strategy at Standard Life Investments in Edinburgh, which oversees $260 billion. "Their economies have been shown to be far more linked than people were hoping," said Mark Konyn, Hong Kong-based chief executive officer at RCM Asia Pacific Ltd., which oversees $15 billion. "The massive boom in international capital overseas has come to a crashing end."
No doubt emerging-market stocks look attractive. Equity valuations in China and India fell by more than 70 percent over the past year as plunging commodity prices and recession concerns erased $9 trillion from developing-nation shares. PetroChina Co., which became the world's first $1 trillion company in November 2007, lost 79 percent of its value through last week. Depressed prices sparked a 20 percent rise in the MSCI Emerging Markets Index last week, part of a global rebound that pushed up the Standard & Poor's 500 Index by 10 percent and Europe's Dow Jones Stoxx 600 Index by 12 percent. The developing-nation index is still down 56 percent from its peak in October 2007.
The MSCI Emerging Markets Index climbed 2.1 percent to 582.74 at 10:10 a.m. London time today. India's Bombay Stock Exchange Sensitive Index added 5.6 percent as the central bank lowered its benchmark interest rate for the second time in two weeks. South Korea's Kospi Index advanced 1.4 percent on the government's 14 trillion won ($10.8 billion) plan to boost to the sagging economy. China's CSI 300 Index lost 0.6 percent. One year ago, the MSCI Emerging Markets Index stood at an all-time high of 1,338.49 after a five-year rally produced a more than fivefold increase and added $12 trillion to the value of developing-nation markets.
As emerging economies grew a record 8 percent in 2007, investors pushed stock valuations above industrialized nations for the first time in more than seven years on speculation their equities would be insulated from the fallout of the worst U.S. housing slump since the Great Depression. It also lifted six companies from emerging markets into the ranks of the world's 10 largest by value. Since then, developing-nation shares tumbled as much as 66 percent. Investors sold everything but the safest assets as credit markets froze and banks hoarded cash after Bear Stearns Cos. and Lehman Brothers Holdings Inc. collapsed.
Chinese stocks in the MSCI fell to 6.55 times profit last week, the lowest since August 1998 and an 80 percent drop from a year ago. Investors in Brazilian and Indian stocks tracked by MSCI were willing to pay an average of $6.69 and $9.29 per dollar of profit respectively, the least for both since at least 1995. At the beginning of the year, shares of companies in the MSCI India Index commanded more than $35 per dollar of profit. Peter Schiff, who oversees $1 billion as president of Darien, Connecticut-based Euro Pacific Capital, says the collapse in valuations makes this an even better buying opportunity than in 1998 -- the last time emerging-market stocks were this cheap.
Less-developed economies have a record $785 billion in current-account surpluses this year, compared with deficits of $109 billion in 1998, data from Washington-based International Monetary Fund show. Foreign debt fell to 24 percent of the gross domestic product, compared with 40 percent a decade ago. China's economy, which has increased by at least 7.5 percent in each year in the past decade, may grow 9.3 percent next year, according to IMF data. In the U.S., where concern that the economy is in a recession helped Barack Obama widen his lead over John McCain in national polls before the presidential election tomorrow, growth may slip to just 0.1 percent.
"You've got fire-sale prices," Schiff said. "Once you take America out of the equation, you're going to see the biggest economic boom that we've ever seen." That optimism helped emerging markets break out of a so- called bear market, as the MSCI index surged 26 percent in four days last week. David Cornell, a London-based money manager at New Star Asset Management, which oversees about $30 billion, isn't convinced the gains herald a bull market in developing countries. Even with emerging-market economies forecast to rise at the fastest rates in the world, the IMF's prediction for 6.1 percent growth in 2009 would be the slowest in six years.
ICICI Bank Ltd., India's second-largest lender, last week reported quarterly profit that missed analysts' estimates as deposits fell and it set aside more money for bad loans and investment losses. The Mumbai-based bank is 72 percent below its January share-price peak, even with last week's 29 percent jump. "The needle has really hardly budged at all" after last week, he said. "We wouldn't say that we've turned the corner." The Federal Reserve agreed last week to provide $30 billion each to the central banks of Brazil, Mexico and South Korea to help alleviate the credit freeze in emerging nations.
Hungary secured a 20 billion euro ($25.5 billion) rescue package from the IMF, the European Union and the World Bank last week as its currency plunged 14 percent in October. Turkey is in talks with the fund, while Pakistan expects to get money to cover its balance of payments deficit for the next two years, Ashfaque Hasan Khan, an adviser at the finance ministry, said Oct. 31. The same day, S&P lowered its rating on Argentina's foreign-currency debt for the second time since August on concern the worsening financial crisis will lead to a default. "The recession is going to be fierce and it will have a dire outlook for earnings," said Axa Investment's Wenzel. "That isn't yet in the prices."
Lehman Good-for-Retirement Notes Worth Pennies for UBS Clients
UBS AG, Switzerland's largest bank, faces dozens of claims in the U.S. from clients who bought "100 percent principal protected notes" issued by Lehman Brothers Holdings Inc. that are now almost worthless. Six attorneys hired to represent clients in the cases say UBS brokers touted the so-called structured notes as low-risk investments and failed to emphasize they were unsecured obligations of Lehman, which filed for bankruptcy in September.
State regulators are fielding so many calls about Lehman's notes they're considering a task force to investigate the sales, said Rex Staples, general counsel for the North American Securities Administrators Association Inc., a group of 67 state and provincial regulators based in Washington. "The sales pitches were that it's good for retirement accounts, and good for the safe, fixed-income part of people's portfolios as an alternative to owning stocks, because it's less risky," said Seth Lipner, a lawyer in Garden City, New York, hired by two holders of Lehman notes sold by UBS, including a 65- year-old accountant who says he lost $1.4 million in retirement savings. "Of course, it turned out to be more risky."
Any awards for investors would add to the financial industry's burgeoning costs for compensating individuals who bought supposedly safe investments that crumbled in the credit crunch. Banks and securities firms, including Zurich-based UBS, Citigroup Inc. and Merrill Lynch & Co., already have had to swallow more than $3.6 billion in fines and market losses on auction-rate securities they had to buy back from clients under orders from the U.S. Securities and Exchange Commission and regulators in New York, Massachusetts and other states.
UBS had to take a charge of $900 million related to the auction-rate probe. It is also being investigated by the SEC for the sale of derivatives and investment contracts to state and local governments, and the Internal Revenue Service is looking into whether it improperly helped U.S. clients evade taxes. Kristopher Kagel, a UBS spokesman in New York, said the bank "properly sold" Lehman's structured notes to its clients. "The offering materials clearly identified Lehman as the issuer and discussed all the relevant risks and features of the product," Kagel said. A state task force on structured notes would be similar to the one convened earlier this year that investigated the auction- rate market. Regulators have been concerned about structured notes for some time and "now the complaints are beginning to come in at a fairly rapid clip," Staples said. He declined to say whether UBS was a target of complaints.
Structured notes, sometimes marketed as "structured equities" or "hybrid financial instruments," are constructed by banks and Wall Street firms from a combination of bonds, stocks, commodities, currencies and derivatives. About a third of the $114 billion sold last year in the U.S. promised full or partial principal protection. The banks, which rely on market borrowings to finance their loans, trades and investments, sold more structured notes to retail clients as the credit crisis made plain-vanilla bonds more expensive to issue in institutional debt markets. Sales of the notes quadrupled in the U.S. during the past four years, according to data compiled by London-based research firm mtn-i.
About $8 billion of Lehman structured notes were outstanding as of September, including $2.8 billion sold this year, mtn-i reported. The New York-based firm was selling the notes as late as August, while it was racing to find capital weeks before being swept away by what Chief Executive Officer Richard Fuld, 62, called a "financial tsunami." UBS, the fifth-biggest brokerage firm in the U.S., sold about $1 billion of Lehman's structured notes in America, according to Kagel. The largest brokerages -- Merrill Lynch, Citigroup's Smith Barney and Morgan Stanley -- weren't big distributors of Lehman's notes because they mostly sell their own products, said a person with knowledge of the matter.
Lehman's Sept. 15 bankruptcy leaves holders of the notes waiting in line with other senior unsecured creditors for what's left of their money. Notes with full principal protection are trading at 10 cents to 14 cents on the dollar, according to New York-based SecondMarket, which provides a marketplace for securities that are illiquid, or barely trade. The Lehman bankruptcy also put a damper on the structured- notes market, with new issuance in the U.S. slowing to about $98 million a day in the 45 days following Lehman's bankruptcy, compared with about $263 million a day in the year through Sept. 15, according to mtn-i.
The business took another blow in early October when the Federal Deposit Insurance Corp. said it plans to exclude "derivative-linked products" and "debt paired with any other security" from the bank-debt guarantees offered as part of the government's plan to stabilize financial markets. The growing number of irate investors in the U.S. adds to those from Hong Kong, Singapore and Taiwan who have demanded refunds from banks that sold structured notes linked to Lehman. DBS Group Holdings Ltd., Southeast Asia's largest bank by assets, said on Oct. 22 that about 4,700 investors in Singapore and Hong Kong may lose their entire investment in Lehman notes. The Singapore-based bank estimates it may have to pay as much as S$80 million ($54 million) to compensate noteholders.
About 200 protesters marched through Hong Kong's financial district on Oct. 31, stopping at banks that sold Lehman notes, the Associated Press reported. They held signs that read: "Major bank fraud" and "My money gone, I don't want to live." In the U.S., investors are starting to come "out of the woodwork" after learning in quarterly statements that their Lehman investments are almost wiped out, said Jeffrey Kaplan, a Miami lawyer who specializes in securities-arbitration claims. "Our phone is ringing off the hook," Kaplan said. "The vast majority of calls we've taken are investors with accounts at UBS."
Scott Silver, an attorney in Coral Springs, Florida, said he was hired by more than 40 clients after he issued an Oct. 8 press release announcing his willingness to investigate claims on behalf of buyers of Lehman structured notes. Some investors had read stories about the Hong Kong claims, he said. "People are livid," Silver said. "They feel that the investment was misrepresented to them. They didn't appreciate that it was tied to the credit risk of Lehman Brothers." Jacob Zamansky, a securities-arbitration lawyer in New York, said he has been retained by at least five clients who collectively purchased "several million dollars" of structured notes issued by Lehman.
"There were a lot of notes sold through UBS," Zamansky said. "Clients are telling me that these were pitched as relatively safe instruments. The principal was protected and the only variable would be in the rate of return that was received. It appears that there were misrepresentations." James Sallah, a securities-arbitration lawyer in Boca Raton, Florida, said he's been contacted by "dozens of clients" and retained by a local 74-year-old doctor whose $5 million account at UBS dropped by 50 percent, including $400,000 of losses on Lehman structured notes. "You've got people who wanted preservation of capital and now have just gotten crushed," Sallah said.
World without Frogs
The northern leopard frogs that inhabit the boreal U.S. have never recovered from some catastrophic population declines in the 1970s. Some blame it on the acidifying lakes and streams caused by coal-burning, others point to the ongoing loss of wetlands to development, and now new evidence shows that the herbicide atrazine—widely sprayed on crop fields throughout the region—is killing the frogs by helping parasitic worms that feast on them.
"Atrazine provides a double whammy to frogs: It increases both amphibian exposure and susceptibility," says biologist Jason Rohr of the University of South Florida in Tampa, who tested the impact by re-creating field conditions in 300-gallon (1,135-liter) tanks in his lab. "Atrazine is one of the more mobile and persistent pesticides being widely applied. In fact, residues have been found in remote, nonagricultural areas, such as the poles." That may explain why amphibians are on the decline worldwide. As many as one third of the nearly 6,000 known amphibian species—frogs, toads, salamanders, even wormlike caecilians—are threatened with extinction, according to the International Union for Conservation of Nature (IUCN). And no one knows why.
In the case of the northern leopards, the culprit appears to be the common herbicide acting as a double-edged sword: It suppresses the frogs' immune systems while boosting the population of snails that play host to parasitic worm larvae, the latter of which infect the weakened leopard frogs. Such herbicides are present in 57 percent of U.S. streams, according to the U.S. Geological Survey, and it is that water pollution—not inbreeding—that is the prime suspect in the high rate of deformity in U.S. amphibian populations, according to new research from Purdue University.
But national parks and other areas protected from pollution and development are providing no refuge. The frogs and salamanders of Yellowstone National Park have been declining since the 1980s, according to a Stanford University study, as global warming dries out seasonal ponds, leaving dried salamander corpses in their wake. Since the 1970s, nearly 75 percent of the frogs and other amphibians of La Selva Biological Station in Braulio Carrillo National Park in the Caribbean lowlands of Costa Rica have died, perhaps due to global warming.
Throughout the tropics, amphibians are also falling prey to a devastating disease, believed to be exacerbated by climate change: chytrid fungus. This pathogen is marching though Central America at present, leaving silent streams—those without the chorus of dozens of frog species—behind. Researchers at the University of Georgia in Athens have surveyed such streams before, during and after such extinctions, and documented the impacts in those waters that have lost all of their amphibians, including muddier waters and a less productive food web.
"There are a whole lot of things that aren't being eaten, mostly insects," says biologist Joseph Mendelson of Zoo Atlanta. "And there are a whole lot of other creatures that don't have prey." But the really bad news is that amphibians may be just the first sign of other species in trouble. Biologists at the University of California, San Diego, have shown that amphibians are the first to respond to environmental changes, thanks to their sensitivity to both air and water. What goes for amphibians may soon be true of other classes of animal, including mammals.
Whereas the exact causes of the amphibian decline remain a mystery, it is clear that man-made problems like atrazine pollution and climate change are contributing factors, both of which can be reversed. "The easiest thing to do," Rohr notes, "would be to identify an alternative herbicide that controls the desired pests but is less detrimental to amphibians."