Friday, April 11, 2008

Debt Rattle, April 11 2008: Fire and Iceland

Somewhere Over The Rainbow, California 1935

Ilargi: G7 meetings might as well be held in ultimate fight cages from now on. There is not nearly enough common ground left, priorities are about as out of sync as you can imagine. And so, the cats in a sack fighting starts. May the best win. Or something.

The Federal Reserve plans announced earlier this week, which constitute nothing more or less than a covert attempt at a gale force shift in political power, will undoubtedly make politicians in larger European countries very nervous.

And extremely hesitant to listen to their US counterparts, let alone follow American suggestions or programs to "save" the economy. No-one in Europe wants to give the ECB or national central banks dictatorial powers over their economies, or their politics for that matter.

Now that the US has indicated it is on its way to doing precisely that, I expect the Atlantic Ocean to get much wider.

Central Banks Signal Deepening Concern at Outlook as G-7 Meets
Finance chiefs from the Group of Seven, meeting amid acknowledgments of growing economic pain from the credit crisis, may not agree on how much coordinated action is needed to alleviate it. Finance ministers and central bankers have said they will discuss stronger regulation of financial markets to reduce the chance of a future crisis, a focus some analysts said doesn't address the current market stresses.

"There is a high risk that what they come out with will be met with disappointment by the markets," said Marco Annunziata, chief economist at Unicredit MIB in London, who used to work at the International Monetary Fund. "They may deliver very few concrete steps to address the crisis."

The G-7 officials meet a day after European Central Bank President Jean-Claude Trichet warned financial-market turmoil may have a "broader" impact on his economy. Treasury Secretary Henry Paulson acknowledged the U.S. economy has "turned down sharply," and the Bank of England cited ebbing global growth and credit access in justifying an interest-rate cut.

The officials from the U.S., Japan, Germany, U.K., France, Italy and Canada are scheduled to release a statement and talk to reporters after 6:30 p.m., before dining with executives from about a dozen American, European and Japanese banks. "We're looking to the G-7 central banks to cooperate in dealing with this crisis and adopt a common position," said Thomas Mayer, chief European economist of Deutsche Bank AG in London. "That hope appears likely be disappointed."

Ilargi: I lost count of the times I’ve hammered this home already on this site: European unity is in grave danger.

A side note: as mentioned below, the IMF has stated that US homes are 12% overvalued. That is ridiculously low; it should be 4-5 times more. US homes will plummet at least 50% from their peak. If the 12% numbers were correct, the entire downfall would be about behind us. Is there anyone left who believes that?

ECB hawks defiant as storm gathers
The European Central Bank has again refused to join Anglo-Saxon peers in cutting interest rates, defying ever-louder calls for action as the economic storm clouds gather over Europe. Jean-Claude Trichet, the ECB's president, dug in his Gallic heels yesterday, insisting that Europe remains insulated from the unfolding slump in the US and would stick to its sole duty of combating inflation, now at a record 3.5pc. "We have one needle in our compass. We have to deliver price stability," he said.

The bank has held rates at 4pc since the credit crisis began, despite a jump in three-month Euribor used to price floating mortgages. The US Federal Reserve has cut rates from 5.25pc to 2.25pc, the most dramatic monetary blitz in a century. The transatlantic gap in interest yields has drawn "hot money" funds into Euroland, pushing the euro to a new high of $1.59 against the dollar - up 27pc in two years.

The ECB is now in open conflict with the International Monetary Fund, which has slashed its eurozone growth forecast to 1.4pc this year and 1.2pc in 2009. The fund said Italy will be trapped near recession levels for the next two years, while Spain's property boom is deflating fast. "In the context of an increasingly negative outlook for activity, the ECB can afford some easing of the policy stance," it said, dismissing the inflation scare as a one-off spike from food and oil - likely to subside.

The IMF warned that Europe's banks are in as much trouble as their US counterparts, facing losses of at least $120bn (£60bn) from asset-backed securities, structured investment vehicles, and other arcana from the credit bubble. It warned that house prices are more overvalued in Ireland (32pc), Holland (29pc), France (22pc), Belgium (18pc), Spain (17pc), and Italy (12.4pc), than in the United States (12pc), and may be subject to a nasty correction. Irish house prices fell 7.3pc last year.

Hans Redeker, currency chief at BNP Paribas, said the ECB had its head in the sand. "They are not looking at the tidal wave that is about to roll straight over them. Balance-sheet stress in Europe is just as bad as it is in the US. The reporting periods are different, so the bad news has not yet come out," he said. Critics say the ECB's staff have misread the eurozone's credit data, mistaking a 14.8pc surge in corporate loans for evidence of buoyancy.

"This is merely a substitution effect. The market for securities has collapsed. Companies are instead turning to their existing credit lines. The question is what will happen when these run out," added Mr Redeker. Julian Callow, Europe economist at Barclays Capital, said eurozone banks are cutting back "radically" on new credit lines, portending a slowdown in lending later this year. He expects the ECB to cut rates twice in coming months as the credit squeeze bites.

"The economy is grinding ever slower. In Spain there has been a dramatic deterioration in business confidence," he said. Spanish bankruptcies rocketed 74pc in the first quarter. Car sales fell 28pc in March. Half of Spain's 80,000 estate agencies have already shut down, laying off 120,000 staff. The head of Italy's business federation, Emma Marcegaglia, said the soaring euro was having "a very negative effect on our economy. The ECB should be cutting rates," she said.

By contrast, Germany is in rude health. By squeezing wages it has gained 40pc in labour cost competitiveness against Italy, and 30pc against Spain, since 1995. It now enjoys a current account surplus of $257bn (£130bn, 6.2pc of GDP). Four fifths comes at the expense of eurozone partners in what amounts to a "beggar-thy-neighbour" policy. Deficits have reached 12.5pc of GDP in Greece, and 9.2pc in Spain.

The euro was launched under an implicit contract with the German people that EMU would not lead to inflation, or to an easy-money bail-out for improvident Club Med debtors. Harsh realities of politics are likely to intrude before long.

Ilargi: Iceland can be angry at hedge funds all it wants. That won’t stop the “attacks”. Besides, their own banks have behaved in much the same way. I find it striking that Icelanders in general are stuck in denial mode. Perhaps that’s because the only info they get is from their government.

Crashing the Party of Icelandic Prosperity
For years, Iceland has been respected for its unmatchable standards of living. But recent global economic turmoil has thrown the island nation's currency off the cliff. The hedge funds are closing in and the government is looking for ways to fight off the predators.

Iceland, island of extremes. In no other place on Earth do people live longer. No other country has a higher literacy rate. And no place utilizes geothermal power as much to heat houses and even sidewalks. But Icelanders would be more than happy to relinquish the latest superlative they've attained: No other country in the world has been as negatively affected by the current financial crisis as Iceland, and this has resulted in an unprecedented fall in the value of the Icelandic krona.

Since the beginning of the year, the krona has dropped more than 20 percent against the euro, the rate of inflation has skyrocketed to almost 9 percent, and the OMX Icelandic stock index has lost a quarter of its value. David Oddsson, chairman of the Icelandic Central Bank's board of governors and a former prime minister, rages against the "unscrupulous dealers" from abroad who are trying to break down the Icelandic financial system with speculative attacks.

Prime Minister Geir Haarde also angrily suspects that hedge funds are the culprits and that they have been driven by profiteers to spread lies about an alleged banking crisis. Haarde is intent on keeping that from happening and he is sounding the counterattack instead. He is studying his options, he announces somewhat nebulously. He will only go so far as to reveal that it will come as a big surprise, like a bear trap snapping shut.

That said, Icelanders should be careful not to let the local bears be the first to spring the traps. For a few years now, the country's three most important banks -- Kaupthing, Glitnir and Landsbanki -- have been playing in the major leagues of big money and specializing in so-called "carry trades." In these transactions, investors borrow money in countries with low interest rates, such as Japan, and invest the borrowed money in countries offering better rates of return, such as Iceland.

This game with the so-called "cod bonds," named after the fish closely associated with Iceland's economy, worked fantastically until the financial crisis hit and the risk became no longer manageable. At the same time, the banks proceeded in a spectacularly clever way by betting against their own currency. To hedge their high debts in foreign currencies, they sold their kronur in complicated futures transactions and made a lot of money when they lost value.

In fact, it was billion-krona deals that caused chaos even for this small country's balance of payments. Since 2004, the foreign debt has grown fourfold. These kinds of unstable rates are just the ones to magically attract the hedge funds. Operating on the assumption that at some point Icelandic banks will no longer be able to pay their debts, they gamble using so-called "credit default swaps" (CDS). These swaps, which have been a part of the international speculation world for several years, are actually financial vehicles that allow lenders to safeguard their credit. There is currently over $45 trillion (€28.4 trillion) in credit insurance floating on the global market.

To shore up the currency, the Bank of Iceland has raised interest rates to 15 percent, and markets are already betting that that figure will climb to 20 percent. As the next step in the "bear hunt," as Prime Minister Haarde has called his recovery strategy, the central bank might directly intervene in the market and buy up kronur on a grand scale. "An intervention," said Stefan Bielmeier, an analyst with Deutsche Bank, "wouldn't cause any major problems for Iceland's central bank."

At the same time, though, controls on the flow of capital abroad rarely promise success. "That will at best stabilize the situation for the short term," said Raffaella Tenconi, a London-based analyst for Dresdner Kleinwort, the investment arm of Dresdner Bank, "but it will only intensify the long-term problems."

Tenconi assumes that either Iceland's banks will be reorganized or that the Icelanders will abandon their own currency in favor of adopting the more stable euro. "In the event of a fundamental banking crisis," Tenconi adds, "the large central banks can just print more money." If they did, though, the Icelandic kronur would no longer be accepted abroad.

Economics Professor Warns Iceland about Hedge Fund
An English professor in economics, Richard Portes, has contacted the Financial Services Authority in Britain and in Iceland to report on his interactions with a certain hedge fund, which disapproved of his coverage of the Icelandic economy. Portes has for the past few weeks published detailed reports about the Icelandic financial system in other countries and evaluated that the economic situation in Iceland and the strength of its banks is more positive than many other analysts have evaluated, Fréttabladid reports.

Portes was then contacted by the management of a large hedge fund, which encouraged the professor to think about his reputation while reporting on the Icelandic economy. The hedge fund in question, which will not be named for legal reasons, is one of the hedge funds Sigurdur Einarsson, Chairman of the Board of Kaupthing Bank, has accused of market manipulation and launching an attack on the Icelandic economy and banks. 

“I quickly realized what was happening and decided to listen carefully and take notes,” Portes said, adding that in the phone call he received a very dark picture of the situation of the Icelandic economy and the troubles of Icelandic financial companies had been presented.

Iceland’s Central Bank Predicts Collapse in Real Estate
The Central Bank of Iceland announced yesterday that, according to its estimates, the price of real estate in Iceland will plummet by 30 percent in two years. Real estate agents say this is an “unsubstantiated apocalyptic forecast.”
“It is completely inconsistent with what the analyst departments of the banks have been forecasting,” Grétar Jónasson, chairman of the Association of Real Estate Agents in Iceland, told Fréttabladid. “The Central Bank has to present its reasoning; otherwise it is nothing but an unsubstantiated apocalyptic forecast.”

The Central Bank bases its forecast on a collapse in the value of properties on the decrease of disposable income, increasingly limited access to loan markets and an increased supply of apartments. Jónasson said the Central Bank’s forecast can have a damaging and unnecessary impact on people’s financial situation. “Nothing indicates that the price here will collapse and if anyone predicts that it will, like public institutions, the least they can do is present a transparent and clear argumentation.”

Ingólfur Bender, director of Glitnir Bank’s research department, said he does not expect the same development to take place in Iceland as in many countries abroad where the price of real estate has dropped considerably. “We don’t have much speculation and the Housing Financing Fund and the pension funds are providing the market with financial resources. The supply of loans in the real estate market abroad has, however, almost come to a halt because the banks aren’t granting loans anymore,” Bender explained.

Gylfi Magnússon, an associate professor in the business and economic department of the University of Iceland, disagrees, saying it is natural for the price of real estate to drop considerably considering the current market situation. “The banks have stopped granting loans, almost without exception, and that of course has great influence on demand in the market.”

Chaos Spreads as Food Prices Skyrocket
The scenes in Haiti have been dramatic. Gunfire on the streets in the capital Port-au-Prince; thousands parading through the streets; and 9,000 United Nations peacekeepers powerless to stop the violence and the widespread looting. Five people have been killed in the violence since last Thursday, according to unofficial reports. Even an impassioned plea by the Caribbean country's President Rene Preval on Wednesday failed to restore order. "The solution is not to go around destroying stores," he said. "I'm giving you orders to stop."

Haitians, though, are reacting to problems that cannot simply be wished away. Food prices across the globe have been skyrocketing in recent years. Rice prices in Asia have spiked as has the price of bread in Egypt, milk products in Europe and pasta in Italy. The result has been unrest in a number of countries and many more concerned that a mass protest is but a price hike away.

Now, World Bank President Robert Zoellick has called on world leaders to act to ease the global food crisis. Zoellick urged the United States, the European Union, Japan and other developed countries to help plug a $500 million (€319 million) shortfall in the United Nations' World Food Program. In a speech given in Washington, D.C. on Wednesday, Zoellick said the money was urgently needed to meet emergency demands and warned that if politicians did not act now, "many more people will suffer and starve."

Unrest triggered by the higher food and fuel prices has been gaining steam across the globe in recent weeks. During a two-day riot in Egypt earlier this week, one person was killed. Cameroon has also seen street violence. In the Philippines, President Gloria Macapagal Arroyo warned on Tuesday that rice shortages were exacerbating political and social tensions in the country. Zoellick, who was speaking in the run-up to the World Bank's spring meeting this weekend, said world leaders needed to develop a new mechanism that focused not only on hunger, malnutrition and access to food and its supply, but also on the connections between energy, crop yields, climate change and other factors.

According to the World Bank president, as financial markets have tumbled, food prices have soared. The prices of some basic staples, such as rice and wheat, have shot up by as much as 80 percent in some places. The UN estimates that global food prices have risen 65 percent since 2002, with grain rising 42 percent and dairy products 80 percent last year alone.

Jacques Diouf, the director-general of the UN Food and Agriculture Organisation warned Wednesday that unrest linked to food and fuel prices, which has been seen in Burkina Faso, Cameroon, Egypt, Indonesia, Ivory Coast, Mauritania, Mozambique and Senegal, could spread to even more countries.

Zoellick said the World Bank, whose main task is to fight poverty in developing countries, estimated "that 33 countries around the world face potential conflict and social unrest because of the acute hike in food and energy prices." In countries where food made up half to three-quarters of consumer spending, "there is no margin for survival," he said.

According to Zoellick, high and volatile food prices will continue for years, because of growing populations, changing diets, rising energy prices, the emergence of biofuels that force farmers to choose between lucrative fuel crops and foodstuffs, and climate change.

Largest U.S. Municipal Bankruptcy Looms in Alabama
They're talking more about Chapter 9 municipal bankruptcy in Jefferson County, Alabama, the home of the largest city in the state, Birmingham. Who can blame them? The county is now being whipsawed by an ill-thought-out debt policy and the collapse of the bond insurers. Credit-rating downgrades all around have triggered a series of events that are no longer in the county's control, leaving it at the mercy of securities firms that have little room for maneuver themselves.

This has produced a steady series of stories in my new favorite newspaper, the Birmingham News, all about how the county is preparing to declare bankruptcy any day. Perhaps the best article ran on Sunday, April 6. It began: "Jefferson County officials have laid the groundwork for the largest municipal bankruptcy in the nation's history while publicly saying they have no imminent plans for a filing."

The one that ran on Wednesday, April 9, was no less compelling: "Talks on the sewer system's debt crisis aren't making progress, increasing the odds that the county will file municipal bankruptcy, Jefferson County Commission President Bettye Fine Collins said Tuesday." This is how it ends for the little county that was going to teach America how to use interest-rate swaps. Make no mistake. This is a story all about public finance and "derivatives," whose use by states and localities exploded during the past decade.

The Jefferson County bankruptcy, if it comes, and it's hard to see how it can be avoided, will eclipse that of the 1994 filing by Orange County, California. "Derivatives" are at the center of both death-spirals. Orange County invested in them -- securities whose value was tied to other securities and markets. The county investment pool, which for years spun off handsome returns for the school districts and local governments that were its participants, found itself holding a bunch of junk when its investors asked for their money back.

Jefferson County played the derivatives game as part of financing a $3.2 billion sewer cleanup. The county engaged in a batch of interest-rate swaps with the banks that helped underwrite the debt, in a strategy designed to save the county and its taxpayers some money. The strategy backfired, demonstrating the speculative, risky nature of swaps.

The bankruptcy will be the biggest in the municipal market's history by virtue of the county's debt load, according to the News. Jefferson County has $3.2 billion in sewer debt; Orange County lost $1.6 billion in its investment pool. I'm sure the matter will be debated. I'm also sure Orange County will be happy to pass the crown to Jefferson County.

Auction Market Shrinks by $51 Billion, With Failure Rate at 71%
The auction-rate securities market is shrinking by at least 15 percent, or $51 billion, as U.S. municipal borrowers refinance to escape higher costs and closed- end funds begin to bail out investors. States, cities, hospitals and colleges from Denver to Washington, D.C., have converted or are planning to replace at least $43.1 billion of the debt, according to data compiled by Bloomberg.

Nuveen Investments Inc. and seven other fund managers said they will redeem $7.8 billion in taxable preferred shares that have rates set through periodic dealer-run auctions. The auction-rate market, which began the year at $331 billion, is receding as concern eases among traditional municipal bond investors that they will get swamped with new supply from issuers refinancing the debt.

Year-to-date municipal bond returns turned positive, gaining 0.75 percent after falling 0.82 percent in the first three months, Merrill Lynch & Co. index data show. "On the municipal side, things are starting to unclog," said Judy Wesalo Temel, director of credit research at Samson Capital Advisors LLC, a fixed-income manager in New York.

An index of rates on debt with auctions held every seven days fell 1.05 percentage points to 5.67 percent on April 2, an eight-week low, according to the latest available data from the Securities Industry and Financial Markets Association. While the rate has fallen from a record 6.89 percent two months ago, it remains 2 percentage points more than last year's average. The high yields, combined with routine failures on almost three-quarters of all auction debt put up for bid, are enough to impel borrowers to escape.

About 71 percent of weekly or monthly auctions, including those of student lenders, were unsuccessful this week, about the same as last week, Bloomberg data show. Dealers, who typically stepped in with their own capital to prevent failures when there weren't enough bidders, pulled back their support in February.

Ilargi: So how much value do the opinions of all the high-paid analysts have? Judge for yourself. Hint: one of them calls this: "the biggest, most overt miss we can recall in 16-plus years of coverage."

GE Stuns Market As Profits Fall Short
General Electric Co. (GE) reported a stunning 5.8% drop in first-quarter net income amid weakness in its sprawling financial-services operations and issued a disappointing forecast for the rest of the year, delivering another blow to markets already concerned about a U.S.-led economic slowdown.

The economic bellwether's results came in well below analysts' expectations, a near unheard-of outcome for a company renowned for posting quarterly earnings at or just above analysts' expectations. Coupled with GE cutting its full-year earnings forecast - now seeing little, if any, growth - and saying second-quarter profits will miss expectations, the news sent a shudder through global markets. U.S. stock futures turned lower on the news, and European bourses also gave up early gains.
Shares of GE were down nearly 11% in recent premarket trading at $32.73.

"GE stock should clearly be under pressure," Citigroup analyst Jeffrey Sprague said, calling the results "the biggest, most overt miss we can recall in 16-plus years of coverage." Analysts at Oppenheimer agreed, saying the stock could soon fall back to its 52-week low of $31.65 set a month ago. The conglomerate - which has operations ranging from industrial to financial to media - posted net income of $4.3 billion, or 43 cents a share, down from $ 4.57 billion, or 44 cents a share, a year earlier.

Excluding discontinued operations, earnings fell to 44 cents a share from 48 cents a share the year before. GE had projected 50 cents to 53 cents a share. Revenue climbed 7.8% to $42.24 billion. Analysts polled by Thomson Financial expected earnings of 51 cents a share on $43.68 billion in revenue. The lowest estimates of those analysts ended up being notably above what GE reported. Profits were down at four of six GE divisions, with only infrastructure and NBC logging gains.

The company pointed to its financial services arm as the main source of the trouble. GE's loss provisions surged 42% to $1.33 billion. Chief Executive Jeff Immelt said last month's "extraordinary disruption in the capital markets affected our ability to complete asset sales and resulted in higher mark-to- market losses and impairments."

Ilargi: Mizuho is the seond-biggest bank in the world’s second-biggest economy. No peanuts. And while it’s hard for me to see from here what their exposure to bad credit/debt is, one thing triggers an alarm: Mizuho, like so many other banks in the world, lost 50% of its share value in the past year.

Japan's Mizuho stung by $5.5 billion in subprime pain
Japan's Mizuho Financial Group Inc cut a third off its earnings estimate for the year just ended, stung by $5.5 billion in subprime-related losses, mostly at its brokerage arm. Mizuho's shares, which have lost about half their value over the past year, jumped 4.4 percent after Friday's announcement as investors bet the worst was over for the bank, although analysts say other Japanese lenders will have to reveal more losses.

Asian lenders have so far avoided the massive write-downs that crippled Western rivals such as UBS AG and Merrill Lynch & Co, but Mizuho is one of the region's bigger subprime casualties. Unlike other banks in Asia, where credit exposure is largely limited to straight investment, Mizuho arranged structured products and other risky investments through its brokerage wing, analysts say.

"Investors have been expecting further subprime-related losses, so this doesn't come as much of a surprise," said Shigemi Nonaka, special adviser at Polestar Investment Management. "Japan's subprime exposure is still relatively small. You can't compare this to the likes of UBS."

China's Currency Reserves Climb 40% to $1.68 Trillion
China's foreign-exchange reserves, the world's largest, surged to $1.68 trillion at the end of March, adding pressure on the government to prevent money inflows from fueling inflation already at an 11-year high. Currency holdings expanded 40 percent from a year earlier, the People's Bank of China said today on its Web site. The assets grew a record $153.9 billion from the end of December, after a $94.6 billion increase in the fourth quarter.

Exports, foreign investment and U.S. dollar depreciation have boosted China's currency assets, hampering government efforts to rein in money supply and inflation. China last month ordered lenders to set aside more deposits as reserves for a second time this year and has let the yuan rise at a quicker pace to stem cash inflows. "The rapid accumulation in foreign-exchange reserves is making it very difficult for China to control money supply and inflation," said Wang Qing, chief China economist at Morgan Stanley in Hong Kong.

Consumer prices surged 8.7 percent in February from a year earlier, the most since May 1996, after the worst snowstorms in half a century disrupted food supplies. Chinese policy makers including Premier Wen Jiabao have named inflation and overheating as China's biggest economic risks this year. The yuan closed at 7.0065 versus the dollar in Shanghai from 6.9995 before the data was released.

The increase in currency reserves is more than the annual economic output of some countries, such as New Zealand. China's economy, the world's fourth largest, expanded 11.9 percent in 2007 from a year earlier, the fastest pace in 13 years. A strengthening Chinese currency, up 4.3 percent already this year against the dollar, has encouraged inflows of speculative capital. The yuan gained 7 percent in 2007.

"The pace of hot money coming into China has picked up, exacerbating the accumulation of foreign reserves," said Glenn Maguire, chief Asia economist at Societe Generale SA in Hong Kong. "The government will slow the appreciation of the yuan to ease speculation." To tame liquidity, the central bank has pushed the required reserve ratio for lenders to a record 15.5 percent. China has held off raising interest rates after six increases last year as the U.S. Federal Reserve cuts borrowing costs.

Ilargi: Put down April 10 as the day the US airline industry started to unravel for real. Bankruptcies will come fast and furious now. In “other” news: American Airlines cut another 600 flights today, the fourth day of ‘repairs”.

Frontier Airlines Files for Bankruptcy Protection
Frontier Airlines Holdings Inc., the U.S. discount carrier that serves 70 destinations from Denver, filed for bankruptcy protection, becoming the fourth U.S. airline to do so in less than a month. Frontier took the step after its main credit-card processor began withholding proceeds from ticket sales, it said in a statement today. The carrier pledged to continue flying and keep paying workers while it seeks additional financing.

"We filed for very different reasons than those of other recent carriers," Frontier Chief Executive Officer Sean Menke said in the statement. "Fortunately, we believe that we currently have adequate cash on hand to meet our operating needs while we take steps to further strengthen our company."

Frontier Airlines has debt of $500 million to $1 billion and about the same in assets, according to Chapter 11 documents filed with the U.S. Bankruptcy Court in Manhattan. A slowing economy and jet fuel costs that have risen 60 percent in a year were blamed for recent filings of Skybus Airlines Inc., Aloha Airgroup Inc. and ATA Airlines Inc. In Asia, long-haul budget carrier Oasis Hong Kong Airlines Ltd. ceased flying after 17 months on April 9, stranding thousands of people in Hong Kong, the U.K. and Canada. Chairman Raymond Lee cited the spiraling price of fuel for the step.

Frontier's Chapter 11 filing will block efforts to collect debts from the carrier, including those proceeds that the unidentified credit-card company is seeking to retain. While the ban may be lifted by court order, Frontier said it is prepared to litigate, if necessary. "Our principal credit-card processor very recently and unexpectedly informed us that, beginning on April 11, it intended to start withholding significant proceeds received from the sale of Frontier tickets," Menke said. "Unchecked, it would have put severe restraints on Frontier's liquidity and would have made it impossible for us to continue normal operations."

Ilargi: The Bank of England, and any other central bank for that matter, can cut rates to zero Kelvin, but it won’t matter, because banks don’t trust each other.

I think the reason for that is not what they don’t know, but what they do.

Mortgage cost rise despite cut in Bank rate
Mortgages will become even more expensive despite the Bank of England cutting interest rates, home owners were warned yesterday. The credit crisis squeezing household finances is likely to worsen with lenders expected to ignore the Bank's latest intervention, analysts said.

The Monetary Policy Committee cut its base rate from 5.25 per cent to 5 per cent amid growing concern about slowing growth in the economy. But some lenders increased the rates on some of their loans hours before the announcement. Yesterday morning, Nationwide - the biggest building society - and Alliance & Leicester said they were increasing rates on their new fixed-rate mortgages. Woolwich made a similar move this week.

Other lenders are expected to follow suit. This is because the interest rates banks charge each other to borrow money have not matched recent cuts in the Bank's base rate. "We expect other lenders to follow suit as the cost of funding new mortgages continues to rise," said Melanie Bien, of the mortgage broker Savills Private Finance. Ann Robinson, the director of consumer policy at, accused big lenders of undermining the property market.

"Many lenders are yet to pass on the recent base rate reductions," she said. "Instead they are busy increasing rates, demanding larger deposits, tightening lending criteria and, in some cases, withdrawing deals from the market. "By refusing to pass on rate reductions and taking extreme measures to reduce business volumes, lenders are fuelling the current lack of confidence in the property market."

With lenders accused of undermining the housing market to shore up their own finances, fears were raised that the global financial crisis has left the central bank almost powerless to help consumers. Mortgages are becoming more expensive as the gap between the Bank's interest rate and the rates commercial banks charge for loans widens. That means the base rate increasingly fails to reflect the interest rate consumers have to pay to borrow money.

The root cause is continuing fear and uncertainty in the financial system. Following the Northern Rock and Bear Stearns banking disasters, analysts say they still do not know whether other banks are concealing potentially devastating bad debts. Because of those fears, commercial banks are wary of lending to one another, charging other banks much higher rates of interest for loans than the Bank's base rate.

Prying Open Hedge Funds' Exit Door
Lately it has become quite common for hedge fund managers to slam shut the exit doors—tying up their investors' money for months on end while hoping for a quick end to the bruising credit crunch that's wreaking havoc with hedge fund performances. For investors it can be a frustrating state of affairs: A wealthy manager gets to keep their money and continue to earn a management fee for sitting on a huge pile of cash.

But at least one prominent hedge fund investor is fighting back by suing a big fund that's barring him from recouping a $1 million investment for at least a year. Earlier this month, Joseph Umbach, a Florida resident and founder of the Mistic line of beverages, sued Carrington Investment Partners, claiming the $1 billion mortgage-backed securities hedge fund "involuntarily" tied up his investment and improperly "rescinded" a redemption notice that was submitted to the fund's manager, Bruce Rose, in July. The lawsuit filed in federal court in Connecticut seeks a declaration that the action taken by Carrington and Rose was "an illegal or unenforceable ex post facto" action.

The dispute arises from an action Rose took late last summer to prevent investors from pulling money out of the $1 billion fund, which invests mainly in hard-to-value securities backed by mortgages—most of them from home loans to borrowers with shaky credit histories. In September, Rose persuaded a majority of his investors to amend the fund's partnership agreement to bar any investor redemptions for at least one year.

The change also gave Rose the power to rescind any redemption requests submitted before Sept. 30, such as the one submitted by Umbach. A copy of the amendment, which is included in Umbach's lawsuit, illustrates why the manager was pushing investors to put a hard freeze on all redemptions. The proposal noted that "given the current market environment," Carrington would incur "significant losses" if the fund were forced to "liquidate assets to meet the withdrawals." The six-page proposal also noted that Rose would likely move to liquidate the hedge fund if investors rejected the redemption freeze.

To his credit, Rose put the matter of freezing redemptions up to an investor vote. In recent months many managers have unilaterally moved to freeze redemptions, citing the broad powers that most hedge fund incorporation documents give them. As of mid-March, at least 24 hedge funds have barred or limited investors from taking their money out, tying up tens of billions of dollars for an indefinite period.

So far, Rose's strategy to freeze redemptions appears to be working. People familiar with the fund say its performance is flat for the year, compared with the negative performance turned in by most hedge-fund managers.

Ilargi: The IMF’s amazing Lazarus act continues. I have to admit, I’m still wondering why. Is it just to be the lender of last resort for the Icelands out there? There is a force somewhere pushing the fund centerstage, but to what end? We’ll know soon.

IMF warns of 'fire and ice' threat to the world
The head of the International Monetary Fund has warned that the world economy is trapped between "fire and ice" - the threat of slumping growth and of rising inflation. Opening the IMF's spring meetings, Dominique Strauss-Kahn told ministers coming to Washington that there was only limited time to repair the financial system after the worst crisis since the Great Depression.

Speaking with oil prices at record highs, he declared that "inflation may be back" and warned the relentless rise of food prices would hit efforts to reduce poverty in Africa and Asia. In a final blow to the so-called "Goldilocks theory" that developing nations' growth will help keep the world economy supported in the coming months, he debunked the idea that rich and poorer countries could "decouple".

However, he added that while the economic impact of the financial crisis would be more severe than that of the dotcom bubble, it would leave a smaller dent on growth than in previous crises. He said: "Rising global food prices may undermine gains in reducing poverty," adding that food prices had increased by 48pc since the end of 2006. The warning coincided with another from World Bank president Robert Zoellick that rising food prices threaten to set back development efforts by seven years.

Mr Strauss-Kahn added: "The world is caught between ice and fire - slower growth and inflation. Inflation is back. It is a key concern. I think there is no such thing as decoupling, but [instead] there is a delay." The IMF this week slashed its figure for global economic growth to 3.7pc, forecast a US recession this year and warned of a one-in-four chance of a global recession. It also cut its UK growth forecast to just 1.6pc this year and next.

Mr Strauss-Kahn said the fund was ideally placed to play a key role in the rescue mission following the crisis, since it was one of the few institutions to analyse the links between the financial markets and real economies. He acknowledged the IMF was "not able to make people listen" when it warned on the possibilities of a major financial crisis 12 months ago.

Proposals Aim to Make IMF More Proactive
British Chancellor of the Exchequer Alistair Darling plans to flesh out a proposal for overhauling the International Monetary Fund in a speech Friday in Washington, calling for it to focus more on the potential for global financial problems. Mr. Darling also wants the fund to be more accountable to the 185 countries it represents, and combine with the Financial Stability Forum to create an early-warning system for the world's financial markets, according to a British Treasury official.

His push to refocus the fund comes as global policy makers seek to reshape a host of multinational agencies to make them better able to prevent a recurrence of the current credit crunch, which continues to take its toll on the world's economy. In a planned speech at the Brookings Institution, Mr. Darling is expected to propose that government ministers have more of a hand in setting IMF priorities.

Under his plan, the IMF's International Monetary and Financial Committee would be replaced by a more-active ministerial council to which the IMF board would report, much like a company's board reports to its shareholders, the British Treasury official said. Currently, the ministers on the committee have more of an advisory role to the executive board. Mr. Darling hopes to influence others to press for change. As steward of one of the economies hit hard by the credit turmoil, he has sought to take a leadership role.

An IMF spokesman declined to comment on specific aspects of Mr. Darling's proposals until he had heard them in full, but said the IMF has an active overhaul agenda under way. The role of many multinational agreements and organizations, from the European Union's banking regulatory system to the rules on bank capital requirements, known as Basel II, are under the spotlight.

Already up for debate at the Washington meeting of the Group of Seven leading nations' finance ministers Friday is a more-general overhaul of international regulation of financial institutions as proposed by the Financial Stability Forum, a body that includes the world's top central bankers, regulators and other financial officials.


Anonymous said...

Back after 9/11 when I was working as a research assistant for a law professor who works in the aviation area, I said that i thought all the bailouts would result in a government owned AmAir (like AmTrak). Looks like maybe I was a few years ahead of the curve on that one. Who knows, if the problems in the skies keep up, maybe AmTrak can turn a profit.

Lisa Zahn said...

I too have been very suspicious of all the Airline "repairs" suddenly having to be made during this time of economic crisis!

What a joke, and the media perpetuates it.

Anonymous said...

Hello Ilargi,

Thought you might like to read this:

It is Steinbrück and Weber talking about the IMF report. They are not impressed.

Steinbrück generally does impress me, but I cannot say the same for Weber.

I wonder what Steinbrück thinks the effect of the situation in the U.S. on Europe will be?


Anonymous said...

The repair bit is interesting - they can't be bankrupt or they'd just take that step, so they must have been cutting corners on maintenance and now it has caught up with them.

I'd say American is toast ... can't take a week off without setting yourself up for a decade of customers remembering you can't be trusted ...

Iowa Boy, who is too lazy to log in ...

scandia said...

A headline from Bloomberg's Fed Watch...Bernacke said regulations must strengthen oversight of financial markets, ensuring that banks have enough capital( Ensure how, I wonder) and THAT ACCOUNTING RULES AREN'T " DESTABILIZING '. Now what does than mean? Are we about to witness a display of accounting wizardry that will eliminate the awaited moment of promised disclosure when the accounting firms sign off on the accounts under the new law holding them legally responsible. This new law is " destabilizing" indeed!
Ilargi, Recently you expressed an opinion that this behaviour from the Feds is not a sudden response to a crisis but planned for some time. Another article on Bloomberg states that Bernacke spoke of the need for readiness, for an aggressive drop in interest rates, in his first speech as head fed, in 2002, 6 years ago.

. said...

And meanwhile those of us in the real world experience this ...

(CNN, made tiny for your viewing pleasure)