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Thursday 6 November 2008
Temasek's A$400m investment in ABC Learning bites the dust
ABC Learning Centres Ltd., the world’s largest child care operator, was seized by its lenders after the global credit crisis forced up the cost of servicing its debt, which jumped almost 20 times over a three-year buying spree.
Singapore’s Temasek doesn’t come off unscathed as it ploughed A$400m into ABC Learning (ASX:ABS), the world’s biggest provider of Child Care Centres, at A$7.30 a share 12 months ago and closed at A$0.69 on 4 Aug 2008 since it executed a debt-funded expansion and its over 1,000 centres in the USA is seeing dwindling enrolment with the global economic crunch.
(Bloomberg) -- ABC Learning Centres Ltd., the world’s largest child care operator, was seized by its lenders after the global credit crisis forced up the cost of servicing its debt, which jumped almost 20 times over a three-year buying spree.
Outside managers from Ferrier Hodgson have been appointed, the Brisbane-based company said in a statement today. Bankers for ABC Learning, including Commonwealth Bank of Australia and Westpac Banking Corp., named McGrathNicol as receiver to 38 divisions of the business.
ABC Learning, which looks after one in three Australian children in day-care through almost 1,100 centres, joins Allco Finance Group as the second Australian company to appoint outside managers this week after being unable to repay debt. Former Chief Executive Officer Eddy Groves, who left the company Sept. 30, borrowed to expand in the U.S. and U.K., almost quadrupling the number of centres it operated in 2 1/2 years.
“The board and current management team are disappointed to be in this position despite the efforts of so many staff and the continued support of parents,” Chairman David Ryan said in the statement. “The management team have worked tirelessly over the past few weeks to ensure that families across Australia and New Zealand continue to have access to quality childcare.”
After peaking at A$8.80 in 2006, giving ABC Learning a market value of A$4.8 billion ($3.4 billion), its shares lost 94 percent of their value before being halted from trade in August, when it failed to release earnings.
Debt Balloons
ABC Learning’s total debt at June 30, 2007 was A$2.2 billion, compared with A$111 million at the end of fiscal 2004. The company hasn’t filed annual results for the 2007/08 financial year.
About 40 percent of ABC Learning’s Australian sales came from government subsidies, while 25 percent came from the U.S. The Australian government is tipped to spend A$11 billion on childcare services by fiscal 2012. The U.S. government spends about $22 billion on child care subsidies and funding, about 40 percent of all childcare expenditure, ABC Learning said last year.
After starting with 43 centres when it made an initial share sale in 2001, ABC Learning acquired operators in Australia, New Zealand, the U.S. and U.K.
ABC now has stakes in 2,323 child care centers including 1,000 in the U.S. from its takeover of operators including La Petite Holdings Inc. and Children’s Courtyard LLP.
Morgan Stanley
The company sold a 60 percent stake in its U.S. operations to Morgan Stanley in April, and in September Computershare Ltd. agreed to buy its U.K. vouchers business for 90 million pounds ($142 million).
Commonwealth Bank, Australia’s second-biggest lender by assets, said Aug. 13 its fiscal 2009 net income will fall about A$100 million after it wrote down the value of listed noted in ABC Learning.
Eddy Groves and his wife Le Neve quit the company in September with Rowan Webb, a former retail clothing executive, appointed as interim CEO.
The Groves’, once the third-largest investors in ABC Learning with a 7.8 percent stake, sold most of their 37 million shares this year as the slumping price prompted margin lenders to demand sales.
MUMBAI: The recent market turmoil has claimed its first victim. Lotus Mutual Fund, the asset management company floated by Temasek of Singapore and Sabre Capital, is on the block, weighed down by losses in its investments and asset-liability mis-matches in its portfolio, market sources said.
Religare Aegon Mutual Fund, a joint venture between Delhi-based Religare and Aegon, the Dutch financial group, is believed to be the front runner to ‘buy' Lotus's assets.
Interestingly, the deal which was being negotiated till late into Monday night, requires that Temasek and Sabre Capital jointly will guarantee losses worth at least Rs 100 crore to Religare Aegon, post-deal. This is to take care of any future losses while liquidating Lotus MF's assets. So in effect, the deal is being structured in such a way that Religare Aegon MF will get Lotus MF's assets and also get about Rs 100 crore rather than paying any money to Lotus MF's sponsors (shareholders), sources said. ‘‘By the time the deal is signed, it (the payment to Religare Aegon MF) could even be more than Rs 100 crore,'' a source close to the deal said.
Ambit Capital is the investment banker for Temasek-Sabre Capital while Religare Securities was acting on behalf of Religare Aegon MF. Ajay Bagga, CEO, Lotus MF, Sunil Godhwani, CEO & MD, Religare Enterprises, the holding company for Religare group, and Ashok Wadhwa, head of Ambit Capital did not respond to TOI's request for comments.
Temasek is the investment arm of the government of Singapore. Sabre Capital is headed by Rana Talwar, the former global CEO of Standard Chartered Bank.
Talwar is also credited with buying out Centurion Bank, then turning around and eventually selling it out to HDFC Bank earlier this year. Data released by Association of Mutual Funds in India (AMFI) on Monday showed that as of October 31, Lotus MF's assets under management was nearly Rs 5,900 crore.
Credit-Default Swaps on Italy, Spain Are Most Traded
By Shannon D. Harrington and Abigail Moses
Nov. 5 (Bloomberg) -- Credit-default swap traders wagered the most on debt of Italy, Spain and Deutsche Bank AG, according to a Depository Trust & Clearing Corp. report that gives the broadest data yet on the unregulated market.
A total $33.6 trillion of transactions are outstanding on governments, companies and asset-backed securities worldwide, based on gross numbers, the DTCC said in the report released on its Web site yesterday. After canceling out offsetting trades, investors have taken out a net $22.7 billion of contracts based on Italy's debt, $16.7 billion against Spain and $12.5 billion on Deutsche Bank of Frankfurt, the report shows.
The DTCC data is the first glimmer of transparency in an unregulated market that U.S. and European authorities blame for inflaming the credit crisis that led to almost $690 billion in bank losses and writedowns. Spain and Italy are among the European countries worst hit, with government data showing both nations are in the grip of a recession.
``There have been big changes in the credit quality of Spain and Italy, and buying credit-default swaps is a safe-haven bet in a crisis,'' said Philip Gisdakis, a Munich-based credit analyst at UniCredit SpA.
Smaller Volume
DTCC, which operates a central registry of credit-default swap trades, reported a smaller amount of outstanding credit- default swap trades than some previous estimates. The International Swaps and Derivatives Association estimated last week the market totaled $47 trillion, while the Bank for International Settlements estimated there were $57.9 trillion of contracts outstanding as of the end of last year. DTCC's data may calm concerns that investors and dealers have too much at risk, said Brian Yelvington, a New York-based strategist at fixed- income research firm CreditSights Inc.
``Far too much mistrust has been engendered by the lack of transparency,'' Yelvington said. ``There's still a lot here that's not captured. But it's a step in the right direction.''
Trading in credit-default swaps, which pay the buyer face value in exchange for the underlying securities should a borrower fail to adhere to its debt agreements, exploded 100-fold during the past decade.
The credit-default swaps market has moved beyond its origins of protecting banks from loan losses to a way for hedge funds, insurance companies and asset managers to speculate on the creditworthiness of companies, governments and other borrowers, including homeowners.
Buffett, Mack
Morgan Stanley Chief Executive Officer John Mack said in September there was ``no rational basis'' for a widening in credit-default swaps on his investment bank, that became a bank holding company amid a stock-price plunge. Billionaire investor Warren Buffett has called the contracts a ``time bomb.''
The collapse of Lehman Brothers Holdings Inc. contributed to a decline in financial markets last month because no one knew how many credit-default swap contracts were outstanding on the securities firm, how many contracts the company had written and who held them. They are private contracts between two parties, don't trade on an exchange and aren't processed through a central clearinghouse, making it virtually impossible for the public to asses the amount wagered on the debt. Estimates on Lehman contracts ranged as high as $400 billion, though the actual amount turned out to be $72 billion, the DTCC said.
Trading Data
After subtracting redundant trades, only $5.2 billion of trades actually changed hands, DTCC said last month, the first time it had released such information from its data warehouse.
Dealers have been trying to reduce the number of contracts outstanding by tearing up overlapping trades, helping reduce the net number of transactions and allaying concerns that the market was too large. The Federal Reserve and the European Central Bank are pushing dealers to create a clearinghouse to act as a counterparty on each trade, eliminating the risk of one side defaulting.
The DTCC, which is controlled by a board of members including JPMorgan Chase & Co. and Goldman Sachs Group Inc., doesn't list contracts on all companies, governments and other securities beyond the top 1,000 in the registry, on which there are a net of $183.3 billion. And there's not a clear accounting of what may exist beyond the registry.
Spain, Italy
Investors have focused wagers on debt of industries and countries that may be most affected by a credit crisis entering its 15th month. The Spanish economy is headed toward its first recession in 15 years amid a slump in its housing market and banking and finance shares have dropped as the credit seizure caused some to collapse.
Credit-default swaps on Italy were quoted at 107.5 basis points today, CMA Datavision prices on 10-year contracts show, after reaching a record 138 basis points on Oct. 24. The contracts have more than doubled since August. Today's price represents a cost of $107,500 a year to protect $10 million of debt for 10 years.
Contracts on Spain climbed to 112 basis points on Oct. 24, from about 47 basis points at the start of September. They have since dropped back to 79 basis points.
``The bigger the outstanding amount of debt, the bigger the volume of credit-default swaps,'' said UniCredit's Gisdakis. ``Sovereigns have huge debt outstanding. Deutsche Bank has a huge balance sheet, so it's quite understandable it's at the top of the list.''
ECB Meeting
The ECB met with regulators, lenders and investors this week to discuss ways of increasing transparency in the default swaps market on its side of the Atlantic. A central counterparty is an ``appropriate solution'' for reducing risk, the ECB said in a statement. Auctions this week are meantime settling default swaps on debt of Iceland's three biggest banks.
In total, about $15.4 trillion of transactions were linked to individual corporate, sovereign and asset-backed bonds worldwide at the end of October, the DTCC data showed. About $14.8 trillion was tied to indexes.
Among companies, GE Capital Corp., the finance arm of General Electric Co., New York-based Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs Group Inc. had the biggest dollar amount of contracts tied to their debt on a net basis, after Deutsche Bank, Germany's biggest lender, DTCC said. New York- based Merrill agreed in September to sell itself to Bank of America Corp.
The net figures are the maximum that sellers would have to pay to buyers if the borrowers defaulted, DTCC said.
Netting Trades
Turkey, Italy, Brazil, Russia, GMAC LLC, and Merrill Lynch had the biggest gross amount of contracts outstanding on their debt as of Oct. 31. Turkey alone had $188.6 billion of default swaps written against its debt. The gross amount doesn't take into account offsetting trades. After netting the trades, there were $7.6 billion outstanding on Turkey.
The industry should ``get the word out about the small size of these risks compared to the notional amounts on which the contracts are based,'' said Mark Brickell, chief executive officer of Blackbird Holdings Inc., which provides an electronic trading system for derivatives, and former chairman of ISDA.
Criticism of the market intensified in September after the collapse of Lehman and the U.S. government's bailout of American International Group Inc., which faced bankruptcy after credit- rating downgrades forced it to post more than $10 billion in collateral on credit swap trades that had plunged in value. There's a net $4.6 billion in contracts tied to AIG, the DTCC data show.
Cox on Disclosure
U.S. Securities and Exchange Commission Chairman Christopher Cox called for authority to regulate the credit swaps market, saying the lack of disclosure and the web of connections between dealers in the market threatened the stability of the financial system. The Federal Reserve Bank of New York, which has spent the last three years pushing dealers to curb risks in the credit swaps market, last week said it welcomed the DTCC's disclosure.
``Publishing this data will provide greater transparency in a critical market,'' Tim Ryan, head of the Securities Industry and Financial Markets Association, said in a statement today. ``This is an important initiative upon which the industry will continue to build.''
Funding Drought Slams Chinese Plans as Banks Shun Plea to Lend
By Luo Jun in Shanghai
Nov. 5 (Bloomberg) -- Wang Yi, who employs 300 people making children's raincoats on China's east coast, is worried his company won't survive the next year as exports dry up.
The apparel manufacturer, which supplies European supermarket chains Tesco Plc and Aldi Group, needs a 600,000 yuan ($88,000) loan by Jan. 31 to stay afloat. China's state-owned banks rejected his previous applications.
``There's no point trying them again,'' says Wang, 40, standing in his two-story factory in Pinghu, about 90 kilometers (56 miles) southwest of Shanghai, where one floor is half empty. ``They prefer big customers.''
China's largest banks, with 4 trillion yuan of cash, are resisting government efforts to boost lending to 42 million small and medium-size companies that drove the economic boom of the past decade. On Nov. 2, the central bank scrapped curbs on loans after three interest rate cuts in seven weeks failed to revive economic growth that has sagged to its slowest in five years.
Half the nation's toy exporters have closed this year, and 67,000 smaller enterprises filed for bankruptcy in the first half, according to government statistics. Companies with assets of less than 40 million yuan provide three-quarters of urban jobs and 60 percent of China's gross domestic product.
``Their failure will lead to unemployment and may threaten social stability,'' says Frank Gong, JPMorgan Chase & Co.'s Hong Kong-based chief China economist.
Controls Scrapped
After five years of economic growth above 10 percent, the rate may slow to 5.8 percent this quarter, according to a Nov. 3 estimate by Credit Suisse Group AG. That would be the lowest rate since at least 1994, according to data compiled by Bloomberg.
In its latest move to reverse that trend, China's central bank said Nov. 2 it would no longer cap commercial bank lending, state-owned Xinhua news agency reported, scrapping a limit imposed in 2007 to prevent the economy from overheating.
In August, the People's Bank of China raised the quota by 5 percent to 3.8 trillion yuan, directing lenders to funnel the additional funds to firms with assets of less than 10 million yuan and farmers.
Banks have so far turned a deaf ear. With delinquency rates on loans to small companies running almost four times those of other loans, they want to avoid the state-directed lending that led to a $500 billion government bailout over the past decade.
``It's wishful thinking for the government to try to talk banks into lending to stimulate the economy,'' says Li Qing, a Shanghai-based analyst at CSC Securities HK Ltd. ``Banks are holding onto their purse not because they are bound by the quota, but because they are expecting mounting defaults and failures.''
`Scaling Back'
Nationwide, loans to small businesses by China's 20 biggest lenders rose 6.2 percent to 3.2 trillion yuan in the first six months of 2008, less than half the 14.1 percent growth in overall lending, according to the China Banking Regulatory Commission.
In Zhejiang province, where Wang is based and 99 percent of companies are small and privately owned, loans are increasingly hard to come by. Industrial & Commercial Bank of China Ltd., the nation's largest, offered 5 billion yuan of new loans to small enterprises in the province during the first six months of 2008, less than half the year-earlier figure, according to the bank.
``Getting a loan takes longer and involves more procedures for small companies,'' says Wang, who is being squeezed by a 20 percent dip in sales as well as higher commodity prices and an appreciation of the yuan, which reduces revenue from exports.
``Every line of business I know is scaling back to preserve capital as survival is the most important thing,'' he says. ``The whole mess in the U.S. and Europe means 2009 will be worse.''
Goldman Sachs, Temasek
Banks are reluctant to reverse the tightening of risk management that was carried out with advice from foreign investors, including Goldman Sachs Group Inc., that have paid $21 billion for stakes in Chinese lenders since 2005.
``Chinese banks are getting smarter and they won't blindly follow lending directives from the top any more,'' says Leo Gao, who helps oversee the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai. ``We've seen banks start to cut back loans to real estate and exporters since the second quarter as they know an outbreak of bad loans is on the horizon.''
Bank of China Ltd. reformed its credit policies with help from Temasek Holdings Pte, which owns a 4.1 percent stake.
The bank now asks borrowers for more documents to prove they have orders that will provide revenue to repay a loan, as well as more collateral and third-party guarantees. It also has moved decision-making from local branches to centralized units at provincial headquarters.
Bank `Dilemma'
Lending to smaller companies is ``challenging,'' because each loan uses the same resources as are required to serve bigger corporations, reducing returns on these higher-risk transactions, says Wang Zhaowen, a Beijing-based spokesman for the bank.
``It's a dilemma and we are trying to find a way out,'' he says. ``Never again will we lower lending standards to meet government directives. Otherwise, we just slip back to the old path.''
About 8.5 percent of the bank's advances to small and medium-size companies were at least 90 days overdue on June 30, compared with 2.6 percent of total lending.
Decades of state-directed lending left China's four biggest banks with bad loans equal to almost 40 percent of outstanding loans in 1998. They were still sitting on $171 billion of soured debt, or 6.1 percent of total advances, at the end of June, compared with 0.5 percent for international banks in China.
``Banks will pay a heavy price for being good corporate citizens,'' says Dorris Chen, a Shanghai-based analyst at BNP Paribas SA. ``And they alone can't keep these companies from failing.''
Some banks that specialize in dealing with smaller firms are already feeling the pinch. China Minsheng Banking Corp., the nation's first privately owned bank, said overdue loans increased 22 percent in the first half from the end of last year.
Factory owner Wang is now trying the Pinghu city cooperative bank, a regional lender whose interest rates are as much as 20 percent higher than state banks. He doesn't think he'll need to try the last resort, a loan shark who charges four times that.
``With all the policies on easing lending, I'm optimistic,'' he says. ``Even if I get it, next year is going to be tough.''
Do our rulers know enough to avoid a 1930s replay?
Events are moving with lightning speed as the global credit freeze evolves into something awfully like a classic trade-depression.
By Ambrose Evans-Pritchard 20 Oct 2008
The commodity and emerging market booms are breaking in unison, leaving no more bubbles left to burst. Almost every corner of the world is now being drawn into the vortex of debt deflation.
The freight rates for Capesize vessels used to ship grains, coal, and iron ore have fallen 95pc to $11,600 since May, hence the bankruptcy of Odessa’s Industrial Carriers last week with a fleet of 52 vessels. Cargo deliveries dropped 15.2pc at the US Port of Long Beach last month, but that is a lagging indicator.
From what I have been able to find out, shipping is slowing as fast as it did in the grim months of late 1931. “The crisis is now in full swing across the entire world,” said Giulio Tremonti, Italy’s finance minister. “It is hitting the real economy, the productive forces of industry. It’s global, it’s total, and it’s everywhere,” he said.
Italy’s industrial output has fallen 11pc in the last year. Foreign orders have dropped 13pc. But we are all in much the same boat. Europe’s car sales fell 9pc in September (32pc in Spain). US housing starts fell to a 45-year low in September.
Last week, the International Monetary Fund had to rescue Hungary and Ukraine as contagion swept Eastern Europe. It would not surprise me if Russia itself were to tip into a downward spiral towards bankruptcy (again) and fascism (again).
Russia’s foreign reserves have fallen by $67bn since August. Ural crude prices fell to $65 a barrel last week, below the budget solvency threshold of the now extravagant Russian state.
The new capitalists have to repay $47bn in foreign loans over the next two months. In Russia, oligarch fiefdoms built on leverage - Mikhail Fridman (Alfa), Oleg Deripaska (Basic Element), and Vladimir Lisin (Novolipetsk) - are lining up for state bail-outs from a $50bn rescue fund.
Brazil is free-fall as well. Sao Paolo’s Bovespa index is down a third in dollar terms in a month. Hopes that the BRIC quartet (Brazil, Russia, India, and China) would take over as the engine of world growth have proved yet another bubble delusion.
China says 53pc of the country’s 3,600 toy factories have gone bust this year. Economist Andy Xie says China is at imminent risk of its own crisis after allowing over-investment to run rampant, like Japan in the 1980s. “The end is near. They’ve been keeping this house of cards going for a long time with bank support,” he said.
Lord (Adair) Turner, the head of Britain’s Financial Services Authority, offers soothing words. “There is no chance of a 1929-33 depression. We know how to stop it happening again,” he said.
I hope Lord Turner is right, but his Olympian certainty bothers me. It assumes that the economic elites a) understand what happened in the 1930s – on that score I suspect that few, other than the Fed’s Ben Bernanke, have delved into the scholarship (sorry, Galbraith’s pot-boiler The Great Crash does not count);
b) that central banks will now jettison the dogma of inflation-targeting that got us into this mess by lulling them into a false sense of security as credit growth and housing booms went mad. Will they now commit the reverse error as credit collapses?
c) understand that non-US banks – especially Europeans – have used the shadow banking system to leverage a $12 trillion (£7 trillion) spree around the world, and that this must be unwound as core bank capital shrivels away;
Yes, the Fed made frightening errors in the early 1930s by raising rates into the crisis, but they were constrained by the norms of the age: the fixed exchange system (Gold Standard), and fear of the bond markets. Are today’s central banks are doing much better? The Europeans fell into the trap of equating this year’s oil and food spike with the events of the early 1970s.
As readers know, I view European Central Bank’s decision to raise rates to 4.25pc in July – when Spain’s property market was already crashing, and Germany and Italy were already in recession – as replay of 1930s ideological madness.
You could say the ECB also acted under the constraints of the age: its rigid inflation mandate. But I suspect that Bundesbank chief Axel Weber and German finance minister Peer Steinbruck were quite simply too arrogant to listen to anybody.
Mr Steinbruck insisted that “German banks are far less vulnerable than US banks” just days before the collapse of Hypo Real with €400bn (£311bn) of liabilities. Had he not read the IMF reports showing that German and European lenders have an even thinner Tier 1 capital base than American banks?
One can only guess what French President Nicolas Sarkozy has been saying to ECB chief Jean-Claude Trichet, but he must have warned in blunt terms that Europe’s leaders would exercise their Maastricht powers to bring the bank to heel unless it slashed rates. Democracies cannot subcontract monetary policy (with all its foreign policy implications) to committees of economists in a fast-moving crisis. Those accountable to their electorates have to take charge.
Whatever occurred behind closed doors, the ECB is now tamed. It has cut rates to 3.75pc, and will cut again soon, perhaps drastically. The risk is that rates have come too late in Europe and Britain to stop a nasty denouement, given the 18-month lag on monetary policy.
We should be thankful that President Sarkozy and Gordon Brown took action in the nick of time to save our banking systems. Their statesmanship should at least spare us mass bankruptcy and unemployment.
But it will not spare us a decade-long toil of pitiful growth – or none at all – as we purge debt. The world stole prosperity from the future for year after year, with the full collusion of governments, regulators, and central banks. Now the future has arrived.
NEW YORK - Democrats strengthened their majorities in both houses of Congress in Tuesday's US elections, picking up five more seats in the Senate and adding at least 18 more seats in the House of Representatives.
The next session of Congress will include 45 Jewish lawmakers, a new record, after Democrats Alan Grayson of Florida and John Adler of New Jersey took two House seats from the Republican column.
Jared Polis, also a Democrat, was widely expected to win his Colorado House seat to match the previous record, set in the 2006 elections.
The House will have 32 Jewish members. Only the class of 1990 had more Jewish members - 34 - but there were fewer Jewish senators at the time.
The next Senate will have 13 Jewish members, the same as the previous session, despite a toss-up race in Minnesota, where both Republican incumbent Norm Coleman and his Democratic challenger, comedian Al Franken, are Jewish.
Democrats said they were disappointed not to have an even larger record after losing several close races - including in Alaska, where polls showed state legislator Ethan Berkowitz mounting a strong challenge for a Republican seat in vice-presidential nominee Sarah Palin's home state - but said they were satisfied with the outcome.
"It's a lot to ask - we had an incredible night with Obama, we had the other pickups in the House and Senate and we should be very grateful," said Ira Forman, executive direction of the National Jewish Democratic Council.
The reinforced Democratic majorities in both chambers assure President-elect Barack Obama a stronger hand in enacting his agenda of change.
The public's expectations were high that Democrats in Congress will help Obama follow through on campaign promises to end the long-running war in Iraq and fix the financial ills that many blame on Bush and his party.
Democrats increased their count in the 100-seat upper house to at least 56. They currently have a 51-49 majority, including two independents who vote in their caucus.
Three Senate races with Republican incumbents remained undecided, among them the contentious reelection bid by 84-year-old Sen. Ted Stevens of Alaska, the longest-serving Senate Republican, who was convicted last month of lying on Senate forms to hide favors he received from a contractor.
Races in Georgia, Oregon and Minnesota were too close to call. The Associated Press called the Senate race in Minnesota prematurely. Republican Sen. Norm Coleman finished ahead of Democrat Al Franken, the former Saturday Night Live comedian, in the final vote count, but Coleman's 571-vote margin falls within the state's mandatory recount law.
Despite the strong showing, Democrats appeared to be falling short of their goal of taking 60 Senate seats. A 60-40 majority would make it nearly impossible for the opposition to use procedural maneuvers to block Democratic proposals from coming to a vote.
In the lower chamber, the House of Representatives, the Democrats expanded their majority by dominating the Northeast and ousting Republicans in every region. The Democrats added at least 18 seats to the 30 they took from Republicans in 2006. Fewer than 10 races remained undecided.
Republicans were on track for their smallest numbers since 1994, the year the so-called Republican Revolution retook the House for the first time in 40 years.
The Democratic edge in the current Congress is 235-199 with one vacancy in a formerly Democratic seat. Two Louisiana seats, one Democratic and one Republican, won't be decided until December because hurricanes postponed their primaries until Tuesday.
"The American people have called for a new direction. They have called for change in America," said House Speaker Nancy Pelosi.
It was the first time in more than 75 years that Democrats were on track for big House gains in back-to-back elections.
"This will be a wave upon a wave," Pelosi said.
House Republicans were licking their wounds and hoping to increase their numbers in the 2010 election.
"We sort of got through this, we think, a little bit better than some people might have expected," said Rep. Tom Cole of Oklahoma, the head of the Republican House campaign committee. "Our worst days are behind us," he added.
The Democratic victories in the Senate included an upset in North Carolina by Democratic state legislator Kay Hagan, who unseated Sen. Elizabeth Dole, one of the biggest names in the Republican Party and wife of Bob Dole, the party's 1996 presidential nominee. Elizabeth Dole, a former Cabinet secretary in two Republican administrations, had been criticized for spending little time in recent years in her home state.
In Virginia, former Democratic Gov. Mark Warner breezed to victory over another former governor, Republican Jim Gilmore, in the race to replace retiring five-term Republican Sen. John W. Warner. The two Warners are not related.
In the West, two Udalls were elected to the Senate. In Colorado, Mark Udall, son of the late Arizona Rep. Morris "Mo" Udall, took the seat vacated by retiring Republican Sen. Wayne Allard. His cousin, Tom Udall, whose father Stewart Udall was Interior Secretary in the Kennedy administration, took the New Mexico Senate seat vacated by retiring Republican Sen. Pete Domenici.
In New Hampshire, Republican Sen. John Sununu lost to Democrat Jeanne Shaheen in a rematch that saw Shaheen referring to Sununu as Bush's "evil twin." Senate Majority Leader Harry Reid, a Nevada Democrat, attributed the party's gains to Obama's coattails.
"It's been a really good night," Reid told The Associated Press. "Obama ran a terrific campaign, he inspired millions of people," he said. According to other preliminary counts, 12 Democrats retained their seats and 14 Republicans were reelected or won seats vacated by retiring Republicans.
Among the Republican survivors was Sen. Mitch McConnell of Kentucky, who outpolled millionaire businessman Bruce Lunsford to retain his seat. McConnell, the Senate minority leader, is a master strategist and could be a thorn in the side of the Democrats.
"Winston Churchill once said the most exhilarating feeling in life is to be shot at and missed," McConnell said. "After the last few months I think he really meant to say there is nothing more exhausting. This election has been both," he added.
In Minnesota, voters cast nearly 2.9 million ballots, prompting a recount that could take weeks to complete. "There is reason to believe that the recount could change the vote tallies significantly," Franken said in a statement.
The Democratic winners included Obama's running mate Joe Biden of Delaware who was elected to his seventh senate term on Tuesday but must give up his seat now that he will become vice president. The state's governor will likely appoint a fellow Democrat to fill Biden's seat until 2010 when a new election will be held.
A total of 35 seats were in contention in the Senate.
In the House, all 435 seats were up for election.
The defeat of 22-year veteran Rep. Chris Shays in Connecticut gave Democrats every House seat from the northeastern New England states. Democratic businessman Jim Himes won despite Republican Shays' recent highly publicized criticism of McCain's presidential campaign.
The Democrat also won an open seat in the New York City borough of Staten Island, giving them control of all of the city's congressional delegation in Washington for the first time in 35 years. The incumbent Republican Rep. Vito Fossella was forced to resign amid drunk driving charges and revelations that he fathered a child from an extramarital affair.
Elsewhere in the Northeast, Republican Reps. John R. Kuhl of New York and Phil English of Pennsylvania were defeated.
In the South, Democrats took seats in Alabama, North Carolina and Virginia. In Florida, two Republican incumbents were defeated by Democrats, including Rep. Tom Feeney, who was under fire for ties to a disgraced lobbyist.
In the Midwest, Democrats captured one seat in Illinois and two seats each in Michigan and Ohio. Rep. Steve Chabot, a 14-year veteran, lost in a district that includes portions of Cincinnati, which has the largest black population of any congressional district in the nation held by a Republican. Obama's candidacy was a major factor in the race, where state Sen. Steven Driehaus won election.
Democrats also made inroads in the West, where they captured two New Mexico seats, one seat each in Colorado and Nevada, and one left open in Arizona by retiring Republican Rep. Rick Renzi, who is awaiting trial on corruption charges.
Among the handful of losing Democratic incumbents was Rep. Tim Mahoney in Florida, who recently admitted to having extramarital affairs. He was defeated by Republican attorney Tom Rooney.
But Rep. John P. Murtha, a Pennsylvania Democrat who angered his constituents by describing them as "racist," easily won reelection.
The Chosen: Jewish members in the 111th U.S. Congress
By Ami Eden November 5, 2008
NEW YORK — The following is a list of the 44 Jewish members — 13 senators and 31 representatives — who will serve in the 111th U.S. Congress that convenes in January:
U.S. SENATE
Barbara Boxer (D-Calif.)
Benjamin Cardin (D-Md.)
Norm Coleman (R-Minn.)**
Russ Feingold (D-Wisc.)
Dianne Feinstein (D-Calif.)
Herb Kohl (D-Wisc.)
Frank Lautenberg (D-N.J.)**
Joseph Lieberman (I-Conn.)
Carl Levin (D-Mich.)**
Bernard Sanders (I-Vt.)
Charles Schumer (D-N.Y.)
Arlen Specter (R-Pa.)
Ron Wyden (D-Ore.)
HOUSE OF REPRESENTATIVES
Gary Ackerman (D-N.Y.)
John Adler (D-N.J.)*
Shelley Berkley (D-Nev.)
Howard Berman (D-Calif.)
Eric Cantor (R-Va.)
Stephen Cohen (D-Tenn.)
Susan Davis (D-Calif.)
Rahm Emanuel (D-Ill.)
Eliot Engel (D-N.Y.)
Bob Filner (D-Calif.)
Barney Frank (D-Mass.)
Gabrielle Giffords (D-Ariz.)
Jane Harman (D-Calif.)
Paul Hodes (D-N.H.)
Steve Israel (D-N.Y.)
Steve Kagen (D-Wisc.)
Ron Klein (D-Fla.)
Sander Levin (D-Mich.)
Nita Lowey (D-N.Y.)
Jerrold Nadler (D-N.Y.)
Jared Polis (D-Colo.)*
Steve Rothman (D-N.J.)
Jan Schakowsky (D-Ill.)
Allyson Schwartz (D-Pa.)
Adam Schiff (D-Calif.)
Brad Sherman (D-Calif.)
Debbie Wasserman Schultz (D-Fla.)
Henry Waxman (D-Calif.)
Anthony Weiner (D-N.Y.)
Robert Wexler (D-Fla.)
John Yarmuth (D-Ky.)
* Elected to Congress for the first time
** Senators who were re-elected (Coleman defeated Democratic challenger Al Franken in Minnesota by 571 votes, but a recount is expected. Franken also is Jewish, leaving 13 Jewish senators regardless of who emerges as the winner.)
Why agreeing a new Bretton Woods is vital and so hard
By Martin Wolf Nov 4 2008
We have arrived at the point in a crisis when ambitious leaders call for a "new Bretton Woods". It is easy to mock such language. Yet it is easy to see why this crisis should make people think in such heroic terms.
First, the world economy has come full circle, with a massive financial crisis emanating from the US, then and still the world's dominant financial power. The Great Depression of the 1930s was accompanied - and aggravated - by failures of economic co-operation, disintegration of the global economy and resurgent nationalism. But it also led to a revolution in economic thinking. "Never again" was the aim of the negotiators in Bretton Woods, New Hampshire. Mired in the worst financial crisis since the 1930s, we have good cause to say the same.
Second, it is unnecessary to wait for calmer times before thinking afresh. The Bretton Woods conference culminated in July 1944, while the second world war was far from over. If they could fight a war and redesign the global economy at the same time, so can we fight a crisis and redesign global institutions simultaneously.
Third, today's global financial system is dysfunctional. What is at stake in reform is maintenance of the open world economy that offers opportunities to so many. Also at stake is sustained co-operation among states. Nothing is less likely than effective co-operation among inward-looking states presiding over frightened, even xenophobic, societies.
Finally, what is happening lies at the intersection between global macroeconomics - money, the exchange rate and the balance of payments - and global finance: capital flows, financial fragility and contagion. The imperative of co-operation remains. But as Robert Zoellick, World Bank president, said on October 6: "We must modernise multilateralism and markets for a changing world economy."
So how is this to be done? We must start with the underlying challenges.
The first is the inability to gain a purchase on the policies of countries that run huge and persistent current account surpluses. That was a dominant concern of John Maynard Keynes in 1944. Ironically, the problem then was US surpluses. Today, it is the collapse in the ability of US households and those of a few other high-income countries to offset the vast current account surpluses generated by China, Germany, Japan and oil-exporting countries. Surplus countries love criticising those who spend what they wish to lend. The former will soon discover they cannot do without the profligacy of the latter.
The second is that of financing countries subject to "sudden stops" in capital inflows of the kind we are seeing, as banks and other foreign-currency lenders cut off financing to a wide range of borrowers, particularly in emerging countries. Many of the latter have made an immense and costly effort to reduce vulnerability by accumulating foreign currency reserves (see chart below). By August of this year, the total foreign currency reserves of emerging countries had reached $5,500bn, dwarfing the $260bn available to the International Monetary Fund. Yet self-insurance is inefficient and, as it has proved, too unequally distributed.
The third challenge is that of making the financial system less unstable and, above all, less vulnerable to such huge swings in risk appetite - from financing anything, however ridiculous, to financing nothing, however meritorious. At present, moreover, as Stephen King of HSBC has pointed out on the FT's economists' forum, the efforts of governments to force rescued banks to finance domestic borrowers are bound to come at the expense of their lending to emerging countries.
The final challenge is that of making the global institutional architecture less illegitimate than today. The Bretton Woods institutions - the IMF and the World Bank - are dominated by the western powers: in the case of the Fund, the US still had 17.1 per cent of the quotas (which largely determine votes) and the European Union another 32.4 per cent in May 2007. Meanwhile, China had just 3.7 per cent and India 1.9 per cent. These are simply anomalous. So, too, is the persistence of the group of seven high-income countries as the co-ordinating group for the world economy, particularly as three of them - Germany, France and Italy - do not have independent currencies. The group of 20, whose summit will take place in Washington on November 15, looks too large. Mr Zoellick suggests a G14, which would add Brazil, China, India, Mexico, Russia, Saudi Arabia and South Africa.
What is interesting about this agenda is how familiar much of it would seem to the participants at Bretton Woods, with one exception. Keynes would be horrified that the world has let the genie of free capital flows out of the bottle. This, he would note, is why more external financing is needed than ever before, why vast foreign currency reserves have been accumulated and why financial crises are once again global, rather than local. He would add that "a sound banker, alas, is not one who foresees danger and avoids it, but one who, when he's ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him". We have far too many such bankers. He would surely add that these undercapitalised and illiquid institutions are little short of financial time-bombs.
Yet can anything useful be done to meet such challenges? It is certainly possible - and indeed necessary - to change the global architecture, not least in response to changing economic weights. It is equally necessary to give the IMF more financial resources in support of its new short-term lending facility. But it is surely too optimistic to believe that the Fund would ever be able to provide reliable warnings of looming crises. Even if it did, it is even less likely that the countries which matter would do anything in response.
Nor am I optimistic that we can sever the links connecting banking as a stodgy utility that provides essential services to the economy to banking as a casino offering opportunities for taking huge bets. Bankers have been given a licence to gamble with taxpayers' money. That is a wonderful business to be in. It is also one we seem unable to bring to heel.
Yet I wish to be proved wrong. I hope that the summit of the G20 will set the agenda for serious reform, by creating working groups that prove able to produce radical and effective proposals. For what is happening now may well be the last chance for an open and dynamic world economy. First, we have to get through the present crisis. Then we have to have to make such catastrophic financial collapses vastly less likely. If not us, who? And if not now, when?
Some critics wonder if the financial rescue plan may prove more costly to taxpayers than expected and delay the financial stability it was supposed to foster
By David Bogoslaw November 4, 2008
Is it too soon to wonder whether the government's $700 billion financial rescue program has gone off track? The U.S. Treasury has taken a lot of flack in the past few weeks for shifting the focus of the plan from buying distressed assets off banks' balance sheets to direct capital injections into financial institutions that may or may not need it. Meanwhile, critics say there are no indications that lending has increased, which was the original objective of the whole plan.
Indeed, some financial institutions that have received government money seem to be using the capital for other purposes, such as acquisitions of other banks, while the methods used in the rescue—and the purpose behind it—seem to be changing every week. And that has made even some of the legislation's original champions take notice.
Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, went so far as to say on Oct. 31 that any use of the cash from the rescue plan by banks for acquisitions, executive bonuses, or other purposes besides lending is "a violation of the terms of the act."
Paulson Forced Capital Injections
The first indication that the bailout game plan was changing: In early October, Treasury Secretary Henry Paulson called a meeting with the leaders of nine of the largest U.S. banks and forced them to take a total of $125 billion in capital injections. In return, the government received preferred stock and stock warrants in each bank.
It's true the original intention of the Troubled Asset Relief Program (TARP) was to promote lending activity, which had frozen up by the end of August as financial services companies became more concerned about capital preservation, rising default rates on loans, and unknown risks involving trading counterparties. But in rethinking its methods, the Treasury still seems to have the same end result in mind, despite what its critics say.
Here's why. Buying $1 billion worth of distressed assets such as mortgage-backed securities from financial institutions provides those firms with $1 billion that can then be used to buy other assets or debt. That same $1 billion, when injected directly into a bank in exchange for preferred shares and stock warrants, adds to existing capital and can generate up to $10 billion worth of lending at a conservative debt-to-equity ratio of 10 to one, says Gerard Cassidy, an equity analyst who covers regional banks for RBC Capital Markets . "The impact of TARP going into equity is much greater because of leverage, and therefore over a longer period of time it will have a more stimulative effect to the economy," he says.
The Reason Treasury Shifted Gears
The benefit of buying troubled assets off banks' books under the TARP's capital purchase program is an increase in liquidity that can facilitate broader trading activity in the short term, but it won't produce as big a bang for the buck in terms of generating lending activity as the equity program, he adds.
Cassidy believes criticism of the Treasury's moves to directly inject capital into banks has stemmed from the fact that many people are focused more on short-term solutions and aren't ready to accept that while the government has managed to calm the crisis down, a full resolution of the problems will take a lot longer.
Why did the Treasury shift gears? Blame the problems around the pricing of the troubled assets, says Professor Cornelius Hurley, director of the Graduate Program in Banking and Financial Law and its related Morin Center for Banking and Financial Law at the Boston University School of Law. Paulson and his staff decided they would be damned for overpaying for assets and for underpaying, because buying the assets at a lower value than what the banks were carrying on their balance sheets would cause a corresponding hit to equity, reduce the amount of lending that would be possible off the revised equity, and defeat the whole purpose of the program, says Hurley.
Reason for Banks to be Cautious
And what about the notion that banks remain reluctant to lend even after the government's capital injections? Contrary to the prevalent belief, commercial banks have been lending since the TARP was implemented. Large banks increased their outstanding loans by $45.2 billion, or nearly 3.5%, in the five weeks ending Oct. 22, while outstanding loans at small banks rose $5.7 billion, or about 0.74%, during the same period, according to a Federal Reserve statistical release on Oct. 31.
Bert Ely, a principal at Ely & Co. an Alexandria (Va.) consulting firm for financial institutions, says it would be a mistake to force banks to make more bad loans right now. Cassidy at RBC Capital agrees, saying that during a recession. banks need to be extra-cautious about lending.
Some argue the Treasury Dept. should be forgiven for changing course since the TARP was first announced in view of how unprecedented many of the events and circumstances involving the financial crisis have been. "Remember that, like it or not, the government is frankly making it up as it goes along. There's no framework, no prior experience model that anybody can refer to," says Charles Horn, senior partner in the financial services regulatory and enforcement practice at Mayer Brown in Washington, D.C. Paulson and his team are discovering that there are many uses for the $700 billion and such great demand for it that they are in the position of having to determine whether or not there's enough to go around, he adds.
More Players Want In
Indeed, capital investments that were originally intended for the most important banks are now being sought by a much broader number of players. Insurance companies and even auto finance firms are rushing to turn themselves into bank holding companies in order to become eligible to apply for the program by the Nov. 14 deadline. The Treasury now estimates as many as 1,800 publicly held companies could queue up for the program in the weeks ahead and says the remaining $125 billion will be sufficient to cover their needs, according to The Wall Street Journal.
The use of taxpayers' money to accelerate consolidation within the banking industry is another example of how the TARP has gone off course, says Hurley at Boston University. PNC Financial Services Group's (PNC) decision to use the $7.7 billion capital injection it got from TARP to acquire National City Corp. (NCC), a Cleveland financial holding company, has rankled people who believe the government shouldn't be picking winners and losers in that industry.
"Consolidation may or may not be a good thing, but it can take a long time," to realize the cost savings that come with economies of scale and full integration of operations, says Hurley. "The whole bailout package was passed with very alarmist rhetoric about how the world was going to come to an end, not with the idea that we had months and months to work this thing through."
Gauging TARP's Success
But others see consolidation among banks as a valid use of the TARP funds to the extent that it eliminates the need to price distressed assets. Instead of overpaying for them or causing further equity destruction by undervaluing them, it's better to leave those assets with the banks that made the loans by allowing weaker banks like National City to be acquired by stronger ones like PNC, says Ely. With a stronger balance sheet as a result of the acquisition, and superior management skills, PNC should be in a better position to work through the problems concerning any distressed assets, he says.
As for how to gauge the success of TARP, Hurley believes there are better ways than by measuring the increase in bank lending.
It's hard to know what the baseline of lending would have been without the Treasury intervention, and it's virtually impossible to tag any number of loans directly to the new capital. Since lending contracts during recessions anyway, it may be that all the capital does is to limit the decline in credit and hence the severity of the recession, he says.
"What I'd look at is: Are these banks able to raise additional capital [from private sources] while the U.S. capital purchase program is in place?" he says. "How soon are these companies going to be able to buy the U.S. Treasury out of its investment?" The top nine recipients of the capital injections have five years to repay the Treasury before the 5% dividend the government is earning on the preferred shares jumps to 9%, which would be punitive, and it would be less onerous for these firms to raise capital sooner than later, he says.
Where Are the Strings?
That's one reason Hurley is critical of the government's decision not to attach more strings to the capital it's giving to banks. The British and Dutch governments insisted on getting seats on the boards of the financial firms in which they bought equity stakes, he points out. "One or two seats is not control, but it's another voice at the table" that could better ensure the money is being used in the most effective ways.
The likelihood that some recipients of capital won't be able to repay the government down the road is strong, given Treasury's willingness to distribute money to the strong and weak alike without apparent differentiation, says Joseph Battipaglia, market strategist at Stifel, Nicolaus & Co. (SF) in Philadelphia. He thinks it's a waste to inject capital into weaker banks that are inclined to sit on the money to bolster their balance sheets without increasing their lending. That only undermines investor confidence by allowing opaque asset portfolios to remain murky, and disrupts efforts by investors to seek the most appropriate rate of return for their money, he adds.
Although Treasury has a short-term preference for capital injections, those are nearly completed for publicly traded companies, and the Treasury said it will be releasing guidelines and a "reasonable" time frame for privately held financial institutions, says Horn at Mayer Brown. Presumably, Paulson & Co. still intend to use the remaining $450 billion in TARP to buy distressed loan portfolios and other assets, but there's been no indications as to when that will begin.
Reverse Auctions Ahead?
And that brings us back to the "TA" part of TARP. Nobody will fault government officials for trying to get the most bang from the taxpayer's buck by pumping money into the banks first. But since those troubled assets lie at the core of the current crisis, they will need to be tackled at some point, whether through reverse auctions or some other pricing method. The sooner they are, the faster the wheels of the capital markets will start turning again.
Washington — A Federal Reserve survey discovered that 85 percent of U.S. banks tightened their lending standards for the third quarter, which was up from the 60 percent that made such measures and responded to the Fed's June poll.
About 95 percent of the banks said more stringent lending requirements were imposed on large and medium-sized businesses borrowers. For credit card debts, 60 percent of the banks said they tightened standards and 65 percent made similar measures against other types of consumer loans for the third quarter.
The stricter standards were applied against prime mortgage loans, nontraditional mortgage loans, subprime mortgages and loans granted to borrowers with weak credit ratings.
The survey, conducted during the first two weeks of October, covered 55 American banks with combined assets of $6.2 trillion and 21 foreign financial institutions.
Richmond Fed president Jeffrey Lacker opined the tougher loan standards may be one of the reasons why the Fed reduced benchmark interest rates by 1 percent last week. Chris Rupkey, chief financial economist of the Bank of Tokyo-Mitsubishi, told Bloomberg, "It has never been harder for business and individuals to get a loan from the bank... Banks are turning away borrowers left and right."
U.S. Stocks Post Biggest Post-Election Drop on Economic Concern
By Elizabeth Stanton
Nov. 5 (Bloomberg) -- The stock market posted its biggest plunge following a presidential election as reports on jobs and service industries stoked concern the economy will worsen even as President-elect Barack Obama tries to stimulate growth.
Citigroup Inc. tumbled 14 percent and Bank of America Corp. lost 11 percent as the Standard & Poor's 500 Index and Dow Jones Industrial Average sank more than 5 percent. Nucor Corp., the largest U.S.-based steel producer, slid 10 percent after bigger rival ArcelorMittal doubled production cuts amid slowing demand. Boeing Co., the world's second-largest commercial planemaker, lost 6.9 percent after UBS AG forecast a 3 percent drop in global air traffic next year.
``We had an election yesterday; that doesn't mean the problems go away,'' said Kevin Rendino, a Plainsboro, New Jersey- based money manager at BlackRock Inc. who oversees $10 billion. ``We still have an economic slowdown.''
The S&P 500 tumbled 52.98 points, or 5.3 percent, to 952.77, erasing yesterday's 4.1 percent rally. The Dow retreated 486.01, or 5.1 percent, to 9,139.27. The Russell 2000 Index of small U.S. companies fell 5.7 percent to 514.64. The MSCI World Index of 23 developed markets decreased 2.5 percent to 982.98.
The slide halted an 18 percent rebound from the S&P 500's five-year low on Oct. 27. The benchmark for U.S. equities has lost more than 35 percent this year, the steepest annual plunge since 1937, and Obama will have to contend with an economy pummeled by the fastest contraction in manufacturing in 26 years and the lowest consumer confidence.
Biggest Rally Erased
The market's decline came a day after the biggest presidential Election Day gain since the New York Stock Exchange first opened for trading on a voting day in 1984.
The report by ADP Employer Services showed companies cut 157,000 jobs in October, the most since November 2002 when the U.S. was emerging from a recession. The Institute for Supply Management said service industries in the U.S., which make up 90 percent of the economy, contracted by the most on record.
About 1.3 billion shares changed hands on the NYSE, 11 percent less than the three-month daily average.
Citigroup lost $2.05 to $12.63 and Bank of America plunged $2.78 to $21.75. The S&P 500 Financials Index sank 8.8 percent after extending declines late in the day following Oppenheimer & Co. analyst Meredith Whitney's prediction on CNBC that the mortgage market will contract and more than $2 trillion in available credit-card lines will be pulled from the system.
Whitney also said potential loan modifications under an Obama administration will hurt banks and diminish their appetite for risk.
$6 Trillion Lost
The S&P 500 has lost about 39 percent since it peaked at 1,565.15 on Oct. 9, 2007, as the U.S. economy contracted 0.3 percent last quarter and credit-related losses and writedowns by global financial firms approached $700 billion. More than $6 trillion was erased from U.S. equities this year by the worst financial crisis since the Great Depression.
Nucor sank $4.16 to $35.50. Luxembourg-based ArcelorMittal reported third-quarter profit that fell short of analyst estimates, said its global output will drop by more than 30 percent, and forecast fourth-quarter earnings will fall as much as 48 percent. The company's New York-registered shares slumped 22 percent to $24.88, their biggest retreat in seven years.
Boeing fell $3.67 to $49.55. Its share price, which rose 28 percent from Oct. 10 through yesterday, ``is at least six to nine months from bottoming and beginning to mover higher again,'' David E. Strauss, a New York-based analyst at UBS, wrote in a report. Aircraft deliveries may tumble 29 percent from 2009 to 2012, the analyst said.
`Continued Softening'
Textron Inc. lost $1.71, or 9.2 percent, to $16.93. The world's biggest business-jet maker through its Cessna unit reduced the number of Citation jets it plans to deliver next year, citing ``continued softening in the global economic environment.''
Stocks extended their retreat even as Nancy Pelosi, Speaker of the House of Representatives, said Democrats may seek two economic stimulus measures if President George W. Bush limits the size of a plan to be considered during the post-election ``lame- duck'' session. Obama's party captured at least 19 seats in the House and at least five in the Senate, expanding its congressional majority.
General Growth Properties Inc. tumbled almost 50 percent to $2.25 for the biggest drop in the S&P 500. The U.S. mall owner that has lost more than 90 percent of its market value on concern it won't be able to refinance debt coming due this year reported a wider third-quarter loss and suspended its quarterly dividend.
Bond Insurers
MBIA Inc. and Ambac Financial Group Inc. slumped after the bond insurers posted wider losses than analysts estimated. MBI fell 22 percent to $8.16. Ambac, dropped from the S&P 500 in June, fell 41 percent to $2.01. Slumping credit markets forced the companies to increase reserves for claims.
Pioneer Natural Resources lost 15 percent to $24.79. The oil and natural-gas producer in North America and Africa reported third-quarter earnings that missed analyst estimates and said it will cut drilling activity.
Sara Lee Corp. slid 14 percent to $10.20. The maker of frozen cakes and Jimmy Dean sausages said full-year profit will be less than it previously estimated because of falling foreign currencies and waning demand in Europe.
Marsh & McLennan Cos. fell 12 percent to $26.06. The world's second-biggest insurance broker said profit dropped 78 percent in the third quarter amid the slowing U.S. economy and price declines for commercial coverage and reinsurance.
Earnings Season
Most companies in the S&P 500 have managed to increase profits even as the economy slows. Of the 386 companies that reported third-quarter results so far, 232 posted higher earnings than in the year-earlier period. Still, profits are down 7.4 percent on average after accounting for losses at financial companies.
Medco Health Solutions Inc. climbed 9.1 percent to $41.47 for the biggest of only 13 advances in the S&P 500. A surge in use of generic and mail-order prescription drugs fueled a 38 percent increase in third-quarter profit at the largest U.S. drug benefits manager.
Molson Coors Brewing Co. gained 8.3 percent to $41.78. The third-largest U.S. beer maker reported market-share gains in Canada and the U.K. and said it expects to achieve total cost savings from its joint U.S. venture with SABMiller Plc six months early.
Chesapeake Energy Corp. climbed 8.2 percent to $24.83 on speculation it will be acquired by BP Plc.
General Motors Corp. slipped 16 cents, or 2.8 percent, to $5.56. GM, the biggest U.S. automaker, needs government aid because ``time is very short'' to stop its collapse, Roger Altman, an adviser to the automaker and Obama, said in an interview.
Recession Rallies
The S&P 500 Index may be on the cusp of a rally by Inauguration Day, based on the speed of its tumble from last year's peak and the time it took stocks to gain before recessions ended in 1975, 1982 and 1991, data compiled by Bloomberg show. This year's plunge in stocks suggests that equity investors anticipate an economic contraction as severe as the one that began under Richard Nixon that will end in July.
The S&P 500's slump since last year's high is the steepest for a comparable period since the gauge fell 43 percent in the 13 months ended in October 1974, Bloomberg data show.
1970s Recession
The economy then was mired in a recession that lasted 16 months and ended in March 1975, five months after the equity market began its rebound. During the recessions of 1982 and 1991, the S&P 500 began to climb four months and five months before the economy started to recover, respectively.
Based on the market's history of anticipating economic recoveries, the S&P 500 may embark on its next bull market in February, about a month after Obama's inauguration on Jan. 20.
Stocks gained yesterday after the 17th straight decline in a key interest rate, a sign that as much as $3 trillion of emergency funds provided by governments to resuscitate bank lending are working. The London interbank offered rate, or Libor, that banks charge each other for three month loans in dollars fell again today to the lowest level since December 2004.
NEW YORK — While Americans eagerly vote for the next president, here’s a sobering reminder: As of Tuesday, George W. Bush still has 77 days left in the White House — and he’s not wasting a minute.
President Bush’s aides have been scrambling to change rules and regulations on the environment, civil liberties and abortion rights, among others — few for the good. Most presidents put on a last-minute policy stamp, but in Mr. Bush’s case it is more like a wrecking ball. We fear it could take months, or years, for the next president to identify and then undo all of the damage.
Here is a look — by no means comprehensive — at some of Mr. Bush’s recent parting gifts and those we fear are yet to come.
CIVIL LIBERTIES
We don’t know all of the ways that the administration has violated Americans’ rights in the name of fighting terrorism. Last month, Attorney General Michael Mukasey rushed out new guidelines for the F.B.I. that permit agents to use chillingly intrusive techniques to collect information on Americans even where there is no evidence of wrongdoing.
Agents will be allowed to use informants to infiltrate lawful groups, engage in prolonged physical surveillance and lie about their identity while questioning a subject’s neighbors, relatives, co-workers and friends. The changes also give the F.B.I. — which has a long history of spying on civil rights groups and others — expanded latitude to use these techniques on people identified by racial, ethnic and religious background.
The administration showed further disdain for Americans’ privacy rights and for Congress’s power by making clear that it will ignore a provision in the legislation that established the Department of Homeland Security. The law requires the department’s privacy officer to account annually for any activity that could affect Americans’ privacy — and clearly stipulates that the report cannot be edited by any other officials at the department or the White House.
The Justice Department’s Office of Legal Counsel has now released a memo asserting that the law “does not prohibit” officials from homeland security or the White House from reviewing the report. The memo then argues that since the law allows the officials to review the report, it would be unconstitutional to stop them from changing it. George Orwell couldn’t have done better.
THE ENVIRONMENT
The administration has been especially busy weakening regulations that promote clean air and clean water and protect endangered species.
Mr. Bush, or more to the point, Vice President Dick Cheney, came to office determined to dismantle Bill Clinton’s environmental legacy, undo decades of environmental law and keep their friends in industry happy. They have had less success than we feared, but only because of the determined opposition of environmental groups, courageous members of Congress and protests from citizens. But the White House keeps trying.
Mr. Bush’s secretary of the interior, Dirk Kempthorne, has recently carved out significant exceptions to regulations requiring expert scientific review of any federal project that might harm endangered or threatened species (one consequence will be to relieve the agency of the need to assess the impact of global warming on at-risk species). The department also is rushing to remove the gray wolf from the endangered species list — again. The wolves were re-listed after a federal judge ruled the government had not lived up to its own recovery plan.
In coming weeks, we expect the Environmental Protection Agency to issue a final rule that would weaken a program created by the Clean Air Act, which requires utilities to install modern pollution controls when they upgrade their plants to produce more power. The agency is also expected to issue a final rule that would make it easier for coal-fired power plants to locate near national parks in defiance of longstanding Congressional mandates to protect air quality in areas of special natural or recreational value.
Interior also is awaiting E.P.A.’s concurrence on a proposal that would make it easier for mining companies to dump toxic mine wastes in valleys and streams.
And while no rules changes are at issue, the interior department also has been rushing to open up millions of acres of pristine federal land to oil and gas exploration. We fear that, in coming weeks, Mr. Kempthorne will open up even more acreage to the commercial development of oil shale, a hugely expensive and environmentally risky process that even the oil companies seem in no hurry to begin. He should not.
ABORTION RIGHTS
Soon after the election, Michael Leavitt, the secretary of health and human services, is expected to issue new regulations aimed at further limiting women’s access to abortion, contraceptives and information about their reproductive health care options.
Existing law allows doctors and nurses to refuse to participate in an abortion. These changes would extend the so-called right to refuse to a wide range of health care workers and activities including abortion referrals, unbiased counseling and provision of birth control pills or emergency contraception, even for rape victims.
The administration has taken other disturbing steps in recent weeks. In late September, the I.R.S. restored tax breaks for banks that take big losses on bad loans inherited through acquisitions. Now we learn that JPMorgan Chase and others are planning to use their bailout funds for mergers and acquisitions, transactions that will be greatly enhanced by the new tax subsidy.
One last-minute change Mr. Bush won’t be making: He apparently has decided not to shut down the prison in Guantánamo Bay, Cuba — the most shameful symbol of his administration’s disdain for the rule of law.
Mr. Bush has said it should be closed, and his secretary of state, Condoleezza Rice, and his secretary of defense, Robert Gates, pushed for it. Proposals were prepared, including a plan for sending the real bad guys to other countries for trial. But Mr. Cheney objected, and the president has refused even to review the memos. He will hand this mess off to his successor.
We suppose there is some good news in all of this. While Mr. Bush leaves office on Jan. 20, 2009, he has only until Nov. 20 to issue “economically significant” rule changes and until Dec. 20 to issue other changes. Anything after that is merely a draft and can be easily withdrawn by the next president.
Unfortunately, the White House is well aware of those deadlines.
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Singapore’s Temasek doesn’t come off unscathed as it ploughed A$400m into ABC Learning (ASX:ABS), the world’s biggest provider of Child Care Centres, at A$7.30 a share 12 months ago and closed at A$0.69 on 4 Aug 2008 since it executed a debt-funded expansion and its over 1,000 centres in the USA is seeing dwindling enrolment with the global economic crunch.
ABC Learning Names Ferrier Hodgson Outside Manager
By Robert Fenner
6 November 2008
(Bloomberg) -- ABC Learning Centres Ltd., the world’s largest child care operator, was seized by its lenders after the global credit crisis forced up the cost of servicing its debt, which jumped almost 20 times over a three-year buying spree.
Outside managers from Ferrier Hodgson have been appointed, the Brisbane-based company said in a statement today. Bankers for ABC Learning, including Commonwealth Bank of Australia and Westpac Banking Corp., named McGrathNicol as receiver to 38 divisions of the business.
ABC Learning, which looks after one in three Australian children in day-care through almost 1,100 centres, joins Allco Finance Group as the second Australian company to appoint outside managers this week after being unable to repay debt. Former Chief Executive Officer Eddy Groves, who left the company Sept. 30, borrowed to expand in the U.S. and U.K., almost quadrupling the number of centres it operated in 2 1/2 years.
“The board and current management team are disappointed to be in this position despite the efforts of so many staff and the continued support of parents,” Chairman David Ryan said in the statement. “The management team have worked tirelessly over the past few weeks to ensure that families across Australia and New Zealand continue to have access to quality childcare.”
After peaking at A$8.80 in 2006, giving ABC Learning a market value of A$4.8 billion ($3.4 billion), its shares lost 94 percent of their value before being halted from trade in August, when it failed to release earnings.
Debt Balloons
ABC Learning’s total debt at June 30, 2007 was A$2.2 billion, compared with A$111 million at the end of fiscal 2004. The company hasn’t filed annual results for the 2007/08 financial year.
About 40 percent of ABC Learning’s Australian sales came from government subsidies, while 25 percent came from the U.S. The Australian government is tipped to spend A$11 billion on childcare services by fiscal 2012. The U.S. government spends about $22 billion on child care subsidies and funding, about 40 percent of all childcare expenditure, ABC Learning said last year.
After starting with 43 centres when it made an initial share sale in 2001, ABC Learning acquired operators in Australia, New Zealand, the U.S. and U.K.
ABC now has stakes in 2,323 child care centers including 1,000 in the U.S. from its takeover of operators including La Petite Holdings Inc. and Children’s Courtyard LLP.
Morgan Stanley
The company sold a 60 percent stake in its U.S. operations to Morgan Stanley in April, and in September Computershare Ltd. agreed to buy its U.K. vouchers business for 90 million pounds ($142 million).
Commonwealth Bank, Australia’s second-biggest lender by assets, said Aug. 13 its fiscal 2009 net income will fall about A$100 million after it wrote down the value of listed noted in ABC Learning.
Eddy Groves and his wife Le Neve quit the company in September with Rowan Webb, a former retail clothing executive, appointed as interim CEO.
The Groves’, once the third-largest investors in ABC Learning with a 7.8 percent stake, sold most of their 37 million shares this year as the slumping price prompted margin lenders to demand sales.
Religare MF set to buy Lotus
4 Nov 2008, 0035 hrs IST, Partha Sinha, TNN
MUMBAI: The recent market turmoil has claimed its first victim. Lotus Mutual Fund, the asset management company floated by Temasek of Singapore and Sabre Capital, is on the block, weighed down by losses in its investments and asset-liability mis-matches in its portfolio, market sources said.
Religare Aegon Mutual Fund, a joint venture between Delhi-based Religare and Aegon, the Dutch financial group, is believed to be the front runner to ‘buy' Lotus's assets.
Interestingly, the deal which was being negotiated till late into Monday night, requires that Temasek and Sabre Capital jointly will guarantee losses worth at least Rs 100 crore to Religare Aegon, post-deal. This is to take care of any future losses while liquidating Lotus MF's assets. So in effect, the deal is being structured in such a way that Religare Aegon MF will get Lotus MF's assets and also get about Rs 100 crore rather than paying any money to Lotus MF's sponsors (shareholders), sources said. ‘‘By the time the deal is signed, it (the payment to Religare Aegon MF) could even be more than Rs 100 crore,'' a source close to the deal said.
Ambit Capital is the investment banker for Temasek-Sabre Capital while Religare Securities was acting on behalf of Religare Aegon MF. Ajay Bagga, CEO, Lotus MF, Sunil Godhwani, CEO & MD, Religare Enterprises, the holding company for Religare group, and Ashok Wadhwa, head of Ambit Capital did not respond to TOI's request for comments.
Temasek is the investment arm of the government of Singapore. Sabre Capital is headed by Rana Talwar, the former global CEO of Standard Chartered Bank.
Talwar is also credited with buying out Centurion Bank, then turning around and eventually selling it out to HDFC Bank earlier this year. Data released by Association of Mutual Funds in India (AMFI) on Monday showed that as of October 31, Lotus MF's assets under management was nearly Rs 5,900 crore.
Credit-Default Swaps on Italy, Spain Are Most Traded
By Shannon D. Harrington and Abigail Moses
Nov. 5 (Bloomberg) -- Credit-default swap traders wagered the most on debt of Italy, Spain and Deutsche Bank AG, according to a Depository Trust & Clearing Corp. report that gives the broadest data yet on the unregulated market.
A total $33.6 trillion of transactions are outstanding on governments, companies and asset-backed securities worldwide, based on gross numbers, the DTCC said in the report released on its Web site yesterday. After canceling out offsetting trades, investors have taken out a net $22.7 billion of contracts based on Italy's debt, $16.7 billion against Spain and $12.5 billion on Deutsche Bank of Frankfurt, the report shows.
The DTCC data is the first glimmer of transparency in an unregulated market that U.S. and European authorities blame for inflaming the credit crisis that led to almost $690 billion in bank losses and writedowns. Spain and Italy are among the European countries worst hit, with government data showing both nations are in the grip of a recession.
``There have been big changes in the credit quality of Spain and Italy, and buying credit-default swaps is a safe-haven bet in a crisis,'' said Philip Gisdakis, a Munich-based credit analyst at UniCredit SpA.
Smaller Volume
DTCC, which operates a central registry of credit-default swap trades, reported a smaller amount of outstanding credit- default swap trades than some previous estimates. The International Swaps and Derivatives Association estimated last week the market totaled $47 trillion, while the Bank for International Settlements estimated there were $57.9 trillion of contracts outstanding as of the end of last year. DTCC's data may calm concerns that investors and dealers have too much at risk, said Brian Yelvington, a New York-based strategist at fixed- income research firm CreditSights Inc.
``Far too much mistrust has been engendered by the lack of transparency,'' Yelvington said. ``There's still a lot here that's not captured. But it's a step in the right direction.''
Trading in credit-default swaps, which pay the buyer face value in exchange for the underlying securities should a borrower fail to adhere to its debt agreements, exploded 100-fold during the past decade.
The credit-default swaps market has moved beyond its origins of protecting banks from loan losses to a way for hedge funds, insurance companies and asset managers to speculate on the creditworthiness of companies, governments and other borrowers, including homeowners.
Buffett, Mack
Morgan Stanley Chief Executive Officer John Mack said in September there was ``no rational basis'' for a widening in credit-default swaps on his investment bank, that became a bank holding company amid a stock-price plunge. Billionaire investor Warren Buffett has called the contracts a ``time bomb.''
The collapse of Lehman Brothers Holdings Inc. contributed to a decline in financial markets last month because no one knew how many credit-default swap contracts were outstanding on the securities firm, how many contracts the company had written and who held them. They are private contracts between two parties, don't trade on an exchange and aren't processed through a central clearinghouse, making it virtually impossible for the public to asses the amount wagered on the debt. Estimates on Lehman contracts ranged as high as $400 billion, though the actual amount turned out to be $72 billion, the DTCC said.
Trading Data
After subtracting redundant trades, only $5.2 billion of trades actually changed hands, DTCC said last month, the first time it had released such information from its data warehouse.
Dealers have been trying to reduce the number of contracts outstanding by tearing up overlapping trades, helping reduce the net number of transactions and allaying concerns that the market was too large. The Federal Reserve and the European Central Bank are pushing dealers to create a clearinghouse to act as a counterparty on each trade, eliminating the risk of one side defaulting.
The DTCC, which is controlled by a board of members including JPMorgan Chase & Co. and Goldman Sachs Group Inc., doesn't list contracts on all companies, governments and other securities beyond the top 1,000 in the registry, on which there are a net of $183.3 billion. And there's not a clear accounting of what may exist beyond the registry.
Spain, Italy
Investors have focused wagers on debt of industries and countries that may be most affected by a credit crisis entering its 15th month. The Spanish economy is headed toward its first recession in 15 years amid a slump in its housing market and banking and finance shares have dropped as the credit seizure caused some to collapse.
Credit-default swaps on Italy were quoted at 107.5 basis points today, CMA Datavision prices on 10-year contracts show, after reaching a record 138 basis points on Oct. 24. The contracts have more than doubled since August. Today's price represents a cost of $107,500 a year to protect $10 million of debt for 10 years.
Contracts on Spain climbed to 112 basis points on Oct. 24, from about 47 basis points at the start of September. They have since dropped back to 79 basis points.
``The bigger the outstanding amount of debt, the bigger the volume of credit-default swaps,'' said UniCredit's Gisdakis. ``Sovereigns have huge debt outstanding. Deutsche Bank has a huge balance sheet, so it's quite understandable it's at the top of the list.''
ECB Meeting
The ECB met with regulators, lenders and investors this week to discuss ways of increasing transparency in the default swaps market on its side of the Atlantic. A central counterparty is an ``appropriate solution'' for reducing risk, the ECB said in a statement. Auctions this week are meantime settling default swaps on debt of Iceland's three biggest banks.
In total, about $15.4 trillion of transactions were linked to individual corporate, sovereign and asset-backed bonds worldwide at the end of October, the DTCC data showed. About $14.8 trillion was tied to indexes.
Among companies, GE Capital Corp., the finance arm of General Electric Co., New York-based Morgan Stanley, Merrill Lynch & Co. and Goldman Sachs Group Inc. had the biggest dollar amount of contracts tied to their debt on a net basis, after Deutsche Bank, Germany's biggest lender, DTCC said. New York- based Merrill agreed in September to sell itself to Bank of America Corp.
The net figures are the maximum that sellers would have to pay to buyers if the borrowers defaulted, DTCC said.
Netting Trades
Turkey, Italy, Brazil, Russia, GMAC LLC, and Merrill Lynch had the biggest gross amount of contracts outstanding on their debt as of Oct. 31. Turkey alone had $188.6 billion of default swaps written against its debt. The gross amount doesn't take into account offsetting trades. After netting the trades, there were $7.6 billion outstanding on Turkey.
The industry should ``get the word out about the small size of these risks compared to the notional amounts on which the contracts are based,'' said Mark Brickell, chief executive officer of Blackbird Holdings Inc., which provides an electronic trading system for derivatives, and former chairman of ISDA.
Criticism of the market intensified in September after the collapse of Lehman and the U.S. government's bailout of American International Group Inc., which faced bankruptcy after credit- rating downgrades forced it to post more than $10 billion in collateral on credit swap trades that had plunged in value. There's a net $4.6 billion in contracts tied to AIG, the DTCC data show.
Cox on Disclosure
U.S. Securities and Exchange Commission Chairman Christopher Cox called for authority to regulate the credit swaps market, saying the lack of disclosure and the web of connections between dealers in the market threatened the stability of the financial system. The Federal Reserve Bank of New York, which has spent the last three years pushing dealers to curb risks in the credit swaps market, last week said it welcomed the DTCC's disclosure.
``Publishing this data will provide greater transparency in a critical market,'' Tim Ryan, head of the Securities Industry and Financial Markets Association, said in a statement today. ``This is an important initiative upon which the industry will continue to build.''
Funding Drought Slams Chinese Plans as Banks Shun Plea to Lend
By Luo Jun in Shanghai
Nov. 5 (Bloomberg) -- Wang Yi, who employs 300 people making children's raincoats on China's east coast, is worried his company won't survive the next year as exports dry up.
The apparel manufacturer, which supplies European supermarket chains Tesco Plc and Aldi Group, needs a 600,000 yuan ($88,000) loan by Jan. 31 to stay afloat. China's state-owned banks rejected his previous applications.
``There's no point trying them again,'' says Wang, 40, standing in his two-story factory in Pinghu, about 90 kilometers (56 miles) southwest of Shanghai, where one floor is half empty. ``They prefer big customers.''
China's largest banks, with 4 trillion yuan of cash, are resisting government efforts to boost lending to 42 million small and medium-size companies that drove the economic boom of the past decade. On Nov. 2, the central bank scrapped curbs on loans after three interest rate cuts in seven weeks failed to revive economic growth that has sagged to its slowest in five years.
Half the nation's toy exporters have closed this year, and 67,000 smaller enterprises filed for bankruptcy in the first half, according to government statistics. Companies with assets of less than 40 million yuan provide three-quarters of urban jobs and 60 percent of China's gross domestic product.
``Their failure will lead to unemployment and may threaten social stability,'' says Frank Gong, JPMorgan Chase & Co.'s Hong Kong-based chief China economist.
Controls Scrapped
After five years of economic growth above 10 percent, the rate may slow to 5.8 percent this quarter, according to a Nov. 3 estimate by Credit Suisse Group AG. That would be the lowest rate since at least 1994, according to data compiled by Bloomberg.
In its latest move to reverse that trend, China's central bank said Nov. 2 it would no longer cap commercial bank lending, state-owned Xinhua news agency reported, scrapping a limit imposed in 2007 to prevent the economy from overheating.
In August, the People's Bank of China raised the quota by 5 percent to 3.8 trillion yuan, directing lenders to funnel the additional funds to firms with assets of less than 10 million yuan and farmers.
Banks have so far turned a deaf ear. With delinquency rates on loans to small companies running almost four times those of other loans, they want to avoid the state-directed lending that led to a $500 billion government bailout over the past decade.
``It's wishful thinking for the government to try to talk banks into lending to stimulate the economy,'' says Li Qing, a Shanghai-based analyst at CSC Securities HK Ltd. ``Banks are holding onto their purse not because they are bound by the quota, but because they are expecting mounting defaults and failures.''
`Scaling Back'
Nationwide, loans to small businesses by China's 20 biggest lenders rose 6.2 percent to 3.2 trillion yuan in the first six months of 2008, less than half the 14.1 percent growth in overall lending, according to the China Banking Regulatory Commission.
In Zhejiang province, where Wang is based and 99 percent of companies are small and privately owned, loans are increasingly hard to come by. Industrial & Commercial Bank of China Ltd., the nation's largest, offered 5 billion yuan of new loans to small enterprises in the province during the first six months of 2008, less than half the year-earlier figure, according to the bank.
``Getting a loan takes longer and involves more procedures for small companies,'' says Wang, who is being squeezed by a 20 percent dip in sales as well as higher commodity prices and an appreciation of the yuan, which reduces revenue from exports.
``Every line of business I know is scaling back to preserve capital as survival is the most important thing,'' he says. ``The whole mess in the U.S. and Europe means 2009 will be worse.''
Goldman Sachs, Temasek
Banks are reluctant to reverse the tightening of risk management that was carried out with advice from foreign investors, including Goldman Sachs Group Inc., that have paid $21 billion for stakes in Chinese lenders since 2005.
``Chinese banks are getting smarter and they won't blindly follow lending directives from the top any more,'' says Leo Gao, who helps oversee the equivalent of $2.3 billion at APS Asset Management Ltd. in Shanghai. ``We've seen banks start to cut back loans to real estate and exporters since the second quarter as they know an outbreak of bad loans is on the horizon.''
Bank of China Ltd. reformed its credit policies with help from Temasek Holdings Pte, which owns a 4.1 percent stake.
The bank now asks borrowers for more documents to prove they have orders that will provide revenue to repay a loan, as well as more collateral and third-party guarantees. It also has moved decision-making from local branches to centralized units at provincial headquarters.
Bank `Dilemma'
Lending to smaller companies is ``challenging,'' because each loan uses the same resources as are required to serve bigger corporations, reducing returns on these higher-risk transactions, says Wang Zhaowen, a Beijing-based spokesman for the bank.
``It's a dilemma and we are trying to find a way out,'' he says. ``Never again will we lower lending standards to meet government directives. Otherwise, we just slip back to the old path.''
About 8.5 percent of the bank's advances to small and medium-size companies were at least 90 days overdue on June 30, compared with 2.6 percent of total lending.
Decades of state-directed lending left China's four biggest banks with bad loans equal to almost 40 percent of outstanding loans in 1998. They were still sitting on $171 billion of soured debt, or 6.1 percent of total advances, at the end of June, compared with 0.5 percent for international banks in China.
``Banks will pay a heavy price for being good corporate citizens,'' says Dorris Chen, a Shanghai-based analyst at BNP Paribas SA. ``And they alone can't keep these companies from failing.''
Some banks that specialize in dealing with smaller firms are already feeling the pinch. China Minsheng Banking Corp., the nation's first privately owned bank, said overdue loans increased 22 percent in the first half from the end of last year.
Factory owner Wang is now trying the Pinghu city cooperative bank, a regional lender whose interest rates are as much as 20 percent higher than state banks. He doesn't think he'll need to try the last resort, a loan shark who charges four times that.
``With all the policies on easing lending, I'm optimistic,'' he says. ``Even if I get it, next year is going to be tough.''
Do our rulers know enough to avoid a 1930s replay?
Events are moving with lightning speed as the global credit freeze evolves into something awfully like a classic trade-depression.
By Ambrose Evans-Pritchard
20 Oct 2008
The commodity and emerging market booms are breaking in unison, leaving no more bubbles left to burst. Almost every corner of the world is now being drawn into the vortex of debt deflation.
The freight rates for Capesize vessels used to ship grains, coal, and iron ore have fallen 95pc to $11,600 since May, hence the bankruptcy of Odessa’s Industrial Carriers last week with a fleet of 52 vessels. Cargo deliveries dropped 15.2pc at the US Port of Long Beach last month, but that is a lagging indicator.
From what I have been able to find out, shipping is slowing as fast as it did in the grim months of late 1931. “The crisis is now in full swing across the entire world,” said Giulio Tremonti, Italy’s finance minister. “It is hitting the real economy, the productive forces of industry. It’s global, it’s total, and it’s everywhere,” he said.
Italy’s industrial output has fallen 11pc in the last year. Foreign orders have dropped 13pc. But we are all in much the same boat. Europe’s car sales fell 9pc in September (32pc in Spain). US housing starts fell to a 45-year low in September.
Last week, the International Monetary Fund had to rescue Hungary and Ukraine as contagion swept Eastern Europe. It would not surprise me if Russia itself were to tip into a downward spiral towards bankruptcy (again) and fascism (again).
Russia’s foreign reserves have fallen by $67bn since August. Ural crude prices fell to $65 a barrel last week, below the budget solvency threshold of the now extravagant Russian state.
The new capitalists have to repay $47bn in foreign loans over the next two months. In Russia, oligarch fiefdoms built on leverage - Mikhail Fridman (Alfa), Oleg Deripaska (Basic Element), and Vladimir Lisin (Novolipetsk) - are lining up for state bail-outs from a $50bn rescue fund.
Brazil is free-fall as well. Sao Paolo’s Bovespa index is down a third in dollar terms in a month. Hopes that the BRIC quartet (Brazil, Russia, India, and China) would take over as the engine of world growth have proved yet another bubble delusion.
China says 53pc of the country’s 3,600 toy factories have gone bust this year. Economist Andy Xie says China is at imminent risk of its own crisis after allowing over-investment to run rampant, like Japan in the 1980s. “The end is near. They’ve been keeping this house of cards going for a long time with bank support,” he said.
Lord (Adair) Turner, the head of Britain’s Financial Services Authority, offers soothing words. “There is no chance of a 1929-33 depression. We know how to stop it happening again,” he said.
I hope Lord Turner is right, but his Olympian certainty bothers me. It assumes that the economic elites a) understand what happened in the 1930s – on that score I suspect that few, other than the Fed’s Ben Bernanke, have delved into the scholarship (sorry, Galbraith’s pot-boiler The Great Crash does not count);
b) that central banks will now jettison the dogma of inflation-targeting that got us into this mess by lulling them into a false sense of security as credit growth and housing booms went mad. Will they now commit the reverse error as credit collapses?
c) understand that non-US banks – especially Europeans – have used the shadow banking system to leverage a $12 trillion (£7 trillion) spree around the world, and that this must be unwound as core bank capital shrivels away;
Yes, the Fed made frightening errors in the early 1930s by raising rates into the crisis, but they were constrained by the norms of the age: the fixed exchange system (Gold Standard), and fear of the bond markets. Are today’s central banks are doing much better? The Europeans fell into the trap of equating this year’s oil and food spike with the events of the early 1970s.
As readers know, I view European Central Bank’s decision to raise rates to 4.25pc in July – when Spain’s property market was already crashing, and Germany and Italy were already in recession – as replay of 1930s ideological madness.
You could say the ECB also acted under the constraints of the age: its rigid inflation mandate. But I suspect that Bundesbank chief Axel Weber and German finance minister Peer Steinbruck were quite simply too arrogant to listen to anybody.
Mr Steinbruck insisted that “German banks are far less vulnerable than US banks” just days before the collapse of Hypo Real with €400bn (£311bn) of liabilities. Had he not read the IMF reports showing that German and European lenders have an even thinner Tier 1 capital base than American banks?
One can only guess what French President Nicolas Sarkozy has been saying to ECB chief Jean-Claude Trichet, but he must have warned in blunt terms that Europe’s leaders would exercise their Maastricht powers to bring the bank to heel unless it slashed rates. Democracies cannot subcontract monetary policy (with all its foreign policy implications) to committees of economists in a fast-moving crisis. Those accountable to their electorates have to take charge.
Whatever occurred behind closed doors, the ECB is now tamed. It has cut rates to 3.75pc, and will cut again soon, perhaps drastically. The risk is that rates have come too late in Europe and Britain to stop a nasty denouement, given the 18-month lag on monetary policy.
We should be thankful that President Sarkozy and Gordon Brown took action in the nick of time to save our banking systems. Their statesmanship should at least spare us mass bankruptcy and unemployment.
But it will not spare us a decade-long toil of pitiful growth – or none at all – as we purge debt. The world stole prosperity from the future for year after year, with the full collusion of governments, regulators, and central banks. Now the future has arrived.
Record no. of Jews elected to Congress
By ALLISON HOFFMAN
Nov 6, 2008
NEW YORK - Democrats strengthened their majorities in both houses of Congress in Tuesday's US elections, picking up five more seats in the Senate and adding at least 18 more seats in the House of Representatives.
The next session of Congress will include 45 Jewish lawmakers, a new record, after Democrats Alan Grayson of Florida and John Adler of New Jersey took two House seats from the Republican column.
Jared Polis, also a Democrat, was widely expected to win his Colorado House seat to match the previous record, set in the 2006 elections.
The House will have 32 Jewish members. Only the class of 1990 had more Jewish members - 34 - but there were fewer Jewish senators at the time.
The next Senate will have 13 Jewish members, the same as the previous session, despite a toss-up race in Minnesota, where both Republican incumbent Norm Coleman and his Democratic challenger, comedian Al Franken, are Jewish.
Democrats said they were disappointed not to have an even larger record after losing several close races - including in Alaska, where polls showed state legislator Ethan Berkowitz mounting a strong challenge for a Republican seat in vice-presidential nominee Sarah Palin's home state - but said they were satisfied with the outcome.
"It's a lot to ask - we had an incredible night with Obama, we had the other pickups in the House and Senate and we should be very grateful," said Ira Forman, executive direction of the National Jewish Democratic Council.
The reinforced Democratic majorities in both chambers assure President-elect Barack Obama a stronger hand in enacting his agenda of change.
The public's expectations were high that Democrats in Congress will help Obama follow through on campaign promises to end the long-running war in Iraq and fix the financial ills that many blame on Bush and his party.
Democrats increased their count in the 100-seat upper house to at least 56. They currently have a 51-49 majority, including two independents who vote in their caucus.
Three Senate races with Republican incumbents remained undecided, among them the contentious reelection bid by 84-year-old Sen. Ted Stevens of Alaska, the longest-serving Senate Republican, who was convicted last month of lying on Senate forms to hide favors he received from a contractor.
Races in Georgia, Oregon and Minnesota were too close to call. The Associated Press called the Senate race in Minnesota prematurely. Republican Sen. Norm Coleman finished ahead of Democrat Al Franken, the former Saturday Night Live comedian, in the final vote count, but Coleman's 571-vote margin falls within the state's mandatory recount law.
Despite the strong showing, Democrats appeared to be falling short of their goal of taking 60 Senate seats. A 60-40 majority would make it nearly impossible for the opposition to use procedural maneuvers to block Democratic proposals from coming to a vote.
In the lower chamber, the House of Representatives, the Democrats expanded their majority by dominating the Northeast and ousting Republicans in every region. The Democrats added at least 18 seats to the 30 they took from Republicans in 2006. Fewer than 10 races remained undecided.
Republicans were on track for their smallest numbers since 1994, the year the so-called Republican Revolution retook the House for the first time in 40 years.
The Democratic edge in the current Congress is 235-199 with one vacancy in a formerly Democratic seat. Two Louisiana seats, one Democratic and one Republican, won't be decided until December because hurricanes postponed their primaries until Tuesday.
"The American people have called for a new direction. They have called for change in America," said House Speaker Nancy Pelosi.
It was the first time in more than 75 years that Democrats were on track for big House gains in back-to-back elections.
"This will be a wave upon a wave," Pelosi said.
House Republicans were licking their wounds and hoping to increase their numbers in the 2010 election.
"We sort of got through this, we think, a little bit better than some people might have expected," said Rep. Tom Cole of Oklahoma, the head of the Republican House campaign committee. "Our worst days are behind us," he added.
The Democratic victories in the Senate included an upset in North Carolina by Democratic state legislator Kay Hagan, who unseated Sen. Elizabeth Dole, one of the biggest names in the Republican Party and wife of Bob Dole, the party's 1996 presidential nominee. Elizabeth Dole, a former Cabinet secretary in two Republican administrations, had been criticized for spending little time in recent years in her home state.
In Virginia, former Democratic Gov. Mark Warner breezed to victory over another former governor, Republican Jim Gilmore, in the race to replace retiring five-term Republican Sen. John W. Warner. The two Warners are not related.
In the West, two Udalls were elected to the Senate. In Colorado, Mark Udall, son of the late Arizona Rep. Morris "Mo" Udall, took the seat vacated by retiring Republican Sen. Wayne Allard. His cousin, Tom Udall, whose father Stewart Udall was Interior Secretary in the Kennedy administration, took the New Mexico Senate seat vacated by retiring Republican Sen. Pete Domenici.
In New Hampshire, Republican Sen. John Sununu lost to Democrat Jeanne Shaheen in a rematch that saw Shaheen referring to Sununu as Bush's "evil twin." Senate Majority Leader Harry Reid, a Nevada Democrat, attributed the party's gains to Obama's coattails.
"It's been a really good night," Reid told The Associated Press. "Obama ran a terrific campaign, he inspired millions of people," he said. According to other preliminary counts, 12 Democrats retained their seats and 14 Republicans were reelected or won seats vacated by retiring Republicans.
Among the Republican survivors was Sen. Mitch McConnell of Kentucky, who outpolled millionaire businessman Bruce Lunsford to retain his seat. McConnell, the Senate minority leader, is a master strategist and could be a thorn in the side of the Democrats.
"Winston Churchill once said the most exhilarating feeling in life is to be shot at and missed," McConnell said. "After the last few months I think he really meant to say there is nothing more exhausting. This election has been both," he added.
In Minnesota, voters cast nearly 2.9 million ballots, prompting a recount that could take weeks to complete. "There is reason to believe that the recount could change the vote tallies significantly," Franken said in a statement.
The Democratic winners included Obama's running mate Joe Biden of Delaware who was elected to his seventh senate term on Tuesday but must give up his seat now that he will become vice president. The state's governor will likely appoint a fellow Democrat to fill Biden's seat until 2010 when a new election will be held.
A total of 35 seats were in contention in the Senate.
In the House, all 435 seats were up for election.
The defeat of 22-year veteran Rep. Chris Shays in Connecticut gave Democrats every House seat from the northeastern New England states. Democratic businessman Jim Himes won despite Republican Shays' recent highly publicized criticism of McCain's presidential campaign.
The Democrat also won an open seat in the New York City borough of Staten Island, giving them control of all of the city's congressional delegation in Washington for the first time in 35 years. The incumbent Republican Rep. Vito Fossella was forced to resign amid drunk driving charges and revelations that he fathered a child from an extramarital affair.
Elsewhere in the Northeast, Republican Reps. John R. Kuhl of New York and Phil English of Pennsylvania were defeated.
In the South, Democrats took seats in Alabama, North Carolina and Virginia. In Florida, two Republican incumbents were defeated by Democrats, including Rep. Tom Feeney, who was under fire for ties to a disgraced lobbyist.
In the Midwest, Democrats captured one seat in Illinois and two seats each in Michigan and Ohio. Rep. Steve Chabot, a 14-year veteran, lost in a district that includes portions of Cincinnati, which has the largest black population of any congressional district in the nation held by a Republican. Obama's candidacy was a major factor in the race, where state Sen. Steven Driehaus won election.
Democrats also made inroads in the West, where they captured two New Mexico seats, one seat each in Colorado and Nevada, and one left open in Arizona by retiring Republican Rep. Rick Renzi, who is awaiting trial on corruption charges.
Among the handful of losing Democratic incumbents was Rep. Tim Mahoney in Florida, who recently admitted to having extramarital affairs. He was defeated by Republican attorney Tom Rooney.
But Rep. John P. Murtha, a Pennsylvania Democrat who angered his constituents by describing them as "racist," easily won reelection.
The Chosen: Jewish members in the 111th U.S. Congress
By Ami Eden
November 5, 2008
NEW YORK — The following is a list of the 44 Jewish members — 13 senators and 31 representatives — who will serve in the 111th U.S. Congress that convenes in January:
U.S. SENATE
Barbara Boxer (D-Calif.)
Benjamin Cardin (D-Md.)
Norm Coleman (R-Minn.)**
Russ Feingold (D-Wisc.)
Dianne Feinstein (D-Calif.)
Herb Kohl (D-Wisc.)
Frank Lautenberg (D-N.J.)**
Joseph Lieberman (I-Conn.)
Carl Levin (D-Mich.)**
Bernard Sanders (I-Vt.)
Charles Schumer (D-N.Y.)
Arlen Specter (R-Pa.)
Ron Wyden (D-Ore.)
HOUSE OF REPRESENTATIVES
Gary Ackerman (D-N.Y.)
John Adler (D-N.J.)*
Shelley Berkley (D-Nev.)
Howard Berman (D-Calif.)
Eric Cantor (R-Va.)
Stephen Cohen (D-Tenn.)
Susan Davis (D-Calif.)
Rahm Emanuel (D-Ill.)
Eliot Engel (D-N.Y.)
Bob Filner (D-Calif.)
Barney Frank (D-Mass.)
Gabrielle Giffords (D-Ariz.)
Jane Harman (D-Calif.)
Paul Hodes (D-N.H.)
Steve Israel (D-N.Y.)
Steve Kagen (D-Wisc.)
Ron Klein (D-Fla.)
Sander Levin (D-Mich.)
Nita Lowey (D-N.Y.)
Jerrold Nadler (D-N.Y.)
Jared Polis (D-Colo.)*
Steve Rothman (D-N.J.)
Jan Schakowsky (D-Ill.)
Allyson Schwartz (D-Pa.)
Adam Schiff (D-Calif.)
Brad Sherman (D-Calif.)
Debbie Wasserman Schultz (D-Fla.)
Henry Waxman (D-Calif.)
Anthony Weiner (D-N.Y.)
Robert Wexler (D-Fla.)
John Yarmuth (D-Ky.)
* Elected to Congress for the first time
** Senators who were re-elected (Coleman defeated Democratic challenger Al Franken in Minnesota by 571 votes, but a recount is expected. Franken also is Jewish, leaving 13 Jewish senators regardless of who emerges as the winner.)
Why agreeing a new Bretton Woods is vital and so hard
By Martin Wolf
Nov 4 2008
We have arrived at the point in a crisis when ambitious leaders call for a "new Bretton Woods". It is easy to mock such language. Yet it is easy to see why this crisis should make people think in such heroic terms.
First, the world economy has come full circle, with a massive financial crisis emanating from the US, then and still the world's dominant financial power. The Great Depression of the 1930s was accompanied - and aggravated - by failures of economic co-operation, disintegration of the global economy and resurgent nationalism. But it also led to a revolution in economic thinking. "Never again" was the aim of the negotiators in Bretton Woods, New Hampshire. Mired in the worst financial crisis since the 1930s, we have good cause to say the same.
Second, it is unnecessary to wait for calmer times before thinking afresh. The Bretton Woods conference culminated in July 1944, while the second world war was far from over. If they could fight a war and redesign the global economy at the same time, so can we fight a crisis and redesign global institutions simultaneously.
Third, today's global financial system is dysfunctional. What is at stake in reform is maintenance of the open world economy that offers opportunities to so many. Also at stake is sustained co-operation among states. Nothing is less likely than effective co-operation among inward-looking states presiding over frightened, even xenophobic, societies.
Finally, what is happening lies at the intersection between global macroeconomics - money, the exchange rate and the balance of payments - and global finance: capital flows, financial fragility and contagion. The imperative of co-operation remains. But as Robert Zoellick, World Bank president, said on October 6: "We must modernise multilateralism and markets for a changing world economy."
So how is this to be done? We must start with the underlying challenges.
The first is the inability to gain a purchase on the policies of countries that run huge and persistent current account surpluses. That was a dominant concern of John Maynard Keynes in 1944. Ironically, the problem then was US surpluses. Today, it is the collapse in the ability of US households and those of a few other high-income countries to offset the vast current account surpluses generated by China, Germany, Japan and oil-exporting countries. Surplus countries love criticising those who spend what they wish to lend. The former will soon discover they cannot do without the profligacy of the latter.
The second is that of financing countries subject to "sudden stops" in capital inflows of the kind we are seeing, as banks and other foreign-currency lenders cut off financing to a wide range of borrowers, particularly in emerging countries. Many of the latter have made an immense and costly effort to reduce vulnerability by accumulating foreign currency reserves (see chart below). By August of this year, the total foreign currency reserves of emerging countries had reached $5,500bn, dwarfing the $260bn available to the International Monetary Fund. Yet self-insurance is inefficient and, as it has proved, too unequally distributed.
The third challenge is that of making the financial system less unstable and, above all, less vulnerable to such huge swings in risk appetite - from financing anything, however ridiculous, to financing nothing, however meritorious. At present, moreover, as Stephen King of HSBC has pointed out on the FT's economists' forum, the efforts of governments to force rescued banks to finance domestic borrowers are bound to come at the expense of their lending to emerging countries.
The final challenge is that of making the global institutional architecture less illegitimate than today. The Bretton Woods institutions - the IMF and the World Bank - are dominated by the western powers: in the case of the Fund, the US still had 17.1 per cent of the quotas (which largely determine votes) and the European Union another 32.4 per cent in May 2007. Meanwhile, China had just 3.7 per cent and India 1.9 per cent. These are simply anomalous. So, too, is the persistence of the group of seven high-income countries as the co-ordinating group for the world economy, particularly as three of them - Germany, France and Italy - do not have independent currencies. The group of 20, whose summit will take place in Washington on November 15, looks too large. Mr Zoellick suggests a G14, which would add Brazil, China, India, Mexico, Russia, Saudi Arabia and South Africa.
What is interesting about this agenda is how familiar much of it would seem to the participants at Bretton Woods, with one exception. Keynes would be horrified that the world has let the genie of free capital flows out of the bottle. This, he would note, is why more external financing is needed than ever before, why vast foreign currency reserves have been accumulated and why financial crises are once again global, rather than local. He would add that "a sound banker, alas, is not one who foresees danger and avoids it, but one who, when he's ruined, is ruined in a conventional and orthodox way along with his fellows, so that no one can really blame him". We have far too many such bankers. He would surely add that these undercapitalised and illiquid institutions are little short of financial time-bombs.
Yet can anything useful be done to meet such challenges? It is certainly possible - and indeed necessary - to change the global architecture, not least in response to changing economic weights. It is equally necessary to give the IMF more financial resources in support of its new short-term lending facility. But it is surely too optimistic to believe that the Fund would ever be able to provide reliable warnings of looming crises. Even if it did, it is even less likely that the countries which matter would do anything in response.
Nor am I optimistic that we can sever the links connecting banking as a stodgy utility that provides essential services to the economy to banking as a casino offering opportunities for taking huge bets. Bankers have been given a licence to gamble with taxpayers' money. That is a wonderful business to be in. It is also one we seem unable to bring to heel.
Yet I wish to be proved wrong. I hope that the summit of the G20 will set the agenda for serious reform, by creating working groups that prove able to produce radical and effective proposals. For what is happening now may well be the last chance for an open and dynamic world economy. First, we have to get through the present crisis. Then we have to have to make such catastrophic financial collapses vastly less likely. If not us, who? And if not now, when?
The Bailout: More Changes, More Questions
Some critics wonder if the financial rescue plan may prove more costly to taxpayers than expected and delay the financial stability it was supposed to foster
By David Bogoslaw
November 4, 2008
Is it too soon to wonder whether the government's $700 billion financial rescue program has gone off track? The U.S. Treasury has taken a lot of flack in the past few weeks for shifting the focus of the plan from buying distressed assets off banks' balance sheets to direct capital injections into financial institutions that may or may not need it. Meanwhile, critics say there are no indications that lending has increased, which was the original objective of the whole plan.
Indeed, some financial institutions that have received government money seem to be using the capital for other purposes, such as acquisitions of other banks, while the methods used in the rescue—and the purpose behind it—seem to be changing every week. And that has made even some of the legislation's original champions take notice.
Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, went so far as to say on Oct. 31 that any use of the cash from the rescue plan by banks for acquisitions, executive bonuses, or other purposes besides lending is "a violation of the terms of the act."
Paulson Forced Capital Injections
The first indication that the bailout game plan was changing: In early October, Treasury Secretary Henry Paulson called a meeting with the leaders of nine of the largest U.S. banks and forced them to take a total of $125 billion in capital injections. In return, the government received preferred stock and stock warrants in each bank.
It's true the original intention of the Troubled Asset Relief Program (TARP) was to promote lending activity, which had frozen up by the end of August as financial services companies became more concerned about capital preservation, rising default rates on loans, and unknown risks involving trading counterparties. But in rethinking its methods, the Treasury still seems to have the same end result in mind, despite what its critics say.
Here's why. Buying $1 billion worth of distressed assets such as mortgage-backed securities from financial institutions provides those firms with $1 billion that can then be used to buy other assets or debt. That same $1 billion, when injected directly into a bank in exchange for preferred shares and stock warrants, adds to existing capital and can generate up to $10 billion worth of lending at a conservative debt-to-equity ratio of 10 to one, says Gerard Cassidy, an equity analyst who covers regional banks for RBC Capital Markets . "The impact of TARP going into equity is much greater because of leverage, and therefore over a longer period of time it will have a more stimulative effect to the economy," he says.
The Reason Treasury Shifted Gears
The benefit of buying troubled assets off banks' books under the TARP's capital purchase program is an increase in liquidity that can facilitate broader trading activity in the short term, but it won't produce as big a bang for the buck in terms of generating lending activity as the equity program, he adds.
Cassidy believes criticism of the Treasury's moves to directly inject capital into banks has stemmed from the fact that many people are focused more on short-term solutions and aren't ready to accept that while the government has managed to calm the crisis down, a full resolution of the problems will take a lot longer.
Why did the Treasury shift gears? Blame the problems around the pricing of the troubled assets, says Professor Cornelius Hurley, director of the Graduate Program in Banking and Financial Law and its related Morin Center for Banking and Financial Law at the Boston University School of Law. Paulson and his staff decided they would be damned for overpaying for assets and for underpaying, because buying the assets at a lower value than what the banks were carrying on their balance sheets would cause a corresponding hit to equity, reduce the amount of lending that would be possible off the revised equity, and defeat the whole purpose of the program, says Hurley.
Reason for Banks to be Cautious
And what about the notion that banks remain reluctant to lend even after the government's capital injections? Contrary to the prevalent belief, commercial banks have been lending since the TARP was implemented. Large banks increased their outstanding loans by $45.2 billion, or nearly 3.5%, in the five weeks ending Oct. 22, while outstanding loans at small banks rose $5.7 billion, or about 0.74%, during the same period, according to a Federal Reserve statistical release on Oct. 31.
Bert Ely, a principal at Ely & Co. an Alexandria (Va.) consulting firm for financial institutions, says it would be a mistake to force banks to make more bad loans right now. Cassidy at RBC Capital agrees, saying that during a recession. banks need to be extra-cautious about lending.
Some argue the Treasury Dept. should be forgiven for changing course since the TARP was first announced in view of how unprecedented many of the events and circumstances involving the financial crisis have been. "Remember that, like it or not, the government is frankly making it up as it goes along. There's no framework, no prior experience model that anybody can refer to," says Charles Horn, senior partner in the financial services regulatory and enforcement practice at Mayer Brown in Washington, D.C. Paulson and his team are discovering that there are many uses for the $700 billion and such great demand for it that they are in the position of having to determine whether or not there's enough to go around, he adds.
More Players Want In
Indeed, capital investments that were originally intended for the most important banks are now being sought by a much broader number of players. Insurance companies and even auto finance firms are rushing to turn themselves into bank holding companies in order to become eligible to apply for the program by the Nov. 14 deadline. The Treasury now estimates as many as 1,800 publicly held companies could queue up for the program in the weeks ahead and says the remaining $125 billion will be sufficient to cover their needs, according to The Wall Street Journal.
The use of taxpayers' money to accelerate consolidation within the banking industry is another example of how the TARP has gone off course, says Hurley at Boston University. PNC Financial Services Group's (PNC) decision to use the $7.7 billion capital injection it got from TARP to acquire National City Corp. (NCC), a Cleveland financial holding company, has rankled people who believe the government shouldn't be picking winners and losers in that industry.
"Consolidation may or may not be a good thing, but it can take a long time," to realize the cost savings that come with economies of scale and full integration of operations, says Hurley. "The whole bailout package was passed with very alarmist rhetoric about how the world was going to come to an end, not with the idea that we had months and months to work this thing through."
Gauging TARP's Success
But others see consolidation among banks as a valid use of the TARP funds to the extent that it eliminates the need to price distressed assets. Instead of overpaying for them or causing further equity destruction by undervaluing them, it's better to leave those assets with the banks that made the loans by allowing weaker banks like National City to be acquired by stronger ones like PNC, says Ely. With a stronger balance sheet as a result of the acquisition, and superior management skills, PNC should be in a better position to work through the problems concerning any distressed assets, he says.
As for how to gauge the success of TARP, Hurley believes there are better ways than by measuring the increase in bank lending.
It's hard to know what the baseline of lending would have been without the Treasury intervention, and it's virtually impossible to tag any number of loans directly to the new capital. Since lending contracts during recessions anyway, it may be that all the capital does is to limit the decline in credit and hence the severity of the recession, he says.
"What I'd look at is: Are these banks able to raise additional capital [from private sources] while the U.S. capital purchase program is in place?" he says. "How soon are these companies going to be able to buy the U.S. Treasury out of its investment?" The top nine recipients of the capital injections have five years to repay the Treasury before the 5% dividend the government is earning on the preferred shares jumps to 9%, which would be punitive, and it would be less onerous for these firms to raise capital sooner than later, he says.
Where Are the Strings?
That's one reason Hurley is critical of the government's decision not to attach more strings to the capital it's giving to banks. The British and Dutch governments insisted on getting seats on the boards of the financial firms in which they bought equity stakes, he points out. "One or two seats is not control, but it's another voice at the table" that could better ensure the money is being used in the most effective ways.
The likelihood that some recipients of capital won't be able to repay the government down the road is strong, given Treasury's willingness to distribute money to the strong and weak alike without apparent differentiation, says Joseph Battipaglia, market strategist at Stifel, Nicolaus & Co. (SF) in Philadelphia. He thinks it's a waste to inject capital into weaker banks that are inclined to sit on the money to bolster their balance sheets without increasing their lending. That only undermines investor confidence by allowing opaque asset portfolios to remain murky, and disrupts efforts by investors to seek the most appropriate rate of return for their money, he adds.
Although Treasury has a short-term preference for capital injections, those are nearly completed for publicly traded companies, and the Treasury said it will be releasing guidelines and a "reasonable" time frame for privately held financial institutions, says Horn at Mayer Brown. Presumably, Paulson & Co. still intend to use the remaining $450 billion in TARP to buy distressed loan portfolios and other assets, but there's been no indications as to when that will begin.
Reverse Auctions Ahead?
And that brings us back to the "TA" part of TARP. Nobody will fault government officials for trying to get the most bang from the taxpayer's buck by pumping money into the banks first. But since those troubled assets lie at the core of the current crisis, they will need to be tackled at some point, whether through reverse auctions or some other pricing method. The sooner they are, the faster the wheels of the capital markets will start turning again.
Credit Continues To Become Tighter In The U.S.
November 4, 2008
Washington — A Federal Reserve survey discovered that 85 percent of U.S. banks tightened their lending standards for the third quarter, which was up from the 60 percent that made such measures and responded to the Fed's June poll.
About 95 percent of the banks said more stringent lending requirements were imposed on large and medium-sized businesses borrowers. For credit card debts, 60 percent of the banks said they tightened standards and 65 percent made similar measures against other types of consumer loans for the third quarter.
The stricter standards were applied against prime mortgage loans, nontraditional mortgage loans, subprime mortgages and loans granted to borrowers with weak credit ratings.
The survey, conducted during the first two weeks of October, covered 55 American banks with combined assets of $6.2 trillion and 21 foreign financial institutions.
Richmond Fed president Jeffrey Lacker opined the tougher loan standards may be one of the reasons why the Fed reduced benchmark interest rates by 1 percent last week. Chris Rupkey, chief financial economist of the Bank of Tokyo-Mitsubishi, told Bloomberg, "It has never been harder for business and individuals to get a loan from the bank... Banks are turning away borrowers left and right."
U.S. Stocks Post Biggest Post-Election Drop on Economic Concern
By Elizabeth Stanton
Nov. 5 (Bloomberg) -- The stock market posted its biggest plunge following a presidential election as reports on jobs and service industries stoked concern the economy will worsen even as President-elect Barack Obama tries to stimulate growth.
Citigroup Inc. tumbled 14 percent and Bank of America Corp. lost 11 percent as the Standard & Poor's 500 Index and Dow Jones Industrial Average sank more than 5 percent. Nucor Corp., the largest U.S.-based steel producer, slid 10 percent after bigger rival ArcelorMittal doubled production cuts amid slowing demand. Boeing Co., the world's second-largest commercial planemaker, lost 6.9 percent after UBS AG forecast a 3 percent drop in global air traffic next year.
``We had an election yesterday; that doesn't mean the problems go away,'' said Kevin Rendino, a Plainsboro, New Jersey- based money manager at BlackRock Inc. who oversees $10 billion. ``We still have an economic slowdown.''
The S&P 500 tumbled 52.98 points, or 5.3 percent, to 952.77, erasing yesterday's 4.1 percent rally. The Dow retreated 486.01, or 5.1 percent, to 9,139.27. The Russell 2000 Index of small U.S. companies fell 5.7 percent to 514.64. The MSCI World Index of 23 developed markets decreased 2.5 percent to 982.98.
The slide halted an 18 percent rebound from the S&P 500's five-year low on Oct. 27. The benchmark for U.S. equities has lost more than 35 percent this year, the steepest annual plunge since 1937, and Obama will have to contend with an economy pummeled by the fastest contraction in manufacturing in 26 years and the lowest consumer confidence.
Biggest Rally Erased
The market's decline came a day after the biggest presidential Election Day gain since the New York Stock Exchange first opened for trading on a voting day in 1984.
The report by ADP Employer Services showed companies cut 157,000 jobs in October, the most since November 2002 when the U.S. was emerging from a recession. The Institute for Supply Management said service industries in the U.S., which make up 90 percent of the economy, contracted by the most on record.
About 1.3 billion shares changed hands on the NYSE, 11 percent less than the three-month daily average.
Citigroup lost $2.05 to $12.63 and Bank of America plunged $2.78 to $21.75. The S&P 500 Financials Index sank 8.8 percent after extending declines late in the day following Oppenheimer & Co. analyst Meredith Whitney's prediction on CNBC that the mortgage market will contract and more than $2 trillion in available credit-card lines will be pulled from the system.
Whitney also said potential loan modifications under an Obama administration will hurt banks and diminish their appetite for risk.
$6 Trillion Lost
The S&P 500 has lost about 39 percent since it peaked at 1,565.15 on Oct. 9, 2007, as the U.S. economy contracted 0.3 percent last quarter and credit-related losses and writedowns by global financial firms approached $700 billion. More than $6 trillion was erased from U.S. equities this year by the worst financial crisis since the Great Depression.
Nucor sank $4.16 to $35.50. Luxembourg-based ArcelorMittal reported third-quarter profit that fell short of analyst estimates, said its global output will drop by more than 30 percent, and forecast fourth-quarter earnings will fall as much as 48 percent. The company's New York-registered shares slumped 22 percent to $24.88, their biggest retreat in seven years.
Boeing fell $3.67 to $49.55. Its share price, which rose 28 percent from Oct. 10 through yesterday, ``is at least six to nine months from bottoming and beginning to mover higher again,'' David E. Strauss, a New York-based analyst at UBS, wrote in a report. Aircraft deliveries may tumble 29 percent from 2009 to 2012, the analyst said.
`Continued Softening'
Textron Inc. lost $1.71, or 9.2 percent, to $16.93. The world's biggest business-jet maker through its Cessna unit reduced the number of Citation jets it plans to deliver next year, citing ``continued softening in the global economic environment.''
Stocks extended their retreat even as Nancy Pelosi, Speaker of the House of Representatives, said Democrats may seek two economic stimulus measures if President George W. Bush limits the size of a plan to be considered during the post-election ``lame- duck'' session. Obama's party captured at least 19 seats in the House and at least five in the Senate, expanding its congressional majority.
General Growth Properties Inc. tumbled almost 50 percent to $2.25 for the biggest drop in the S&P 500. The U.S. mall owner that has lost more than 90 percent of its market value on concern it won't be able to refinance debt coming due this year reported a wider third-quarter loss and suspended its quarterly dividend.
Bond Insurers
MBIA Inc. and Ambac Financial Group Inc. slumped after the bond insurers posted wider losses than analysts estimated. MBI fell 22 percent to $8.16. Ambac, dropped from the S&P 500 in June, fell 41 percent to $2.01. Slumping credit markets forced the companies to increase reserves for claims.
Pioneer Natural Resources lost 15 percent to $24.79. The oil and natural-gas producer in North America and Africa reported third-quarter earnings that missed analyst estimates and said it will cut drilling activity.
Sara Lee Corp. slid 14 percent to $10.20. The maker of frozen cakes and Jimmy Dean sausages said full-year profit will be less than it previously estimated because of falling foreign currencies and waning demand in Europe.
Marsh & McLennan Cos. fell 12 percent to $26.06. The world's second-biggest insurance broker said profit dropped 78 percent in the third quarter amid the slowing U.S. economy and price declines for commercial coverage and reinsurance.
Earnings Season
Most companies in the S&P 500 have managed to increase profits even as the economy slows. Of the 386 companies that reported third-quarter results so far, 232 posted higher earnings than in the year-earlier period. Still, profits are down 7.4 percent on average after accounting for losses at financial companies.
Medco Health Solutions Inc. climbed 9.1 percent to $41.47 for the biggest of only 13 advances in the S&P 500. A surge in use of generic and mail-order prescription drugs fueled a 38 percent increase in third-quarter profit at the largest U.S. drug benefits manager.
Molson Coors Brewing Co. gained 8.3 percent to $41.78. The third-largest U.S. beer maker reported market-share gains in Canada and the U.K. and said it expects to achieve total cost savings from its joint U.S. venture with SABMiller Plc six months early.
Chesapeake Energy Corp. climbed 8.2 percent to $24.83 on speculation it will be acquired by BP Plc.
General Motors Corp. slipped 16 cents, or 2.8 percent, to $5.56. GM, the biggest U.S. automaker, needs government aid because ``time is very short'' to stop its collapse, Roger Altman, an adviser to the automaker and Obama, said in an interview.
Recession Rallies
The S&P 500 Index may be on the cusp of a rally by Inauguration Day, based on the speed of its tumble from last year's peak and the time it took stocks to gain before recessions ended in 1975, 1982 and 1991, data compiled by Bloomberg show. This year's plunge in stocks suggests that equity investors anticipate an economic contraction as severe as the one that began under Richard Nixon that will end in July.
The S&P 500's slump since last year's high is the steepest for a comparable period since the gauge fell 43 percent in the 13 months ended in October 1974, Bloomberg data show.
1970s Recession
The economy then was mired in a recession that lasted 16 months and ended in March 1975, five months after the equity market began its rebound. During the recessions of 1982 and 1991, the S&P 500 began to climb four months and five months before the economy started to recover, respectively.
Based on the market's history of anticipating economic recoveries, the S&P 500 may embark on its next bull market in February, about a month after Obama's inauguration on Jan. 20.
Stocks gained yesterday after the 17th straight decline in a key interest rate, a sign that as much as $3 trillion of emergency funds provided by governments to resuscitate bank lending are working. The London interbank offered rate, or Libor, that banks charge each other for three month loans in dollars fell again today to the lowest level since December 2004.
So Little Time, So Much Damage
Editorial
November 3, 2008
NEW YORK — While Americans eagerly vote for the next president, here’s a sobering reminder: As of Tuesday, George W. Bush still has 77 days left in the White House — and he’s not wasting a minute.
President Bush’s aides have been scrambling to change rules and regulations on the environment, civil liberties and abortion rights, among others — few for the good. Most presidents put on a last-minute policy stamp, but in Mr. Bush’s case it is more like a wrecking ball. We fear it could take months, or years, for the next president to identify and then undo all of the damage.
Here is a look — by no means comprehensive — at some of Mr. Bush’s recent parting gifts and those we fear are yet to come.
CIVIL LIBERTIES
We don’t know all of the ways that the administration has violated Americans’ rights in the name of fighting terrorism. Last month, Attorney General Michael Mukasey rushed out new guidelines for the F.B.I. that permit agents to use chillingly intrusive techniques to collect information on Americans even where there is no evidence of wrongdoing.
Agents will be allowed to use informants to infiltrate lawful groups, engage in prolonged physical surveillance and lie about their identity while questioning a subject’s neighbors, relatives, co-workers and friends. The changes also give the F.B.I. — which has a long history of spying on civil rights groups and others — expanded latitude to use these techniques on people identified by racial, ethnic and religious background.
The administration showed further disdain for Americans’ privacy rights and for Congress’s power by making clear that it will ignore a provision in the legislation that established the Department of Homeland Security. The law requires the department’s privacy officer to account annually for any activity that could affect Americans’ privacy — and clearly stipulates that the report cannot be edited by any other officials at the department or the White House.
The Justice Department’s Office of Legal Counsel has now released a memo asserting that the law “does not prohibit” officials from homeland security or the White House from reviewing the report. The memo then argues that since the law allows the officials to review the report, it would be unconstitutional to stop them from changing it. George Orwell couldn’t have done better.
THE ENVIRONMENT
The administration has been especially busy weakening regulations that promote clean air and clean water and protect endangered species.
Mr. Bush, or more to the point, Vice President Dick Cheney, came to office determined to dismantle Bill Clinton’s environmental legacy, undo decades of environmental law and keep their friends in industry happy. They have had less success than we feared, but only because of the determined opposition of environmental groups, courageous members of Congress and protests from citizens. But the White House keeps trying.
Mr. Bush’s secretary of the interior, Dirk Kempthorne, has recently carved out significant exceptions to regulations requiring expert scientific review of any federal project that might harm endangered or threatened species (one consequence will be to relieve the agency of the need to assess the impact of global warming on at-risk species). The department also is rushing to remove the gray wolf from the endangered species list — again. The wolves were re-listed after a federal judge ruled the government had not lived up to its own recovery plan.
In coming weeks, we expect the Environmental Protection Agency to issue a final rule that would weaken a program created by the Clean Air Act, which requires utilities to install modern pollution controls when they upgrade their plants to produce more power. The agency is also expected to issue a final rule that would make it easier for coal-fired power plants to locate near national parks in defiance of longstanding Congressional mandates to protect air quality in areas of special natural or recreational value.
Interior also is awaiting E.P.A.’s concurrence on a proposal that would make it easier for mining companies to dump toxic mine wastes in valleys and streams.
And while no rules changes are at issue, the interior department also has been rushing to open up millions of acres of pristine federal land to oil and gas exploration. We fear that, in coming weeks, Mr. Kempthorne will open up even more acreage to the commercial development of oil shale, a hugely expensive and environmentally risky process that even the oil companies seem in no hurry to begin. He should not.
ABORTION RIGHTS
Soon after the election, Michael Leavitt, the secretary of health and human services, is expected to issue new regulations aimed at further limiting women’s access to abortion, contraceptives and information about their reproductive health care options.
Existing law allows doctors and nurses to refuse to participate in an abortion. These changes would extend the so-called right to refuse to a wide range of health care workers and activities including abortion referrals, unbiased counseling and provision of birth control pills or emergency contraception, even for rape victims.
The administration has taken other disturbing steps in recent weeks. In late September, the I.R.S. restored tax breaks for banks that take big losses on bad loans inherited through acquisitions. Now we learn that JPMorgan Chase and others are planning to use their bailout funds for mergers and acquisitions, transactions that will be greatly enhanced by the new tax subsidy.
One last-minute change Mr. Bush won’t be making: He apparently has decided not to shut down the prison in Guantánamo Bay, Cuba — the most shameful symbol of his administration’s disdain for the rule of law.
Mr. Bush has said it should be closed, and his secretary of state, Condoleezza Rice, and his secretary of defense, Robert Gates, pushed for it. Proposals were prepared, including a plan for sending the real bad guys to other countries for trial. But Mr. Cheney objected, and the president has refused even to review the memos. He will hand this mess off to his successor.
We suppose there is some good news in all of this. While Mr. Bush leaves office on Jan. 20, 2009, he has only until Nov. 20 to issue “economically significant” rule changes and until Dec. 20 to issue other changes. Anything after that is merely a draft and can be easily withdrawn by the next president.
Unfortunately, the White House is well aware of those deadlines.
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