Marie Costa, basket seller, lives at 605 Elm Street, Cincinnati,
Sixth Street Market, 9 p.m. Had been there since 10 a.m. Sister and friend help her
Ilargi: Bit late and lite today, sorry, I was simply running out of time. Spring happens. Today’s intro comes from Stranded Wind, who returns to something he's touched on before: the mayhem caiused by lower levels of ammonia and protein in global food production. This is a crucial issue. It may not seem to be a finance issue, but boy, will it ever turn out to be. Nothing like scarciry to drive prices up for all the millions of newly unemployed in the world.
Wheat, Fertilizer, and Land
Farming has changed dramatically in the last century. The horse as a source of power, the cow as a source of fertilizer, and triennial mix of corn, alfalfa or soy, and letting the land lay fallow is gone. Today on the fertile lands of Iowa, Illinois, and Nebraska the biennial dance of corn and soy is giving way to economic pressure from ethanol and advancing technology; unthinkable even five years ago, today "corn on corn" is the norm.
Things are changing in equally dramatic ways in the drylands of the Dakotas, but the trend runs opposite to that seen in the wetter, richer lands to the east. Skyrocketing ammonia prices and limited moisture are driving lands out of annual wheat production and into a biennial rotation of fallow and wheat production. This sounds like something only an agronomist could love, but the reality of the matter is that lives are on the line eighteen months from now based on the decisions farmers are making today.
(If you like this you might also like Global Human Protein Deficit.)
Historically a ton of ammonia cost about eighty bushels of wheat; $2.25 wheat, $200 ammonia, and this ratio held for forty years. Two years ago that long standing relationship broke down. Today wheat is $4.50 and ammonia is $1,000 – over two hundred bushels of wheat are required to purchase a ton of ammonia.
The first effect of this has been a reduction in fertilization on wheat planted. Instead of 14% protein we'll be seeing crops with protein closer to the 8% range. Instead of the seventy bushels per acre achieved with full fertilization we'll see yields sliding off towards the twenty five bushels per acre unfertilized wheat yielded. Fertilization isn't a go/no go decision, it's a continuum, but as the farmers seek balance it is clear that this will be a case of less being more – less money out for ammonia means more money in their pockets.
Another effect that we'll see is the practice of simply idling land for a year. Wheat needs water as well as fertilizer and the places where it is raised are much drier than corn country. The land may be left "chemfallow", where weeds are killed with Roundup herbicide three times during the season, or it may be left summer fallow, where the weeds are periodically wiped out by mechanical cultivation. Both of these practices allow the soil to rest both in terms of water and nutrients. The Roundup method has the chemical cost and attendant concerns while the cultivation method is much more fuel intensive.
Why would land be left out of production? Cash rent on an acre used to be 120% of the price of ammonia but now it's 50% of that $1,000. This makes the choice very simple; half of the land is left standing idle in any given growing season, accumulating water along with the improvements associated with leaving the organic matter from the weeds on the field. The financial effect is the same as fertilization only without the attendant expense and risk.
Bryan Lutter of Producer's Hybrids puts it succinctly:
"Farmers can't afford a thousand dollars a ton, so they've cut back on ammonia. Wheat protein percentages will drop from 14% to 8%. People are going to starve."
Let's take a look at what this means to the global food supply. Here are the 2005 production numbers in millions of tons. There are six and a half billion of us and 626 million tons produced; this staple crop provides a little less than two hundred pounds of grain per capita.
The U.S. has three hundred million people and consequently a net export of about half of our crop occurs, which means we're providing 25% to 30% of the global wheat need. Australia has a massive crop and a tiny population of ten million, Canada is in a similar situation, and historically their exports together roughly equal ours. The E.U. has a good share of global exports but I believe that is local trade and Russia manages a good bit of export, too.
The overall condition of Pakistan is worrisome but wheat production is a bright spot. Their imports are a tiny slice of their overall consumption and their cultivation practices are more traditional as opposed to intensive. A change in ammonia based fertilizer availability should have less of an impact there than it will for the other large consumers. India's production and consumption match as well, but they've been shedding ammonia plants at a scary rate and probably face the same protein deficit U.S. crops will have. China has a variable harvest and will take anywhere from nothing to ten percent of the global export stream or about ten million tons.
A quick look at the USDA's Economic Research Service report shows where the hammer will fall when wheat production drops.
One sees discussion of people "being priced out of the food market" in some energy and agriculture related venues but this graph really brings home what will happen when U.S. and Australian exports crater. That big, purple developing countries portion of the graph are the ones least able to tolerate changes in market conditions and they'll be the first to lose out when supplies are tight and prices are high.
The contributing factors do not just effect the United States. Australia has the same ammonia concerns as the U.S. and they're dealing with a very persistent drought.
So, this does not look to be a good situation. Two producers that make up fifty percent of exports are cutting back due to the impact of the natural gas market on ammonia production and one of them is in dire straights due to global warming. This is going to lead to food riots and governments falling among the developing nations.
This nasty graph, which just doesn't scale down well, was developed after this diary was originally written in the fall of 2008. The key thing to look at here is on the right - see the yield lines going up? See the per capita end of season stocks going down? The two curves match in shape but that counter-intuitive separation? That's the ethanol effect ... )
I worried over The Famine of 2009 so much that I got together with my co-conspirators from the Stranded Wind Initiative and we created a National Renewable Ammonia Architecture. And in my spare time I sleep.)
Less Cities More Moving People: The Fixx
Another home falls by the wayside
A few old cushions stuffed with pride
A hand is shaking from the rubble
This is spirit still alive
A servant bares his occupation
Breaks his back just growing old
Never mind his views were taken
Just saw by the rules of old
Less cities, more moving people
Rushing out with pride
Less cities, more moving people
These hands that once were tied
A church bell rang for the occasion
The average man learns what's in store
Now he sees where life was taken
Fighting heat, but growing cold
Less cities, more moving people
Rushing out with pride
Less cities, more moving people
Hands that once were tied
Is this what we call education?
Just watch the wheel of time revolve
But why is this not what I'm thinking?
It's just one mind and the unknown
Less cities, more moving people
Rushing out with pride
Less cities, more moving people
Who just forgot their lives
Less cities, more moving people
Rushing out with pride
Less cities, more moving people
Who just forgot their lives
The gap of twenty
For those longing for the halcyon days of the 1990s globalisation boom, this week has provided a blast of nostalgia. The pugnacious Lawrence Summers – then Bill Clinton’s Treasury secretary, now Barack Obama’s top economic adviser – has been telling the rest of the world how to run its economy. Europeans have been reacting with stiff-backed resentment. The UK is trying precariously to keep a foot in both the Anglosphere and European Union camps. The emerging market countries are worrying that their views are being ignored. The run-up to the Group of 20 heads of government meeting in London early next month is proceeding apace, prefigured by the meeting of finance ministers that ends today. Tour veterans of the international economics circuit digging out their Asia crisis souvenir T-shirts will find the only thing missing is a fight about the value of the dollar, though that might come.
This time, though, the economic crisis is much bigger and the credibility of the grouping that has appointed itself to combat the turmoil is itself in danger. "They have fuelled the rhetoric of co-ordination but weakened the reality," says one banker. "The markets are now expecting a lot from the G20 and there is a real risk they could destabilise the situation further if they cannot agree." This week’s drama has involved a blunt rebuff from Europe, an American attempt to soothe ruffled feathers wrapped around a giant surprise reform package, and a host country desperate for the party to go well but apparently baffled by not being able to get the main guest on the phone. The tensions have one thing in common: although governments are talking global co-operation, they are being driven by their domestic constituencies. Those pressures are pushing them in unusual directions. When the US starts using the International Monetary Fund to encourage all governments that can afford it to get out there and spend, the old orthodoxies have gone to the same place as Lehman Brothers.
As Mr Summers appeared in Monday’s Financial Times declaring, "There’s no place that should be reducing its contribution to global demand right now" and "It is really the universal demand agenda", European countries had no doubt his words were addressed to them. George W. Bush may have gone but parts of Old Europe are acutely sensitive to being lectured about the need for fiscal stimulus by the very country that many of them blame for having started the crisis. Peer Steinbrück, the German finance minister, reacted the next day with what came across – at least from a distance – as lofty disdain, implying that such a call was not worthy of discussion. "We are not debating any additional measures," he told reporters. With the crotchety air of a dowager duchess sending a sub-standard amuse-bouche back to the kitchens, Jean-Claude Juncker, Luxembourg prime minister and chair of the "eurogroup" of finance ministers from the single currency zone, added sniffily: "The 16 finance ministers agreed that recent American appeals insisting Europeans make an added budgetary effort were not to our liking."
Instead, the Germans said, the G20 summit should concentrate on reining in the financial institutions that got the world into this mess in the first place. In that category they prioritised their long-standing enemies: hedge funds and offshore financial centres. One finance official characterises this attitude as akin to that of a pugilist in a bar brawl. "You wait until a fight breaks out and then take a swing at the guy you have always wanted to hit," the official says. "Whether or not he had anything to do with starting the fight is not the point." Bashing unregulated financial capitalism in general and hedge funds in particular is sufficiently popular in continental Europe that this call even overcame the habitual froideur between Angela Merkel, Mr Steinbrück’s boss, and Nicolas Sarkozy, the French president. Later in the week, the two of them joined forces to argue that more rules rather than an open cheque book would be the way out of the financial crisis. Asked about the US push for stimulus, Ms Merkel pointedly responded: "This is the reason why we decided to speak with one voice today."
Both Ms Merkel and Mr Sarkozy are facing fractious electorates concerned about the stability of public finances and the euro. In Ms Merkel’s case, she has until September, when an election is due, to convince her political camp she has not drifted too far to the left. Yet to many Europeans, the US is also trying to deflect problems from its own domestic woes – notably the risk that American banks are drifting towards zombie status at a time when the appetite on Capitol Hill for more money for Wall Street bail-outs is close to nil. "The Europeans have developed this nice line: ‘The Americans are only asking us for money because they haven’t got the guts to ask Congress for it’," says one hedge fund manager. At the centre of this particular storm is the UK. A certain amount of schadenfreude can be detected outside the host country at its difficulties in achieving unity. It was Gordon Brown, prime minister, along with Mr Sarkozy, who insisted on portraying the last G20 summit in Washington in November as something akin to a new Bretton Woods, the 1944 conference that designed the postwar financial order.
At the time, Mr Brown was enjoying an unexpected bounce in the opinion polls from his brief status as saviour of the world after his bank rescue initiative – or at least being ahead of the global curve in his moves to recapitalise Britain’s banks. That popularity has long since dissipated and the domestic pressures on the prime minister to deliver a successful summit became evident when he blew into Washington last week. Chief among Mr Brown’s tormentors was the semi-hysterical British press, sufficiently obsessed by his relationship with Mr Obama to regard as a "White House snub" the president’s failure to hold a joint press conference in the snow-covered Rose Garden in sub-zero temperatures. Still, it was in vague terms that the prime minister talked about turning the G20 on April 2 into a global New Deal, a familiar tactic to those who have watched him over the years attach grandiose Rooseveltian labels to minor regulatory or bureaucratic reshuffles. But this week, Mr Brown was forced to choose whether to break ranks with fellow EU leaders when they declared they had done enough for the moment on fiscal stimulus.
Notably, he appeared to hold to the European consensus, despite tugs in the other direction from UK business leaders balking at the endless talk of remaking the global economic order. Martin Broughton, president of the CBI, Britain’s main business lobby group, and chairman of British Airways, described campaigns against bankers’ bonuses and tax havens as "red herring" issues and urged instead a focus on boosting demand. On top of that, it was accidentally revealed that Sir Gus O’Donnell, Mr Brown’s top civil servant, had told a conference of fellow bureaucrats that, thanks to the tortuously slow process of staffing up the Obama administration, no one at the US Treasury was picking up the phone. "There is nobody there," he said. "You cannot believe how difficult it is."
One of the people there is Tim Geithner, Treasury secretary, who is facing his own domestic popularity problems. Mr Geithner appeared in the guise of the good cop on Wednesday, promising that it was possible to walk (increase fiscal stimulus) and chew gum (reform financial regulation) at the same time, and claiming to have encountered no pushback at all from fellow finance ministers. "It is not what I hear from my conversations with my counterparts," he said. "I think you are going to find very broad support." Along with the emollience came a specific, rather startling, proposal. The IMF, where Mr Geithner himself used to be a senior official, should get $500bn (£359bn, €388bn) more in cash, he said – the money being put up by an array of rich countries but with some of the big emerging markets also being invited to join the club. Even the IMF’s management, which has been doing the rounds of reserves-rich countries such as China, was asking only for an extra $250bn.
Along with the present, though, came a less universally welcomed rider: the IMF should monitor the big economies to ensure that they kept the fiscal taps open. Europe gave a swift thumbs-down to this idea as well, and some of the emerging markets pointed out that they were not really in a position to spend like the US. The scene has thus been set for the grandmother of all gap-papering exercises that will test even the legendary capabilities of British communiqué drafters to the full. But there should be little doubt, observers say, that the divisions seen on display have already dissipated the G20’s ability to spread confidence. The FT’s discovery that the UK had divided G20 members into "priority" and "tier two" for its public relations effort will also have undermined the spirit of being all in this together. Along the way, despite the superficial similarities to the late 1990s, some extraordinary reversals have happened. Washington is lecturing the world on the dangers of fiscal prudence. The IMF is begging Asia for money. And Mr Brown is prioritising European unity. These are strange times indeed.
G20 leaders are good for nothing
At a time when our public finances are in a state of catastrophe, it is right to look for savings. And an obvious place to start would seem to be the cancellation of the G20 meeting of the world's supposedly richest economies, scheduled in London in three weeks' time. After all, it is now apparent that this circus – estimates of the cost of which seem to range from £20 million to £50 million – is going to achieve nothing. This looked to be the case from the moment it was planned, given that the governments that got us into this mess are the last people you would ask to get you out of it: it is a bit like an alcoholic deciding to switch from whisky as the boisson du choix to Bacardi Breezers. But once Barack Obama, late on Thursday, let it be known that he was not expecting any particular "commitment" to be issued at the end of the meeting, it became absolutely clear that the enterprise was doomed.
The one thing that unites all the governments of the developed nations is that each thinks all or most of the others are incompetent. Gordon Brown started this trend by claiming that our own crisis was imported from America (and he wonders why he had such a lukewarm reception when he went there last week). The French blame the failure of Anglo-Saxon capitalism, lumping us in with the Americans as villains of the piece. And the Germans seem to blame everybody else for having a delinquent approach to finance and a dependent-relative mentality towards the one true economic power left on earth – the Germans. And thus it goes on. So the hope of any agreement – even if President Obama had wanted one – was pretty remote. More to the point, the President has made it quite clear that he is going to plough his own furrow, and the rest of the world can like it or lump it. He is not new in taking this attitude to an economic problem that Mr Brown says can only be solved by concerted, global action.
The Germans, who have a history of starting international conflicts, instituted this frame of mind last September when European finance ministers met to discuss the banking crisis. Sensing not just that no other country had a clue what it was doing, but also that Germany was about to be touched for a vast sum of money to help with a bail-out, they headed back to Berlin and sensibly did their own thing. There does not need to be a meeting to sort out what has to be done. What is needed is the stimulation of demand. This will be assisted by a shift in resources from the public to the private sector – in other words, huge tax cuts for businesses and individuals.
With interest rates already insanely low, and risking massive inflation in two or three years' time, this is the only option. It is up to other countries whose exports are collapsing – like China or the eurozone – to work out that their currencies might be grotesquely over-valued, and to do something about it. But equally, it is up to countries in the West to admit that they have been living way beyond their means for years, and to tighten their belts and adjust expectations accordingly. None of this requires a meeting: it requires individual governments to shrink the size of their operations, and to make the philosophical decision to enable enterprise to lead a recovery.
Instead, our state remains bloated, and even the Opposition seems entrenched in the view that only state action – such as nationalising banks, printing money and organising the debauch of the currency – can rescue us from this. I have always suspected that Mr Brown wanted this G20 meeting not merely to create a further illusion of activity, but to try to enlist other nations in his defence of the indefensible. Instead, as Mr Obama seems now to have indicated, it really is every man for himself – and probably just as well.
Deal on IMF likely to disguise divisions
The Group of 20 advanced and emerging countries is poised to agree new funding for the International Monetary Fund on Saturday at a meeting of finance ministers and central bank governors that will paper over deep divisions on the need for more fiscal stimulus to battle the global recession. All week, officials from the US administration have urged European countries to make bigger discretionary tax cuts and public spending increases, only to be met with stiff resistance. The evident divisions on Friday led Alistair Darling, the UK chancellor and host of the meeting, to urge people to be “realistic” about what could be agreed at the G20 summit next month.
But the long-range bickering continued. Lawrence Summers, Barack Obama’s main economic adviser, called on a “large majority” of big economies to increase fiscal stimulus, arguing that an IMF benchmark of 2 per cent of gross domestic product in 2009 and 2010 was an appropriate guide. “There are some for whom it would be imprudent,” he said, noting that the crisis-hit countries in eastern Europe – which have large foreign currency debts – could not increase spending. “But for a very large majority of the world economy, [a fiscal expansion] is appropriate.” IMF officials say privately that the 2 per cent level was never meant to be a guide to spending for all countries. Later on Friday Robert Gibbs, White House spokesman, played down suggestions that the US would try to hold each G20 member to a numerical target of spending 2 per cent of GDP on fiscal stimulus.
Mr Summers’ words were countered by Angela Merkel, the German chancellor. Speaking of Berlin’s “considerable contribution, which must now take effect”, she said: “That is why we don’t think we need to draw up new stimulus packages, and I’m supported on that by German industry.” Several European countries stress their welfare systems give greater automatic stabilisers to limit a recession than does the US. The IMF gives partial but not full support to this argument. The debate also drew in representatives from international financial institutions. Robert Zoellick, the World Bank president, warned that “2009 is shaping up to be a very dangerous year” and said action was needed on many fronts.
“The danger is doing too little too late,” he said, adding that any fiscal stimulus without action to rid banks of their bad assets would be merely a “sugar high”, providing temporary relief. Many G20 officials on Friday sought to play down expectations of big policy announcements on Saturday. Mr Darling, who welcomed G20 finance ministers for two days of talks , said the meeting and next month’s London summit were “part of a process” for tackling the recession and building for the future. Mr Zoellick said that the finance ministers’ meeting should be viewed as a preparatory get-together that would probably have a positive outcome in the form of a deal on IMF funding, a condemnation of protectionism and small practical solutions in other areas.
The G20 will also welcome Thursday’s decision from the Financial Stability Forum, the club of central bankers and regulators devoted to promoting stable financial markets, to expand to include the full G20 membership and Spain. Lord Mandelson, the British business secretary, said: “We are not going to build Rome in a day but we are organising how well we lay the foundations.” While Gordon Brown remains hopeful the meeting will produce positive results, one G20 official said that the focus in Downing Street was now on finding things the UK prime minister can announce in April. The US suggested this week that the IMF should be given up to $500bn more in lending capacity by expanding the so-called New Arrangements to Borrow, an emergency financing facility provided by richer members.
But experts have warned that increasing the IMF’s firepower was likely to prove slower than its current plan of encouraging ad hoc, bilateral contributions from individual governments. Charles Dallara, managing director of the IIF, said: “Unless the countries involved can quickly get legislative approval, I am concerned that going this route is likely to take too long. It could be faster for members to receive selective ad hoc increases in their quotas [voting weights] for putting up bilateral contributions.”
AIG Paying Millions in Bonuses Despite Receiving Federal Bailout
Despite receiving $170 billion in federal aid and recording a staggering loss for the last quarter, insurance giant American International Group is doling out tens of million of dollars in bonuses this week to senior employees. While AIG agreed to pay the bonuses months before the government's rescue of the company began, the matter still is a source of anger for government officials. In a phone call on Wednesday, Treasury Secretary Timothy F. Geithner told AIG Chairman and chief executive Edward M. Liddy that the payments were unacceptable and needed to be renegotiated, according to an administration source.
The company has since agreed to change the terms of some of these payments. But in a letter to Geithner, Liddy wrote that the bonuses could not be cancelled altogether because the firm would risk a lawsuit for breaching employment contracts. Liddy also expressed concerns about whether changing the bonuses would lead to an exodus of talented employees who are needed to turn the company around.
"We cannot attract and retain the best and brightest talent to lead and staff the AIG businesses -- which are now being operated principally on behalf of the American taxpayers -- if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. treasury," Liddy wrote. AIG has agreed to restructure the $9.6 million in bonuses it would have paid to the firm's top 50 officers. AIG's top seven executives, including Liddy, have already agreed to forgo this payment altogether.
The next 43 highest ranking officers would still receive half of their bonuses now. A quarter would be dispersed on July 15 and the rest on Sept. 15, but these last two payments would be contingent on whether the company makes progress on its restructuring plan. Other bonus payments to thousands of employees, which total in the hundreds of millions of dollars, are still on track to be paid out.
G-20 Finance Chiefs Work to Tackle Toxic Bank Assets, Seek to Defuse Rift
Group of 20 finance ministers zeroed in on cleansing banks of toxic assets as they sought to set aside a transatlantic dispute on how best to fight the global recession. As the officials gathered for talks in southern England, Canada’s Jim Flaherty and Christine Lagarde of France signaled they were seeking fresh ways to tackle the banking crisis, which continues to choke off money from their economies. "You are not going to have a substantial recovery in the real economies until we solve this bank issue," Flaherty told reporters in Horsham. Lagarde, who this week stoked concerns of a rift with the U.S., said in an interview that "it would be major" if the G-20 agreed how to aid banks.
A deepening slump and the banking turmoil are forcing officials to form a more united approach. The run-up to the meeting was marred by discord as European governments rebuffed a U.S. call to spend more money and demanded more focus be paid to tightening market regulation. "We need urgent policy action," Simon Johnson, a former chief economist at the International Monetary Fund and now a senior fellow at the Peterson Institute for International Economics, told Bloomberg Television. "The financial sector problems are far from over. We have a worsening real economy." The G-20 officials dined last night at a luxury countryside retreat and continue discussions today. The gathering will craft the agenda for an April 2 summit of national leaders in London.
They met at the end of a week in which the IMF said the global economy would contract for the first year since World War II. Data in recent days showed U.S. consumer confidence near a 28-year low, Chinese exports plunging by a record and German factory orders sinking 38 percent. IMF Managing Director Dominique Strauss-Kahn warns that failure to step up efforts to rid banks of damaged securities may delay the economic recovery beyond 2010. "If you don’t take on the banking issue, stimulus is just like a sugar high," World Bank President Robert Zoellick said yesterday in London. Indicating that banks remain reluctant to lend 19 months after the crisis began, the London interbank offered rate, or Libor, that they say they charge each other for three-month funds, this week rebounded to the highest since Jan. 8. Financial companies are still hoarding cash after being stung by almost $1.2 trillion of writedowns and losses.
The U.S. has yet to implement its plan to remove tainted assets from banks, while the U.K. has guaranteed 585 billion pounds ($820 billion) of them held by Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc. German Chancellor Angela Merkel’s government is considering a plan to take over non-performing bank assets until they mature, enabling lenders to avoid massive write- offs while dodging a new bailout, according to three people familiar with the proposal. "I’m quite sure we will make progress," U.K. Chancellor of the Exchequer Alistair Darling told fellow officials as the meeting began today. One possible compromise is for the G-20 to agree to monitor what stimulus has been introduced and then judge whether more is needed. Having told LCI Television yesterday morning that G-20 members "don’t exactly have the same priorities," Lagarde later said she was "very optimistic" that a compromise could be found between the U.S.’s urging of greater stimulus and Europe’s request to toughen market rules. "Everyone is working with that spirit," she said in an interview in Horsham.
For their part, U.S. officials said they weren’t obsessed with easing fiscal policy alone and that they were as keen to overhaul governance of markets to prevent future crises. Treasury Secretary Timothy Geithner "will reiterate the dual priorities of forging consensus on the need for sustained action toward recovery and growth, while coordinating and reforming the international regulatory and supervisory system," his office said. Geithner approached the G-20 talks by lobbying his counterparts to follow the U.S. in injecting fiscal stimulus equivalent to at least 2 percent of their economy’s gross domestic product this year. European officials argued they had already spent enough, ran bigger social safety nets and didn’t want to blow out budgets.
The U.S. push for governments to do more was heeded by Japan, where Prime Minister Taro Aso ordered a third spending plan. The U.S. and Japan share the view that "combating economic and financial crisis should be a priority at this point, although regulatory reform is important," Japanese Finance Minister Kaoru Yosano said after meeting Geithner. The G-20 officials will also agree today to bolster the resources of the IMF although they have yet to agree by how much, a European official said on condition he not be named. Strauss-Kahn has lobbied for a doubling of firepower to $500 billion as countries from Pakistan to Hungary seek loans.
G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.
Germany Said to Consider New 'Bad Bank' Plan for Toxic Assets
German Chancellor Angela Merkel’s government is considering a plan to take over toxic bank assets until they mature, enabling lenders to avoid massive write-offs while dodging adding to bailout funds, three people familiar with the proposal said. The recommendation by a government panel co-chaired by Deputy Finance Minister Joerg Asmussen and Deputy Economics Minister Walther Otremba aims to circumvent pricing the assets, according to the people, who spoke anonymously because details have yet to be provided to lawmakers. Lenders would "park" the holdings in a state-controlled "bad bank" until maturity, betting a market recovery will minimize losses, the people said.
The measures draw on the lessons of a $73 billion aid program for the banking system inherited from East Germany in 1990 after re-unification. They’d mark a tack untried in the U.S. and the U.K., where officials are also struggling to relieve banks of junk assets that have frozen lending. "Taking assets off banks’ books was never going to be a smooth ride though the case for doing so is urgent," Wolfgang Gerke, president of the Bavarian Center of Finance, a Munich- based research institute, said in an interview. "Lessons learned after reunification may be a big help." Germany has had several false starts in seeking to exorcise the bad assets that BaFin, the financial-services regulator, estimates at 300 billion euros ($388 billion). Earlier plans have considered swapping government bonds for the assets and establishing a number of separate "bad banks."
In the U.S., President Barack Obama considered creating a so-called bad bank to buy the assets before scrapping the idea in favor of a public-private partnership in a program that may reach $1 trillion with government financing, if it’s implemented. British officials are selling state guarantees to banks to insure risky assets.
Merkel set up a 500 billion-euro bank-rescue fund in October that’s helped jump start lending between banks and financed the purchase of a 25 percent stake in Commerzbank AG. Some 197 billion euros of the fund were distributed by the end of February, according to its Web site.
Time is running out for Merkel, who faces elections on Sept. 27, to spark lending by banks. Companies from carmakers to shipbuilders are being starved of loans, choking cash flow that’s already shrinking as sales plummet amid the deepest global economic slump since the Great Depression. "Liquidity is the alpha and omega of operations now," Joe Kaeser, chief financial officer of Siemens AG, Europe’s biggest engineering company, told reporters in Berlin on March 12. The rescue effort represents the biggest upheaval in German banking since the aftermath of the fall of the Berlin Wall in 1989. Germany took on the assets of state banks inherited from the German Democratic Republic, giving the lenders a right to assign a fixed value for the assets -- based on a specific day in the year -- in their books. The step protected the valuation of the banks’ assets, said Gerke.
The European Central Bank said on Feb. 10 that governments should consider combining a so-called bad bank with guarantees of securities to achieve the most cost-effective way of ridding lenders of toxic assets. Risk should be shared between the state and the banking system, while the program should be allowed to run possibly as long as it takes the assets to mature, the ECB said. Under the government panel’s plan, the banks’ "old owners" -- its "Alteigentumer" in German -- would take on liability directly for potential losses when debt matures, the people said. That would free taxpayers from stumping up for losses as well as prevent banks from having to set aside reserves to anticipate losses in the form of writedowns, a member of the committee said.
The proposal faces challenges before emerging as law. Finance Minister Peer Steinbrueck is so far lukewarm over the plan as it necessitates the sale of bonds to back the creation of a unit, inside or outside Soffin, they said. Jeanette Schwamberger, a spokeswoman for Steinbrueck, declined to comment on the progress of talks to set up a bad bank or banks. The matter remains in an early, "exploratory stage," she said in an interview. The plan will probably be discussed by lawmakers of parliament’s Soffin control committee and by members of the Finance Committee in sittings scheduled in the final two weeks of this month, said the people familiar with the talks.
US treasury soon to offer details on toxic-asset plan
The Treasury will offer more details in the coming week about how proposed public-private partnerships to take bad assets off banks' books will work, a senior department official said on Saturday. The proposal for such partnerships was first made by Treasury Secretary Timothy Geithner in February but the lack of detail about them at the time disappointed financial markets led to a sharp drop in stock prices. Many analysts say the problem of toxic assets -- particularly mortgages gone bad as a result of the U.S. housing bust -- is at the heart of banks' reluctance to lend and must be dealt with before credit markets can operate normally again.
The Treasury official told reporters it wants to put out enough information in the coming week so that potential participants can better judge the proposal and it wants to indicate the timeframe within which it is expected to become operational. Geithner, who was in southern England to meet finance ministers from Group of 20 nations, had indicated that something was likely soon but gave no details. The Treasury official who spoke to reporters later said that enough information will be provided so that people can see that "market mechanisms" can be brought to bear on the issue.
The public-private partnerships could be a device for attracting investors to buy troubled assets at some discount in hope of future profit, offering financing support from the government for those that are willing to buy the assets. Treasury officials have said the public-private investment fund, or funds, would be a vehicle for putting government capital alongside private capital in a program the Federal Reserve and Federal Deposit Insurance Corp. would participate in to provide as much as $1 trillion in financing for buying in assets weighing down bank balance sheets.
At the time the proposal first was announced on February 10, the scant detail and lack of a clear time frame for removing the toxic assets disappointed investors, who sent bank shares sharply lower, helping to trigger new government rescues for Citigroup and American International Group. Since then, officials have provided bits and pieces of the plan, which is expected to involve multiple investment funds. Geithner said in testimony last week that the initiative would leverage both public and private capital to buy assets using government financing.
He said the plan could get started using the remaining funds in the Treasury's $700 billion financial rescue fund, but this and other banking stability efforts may require the Treasury to request additional funds from Congress.
A "placeholder" provision in President Barack Obama's fiscal 2010 budget plan signals a possible request of around $750 billion in new funds.
Neel Kashkari, the Treasury's interim administrator for the $700 billion rescue fund, also told lawmakers this week that private investors are ready to invest in distressed mortgage assets if they can get financing. With no private financing available, they could only pay prices that are too low for banks to be willing to sell. The bad asset plan is expected to be structured similar to the Federal Reserve's Term Asset-Backed Securities Loan Facility (TALF), which is scheduled to launch this week to help unblock consumer lending markets. In it, investors are able to borrow funds from the Fed against highly rated asset-backed securities, which then can be used to invest in new securities, helping to jumpstart consumer credit.
Obama Tries to Reassure China U.S. Treasury Debt Is Safe, Deficits Are Under Control
The U.S. sought to ease Chinese Premier Wen Jiabao’s concern about the security of his country’s investments in U.S. government debt, reiterating pledges to cut the budget deficit in half in four years. "There’s no safer investment in the world than in the United States," White House Press Secretary Robert Gibbs said yesterday at a briefing in Washington. Gibbs was responding to comments from Wen that China, the U.S. government’s largest creditor, is "worried" about its holdings of Treasuries and wants assurances that the investment is safe. "I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets," Wen said at a press briefing in Beijing.
President Barack Obama is relying on China to sustain buying of Treasuries amid record amounts of U.S. debt sales to fund a $787 billion stimulus package and a deficit this year forecast to reach $1.5 trillion. Investors abroad own almost half of all U.S. debt outstanding, and China last year overtook Japan as the biggest foreign buyer. Wen’s comments contributed to a decline in Treasuries yesterday. Yields on benchmark 10-year notes rose as high as 2.96 percent, from 2.85 percent a day earlier, and closed at 2.89 percent. White House National Economic Council Director Lawrence Summers, asked yesterday about Wen’s remarks, said overseas "confidence" in Treasuries would be hurt without the administration’s steps to end the economy’s decline.
China held $696 billion in U.S. Treasury debt as of Dec. 31, more than Japan’s holdings of $578 billion. Foreign holdings of U.S. Treasury debt at the end of last year totaled $3.1 trillion. The Treasury also offered a response that sought to reassure investors. "The U.S. Treasury market remains the deepest and most liquid market in the world," Treasury spokeswoman Heather Wong said in an e-mailed statement. "President Obama is committed to taking the steps necessary to restore growth and put this country on the path of fiscal sustainability, including cutting the long-term deficit in half over the next four years." During the first five months of fiscal 2009, which began Oct. 1, the U.S. budget deficit swelled to a record $764.5 billion for the period, compared with a $265 billion shortfall during the same period a year earlier. The shortfall this year already has exceeded the record $459 billion gap for all of 2008.
The administration is "tackling many long-ignored problems, ensuring that the U.S. will be in a stronger position than ever," Wong said. "We are facing whatever challenges come up and will continue to do so." Treasuries have handed investors a loss of 2.7 percent in yuan terms this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index. Chinese holdings of the securities surged 46 percent last year, according to Treasury Department data. "Of course we are concerned about the safety of our assets," Wen said after an annual meeting of the legislature. "To be honest, I am a little bit worried." China should seek to "fend off risks" as it diversifies its $1.95 trillion in foreign-exchange reserves, Wen said. Yu Yongding, a former adviser to the central bank, said in an interview on Feb. 10 that the nation should seek guarantees that its Treasury holdings won’t be eroded by "reckless policies."
Treasuries have benefited from demand as a haven in the past two years as financial companies reported $1.2 trillion in credit losses. China boosted holdings of government debt as it lost more than $5 billion from investing $10.5 billion of its reserves in New York-based Blackstone Group LP, Morgan Stanley and TPG Inc. since mid-2007. "China won’t sell the U.S. debt now as that will only drive down Treasury prices, hurting not only the U.S. but also the value of its own investments," said Shen Jianguang, a Hong Kong-based economist at China International Capital Corp., an investment bank partly owned by Morgan Stanley. U.S. Secretary of State Hillary Clinton urged China, while visiting officials in Beijing on Feb. 22, to continue buying U.S. debt, which she called a "safe investment."
Despite China's jitters, Treasury bond market stays calm
The Treasury bond market hiccuped early today after Chinese Premier Wen Jiabao expressed nervousness about the "safety" of U.S. debt. But a modest rise in yields on long-term Treasury bonds quickly brought buyers back into the market, which has been remarkably resilient in recent weeks despite Uncle Sam's huge ongoing borrowing wave. The 10-year T-note yield, which jumped as high as 2.97% this morning, ended the day at about 2.89%, flat with Thursday's closing yield. The 30-year T-bond edged up to 3.67% from 3.63% on Thursday. Yields on shorter-term Treasuries ended mostly lower for the day. At a press briefing in Beijing today, Wen noted that China had "lent huge amounts of money to the United States," making China America's single biggest creditor.
"To be honest, we are a little bit worried," Wen said. "We hope the United States honors its word and ensures the safety of Chinese assets." What was his point? The Chinese may be legitimately worried about record U.S. borrowing this year to fund the Obama administration’s rescues of the economy and the financial system. Government stimulus spending is expected to be a key discussion point at this weekend’s meeting of finance ministers of the Group of 20 nations in London. If investors begin to balk at Treasury debt, forcing yields up dramatically, that would devalue China's holdings of older fixed-rate Treasuries. Wen also may have been warning the U.S. against badgering China on the issue of its currency’s value against the dollar.
China has resisted allowing its currency to appreciate quickly against the greenback, for fear of driving up prices of Chinese exports for U.S. buyers. "I think it’s a lot of political posturing for currency purposes," said John Spinello, a market strategist at brokerage Jefferies & Co. in New York. Despite Wen’s jitters, the Treasury market still is basking in the glow of surprisingly strong investor demand this week as the government sold $18 billion in new 10-year T-notes and $11 billion in 30-year T-bonds Wednesday and Thursday, respectively. A wild card that continues to buoy the market is the possibility of the Federal Reserve stepping in to buy Treasury bonds for its own account.
The Fed has said in recent months that it was considering the move as a way to push long-term interest rates lower, to help the economy. Fed policymakers are expected to provide an update on their thinking when they meet Wednesday. The Bank of England last week said it would begin buying British government bonds -- and the market reaction was dramatic: The yield on 10-year British bonds has plunged to 2.94% from 3.64% on March 4. With that kind of response, bond traders are reluctant to sell Treasuries now, figuring the Fed could work some of the same magic if it decides to jump into the market, said Lou Crandall, chief economist at bond research firm Wrightson ICAP in Jersey City, N.J.
Bank Secrecy Bites the Dust in Europe
Switzerland, Austria and Luxembourg announced a relaxation of their banking secrecy laws on Friday (13 March) following mounting pressures on both sides of the Atlantic to crack down non-cooperating tax zones. The news comes only one day after Liechtenstein and Andorra made similar declarations, as a number of financial centres around the world attempt to pre-empt any decision coming out of the G20 leaders summit on 2 April. As western governments feel the pinch due to expensive stimulus spending projects coupled with reduced tax receipts, the spotlight has been turned on a handful of geographic locations that profit by harbouring capital owned by companies and wealthy individuals from abroad.
The Swiss government said on Friday that it intends to adopt OECD standards on the sharing of banking information between different countries, citing its desire to avoid being placed on the organization's 'black list' of tax havens. "If Switzerland were to wind up on a black list it wouldn't only hurt the banking sector," Finance Minister, Hans-Rudolf Merz, said at a press conference in Bern implying that the economy as a whole would suffer. In the past, Switzerland has said that signing up to OECD standards would compromise the banking secrecy of its clients. Switzerland's largest bank, UBS, last month handed over the names of 300 customers to the US government after it produced strong evidence they were avoiding paying tax.
It is estimated that Switzerland holds around $2 trillion worth of capital from abroad reports the BBC. In a separate announcement on Friday, Luxembourg also said it would cooperate with tax authorities from other countries but will only provide client details once 'concrete proof' of tax evasion is provided. For its part, Austria said will renegotiate current agreements on banking secrecy in the fight against tax fraud and evasion its finance minister, Josef Proell, said on Friday. It too has only agreed to hand over information once supplied with evidence of tax evasion by individuals with accounts in the country.
"There won't be an automatic exchange of information, but we will renegotiate a number of the 80 tax agreements that we have with other countries," Mr Proell said in Vienna. "We have been fighting tax evasion and fraud in the past, and we will continue to do so," he added. France, which has lead calls in recent weeks for a comprehensive review of the ‘uncooperative jurisdictions', was initially guarded in its response to the news. "The devil is in the details," said French Finance Minister, Christine Lagarde, in Paris. "We must go all the way and see if banking secrecy is sufficiently lifted." UK Prime Minister Gordon Brown said the changes were "the beginning of the end of tax havens." "Tax evasion, which costs the global economy billions of pounds each year, will become more difficult in future."
Brussels pushing finance deregulation in third world
While EU and other global leaders have talked tough about re-regulating the financial sector in the wake of the economic crisis, they remain committed to pushing through banking deregulation in the developing world via trade deals. This strategy is undermining poverty reduction in these countries and is reproducing the same type of circumstances that led to the crisis in the first place, warns a new report published on Wednesday (11 March) by the World Development Movement, an UK-based anti-poverty NGO. Both via the WTO negotiations on a General Agreement on Trade in Services (GATS) and potential EU bilateral or regional trade deals with 34 countries in Latin America, Asia and the Mediterranean, the bloc continues to push for the lifting of restrictions on how Western banks operate in developing countries.
The EU In 2002, via "GATS" global trade talks, requested that 94 countries open up their financial industry, 20 of which were least developed countries and 30 were low income countries. A financial services component of GATS would mean that countries would not be able to introduce new rules that are more restrictive than those already operating, making it difficult to pass laws on risky trading such as "short-selling" or to limit the numbers of service providers or the number of transactions. All new financial services would also have to be permitted, giving the green light to the very same complex financial products that have been held responsible for the creation of the toxic asset problem in the north. Also under GATS, full ownership by foreign banks would be allowed, which can make it hard for a host country's financial supervisor to monitor the foreign bank's activities and to ensure it is acting in the interests of the host country.
Even in the EU, the problem of foreign bank ownership is exacerbating the crisis in the east. The tap of credit to much of eastern Europe - where most of the banks are owned by Austrian, Swedish and other EU parent companies - today has been all but turned off, as the owners focus on provision of credit in their home markets. After seven years of talks, however, countries are still haggling over a GATS deal, and the EU has sought bilateral and regional trade deals to get over the impasse. The bilateral strategy, known as "Global Europe," seeks to remove regulations on European financial service companies, along with other liberalising measures in a range of sectors, in case a deal at the WTO level is not reached.
The EU trade deals already signed with Chile and Mexico contain substantial chapters on financial services, while the Caribbean Economic Partnership Agreement with the EU signed in October last year contains many of the financial liberalisation clauses proposed in GATS. Similar pressure on central American nations is being brought to bear to open up their financial sectors. The report reveals that where banking liberalisation has occurred, looking in particular at India and, crucially, Mexico - home to one of the most liberalised financial sectors in the world, with 80 percent foreign ownership, poor people and small businesses see their access to credit, bank accounts and other financial services restricted. At the same time, where such credit does exist, it is in the form of credit cards, car loans or mortgages, boosting spending on consumer items rather than productive sectors of the economy such as farming or manufacturing.
On Monday (9 March), UK Prime Minister Gordon Brown himself spoke out against the "do as we say, not as we do" attitude of Western countries regarding economic policies promoted to the developing world. At an international development conference in London, he announced that he would push the World Bank and other wealthy nations to create a new fund for developing countries to help the poor through the crisis, although he did not attach any figures to the idea. While there, he criticised the imposition of "economic orthodoxy" on the developing world. "Too often in the past our responses to such crises have been inadequate or misdirected - promoting economic orthodoxies that we ourselves have not followed and that have condemned the world's poorest to a deepening cycle of poverty," he said. The World Development Movement (WDM) however, says that there is an acute contradiction between such leaders' words and deeds in pushing for financial deregulation in the third world.
"On the one hand, Gordon Brown has developed a mantra of tough talk on the re-regulation of banks," said Benedict Southworth, the director of WDM. "On the other, together with other European leaders, he is aggressively pushing free trade deals which demand that developing countries follow a deregulated and liberalised banking model." "That model has clearly and spectacularly failed here and has also failed poor people in the developing countries," she added. The study highlights how the presence of European banks in developing countries has resulted in foreign banks cherry-picking the richer customers, resulting in an overall decline in services and credit for others, and notably to rural areas.
In urban areas where foreign banks are concentrated, low-income householders and small businesses struggle to meet the criteria to open an account, let alone to receive a loan. In response, WDM is calling for financial services liberalisation to be reoved from from proposed bilateral and multilateral EU trade deals. An official with the European Commission told EUobserver that they were studying the report very closely, but that the report's authors had "confused liberalisation with deregulation." "Market access for European financial service providers in no way restrains the ability of countries to regulate financial services," the official said. "The question is whether such moves become protectionist."
Stress Test Zombies: Not Too Big To Fail? Tough Tootsies Little Banks!
There are certain professions in which the collective genius of the American people dominates the field: semiconductor design, fast food product differentiation, fire-control systems for air-to-air combat, and con artistry. That these are not, at the moment, sufficient to earn a current account surplus, is a problem being worked on, not least by the service exporters in the latter occupation.
John Dizard, Financial TimesMarch 1, 2009
Last week, we learned from Fed Chairman Ben Bernanke and Treasury Secretary Tim Geithner that Washington lacks the guts to fix the problems eating away at the US financial system, at least so far. So large are the derivative-fueled losses and so majestic the collective incompetence of the Congress, regulators and the Sell Side dealers on Wall Street in enabling these losses, that the judgment of the single party state called Washington is to simply hide the problem under an ever-widening public TARP.
Now, in most parts of the country, a TARP is used to cover unneeded things, usually a pile of stuff nobody wants, far in the back yard. This is essentially the plan articulated by Bernanke and Geithner: Buy the bad assets, invest more capital in the zombie banks, and hope asset prices eventually recover. This is not a plan to do anything but buy time and extend losses. The scary part is that nobody else in the Obama White House seems to know enough about finance to argue the point.
As we told the subscribers to IRA's Advisory Service, the Fed and Treasury have created a rule without reason, a ridiculous standard that only ensures the unsoundness and instability of the US financial system. Apparently, banks that fail the Supervisory Capital Assessment Program stress test will not be broken up as required by law, but instead given more capital at taxpayer expense. This is the solution to the financial crisis embraced by President Barack Obama. There is no market discipline, no bad results for the bond holders who stupidly funded these giant derivatives-driven, risk-creation machines.
Below is our best guess as to the identity of the 19 or so banks that are part of the stress test process. We hear in the community that these 19 domestic financials are the de facto "Too Big Too Fail" banks, which of course means that all other banks are not part of the group. We should probably add American International Group and the Depository Trust and Clearing Corp, which owns a Fed member bank, to the TBTF list.
JPMORGAN CHASE & CO.
BANK OF AMERICA CORPORATION
WELLS FARGO & COMPANY
PNC FINANCIAL SERVICES GROUP
BANK OF NEW YORK MELLON
SUNTRUST BANKS, INC.
STATE STREET CORPORATION
GOLDMAN SACHS GROUP
CAPITAL ONE FINANCIAL CORPORATION
REGIONS FINANCIAL CORPORATION
FIFTH THIRD BANCORP
NORTHERN TRUST CORPORATION
Notice that there are no foreign-owned banks as part of the stress test group. Note too that there are several banks on the list that are rated "F" by the IRA Bank Monitor as of year-end 2008. These negative ratings are driven both by negative ROEs as well as above-average realized credit losses. We see two issues facing Bernanke, Geithner and the Obama Administration when it comes to the cowardly "feed the zombies" approach articulated last week. First, it is not sustainable financially and must eventually be changed because of funding constraints. And two, the policy of subsidizing the bond holders of the largest banks is unworkable politically and must eventually also be changed to conform with domestic political reality. That's right, at some point the Obama Administration may need to choose between our foreign creditors and American voters.
The Bernanke/Geithner approach to not dealing with the financial crisis amounts to a hideous public subsidy of the global transactional class, a transfer of wealth from American taxpayers to the institutional investors who hold the bonds and derivative obligations tied to the zombie banks, AIG and the GSEs. All of these companies will require continuing cash subsidies if they are not resolved in bankruptcy.
Remember that the maximum probably loss ("MPL") shown in The IRA Bank Monitor for the top US banks with assets above $10 billion, also known as Economic Capital, is a cash number representing the amount of incremental capital the banks may require to absorb the losses from a 3-4 standard deviation economic slump, such as the one we have today. If you include the subsidy required for the GSEs and AIG, the US Treasury could face a collective funding requirement of $4 trillion through the cycle. Do Ben Bernanke and Tim Geithner really believe that they can sell such a program to the Congress? To put it in perspective, the $250 billion in the Obama Budget for additional TARP funds will not quite cover Citigroup (NYSE:C).
Bottom line: The policy decision articulated this week by Bernanke and Geithner represents the largest transfer of wealth in American history, yet no legislation and been passed and no meaningful debate has occurred. The biggest danger facing the markets is that Ben and Tim still do not seem to have a clue what to do about the big banks -- other than to write more checks against the public trust. The conflict over this decision to pass the cost to the taxpayer, between the Fed, Treasury and the Congress, on the one hand, and the Wall Street dealer banks is staggering, yet nothing is said in the Big Media.
The Fed and Treasury claim that situations like C and AIG cannot be addressed idiosyncratically, to paraphrase our friend David Kotok, but the reality is more complex. Fact is, the Sell Side dealers have leveraged the real economy via OTC derivatives to such a degree that bailing out toxic waste sites like AIG, several large Euroland banks and the world of structured finance could cost trillions of dollars. That is the true cost of the crisis. The only issue is whether we recognize it directly, via a public resolution, or hide the costs via public subsidies and future inflation.
If we wish to preserve some semblance of market discipline in the US, an alternative strategy must be found. Until somebody, somehow gets to President Obama and effectively refutes the self-serving argument of the Fed and Treasury that we can't resolve C or AIG, the cost of the zombie dance party can only grow. The way you end the need for public subsidy is by resolving these firms via a restructuring and forcing the bond and equity holders of the bank's public parent company to absorb the cost of marking assets to market. If we establish a hard rule regarding solvency and break up rather than recapitalize zombie firms, then we have started to apply a real solution.
Mark to Market Accounting
To answer your many questions about our view on mark-to-market accounting, the damage - or adjustment - is done. We opposed the way the return to FVA was handled because it was too much driven by accounting and not enough other issues around business reporting. We need to be cognizant of not just accounting goals and rules, but also business reporting, investor relations, legal and business issues in order to assess this question.
We like the idea of more disclosure. We just think that swings in short-term prices observed by M2M need be confirmed by time, then you begin to convince us that the observed average price over a period of time equals value and should affect assets or income. We submitted individual comments on same to The Financial Crisis Advisory Group (FCAG) of the IASB and FASB. Members of the financial community who care about M2M should attend the open meetings hosted by FASB and submit comments to the FCAG as well.
When we stated on Bloomberg TV a while back that M2M was an attempt by the accounting industry to deal with the growing opacity and deliberate inefficiency of the OTC world, our friend David Reilly ran downstairs and declared our conversion to the forces of good "on the road to Jerusalem." Fair enough. Our recommendation is that we continue to report M2M price swings, but be more reasonable when it comes to writing down performing assets vs. income and charging-off credit exposures that are paying as contracted. The inclusion of something that resembles an impairment test may be part of the eventual solution
Ruling On Merrill Bonus Confidentiality Due By March 20
A New York State judge on Friday said he'll rule by next week on whether to keep confidential details about individuals who received bonuses at Merrill Lynch & Co. on the eve of its merger with Bank of America Corp. last year. At a hearing Friday, New York Supreme Court Justice Bernard J. Fried in Manhattan said he'll issue a ruling on or before March 20 on a request by the Charlotte, N.C., bank to prevent New York Attorney General Andrew Cuomo from publicly releasing the names of individuals who received bonuses and how much they made. Last month, Cuomo's office subpoenaed Bank of America for a list of who received 2008 bonus awards at Merrill Lynch. The bank has declined to turn over the names without having a confidentiality order in place.
Evan A. Davis, a lawyer for the bank, argued Friday that the list of who received bonuses is proprietary data and releasing it would put it at a competitive disadvantage, particularly if competitors were able to learn how much its top 200 executives were paid. "I think you have the power to fix a condition of privacy if there's a competitive harm to us," Davis said to the judge. Cuomo's office is probing disclosures related to the timing and nature of more than $3.6 billion in bonus payments made shortly before Bank of America's merger with Merrill Lynch closed last year. Davis also argued that releasing the list would cause some employees to leave because of privacy or safety concerns. He noted some highly paid employees have received threats.
Eric Corngold, executive deputy attorney general, argued the court imposing a confidentiality order on Cuomo's office would restrict its ability to conduct investigations and violate state law. "It's the nature of an investigation," Corngold said. "An investigation reveals information people may not want out on the street, but it's not a reason for the court to create a handcuff of the attorney general." The bank also wants the confidentiality order, in part, to apply to testimony given by John A. Thain, Merrill Lynch's former chief executive. A temporary confidentiality order on Thain's testimony remains in place until the judge makes his ruling. Thain was forced out in January in the wake of his handling of the investment bank's fourth-quarter loss. In a recent regulatory filing, Merrill Lynch reported a fourth-quarter loss of $15.84 billion, $500 million higher than prior estimates. On Friday, Thain's lawyer took no position on the bank's motion for a confidentiality order.
EU banks named in dirty money report
Europe's biggest banks are happy to do business with corrupt regimes in Africa and Central Asia, according to a new report by UK-based NGO, Global Witness. As late as November 2007, Barclays in Paris held a private account for Teodorin Obiang, the study says. A scion of the ruling family in Equitorial Guinea, Mr Obiang in the past 10 years spent €4.5 million on sports cars even as 20 percent of children die before their fifth birthday due to poverty in the oil-rich country. Until March 2007, BNP Paribas was involved in billions of euros of syndicated loans to the Angola ruling elite-linked oil firm Sonangol, Global Witness writes. Deutsche Bank has still not made clear to the NGO what happened to the €2 billion or so of Turkmenistan's natural gas income, which it was holding for the country's notoriously cruel dictator, Saparmurat Niyazov, when he died in January 2007.
"The international banking system is complicit in helping to perpetuate poverty, corruption, conflict, human suffering and misery," the Global Witness paper says. Coming ahead of the G20 finance summit in London on 2 April and in a climate of hostility to big bank secrecy caused by the financial crisis, the report calls for regulation of bank dealings with "PEPs" (politically-exposed persons) and a name-and-shame campaign by FATF (the Financial Action Task Force). The Paris-based FATF is a little-known international anti-money laundering body with 34 members, including 15 of the richest EU states and the European Commission.
Of 10 EU states surveyed which are also FATF members, none complied with the body's full set of recommendations on issues such as making money laundering illegal or forcing banks to carry out enhanced due diligence on PEP-type clients.
Global Witness' paper, Undue Diligence, reads like a roll call of the most respectable financial institutions in Europe. HSBC and Banco Santander are named in connection to the Obiang family. Credit Lyonnais allegedly helped Gabonese President Omar Bongo place funds abroad. Societe Generale is said to have done similar work for the ruling family of Congo-Brazzaville. Fortis bank is accused of helping the former ruler of Liberia, Charles Taylor, fund conflict in east Africa by processing payments for government-linked timber firms.
The list of banks implicated in the Angola loans includes Commerzbank, KBC, the Royal Bank of Scotland, ING and Standard Chartered. "If [banks] cannot identify the ultimate beneficial owner of the funds ...and if they cannot identify a natural person (not a legal entity) who does not pose a corruption risk, they must not accept the customer as a client," the NGO said. An article which appeared on 8 March on a Turkmenistan opposition website, the Chronicles of Turkmenistan, broadens the debate. The story points the finger at French construction company Bouygues for allegedly giving current President Gurbanguly Berdymukahemmedov an €80,000 Mitsubishi Evolution X while bidding for contracts for a new airport building and palace complex.
Ilargi: EU car sales were down 18% YoY in February. That’s pretty bad already , but the number is hugely distorted to the upside by the fact that Germany sales increased 22% on a similar government sponsored trade-in deal for used cars. The UK would like that same effect.
UK to offer £2,000 deal to trade in used cars
Lord Mandelson is preparing to put a £2,000 bounty on used cars in an attempt to stimulate the motor industry. Senior government sources said that talks were at an advanced stage and a deal could be announced in the Budget on April 22. Under the proposed stimulus package, drivers would be able to turn in their car, which must be at least nine years old, and get a £2,000 discount on the purchase of any new or one-year-old car bought at a dealership in Britain. The motorists would have to deliver their old vehicles to one of a number of car recycling plants and receive a confirmation certificate.
They would present this to a car dealer and get the government-funded £2,000 discount. Motorists would be able to purchase any brand of car. Whitehall aides said last night that no final decision had been taken but Lord Davies of Abersoch, the Trade Minister, gave the clearest hint yet that the Government was minded to introduce the scheme. In an interview with The Times, he said: "The scrappage scheme has potential. It’s been tried in other countries . . . we’re looking at it very closely." There has been a surge in new car sales in Germany since the introduction of a similar €2,500 scheme.
Roy Kishor, a car industry restructuring expert, at the consultancy Permanence, said: "Scrappage is an absolute no-brainer. It addresses the two most fundamental issues facing the car industry today – the first is that it creates demand, getting inventory moving and helping the car companies get back to manufacturing. The second is that it deals with emissions." The new or nearly-new cars that participants would be eligible to buy all have much lower carbon emissions than older cars. The Government had been examining proposals to use public money to finance car loans by giving car finance companies access to the Bank of England’s special liquidity scheme. However, this has been opposed by Mervyn King, the Bank’s governor.
European Car Sales Drop 18% as Recession Hits Once-Booming East
European car sales plunged 18 percent in February as the global recession stifled demand for Opel, Mercedes-Benz and BMW models, especially in the once- booming eastern part of the continent. Registrations fell to 968,159 vehicles last month from 1.19 million a year earlier, the Brussels-based European Automobile Manufacturers’ Association said in a statement today. It was the sharpest February drop since the organization began recording data in 1990 and follows a 27 percent drop in January, which was the steepest in a contraction that’s extended to 10 months.
The slumping economy and tight credit markets have taken a toll on the auto industry. Volkswagen AG, Europe’s largest automaker, yesterday predicted a first-quarter loss as Chief Executive Officer Martin Winterkorn said 2009 "will be one of the most difficult year’s in the company’s history." Bayerische Motoren Werke AG, the world’s top luxury-car manufacturer, said 2008 net income plunged 89 percent after it took charges for bad loans and leases. Industry deliveries in eastern Europe fell 30 percent to 66,123 vehicles, as Romania dropped 67 percent and Hungary declined 46 percent. Poland, the region’s largest market, bucked the trend, posting an increase of 7.3 percent to 30,194 cars and sport-utility vehicles.
In western Europe, demand fell 17 percent to 902,037 vehicles, as the Spanish market plunged 49 percent and the U.K. dropped 22 percent. Auto sales collapsed in Iceland, where the economy capsized after the island nation’s biggest banks failed to refinance their debt. There were 91 new vehicles registered in the country in February compared with 1,035 a year earlier. The auto industry is pressing European governments and regulators for emergency help as it slashes production to clear inventories of unsold cars. The euro-region economy will contract in 2009 for the first time since the single currency was introduced a decade ago, according to the European Commission.
Sales in Germany, which is offering consumers 2,500 euros ($3,234) on new-car purchases when they scrap an old car, surged 22 percent to 277,740. The government-incentive program has sparked a wave of deal-making, leading to discounts of more than 40 percent, according to Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg- Essen. General Motors Corp.’s Opel, sold as Vauxhall in the U.K., lost market share, as the Ruesselsheim, Germany-based manufacturer petitions European governments for 3.3 billion euros in emergency aid. Opel and Vauxhall sales fell 22 percent, eroding their market share to 7.3 percent from 7.6 percent. Sales at Trollhaettan, Sweden-based Saab, which filed for reorganization after GM halted financing, fell 54 percent.
Volkswagen AG’s Audi unit overtook BMW and Mercedes-Benz to become the region’s largest luxury brand, at least for last month. Audi’s market share rose to 4.5 percent from 3.9 percent, after sales fell 7.1 percent. Munich-based BMW posted a 29 percent sales fall, as the brand’s share slipped to 3.5 percent from 4 percent. Stuttgart, Germany-based Daimler AG’s Mercedes-Benz brand suffered a 34 percent drop, losing nearly a full percentage point of market share to 3.6 percent from 4.5 percent. Volkswagen, the region’s best-selling brand, boosted its market share to 11.6 percent in February from 10.1 percent, as deliveries slipped 6.2 percent. The Wolfsburg, Germany-based manufacturer’s Spanish Seat brand suffered from its home market’s weakness as sales plunged 31 percent. Deliveries for PSA Peugeot Citroen, Europe’s second-largest automaker, tumbled 25 percent, leading to a market-share decline of 1.2 percentage points to 13 percent.
Poles Lose in Currency-Exchange Gamble
Like many of its formerly communist neighbors in Eastern Europe, Poland has turned into a country of capitalist gamblers. In recent years, as their economy boomed, millions of Poles became foreign-currency speculators, buying property, cars and consumer goods with loans denominated in low-interest Swiss francs. As the Polish currency, the zloty, soared in value, most borrowers found it cheaper to pay off their debts in Swiss money, even though few had ever been to Switzerland or knew what a franc looked like.
Since August, however, the zloty has unexpectedly collapsed, losing nearly half its value against the Swiss franc. About two-thirds of all Polish mortgage holders now face skyrocketing payments. If the zloty continues to tumble, analysts fear the problem could lead to a wave of defaults in the region, dealing a major setback to Europe's already weakened banking system. "Just like the subprime mortgages were a wonderful idea in the United States as long as house prices kept rising, so it was with the Swiss-franc loans here," said Witold M. Orlowski, a former adviser to the Polish president and now chief economist for PricewaterhouseCoopers in Warsaw. "It was seen as a win-win game. There were warnings, but basically people ignored them."
Currency gambling has backfired in several other countries in Eastern and Central Europe. In Hungary, Romania and Ukraine, a majority of mortgages and other consumer loans were taken out in Swiss francs, euros, even Japanese yen -- all of which offered substantially lower interest rates than the Eastern European currencies. The borrowing binge rested on the assumption that the Hungarian forint, Romanian leu and Ukrainian hryvnia would keep rising in value, or at least remain stable. But since last summer, those currencies have crashed.
Moody's credit-rating agency warned last month that the region's financial system was vulnerable to defaults on foreign-currency loans and that the problem could devastate the balance sheets of Western European banks operating in the region. German, Austrian and Italian banks dominate finance in Eastern Europe. U.S. banks are less exposed, but a few, including Citibank and General Electric's Money Bank, have a substantial market share. In Poland, people owing money in Swiss francs have seen their monthly payments rise by 50 percent or more since last summer. Few have defaulted. But analysts predict the number of bad debts will jump if the zloty remains weak much longer.
Marzena Rudkiewicz, 54, a Warsaw dentist, took an extra job this month at a government hospital fitting false teeth for pensioners, saying payments on a mortgage she took out to buy an apartment for her son in 2005 have ballooned by more than half. The mortgage is denominated in Swiss francs, but she is paid in zlotys and has to exchange the weak Polish currency to pay off the debt. "I've had to change my life because I'm stuck with this loan," she said. "It's too painful to think about." Rudkiewicz's husband, Jakub, an industrial designer, took out a Swiss-franc loan four years ago so his small firm could buy its own office space. At the time, his monthly payment was 1,600 zlotys. Now it's 2,400, at a time when he can least afford it; business has slowed since the onset of the global financial crisis last fall.
Compared with some of its neighbors, Poland's overall economy is actually in good shape. Growth tailed off late last year, but analysts have not forecast a recession for 2009. Public finances are stable, and many banks are still reporting profits. Government officials said they worry Poland is being unfairly lumped together with the region's economic basket cases, such as Latvia, Ukraine and Hungary. All three countries have required bailouts by the International Monetary Fund. "You try to differentiate yourself and explain what problems exist in your own country and which problems do not," said Dominik Radziwill, a deputy finance minister. "Just because we only recently joined the European Union doesn't mean we have a bigger potential to default."
But the Polish economy is facing trouble on several other fronts. After the country joined the bloc in 2004, it had a chance to move quickly to replace the zloty with the euro. But as the zloty appreciated, lawmakers put off adopting the new currency. Today, Polish officials are kicking themselves. Two countries in the region that did adopt the euro -- Slovakia and Slovenia -- have been sheltered from the financial woes affecting the region. After Poland was admitted to the European Union, more than 1 million Poles moved abroad to seek work, particularly in Britain, Ireland and Sweden. Now that economies in those countries are swooning, many of the expatriates are returning home -- just as the jobless rate in Poland is rising for the first time in years.
Leszek Czarnecki, a billionaire developer and banker who became Poland's wealthiest investor during its go-go years, said nobody knows how things will turn out.
In an interview, Czarnecki called Poland's economy "fundamentally sound" but warned that the government's biggest challenge will be to stabilize the zloty. If it does, he said, the economy could grow by 2.5 percent this year -- a major accomplishment in the face of a global recession. But if the zloty continues to plummet, he said, the economy could contract by as much as 5 to 7 percent. "It might be totally crushed, an unbelievable crisis," he said. Czarnecki is the chief investor in Getin Holding, a banking company that specialized in Swiss franc loans. He said that his banks have not experienced a rise in defaults and that Getin remains highly profitable. But he acknowledged that, in hindsight, the foreign-currency strategy was "a mistake."
Czarnecki blamed the problem largely on credit-rating agencies and foreign banks, which he said treated the loans as low risk and encouraged them for years. Now, he said, those same institutions are telling investors to pull their money out of Eastern Europe. "We believed that well-dressed, perfectly well-spoken bankers -- some people call them 'bangsters' -- from Wall Street and London City really knew what they were talking about," he said. The foreign-currency crunch has shaken other pillars of the Polish economy. Mortgage lending has dried up, depressing the real-estate market. One-third of construction jobs have been lost since last year. Grandiose dreams have been dashed. Two years ago, Czarnecki unveiled plans to build Sky Tower, an 846-foot-tall skyscraper in Wroclaw, Poland's fourth-biggest city. The building would have been the country's tallest, but he has had to shrink it by 20 percent and postpone construction.
The story is similar in downtown Warsaw. Until last fall, the capital was jammed with construction cranes. Today, all but a handful of projects have been canceled or put on hold. One of the few buildings still under construction is a 56-story luxury apartment tower on Gold Street, in the city center. Designed by the renowned U.S. architect Daniel Libeskind, it was intended to cater to Warsaw's newly rich, with many residences priced at more than $1 million. But the developer, Orco Property Group, has been able to sell only about 40 percent of the units. "It's definitely slowed down," said Alicja Kosciesza, the marketing director. As in the United States, angry Poles are blaming the banks for excessive lending. Until banks tightened credit last fall, no-money-down loans valued at 120 percent of collateral were common. Borrowers could sign up for mortgages lasting 75 years.
"Banks started this huge competition for customers, lowering all the conditions and requirements to make loans more accessible," said Aleksandra Natalli-Swiat, an opposition lawmaker. In 2006, the Polish Financial Supervision Authority recommended that banks limit the size of Swiss-franc loans to 80 percent of the maximum it would otherwise lend a customer. The recommendation was not binding, but most banks observed it, said Andrzej Stopczynski, the authority's managing director for banking supervision. If regulators hadn't intervened, he added, today's problems would be far worse. Most banks stopped offering foreign-currency loans last fall after the zloty began to plunge. But about 60 to 70 percent of existing mortgages in Poland are still denominated in Swiss francs, Stopczynski said.
Despite the fall in the zloty, many Poles remain convinced that speculating in Swiss francs can be a good deal. Rafal Lyczek, a 31-year-old economist from Poznan, converted his mortgage from zlotys to Swiss francs last May, in a terrible bit of timing. His payments have almost doubled since then. "I didn't think the zloty could weaken so quickly," he said. Lyczek has started a Web site, dubbed "Buy a Franc" in Polish, designed to help people trade in the foreign-exchange market themselves instead of paying high commissions to banks. But he said he has no regrets about borrowing in Swiss francs in the first place. He thinks the zloty is undervalued and will make a comeback. "If I gave in now, it means I'd be giving my money back to the speculators and that I will have lost," he said.
Australian investment bank Babcock & Brown finally falls prey to crisis
Babcock & Brown, the Australian investment bank saddled with more than A$3.1bn (£1.5bn) of debt, has finally collapsed, becoming the country's biggest casualty of the financial crisis to date. The company, which has a satellite investment fund that owns British port operator PD Ports, entered voluntary administration on Friday after a group of New Zealand-based bondholders voted against a restructuring plan. The move all but ends a saga stretching back to June, when steep falls in the group's share price triggered a review of its debt facility.
Babcock & Brown, an infrastructure investment specialist renowned for its aggression at the bargaining table, had been on life support for months. It secured a provisional deal with its banking syndicate in December to restructure its debt in a programme that would have seen large-scale asset sales over several years.
Bondholders in both Australia and New Zealand, who were to receive 10 cents in every A$100, were required to approve a restructuring of their bond terms. A meeting of Australian bondholders, scheduled for Friday afternoon, was rendered pointless and cancelled after their New Zealand counterparts voted the plan down.
Senior creditors, including Australia's five biggest banks, already control the group's main operating company, unlisted Babcock & Brown International, and are now expected to sell down the $14bn asset portfolio. Royal Bank of Scotland is among overseas creditors who have an exposure totalling $2bn. RBS was earlier this week hired by Babcock & Brown Infrastructure to sell PD Ports, the UK's third-largest ports operator. Babcock & Brown says the operation of the satellite fund will not be affected by its administration, which is to be managed by Deloitte Touche Tohmatsu
Iran says oil market oversupplied
Iran's oil minister Gholam Hossein Nozari said there was "too much oil" on the market on Saturday, the eve of a crucial OPEC output meeting. "Of course, there is too much oil," Nozari told reporters upon his arrival in the Austrian capital, hinting that he could seek to lower output. But Nozari did not specify whether he would call for a new production cut at the scheduled cartel meeting on Sunday. "We'll review the market and then we decide," he added.
The Organisation of Petroleum Exporting Countries (OPEC), which pumps 40 per cent of world crude, agreed late last year on cuts to reduce output by 4.2 million barrels per day. Iran, the cartel's second largest oil producer after kingpin member Saudi Arabia, pumps approximately four million barrels of oil per day. OPEC's 12-member states have seen their oil revenues slashed because crude prices have slumped from record levels since July in line with a sharp global economic downturn. On Friday, Venezuelan Energy Minister Rafael Ramirez had called for OPEC members to comply "100 per cent" with recent output cuts to address oversupply. There is "a very good level of compliance but we are going to work to have 100 per cent of compliance" to boost weak oil prices, Ramirez said in Vienna.