From political risk to corruption, obstacles to mining in Africa are many, but for those who persevere, the rewards can be huge
Peter Koven, Financial Post Saturday, March 01, 2008
Before an audience of thousands at the 2008 Mining Indaba conference, Cynthia Carroll, chief executive of Anglo American PLC, ended her keynote speech with a message that everyone knew was coming: “Africa’s time has come!”
The mining folks in the audience nodded. They have heard all this before. In fact, they realized it a long time ago, even if their investors in Toronto, London and New York are just starting to figure it out.
They were all drawn to the continent years ago with the hopes of capitalizing on democratic reform and access to unimaginable resource wealth that came with it. The fact that nearly 5,000 people, a record number, trekked to Cape Town for this convention shows that those dreams have been largely realized, or will be.
The numbers tell the story. More than $45-billion in new mining investment is expected over the next five years. Canadian companies alone now have mining assets worth more than $12-billion in Africa, a number that is projected to nearly double in the next three years. Five years ago, Canadians had less than $1-billion invested on the continent.
Despite a turbulent political environment, Africa is quickly earning a reputation as the place where mining gets done right. Unlike Canada, this is where mines can get permitted and built with breathtaking speed by entrepreneurs who rarely disappoint the market. A group of small, nimble companies like Equinox Minerals Ltd. and CIC Energy Corp. are developing remarkable projects in Africa in a fraction of the time it would take in Canada. Many of them trade in Toronto.
“In Africa you don’t get the long permitting delays to get your environmental assessment through. There doesn’t seems to be any issue getting drill rigs, unlike in Canada. There are good assay labs and good engineering support out of Johannesburg. It’s all there,” says Canadian Stephen Dattels, the entrepreneur who built African miner UraMin Inc. almost overnight and sold it for US$2.5-billion. “There’s a reason mining companies are looking beyond North America.”
It is no surprise that Africa is receiving unprecedented levels of mining investment amid today’s sky-high metal prices; the continent holds about 40% of the world’s known gold reserves, 60% of the cobalt, 65% of the diamonds, 88% of the platinum, and so on.
The investment numbers point to a very healthy industry, but you wouldn’t know it by reading the headlines. The news that flows from Africa -- mining or otherwise -- is invariably bad. When it comes to mining, the talk usually focuses on a handful of predictable topics: violent upheavals threatening projects, corrupt governments scrapping contracts, and collapsing infrastructure and power failures. Then there is the overbearing spectre of China, which wants the vast resources for itself.
There is no question that Africa is a difficult place to do business. But as anyone at Indaba will point out, the “bad news” misses the point: companies mining Africa are overcoming the challenges and succeeding.
WEALTH OF RESOURCES
In North America, investors have reached a stage where they assume that mines will not be delivered on time and on budget. That is largely due to a glacial permitting process that can hold up projects for years as politicians and other interest groups grandstand.
In Africa, meanwhile, a company like First Quantum Minerals Ltd. can get its Lonshi mine up and running less than a year after a discovery is made. “We wouldn’t want to be in the U.S., for example, because the permitting requirements are so severe,” says Clive Newall, First Quantum’s president. “It takes 10 to 20 years to take a mine into production. We just don’t operate like that.”
There is another simple truth: It is much easier to find resources in Africa. In Canada, the easy stuff has been found and companies are now developing low-grade projects with marginal economics. The most notorious is Teck Cominco Ltd.’s Galore Creek, the British Columbia debacle that was halted late last year after costs spiralled out of control.
In Africa, there are highly prospective regions like the Central African copperbelt that have had no serious exploration for decades, or ever. “You’re looking at virgin ground that’s almost untouched. It’s finally being explored properly,” says Jean Luc Roy, CEO of the copperbelt exploration play El Nino Ventures Inc.
For investors, it comes down to “picking your poison,” as one hedge fund manager puts it. Do you want the growing geological risk of Canada or the political risk of Africa?
More and more investors are choosing the latter, and that doesn’t surprise Mr. Newall. His mining company was the first to enter the Zambian copperbelt when it opened up for foreign investment in the mid-1990s, but it still had little trouble raising money. “The quality of the projects we were presenting to the banks was so high that they were not likely to turn them down,” he says. “They were surprisingly easy to finance, given that we were first mover in an environment no one had been in for decades, in a time of collapsing copper prices.”
But there is more to the booming African mining industry than good geology and easy permitting. The continent is drawing people with that extra entrepreneurial spirit who aren’t afraid to take big risks to get projects built.
There is CIC Energy in Botswana, a creation of Canadian and South African entrepreneurs that is building a staggering $9.5-billion integrated coal project and power station. The power will go to South Africa, which is suffering a huge shortage. In Egypt, a company called Centamin Egypt Ltd. followed the lead of the ancient pharoahs and found millions of ounces of gold. In countries like Eritrea and Central African Republic, a few juniors have dared to enter totally uncharted territory and been rewarded.
These miners are kept on a shorter leash than the ones operating here at home. Shareholders are already worried about the volatile politics in Africa, and if these firms can’t manage political risk and deliver on their promises, the money will vanish overnight.
POLITICAL RISKS
The downside is obviously the political risk. In Africa the political environment changes, for better or worse, very quickly. It happened recently with the ethnic violence in Kenya. And a lot of miners are worried about South Africa, where controversial politician Jacob Zuma is gaining more power and rattling the nerves of foreign business owners.
But the big hot zone right now is the Democratic Republic of the Congo (DRC), a fledgling democracy that is still trying to find its feet after a bloody civil war. That is where the investment dollars are flowing these days and it’s not hard to see why: “If you look at the head grade of all the open pit copper producers in the world, it’s approximately 1.2%, 1.3%,” says Robert Lavalliere, vice-president of investor relations at Anvil Mining Ltd., which has three major DRC projects. “If you look what we have in the DRC, it’s three, four, five times that.”
Operating in the DRC is always an adventure, and the companies never quite know what’s coming next. Most famous is the “contract review” process that is now forcing each company to renegotiate its mining terms. Investors are livid, but that kind of thing happens in this corner of the world.
To overcome these challenges, DRC companies like Anvil and Lundin MiningCorp., expend huge amounts of effort into government relations and community development, teaming up with NGOs and reinvesting millions of dollars in social spending and infrastructure development. They also give Gecamines, the state-owned company, stakes in many of the ultra-high-grade projects.
The DRC is an extreme example, but even stable countries can turn on a dime. In January, the Zambian government introduced an unheralded profits tax on mining companies, boosting the effective rate from 31.7% to 47%. The companies heard about it when their investors did.
There was a predictable uproar afterward. But as one source pointed out, Ontario slapped a royalty on diamond mining last year and nobody blinked.
THE CHINA FACTOR
In the long term, the biggest threat to Western mining interests in Africa may not be the politics or the lack of infrastructure but China, which craves the resources to feed its surging economy and is using its considerable heft to get them.
At Indaba, the Chinese are the proverbial elephant in the room. Ms. Car-roll’s remark that the Chinese “have not been guilty of under-appreciating Africa’s economic potential” is about as public as the comments get. But the Chinese come up frequently in casual conversation.
“In every jurisdiction we were in, the Chinese were there trying to steal our projects,” offers one individual, who claims he was harassed and threatene as he tried to secure projects and build his company.
The Chinese are often accused of not playing fair in Africa. But to their credit, they have had a significant positive impact on the continent. They will offer countries hundreds of millions (or billions) of dollars in aid and infrastructure build-out in exchange for energy and base metals.
Critics call this “colonialism” and the tactics have angered mining companies, who find it difficult to compete. “They play by different rules,” says Paul Conibear, senior vice-president of projects with Lundin Mining. “For example, when anything meaningful happens to us, we have to press release it with all the fundamental details. So, automatically the Chinese get all this benchmarking. We’d love to know the details of the last four or five Chinese deals in Africa, but you have no way of finding out.”
Bruce Shapiro, president of business development firm MineAfrica, says most African nations would still prefer to deal with Western mining companies. But the more volatile the country, the more likely the Chinese will be looking around. “They know these countries are more desperate for investment and are not as concerned with the niceties of the situation,” he says.
Naturally, the DRC has become the big battleground between East and West. Last fall, a Chinese consortium struck an eye-opening $9-billion joint venture deal with Gecamines, in which it pledged to build an array of infrastructure projects.
The agreement was criticized by the World Bank and others, but sources close to the DRC say the deal made total sense. When the World Bank lends money, it takes forever to arrive and comes in small amounts with a mountain of conditions attached. But with the Chinese, the results are immediate.
“The way I look at it, it’s up to the Africans,” a Johannesburg-based hedge fund manager and African nationalist says. “If the African leaders and African subjects want an honest regime, the Chinese are not going to deflect them from that. If they want a dishonest regime, the Chinese permit them to do that.
“But it’s quite clear from the history of Africa that many Western companies and governments have been very comfortable supporting bad government.”
THE RUSH GOES ON
The one thing everyone in Africa agrees on is that the foreign mining dollars will continue to pour into the continent for years in the future. As long as commodity prices stay at high levels there is no reason to assume otherwise.
The question is, who will be making the investments. In stable countries like South Africa, Western mining interests are established and are not going away. But in countries like the DRC, Zambia and Eritrea, the investments by companies like Lundin and Anvil are still a new phenomenon. They have been remarkably successful so far, and if this continues they will have a lot of company.
“If these investments are all successful, then everyone will come --all the transparent Canadian, North American and European companies,” Mr. Conibear says. “And if they’re not successful for whatever reason, mining will still occur but by much less reputable [companies].”
Mr. Newall at First Quantum looks at it another way. His company has tried to expand out of Africa on a number of occasions. Each time it goes after a big acquisition off the continent, it gets trumped by a company with more financial horsepower, such as Xstrata PLC. It gets a bit frustrating.
But he has to admit that staying in Africa isn’t such a bad thing. “You get drawn back here because when you’re looking at competing investment opportunities, the potential of the opportunities here, notwithstanding political risk, is too tempting. Too attractive. “So you keep being drawn back.”
NEW YORK (MarketWatch) -- Banks owed money by London-based hedge fund Peloton have seized some of its assets after it liquidated one of its funds and disallowed redemptions at another, according to a news report Saturday.
The Wall Street Journal report cited “people familiar with the situation,” and said that six banks have seized assets while three others are giving the fund time to try to find buyers.
The Peloton ABS Fund -- which invests in asset-backed securities, including those backed by mortgages -- has suspended investor redemptions and is looking to sell its portfolio after recent heavy losses, according to a letter to investors Thursday from Peloton managers Ron Beller and Geoffrey Grant, a copy of which was obtained by MarketWatch.
“Although there has not been any material deterioration in the credit quality of the Fund’s assets, given the current liquidity situation in the asset-backed securities market, the Fund has experienced severe NAV [net asset value] declines,” the managers wrote.
“In addition, because of their own well-publicized issues, credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms, which has compounded our difficulties and made it impossible to meet margin calls,” Beller and Grant said.
Peloton has been working to find a solution to its problems, but decided the best way to protect the interests of investors and other stakeholders was to seek buyers for its portfolio, they said.
Peloton’s bigger Multi-Strategy Fund has a very large position in the firm’s ABS Fund, so it too has been hit hard by the problems. Because of this, investor redemptions from the Multi-Strategy Fund have also been suspended, the managers said.
“The problems for the Peloton ABS Fund have had a serious negative impact on the Multi-Strategy Fund, and we are currently assessing our options,” they wrote in another letter to investors.
The Wall Street Journal said Peloton has been looking for a buyer for the fund, but that at least one rival firm, Citadel Investment Group, has turned the offer down.
Business leaders offered mixed reactions to the Bank of Thailand's sudden announcement yesterday that it would scrap capital controls on foreign inflows effective Monday.
Brokers and fund managers cheered the move as opening the door for a wave of new foreign investment flows and lifting the cloud over the country's reputation since the 30% reserve rule on inflows was first imposed in December 2006.
But exporters and other business leaders expressed concern that the shift would lead to a rapid appreciation of the baht, affecting trade competitiveness.
''If there aren't other measures, we are dead,'' said Poj Aramwattananont, the president of the Thai Frozen Foods Association.
''The baht has already been appreciating faster than other currencies. Rice traders are fortunate because world prices are quite strong. But processed food and frozen shrimp firms will definitely suffer from a stronger baht, and the ultimate impact will fall on local farmers.''
Nipon Surapongrakcharoen, vice-chairman of the Federation of Thai Industries, expressed concern that without the capital controls, currency volatility would increase, imposing greater costs and uncertainties on local businesses.
The central bank first imposed the capital controls on Dec 18, 2006, requiring investors to set aside 30% of their inflows with the central bank, which would pay them no interest, for a year.
The measure, intended to stem speculative inflows and ease pressure on the currency to appreciate, was quickly relaxed to exempt investments in the local stock market and foreign direct investment, although curbs have been maintained for inflows into the bond market and property funds.
Tarisa Watanagase, the central bank governor, said yesterday that the economic situation now facilitated the lifting of the controls.
The central bank will continue to require foreign investors to channel inflows through non-resident baht accounts for securities (NRBS) and non-resident baht accounts (NRBA) to facilitate monitoring of fund flows. Account balance limits were also maintained at 300 million baht per person per account.
The Finance Ministry also announced several measures that aim to increase capital outflows to reduce pressure on the baht, including eased overseas investment rules for Thai residents.
The baht, which traded on Thursday at 32 to the US dollar, rose to 31.45/5 yesterday after the announcement.
Thiti Tantikulanan, head of capital markets at Kasikornbank, said the baht was likely to appreciate further, with onshore and offshore rates converging.
The capital controls had created a two-tier market, with offshore rates 1.5 to two baht higher than local ones _ moving below 28.50 at one point _ due to supply constraints.
''The trend for the baht is definitely to appreciate further. The baht is already undervalued onshore as a result of central bank intervention. But I don't think that we will see rates reach 30 [to the dollar] immediately,'' Mr Thiti said.
Bond yields also fell sharply yesterday, with the five-year government bond yield dropping 25 basis points to 3.71161% and the 10-year bond 17 points to 4.46585% on heavy volume.
Nattapol Chavalitcheevin, the president of the Thai Bond Market Association, said yields fell across the curve in anticipation of further baht appreciation and foreign inflows.
''While foreign investors are not necessarily major players in the bond market, the removal of the controls does help facilitate investment,'' he said.
Stock traders said they expected a big rally when trading opened on Monday. The SET index closed yesterday at 845.76 points, up 3.64, in trade worth 24.57 billion baht.
''I'm confident that the market will welcome the [policy change] on Monday,'' said Kongkiat Opaswongkarn, the chairman of the Federation of Thai Capital Market Organisations.
Removing the capital controls will help facilitate financial flows and new investment, he said. ''And Thailand certainly has a need for new foreign investment.''
Thai Central Bank to Remove Curbs on Capital March 3
By Suttinee Yuvejwattana and Shanthy Nambiar
Feb. 29 (Bloomberg) -- Thailand's central bank will lift restrictions on overseas capital entering the nation on March 3 to attract investment from abroad and boost economic growth. The baht rose the most in at least a year.
``We think it's the right timing to remove the capital controls because economic conditions are quite strong,'' Governor Tarisa Watanagase said in Bangkok. The curbs are being removed two months ahead of schedule because speculation they would soon be lifted made them less effective, she said.
Limits on bringing money into Thailand imposed in December 2006 dented investor and consumer confidence in Southeast Asia's second-largest economy. Prime Minister Samak Sundaravej this month said the government plans to ease restrictions on foreign capital inflows to help boost investment.
``We welcome the lifting of the capital controls,'' said Peter Eerdmans, head of emerging market bonds for Investec Asset Management in Cape Town, who helps manage $55 billion in bonds. ``Before the capital controls were introduced, we were involved in bonds and the currency market there. We haven't been since the capital controls because it was too complex and expensive.''
The central bank imposed limits on funds entering the nation to slow baht gains and protect exporters, a measure that led to a divergence between the onshore traded value of the baht and the offshore value. Earnings from goods shipped overseas comprise 60 percent of the $206 billion economy.
Rising Baht
``The timing is fine,'' said Ajva Taulananda, vice chairman of Charoen Pokphand Group, Thailand's biggest meat exporter and Asia's biggest animal feed producer. ``They have been talking about the removal for awhile and the restriction hasn't been seriously effective. We will be able to cope.''
The currency has gained 7.4 percent this year, the best performer of Asia's 10 most-traded currencies outside Japan. The onshore baht rose 1.7 percent to 31.45 per dollar, according to data compiled by Bloomberg.
``The two markets, offshore and onshore, should converge to the same rate after lifting the capital controls,'' Tarisa said.
The central bank has peeled away some of the controls over the past 14 months. Equity investors were made exempt from restrictions on Dec. 19, 2006, after the benchmark stock index slumped 15 percent. In December 2006, the central bank lifted curbs on real estate funds and overseas loans.
Reserve Requirement
The move today will remove a so-called reserve requirement that 30 percent of overseas bond investments be withheld in bank accounts for a year. Debt investors had won a waiver last March so long as they prove they are hedged against currency fluctuations.
Ten-year government bonds advanced for a second day before the central bank's announcement. The yield on the 10-year note fell 15.8 basis points to 4.484 percent at the 4 p.m. close in Bangkok, according to the Thai Bond Market Association. The price of the 5 1/8 percent security due March 2018 rose 1.29259, or 12.9 baht per 1,000 baht face amount, to 105.1318.
Investors who had foreign funds withheld as reserves can request a full refund from the central bank, it said in a statement today. About $5 billion has been hedged and kept in local accounts as part of the reserve rules, Tarisa said.
``A quick removal of capital controls won't be a good thing,'' said Chanin Vongkusolkit, chief executive officer of Banpu Pcl, Thailand's biggest coal miner. About 95 percent of the company's sales are in dollars. ``I don't see a direct benefit from a swift removal.''
Overseas Borrowings
The central bank will also ease rules on domestic financial institutions that borrow money from overseas for reasons other than investment or trade, by cutting the limit on such transactions to $10 million.
Thailand narrowed to two from four the type of bank accounts foreign investors are required to set up. The central bank will now require overseas investors set up separate non- resident bank accounts in Thailand for securities investments and another for general investment. Funds transfers between these accounts are prohibited, and the limit on each account is $300 million.
Governor Tarisa on Jan. 28 said the bank planned to ease rules on outbound capital flows to help stem baht gains. A week later it extended the period exporters can convert their foreign-exchange earnings into baht to 360 days from 15 days. The central bank also lifted its $100 million limit on overseas investment, allowing listed Thai companies to invest an ``unlimited'' amount in units abroad.
The currency controls spawned an offshore exchange rate that is higher than the official price of the baht. The baht fell 4 percent to 30.91 per dollar offshore.
``There are still certain restrictions in place,'' said Nicholas Bibby, regional Asia economist at Barclays Capital in Singapore. ``We will potentially still have an offshore market. I suspect both rates will be tracking very closely together if the offshore isn't completely abandoned.''
TAIPEI, Taiwan -- Despite political rivalry, bilateral trade between Taiwan and China rose 16.1 percent in 2007 to a record US$102.3 billion on the back of expanding cross-strait exchanges, the island's authorities said yesterday.
China remained Taiwan's largest trading partner last year accounting for 21.9 percent of the island's total external trade last year, compared to 20.6 percent for 2006, according to the Board of Foreign Trade.
China and Taiwan split in 1949 at the end of a civil war and direct links in commerce, post and transportation have been banned since, amid political tensions.
However, trade and other economic ties have been booming since Taipei relaxed travel restrictions in late 1987 and started liberalizing mainland-bound investments in the early 1990s.
China remained Taiwan's largest market in 2007 with shipments there accounting for 30.1 percent of the island's total exports, up from 28.3 percent a year earlier.
Imports from China accounted for 12.8 percent of the island's total imports, up from 12.2 percent a year earlier.
Taiwan enjoyed a trade surplus of US$46.26 billion in 2007, up 20 percent from a year earlier. This followed exports of US$74.28 billion, up 17.3 percent, and imports worth US$28.02 billion, up 13.1 percent, the Board said.
Exports were backed by strong economic growth in China, global demand for notebook personal computers, contracts from major international firms, demand for consumer electronics, and a recovery in the liquid crystal display panel industry.
China still regards Taiwan as part of its territory awaiting reunification, by force if necessary, but has become a favorite investment site for Taiwanese enterprises.
Local investors have channeled an estimated US$150 billion to China and an some one million Taiwanese, or 4.3 percent of the island's population, are either working or living in China.
Cross-strait policy dominates the current presidential campaign with both Democratic Progressive Party candidate Frank Hsieh and the Kuomintang's Ma Ying-jeou emphasizing the need to work with, not antagonize, Beijing.
The presidential election is scheduled for March 22.
Air China parent places ad to plead with China Eastern on tie-up
Saturday, March 1, 2008 AFP
The parent company of Air China used a newspaper advertisement Saturday to plead with the directors of China Eastern to review its rejection of a proposed alliance between the two carriers.
China National Aviation Corp (CNAC), parent of flagship carrier Air China, insisted its bid was sincere in an ad placed in the South China Morning Post.
"CNAC has been highly sincere in seeking a strategic partnership with China Eastern Airlines," the ad in the English-language daily said.
"CNAC hopes that the board of directors of China Eastern Airlines will seriously review and give full consideration to the proposal."
CNAC called on China Eastern to hold a meeting as soon as possible to discuss the details.
China Eastern, the country's third largest carrier, Tuesday rejected the alliance and said the bid "lacks sincerity, planning and mutual trust and it would be hard to create a basis for cooperation".
China Eastern added it would continue seeking strategic investors to strengthen its core business, offering a glimmer of hope for a deadlocked plan for a tie up with Singapore Airlines (SIA).
SIA and Temasek Holdings, Singapore's state-linked investment firm, signed a preliminary deal in September to take a 24 percent stake in China Eastern for 923 million US dollars.
But minority shareholders rejected the bid, worth 3.80 Hong Kong dollars per share in January, after an intervention by CNAC.
Last month CNAC proposed to buy 2.985 billion new Hong Kong listed shares in China Eastern for at least five Hong Kong dollars each after China Eastern's shareholders voted down the deal with SIA.
China Eastern will receive at least 14.9 billion Hong Kong dollars (1.9 billion US dollars) in cash under CNAC's proposal.
CNAC also suggested the two carriers integrate their cargo business to set up a joint venture and cooperate in codesharing, optimisation of route networks, maintenance and ground service.
MF Global Falls as Analysts Cut Stock, Credit Ratings
By Edgar Ortega
Feb. 29 (Bloomberg) -- MF Global Ltd., the futures brokerage that yesterday set aside $141.5 million to cover losses from ``unauthorized'' trading, tumbled 17 percent in New York after at least three analysts cut ratings on the stock.
Lehman Brothers Holdings Inc., Credit Suisse Group and UBS AG today lowered their recommendations on shares of Hamilton, Bermuda-based MF Global. Standard & Poor's and Moody's Investors Service also lowered credit ratings on the brokerage, citing the risk-controls breakdown that let an employee's wheat-market bets exceed the company's limit.
MF Global lost as much as half of its market value after setting aside funds to cover a pretax loss of about $80 million resulting from a broker's trades in wheat futures. Chief Executive Officer Kevin Davis called the company's lapse an ``aberration,'' and opened a review of risk controls to quell investor concerns.
``We do not yet have confidence that there are no other lapses,'' Lehman's Roger Freeman, who cut his rating to ``equalweight'' from ``overweight,'' wrote in a report to clients today. ``The perception around MF, at least in the interim, will now include a greater notion of balance-sheet risk.''
MF Global fell $3.64, or 17 percent, to $17.55 at 4:17 p.m. in composite trading on the New York Stock Exchange. The stock yesterday fell 28 percent. The slump has erased about 42 percent of the company's market value since it went public in July.
Inefficient Controls
A broker at MF Global's branch in Memphis, Tennessee, was able to exceed trading limits because electronic controls in a retail order-entry system weren't operating, Davis told analysts yesterday. Controls at the branch were deemed inefficient because they could slow handling of customer orders, he said.
``In some cases, we allow an office to not have the buying power control,'' Davis said yesterday. ``Clearly, that was a mistake, and it's one which we have rectified.''
MF Global, which handles trading in currency, interest-rate and commodity futures in more than 12 countries, extended the trading-limit controls to all brokers and customers. The move will have little impact on MF Global's trading business, wrote Keefe Bruyette & Woods analyst Niamh Alexander.
The company hired Baltimore-based FTI Consulting Inc. to review its risk-management procedures, said Diana DeSocio, an MF Global spokeswoman. She declined to comment on the analysts' reports.
Clearing Broker
As a clearing broker, MF Global is responsible for transactions when customers don't have sufficient cash. The unauthorized trades were all for U.S. wheat futures, and were entered and liquidated the morning of Feb. 27. The $141.5 million loss equals about 30 percent of MF Global's commission revenue in the quarter ended Dec. 31, and about 6 percent of the brokerage's total equity.
``The magnitude of the trading loss is clearly disconcerting to us and calls into question the degree of risk- taking and management at the franchise,'' Credit Suisse analyst Howard Chen wrote in a note to clients today. He cut his rating to ``neutral'' from ``outperform.''
While MF Global has benefited from increased trading because of the volatility in commodity markets, the wider price swings in U.S. wheat futures helped magnify losses. Wheat futures have more than doubled in the past year on the Chicago Board of Trade, with unprecedented price swings last weekof as much as $270 on the contract for May delivery.
`Jungle Gym'
``The moves are that much more damaging because we're at price levels that are way outside of historical ranges,'' said Dennis Stuart, a vice president at FCStone Group Inc., a commodity risk-management company in Kansas City, Missouri. ``It's as if in the past we were in a juggle gym that was only three feet off the ground. Now we are 12 feet off the ground.''
MF Global will rely on insurance to cushion on the impact from the trading losses. Davis said yesterday bonuses for senior executives will also get cut by a yet-to-be determined amount. Five executives including Davis and Chief Operating Officer Chris Smith, as well as director Edward Goldberg bought a total of about $3 million in stock, MF said in a statement today.
MF Global, formerly the brokerage unit of Man Group Plc, the world's largest publicly traded hedge-fund manager, was spun off in a $2.92 billion initial public offering in July. Man Group, based in London, retained an 18.6 percent stake in the company.
Bank Negara dampens talk of interest rate cut in near term
Current rates are adequate to keep economy motoring along: central bank
Saturday, March 1, 2008
(KUALA LUMPUR) -- Malaysia's central bank yesterday dampened talk of an interest rate cut in the near term, saying current rates are adequate to keep the economy motoring along.
Low borrowing costs have supported a consumption boom in Malaysia but some economists think an easing would be needed to sustain spending as rising prices crimp consumers' purchasing power.
'Given that interest rates are supportive of the overall economic activity, we believe the current interest rates will sustain the growth prospects,' central bank chief Zeti Akhtar Aziz told reporters.
She was replying to a question on whether an interest rate cut would be needed to help the economy achieve the official growth target this year.
Malaysia's inflation is near a 10-month high, making it difficult for the central bank to cut borrowing costs even as easing US demand threatens growth in South-east Asia's third- largest economy.
The central bank on Feb 25 kept its key interest rate unchanged at 3.5 per cent.
Malaysia's economy, which grew 6.3 per cent in 2007, may expand between 6 per cent and 6.5 per cent this year, the government said. Prime Minister Abdullah Ahmad Badawi told Reuters on Wednesday this target could be beaten.
At 3.50 per cent, Malaysia's official interest rate is among the lowest policy rates in Asia.
Ms Zeti said the economy remained on a steady growth path despite the darkening global outlook.
Asked whether the projected growth for this year was too optimistic in view of the external challenges such as the US sub-prime credit crisis and high crude oil prices, she replied: 'Our forecast is without any further policies and we have always said that if we see any signs of slowing growth, we have at our disposal some significant policy measures that can be taken to address that.'
'We are going to announce our forecast in a month from now when we release our annual report, so you'll have to wait,' she said, when asked whether Bank Negara is coming out with a revision of the gross domestic product (GDP) growth rate forecast.
Ms Zeti also downplayed concerns that the strengthening ringgit would hurt Malaysia's trade-reliant economy, after the currency broke past the 3.2-per-dollar level yesterday and hit a decade-high at 3.1845.
'As we have always said from time to time, two-way flows determine the level of the exchange rate. Our view is that, there has to be orderly market condition,' Ms Zeti said.
'Secondly, it should reflect underlying fundamentals and we believe that over the medium term, it will do this. But from time to time, we will see certain flows dominating and these of course will result in some volatility.'
On whether the stronger ringgit had affected last year's exports, she pointed out that the slower growth in exports had already taken place over a year. Last year's exports were valued at RM605.1 billion (S$263.9 billion), an increase of 2.7 per cent on a year-on-year basis.
'This reflect the global demand condition rather than the exchange rate. When you talk about the exchange rate movement you are only comparing our rate with the US dollar whereas in fact you have to compare our rate with other countries and other currencies as well,' Ms Zeti explained.
She pointed out that the ringgit has a stable relationship with many of the currencies in this region.
With land above ground exploited almost to the point of extinction, the only way for Singapore to grow is downwards.
BY SEAH CHEANG NEE Saturday March 1, 2008
PRESSED by circumstances, the 21st Century Singaporean is spending more and more time underground – working, driving, eating and shopping – and the trend is for more of it.
For years the government had been burrowing deep into the bowels of Singapore to squeeze out more use of its limited land area.
From a simple car-parking idea long ago, the subterranean concept has rapidly expanded in scope to reach almost every aspect of life.
The convenience has become an urgent solution to over-crowdedness that is expected to worsen by the proposed future population of 5.5 million people.
Today, almost every building in Singapore – from department stores to hospitals, and from military installations to churches – has one or two basement levels.
(The Gothic-style chapel of Singapore’s 141-year-old Convent has been preserved but modernised with a new underground courtyard.)
Singapore has just built South-East Asia’s longest underground tunnel to alleviate traffic jams. The 18km road – with the tunnel forming half of it – links two other expressways expanding Singapore’s network of underground transport systems.
The next will be the construction of a multi-billion-dollar MRT line (one of two new ones) that will run a circular 33.3km underneath central Singapore.
When it opens after 2010, the new Central Circle Line will have 29 stations and connect with all the radial lines leading in and out of the city.
Spotlighting on the Central Line, a Discovery Channel programme reported: “If you take all the best bits from undergrounds around the world, discard everything that does not work and then throw millions of dollars into further design and construction, then you have the project that has every Singaporean drooling over their dim sum.
“The Singapore Circle Line ... one of the biggest and certainly best underground railways in the world. In this film we witness the realisation of this utopian vision under construction. The spectacle is addictively fascinating.”
Dhoby Ghaut also stands out as an underground engineering feat. The five-level subterranean station links three MRT lines and a shopping complex and the Istana Park and will cater to 20,000 people an hour at its peak.
Two other lines are already partially below ground – as well as some roads and highways in the city.
The problems faced by affluent Singapore, especially in public transport, are best described in the Discovery Channel report:
“With a permanent population of 4.5 million, and a further 10 million visitors a year, the streets daily swarm with people, the roads are choked with cars, buses and bicycles, and the trains are packed. Gridlock beckons.”
For more than 40 years, this fourth densest city in the world, has implemented a long-term creative effort to maximise land use. Planners regard land as a non-finite commodity.
With the acute shortage, land use is strictly apportioned. Just over 50% is used to build homes, schools and hospitals, almost 38% for industrial use, and 12% for parks.
The strategy began after independence by reclaiming land from the sea and building upward, packing millions of people into high-rise homes and offices.
Reclamation is, of course continuing. A S$7bil (RM16bil) project has just joined up seven outlying islands to be a chemical hub. By 2010, Singapore will grow to 730 sq km, 25% larger than before independence.
Cemeteries were cleared after 1965, when citizens, except Muslims, were asked to reclaim family members for cremation.
The five-year cemetery exhumation plan immediately freed land to build 12,000 centrally located, high-rise apartments.
Over the past two decades, the government has exhumed more than 36 cemeteries of different races and religions.
Today there are no burial grounds in Singapore for non-Muslims; the dead had long made way for the living.
And now, with increasing tempo, it has indulged in a much more expensive programme of building below ground.
Underground caverns have been created as bomb shelters and storage for ammunition.
Singapore is also building subterranean ring roads, a science lab, shopping complexes and a S$9bil (RM20.6bil) underground sewage system that will take 20 years to finish.
Creating a city underground is, of course, slow and very costly, but less intrusive; something that goes on almost without interruption through the years.
Several years ago Minister Mentor Lee Kuan Yew returned from Paris impressed with its central underground ring roads and called for an eventual adaptation in Singapore.
The result is a S$4.8bil (RM11bil) plan to build a network of ring roads below the central business district.
Other mega subterranean projects include:
> A large sewage system that comprises two highway-size tunnels criss-crossing the island 12 storeys below ground; stretching for 80km with a series of smaller link sewers running another 170km, the project will take 20 years to finish;
> Singapore’s first underground ammunition storage depots, leading to land savings equivalent to half a fair-sized New Town;
> An underground science complex, being planned near the National University of Singapore; and,
> Shifting the big oil-storage business, which takes up much land, to underground caverns.
“Underground space is an alternative for the future space development in Singapore,” an official said.
This could be created in the form of caverns, tunnels and deep basements, for commercial, transportation, industrial and institutional purposes, he added.
The Economist recently wrote of Singapore's future underground ambitions. “Then perhaps concert halls, sports stadiums – who knows? Such schemes are hugely costly, but Singapore has massive financial reserves for its size,” it commented.
“In creating enough space to continue its breakneck expansion, money will be no object.”
Singaporeans question escape of alleged militant leader
02 March 2008
SINGAPORE’S government has come under stinging public criticism after the escape of an alleged militant leader from custody dented the country’s reputation for airtight security.
Letters to the editor and Internet blogs by Singaporeans took officials to task for the escape on Wednesday of Mas Selamat bin Kastari, alleged leader of the Singapore wing of the militant Islamic group Jemaah Islamiyah.
Open criticism of the government is rare in tightly ruled Singapore, but the apparent ease with which Kastari managed to slip out of a detention centre raised questions about the authorities’ anti-terrorist measures.
Since his escape, security forces including paramilitary Nepalese Gurkhas employed by the police have been combing the island and keeping a tight watch on its borders with Malaysia and Indonesia.
Kastari was accused of plotting to hijack a plane in order to crash it into Singapore’s busy Changi Airport in 2001, but never charged in court. He was being held under an internal security law which allows for detention without trial.
The Ministry of Home Affairs said Kastari escaped after he was permitted to use the toilet during a visit by family members.
‘I am sure Singaporeans would like to know the details of the escape - what happened from the time the terrorist left for the restroom while his family members were waiting for him,’ said a letter from reader Rosemary Chwee published on Saturday by Singapore’s leading daily, The Straits Times.
‘Such a slip is professionally unforgivable... As a citizen, I am deeply concerned, especially if Mas Selamat continues to be on the loose,’ she wrote.
Police flyers seeking public help in recapturing the 47-year-old Kastari say he is ‘not known to be armed’ and walks with a limp.
‘What puzzles me is how a middle-aged man who has difficulty walking can leave the detention centre with such ease,’ wrote another reader, Siow Jia Rui.
Another letter writer, Lee Beng Hai, suspected Kastari could have been helped by ‘sleepers and sympathisers’.
Internet blog sites - the usual refuge of Singapore government critics who are denied space in the mainstream media - were full of chatter and conspiracy theories on the escape.
Even the Straits Times, which is closely identified with the government, said in an editorial that the authorities had to confront the question of whether Kastari had help.
‘It stretches credulity to imagine this was an opportunistic solo effort... The escape was too easy, too neat,’ it said.
If he had help, it would mean ‘terror cells are still morphing and sympathisers are being drawn into the network’, the newspaper said.
If he acted alone, ‘the system breakdown was egregious’, it added.
‘Security incidents like this one... will shake confidence in the anti-terror system.’
The editorial said complacency may have set in because Singapore has been spared from terrorist violence so far.
Since the September 11, 2001 attacks in the United States, Singapore has implemented tough security measures and rounded up suspected militants and sympathisers of the Jemaah Islamiyah.
The group has been blamed for a series of attacks including the 2002 bombings on the Indonesian resort island of Bali which killed 202 people, mostly tourists.
Kastari, a Singaporean citizen of Indonesian ancestry, was handed over by Indonesian officials after his second arrest there in 2006.
Singapore is a predominantly ethnic Chinese city-state which has a Malay Muslim minority and hosts hundreds of thousands of foreign workers, many of them Malaysians and Indonesians. -- AFP
Buffett Says U.S. Trade Imbalance Lures Sovereign Wealth Funds
01 March 2008
March 1 (Bloomberg) -- Billionaire investor Warren Buffett stepped into a debate about the emergence of sovereign wealth funds, saying the government-controlled firms are fuelled by U.S. spending overseas, not political motives.
“This is our doing, not some nefarious plot by foreign governments,” Buffett, the chairman of Berkshire Hathaway Inc., said yesterday in his annual letter to shareholders. “Our trade equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest of the world, they must invest in something here.”
Countries including China, Russia and Dubai have deployed record central bank reserves to set up funds wielding as much as $2.9 trillion. Firms from Singapore, Korea, Kuwait and Abu Dhabi bought stakes during the past four months in Citigroup Inc., the biggest U.S. bank by assets, and Merrill Lynch & Co., the world’s biggest brokerage. Officials from the U.S. Treasury Department and the Securities and Exchange Commission have said there’s a risk government-controlled funds may invest to achieve political, rather than commercial, ends.
“He’s right that we’re the ones that created the problem in the first place,” said Mohnish Pabrai, who manages $600 million at Pabrai Investment Funds in Irvine, California. “The U.S. is better off if foreign governments buy Treasuries, because we have a printing press for them, but if I were running China’s money, I’d be buying U.S. companies, oil reserves, hard assets too.”
Pabrai and a friend paid $650,100 last year in an annual charity auction to have lunch with Buffett.
Warren’s World
“Both the growth in size and number of these funds is such now that vigilance is required,” Deputy U.S. Treasury Secretary Robert Kimmitt said in a Feb. 27 interview on Bloomberg Television. SEC Chairman Christopher Cox said in December that the state-run investment firms don’t adequately disclose why they’re buying stocks and other assets.
Buffett, 77, built Berkshire Hathaway over four decades from a failing textile manufacturer into a $215 billion investment and holding company. The stock rose 29 percent in 2007 and about 4,700 percent in the 20 years through Dec. 31, six times more than the Standard & Poor’s 500 Index, dividends included. The feat made Buffett an icon to shareholders and investors.
In his annual letters, Buffett offers his view of market conditions, potential investments, corporate governance and economic policy, as well as his plans for Omaha, Nebraska-based Berkshire.
Fear and Greed
Along with insurance operations and a stock portfolio valued at $75 billion at yearend, Berkshire owns businesses ranging from candy making and residential real estate brokerage to utilities and corporate jet leasing, giving Buffett an insider’s perspective on many facets of the economy and finance.
Buffett released the shareholder letter with Berkshire’s 2007 full-year and fourth-quarter financial results. Net income in the quarter fell 18 percent to $2.95 billion, or $1,904 a share as profit from insurance units fell. The company’s shares dropped $250, or 0.2 percent, to $140,000 yesterday in New York Stock Exchange composite trading.
Berkshire said it owned a 1.3 percent stake in Sanofi-Aventis SA, France’s largest pharmaceuticals company, at yearend. The 17.2 million shares cost $1.47 billion and had appreciated by $109 million, Berkshire said.
In last year’s letter, Buffett said his method was to “be fearful when others are greedy, and be greedy when others are fearful.”
Party’s Over
He said Berkshire followed that maxim by rushing to insure coastal properties after 2005’s Hurricane Katrina caused prices to double and triple. Berkshire, which gets about half its profit from insurance, sold less of the coverage in 2007 as prices dropped.
“The party is over,” Buffett said in yesterday’s letter. “It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down.”
Fourth-quarter underwriting profit from Berkshire’s insurance business dropped 46 percent to $465 million, led by declines at auto insurer Geico Corp. and reinsurance units. Reinsurance is coverage for insurance companies.
The worst housing recession in a quarter century hurt Berkshire’s building-related companies. Profit fell 17 percent to $109 million at Shaw Industries, the world’s largest carpet maker. Earnings also dropped at Acme Brick and Johns Manville.
Buffett applied the strategy of greed in the face of fear when defaults on mortgage-related securities surged during the past year.
MBIA, Ambac
The losses threatened the credit ratings of bond insurers including MBIA Inc. and Ambac Financial Group Inc. Berkshire formed a company in December to compete with the firms, charging more to guarantee payment on municipal debt while avoiding the mortgage-related securities that jeopardized their credit ratings.
As defaults on mortgage-related securities climbed, Buffett offered to assume $800 billion of municipal bond obligations from MBIA, Ambac and FGIC Corp. in exchange for more than $9 billion in premiums. None of the companies have said they’ll accept the terms.
“When you have an adversary who’s embattled, in a corner and has no other options for survival, they’ll do anything,” said Charles Hamilton, an analyst at FTN Midwest Securities Corp. in Nashville, Tennessee. “He was just seeing if they were desperate enough to have to take the deal.” Hamilton rates the stock “neutral.”
Four Contenders
Buffett revealed in last year’s letter his decision to split the roles of chief executive officer and chief investment officer when he steps down. He previously said the CEO spot will go to one of three Berkshire managers, whom he hasn’t identified. He has said his health is good and he has no plans to retire.
Four “young to middle-aged” candidates have been selected for the investing post, Buffett wrote in yesterday’s letter.
“All manage substantial sums currently,” he said. “The board knows the strengths of the four and would expect to hire one or more if the need arises.” They range from “well-to-do to rich,” and “all wish to work for Berkshire for reasons that go beyond compensation,” Buffett said.
GLOBAL MARKETS WEEKAHEAD - Dollar decline to dominate
LONDON, March 2 - Currencies will be in full focus on financial markets this week following the dollar's drubbing of recent days yet anyone hoping for help from policy makers to shore up the ailing greenback is likely to be disappointed.
Key meetings of European Union finance ministers and European Central Bank interest-rate setters are expected to do little to shift the status quo, while the U.S. Federal Reserve appears dead-set on cutting again this month.
"I don't see a major change in trend week", said Lex Hoogduin, chief economist at Dutch investor Robeco.
This means that gold and oil prices should maintain their record-breaking pace at least over coming days, while equity and bond investors will have to continue revaluating their holdings in light of a soaring euro and low-yielding dollar.
It may also put strains on export-oriented emerging Asian stock markets, which have otherwise started to see an increase in institutional investment flows.
The dollar took many investors by surprise last week, falling to an all-time record beyond $1.50 to the euro, meaning that the 15-nation currency has strengthened around 15 percent against the greenback over the past 12 months.
Less heralded, but by no means less significant, the so-called dollar index, which tracks the U.S. currency against six major counterparts, hit its lowest level since inception in 1973.
While many institutional investors believe that the dollar will recover some strength by the end of this year, there is no conviction that this will happen soon.
"The trend in the short term is for more dollar weakness," said Colin Asher, senior economist at investment bank Nomura.
DIFFERENT RATES
A key reason for this is that the background dynamics that have pushed the dollar lower -- specifically interest rate differences -- are unlikely to change in the next few months, let alone in the week to come.
ECB rate-setters, for example, have made it clear that they are more worried about inflation than a slowing economy. All 72 economists in a Reuters poll last week said the ECB would leave rates at 4.0 percent when it meets on Thursday.
European policy makers are also unlikely to be overly concerned about the euro because its strength makes imports cheap, putting a damper on the inflation that so concerns them.
By contrast, U.S. Federal Reserve Chairman Ben Bernanke clearly signalled last week that the U.S. central bank will cut rates again to stop further damage to the ailing U.S. economy.
The Fed is widely seen cutting U.S. rates by at least 50 basis points to 2.5 percent at its next meeting on March 18 .
This leaves currency markets hostage to a raft of U.S. data this week -- including on manufacturing, services, jobs and vehicles sale -- which are expected to be poor overall.
The question may then be "how far will the dollar fall", although Nomura's Asher noted that with the dollar already so weak a bit of a bounce cannot be ruled out.
Profit-taking and better-than-expected data can always turn things around quickly, particularly in an era of overall global market volatility.
SPILLOVER
For equities this week, the weak dollar provides a mixed picture. It has little short-term impact on many U.S. equities, which tend to be domestic in orientation, but shakes the more export-focused markets of Europe and Asia.
"It should hurt European equity markets more than it will help U.S. equity markets," said Klaus Wiener, chief economist of Generali Investments.
Stock markets, he said, will be focused on plans to rescue U.S. monoline insurers, the firms that insure structured finance whose potential downgrading as a result of credit market turmoil threatens to spill over into other parts of the financial sector.
The volatility on currency markets, meanwhile, comes as equity markets have been rallying relatively sharply.
MSCI's benchmark world stock index, incorporating U.S., European, Japanese and emerging market shares, is up around 8 percent from a low on Jan. 22, the day the Fed announced an emergency rate cut to boost the U.S. economy.
Where a weak dollar most certainly has an impact, however, is with commodities, notably gold and oil.
Because these assets are priced in dollars they rise when the currency falls as they become more attractive for non-U.S. investors. In both cases, this has added to their already soaring demand driven prices.
Gold hit a record high around $975 an ounce on Friday, leaving the psychological $1,000 milestone within sight this week. Oil, meanwhile, breached a new high of $103 a barrel.
The rub is that such prices fire up inflation, making central bank decision making that much trickier.
"The current inflation is due primarily to commodity prices of oil and energy and other prices that are being set in global markets," the Fed's Bernanke said last week. - Reuters
How did a strawberry picker earning $15,000 a year qualify for a loan of $720,000? *_*
Impossible loan turns dream home into nightmare
By Carol Lloyd 15 April 2007
When Alberto and Rosa Ramirez began looking for a home, they never imagined that 18 months later they would personify a national real estate crisis.
It's not that they bought a house with walls crawling with toxic mold or inherited an insane neighbor next door or even, God forbid, that they didn't buy at all. They bought, and they love their slice of the American Dream.
"It's all very nice and beautiful," Rosa tells me through a translator. "The neighborhood is very peaceful. The problem is not with the house at all. It's the price of the house."
Indeed, in a different era (when housing prices were lower), their story might have been one of those bootstrap tales about homeownership transforming immigrant lives. The husband and wife work as strawberry pickers in the fields around Watsonville, and each earns about $300 a week. They have three children. Not only did they dream the impossible dream, they managed to finance it.
It all began when they were talking to another family about escaping their subsidized apartments and getting a real house. The other couple -- Jesus Martinez and his wife, who also have three children -- work as mushroom farmers, earning about $500 a week each when there is work. The two couples decided to pool their resources and begin house hunting.
Given their total income, they estimated that they could afford payments of $3,000 a month. They spotted an ad in the local magazine La Ganga for Maria Avila of Rancho Grande Real Estate and called her.
"We wanted to live in Watsonville," says Rosa. "But (the real estate agent) said the houses there were older and more expensive." One of the first homes they were shown was a four-bedroom, two-bath house in Hollister (San Benito County) for $720,000. When the Ramirezes heard the price, they worried that they couldn't afford it. But the couple say they were assured it was possible.
"The monthly payment was supposed to be $4,800, but then, after we bought it, it went up to $5,378," says Rosa, speaking of their zero-down mortgage with a one-month "teaser rate." "Our agent told us that once we refinanced, we could get the payments down to $3,000 or less."
For a number of months, Avila, who arranged for the loan with New Century Mortgage, paid the difference between what the buyers had said they could afford -- $3,000 -- and the loan payment, an attorney for the buyers says. This arrangement was supposed to carry them over until the group refinanced, they say, but the money-saving refinance failed to materialize.
Avila and Rancho Grande Real Estate declined to comment for this column.
Earlier this month, New Century Mortgage, the nation's second-largest subprime mortgage lender, filed for bankruptcy. It's also facing a federal investigation.
According to my analysis of interest rates during the period, hitting the $3,000 number would have been virtually impossible under any circumstances. An interest-only $720,000 loan at a 5 percent interest rate, yields a $3,000 mortgage, but such rates weren't available, especially to a laborer with a low income, no down payment and no other assets. Plus that doesn't count another $750 a month or so in property taxes and insurance.
The two families made the payments, sometimes sacrificing basic necessities, other times borrowing more. "It was very difficult," Rosa says. "Sometimes we would eat less, and we took out personal loans from Bank of America."
In November, they stopped paying their mortgage and sought the advice of Pamela Simmons, an attorney who specializes in predatory- lending cases. Upon reviewing the loan documents, they discovered more bad news. Despite the intention that both couples would be buying the home together (they'd submitted income information for three of the four buyers), the loan was made exclusively in Alberto Ramirez's name. This meant he was solely responsible for the debt.
The Ramirezes also discovered that the home wasn't nearly as valuable as they thought: When a new real estate agent looked at the house, he told them he'd list it between $560,000 and $580,000. They have sent a letter of demand to Rancho Grande, claiming the brokers breached their fiduciary duties by selling Alberto Ramirez a home he couldn't afford. Rancho Grande declined to comment.
How did a strawberry picker earning $15,000 a year qualify for a loan of $720,000? The answer, the experts say, lies in a lending industry that got too innovative for its own good. Last week, a coalition of civil rights groups, including the National Council of La Raza, the Center for Responsible Lending and the NAACP, called for a national six-month moratorium on foreclosures -- after observing that the subprime crisis disproportionately affected minorities.
"The point is to just take time out and provide services to families who might be vulnerable as a result of payment shock," says Janice Bowdler, senior policy analyst for housing for the National Council of La Raza, referring to the hybrid loans that begin with low fixed rates and then jump to adjustable-rate mortgages. Bowdler adds that they are hoping many homeowners can avoid foreclosure by taking advantage of such financial tools as changing their current loan terms or refinancing.
According to the National Council of La Raza, 40 percent of Latino families and more than half of African Americans who receive home loans get higher-cost mortgages, predominately subprime loans. In a study released last month, an analysis of 2005 federal mortgage lending data of large subprime originators in six metropolitan areas, African American borrowers were 3.8 times and Latino borrowers were 3.6 times more likely to receive a higher-cost home purchase loan than white borrowers.
One argument is that these groups naturally get subprime loans because they have bad credit or are buying in riskier neighborhoods. But according to Fannie Mae, there is an enormous lending disparity across the nation: One study found that 50 percent of all borrowers qualified for a cheaper loan than the one they eventually got. They even discovered that female buyers tend to get higher-cost loans than male counterparts.
But for Rosa and Alberto Ramirez and many others like them, a foreclosure moratorium won't help. It's not that a better loan would have remedied their situation -- it's that they can't afford the home they bought. "Many of my clients can't afford their homes in any circumstance," Simmons said. "I have a dishwasher who bought a house and never even moved in. The moment he saw the first payment, he knew he couldn't afford it."
Indeed, the Ramirez family exemplifies a type of new buyer that didn't exist a decade ago.
Neither Rosa nor Alberto speaks English, so they were completely dependent on their real estate agent and their mortgage broker for advice and to translate and educate them about the process.
"In other business transactions in California, if you negotiate in Spanish, you are required to provide translations of all documents. But real estate contracts are exempt from this," said Simmons, who has 30 active cases and sees her potential caseload growing by the day. "There's a large increase in the amount of borrowers reaching out to lawyers with subprime loans. I've gotten to the point that I have to say to a lot of people, 'I can't represent you, I have too many clients.'
"It's astounding to me," she said. "I neither expected nor have I seen anything like this in all the years I've practiced law. It's as if in real estate it's gone back to the wild, wild West of San Francisco in the 1800s."
Maeve Brown, co-founder of Oakland's Housing and Economic Rights Advocates, says most of her clients fall into one of two categories. There are the non-English-speaking first-time home buyers who "buy homes that they can't afford, with mortgage brokers raking in the fees and an added twist that the homes are often substandard and they are appraised above their actual value."
The other kind of cases involves seniors, often African American, who are persuaded to refinance their homes with more expensive adjustable-rate loans that carry steep prepayment penalties.
"Buying a (house) is a complex process," Brown says. "I think we've been sold a bill of goods about the American dream: that it's fast, it's fun, it's easy. Well, it's not easy -- it's really complex.
"The ideal would be that every buyer retain their own counsel to protect them from their Realtor and their broker, because though there are great agents and brokers out there and they have a fiduciary duty to represent your best interests, in the end, it's a contract and you're on the hook for it."
Regarding subprime lenders going bankrupt, she has "no sympathy whatsoever. They created this monster."
13 comments:
Africa rush
From political risk to corruption, obstacles to mining in Africa are many, but for those who persevere, the rewards can be huge
Peter Koven, Financial Post
Saturday, March 01, 2008
Before an audience of thousands at the 2008 Mining Indaba conference, Cynthia Carroll, chief executive of Anglo American PLC, ended her keynote speech with a message that everyone knew was coming: “Africa’s time has come!”
The mining folks in the audience nodded. They have heard all this before. In fact, they realized it a long time ago, even if their investors in Toronto, London and New York are just starting to figure it out.
They were all drawn to the continent years ago with the hopes of capitalizing on democratic reform and access to unimaginable resource wealth that came with it. The fact that nearly 5,000 people, a record number, trekked to Cape Town for this convention shows that those dreams have been largely realized, or will be.
The numbers tell the story. More than $45-billion in new mining investment is expected over the next five years. Canadian companies alone now have mining assets worth more than $12-billion in Africa, a number that is projected to nearly double in the next three years. Five years ago, Canadians had less than $1-billion invested on the continent.
Despite a turbulent political environment, Africa is quickly earning a reputation as the place where mining gets done right. Unlike Canada, this is where mines can get permitted and built with breathtaking speed by entrepreneurs who rarely disappoint the market. A group of small, nimble companies like Equinox Minerals Ltd. and CIC Energy Corp. are developing remarkable projects in Africa in a fraction of the time it would take in Canada. Many of them trade in Toronto.
“In Africa you don’t get the long permitting delays to get your environmental assessment through. There doesn’t seems to be any issue getting drill rigs, unlike in Canada. There are good assay labs and good engineering support out of Johannesburg. It’s all there,” says Canadian Stephen Dattels, the entrepreneur who built African miner UraMin Inc. almost overnight and sold it for US$2.5-billion. “There’s a reason mining companies are looking beyond North America.”
It is no surprise that Africa is receiving unprecedented levels of mining investment amid today’s sky-high metal prices; the continent holds about 40% of the world’s known gold reserves, 60% of the cobalt, 65% of the diamonds, 88% of the platinum, and so on.
The investment numbers point to a very healthy industry, but you wouldn’t know it by reading the headlines. The news that flows from Africa -- mining or otherwise -- is invariably bad. When it comes to mining, the talk usually focuses on a handful of predictable topics: violent upheavals threatening projects, corrupt governments scrapping contracts, and collapsing infrastructure and power failures. Then there is the overbearing spectre of China, which wants the vast resources for itself.
There is no question that Africa is a difficult place to do business. But as anyone at Indaba will point out, the “bad news” misses the point: companies mining Africa are overcoming the challenges and succeeding.
WEALTH OF RESOURCES
In North America, investors have reached a stage where they assume that mines will not be delivered on time and on budget. That is largely due to a glacial permitting process that can hold up projects for years as politicians and other interest groups grandstand.
In Africa, meanwhile, a company like First Quantum Minerals Ltd. can get its Lonshi mine up and running less than a year after a discovery is made. “We wouldn’t want to be in the U.S., for example, because the permitting requirements are so severe,” says Clive Newall, First Quantum’s president. “It takes 10 to 20 years to take a mine into production. We just don’t operate like that.”
There is another simple truth: It is much easier to find resources in Africa. In Canada, the easy stuff has been found and companies are now developing low-grade projects with marginal economics. The most notorious is Teck Cominco Ltd.’s Galore Creek, the British Columbia debacle that was halted late last year after costs spiralled out of control.
In Africa, there are highly prospective regions like the Central African copperbelt that have had no serious exploration for decades, or ever. “You’re looking at virgin ground that’s almost untouched. It’s finally being explored properly,” says Jean Luc Roy, CEO of the copperbelt exploration play El Nino Ventures Inc.
For investors, it comes down to “picking your poison,” as one hedge fund manager puts it. Do you want the growing geological risk of Canada or the political risk of Africa?
More and more investors are choosing the latter, and that doesn’t surprise Mr. Newall. His mining company was the first to enter the Zambian copperbelt when it opened up for foreign investment in the mid-1990s, but it still had little trouble raising money. “The quality of the projects we were presenting to the banks was so high that they were not likely to turn them down,” he says. “They were surprisingly easy to finance, given that we were first mover in an environment no one had been in for decades, in a time of collapsing copper prices.”
But there is more to the booming African mining industry than good geology and easy permitting. The continent is drawing people with that extra entrepreneurial spirit who aren’t afraid to take big risks to get projects built.
There is CIC Energy in Botswana, a creation of Canadian and South African entrepreneurs that is building a staggering $9.5-billion integrated coal project and power station. The power will go to South Africa, which is suffering a huge shortage. In Egypt, a company called Centamin Egypt Ltd. followed the lead of the ancient pharoahs and found millions of ounces of gold. In countries like Eritrea and Central African Republic, a few juniors have dared to enter totally uncharted territory and been rewarded.
These miners are kept on a shorter leash than the ones operating here at home. Shareholders are already worried about the volatile politics in Africa, and if these firms can’t manage political risk and deliver on their promises, the money will vanish overnight.
POLITICAL RISKS
The downside is obviously the political risk. In Africa the political environment changes, for better or worse, very quickly. It happened recently with the ethnic violence in Kenya. And a lot of miners are worried about South Africa, where controversial politician Jacob Zuma is gaining more power and rattling the nerves of foreign business owners.
But the big hot zone right now is the Democratic Republic of the Congo (DRC), a fledgling democracy that is still trying to find its feet after a bloody civil war. That is where the investment dollars are flowing these days and it’s not hard to see why: “If you look at the head grade of all the open pit copper producers in the world, it’s approximately 1.2%, 1.3%,” says Robert Lavalliere, vice-president of investor relations at Anvil Mining Ltd., which has three major DRC projects. “If you look what we have in the DRC, it’s three, four, five times that.”
Operating in the DRC is always an adventure, and the companies never quite know what’s coming next. Most famous is the “contract review” process that is now forcing each company to renegotiate its mining terms. Investors are livid, but that kind of thing happens in this corner of the world.
To overcome these challenges, DRC companies like Anvil and Lundin MiningCorp., expend huge amounts of effort into government relations and community development, teaming up with NGOs and reinvesting millions of dollars in social spending and infrastructure development. They also give Gecamines, the state-owned company, stakes in many of the ultra-high-grade projects.
The DRC is an extreme example, but even stable countries can turn on a dime. In January, the Zambian government introduced an unheralded profits tax on mining companies, boosting the effective rate from 31.7% to 47%. The companies heard about it when their investors did.
There was a predictable uproar afterward. But as one source pointed out, Ontario slapped a royalty on diamond mining last year and nobody blinked.
THE CHINA FACTOR
In the long term, the biggest threat to Western mining interests in Africa may not be the politics or the lack of infrastructure but China, which craves the resources to feed its surging economy and is using its considerable heft to get them.
At Indaba, the Chinese are the proverbial elephant in the room. Ms. Car-roll’s remark that the Chinese “have not been guilty of under-appreciating Africa’s economic potential” is about as public as the comments get. But the Chinese come up frequently in casual conversation.
“In every jurisdiction we were in, the Chinese were there trying to steal our projects,” offers one individual, who claims he was harassed and threatene as he tried to secure projects and build his company.
The Chinese are often accused of not playing fair in Africa. But to their credit, they have had a significant positive impact on the continent. They will offer countries hundreds of millions (or billions) of dollars in aid and infrastructure build-out in exchange for energy and base metals.
Critics call this “colonialism” and the tactics have angered mining companies, who find it difficult to compete. “They play by different rules,” says Paul Conibear, senior vice-president of projects with Lundin Mining. “For example, when anything meaningful happens to us, we have to press release it with all the fundamental details. So, automatically the Chinese get all this benchmarking. We’d love to know the details of the last four or five Chinese deals in Africa, but you have no way of finding out.”
Bruce Shapiro, president of business development firm MineAfrica, says most African nations would still prefer to deal with Western mining companies. But the more volatile the country, the more likely the Chinese will be looking around. “They know these countries are more desperate for investment and are not as concerned with the niceties of the situation,” he says.
Naturally, the DRC has become the big battleground between East and West. Last fall, a Chinese consortium struck an eye-opening $9-billion joint venture deal with Gecamines, in which it pledged to build an array of infrastructure projects.
The agreement was criticized by the World Bank and others, but sources close to the DRC say the deal made total sense. When the World Bank lends money, it takes forever to arrive and comes in small amounts with a mountain of conditions attached. But with the Chinese, the results are immediate.
“The way I look at it, it’s up to the Africans,” a Johannesburg-based hedge fund manager and African nationalist says. “If the African leaders and African subjects want an honest regime, the Chinese are not going to deflect them from that. If they want a dishonest regime, the Chinese permit them to do that.
“But it’s quite clear from the history of Africa that many Western companies and governments have been very comfortable supporting bad government.”
THE RUSH GOES ON
The one thing everyone in Africa agrees on is that the foreign mining dollars will continue to pour into the continent for years in the future. As long as commodity prices stay at high levels there is no reason to assume otherwise.
The question is, who will be making the investments. In stable countries like South Africa, Western mining interests are established and are not going away. But in countries like the DRC, Zambia and Eritrea, the investments by companies like Lundin and Anvil are still a new phenomenon. They have been remarkably successful so far, and if this continues they will have a lot of company.
“If these investments are all successful, then everyone will come --all the transparent Canadian, North American and European companies,” Mr. Conibear says. “And if they’re not successful for whatever reason, mining will still occur but by much less reputable [companies].”
Mr. Newall at First Quantum looks at it another way. His company has tried to expand out of Africa on a number of occasions. Each time it goes after a big acquisition off the continent, it gets trumped by a company with more financial horsepower, such as Xstrata PLC. It gets a bit frustrating.
But he has to admit that staying in Africa isn’t such a bad thing. “You get drawn back here because when you’re looking at competing investment opportunities, the potential of the opportunities here, notwithstanding political risk, is too tempting. Too attractive. “So you keep being drawn back.”
Some banks seizing Peloton assets
By Greg Morcroft, MarketWatch
March 1, 2008
NEW YORK (MarketWatch) -- Banks owed money by London-based hedge fund Peloton have seized some of its assets after it liquidated one of its funds and disallowed redemptions at another, according to a news report Saturday.
The Wall Street Journal report cited “people familiar with the situation,” and said that six banks have seized assets while three others are giving the fund time to try to find buyers.
The Peloton ABS Fund -- which invests in asset-backed securities, including those backed by mortgages -- has suspended investor redemptions and is looking to sell its portfolio after recent heavy losses, according to a letter to investors Thursday from Peloton managers Ron Beller and Geoffrey Grant, a copy of which was obtained by MarketWatch.
“Although there has not been any material deterioration in the credit quality of the Fund’s assets, given the current liquidity situation in the asset-backed securities market, the Fund has experienced severe NAV [net asset value] declines,” the managers wrote.
“In addition, because of their own well-publicized issues, credit providers have been severely tightening terms without regard to the creditworthiness or track record of individual firms, which has compounded our difficulties and made it impossible to meet margin calls,” Beller and Grant said.
Peloton has been working to find a solution to its problems, but decided the best way to protect the interests of investors and other stakeholders was to seek buyers for its portfolio, they said.
Peloton’s bigger Multi-Strategy Fund has a very large position in the firm’s ABS Fund, so it too has been hit hard by the problems. Because of this, investor redemptions from the Multi-Strategy Fund have also been suspended, the managers said.
“The problems for the Peloton ABS Fund have had a serious negative impact on the Multi-Strategy Fund, and we are currently assessing our options,” they wrote in another letter to investors.
The Wall Street Journal said Peloton has been looking for a buyer for the fund, but that at least one rival firm, Citadel Investment Group, has turned the offer down.
Mixed reaction as 30% reserve axed
Brokers cheer, exporters gloomy
POST REPORTERS
01 March 2008
Business leaders offered mixed reactions to the Bank of Thailand's sudden announcement yesterday that it would scrap capital controls on foreign inflows effective Monday.
Brokers and fund managers cheered the move as opening the door for a wave of new foreign investment flows and lifting the cloud over the country's reputation since the 30% reserve rule on inflows was first imposed in December 2006.
But exporters and other business leaders expressed concern that the shift would lead to a rapid appreciation of the baht, affecting trade competitiveness.
''If there aren't other measures, we are dead,'' said Poj Aramwattananont, the president of the Thai Frozen Foods Association.
''The baht has already been appreciating faster than other currencies. Rice traders are fortunate because world prices are quite strong. But processed food and frozen shrimp firms will definitely suffer from a stronger baht, and the ultimate impact will fall on local farmers.''
Nipon Surapongrakcharoen, vice-chairman of the Federation of Thai Industries, expressed concern that without the capital controls, currency volatility would increase, imposing greater costs and uncertainties on local businesses.
The central bank first imposed the capital controls on Dec 18, 2006, requiring investors to set aside 30% of their inflows with the central bank, which would pay them no interest, for a year.
The measure, intended to stem speculative inflows and ease pressure on the currency to appreciate, was quickly relaxed to exempt investments in the local stock market and foreign direct investment, although curbs have been maintained for inflows into the bond market and property funds.
Tarisa Watanagase, the central bank governor, said yesterday that the economic situation now facilitated the lifting of the controls.
The central bank will continue to require foreign investors to channel inflows through non-resident baht accounts for securities (NRBS) and non-resident baht accounts (NRBA) to facilitate monitoring of fund flows. Account balance limits were also maintained at 300 million baht per person per account.
The Finance Ministry also announced several measures that aim to increase capital outflows to reduce pressure on the baht, including eased overseas investment rules for Thai residents.
The baht, which traded on Thursday at 32 to the US dollar, rose to 31.45/5 yesterday after the announcement.
Thiti Tantikulanan, head of capital markets at Kasikornbank, said the baht was likely to appreciate further, with onshore and offshore rates converging.
The capital controls had created a two-tier market, with offshore rates 1.5 to two baht higher than local ones _ moving below 28.50 at one point _ due to supply constraints.
''The trend for the baht is definitely to appreciate further. The baht is already undervalued onshore as a result of central bank intervention. But I don't think that we will see rates reach 30 [to the dollar] immediately,'' Mr Thiti said.
Bond yields also fell sharply yesterday, with the five-year government bond yield dropping 25 basis points to 3.71161% and the 10-year bond 17 points to 4.46585% on heavy volume.
Nattapol Chavalitcheevin, the president of the Thai Bond Market Association, said yields fell across the curve in anticipation of further baht appreciation and foreign inflows.
''While foreign investors are not necessarily major players in the bond market, the removal of the controls does help facilitate investment,'' he said.
Stock traders said they expected a big rally when trading opened on Monday. The SET index closed yesterday at 845.76 points, up 3.64, in trade worth 24.57 billion baht.
''I'm confident that the market will welcome the [policy change] on Monday,'' said Kongkiat Opaswongkarn, the chairman of the Federation of Thai Capital Market Organisations.
Removing the capital controls will help facilitate financial flows and new investment, he said. ''And Thailand certainly has a need for new foreign investment.''
Thai Central Bank to Remove Curbs on Capital March 3
By Suttinee Yuvejwattana and Shanthy Nambiar
Feb. 29 (Bloomberg) -- Thailand's central bank will lift restrictions on overseas capital entering the nation on March 3 to attract investment from abroad and boost economic growth. The baht rose the most in at least a year.
``We think it's the right timing to remove the capital controls because economic conditions are quite strong,'' Governor Tarisa Watanagase said in Bangkok. The curbs are being removed two months ahead of schedule because speculation they would soon be lifted made them less effective, she said.
Limits on bringing money into Thailand imposed in December 2006 dented investor and consumer confidence in Southeast Asia's second-largest economy. Prime Minister Samak Sundaravej this month said the government plans to ease restrictions on foreign capital inflows to help boost investment.
``We welcome the lifting of the capital controls,'' said Peter Eerdmans, head of emerging market bonds for Investec Asset Management in Cape Town, who helps manage $55 billion in bonds. ``Before the capital controls were introduced, we were involved in bonds and the currency market there. We haven't been since the capital controls because it was too complex and expensive.''
The central bank imposed limits on funds entering the nation to slow baht gains and protect exporters, a measure that led to a divergence between the onshore traded value of the baht and the offshore value. Earnings from goods shipped overseas comprise 60 percent of the $206 billion economy.
Rising Baht
``The timing is fine,'' said Ajva Taulananda, vice chairman of Charoen Pokphand Group, Thailand's biggest meat exporter and Asia's biggest animal feed producer. ``They have been talking about the removal for awhile and the restriction hasn't been seriously effective. We will be able to cope.''
The currency has gained 7.4 percent this year, the best performer of Asia's 10 most-traded currencies outside Japan. The onshore baht rose 1.7 percent to 31.45 per dollar, according to data compiled by Bloomberg.
``The two markets, offshore and onshore, should converge to the same rate after lifting the capital controls,'' Tarisa said.
The central bank has peeled away some of the controls over the past 14 months. Equity investors were made exempt from restrictions on Dec. 19, 2006, after the benchmark stock index slumped 15 percent. In December 2006, the central bank lifted curbs on real estate funds and overseas loans.
Reserve Requirement
The move today will remove a so-called reserve requirement that 30 percent of overseas bond investments be withheld in bank accounts for a year. Debt investors had won a waiver last March so long as they prove they are hedged against currency fluctuations.
Ten-year government bonds advanced for a second day before the central bank's announcement. The yield on the 10-year note fell 15.8 basis points to 4.484 percent at the 4 p.m. close in Bangkok, according to the Thai Bond Market Association. The price of the 5 1/8 percent security due March 2018 rose 1.29259, or 12.9 baht per 1,000 baht face amount, to 105.1318.
Investors who had foreign funds withheld as reserves can request a full refund from the central bank, it said in a statement today. About $5 billion has been hedged and kept in local accounts as part of the reserve rules, Tarisa said.
``A quick removal of capital controls won't be a good thing,'' said Chanin Vongkusolkit, chief executive officer of Banpu Pcl, Thailand's biggest coal miner. About 95 percent of the company's sales are in dollars. ``I don't see a direct benefit from a swift removal.''
Overseas Borrowings
The central bank will also ease rules on domestic financial institutions that borrow money from overseas for reasons other than investment or trade, by cutting the limit on such transactions to $10 million.
Thailand narrowed to two from four the type of bank accounts foreign investors are required to set up. The central bank will now require overseas investors set up separate non- resident bank accounts in Thailand for securities investments and another for general investment. Funds transfers between these accounts are prohibited, and the limit on each account is $300 million.
Governor Tarisa on Jan. 28 said the bank planned to ease rules on outbound capital flows to help stem baht gains. A week later it extended the period exporters can convert their foreign-exchange earnings into baht to 360 days from 15 days. The central bank also lifted its $100 million limit on overseas investment, allowing listed Thai companies to invest an ``unlimited'' amount in units abroad.
The currency controls spawned an offshore exchange rate that is higher than the official price of the baht. The baht fell 4 percent to 30.91 per dollar offshore.
``There are still certain restrictions in place,'' said Nicholas Bibby, regional Asia economist at Barclays Capital in Singapore. ``We will potentially still have an offshore market. I suspect both rates will be tracking very closely together if the offshore isn't completely abandoned.''
Taiwan-China bilateral trade hits record-high US$102.3 billion
Saturday, March 1, 2008
AFP
TAIPEI, Taiwan -- Despite political rivalry, bilateral trade between Taiwan and China rose 16.1 percent in 2007 to a record US$102.3 billion on the back of expanding cross-strait exchanges, the island's authorities said yesterday.
China remained Taiwan's largest trading partner last year accounting for 21.9 percent of the island's total external trade last year, compared to 20.6 percent for 2006, according to the Board of Foreign Trade.
China and Taiwan split in 1949 at the end of a civil war and direct links in commerce, post and transportation have been banned since, amid political tensions.
However, trade and other economic ties have been booming since Taipei relaxed travel restrictions in late 1987 and started liberalizing mainland-bound investments in the early 1990s.
China remained Taiwan's largest market in 2007 with shipments there accounting for 30.1 percent of the island's total exports, up from 28.3 percent a year earlier.
Imports from China accounted for 12.8 percent of the island's total imports, up from 12.2 percent a year earlier.
Taiwan enjoyed a trade surplus of US$46.26 billion in 2007, up 20 percent from a year earlier. This followed exports of US$74.28 billion, up 17.3 percent, and imports worth US$28.02 billion, up 13.1 percent, the Board said.
Exports were backed by strong economic growth in China, global demand for notebook personal computers, contracts from major international firms, demand for consumer electronics, and a recovery in the liquid crystal display panel industry.
China still regards Taiwan as part of its territory awaiting reunification, by force if necessary, but has become a favorite investment site for Taiwanese enterprises.
Local investors have channeled an estimated US$150 billion to China and an some one million Taiwanese, or 4.3 percent of the island's population, are either working or living in China.
Cross-strait policy dominates the current presidential campaign with both Democratic Progressive Party candidate Frank Hsieh and the Kuomintang's Ma Ying-jeou emphasizing the need to work with, not antagonize, Beijing.
The presidential election is scheduled for March 22.
Air China parent places ad to plead with China Eastern on tie-up
Saturday, March 1, 2008
AFP
The parent company of Air China used a newspaper advertisement Saturday to plead with the directors of China Eastern to review its rejection of a proposed alliance between the two carriers.
China National Aviation Corp (CNAC), parent of flagship carrier Air China, insisted its bid was sincere in an ad placed in the South China Morning Post.
"CNAC has been highly sincere in seeking a strategic partnership with China Eastern Airlines," the ad in the English-language daily said.
"CNAC hopes that the board of directors of China Eastern Airlines will seriously review and give full consideration to the proposal."
CNAC called on China Eastern to hold a meeting as soon as possible to discuss the details.
China Eastern, the country's third largest carrier, Tuesday rejected the alliance and said the bid "lacks sincerity, planning and mutual trust and it would be hard to create a basis for cooperation".
China Eastern added it would continue seeking strategic investors to strengthen its core business, offering a glimmer of hope for a deadlocked plan for a tie up with Singapore Airlines (SIA).
SIA and Temasek Holdings, Singapore's state-linked investment firm, signed a preliminary deal in September to take a 24 percent stake in China Eastern for 923 million US dollars.
But minority shareholders rejected the bid, worth 3.80 Hong Kong dollars per share in January, after an intervention by CNAC.
Last month CNAC proposed to buy 2.985 billion new Hong Kong listed shares in China Eastern for at least five Hong Kong dollars each after China Eastern's shareholders voted down the deal with SIA.
China Eastern will receive at least 14.9 billion Hong Kong dollars (1.9 billion US dollars) in cash under CNAC's proposal.
CNAC also suggested the two carriers integrate their cargo business to set up a joint venture and cooperate in codesharing, optimisation of route networks, maintenance and ground service.
MF Global Falls as Analysts Cut Stock, Credit Ratings
By Edgar Ortega
Feb. 29 (Bloomberg) -- MF Global Ltd., the futures brokerage that yesterday set aside $141.5 million to cover losses from ``unauthorized'' trading, tumbled 17 percent in New York after at least three analysts cut ratings on the stock.
Lehman Brothers Holdings Inc., Credit Suisse Group and UBS AG today lowered their recommendations on shares of Hamilton, Bermuda-based MF Global. Standard & Poor's and Moody's Investors Service also lowered credit ratings on the brokerage, citing the risk-controls breakdown that let an employee's wheat-market bets exceed the company's limit.
MF Global lost as much as half of its market value after setting aside funds to cover a pretax loss of about $80 million resulting from a broker's trades in wheat futures. Chief Executive Officer Kevin Davis called the company's lapse an ``aberration,'' and opened a review of risk controls to quell investor concerns.
``We do not yet have confidence that there are no other lapses,'' Lehman's Roger Freeman, who cut his rating to ``equalweight'' from ``overweight,'' wrote in a report to clients today. ``The perception around MF, at least in the interim, will now include a greater notion of balance-sheet risk.''
MF Global fell $3.64, or 17 percent, to $17.55 at 4:17 p.m. in composite trading on the New York Stock Exchange. The stock yesterday fell 28 percent. The slump has erased about 42 percent of the company's market value since it went public in July.
Inefficient Controls
A broker at MF Global's branch in Memphis, Tennessee, was able to exceed trading limits because electronic controls in a retail order-entry system weren't operating, Davis told analysts yesterday. Controls at the branch were deemed inefficient because they could slow handling of customer orders, he said.
``In some cases, we allow an office to not have the buying power control,'' Davis said yesterday. ``Clearly, that was a mistake, and it's one which we have rectified.''
MF Global, which handles trading in currency, interest-rate and commodity futures in more than 12 countries, extended the trading-limit controls to all brokers and customers. The move will have little impact on MF Global's trading business, wrote Keefe Bruyette & Woods analyst Niamh Alexander.
The company hired Baltimore-based FTI Consulting Inc. to review its risk-management procedures, said Diana DeSocio, an MF Global spokeswoman. She declined to comment on the analysts' reports.
Clearing Broker
As a clearing broker, MF Global is responsible for transactions when customers don't have sufficient cash. The unauthorized trades were all for U.S. wheat futures, and were entered and liquidated the morning of Feb. 27. The $141.5 million loss equals about 30 percent of MF Global's commission revenue in the quarter ended Dec. 31, and about 6 percent of the brokerage's total equity.
``The magnitude of the trading loss is clearly disconcerting to us and calls into question the degree of risk- taking and management at the franchise,'' Credit Suisse analyst Howard Chen wrote in a note to clients today. He cut his rating to ``neutral'' from ``outperform.''
While MF Global has benefited from increased trading because of the volatility in commodity markets, the wider price swings in U.S. wheat futures helped magnify losses. Wheat futures have more than doubled in the past year on the Chicago Board of Trade, with unprecedented price swings last weekof as much as $270 on the contract for May delivery.
`Jungle Gym'
``The moves are that much more damaging because we're at price levels that are way outside of historical ranges,'' said Dennis Stuart, a vice president at FCStone Group Inc., a commodity risk-management company in Kansas City, Missouri. ``It's as if in the past we were in a juggle gym that was only three feet off the ground. Now we are 12 feet off the ground.''
MF Global will rely on insurance to cushion on the impact from the trading losses. Davis said yesterday bonuses for senior executives will also get cut by a yet-to-be determined amount. Five executives including Davis and Chief Operating Officer Chris Smith, as well as director Edward Goldberg bought a total of about $3 million in stock, MF said in a statement today.
MF Global, formerly the brokerage unit of Man Group Plc, the world's largest publicly traded hedge-fund manager, was spun off in a $2.92 billion initial public offering in July. Man Group, based in London, retained an 18.6 percent stake in the company.
Bank Negara dampens talk of interest rate cut in near term
Current rates are adequate to keep economy motoring along: central bank
Saturday, March 1, 2008
(KUALA LUMPUR) -- Malaysia's central bank yesterday dampened talk of an interest rate cut in the near term, saying current rates are adequate to keep the economy motoring along.
Low borrowing costs have supported a consumption boom in Malaysia but some economists think an easing would be needed to sustain spending as rising prices crimp consumers' purchasing power.
'Given that interest rates are supportive of the overall economic activity, we believe the current interest rates will sustain the growth prospects,' central bank chief Zeti Akhtar Aziz told reporters.
She was replying to a question on whether an interest rate cut would be needed to help the economy achieve the official growth target this year.
Malaysia's inflation is near a 10-month high, making it difficult for the central bank to cut borrowing costs even as easing US demand threatens growth in South-east Asia's third- largest economy.
The central bank on Feb 25 kept its key interest rate unchanged at 3.5 per cent.
Malaysia's economy, which grew 6.3 per cent in 2007, may expand between 6 per cent and 6.5 per cent this year, the government said. Prime Minister Abdullah Ahmad Badawi told Reuters on Wednesday this target could be beaten.
At 3.50 per cent, Malaysia's official interest rate is among the lowest policy rates in Asia.
Ms Zeti said the economy remained on a steady growth path despite the darkening global outlook.
Asked whether the projected growth for this year was too optimistic in view of the external challenges such as the US sub-prime credit crisis and high crude oil prices, she replied: 'Our forecast is without any further policies and we have always said that if we see any signs of slowing growth, we have at our disposal some significant policy measures that can be taken to address that.'
'We are going to announce our forecast in a month from now when we release our annual report, so you'll have to wait,' she said, when asked whether Bank Negara is coming out with a revision of the gross domestic product (GDP) growth rate forecast.
Ms Zeti also downplayed concerns that the strengthening ringgit would hurt Malaysia's trade-reliant economy, after the currency broke past the 3.2-per-dollar level yesterday and hit a decade-high at 3.1845.
'As we have always said from time to time, two-way flows determine the level of the exchange rate. Our view is that, there has to be orderly market condition,' Ms Zeti said.
'Secondly, it should reflect underlying fundamentals and we believe that over the medium term, it will do this. But from time to time, we will see certain flows dominating and these of course will result in some volatility.'
On whether the stronger ringgit had affected last year's exports, she pointed out that the slower growth in exports had already taken place over a year. Last year's exports were valued at RM605.1 billion (S$263.9 billion), an increase of 2.7 per cent on a year-on-year basis.
'This reflect the global demand condition rather than the exchange rate. When you talk about the exchange rate movement you are only comparing our rate with the US dollar whereas in fact you have to compare our rate with other countries and other currencies as well,' Ms Zeti explained.
She pointed out that the ringgit has a stable relationship with many of the currencies in this region.
The future is underground
With land above ground exploited almost to the point of extinction, the only way for Singapore to grow is downwards.
BY SEAH CHEANG NEE
Saturday March 1, 2008
PRESSED by circumstances, the 21st Century Singaporean is spending more and more time underground – working, driving, eating and shopping – and the trend is for more of it.
For years the government had been burrowing deep into the bowels of Singapore to squeeze out more use of its limited land area.
From a simple car-parking idea long ago, the subterranean concept has rapidly expanded in scope to reach almost every aspect of life.
The convenience has become an urgent solution to over-crowdedness that is expected to worsen by the proposed future population of 5.5 million people.
Today, almost every building in Singapore – from department stores to hospitals, and from military installations to churches – has one or two basement levels.
(The Gothic-style chapel of Singapore’s 141-year-old Convent has been preserved but modernised with a new underground courtyard.)
Singapore has just built South-East Asia’s longest underground tunnel to alleviate traffic jams. The 18km road – with the tunnel forming half of it – links two other expressways expanding Singapore’s network of underground transport systems.
The next will be the construction of a multi-billion-dollar MRT line (one of two new ones) that will run a circular 33.3km underneath central Singapore.
When it opens after 2010, the new Central Circle Line will have 29 stations and connect with all the radial lines leading in and out of the city.
Spotlighting on the Central Line, a Discovery Channel programme reported: “If you take all the best bits from undergrounds around the world, discard everything that does not work and then throw millions of dollars into further design and construction, then you have the project that has every Singaporean drooling over their dim sum.
“The Singapore Circle Line ... one of the biggest and certainly best underground railways in the world. In this film we witness the realisation of this utopian vision under construction. The spectacle is addictively fascinating.”
Dhoby Ghaut also stands out as an underground engineering feat. The five-level subterranean station links three MRT lines and a shopping complex and the Istana Park and will cater to 20,000 people an hour at its peak.
Two other lines are already partially below ground – as well as some roads and highways in the city.
The problems faced by affluent Singapore, especially in public transport, are best described in the Discovery Channel report:
“With a permanent population of 4.5 million, and a further 10 million visitors a year, the streets daily swarm with people, the roads are choked with cars, buses and bicycles, and the trains are packed. Gridlock beckons.”
For more than 40 years, this fourth densest city in the world, has implemented a long-term creative effort to maximise land use. Planners regard land as a non-finite commodity.
With the acute shortage, land use is strictly apportioned. Just over 50% is used to build homes, schools and hospitals, almost 38% for industrial use, and 12% for parks.
The strategy began after independence by reclaiming land from the sea and building upward, packing millions of people into high-rise homes and offices.
Reclamation is, of course continuing. A S$7bil (RM16bil) project has just joined up seven outlying islands to be a chemical hub. By 2010, Singapore will grow to 730 sq km, 25% larger than before independence.
Cemeteries were cleared after 1965, when citizens, except Muslims, were asked to reclaim family members for cremation.
The five-year cemetery exhumation plan immediately freed land to build 12,000 centrally located, high-rise apartments.
Over the past two decades, the government has exhumed more than 36 cemeteries of different races and religions.
Today there are no burial grounds in Singapore for non-Muslims; the dead had long made way for the living.
And now, with increasing tempo, it has indulged in a much more expensive programme of building below ground.
Underground caverns have been created as bomb shelters and storage for ammunition.
Singapore is also building subterranean ring roads, a science lab, shopping complexes and a S$9bil (RM20.6bil) underground sewage system that will take 20 years to finish.
Creating a city underground is, of course, slow and very costly, but less intrusive; something that goes on almost without interruption through the years.
Several years ago Minister Mentor Lee Kuan Yew returned from Paris impressed with its central underground ring roads and called for an eventual adaptation in Singapore.
The result is a S$4.8bil (RM11bil) plan to build a network of ring roads below the central business district.
Other mega subterranean projects include:
> A large sewage system that comprises two highway-size tunnels criss-crossing the island 12 storeys below ground; stretching for 80km with a series of smaller link sewers running another 170km, the project will take 20 years to finish;
> Singapore’s first underground ammunition storage depots, leading to land savings equivalent to half a fair-sized New Town;
> An underground science complex, being planned near the National University of Singapore; and,
> Shifting the big oil-storage business, which takes up much land, to underground caverns.
“Underground space is an alternative for the future space development in Singapore,” an official said.
This could be created in the form of caverns, tunnels and deep basements, for commercial, transportation, industrial and institutional purposes, he added.
The Economist recently wrote of Singapore's future underground ambitions. “Then perhaps concert halls, sports stadiums – who knows? Such schemes are hugely costly, but Singapore has massive financial reserves for its size,” it commented.
“In creating enough space to continue its breakneck expansion, money will be no object.”
Singaporeans question escape of alleged militant leader
02 March 2008
SINGAPORE’S government has come under stinging public criticism after the escape of an alleged militant leader from custody dented the country’s reputation for airtight security.
Letters to the editor and Internet blogs by Singaporeans took officials to task for the escape on Wednesday of Mas Selamat bin Kastari, alleged leader of the Singapore wing of the militant Islamic group Jemaah Islamiyah.
Open criticism of the government is rare in tightly ruled Singapore, but the apparent ease with which Kastari managed to slip out of a detention centre raised questions about the authorities’ anti-terrorist measures.
Since his escape, security forces including paramilitary Nepalese Gurkhas employed by the police have been combing the island and keeping a tight watch on its borders with Malaysia and Indonesia.
Kastari was accused of plotting to hijack a plane in order to crash it into Singapore’s busy Changi Airport in 2001, but never charged in court. He was being held under an internal security law which allows for detention without trial.
The Ministry of Home Affairs said Kastari escaped after he was permitted to use the toilet during a visit by family members.
‘I am sure Singaporeans would like to know the details of the escape - what happened from the time the terrorist left for the restroom while his family members were waiting for him,’ said a letter from reader Rosemary Chwee published on Saturday by Singapore’s leading daily, The Straits Times.
‘Such a slip is professionally unforgivable... As a citizen, I am deeply concerned, especially if Mas Selamat continues to be on the loose,’ she wrote.
Police flyers seeking public help in recapturing the 47-year-old Kastari say he is ‘not known to be armed’ and walks with a limp.
‘What puzzles me is how a middle-aged man who has difficulty walking can leave the detention centre with such ease,’ wrote another reader, Siow Jia Rui.
Another letter writer, Lee Beng Hai, suspected Kastari could have been helped by ‘sleepers and sympathisers’.
Internet blog sites - the usual refuge of Singapore government critics who are denied space in the mainstream media - were full of chatter and conspiracy theories on the escape.
Even the Straits Times, which is closely identified with the government, said in an editorial that the authorities had to confront the question of whether Kastari had help.
‘It stretches credulity to imagine this was an opportunistic solo effort... The escape was too easy, too neat,’ it said.
If he had help, it would mean ‘terror cells are still morphing and sympathisers are being drawn into the network’, the newspaper said.
If he acted alone, ‘the system breakdown was egregious’, it added.
‘Security incidents like this one... will shake confidence in the anti-terror system.’
The editorial said complacency may have set in because Singapore has been spared from terrorist violence so far.
Since the September 11, 2001 attacks in the United States, Singapore has implemented tough security measures and rounded up suspected militants and sympathisers of the Jemaah Islamiyah.
The group has been blamed for a series of attacks including the 2002 bombings on the Indonesian resort island of Bali which killed 202 people, mostly tourists.
Kastari, a Singaporean citizen of Indonesian ancestry, was handed over by Indonesian officials after his second arrest there in 2006.
Singapore is a predominantly ethnic Chinese city-state which has a Malay Muslim minority and hosts hundreds of thousands of foreign workers, many of them Malaysians and Indonesians. -- AFP
Buffett Says U.S. Trade Imbalance Lures Sovereign Wealth Funds
01 March 2008
March 1 (Bloomberg) -- Billionaire investor Warren Buffett stepped into a debate about the emergence of sovereign wealth funds, saying the government-controlled firms are fuelled by U.S. spending overseas, not political motives.
“This is our doing, not some nefarious plot by foreign governments,” Buffett, the chairman of Berkshire Hathaway Inc., said yesterday in his annual letter to shareholders. “Our trade equation guarantees massive foreign investment in the U.S. When we force-feed $2 billion daily to the rest of the world, they must invest in something here.”
Countries including China, Russia and Dubai have deployed record central bank reserves to set up funds wielding as much as $2.9 trillion. Firms from Singapore, Korea, Kuwait and Abu Dhabi bought stakes during the past four months in Citigroup Inc., the biggest U.S. bank by assets, and Merrill Lynch & Co., the world’s biggest brokerage. Officials from the U.S. Treasury Department and the Securities and Exchange Commission have said there’s a risk government-controlled funds may invest to achieve political, rather than commercial, ends.
“He’s right that we’re the ones that created the problem in the first place,” said Mohnish Pabrai, who manages $600 million at Pabrai Investment Funds in Irvine, California. “The U.S. is better off if foreign governments buy Treasuries, because we have a printing press for them, but if I were running China’s money, I’d be buying U.S. companies, oil reserves, hard assets too.”
Pabrai and a friend paid $650,100 last year in an annual charity auction to have lunch with Buffett.
Warren’s World
“Both the growth in size and number of these funds is such now that vigilance is required,” Deputy U.S. Treasury Secretary Robert Kimmitt said in a Feb. 27 interview on Bloomberg Television. SEC Chairman Christopher Cox said in December that the state-run investment firms don’t adequately disclose why they’re buying stocks and other assets.
Buffett, 77, built Berkshire Hathaway over four decades from a failing textile manufacturer into a $215 billion investment and holding company. The stock rose 29 percent in 2007 and about 4,700 percent in the 20 years through Dec. 31, six times more than the Standard & Poor’s 500 Index, dividends included. The feat made Buffett an icon to shareholders and investors.
In his annual letters, Buffett offers his view of market conditions, potential investments, corporate governance and economic policy, as well as his plans for Omaha, Nebraska-based Berkshire.
Fear and Greed
Along with insurance operations and a stock portfolio valued at $75 billion at yearend, Berkshire owns businesses ranging from candy making and residential real estate brokerage to utilities and corporate jet leasing, giving Buffett an insider’s perspective on many facets of the economy and finance.
Buffett released the shareholder letter with Berkshire’s 2007 full-year and fourth-quarter financial results. Net income in the quarter fell 18 percent to $2.95 billion, or $1,904 a share as profit from insurance units fell. The company’s shares dropped $250, or 0.2 percent, to $140,000 yesterday in New York Stock Exchange composite trading.
Berkshire said it owned a 1.3 percent stake in Sanofi-Aventis SA, France’s largest pharmaceuticals company, at yearend. The 17.2 million shares cost $1.47 billion and had appreciated by $109 million, Berkshire said.
In last year’s letter, Buffett said his method was to “be fearful when others are greedy, and be greedy when others are fearful.”
Party’s Over
He said Berkshire followed that maxim by rushing to insure coastal properties after 2005’s Hurricane Katrina caused prices to double and triple. Berkshire, which gets about half its profit from insurance, sold less of the coverage in 2007 as prices dropped.
“The party is over,” Buffett said in yesterday’s letter. “It is a certainty that insurance industry profit margins, including ours, will fall significantly in 2008. Prices are down.”
Fourth-quarter underwriting profit from Berkshire’s insurance business dropped 46 percent to $465 million, led by declines at auto insurer Geico Corp. and reinsurance units. Reinsurance is coverage for insurance companies.
The worst housing recession in a quarter century hurt Berkshire’s building-related companies. Profit fell 17 percent to $109 million at Shaw Industries, the world’s largest carpet maker. Earnings also dropped at Acme Brick and Johns Manville.
Buffett applied the strategy of greed in the face of fear when defaults on mortgage-related securities surged during the past year.
MBIA, Ambac
The losses threatened the credit ratings of bond insurers including MBIA Inc. and Ambac Financial Group Inc. Berkshire formed a company in December to compete with the firms, charging more to guarantee payment on municipal debt while avoiding the mortgage-related securities that jeopardized their credit ratings.
As defaults on mortgage-related securities climbed, Buffett offered to assume $800 billion of municipal bond obligations from MBIA, Ambac and FGIC Corp. in exchange for more than $9 billion in premiums. None of the companies have said they’ll accept the terms.
“When you have an adversary who’s embattled, in a corner and has no other options for survival, they’ll do anything,” said Charles Hamilton, an analyst at FTN Midwest Securities Corp. in Nashville, Tennessee. “He was just seeing if they were desperate enough to have to take the deal.” Hamilton rates the stock “neutral.”
Four Contenders
Buffett revealed in last year’s letter his decision to split the roles of chief executive officer and chief investment officer when he steps down. He previously said the CEO spot will go to one of three Berkshire managers, whom he hasn’t identified. He has said his health is good and he has no plans to retire.
Four “young to middle-aged” candidates have been selected for the investing post, Buffett wrote in yesterday’s letter.
“All manage substantial sums currently,” he said. “The board knows the strengths of the four and would expect to hire one or more if the need arises.” They range from “well-to-do to rich,” and “all wish to work for Berkshire for reasons that go beyond compensation,” Buffett said.
GLOBAL MARKETS WEEKAHEAD - Dollar decline to dominate
LONDON, March 2 - Currencies will be in full focus on financial markets this week following the dollar's drubbing of recent days yet anyone hoping for help from policy makers to shore up the ailing greenback is likely to be disappointed.
Key meetings of European Union finance ministers and European Central Bank interest-rate setters are expected to do little to shift the status quo, while the U.S. Federal Reserve appears dead-set on cutting again this month.
"I don't see a major change in trend week", said Lex Hoogduin, chief economist at Dutch investor Robeco.
This means that gold and oil prices should maintain their record-breaking pace at least over coming days, while equity and bond investors will have to continue revaluating their holdings in light of a soaring euro and low-yielding dollar.
It may also put strains on export-oriented emerging Asian stock markets, which have otherwise started to see an increase in institutional investment flows.
The dollar took many investors by surprise last week, falling to an all-time record beyond $1.50 to the euro, meaning that the 15-nation currency has strengthened around 15 percent against the greenback over the past 12 months.
Less heralded, but by no means less significant, the so-called dollar index, which tracks the U.S. currency against six major counterparts, hit its lowest level since inception in 1973.
While many institutional investors believe that the dollar will recover some strength by the end of this year, there is no conviction that this will happen soon.
"The trend in the short term is for more dollar weakness," said Colin Asher, senior economist at investment bank Nomura.
DIFFERENT RATES
A key reason for this is that the background dynamics that have pushed the dollar lower -- specifically interest rate differences -- are unlikely to change in the next few months, let alone in the week to come.
ECB rate-setters, for example, have made it clear that they are more worried about inflation than a slowing economy. All 72 economists in a Reuters poll last week said the ECB would leave rates at 4.0 percent when it meets on Thursday.
European policy makers are also unlikely to be overly concerned about the euro because its strength makes imports cheap, putting a damper on the inflation that so concerns them.
By contrast, U.S. Federal Reserve Chairman Ben Bernanke clearly signalled last week that the U.S. central bank will cut rates again to stop further damage to the ailing U.S. economy.
The Fed is widely seen cutting U.S. rates by at least 50 basis points to 2.5 percent at its next meeting on March 18 .
This leaves currency markets hostage to a raft of U.S. data this week -- including on manufacturing, services, jobs and vehicles sale -- which are expected to be poor overall.
The question may then be "how far will the dollar fall", although Nomura's Asher noted that with the dollar already so weak a bit of a bounce cannot be ruled out.
Profit-taking and better-than-expected data can always turn things around quickly, particularly in an era of overall global market volatility.
SPILLOVER
For equities this week, the weak dollar provides a mixed picture. It has little short-term impact on many U.S. equities, which tend to be domestic in orientation, but shakes the more export-focused markets of Europe and Asia.
"It should hurt European equity markets more than it will help U.S. equity markets," said Klaus Wiener, chief economist of Generali Investments.
Stock markets, he said, will be focused on plans to rescue U.S. monoline insurers, the firms that insure structured finance whose potential downgrading as a result of credit market turmoil threatens to spill over into other parts of the financial sector.
The volatility on currency markets, meanwhile, comes as equity markets have been rallying relatively sharply.
MSCI's benchmark world stock index, incorporating U.S., European, Japanese and emerging market shares, is up around 8 percent from a low on Jan. 22, the day the Fed announced an emergency rate cut to boost the U.S. economy.
Where a weak dollar most certainly has an impact, however, is with commodities, notably gold and oil.
Because these assets are priced in dollars they rise when the currency falls as they become more attractive for non-U.S. investors. In both cases, this has added to their already soaring demand driven prices.
Gold hit a record high around $975 an ounce on Friday, leaving the psychological $1,000 milestone within sight this week. Oil, meanwhile, breached a new high of $103 a barrel.
The rub is that such prices fire up inflation, making central bank decision making that much trickier.
"The current inflation is due primarily to commodity prices of oil and energy and other prices that are being set in global markets," the Fed's Bernanke said last week. - Reuters
A slice of the American Dream...
How did a strawberry picker earning $15,000 a year qualify for a loan of $720,000? *_*
Impossible loan turns dream home into nightmare
By Carol Lloyd
15 April 2007
When Alberto and Rosa Ramirez began looking for a home, they never imagined that 18 months later they would personify a national real estate crisis.
It's not that they bought a house with walls crawling with toxic mold or inherited an insane neighbor next door or even, God forbid, that they didn't buy at all. They bought, and they love their slice of the American Dream.
"It's all very nice and beautiful," Rosa tells me through a translator. "The neighborhood is very peaceful. The problem is not with the house at all. It's the price of the house."
Indeed, in a different era (when housing prices were lower), their story might have been one of those bootstrap tales about homeownership transforming immigrant lives. The husband and wife work as strawberry pickers in the fields around Watsonville, and each earns about $300 a week. They have three children. Not only did they dream the impossible dream, they managed to finance it.
It all began when they were talking to another family about escaping their subsidized apartments and getting a real house. The other couple -- Jesus Martinez and his wife, who also have three children -- work as mushroom farmers, earning about $500 a week each when there is work. The two couples decided to pool their resources and begin house hunting.
Given their total income, they estimated that they could afford payments of $3,000 a month. They spotted an ad in the local magazine La Ganga for Maria Avila of Rancho Grande Real Estate and called her.
"We wanted to live in Watsonville," says Rosa. "But (the real estate agent) said the houses there were older and more expensive." One of the first homes they were shown was a four-bedroom, two-bath house in Hollister (San Benito County) for $720,000. When the Ramirezes heard the price, they worried that they couldn't afford it. But the couple say they were assured it was possible.
"The monthly payment was supposed to be $4,800, but then, after we bought it, it went up to $5,378," says Rosa, speaking of their zero-down mortgage with a one-month "teaser rate." "Our agent told us that once we refinanced, we could get the payments down to $3,000 or less."
For a number of months, Avila, who arranged for the loan with New Century Mortgage, paid the difference between what the buyers had said they could afford -- $3,000 -- and the loan payment, an attorney for the buyers says. This arrangement was supposed to carry them over until the group refinanced, they say, but the money-saving refinance failed to materialize.
Avila and Rancho Grande Real Estate declined to comment for this column.
Earlier this month, New Century Mortgage, the nation's second-largest subprime mortgage lender, filed for bankruptcy. It's also facing a federal investigation.
According to my analysis of interest rates during the period, hitting the $3,000 number would have been virtually impossible under any circumstances. An interest-only $720,000 loan at a 5 percent interest rate, yields a $3,000 mortgage, but such rates weren't available, especially to a laborer with a low income, no down payment and no other assets. Plus that doesn't count another $750 a month or so in property taxes and insurance.
The two families made the payments, sometimes sacrificing basic necessities, other times borrowing more. "It was very difficult," Rosa says. "Sometimes we would eat less, and we took out personal loans from Bank of America."
In November, they stopped paying their mortgage and sought the advice of Pamela Simmons, an attorney who specializes in predatory- lending cases. Upon reviewing the loan documents, they discovered more bad news. Despite the intention that both couples would be buying the home together (they'd submitted income information for three of the four buyers), the loan was made exclusively in Alberto Ramirez's name. This meant he was solely responsible for the debt.
The Ramirezes also discovered that the home wasn't nearly as valuable as they thought: When a new real estate agent looked at the house, he told them he'd list it between $560,000 and $580,000. They have sent a letter of demand to Rancho Grande, claiming the brokers breached their fiduciary duties by selling Alberto Ramirez a home he couldn't afford. Rancho Grande declined to comment.
How did a strawberry picker earning $15,000 a year qualify for a loan of $720,000? The answer, the experts say, lies in a lending industry that got too innovative for its own good. Last week, a coalition of civil rights groups, including the National Council of La Raza, the Center for Responsible Lending and the NAACP, called for a national six-month moratorium on foreclosures -- after observing that the subprime crisis disproportionately affected minorities.
"The point is to just take time out and provide services to families who might be vulnerable as a result of payment shock," says Janice Bowdler, senior policy analyst for housing for the National Council of La Raza, referring to the hybrid loans that begin with low fixed rates and then jump to adjustable-rate mortgages. Bowdler adds that they are hoping many homeowners can avoid foreclosure by taking advantage of such financial tools as changing their current loan terms or refinancing.
According to the National Council of La Raza, 40 percent of Latino families and more than half of African Americans who receive home loans get higher-cost mortgages, predominately subprime loans. In a study released last month, an analysis of 2005 federal mortgage lending data of large subprime originators in six metropolitan areas, African American borrowers were 3.8 times and Latino borrowers were 3.6 times more likely to receive a higher-cost home purchase loan than white borrowers.
One argument is that these groups naturally get subprime loans because they have bad credit or are buying in riskier neighborhoods. But according to Fannie Mae, there is an enormous lending disparity across the nation: One study found that 50 percent of all borrowers qualified for a cheaper loan than the one they eventually got. They even discovered that female buyers tend to get higher-cost loans than male counterparts.
But for Rosa and Alberto Ramirez and many others like them, a foreclosure moratorium won't help. It's not that a better loan would have remedied their situation -- it's that they can't afford the home they bought. "Many of my clients can't afford their homes in any circumstance," Simmons said. "I have a dishwasher who bought a house and never even moved in. The moment he saw the first payment, he knew he couldn't afford it."
Indeed, the Ramirez family exemplifies a type of new buyer that didn't exist a decade ago.
Neither Rosa nor Alberto speaks English, so they were completely dependent on their real estate agent and their mortgage broker for advice and to translate and educate them about the process.
"In other business transactions in California, if you negotiate in Spanish, you are required to provide translations of all documents. But real estate contracts are exempt from this," said Simmons, who has 30 active cases and sees her potential caseload growing by the day. "There's a large increase in the amount of borrowers reaching out to lawyers with subprime loans. I've gotten to the point that I have to say to a lot of people, 'I can't represent you, I have too many clients.'
"It's astounding to me," she said. "I neither expected nor have I seen anything like this in all the years I've practiced law. It's as if in real estate it's gone back to the wild, wild West of San Francisco in the 1800s."
Maeve Brown, co-founder of Oakland's Housing and Economic Rights Advocates, says most of her clients fall into one of two categories. There are the non-English-speaking first-time home buyers who "buy homes that they can't afford, with mortgage brokers raking in the fees and an added twist that the homes are often substandard and they are appraised above their actual value."
The other kind of cases involves seniors, often African American, who are persuaded to refinance their homes with more expensive adjustable-rate loans that carry steep prepayment penalties.
"Buying a (house) is a complex process," Brown says. "I think we've been sold a bill of goods about the American dream: that it's fast, it's fun, it's easy. Well, it's not easy -- it's really complex.
"The ideal would be that every buyer retain their own counsel to protect them from their Realtor and their broker, because though there are great agents and brokers out there and they have a fiduciary duty to represent your best interests, in the end, it's a contract and you're on the hook for it."
Regarding subprime lenders going bankrupt, she has "no sympathy whatsoever. They created this monster."
Post a Comment