Friday, May 9, 2008

Debt Rattle, May 9 2008: The Price of a Fire Sale

Russell Lee: Oklahoma City, Oklahoma - July 1939
May's avenue camp, an agricultural workers' shacktown. Child drawing water.

Please see also The World Has Not Always Been This Way

Ilargi: It’s amusing this morning to see the attempts to put a positive spin on Citigroup’s unequaled $500 billion fire sale. The number, which allegedly equals some 22% of Citi’s assets, was announced in a conference call this morning.

They fall over each other trying to make Citi CEO Vikram Pandit look like an action figure hero. But even if he is good at this, he’s still just a crisis manager trying to get rid of what is perhaps the world’s largest toxic dump. Which may well turn out to be a lost case. Besides, when I see him declaring “the bank also said it was seeking revenue growth of 10 percent a year from its core units”, and "Citi intends its securities business to eventually produce a return on equity of "18-20%.", I get pretty lousy vibes. Eventually? What is that, 2020?

A few facts remain, no matter what he says or the cheerful commenters say. First, the entire diversification model, supposed to make the bank less vulnerable to losses in separate sectors, has failed miserably. It’s back to core business, pure and simple. And you need to ask why that hasn’t been done before. I just saw someone call the operation the "streamlining" of the company. That’s hilarious. But not funny.

Second, you have to ask very serious questions about the price Citi will pay for getting rid of $500 billion in “assets”. It certainly won’t get face value. If it had prudently executed this sale last year, it would have gotten much more, that’s for sure. But my impression is that if Meredith Whitney had not called Citi to task on its position multiple times in the past year, it would still be reporting Cloud Nine stories.

How high will the loss be? 25%, for $125 billion? Or 50%, $250 billion? It’s hard to say, and undoubtedly the truth will be hidden inside all kinds of terms, timelines and cheerleader chants. In reality, you might even see this as a form of "secretly" splitting up the world’s biggest bank, even if the pundits declare that Pandit wants to keep the company together.

And what will be sold? Not the best assets, of course. They’ll try to unload the shaky stuff. Plenty to choose from. But it won’t fetch anything other than shaky prices.

Citi has recorded $40 billion in losses so far, and raised $44 billion in "new" capital. Both are record numbers in the world of global finance. And both now prove to be not nearly enough. Not even close.

And Citi is no "exception to the rule". There’s a lesson in here for all the other major financial institutions, which as of today includes insurance companies: AIG posts stunning losses on derivatives, and they’re no exception in their industry either. I think Citi is the first of a long line of fire sales this year.

Pandit's best insight may be that he tries to be the first in that long line. Yet, while that will probably limit the losses to an extent, it offers no guarantee for Citi’s survival. What it does offer is a view of what people like him see but don't say.

The bottomline remains: operations like Citi MUST turn a profit, or they die. And what are the chances of that happening anytime soon, say, before 2020?

Brazil Wants to Join OPEC
Brazilian President Luiz Ignacio Lula da Silva wants to get his country into OPEC -- a move that could lower the price of oil worldwide. With a booming biofuel business alongside new oil reserves, Brazil is poised to become a global energy leader.

n 2007, a huge oil reserve was discovered off the coast of Brazil's Rio de Janeiro. The find boosted Brazil's oil reserves by 40 percent and could catapult the South American nation into the top rank of global producers. In an interview with SPIEGEL President Luiz Ignacio Lula da Silva said that Brazil wants to join the OPEC oil cartel -- a move that could lower petroleum prices worldwide.

Brazil is banking on more than just oil. In the interview, the president emphasizes the country's economic successes. Of particular note are the huge gains Brazil has made in the production of biofuel, especially environmentally friendly ethanol from sugar cane. By 2025, Brazil hopes to supply its own energy needs entirely with ethanol and produce enough of a surplus to fuel 5 percent of the world. "Our production costs are unbeatable," Lula said.

When asked about European plans to increase the production of biofuels at the expense of food crops -- grains in particular -- Lula said Europe should leave biofuel production to others. "It can be done better by us and the Africans," he said. Right now, Europeans and Americans are trying to turn corn and sugar beets into fuel -- a far less efficient process than that used for sugar cane. The results are higher food prices around the world.

"I'd like to see the First World drop agricultural subsidies and lift the high tariffs on imports," Lula said. When German Chancellor Angela Merkel visits Brazil on May 13, Lula will encourage her and her European colleagues to pay more attention to South America and "not to fear the Left in Latin America."

Citigroup to cut about $500 bln in noncore assets
Citigroup CEO Vikram Pandit said Friday the firm plans to reduce about $500 billion of noncore assets over the next several years.

"These reductions will release capital that we could use in our other businesses," Pandit said on a conference call with analysts and investors. Pandit said the $500 billion figure is about 22% of the firm's total assets.

Pandit said the asset reductions, which will be done either through holding to maturity or sales, will take a few years and, "will improve the quality of earnings."

Citigroup to shed $500 billion in assets
Citigroup Inc. said Friday it aims to shed about $500 billion in assets and grow revenue by 9 percent over the next few years, as it tries to rebound from massive losses tied to deterioration in the mortgage and credit markets. The bank's plans to wind down its $2.2 trillion in assets to approximately $1.7 trillion were part of an investor day presentation.

Citigroup has been under heavy investor scrutiny over the past year as the value of its stock tumbled. Many Citigroup holders have been angling for a large-scale overhaul of the company's structure. Those shareholders' hopes, however, are dwindling, with executives apparently largely sticking with the bank's current identity. "We believe the right model is a global universal bank," said Vikram Pandit, who is nearing his five-month anniversary as the chief executive of the financial conglomerate.

Citigroup has written down its assets by some $38 billion since late summer of 2007, built up its reserves to account for future consumer loan defaults, and raised more than $40 billion in cash by selling stakes to outside investors, offering new stock in the markets, and shedding other assets. Executives have also announced global job cuts amounting to 13,200 so far.

Most analysts believe that while the bulk of the bank's write-downs are through, there are still at least some more to come. In a note Thursday, Deutsche Bank analyst Mike Mayo estimated that Citigroup's $29 billion bucket of mortgage investments and related structured products has the potential to result in another $15 billion write-down.

And given that Citigroup has $63 billion in exposure to home equity loans, $150 billion to mortgages, $21 billion to auto loans, and other exposure to consumer loans such as credit cards, Mayo estimated that the bank will have to build up its reserves by an additional $5 billion. Amid substantial turmoil in the credit markets, Citigroup generated $13.22 billion in revenue during the first quarter — 48 percent less than the $25.46 billion it generated during the first three months of 2007.

Citi CEO Pandit sees three-phase return to health
Citigroup's chief executive Vikram Pandit on Friday seemed to respond to recent investors' complaints that he has been slow in developing a long-term vision for the struggling New York bank behemoth. At the firm's annual meeting for analysts and institutional investors, Pandit said he envisions the bank's return to profitability will last through three phases, during which he says Citi must "get fit," then "restructure," and finally "maximize."

As if to head off investor restlessness, Pandit said that the phases "could" overlap, and quicken the bank's progress. As part of those efforts, Pandit said Citi will sell $400 billion more in "legacy assets" - especially the sale of business units that are not in Pandit's long-term plans. Citi has already sold off some business units in recent months, and is rumored to be interested in selling its insurance unit Primerica.

Pandit also addresses the recent shake-ups at the firm's securities and banking unit - the very business that has cost Citi tens of billions in losses from bad bets on subprime mortgages. "We're looking at everything," Pandit said of the unit's long-term prospects, but added that Citi intends its securities business to eventually produce a return on equity of "18-20%."

Pandit stressed that such progress won't come quickly, however. The unit's performance will be "lower, clearly, for the next couple of years," he said.

More Blue-Light Specials on the Way at Citigroup
Vikram S. Pandit is doing some serious spring cleaning at Citigroup. Since becoming chief executive in December, Mr. Pandit has been clearing out the corporate attic of weak businesses and unloading worrisome assets at bargain-basement prices.

In an effort to streamline the sprawling company and placate restive shareholders, Mr. Pandit has sold or closed more than 45 branches in eight states. He has also disposed of Citigroup’s headquarters building in Tokyo and its investment-banking base in New York and ditched more than $12.5 billion in loans used to finance corporate buyouts. And he has jettisoned the Diners Club credit card franchise, Citi’s commercial leasing divisions and a big pension administration unit.

Mr. Pandit is not done yet. After months of false starts, Citigroup is now trying to sell Primerica Financial, a life insurance and mutual fund company, according to people close to the situation. He is also looking to sell its back-office outsourcing unit in India and its Smith Barney brokerage firm in Australia. Some speculate he also may try to sell 340 bank branches in Germany, possibly to Deutsche Bank.

On Friday, at Mr. Pandit’s first major presentation to investors and analysts, Citigroup said that it planned to sell about $400 billion in assets in the next two to three years. In the presentation, the bank also said it was seeking revenue growth of 10 percent a year from its core units. Together, the sales could raise billions of dollars for Citigroup, yet the moves also reflect a crucial shift in how Mr. Pandit plans to run the bank.

Mr. Pandit is intent on keeping Citigroup together, rather than carving up the financial conglomerate, as some investors are urging. But in a break from the financial supermarket model championed by Sanford I. Weill, who built Citigroup through acquisitions in the late 1990s, Mr. Pandit plans to focus on businesses and regions where Citigroup can generate the fattest returns.

At the same time, Mr. Pandit vows to “break apart the culture” and demand better performance. To do so, he has brought in executives and overhauled compensation so his managers have incentives to focus on what is best for the entire company, rather than their own corner of it.

Citigroup's garage sale
When in doubt, get rid of the clutter

When times get tough, personal finance experts sometimes suggest holding a garage sale to raise spot cash and clear out clutter.

Citigroup is on the verge of holding the mother of all such sales, getting ready to unload $500 billion of assets. It's just astonishing how much junk you can find lying around your bank, especially if you've been collecting things for as long as Citigroup has. Still, as sales go, it's only about 25% of the assets held, so it's not like they're talking about gutting the company.

And that, in fact, is the larger point. If Citi can manage to unwind enough "non-core" assets -- and cut operating costs and refresh its capital holdings, it may be able to stay the massive financial giant we've all grown to love. That may not be what every investor wants, but it's clearly what Chief Executive Vikram Pandit wants, as he struggles to turn things around.

Of course, given the state of the credit markets, finding buyers for all that stuff may be a bit challenging. And if it gets too difficult, the garage sale could turn into more of a fire sale. But it's hard to imagine that calls for breaking up the company would make more sense in those circumstances than they do now.

Citigroup's Pandit to 'Wind Down' About $400 Billion of Assets
Citigroup Inc. Chief Executive Officer Vikram Pandit plans to "wind down" about $400 billion of assets over the next three years as part of his plan to return the biggest U.S. bank to profitability. Citigroup announced the plan today in a presentation posted on the company's Web site.

The New York-based bank, which lost $5.1 billion in the first quarter, has recorded more than $40 billion of credit losses and writedowns since the subprime mortgage market collapsed last year. Pandit, who succeeded Prince as CEO in December, has raised $44 billion in capital, more than any financial-services company, through stock sales and private offerings to investment funds controlled by foreign governments including Abu Dhabi. He goes before shareholders today in New York to lay out details of his plan for a turnaround.

"They need to pare back the parts that are broken," said Barry James, who manages more than $2 billion as president of James Investment Research in Xenia, Ohio, including Citigroup bonds. "He's going about this very deliberately. He's not in any kind of panic. He's a cautious guy. He's not going to do anything rash."

Citigroup has plunged 54 percent on the New York Stock Exchange since the end of 2006 to the lowest in almost a decade, erasing gains made under former Chairman and CEO Sanford "Sandy" Weill, who built the company through a series of acquisitions over 17 years. Weill stepped down in 2003 and tapped Prince as his successor. Prince, 58, was forced to resign last November as the bank headed for a record fourth-quarter loss of almost $10 billion.

Pandit has already changed managers, putting former Morgan Stanley colleague John Havens in charge of trading and investment banking, moving U.S. consumer head Steve Freiberg to head a new credit-card division and recruiting former Wells Fargo & Co. executive Terri Dial to oversee consumer banking in the U.S. He has already announced plans that would reduce assets by at least $65 billion, according to Katzke at Credit Suisse. Last week, Citigroup agreed to sell employee-benefit joint venture CitiStreet LLC.

In April, the bank agreed to sell its Diners Club International credit-card payment network and CitiCapital, a provider of leases and financing for industries including health care and construction. "He's carting off the non-significant operations and raising money so that he can reinvest it in the business he's in, which is loaning money," said Robert Olstein, chief investment officer of Purchase, New York-based Olstein Capital Management, which owns Citigroup shares.

The bank slashed the quarterly dividend by 41 percent in January to 32 cents a share, the first drop since the early 1990s. Oppenheimer & Co.'s Meredith Whitney has said the bank might have to cut the dividend again to bolster capital as losses escalate. "The fact that he's not romancing Wall Street, so be it because why should he," Olstein said. "Just produce results, you don't have to romance anybody."

Can Citi Find $400 Billion in Assets to Sell?
Last night we saw news out of the Financial Times reporting that Citigroup, Inc. (NYSE: C) was on tap looking to unload some $400 Billion.  The plan is set for today's analyst meeting, although no press release has come from the company regarding what assets this will be and just where that will go. While a billion dollars just isn't what it used to be, four-hundred of them is still a massive number no matter how you cut it.

The FT also noted that CEO Vikram Pandit will aim to cut the company's $60 Billion cost basis by some 20%.  This is all said to be an effort to turn down the request to break up the financial giant. When we hear about $400 Billion, the breakdown of the how and the what becomes ever-important.  First and foremost, this won't be an eBay or a Fed swap, and it won't even be anything instant. 

As of March 31, 2008, Citi had some $2.199 Trillion listed as assets on the books.  It also listed total liabilities as $2.07 Trillion.  With all of the recent financings and with all of the real plans, it's probably too hard to call the ball on where those books really sit today.   Citigroup also lists some $67.5 Billion as "goodwill" and "intangibles" on its assets.  On a combined basis, those two combined have grown over the last year while the distrust and while the problems have both grown in the entire financial system.

When companies get this large and this diversified and this spread out around the world, let's just say that it's always safe to assume a little financial alchemy has to be used with currency adjustments and the like. What is interesting here is that this could bring up the potential sale of Diners Club credit card operations and could even include Primerica. 

Don't forget about all of those trading assets and all the minority investments it holds.  It is also a significant holder of land related assets.  We could even see retail banking operations go on the block in select countries where Citigroup decides to to not have a core presence.

Citigroup Leads Wall Street Drive to Hurt Taxpayers
Taxpayers from Massachusetts to California are paying Wall Street banks to end derivative contracts gone bad as they exit the collapsing auction-rate bond market, with penalties in some cases topping $10 million and compounding the pain of rising borrowing costs.

Sacramento County, California, paid Morgan Stanley $5 million to cancel an interest-rate swap agreement when it refinanced $79.5 million in auction-rate securities last month. The fee added to the cost of the bonds after the rate on the securities more than doubled to 9.8 percent in March as dealers stopped supporting the market. "It's kind of like damage control," said Chris Marx, the county's debt officer. "It didn't make a lot of sense to us to leave the swap in place."

The breakdown of the $166 billion market where municipal rates are typically set through bidding run by a dealer is squeezing borrowers already hurt by the first decline in state sales-tax revenue in six years, according to the Nelson A. Rockefeller Institute of Government in Albany, New York. States, cities, hospitals and colleges face penalties exceeding $10 million to terminate swaps that failed to protect them against higher rates, according to interviews with borrowers and advisers.

That's on top of the $1 billion in fees they're paying to dealers to help sell bonds that would replace auction- rate securities they sold, based on industry averages. "Some of the termination fees are ugly," said Christopher "Kit" Taylor, former executive director of the Municipal Securities Rulemaking Board, the market's regulator. "It's going to be a tough lesson for a lot of issuers."

Though no data exists on how many municipalities entered into swaps, it was "the trade du jour," said Robert Fuller, a financial adviser who runs Capital Markets Management LLC in Hopewell, New Jersey. Many issuers sold auction-rate securities and then agreed to swaps with their bank, leaving them with a fixed rate derived from the taxable bond market that was often lower than conventional tax-exempt rates, he said.

Citigroup, based in New York, was the top underwriter of auction-rate securities in the municipal market, arranging $55 billion in sales between 2000 and the end of last year, according to data compiled by Thomson Reuters. Zurich-based UBS AG, which said May 6 it will close or sell its municipal bond department, underwrote $42 billion, followed by Morgan Stanley of New York at $22 billion and 19 others.

Gas jumps above $3.67, oil passes $126 on Venezuela concerns
Oil rose above $126 a barrel for the first time Friday, bringing its advance this week to nearly $10, as investors questioned whether a possible confrontation between the U.S. and Venezuela could cut exports from the OPEC member. Gas prices, meanwhile, rose above an average $3.67 a gallon at the pump, following oil's recent path higher.

On Friday, The Wall Street Journal published a report that suggested closer ties between Venezuelan President Hugo Chavez and rebels attempting to overthrow Colombia's government. Chavez has been linked to Colombian rebels previously, but the paper reported it had reviewed computer files indicating concrete offers by Venezuela's leader to arm guerillas. That appears to heighten the chances that the U.S. could impose sanctions on one of its biggest oil suppliers.

"If we put on sanctions, I'm sure Chavez would threaten to cut off our oil supply," said Phil Flynn, an analyst at Alaron Trading Corp. "Obviously that would have a major impact on oil prices." Light, sweet crude for June delivery vaulted to a new record of $126.20 in morning trading on the New York Mercantile Exchange before retreating to trade up $1.09 at $124.78 a barrel.

Even if Chavez cut oil shipments to the U.S., Venezuelan oil would still make its way to the U.S. via middle men, who would buy it from Venezuela and resell it to the U.S., Flynn said. But that new layer in the supply chain would bump up costs.
Oil prices also were boosted Friday by the dollar, which declined against the euro. The European Central Bank said it was unlikely to consider interest rate cuts to cool the strong euro against the slumping dollar.

Investors often buy commodities such as oil as a hedge against inflation when the greenback falls. A weaker dollar also makes oil less expensive to overseas investors. Many analysts believe the doubling in oil prices since this time last year has much to do with the dollar's protracted decline. Another school of thought thinks tight global supplies of oil, driven by growing demand in countries such as China, Brazil and India, is the primary factor driving oil higher.

Fried Friday
Well, well, well.

Yesterday the SEC says that banks will have to disclose that which they'd rather not tell us (what they have and how they priced it) in the United States. Now, its the Japanese!
"Japan's Financial Services Agency has called on major banks to disclose details of assets and losses related to subprime mortgages before they announce full-year earnings, Nikkei English News reported, without saying where it got the information."

Oh so now Japan gets it? Gee, how long did it take? 20 years? I do have to give the Japanese credit - they listened to Einstein. You see, they tried "hide the truth" 20 years ago, and it resulted in a "lost decade" in their economy. The Nikkei has never seen the levels it once traded at, their economy has been moribund for over a decade and their currency became the funding source for a vast arbitrage play instead of a medium of exchange. All of this adds up to raw mockery of a nation that just a few years prior was the pride of Asia.

Of course Bernanke is hellbent and determined to try a re-run of the Japanese experiment, as he has demonstrated exactly zero propensity to force banks to tell the truth, and neither has Congress. That Chris Cox and the SEC have stepped up and decided to make a run at the truth is to be lauded, but don't rest on your laurels America - there are still 535 clowns in Washington DC collecting campaign contributions and one Fed Chairman who are pushing as hard as possible in the opposite direction.

The "alphabet soup" of various funding facilities that require zero disclosure of who's tapping those "sources" along with what they're putting up and how its being valued is all the evidence you need. If we lived in a nation where honest accounting and truth was paramount every security put forward to The Fed for credit would be identified by CUSIP, its source and composition published, its valuation by The Fed made public and the organization tendering it named.

Thus we would see what The Fed thinks of it on a 28-day basis in terms of "value", which would be a tremendous improvement in disclosure. I fully expect both our politicians and The Fed to continue to "hide the sausage" right into a re-run of the 1930s, with the truth being forced out into the bright light of the sun only when these institutions fail outright.

AIG Falls After Giving 'No Assurance' Losses Are Over
American International Group Inc., the world's biggest insurer by assets, fell the most since February in New York trading after saying losses tied to faltering credit markets may continue.

AIG can offer "no assurance" that write-offs and disruptions in credit markets are over, Vice Chairman Steven Bensinger said during a conference call today. Chief Executive Officer Martin Sullivan said a dividend increase announced yesterday, which he said some investors have questioned, reflected New York-based AIG's long-term prospects.

"We harbor no illusions about the challenges ahead and recognize that many of our businesses, while largely affected by external factors, fell short of our own high expectations," Sullivan said.

Pressure is building on Sullivan to turn around AIG after the company posted two consecutive money-losing quarters for the first time since its initial public offering in 1969. AIG said yesterday it needs to raise $12.5 billion following more than $15 billion in pretax writedowns. The losses prompted Standard & Poor's and Fitch Ratings to cut the company's credit ratings.

AIG Will Raise $12.5 Billion After Record Loss On Derivatives
American International Group Inc., the world's largest insurer by assets, plans to will raise $12.5 billion after posting its second straight record quarterly loss, sending the shares down 7.7 percent. AIG had a first-quarter net loss of $7.81 billion, or $3.09 a share, compared with earnings of $4.13 billion, or $1.58, a year earlier, the company said in a statement. Standard and Poor's lowered AIG's credit rating after the insurer reduced the value of contracts it sold to protect fixed-income investors by $9.11 billion and marked down other holdings by $6.09 billion.

Chief Executive Officer Martin Sullivan's job may be on the line unless he stems losses from the subprime mortgage collapse and reverses a 12-month stock decline of 38 percent. Sullivan in December said writedowns from the housing market would be "manageable." In February, the New York-based insurer said losses by the unit that sells the fixed-income contracts won't be "material" over time.

"There aren't a lot of positives to take away from this," said David Havens, a credit analyst at UBS AG in Stamford, Connecticut, in a note to investors. "Management capability issues, which have been smoldering for a while, are likely to flare up." AIG has already started raising capital, offering $7.5 billion in stock, debt and equity units that obligate holders to buy shares. The insurer will issue another $5 billion in fixed- income securities later, spokesman Chris Winans said.

The financial products business, co-founded by Joseph Cassano in 1987, guaranteed more than $500 billion of assets for fixed-income investors at the end of 2007, including $61.4 billion in securities tied to subprime mortgages. Cassano stepped down after AIG reported a $5.29 billion loss in the fourth quarter.

S&P, Fitch cut AIG's ratings following big 1Q loss
Standard & Poor's Ratings Services and Fitch Ratings each cut their debt ratings for American International Group Inc. late Thursday, shortly after the world's biggest insurer swung to a large first-quarter loss. S&P lowered its counterparty credit ratings on AIG and several subsidiaries to 'AA-/A-1+' from 'AA/A-1+', and on AIG's indirect subsidiary, International Lease Finance Corp., to 'A+/A-1' from 'AA-/A-1+'.

S&P put the affected ratings and the 'AA+' counterparty credit and financial strength ratings of AIG's core insurance divisions on a negative watch list, suggesting further rate cuts are possible. Meanwhile, Fitch downgraded AIG's issuer default rating and senior debt ratings to 'AA-' from 'AA', and said all the ratings remain on a negative watch list. All the ratings remain investment grade.

The downgrades come after AIG reported that it swung to a bigger-than-expected first-quarter loss of $7.81 billion because of losses tied to credit swaps and mortgage-related operations. The insurer also announced plans to raise $12.5 billion through offerings of stock and other securities to fatten its capital base.

"Although we expected that AIG would have some losses in the first quarter, the level of the additional losses exceeds these expectations," S&P credit analyst Rodney Clark said in a statement.

Wachovia Removes Thompson as Chairman as Losses Mount
Wachovia Corp. Chief Executive Officer Kennedy Thompson, under fire for buying a California lender as the housing market peaked in 2006, was stripped of his role as chairman of the fourth-largest U.S. bank. Lanty Smith will become non-executive chairman, Charlotte, North Carolina-based Wachovia said in a statement yesterday. Thompson, 57, remains on the board and retains full management responsibility, spokeswoman Christy Phillips Brown said.

A group of shareholders demanded at last month's annual meeting that Thompson quit after the bank posted its first quarterly loss since 2001 because of writedowns of securities backed by subprime loans and rising home loan defaults. Thompson said this year that Wachovia's $24 billion purchase of Golden West Financial Corp. in 2006 was "ill-timed." About half of the unit's lending is in California and Florida, two states with some of the highest foreclosure rates.

"This is caving into pressure because they know the lawsuits are inevitably coming," said Nancy Bush, an independent bank analyst in Aiken, South Carolina, who rates Wachovia "hold." Splitting the CEO's and chairman's jobs "is a corporate governance move that should have been done years ago." Wachovia rose 31 cents to $28.14 in German trading today. The shares have declined 27 percent this year, third-worst in the 24-company KBW Bank Index.

Thompson's credibility was dented May 6 when the bank said its first-quarter loss was $708 million, 80 percent more than what Wachovia reported last month, because of writedowns for bank-owned insurance policies. Wachovia cut its dividend by 41 percent last month and raised almost $8 billion by selling preferred stock to ensure the bank will have enough capital.

Ilargi: A smaller trade deficit sounds nice, and it is played like that in the media. But the truth is the deficit is down because Americans can’t afford China trinkets anymore. And just maybe that is not so great. Still, who will know when viewing the positron headlines today?

U.S. March Trade Deficit Narrows As Imports Plunge
The U.S. trade deficit narrowed more than forecast in March as imports dropped by the most in more than six years, reflecting the economic slowdown. The gap shrank to $58.2 billion, the lowest this year, from a revised $61.7 billion in February, the Commerce Department said today in Washington. The shortfall with China was the smallest in two years.

Americans bought fewer automobiles and less crude oil, furniture and communications equipment from overseas as the economy grew at the slowest pace since 2001. Exports fell for the first time in more than a year, indicating economies abroad may also be starting to cool. "The report did not reflect well on the health of the underlying economy given that it was largely based on imports falling more than exports," said Russell Price, senior economist at H&R Block Financial Advisors in Detroit, who forecast a gap of $59 billion.

A weaker dollar should still cause the shortfall to diminish further by fueling demand for U.S. products, he said. Economists forecast the trade gap would narrow to $61 billion from a previously reported $62.3 billion, according to the median of 71 economists surveyed by Bloomberg News. Forecasts ranged from $59 billion to $64.9 billion. The dollar, which fell earlier today, remained lower after the figures. The U.S. currency was at $1.5447 per euro at 8:58 a.m. in New York, from $1.5393 late yesterday.

After eliminating the influence of prices, which are the numbers used to calculate gross domestic product, the trade deficit shrank to $47.2 billion, the lowest since November 2003, from $50.9 billion. Imports decreased 2.9 percent, the most since December 2001, to $206.7 billion. Purchases of crude oil dropped, even as the average price for the month jumped to a record $89.85. The quantity of petroleum bought from overseas was the lowest since February 2007.

The trade gap may not be able to keep narrowing as oil prices continue to surge. Crude oil prices jumped to over $125 a barrel today, the highest ever. Demand for goods from China suffered the biggest slump last month, helping to narrow the trade gap with that nation to $16.1 billion, the smallest in two years. At the same time, exports to China were the second-highest ever.

India Bans Rubber, Soybean Oil Futures to Cool Prices
India, the world's second-largest buyer of vegetable oils, banned futures trading in soybean oil, rubber, chickpeas and potatoes as the government seeks to rein in the fastest inflation since 2005. The Forward Markets Commission halted trading for at least four months from today, Anupam Mishra, a director at the market regulator, said last night in a phone interview. Trades will be settled at yesterday's closing price.

Communist allies of Prime Minister Manmohan Singh want to ban futures in cooking oil, sugar and other commodities to tame inflation that reached 7.57 percent last month. While a study found no evidence that halting rice and wheat futures last year curbed prices, the government needs to keep food affordable for the half the 1.1 billion people who live on less than $2 a day.

"Halting futures trading will probably have little impact on Indian inflation," Anne Frick, a senior oilseed analyst for Prudential Financial in New York, said in an e-mail. "World soy- oil prices are up due to fundamental factors, not speculation." More than a dozen nations including China, India and Vietnam have taken steps to curb food costs, including halting exports of rice. French Agriculture Minister Michel Barnier urged limits to speculation after prices that rose 57 percent in the year ended March sparked unrest in Indonesia, Haiti, Egypt and Ivory Coast.

"We must look at what is happening to prices and who is speculating," Barnier said in an interview with Bloomberg Television yesterday. "We must look carefully at futures markets and take measures to limit this speculation." The four commodities banned by India have a daily traded value of about 12 billion rupees ($288 million) on the Multi Commodity Exchange of India Ltd. and the National Commodities & Derivatives Exchange Ltd., according to the regulator. Trading of all commodities on India's 23 exchanges totaled $922 billion in the year to March.

Finance Minister Palaniappan Chidambaram said on May 4 the government may halt some contracts because of political pressure to see "if it has any impact at all on inflation." The government-appointed panel chaired by economist Abhijit Sen last month didn't recommend extending the ban to other food commodities, saying there was no conclusive evidence to suggest futures trading contributed to price increases.

Chickpeas futures surged 89 percent in the past 12 months on the National Commodities exchange, while rubber rose 41 percent and soybean oil advanced 21 percent in the period. "Prices may start to rise again if supply-side constraints are not eased," Si Kannan, associate vice president at Kotak Commodity Services in Mumbai, said by telephone. "The ban is a short-term measure."

Global free market for food and energy faces biggest threat in decades
The global free market for food and energy is facing its biggest threat in decades as a host of countries push through draconian measures to hold down prices, raising fears of a new "resource nationalism" that could endanger world food security. India shocked the markets yesterday by suspending trading in futures contracts for a range of farm products in a bid to clamp down on alleged speculators and curb inflation, now running at 7.6pc.

The country's Forward Markets Commission said contracts for soybean oil, chana (chickpeas), potatoes, and rubber had been banned for four months, even though a report by the Indian parliament last month concluded that soaring food costs had almost nothing to do with the futures contracts. Traders in Mumbai slammed the ban as an act of brazen political populism.

The move has been seen as a concession to India's Communist MPs - key allies of premier Manmohan Singh - who want a full-fledged ban on futures trading in sugar, cooking oil, and grains. As food and fuel riots spread across the world, a string of governments have resorted to steps that menace the free flow of food and key commodities. Argentina has banned beef exports, while Egypt and India have stopped shipments of rice.

Kazakhstan has prohibited wheat exports. Russia has slapped a 40pc export duty on shipments, and Pakistan a 35pc duty. China, Cambodia, Malaysia, Philipines, Sri Lanka, and Vietnam have all imposed export controls or forms of rationing to ease the crisis. UN Secretary-General Ban Ki-moon has warned that this lurch towards national controls is becoming a threat to the open global system we all take for granted. "If not handled properly, this crisis could result in a cascade of others and affect political security around the world," he said.

A new report by UBS says the scramble for scarce raw materials is turning ever more political, with ominous implications for ill-endowed societies that rely on imports. "The bottom line is that countries with resources, particularly in food and energy are becoming more protective of these resources," it said. Nationalist policies are making the crisis worse. Governments are blocking foreign investments in sensitive sectors, imposing arbitary taxes, or meddling in details.

UBS said political intervention in the African Copper Belt, Kazakhstan, and Mongolia was already taking its toll on copper output, while oil companies are being shut out of key markets such as Russia - with damaging effect on oil production. Even the US and Europe are falling prey to some of these populist impulses. A group of top Democratic senators on Capitol Hill this week called for draconian measures to halt speculative trading on oil futures, widely blamed for pushing crude prices to $124 a barrel.

They have drafted the Consumer-First Energy Act mandating higher margin requirements on oil futures contracts, as well as revoking $17bn in tax concessions for oil companies and imposing a 25pc windfall tax on oil profits. "Big oil is making money hand over fist: We will hold them accountable for their unconscionable price-gouging and force them to invest in renewable energy," said Senator Harry Reid, the Senate Majority Leader.

Martin Schulz, MEP, the leader of the Socialist group in the European Parliament, said speculators had crossed a moral line by trying to corner positions in the staple foods at a time when 100m people in the poorest countires are at risk of famine.

"Casino capitalism has taken a seat at the table of the poor. This is immorality carried to the extreme. We need international controls on financial markets," he said, echoing a feeling share widely by Europe's political class..

Rice Trades at Daily Limit for Third Day, Prices up for Sixth Day
Rice surged for a third day by the maximum allowed as Nigeria and the Philippines, the two largest importers, sought shipments, further straining global supplies after a cyclone devastated crops in Myanmar. Nigeria is looking for 500,000 metric tons of Thai rice, said Bhartendu Pandey, a trader at Thai Maparn Trading Co. The Philippines is in talks with Thailand and Vietnam, National Food Authority spokesman Tomas Escarez said today.

Rice advanced for a sixth day in Chicago, trading within 6.7 percent of the all-time high reached April 24. Flooding from the May 3 cyclone may limit Myanmar's main rice crop. Rice, wheat and corn have risen to records this year, prompting the United Nations to call for emergency aid to relieve a global food crisis that has caused riots from Haiti to Egypt.

"The cyclone damage in the country has again highlighted tight global supplies of rice," Kenji Kobayashi, an analyst at Kanetsu Asset Management Co., said by telephone from Tokyo today. "The rice price is now set to retest the previous peak."

Rice rose $1.15 to $23.50 per 100 pounds on the Chicago Board of Trade. The contract, which has more than doubled in the past year, reached a record $25.07 on April 24. Nigeria, the world's second-largest rice importer, on May 7 suspended levies on imports for six months and offered subsidized seedlings to farmers to curb rising food prices.

Ilargi: Allow me to quote myself from last week in A culture of death :

What is happening is exactly the same as when the Europeans started expanding 500 years ago, looking for new land to feed their growing numbers. But there never was any "New Land" then, and there certainly isn't any now. We all know to some extent what the European expansion meant for the indigenous populations of the countries they invaded. The main difference, 5 centuries later? There are 10 times as many people in the world today.

China eyes overseas land in food push
Chinese companies will be encouraged to buy farmland abroad, particularly in Africa and South America, to help guarantee food security under a plan being considered by Beijing. A proposal drafted by the Ministry of Agriculture would make supporting offshore land acquisition by domestic agricultural companies a central government policy.

Beijing already has similar policies to boost offshore investment by state-owned banks, manufacturers and oil companies, but offshore agricultural investment has so far been limited to a few small projects. If approved, the plan could face intense opposition abroad given surging global food prices and deforestation fears. However an official close to the deliberations said it was likely to be adopted.

“There should be no problem for this policy to be approved. The problem might come from foreign governments who are unwilling to give up large areas of land,” the official said. The move comes as oil-rich but food-poor countries in the Middle East and north Africa explore similar options. Libya is talking with Ukraine about growing wheat in the former Soviet republic, while Saudi Arabia has said it would invest in agricultural and livestock projects abroad to ensure food security and control commodity prices.

China is losing its ability to be self-sufficient in food as its rising wealth triggers a shift away from diet staples such as rice towards meat, which requires large amounts of imported feed. China has about 40 per cent of the world’s farmers but just 9 per cent of the world’s arable land. Some Chinese scholars argue that domestic agricultural companies must expand overseas if China is to guarantee its food security and reduce its exposure to global market fluctuations.

“China must ‘go out’ because our land resources are limited,” said Jiang Wenlai, of the China Agricultural Science Institute. “It will be a win-win solution that will benefit both parties by making the maximum use of the advantages of both sides.” In the first quarter of this year, food prices in China rose 25 per cent from a year earlier, the highest level of farm inflation since the early 1990s, said UBS.

U.S. House Approves Democratic Anti-Foreclosure Bill
The U.S. House of Representatives approved legislation to let the government insure up to $300 billion in mortgages to help homeowners avert foreclosure, after the White House said the measure would force taxpayers to bear excessive risk.

The House voted 266-154 for the housing package offered by Massachusetts Democrat Barney Frank. The plan would have the Federal Housing Administration insure refinanced mortgages after loan holders agree to cut principal to make payments affordable. "We're in a recession and a major cause of that recession is the subprime crisis," Frank, chairman of the House Financial Services Committee, said today on the House floor. "We do not see any alternatives to this bill to try to work on that."

Democrats in Congress are at odds with Republican lawmakers and the Bush administration over efforts to stem foreclosures amid the worst housing slump in a quarter century. The White House favors a voluntary, industry-led program to modify loan terms and yesterday issued a veto threat against Frank's bill.

Republicans oppose using government funds, saying that would reward lenders and investors who acted recklessly and is unfair to homeowners who are keeping up with mortgage payments. Democrats including Frank say government funding is needed to preserve neighborhoods and help homeowners who were steered into loans they couldn't afford.

A vast majority of Americans "are now going to assume responsibility for ill-advised financial decisions and misjudgments of other people," said Representative Spencer Bachus of Alabama, the top Republican on the House Financial Services Committee, today on the House floor. Frank's FHA proposal would cost $2.7 billion and help about 500,000 homeowners, according to a Congressional Budget Office estimate. Federal Reserve Chairman Ben S. Bernanke indicated support for the plan during a May 5 speech without explicitly endorsing it.

Barely surviving on credit cards
These days, more and more people are saying "Charge it." Finding themselves strapped for cash and unable to use their home as an ATM, Americans are increasingly turning to credit cards to cover gas, groceries and other living expenses. But many find themselves struggling to pay the burgeoning bills at a time when even the basic needs are growing costlier.

"Other sources of money for a lot of Americans are drying up," said Dick Reed, regional counseling manager of Consumer Credit Counseling Service of Greater Atlanta, who sees more clients with mounting credit card debts these days. "Consumers just don't have a place to go to get money. They are digging themselves into a deeper hole not only to pay for normal living expenses, but to make minimum payments on outstanding debt."

Government and agency statistics illustrate this troubling trend. The Federal Reserve reported Wednesday that Americans' credit card debt jumped 6.7% in the first quarter of this year to $957.2 billion, This spike comes despite the fact that nearly one in three banks is tightening guidelines for credit cards.

In Atlanta, debtors calling the agency in the first quarter of this year had an average of $29,300 in unsecured debt, primarily on credit cards, up from $25,700 in 2007. They spent $335 on groceries and $242 on gas, on average, in April. A year earlier, those outlays averaged only $291 and $181, respectively.

For many people, racking up credit card debt is not a choice they want to make, experts say. Not too long ago, they could have tapped into the equity in their homes through loans or lines of credit or refinancing. But this debt, which usually carries lower interest rates, is no longer as widely available with the collapse of the housing market. So, faced with soaring costs for food and fuel, people find they must charge more to make ends meet.

"They are not able to increase their income, but their expenses are going up, so the credit card becomes a way to cope," said Sara Gilbert, executive director of the Consumer Credit Counseling Service in Fort Collins, Colo. Take Lois Eldridge. The Arizona retiree has watched in dismay as her credit card balance doubled to $2,000 over the last few months. Higher gas and grocery prices forced her to charge these essentials for the first time late last year.

She has since drastically reduced her spending on clothing, entertainment and dining out. It's helped, but she says she's still adding about a $100 a month to her balance. The retired criminology professor also has tried to get a job at a local college in order to supplement her Social Security and savings. But she found would-be employers either paid too little or told her she was overqualified. Her only other options were minimum-wage jobs at local retailers.

"My income has stayed the same, but my expenses are much more than they were last year, even with my attempts to cut back," said Eldridge, 71, who plans to put her federal tax rebate toward her debt. "I'm somewhat overwhelmed that I've had to use credit cards, which I've never had to do before. All I've done in the last four to six months is worry, worry, worry."

Unexplained Mass Bee Die-Off Hits German Hives
Bees in the German state of Baden-Württemburg are dying by the hundreds of thousands. In some places more than half of hives have perished. Government officials say the causes are unclear -- but beekeepers are blaming new pesticides.

In Germany's bucolic Baden-Württemburg region, there is a curious silence this week. All up and down the Rhine river, farm fields usually buzzing with bees are quiet. Beginning late last week, helpless beekeepers could only watch as their hives were hit by an unprecedented die-off. Many say one of Germany's biggest chemical companies is to blame.

In some parts of the region, hundreds of bees per hive have been dying each day. "It's an absolute bee emergency," Manfred Hederer, president of the German Professional Beekeeper's Association, told SPIEGEL ONLINE. "Fifty to 60 percent of the bees have died on average, and some beekeepers have lost all their hives." The crisis hit its peak last weekend. Beekeepers from Germany's Baden-Württemburg reported hives full of thousands of dead bees.

The worst-hit region, according to state officials, was along the upper Rhine river between the towns of Rastatt and Lorrach. The Rhine valley is one of Germany's prime agricultural regions. Regional officials spent the week testing bees, pollen, honey and plant materials to look for the die-off's causes. The Julius Kühn Institute in Braunschweig, a federal research institute dealing with agricultural issues, set up a special hotline for beekeepers to send in dead bees for analysis.

But on Friday, Baden-Württemburg Agriculture Minister Peter Hauk said scientists still weren't sure what was behind the disaster. "As long as the causes are still unclear, we must consider all the possible ways we can reduce the risks for the bees," Hauk said. Hauk encouraged beekeepers to move their hives outside the affected area to prevent further damage.
Meanwhile, Germany's beekeepers were pointing fingers at one of Germany's largest companies, blaming a popular, recently-introduced pesticide called clothianidin for the recent die-off.

Produced by Monheim-based Bayer CropScience, a subsidiary of German chemical giant Bayer AG, clothianidin is sold in Europe under the trade name Poncho. It's designed to attack the nervous systems of insects "like nerve gas," says Hederer. The chemical was used last year to fight an outbreak of corn rootworm, and its success against the pest led to a much wider application this spring up and down the Rhine.

But clothianidin is not a particularly selective poison. According to the US Environmental Protection Agency's fact sheet on the pesticide, "clothianidin is highly toxic to honey bees." Seeds are treated with the clothianidin in advance or sprayed with it while in the field, and the insecticide can blow onto other crops as well.

The chemical is often sprayed on corn fields during the spring planting to create a sort of protective film on cornfields. Beekeepers say it's no coincidence that the bee die-off began at the beginning of May, right when corn planting started. "It's the pesticides' fault, one hundred percent," Baden Beekeeper Association chairman Ekkehard Hülsmann told the Bädische Zeitung newspaper.

The circumstantial evidence is piling up. Beekeepers and agricultural officials in Italy, France and Holland all noticed similar phenomena in their fields when planting began a few weeks ago. French beekeepers recently protested the use of clothianidin in the Alsace region, just across the Rhine from Baden-Württemburg. Hederer said German officials have been ignoring the damage pesticides do to bee populations for years.

"The people who work in government agencies are all in the pockets of manufacturers," he said. Beekeepers are fed up, he says: "We've decided that keeping bees is more important than keeping our mouths shut."

1 comment:

Anonymous said...

I'm fascinated towards the trend of virtual colonisation by the Chinese. In the old days if you needed more agricultural land for a growing population you had to find an "underutilized" continent and wipe out the natives.

Today, you just invest in multinational agribusiness. Funnily enough the Chinese seemed to have learned this technique from the USA.

Of course once you have a local subsiduary in Argentina or Brazil or the Ukraine or Tanzania, that company can then sponsor Chinese workers to come over and run the local operations. Nothing unusual there. You can bring people over on temporary visas for a couple of years, then rotate them out and bring new people in.

If the colonisers actually turned up with families in tow, planted a permanent settlement, and claim sovereignty, you'd have a war.
But a corporation using "guestworkers" can achieve exactly the same thing under the radar.