(SHANGHAI) China’s government, anxious to protect local investors from losing their life savings in the stock market, has decided to delay a plan that would allow citizens to buy Hong Kong-traded equities, the bank regulator said.
‘We’ve had to change the plan for introducing the programme because market conditions have changed,’ China Banking Regulatory Commission chairman Liu Mingkang said yesterday during a meeting of the Chinese legislature in Beijing. ‘We’re considering the timing for introducing the plan.’
China in August 2007 announced a so-called ‘through train’ plan for Chinese individuals to buy Hong Kong stocks. That plan was delayed after regulators voiced concern that inexperienced Chinese investors may suffer losses in Hong Kong’s stock market, which doesn’t use circuit breakers to halt declines.
Hong Kong’s key Hang Seng Index has fallen almost 20 per cent this year, the 10th worst-performing stock index among 90 primary indices tracked by Bloomberg. The Hang Seng China Enterprises Index, which tracks 43 Chinese companies in Hong Kong, slumped 23 per cent this year\. \-- Bloomberg
Carlyle Capital Gets Default Notice on Margin Calls
2008-03-06 00:56 (New York)
March 6 (Bloomberg) -- Carlyle Capital Corp., the publicly traded credit fund backed by private-equity firm Carlyle Group, said it received a notice of default after failing to meet a margin call yesterday.
The Guernsey, U.K.-based fund didn't meet four of seven margin calls totalling more than $37 million received yesterday, it said today in a statement. It expects to receive at least one more notice of default related to yesterday's margin calls, according to the statement.
Since filing its annual report a week ago, Carlyle Capital has received and met margin calls and additional collateral requirements of more than $60 million, it said.
“This disconnect has created instability and variability in our repo financing arrangements,” Chief Executive Officer John Stomber said in the statement. “Management is actively working with the company's repo counterparties to develop more stable financing terms.”
Carlyle Capital eliminated its dividend and waived an incentive fee Feb. 28 when it reported quarterly financial results, seeking to build liquidity as mortgage defaults in the U.S. rise.
The fund's portfolio was made up exclusively of AAA-rated mortgage-backed securities issued by Fannie Mae and Freddie Mac as of Feb. 27, it said last week.
PricewaterhouseCoopers LLP: China will surpass US as largest economic entity in 2025
According to China News Agency, a report released on the 4th by the well-known international accounting firm PricewaterhouseCoopers, predicted that China will probably surpass the United States to become the largest economic entity in 2025. The economic scale of China will increase to 1.3 times that of the United States by 2050 or before.
Macro-economy director John Hawksworth of PricewaterhouseCoopers pointed out that China’s science and technology developed rapidly; caught up with the United States; and has greatly increased productivity and efficiency. Development is sufficient to support China’s sustained economic growth for the next ten to fifteen years. Compared with the United States, the China’s production forces have developed faster which means the actual appreciation rate of the RMB against the U.S. dollar is possibly more rapid than previously thought.
PricewaterhouseCoopers also predicts in the report, “The World in 2050: Beyond 4 Golden Brick Countries,” that India’s economic scale may increase to ninety percent of the United States’ economy by 2050. There is also a great opportunity for Brazil to surpass Japan to become the 4th largest economic entity in the world. Russia, Mexico and Indonesia all have huge potential; and may surpass Germany or Britain by the middle of this century.
China continues to lift restrictions on citizens' overseas investment
March 06, 2008
China will stick to the policy of facilitating citizens' overseas investment, said an official in Beijing on Thursday.
"China will continue to lift restrictions on overseas investment of its citizens through various channels," said Zhou Xiaochuan, head of the People's Bank of China (PBOC).
The central bank governor made the remarks at a press conference held on the sideline of the annual meeting of China's top legislature, the National People's Congress (NPC).
With a rather high bank saving rate in China's gross domestic product (GDP), Zhou said it is reasonable for a considerable amount of money to be invested overseas by domestic citizens or companies of public or private ownership.
"Otherwise, the domestic investment would be overheating and production capability excessive. The overseas investment by Chinese citizens will also reduce government's overseas investment pressure," Zhou said.
He believed that aside from Hong Kong, other international markets like Japan, London and Singapore also have large potentials for Chinese mainland investors.
Corporate investment shrinks at fastest rate in 5 years, sparking recession fears
March 5, 2008
TOKYO (AP) -- Japan's business investment shrank at its fastest pace in more than five years during the fourth quarter, the government said Wednesday, fueling worries that world's second-biggest economy may be entering a recession.
Capital spending, including investment in plant, equipment and software, declined 7.7 percent in the October-December period from a year earlier, the Ministry of Finance said. That was its biggest fall since the third quarter of 2002, when it dropped 12.2 percent.
The ministry's quarterly economic survey also showed Japanese companies' profit fell for the second straight quarter, declining 4.5 percent from a year earlier, the sharpest drop since April-June 2002.
Higher crude oil and other raw material prices pushed up costs for companies, which weighed on their profits, the ministry said.
The figures contradict the government's view that capital spending and industrial production remain healthy.
"Frankly speaking, these results are fairly bad," said Lehman Brothers economist Hiroshi Shiraishi. "The Japanese economy is on an unstable footing and its outlook is increasingly gloomy."
Shiraishi said the government's reading for the gross domestic product growth in October-December will be cut to somewhere between 1.6 percent and 2.3 percent _ down from the preliminary estimate of 3.7 percent.
Analysts said high material costs are hurting profits and companies may need to cut jobs and wages. That in turn is likely to hurt consumer spending.
A slowdown in the U.S. economy is also fanning concerns about weaker demand for exports, a vital part of Japan's economy.
"The risk of recession is higher than thought," said BNP Paribas economist Yoshimasa Maruyama.
Buffett Passes Gates as Richest Person, Forbes Says
By Chris Dolmetsch
March 6 (Bloomberg) -- Berkshire Hathaway Inc. Chairman Warren Buffett beat out Bill Gates for the top spot on Forbes magazine's annual list of billionaires worldwide, ending a 13- year reign for Microsoft Corp.'s co-founder.
Buffett's wealth increased $10 billion to about $62 billion in the 12 months through Feb. 11, mostly from a gain in his company's shares, Forbes said in a statement released yesterday.
``He is the iconoclastic investor of his generation,'' said Ken Murray, who runs Blue Planet Investment Management in Edinburgh, which oversees about $250 million in financial stocks. He doesn't hold Berkshire. ``The fantastic amount of wealth he has accumulated puts him up there with Carnegie and Morgan.''
The fortune of Gates, 52, rose $2 billion to $58 billion. The Microsoft chairman fell to third on the list behind Mexican telecommunications mogul Carlos Slim, 68, who has an estimated net worth of $60 billion.
Forbes's list shows wealth expanding in emerging markets around the globe, with Russia overtaking Germany as the second- richest country in terms of billionaires, and 70 percent of newcomers from Russia, India, China and the U.S. In 2006, half of the top 20 billionaires came from the U.S. This year there were only four Americans.
Buffett, 77, is the biggest holder of Berkshire Hathaway's stock with about 32 percent of the Class A shares as of July and 18 percent of the Class B shares as of Dec. 31, according to Bloomberg data.
4,700 Percent
The company's Class A shares rose 28 percent in the 12 months ended Feb. 11. They now sell for $139,000 each, the most expensive on the New York Stock Exchange. The S&P 500 declined 6.9 percent in the period.
Berkshire shares rose 4,700 percent in the 20 years through the end of 2007, six times more than the Standard & Poor's 500 Index, dividends included.
``Warren Buffett is a great example of an extremely smart investor who has stayed loyal to his valuation discipline,'' said Simon Carter, who manages $3 billion at Aegon Asset Management in Edinburgh. ``By taking advantage of the markets' preoccupation with short-term issues during downturns, he has systematically reinvested his cash at very attractive rates of return over his entire career.'' Aegon doesn't disclose its investment holdings.
Greed and Fear
A year ago, in his annual letter to investors, Buffett said his method was to ``be fearful when others are greedy, and be greedy when others are fearful.''
Berkshire Hathaway has a market value of $215 billion, ranking it 10th among the 500 largest companies by that measure, according to Bloomberg data.
Buffett built Omaha, Nebraska-based Berkshire Hathaway during the past four decades by investing premiums from insurers such as Geico Corp., National Indemnity Co. and General Reinsurance Corp. Buffett filed his first tax return at age 13, claiming a $35 deduction for the bicycle he used to deliver newspapers, Forbes said.
Gates in November donated $695 million worth of his Microsoft stake to the Bill & Melinda Gates Foundation. Shares of Microsoft, the world's largest software maker, of which Gates owned 9.2 percent as of November, declined 2.7 percent during the period covered by the list.
Microsoft has a market value of $262 billion, ranking it seventh among the 500 largest companies.
Slim, Mittal, the Ambanis
Slim, the son of Lebanese immigrants to Mexico, amassed his fortune building Latin America's largest telecommunication carriers, according to Forbes.
Indian steel entrepreneur Lakshmi Mittal was fourth, and one of four Indians in the top 10, the magazine said. Estranged brothers Mukesh and Anil Ambani, whose father founded the Reliance Group of companies, were fifth and sixth, and Kushal Pal Singh, who heads property developer DLF Ltd., moved up 54 spots to eighth with $30 billion.
Ikea founder Ingvar Kamprad was seventh with $31 billion, making him the list's top European, while Russia's richest man, Oleg Deripaska, was ninth with $28 billion. Retired German supermarket mogul Karl Albrecht was 10th with $27 billion.
There are 1,125 billionaires on the list from 54 countries and one principality, or 179 more members than a year ago, with a total net worth of $4.4 trillion, the magazine said. The average worth of a list member is $3.9 billion, or about $250 million more than last year. The top 20 members are worth at least $20.8 billion each, an increase of $3.3 billion.
Yang Huiyan, Zuckerberg
The list also demonstrated the growing wealth of younger billionaires, with 50 members younger than 40, 68 percent of whom were self-made.
The average age dropped to 61, helped by Russia, where the average of billionaires is 46, and China, where the average is 48, the magazine said. China's richest person is 26-year-old Yang Huiyan. She is the owner of property company Country Garden Holdings Co., listed at 125 with $7.4 billion.
The youngest member on the list was Facebook founder Mark Zuckerberg, 23, at 785 with $1.5 billion, the youngest self-made billionaire ever to make a Forbes list.
The world's richest woman, France's Liliane Bettencourt, the daughter of the founder of the L'Oreal SA cosmetics company, was 17th, with $22 billion. The average net worth of women on the list was $3.7 billion.
Published: March 5 2008 21:40 | Last updated: March 5 2008 21:40
The credit crisis has entered a new phase on both sides of the Atlantic, with banks going on the defensive and sharply curtailing their support of trading in the capital markets.
Even traditionally quiet areas of the credit universe, such as the municipal bond market, where 70 per cent of regular auctions are currently failing, have now become casualties of an ever-expanding credit squeeze that has hit both high and low quality bonds.
The chaos – first sparked by sharply higher defaults on subprime mortgages – is now being driven by banks who no longer have the ability or desire to take risk, as they try to repair shattered balance sheets.
“As our nation’s largest banks and brokerage firms have written down more than $180bn in capital, liquidity has become an expensive luxury,” says Jack Ablin, chief investment officer at Harris Private Bank.
“Not all of the paper peddled on Wall Street is worthless, although the market is trading as if it were,” he says.
This means banks are reluctant to buy bonds that are left unsold at debt auctions. It also means that banks are scaling back on how much leverage they will provide for speculative investors such as hedge funds, who in past crises have bought distressed assets and helped ease the pressure.
In other words, bank balance sheet constraints have not only fuelled the problems in credit markets, they are also delaying the arrival of a solution.
“You need to have a buyer who sees value and has the power to put money to work,” says George Goncalves, strategist at Morgan Stanley. “There are indications that there is a lack of confidence in the system and not enough liquidity is being extended to investors.”
At the heart of the problem is the banking system’s use of securitisation and derivatives to offload lending risk, a trend known as dis-intermediation, which has hit a brick wall. Investors have backed away from these markets as they lost confidence in the quality of collateral originated and sold by the banks, a process that started with mortgages last year but has gradually percolated through other asset classes.
As investors have shunned complex debt products, banks have had to take billions of dollars of risk back on to their balance sheets, and are back in the business of direct lending. Banks are still holding $150bn of unsold high-yield loans needed to fund leveraged buy-outs struck in the first half of 2007, for example.
This “re-intermediation” of balance sheets comes at a time when the economy is slowing and both corporate and consumer levels of default are rising from historically low levels. This leaves banks facing further balance sheet constraints just as they need to purge risk in preparation for a downturn.
Sharply wider interest rate swaps in recent days are a sign that banks are under growing stress. A swap rate that measures the expected relationship between the Fed funds rate and the three-month dollar Libor rate has returned to levels not seen since the start of the year. This comes in spite of liquidity infusions by the Federal Reserve.
Meanwhile, the handful of investors who in recent months stepped in and bought faltering assets now face mounting losses, as markets have deteriorated further.
In the US and European credit derivative markets, for example, the cost of buying protection against corporate default has surged beyond current estimates of expected corporate bankruptcies. This type of move suggests that investors are buying this kind of protection as a safe haven trade, a trend that is exacerbated by a lack of liquidity from risk averse dealing desks.
The CDX investment grade is currently trading around 168 basis points, up from 98bp at the start of the year. Tim Backshall, analyst at Credit Derivatives Research, said that 140bp is the historical default-based level that would be fair given a recessionary slowdown and rising default rates.
In Europe, the iTraxx Crossover index of mainly high-yield rated credits is trading at 584bp for five years’ worth of protection, up from 365bp at the beginning of the year.
Bank balance sheet problems have also spilled over into the municipal bond market, where problems at the so-called “monoline” bond insurers have contributed to market volatility. This prompted banks to stop providing support for short-term debt auctions. Local government borrowers are now paying much higher interest rates at a time when the economy is faltering and taxation revenue is slowing.
Meanwhile, the US mortgage market remains in disarray. Mortgage rates remain elevated, diluting the Fed’s efforts to ease the pain for struggling homeowners.
Balance sheet constraints mean this situation is likely to be prolonged, as buying mortgages in a falling housing market is not a risk that many banks may be willing to take. “As bank balance sheets have swollen, banks are unlikely to buy mortgage backed securities the near future,” said analysts at Barclays Capital.
Traders say other traditional buyers of mortgages, particularly foreign investors, remain on the sidelines. Meanwhile, government-sponsored mortgage agencies Fannie Mae and Freddie Mac have limited ability to step in as the buyers of last resort. Commercial real estate has also come under renewed pressure in recent days, with selling of a derivative index that tracks this market.
”There are concerns that there will be further bad news from the mortgage markets,” said Jon Schotz, chief investment officer at Saybrook Capital, warning that April will see a wave of adjustable rate mortgage resets. “This could further reduce demand from investors like hedge funds and prop desks.”
All this adds up to a situation where credit markets are in deep crisis and the banks are in no position to provide liquidity. The question is whether equities can ignore the warning being sounded.
“With the monoline rescue still unresolved, and asset-backed securities liquidation trades in evidence, investors have been scrambling for cash again, and some of that scramble is likely being met by equity sales,” says Kevin Gardiner, head of global equity strategy at HSBC. “Financials are most at risk, but when portfolios are being shut down or scaled back in a hurry, few sectors and stocks are immune.”
Bank of China Ltd, the Chinese lender with the largest portfolio of subprime-related investments, has sold some of those securities, Chairman Xiao Gang said.
The Beijing-based bank disposed of all its collateralized debt obligations, Xiao said yesterday in Beijing. The company reported owning $7.95 billion of subprime securities on Sept 30, with $496 million in the form of CDOs. Xiao declined to disclose how much subprime-related debt the bank still owns.
"It will be in everybody's interest to find out what exactly they are holding," said Dominic Chan, an analyst at CLSA Asia-Pacific Markets, in an interview.
Bank of China's stock has fallen 36 percent since Oct 30, when its profit trailed that of rivals because of losses on its subprime-related investments. Financial institutions around the world face $400 billion of write-offs and credit losses related to the subprime mortgage slump, according to Group of Seven estimates.
The bank, the nation's third biggest, may have to write down the value of overseas securities by 35 billion yuan, analysts at BNP Paribas SA have estimated. Bank of China said last month its 2007 profit would continue to see "record growth".
Chan has maintained a "sell" rating on Bank of China since late August. At the time, the company said it held almost $9.7 billion of subprime-backed securities.
"I don't expect solid guidance from Chinese management" on the details of the banks' subprime-related investments, Chan said, adding that investors should prepare for more provisions from Bank of China should the US economy deteriorate in 2008 and 2009.
Conflicting forces affecting inflation and growth will result in volatility and downside risks for Chinese stocks.
Inflation in China may go above 8% in the coming months before it retreats. Chinese inflation expectations are also rising and corporates are starting to pass on some of the cost increases to consumers. This argues for policy tightening to defend price stability. At the same time the risk to economic growth is rising, due to damages from the recent snow storms and weakening external demand. This calls for policy easing.
These conflicting forces will create growth and policy uncertainties, and lead to confusion, volatility and downside risk for Chinese asset prices in the short-term. Investors should rebalance their portfolios towards sectors that are less vulnerable to the risks of worsening Chinese inflation, Beijing’s policy interventions and a sharp US economic slowdown.
Near-term inflation risk
The snow storms have aggravated the short-term inflationary pressures by destroying agricultural products and livestock. Food and meat prices will likely rise further in the coming months. While we are forecasting headline CPI to average over 7% year-on-year in 1Q08, recent food price trends (Chart 1) may push the headline CPI to over 8% some time in the first quarter.
Inflation expectations are also rising, as seen in a recent survey by the People's Bank of China (PBoC) in which 65% of the respondents were expecting rising inflation this year. This compares with less than 50% a few months ago. Rising inflation expectations could risk a self-perpetuating process to push up core inflation. International Monetary Fund research shows that in some developing economies, inflation expectations explain 60% of future inflation.
Corporate goods prices have also been rising and producers have been able to pass on some of the rising costs to the consumers, especially on agricultural products (Chart 2). Although pricing power outside the food and energy areas remains constrained, as seen in the subdued core CPI inflation rate, rising inflation expectations are creeping into core CPI, which rose from about 0.5% in 2007 to 1.5% this January. This means an increasing challenge for the authorities to keep inflation from spreading further and, hence, the need for keeping the tight policy bias.
Indeed, the PBoC stressed in a recent (February 22) policy statement that it would keep its tight policy bias for the rest of the year, and would allow more renminbi flexibility to help curb China’s inflation. This implies it may front-load the renminbi appreciation in the coming months to augment the impact of its macro tightening policy.
The policy risk
On the other hand, the damages to agriculture and infrastructure (including power facilities and communication links) by the snow storms earlier this year argue for policy relaxation to rebuild the economy. Powerful political interests are urging the government to ease credit policy and investment approval procedures, and to increase budgetary spending for reconstruction.
The demand for policy easing to rebuild the economy will clash with the need for keeping the tight policy bias to curb inflation expectations. This will create highly uncertain policy reactions: Upon seeing significantly higher inflation together with strong money and credit growth in the next couple of months, the authorities may tighten up policy further, risking policy overkill in the near-term.
However, if political consideration prompts substantial policy easing around the timing of the National People’s Congress, a quick policy reversal would be likely because of the temporary nature of the snowstorm damages and rising inflation expectations. All this will aggravate policy volatility and hurt Beijing’s economic management credibility.
Market implications
There are increasing growth and policy uncertainties stemming from the conflicting forces between worsening domestic inflation and a deteriorating global economic backdrop. With the PBoC’s higher tolerance for renminbi appreciation, we may see 8%-10% currency appreciation in the short-term before the appreciation pace subsides in the second half when the drag from slowing global demand might prompt a policy shift by the PBoC.
The combination of volatile policy responses and an uncertain growth outlook will haunt Chinese stocks in the next few months, affecting both the A-shares, H-shares and other Hong Kong shares with high volatility and a downward bias.
Under these circumstances, investment strategy should focus on overweighing sectors that are the least vulnerable to risks of worsening inflation and policy interventions, as well as a sharp US economic slowdown. These sectors may include gold, telecom and selected oil and energy stocks. Banks, properties and commodities are more geared towards macro improvement and thus have an unfavourable outlook in the short-term.
Chi Lo is a director of investment research at Ping An of China Asset Management (Hong Kong)
Knight Vinke Asset Management, an activist investor based in the US, has released its view of HSBC's 2007 financial results that were issued earlier this week. Knight Vinke has been a critic of HSBC's management since September 2007, condemning the bank for its “strategy of seeking earnings diversification above all else”.
Knight Vinke continues to argue that businesses like HSBC's operations in France lack critical mass and scale, while its US subprime business has no strategic fit with the rest of the bank. The asset manager also contends that a preoccupation with some of these markets has caused HSBC to neglect its comparative advantage in Asia and emerging markets.
As reported by FinanceAsia earlier this week, HSBC appointed four new board members - two internal promotions and two independent nominees. Knight Vinke expressed approval of the move and said that the board-level changes had alleviated some of its concerns with respect to corporate governance and insufficient independence of the board.
Knight Vinke's analysis of HSBC’s recent 2007 results concludes that the 18% increase in earnings per share to $1.65 can largely be attributed to: “one-offs, acquisitions and currency charges rather than underlying improvements in operating performance”. It recast HSBC’s net profits to corroborate this assessment and estimates that continuing businesses, after adjustments, are actually 14% down year-on-year.
On Friday last week (February 29), before HSBC released its results, Knight Vinke sent a briefing note to shareholders that termed HSBC’s decision to enter the subprime business in the US “a catastrophic strategic error”. The firm believes HSBC Finance Corporation, the bank's US subsidiary, is unable to support the $150 billion of debt currently on its balance sheet and suggests HSBC “ring fence HSBC Finance Corporation by selling the business, spinning it off or, more radically, walking away from it”. Knight Vinke has been proposing options for the US subsidiary since May 2007.
In its statement on Friday, Knight Vinke also said that the strong financial performance HSBC was expected to announce for its core business in Hong Kong and emerging markets was in line with the results declared by the other emerging markets bank, Standard Chartered. It termed HSBC “the world’s most profitable emerging markets franchise”.
But on Friday, and again yesterday, Knight Vinke said it believed HSBC would be trading £2.00-£3.00 ($3.97-$5.96) higher had the bank not acquired HFC. HSBC was trading on Wednesday at £7.84, up 0.15%. Knight Vinke believes “the true value of HSBC is not reflected in its share price because of investors’ concerns about the risk of subprime contagion”.
Citi remains bullish on HSBC. In a research report issued on March 4 the US bank reiterated a buy recommendation on HSBC, with a target price of £9.50, down only 50 pence from its earlier target, saying that "HSBC's valuation remains compelling with less risks and greater earnings visibility than most of its peers". Citi has factored into its assessment the likelihood of higher losses from the HSBC Finance Corporation business in 2008.
Meanwhile, HSBC got a fillip yesterday when its proposed acquisition of Korea Exchange Bank moved a small step forward. South Korea’s Fair Trade Commission has approved HSBC’s $6.3 billion purchase of a controlling interest in the bank from US private equity fund Lone Star. But the deal is still subject to approval by the Financial Services Commission (FSC). FSC approval may be contingent upon resolution of various issues pending with respect to Lone Star’s original acquisition of a stake in KEB.
LONDON (MarketWatch) -- UBS may have sold off a portfolio of Alt-A securities worth around 25 billion Swiss francs ($24.1 billion), according to an analyst at J.P. Morgan.
UBS was "highly likely" to have sold the securities in a fire sale, said J.P. Morgan analyst Kian Abouhossein, noting press speculation on the subject. "We see the speculated level of 70 cents on the dollar as realistic in a fire sale," he said in a Thursday note to clients, adding the current market price is probably 84 cents on the dollar.
His note came amid published reports that UBS sold its entire portfolio to Pimco, the bond-house giant owned by German insurer Allianz.
A separate note from Huw Van Steenis of Morgan Stanley estimated that UBS may record mark-to-market losses of nearly 5 billion francs this quarter, if the reports are true.
Neither firm has commented on the reports.
Alt-A mortgages are home loans sold to borrowers with better credit than those who take out subprime mortgages, and they often require less information.
Delinquencies and foreclosures on Alt-A mortgages haven't climbed as high as subprime loans, but they have deteriorated faster than many expected.
Securities backed by Alt-A loans also built in less protection for investors than similar structures holding subprime mortgages. That's made the deterioration in Alt-A securities almost as painful as the subprime meltdown.
The massive Alt-A holdings at UBS, disclosed on Valentine's Day, have hit other firms, notably ensnaring Thornburg Mortgage Asset Corp. and hedge-fund manager Peloton Partners.
As for UBS, its shares dropped 2.6% in Zurich trading, more than offsetting gains made on Wednesday, when the fire-sale speculation first emerged. The Swiss-traded shares hit a 52-week low on Tuesday.
J.P. Morgan's Abouhossein revised higher his estimate for 2008 credit-crisis write-downs for UBS, increasing it to 18.5 billion francs from 15 billion francs.
But he also kept an overweight rating on the Swiss bank, citing "undiscounted value" in its wealth-management division.
S&P downgrades Washington Mutual, places on negative watch
By Wallace Witkowski March 6, 2008
SAN FRANCISCO (MarketWatch) -- Standard & Poor's Ratings Services said Thursday it downgraded its long-term counterparty credit rating on Washington Mutual Inc. to BBB from BBB+, and its long-term counterparty credit rating on Washington Mutual Bank to BBB+ from A-. S&P placed all of Washington Mutual's ratings on a negative credit watch. "These rating actions reflect our expectations for a more severe residential mortgage credit cycle than we had anticipated at the start of 2008," said Victoria Wagner, an S&P credit analyst, in a statement. "We now believe that the severity of losses on all residential mortgages will be higher that we had thought and that the weak housing market will now be a longer cycle." Shares of Washington Mutual fell 6.5% to $11.96 in morning trading.
FRANKFURT — On Jan. 21, the Federal Reserve chairman, Ben S. Bernanke, abruptly canceled plans to travel to New York so he could stay in Washington to engineer the largest one-day reduction of interest rates in recent times.
His counterpart at the European Central Bank, Jean-Claude Trichet, did not change his travel plans — or his policy.
Taking care to give the European bankers a heads-up before a public announcement, Mr. Bernanke sharply cut the Fed’s benchmark lending rate by 0.75 percentage point early the next morning, partly in response to plunging global share prices.
The next day, with Europe weathering market turmoil as well, Mr. Trichet coolly told the European Parliament in Brussels that the bank, based in Frankfurt, would keep rates steady despite the Fed’s move.
“There is no contradiction,” he said later that week, “between price stability and financial stability.”
The contrasting ways Mr. Bernanke and Mr. Trichet responded to the crisis in the markets reflect something more than the differing economic and financial conditions in the United States and Europe.
At a more fundamental level, they reflect surprisingly different views of how each economy responds to the underlying forces affecting growth and inflation.
The Fed’s mandate, balanced between fighting inflation and encouraging full employment, leads to a simple investor calculus: if growth sags, the Fed is virtually certain to cut interest rates.
Usefully for the Fed, which seems likely to cut its benchmark short-term rate below the current 3 percent, inflation in the United States tends to fall as demand slackens during a slowdown. And even though inflation has lately been rising to worrisome levels, the Fed appears to be counting on that rule to apply again.
The European bank, by contrast, is skeptical of the notion that inflation automatically falls when growth cools, and it has a mandate, inherited from the German central bank, to keep prices stable above all else. So the view from the European bank’s sleek silvery headquarters here is very different from the Fed’s perspective in Washington, whatever market participants may think about the inevitability of lower European interest rates.
Mr. Trichet is likely to drive home this point after the central bankers emerge from their monthly meeting here Thursday, when they are expected to leave rates unchanged at 4 percent.
Many investors remain convinced that the European bank has little choice but to follow the Fed’s lead, if only to ensure that recessionary conditions do not leach into Europe. As the Fed has cut rates, investors have bet that the bank here will follow and lower its benchmark rate, certainly by June and possibly earlier.
The rise of the euro, which breached the $1.50 threshold last week and settled in New York Wednesday at $1.5262, also increases the pressure on the bankers from European politicians to at least hint at lower borrowing costs. Falling interest rates in the United States have exerted a powerful force on currency values by damping the appeal of dollar-denominated assets.
“In the present circumstances, we are concerned about excessive exchange-rate moves,” Jean-Claude Juncker, Luxembourg’s prime minister, who is presiding over the group of 15 euro-zone finance ministers, said on Monday.
But what sets off alarm among some politicians in Europe is far less likely to raise hackles at the central bank. That is because the euro’s rise also helps curb inflation by lowering the cost of imported goods. And if the euro’s appreciation is smooth, it supports the bankers’ decision so far to stand pat.
At its core, the market expectations of a rate cut despite the European bank’s warnings that inflation remains its primary concern stems from the bank’s failure — nearly 10 years after it was created as the steward of the euro, now the common currency of 15 nations — to emerge from the Fed’s shadow.
“Markets tend to put a very high correlation on Fed interest rates and European interest rates,” said Klaus Baader, chief Europe economist at Merrill Lynch and one of a minority of European bank watchers who maintain that it will keep rates steady all year. “That was the case when European monetary policy was driven by the Bundesbank, and it is true now.”
While the central bank could end up lowering rates if conditions change significantly, it is struggling over how to change the perception that a European rate cut is inevitable.
Consider what happened when its council gathered behind closed doors in Frankfurt on Jan. 10 after a usual working dinner the night before. At that point, its members — the 6 top bank officials and 15 central bankers of member countries — found themselves embroiled in a lively and previously undisclosed debate linked to market expectations.
They had already decided to leave rates steady. As a result of rising energy and food prices, inflation was running at an annual pace around 3 percent, above the bank’s goal of keeping European inflation under 2 percent.
The council members were wrangling over a proposed statement that included a threat to act “pre-emptively” if labor unions tried to embed higher energy and food prices into new contracts, risking a new wage-price spiral.
Mr. Trichet has long held that central banks do their best work when their threats to raise interest rates deter inflationary actions in the first place, avoiding the need for excessive swings in the benchmark rate. In a speech at the annual meeting of central bankers in Jackson Hole, Wyo., in August 2005, Mr. Trichet called this concept “credible alertness.”
But there was another reason for including it. The central bankers had agreed that they had to offer a slightly more downbeat view of the euro area’s growth prospects in the opening paragraph of their monthly statement.
The financial market turmoil showed no sign of ending, and with each day, the risks rose that banks would constrict the flow of credit to the real economy, endangering business investment and consumer spending.
European Central Bank officials knew that a message about slower growth would inevitably fuel speculation that it was opening the door to lower rates. So against the wishes of some council members, the threat was added to help counterbalance the message on growth.
The episode has been widely viewed as a communications failure, and the word “pre-emptively” disappeared from the next month’s statement.
“In my view, this was a pretty clumsy move,” said Charles Wyplosz, a professor of international economics at the Graduate Institute of International Studies in Geneva. “They had to drop it unceremoniously when it didn’t work out.”
But despite the statement’s awkwardness, it reflected the central bank’s poorly understood view that strong employment protections coupled with muscular labor unions and generous social benefits act as a brake on falling demand. And if higher inflation is being imported through commodity prices, any automatic link between lower growth and lower inflation cannot be taken for granted.
Moreover, the ups and downs of the European economy — the distance it travels between strong growth and severe downturns — have been less than in the United States in recent decades. So even if recession seems imminent to some in the United States, central bankers here say, Europe need not expect a similar outcome.
“The U.S. economy is not the European economy,” Mr. Trichet said last month, “and both sides of the Atlantic are not in the same situation.”
After the end of the Internet boom and the terrorist attacks in September 2001, the European Central Bank never went as far as the Fed, which cut rates to 1 percent. Nor did it tighten rates as much as the Fed did when times got better.
“The E.C.B. never followed the Fed on the upside,” said Elga Bartsch, chief economist for the region at Morgan Stanley. “They never lowered as far and they never got into restrictive territory the way the Fed did. So all these notions that the E.C.B. has to follow the Fed are misguided.”
That did not stop investors from lurching to the conclusion early in February that a European rate cut might be imminent.
By the time of the bank’s Feb. 7 meeting, the outlook in Europe had dimmed, with real-time indicators showing a slight softening in the economy. That made any threat of a rate increase untenable, the council members concluded.
Nonetheless, at his monthly news conference, Mr. Trichet underscored the bank’s determination to focus on inflation.
“We have only one needle in our compass,” Mr. Trichet said, “which is that we have to deliver price stability.”
Despite that message, the markets bid up the odds for a rate cut, with some traders speculating that it could come as early as March. In response, Mr. Trichet, by then in Tokyo for a meeting of Group of 7 finance ministers and central bankers, stressed that not one central banker at the last meeting in Frankfurt had proposed lower rates.
“We had no call for an increase of rates, but we had no call for a decrease in rates,” Mr. Trichet said. “So I would think that it is important that the two messages be fully understood.”
WASHINGTON - US home foreclosures and the rate of homes entering the foreclosure process rose to record highs in the fourth quarter, led by failing sub-prime loans, the Mortgage Bankers Association said on Thursday.
The rate of failing loans swelled across most mortgage types but was led by a growing wave of sub-prime borrowers unable to make payments, the trade group said in its delinquency and foreclosure survey.
A record 0.83 per cent of US loans were entering the foreclosure process in the last three months of 2007 compared with 0.54 per cent in the same time a year earlier.
The US mortgage delinquency rate of 5.82 per cent was the highest since 1985 and up from the 4.95 per cent seen in the fourth quarter of 2006.
For sub-prime mortgage loans, the delinquency rate rose a full percentage point to 17.31 per cent from the previous quarter. The easy terms of sub-prime loans drew many borrowers with shaky credit, and those failing mortgages have stoked anxiety in credit markets worldwide.
Wall Street and policy-makers have worried that foreclosures will grow when many sub-prime loans face a built-in interest rate reset in coming months. But MBA's chief economist, Doug Duncan, blamed the current spree of failing loans on poor credit quality of the borrower rather than a rate spike.
'The current delinquencies are due to credit quality rather than resets,' he said. -- REUTERS
GLOOM. Doom. Calamity. Home prices are tumbling. We're bombarded by sombre reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last. It's elementary economics. Say, houses are apples. We have 1,000 apples, priced at US$1 each. They don't sell. We can either keep the price at US$1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.
Even many economists - who should know better - describe the present situation as an oversupply of unsold homes. True, there is about 10 months' supply of existing homes as opposed to four months a few years ago. But the real problem is insufficient demand. There aren't more homes than there are Americans who want homes; that would be a true surplus. There's so much supply because many prospective customers can't buy at today's prices. By definition, the 'housing bubble' meant that home prices got too high. Easy credit, lax lending standards and panic buying raised them to foolish levels. Weak borrowers got loans. People with good credit borrowed too much. Speculators joined the circus.
Look at some numbers from the (US) National Association of Realtors. From 2000 to 2006, median family income rose almost 14 per cent to US$57,612. Over the same period, the median-priced existing home increased about 50 per cent to US$221,900. By other indicators, the increase was even greater. But home prices could not rise faster than incomes forever. Inevitably, the bust arrived. Credit standards have now been tightened, and the (false) hope of perpetually rising home prices - along with the possibility of always selling at a profit - has evaporated. For many potential buyers, prices have to drop for housing to become affordable.
How much? No one really knows. There is no national housing market. Prices and family incomes vary by state, city and neighbourhood. Prices rose faster in some areas (Los Angeles, Miami, Phoenix) than in others (Dallas, Detroit, Minneapolis). Some economists now expect an average national decline of about 20 per cent. The Federal Reserve estimates that owner-occupied real estate is worth almost US$21 trillion. A 20 per cent reduction implies losses of about US$4 trillion.
The largest part would be paper losses for homeowners: values that rose spectacularly will now fall less spectacularly - back to roughly 2004 levels; that's still 30 per cent or so higher than in 2000. But hundreds of billions of dollars of other losses are already being suffered by builders (from the lower value of land and home inventories), mortgage lenders (from defaulting loans), speculators and homeowners (from lost homes). Mark Zandi of Moody's Economy.com estimates that mortgage defaults this year will exceed 2 million, up from 893,000 in 2006.
To be sure, all this weakens the economy. No one relishes evicting hundreds of thousands of families from their homes. Eroding real estate values make many consumers less willing to borrow and spend. Some economists fear a vicious downward spiral of home prices. More foreclosures depress prices, increasing foreclosures as people abandon houses where the mortgage exceeds the value. Losses to banks and other lenders rise, and they curb lending further. Particularly vulnerable would be Fannie Mae and Freddie Mac, the two government-sponsored housing lenders.
Up to a point, there's a case for providing relief to some mortgage borrowers. In many cases, everyone would gain if lenders and borrowers renegotiated loan terms to reduce monthly payments. Losses to both would be less than if their homes went into foreclosure and were sold. The Treasury has organised voluntary efforts. Some measures being considered by Congress (for example, overhauling the Federal Housing Administration) might help. But other proposals - particularly empowering bankruptcy judges to reduce mortgages unilaterally - would perversely hurt the housing market by raising the cost of mortgage credit. Lenders would increase interest rates or downpayments to compensate for the risk that a court might modify or nullify their loans.
The understandable impulse to minimise foreclosures should not serve as a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today's homeowners makes little sense if it penalises tomorrow's homeowners. An unstoppable free fall of prices seems unlikely.
Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices. -- The Washington Post Writers Group
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China delays HK stock-buying by mainlanders
(SHANGHAI) China’s government, anxious to protect local investors from losing their life savings in the stock market, has decided to delay a plan that would allow citizens to buy Hong Kong-traded equities, the bank regulator said.
‘We’ve had to change the plan for introducing the programme because market conditions have changed,’ China Banking Regulatory Commission chairman Liu Mingkang said yesterday during a meeting of the Chinese legislature in Beijing. ‘We’re considering the timing for introducing the plan.’
China in August 2007 announced a so-called ‘through train’ plan for Chinese individuals to buy Hong Kong stocks. That plan was delayed after regulators voiced concern that inexperienced Chinese investors may suffer losses in Hong Kong’s stock market, which doesn’t use circuit breakers to halt declines.
Hong Kong’s key Hang Seng Index has fallen almost 20 per cent this year, the 10th worst-performing stock index among 90 primary indices tracked by Bloomberg. The Hang Seng China Enterprises Index, which tracks 43 Chinese companies in Hong Kong, slumped 23 per cent this year\. \-- Bloomberg
Carlyle Capital Gets Default Notice on Margin Calls
2008-03-06 00:56 (New York)
March 6 (Bloomberg) -- Carlyle Capital Corp., the publicly traded credit fund backed by private-equity firm Carlyle Group, said it received a notice of default after failing to meet a margin call yesterday.
The Guernsey, U.K.-based fund didn't meet four of seven margin calls totalling more than $37 million received yesterday, it said today in a statement. It expects to receive at least one more notice of default related to yesterday's margin calls, according to the statement.
Since filing its annual report a week ago, Carlyle Capital has received and met margin calls and additional collateral requirements of more than $60 million, it said.
“This disconnect has created instability and variability in our repo financing arrangements,” Chief Executive Officer John Stomber said in the statement. “Management is actively working with the company's repo counterparties to develop more stable financing terms.”
Carlyle Capital eliminated its dividend and waived an incentive fee Feb. 28 when it reported quarterly financial results, seeking to build liquidity as mortgage defaults in the U.S. rise.
The fund's portfolio was made up exclusively of AAA-rated mortgage-backed securities issued by Fannie Mae and Freddie Mac as of Feb. 27, it said last week.
影响英镑的基本面因素
英国央行
2008-1-21
从1997年开始，BoE获得了独立制订货币政策的职能。政府用通货膨胀目标来作为物价稳定的标准，一般用除去抵押贷款外的零售物价指数来衡量，年增控制在2.5%以下。因此，尽管独立于政府部门来制订货币政策，但是BoE仍然要符合财政部规定的通货膨胀标准。 货币政策委员会。此委员会主要负责制订利率水平。
利率
央行的主要利率是最低贷款利率(基本利率)。每月的第一周，央行都会用利率调整来向市场发出明确的货币政策信号。利率变化通常都会对英镑产生较大影响。BoE同时也会通过每天对从贴现银行(指定的交易货币市场工具的金融机构)购买政府债券交易利率的调整来制订货币政策。
金边债券。英国政府债券也叫金边债券。同样，10年期金边债券收益率与同期其它国家债券或美国国库券收益率的利差也会影响到英镑和其它国家货币的汇率。 3-month Eurosterling Deposits: 3个月欧洲英镑存款。存放在非英国银行的英镑存款称为欧洲英镑存款。其利率和其它国家同期欧洲存款利率之差也是影响汇率的因素之一。
财政部
其制订货币政策的职能从1997年以来逐渐减弱，然而财政部依然为BoE设定通货膨胀指标并决定BoE主要人员的任免。
英镑与欧洲经济和货币联盟的关系：由于首相布莱尔(Tony Blair)关于可能加入欧洲单一货币-欧元的言论，英镑经常收到打压。英国如果想加入欧元区，则英国的利率水平必须降低到欧元利率水平。如果公众投票同意加入欧元区，则英镑必须为了本国工业贸易的发展而兑欧元贬值。因此，任何关于英国有可能加入欧元区的言论都会打压英镑汇价。
经济数据
国的主要经济数据包括：初始失业人数，初始失业率，平均收入，扣除抵押贷款外的零售物价指数，零售销售，工业生产，GDP增长，采购经理指数，制造业和服务业调查，货币供应量(M4)，收入与房屋物价平衡。
3个月欧洲英镑存款期货(短期英镑)。期货合约价格反映了市场对3个月以后的欧洲英镑存款利率的预期。与其它国家同期期货合约价格的利差也可以引起英镑汇率的变化。
100指数
英国的主要股票指数。与美国和日本不同，英国的股票指数对货币的影响比较小。但是尽管如此，金融时报指数和美国道琼斯指数有很强的联动性。 交叉汇率的影响。交叉汇率也会对英镑汇率产生影响。
PricewaterhouseCoopers LLP: China will surpass US as largest economic entity in 2025
According to China News Agency, a report released on the 4th by the well-known international accounting firm PricewaterhouseCoopers, predicted that China will probably surpass the United States to become the largest economic entity in 2025. The economic scale of China will increase to 1.3 times that of the United States by 2050 or before.
Macro-economy director John Hawksworth of PricewaterhouseCoopers pointed out that China’s science and technology developed rapidly; caught up with the United States; and has greatly increased productivity and efficiency. Development is sufficient to support China’s sustained economic growth for the next ten to fifteen years. Compared with the United States, the China’s production forces have developed faster which means the actual appreciation rate of the RMB against the U.S. dollar is possibly more rapid than previously thought.
PricewaterhouseCoopers also predicts in the report, “The World in 2050: Beyond 4 Golden Brick Countries,” that India’s economic scale may increase to ninety percent of the United States’ economy by 2050. There is also a great opportunity for Brazil to surpass Japan to become the 4th largest economic entity in the world. Russia, Mexico and Indonesia all have huge potential; and may surpass Germany or Britain by the middle of this century.
China continues to lift restrictions on citizens' overseas investment
March 06, 2008
China will stick to the policy of facilitating citizens' overseas investment, said an official in Beijing on Thursday.
"China will continue to lift restrictions on overseas investment of its citizens through various channels," said Zhou Xiaochuan, head of the People's Bank of China (PBOC).
The central bank governor made the remarks at a press conference held on the sideline of the annual meeting of China's top legislature, the National People's Congress (NPC).
With a rather high bank saving rate in China's gross domestic product (GDP), Zhou said it is reasonable for a considerable amount of money to be invested overseas by domestic citizens or companies of public or private ownership.
"Otherwise, the domestic investment would be overheating and production capability excessive. The overseas investment by Chinese citizens will also reduce government's overseas investment pressure," Zhou said.
He believed that aside from Hong Kong, other international markets like Japan, London and Singapore also have large potentials for Chinese mainland investors.
Corporate investment shrinks at fastest rate in 5 years, sparking recession fears
March 5, 2008
TOKYO (AP) -- Japan's business investment shrank at its fastest pace in more than five years during the fourth quarter, the government said Wednesday, fueling worries that world's second-biggest economy may be entering a recession.
Capital spending, including investment in plant, equipment and software, declined 7.7 percent in the October-December period from a year earlier, the Ministry of Finance said. That was its biggest fall since the third quarter of 2002, when it dropped 12.2 percent.
The ministry's quarterly economic survey also showed Japanese companies' profit fell for the second straight quarter, declining 4.5 percent from a year earlier, the sharpest drop since April-June 2002.
Higher crude oil and other raw material prices pushed up costs for companies, which weighed on their profits, the ministry said.
The figures contradict the government's view that capital spending and industrial production remain healthy.
"Frankly speaking, these results are fairly bad," said Lehman Brothers economist Hiroshi Shiraishi. "The Japanese economy is on an unstable footing and its outlook is increasingly gloomy."
Shiraishi said the government's reading for the gross domestic product growth in October-December will be cut to somewhere between 1.6 percent and 2.3 percent _ down from the preliminary estimate of 3.7 percent.
Analysts said high material costs are hurting profits and companies may need to cut jobs and wages. That in turn is likely to hurt consumer spending.
A slowdown in the U.S. economy is also fanning concerns about weaker demand for exports, a vital part of Japan's economy.
"The risk of recession is higher than thought," said BNP Paribas economist Yoshimasa Maruyama.
Buffett Passes Gates as Richest Person, Forbes Says
By Chris Dolmetsch
March 6 (Bloomberg) -- Berkshire Hathaway Inc. Chairman Warren Buffett beat out Bill Gates for the top spot on Forbes magazine's annual list of billionaires worldwide, ending a 13- year reign for Microsoft Corp.'s co-founder.
Buffett's wealth increased $10 billion to about $62 billion in the 12 months through Feb. 11, mostly from a gain in his company's shares, Forbes said in a statement released yesterday.
``He is the iconoclastic investor of his generation,'' said Ken Murray, who runs Blue Planet Investment Management in Edinburgh, which oversees about $250 million in financial stocks. He doesn't hold Berkshire. ``The fantastic amount of wealth he has accumulated puts him up there with Carnegie and Morgan.''
The fortune of Gates, 52, rose $2 billion to $58 billion. The Microsoft chairman fell to third on the list behind Mexican telecommunications mogul Carlos Slim, 68, who has an estimated net worth of $60 billion.
Forbes's list shows wealth expanding in emerging markets around the globe, with Russia overtaking Germany as the second- richest country in terms of billionaires, and 70 percent of newcomers from Russia, India, China and the U.S. In 2006, half of the top 20 billionaires came from the U.S. This year there were only four Americans.
Buffett, 77, is the biggest holder of Berkshire Hathaway's stock with about 32 percent of the Class A shares as of July and 18 percent of the Class B shares as of Dec. 31, according to Bloomberg data.
4,700 Percent
The company's Class A shares rose 28 percent in the 12 months ended Feb. 11. They now sell for $139,000 each, the most expensive on the New York Stock Exchange. The S&P 500 declined 6.9 percent in the period.
Berkshire shares rose 4,700 percent in the 20 years through the end of 2007, six times more than the Standard & Poor's 500 Index, dividends included.
``Warren Buffett is a great example of an extremely smart investor who has stayed loyal to his valuation discipline,'' said Simon Carter, who manages $3 billion at Aegon Asset Management in Edinburgh. ``By taking advantage of the markets' preoccupation with short-term issues during downturns, he has systematically reinvested his cash at very attractive rates of return over his entire career.'' Aegon doesn't disclose its investment holdings.
Greed and Fear
A year ago, in his annual letter to investors, Buffett said his method was to ``be fearful when others are greedy, and be greedy when others are fearful.''
Berkshire Hathaway has a market value of $215 billion, ranking it 10th among the 500 largest companies by that measure, according to Bloomberg data.
Buffett built Omaha, Nebraska-based Berkshire Hathaway during the past four decades by investing premiums from insurers such as Geico Corp., National Indemnity Co. and General Reinsurance Corp. Buffett filed his first tax return at age 13, claiming a $35 deduction for the bicycle he used to deliver newspapers, Forbes said.
Gates in November donated $695 million worth of his Microsoft stake to the Bill & Melinda Gates Foundation. Shares of Microsoft, the world's largest software maker, of which Gates owned 9.2 percent as of November, declined 2.7 percent during the period covered by the list.
Microsoft has a market value of $262 billion, ranking it seventh among the 500 largest companies.
Slim, Mittal, the Ambanis
Slim, the son of Lebanese immigrants to Mexico, amassed his fortune building Latin America's largest telecommunication carriers, according to Forbes.
Indian steel entrepreneur Lakshmi Mittal was fourth, and one of four Indians in the top 10, the magazine said. Estranged brothers Mukesh and Anil Ambani, whose father founded the Reliance Group of companies, were fifth and sixth, and Kushal Pal Singh, who heads property developer DLF Ltd., moved up 54 spots to eighth with $30 billion.
Ikea founder Ingvar Kamprad was seventh with $31 billion, making him the list's top European, while Russia's richest man, Oleg Deripaska, was ninth with $28 billion. Retired German supermarket mogul Karl Albrecht was 10th with $27 billion.
There are 1,125 billionaires on the list from 54 countries and one principality, or 179 more members than a year ago, with a total net worth of $4.4 trillion, the magazine said. The average worth of a list member is $3.9 billion, or about $250 million more than last year. The top 20 members are worth at least $20.8 billion each, an increase of $3.3 billion.
Yang Huiyan, Zuckerberg
The list also demonstrated the growing wealth of younger billionaires, with 50 members younger than 40, 68 percent of whom were self-made.
The average age dropped to 61, helped by Russia, where the average of billionaires is 46, and China, where the average is 48, the magazine said. China's richest person is 26-year-old Yang Huiyan. She is the owner of property company Country Garden Holdings Co., listed at 125 with $7.4 billion.
The youngest member on the list was Facebook founder Mark Zuckerberg, 23, at 785 with $1.5 billion, the youngest self-made billionaire ever to make a Forbes list.
The world's richest woman, France's Liliane Bettencourt, the daughter of the founder of the L'Oreal SA cosmetics company, was 17th, with $22 billion. The average net worth of women on the list was $3.7 billion.
The World's Billionaires
Defensive banks pull their purse strings tighter
By Michael Mackenzie and Saskia Scholtes
Published: March 5 2008 21:40 | Last updated: March 5 2008 21:40
The credit crisis has entered a new phase on both sides of the Atlantic, with banks going on the defensive and sharply curtailing their support of trading in the capital markets.
Even traditionally quiet areas of the credit universe, such as the municipal bond market, where 70 per cent of regular auctions are currently failing, have now become casualties of an ever-expanding credit squeeze that has hit both high and low quality bonds.
The chaos – first sparked by sharply higher defaults on subprime mortgages – is now being driven by banks who no longer have the ability or desire to take risk, as they try to repair shattered balance sheets.
“As our nation’s largest banks and brokerage firms have written down more than $180bn in capital, liquidity has become an expensive luxury,” says Jack Ablin, chief investment officer at Harris Private Bank.
“Not all of the paper peddled on Wall Street is worthless, although the market is trading as if it were,” he says.
This means banks are reluctant to buy bonds that are left unsold at debt auctions. It also means that banks are scaling back on how much leverage they will provide for speculative investors such as hedge funds, who in past crises have bought distressed assets and helped ease the pressure.
In other words, bank balance sheet constraints have not only fuelled the problems in credit markets, they are also delaying the arrival of a solution.
“You need to have a buyer who sees value and has the power to put money to work,” says George Goncalves, strategist at Morgan Stanley. “There are indications that there is a lack of confidence in the system and not enough liquidity is being extended to investors.”
At the heart of the problem is the banking system’s use of securitisation and derivatives to offload lending risk, a trend known as dis-intermediation, which has hit a brick wall. Investors have backed away from these markets as they lost confidence in the quality of collateral originated and sold by the banks, a process that started with mortgages last year but has gradually percolated through other asset classes.
As investors have shunned complex debt products, banks have had to take billions of dollars of risk back on to their balance sheets, and are back in the business of direct lending. Banks are still holding $150bn of unsold high-yield loans needed to fund leveraged buy-outs struck in the first half of 2007, for example.
This “re-intermediation” of balance sheets comes at a time when the economy is slowing and both corporate and consumer levels of default are rising from historically low levels. This leaves banks facing further balance sheet constraints just as they need to purge risk in preparation for a downturn.
Sharply wider interest rate swaps in recent days are a sign that banks are under growing stress. A swap rate that measures the expected relationship between the Fed funds rate and the three-month dollar Libor rate has returned to levels not seen since the start of the year. This comes in spite of liquidity infusions by the Federal Reserve.
Meanwhile, the handful of investors who in recent months stepped in and bought faltering assets now face mounting losses, as markets have deteriorated further.
In the US and European credit derivative markets, for example, the cost of buying protection against corporate default has surged beyond current estimates of expected corporate bankruptcies. This type of move suggests that investors are buying this kind of protection as a safe haven trade, a trend that is exacerbated by a lack of liquidity from risk averse dealing desks.
The CDX investment grade is currently trading around 168 basis points, up from 98bp at the start of the year. Tim Backshall, analyst at Credit Derivatives Research, said that 140bp is the historical default-based level that would be fair given a recessionary slowdown and rising default rates.
In Europe, the iTraxx Crossover index of mainly high-yield rated credits is trading at 584bp for five years’ worth of protection, up from 365bp at the beginning of the year.
Bank balance sheet problems have also spilled over into the municipal bond market, where problems at the so-called “monoline” bond insurers have contributed to market volatility. This prompted banks to stop providing support for short-term debt auctions. Local government borrowers are now paying much higher interest rates at a time when the economy is faltering and taxation revenue is slowing.
Meanwhile, the US mortgage market remains in disarray. Mortgage rates remain elevated, diluting the Fed’s efforts to ease the pain for struggling homeowners.
Balance sheet constraints mean this situation is likely to be prolonged, as buying mortgages in a falling housing market is not a risk that many banks may be willing to take. “As bank balance sheets have swollen, banks are unlikely to buy mortgage backed securities the near future,” said analysts at Barclays Capital.
Traders say other traditional buyers of mortgages, particularly foreign investors, remain on the sidelines. Meanwhile, government-sponsored mortgage agencies Fannie Mae and Freddie Mac have limited ability to step in as the buyers of last resort. Commercial real estate has also come under renewed pressure in recent days, with selling of a derivative index that tracks this market.
”There are concerns that there will be further bad news from the mortgage markets,” said Jon Schotz, chief investment officer at Saybrook Capital, warning that April will see a wave of adjustable rate mortgage resets. “This could further reduce demand from investors like hedge funds and prop desks.”
All this adds up to a situation where credit markets are in deep crisis and the banks are in no position to provide liquidity. The question is whether equities can ignore the warning being sounded.
“With the monoline rescue still unresolved, and asset-backed securities liquidation trades in evidence, investors have been scrambling for cash again, and some of that scramble is likely being met by equity sales,” says Kevin Gardiner, head of global equity strategy at HSBC. “Financials are most at risk, but when portfolios are being shut down or scaled back in a hurry, few sectors and stocks are immune.”
Copyright The Financial Times Limited 2008
BOC cuts subprime securities
09:11, March 06, 2008
Bank of China Ltd, the Chinese lender with the largest portfolio of subprime-related investments, has sold some of those securities, Chairman Xiao Gang said.
The Beijing-based bank disposed of all its collateralized debt obligations, Xiao said yesterday in Beijing. The company reported owning $7.95 billion of subprime securities on Sept 30, with $496 million in the form of CDOs. Xiao declined to disclose how much subprime-related debt the bank still owns.
"It will be in everybody's interest to find out what exactly they are holding," said Dominic Chan, an analyst at CLSA Asia-Pacific Markets, in an interview.
Bank of China's stock has fallen 36 percent since Oct 30, when its profit trailed that of rivals because of losses on its subprime-related investments. Financial institutions around the world face $400 billion of write-offs and credit losses related to the subprime mortgage slump, according to Group of Seven estimates.
The bank, the nation's third biggest, may have to write down the value of overseas securities by 35 billion yuan, analysts at BNP Paribas SA have estimated. Bank of China said last month its 2007 profit would continue to see "record growth".
Chan has maintained a "sell" rating on Bank of China since late August. At the time, the company said it held almost $9.7 billion of subprime-backed securities.
"I don't expect solid guidance from Chinese management" on the details of the banks' subprime-related investments, Chan said, adding that investors should prepare for more provisions from Bank of China should the US economy deteriorate in 2008 and 2009.
China Daily/Agencies
What if inflation in China hits 8%?
By Chi Lo, FinanceAsia
5 March 2008
Conflicting forces affecting inflation and growth will result in volatility and downside risks for Chinese stocks.
Inflation in China may go above 8% in the coming months before it retreats. Chinese inflation expectations are also rising and corporates are starting to pass on some of the cost increases to consumers. This argues for policy tightening to defend price stability. At the same time the risk to economic growth is rising, due to damages from the recent snow storms and weakening external demand. This calls for policy easing.
These conflicting forces will create growth and policy uncertainties, and lead to confusion, volatility and downside risk for Chinese asset prices in the short-term. Investors should rebalance their portfolios towards sectors that are less vulnerable to the risks of worsening Chinese inflation, Beijing’s policy interventions and a sharp US economic slowdown.
Near-term inflation risk
The snow storms have aggravated the short-term inflationary pressures by destroying agricultural products and livestock. Food and meat prices will likely rise further in the coming months. While we are forecasting headline CPI to average over 7% year-on-year in 1Q08, recent food price trends (Chart 1) may push the headline CPI to over 8% some time in the first quarter.
Inflation expectations are also rising, as seen in a recent survey by the People's Bank of China (PBoC) in which 65% of the respondents were expecting rising inflation this year. This compares with less than 50% a few months ago. Rising inflation expectations could risk a self-perpetuating process to push up core inflation. International Monetary Fund research shows that in some developing economies, inflation expectations explain 60% of future inflation.
Corporate goods prices have also been rising and producers have been able to pass on some of the rising costs to the consumers, especially on agricultural products (Chart 2). Although pricing power outside the food and energy areas remains constrained, as seen in the subdued core CPI inflation rate, rising inflation expectations are creeping into core CPI, which rose from about 0.5% in 2007 to 1.5% this January. This means an increasing challenge for the authorities to keep inflation from spreading further and, hence, the need for keeping the tight policy bias.
Indeed, the PBoC stressed in a recent (February 22) policy statement that it would keep its tight policy bias for the rest of the year, and would allow more renminbi flexibility to help curb China’s inflation. This implies it may front-load the renminbi appreciation in the coming months to augment the impact of its macro tightening policy.
The policy risk
On the other hand, the damages to agriculture and infrastructure (including power facilities and communication links) by the snow storms earlier this year argue for policy relaxation to rebuild the economy. Powerful political interests are urging the government to ease credit policy and investment approval procedures, and to increase budgetary spending for reconstruction.
The demand for policy easing to rebuild the economy will clash with the need for keeping the tight policy bias to curb inflation expectations. This will create highly uncertain policy reactions: Upon seeing significantly higher inflation together with strong money and credit growth in the next couple of months, the authorities may tighten up policy further, risking policy overkill in the near-term.
However, if political consideration prompts substantial policy easing around the timing of the National People’s Congress, a quick policy reversal would be likely because of the temporary nature of the snowstorm damages and rising inflation expectations. All this will aggravate policy volatility and hurt Beijing’s economic management credibility.
Market implications
There are increasing growth and policy uncertainties stemming from the conflicting forces between worsening domestic inflation and a deteriorating global economic backdrop. With the PBoC’s higher tolerance for renminbi appreciation, we may see 8%-10% currency appreciation in the short-term before the appreciation pace subsides in the second half when the drag from slowing global demand might prompt a policy shift by the PBoC.
The combination of volatile policy responses and an uncertain growth outlook will haunt Chinese stocks in the next few months, affecting both the A-shares, H-shares and other Hong Kong shares with high volatility and a downward bias.
Under these circumstances, investment strategy should focus on overweighing sectors that are the least vulnerable to risks of worsening inflation and policy interventions, as well as a sharp US economic slowdown. These sectors may include gold, telecom and selected oil and energy stocks. Banks, properties and commodities are more geared towards macro improvement and thus have an unfavourable outlook in the short-term.
Chi Lo is a director of investment research at Ping An of China Asset Management (Hong Kong)
Knight Vinke's view on HSBC's results
By Sameera Anand
6 March 2008
Knight Vinke Asset Management, an activist investor based in the US, has released its view of HSBC's 2007 financial results that were issued earlier this week. Knight Vinke has been a critic of HSBC's management since September 2007, condemning the bank for its “strategy of seeking earnings diversification above all else”.
Knight Vinke continues to argue that businesses like HSBC's operations in France lack critical mass and scale, while its US subprime business has no strategic fit with the rest of the bank. The asset manager also contends that a preoccupation with some of these markets has caused HSBC to neglect its comparative advantage in Asia and emerging markets.
As reported by FinanceAsia earlier this week, HSBC appointed four new board members - two internal promotions and two independent nominees. Knight Vinke expressed approval of the move and said that the board-level changes had alleviated some of its concerns with respect to corporate governance and insufficient independence of the board.
Knight Vinke's analysis of HSBC’s recent 2007 results concludes that the 18% increase in earnings per share to $1.65 can largely be attributed to: “one-offs, acquisitions and currency charges rather than underlying improvements in operating performance”. It recast HSBC’s net profits to corroborate this assessment and estimates that continuing businesses, after adjustments, are actually 14% down year-on-year.
On Friday last week (February 29), before HSBC released its results, Knight Vinke sent a briefing note to shareholders that termed HSBC’s decision to enter the subprime business in the US “a catastrophic strategic error”. The firm believes HSBC Finance Corporation, the bank's US subsidiary, is unable to support the $150 billion of debt currently on its balance sheet and suggests HSBC “ring fence HSBC Finance Corporation by selling the business, spinning it off or, more radically, walking away from it”. Knight Vinke has been proposing options for the US subsidiary since May 2007.
In its statement on Friday, Knight Vinke also said that the strong financial performance HSBC was expected to announce for its core business in Hong Kong and emerging markets was in line with the results declared by the other emerging markets bank, Standard Chartered. It termed HSBC “the world’s most profitable emerging markets franchise”.
But on Friday, and again yesterday, Knight Vinke said it believed HSBC would be trading £2.00-£3.00 ($3.97-$5.96) higher had the bank not acquired HFC. HSBC was trading on Wednesday at £7.84, up 0.15%. Knight Vinke believes “the true value of HSBC is not reflected in its share price because of investors’ concerns about the risk of subprime contagion”.
Citi remains bullish on HSBC. In a research report issued on March 4 the US bank reiterated a buy recommendation on HSBC, with a target price of £9.50, down only 50 pence from its earlier target, saying that "HSBC's valuation remains compelling with less risks and greater earnings visibility than most of its peers". Citi has factored into its assessment the likelihood of higher losses from the HSBC Finance Corporation business in 2008.
Meanwhile, HSBC got a fillip yesterday when its proposed acquisition of Korea Exchange Bank moved a small step forward. South Korea’s Fair Trade Commission has approved HSBC’s $6.3 billion purchase of a controlling interest in the bank from US private equity fund Lone Star. But the deal is still subject to approval by the Financial Services Commission (FSC). FSC approval may be contingent upon resolution of various issues pending with respect to Lone Star’s original acquisition of a stake in KEB.
UBS may have dumped $24 billion Alt-A portfolio
By Steve Goldstein
March 6, 2008
LONDON (MarketWatch) -- UBS may have sold off a portfolio of Alt-A securities worth around 25 billion Swiss francs ($24.1 billion), according to an analyst at J.P. Morgan.
UBS was "highly likely" to have sold the securities in a fire sale, said J.P. Morgan analyst Kian Abouhossein, noting press speculation on the subject.
"We see the speculated level of 70 cents on the dollar as realistic in a fire sale," he said in a Thursday note to clients, adding the current market price is probably 84 cents on the dollar.
His note came amid published reports that UBS sold its entire portfolio to Pimco, the bond-house giant owned by German insurer Allianz.
A separate note from Huw Van Steenis of Morgan Stanley estimated that UBS may record mark-to-market losses of nearly 5 billion francs this quarter, if the reports are true.
Neither firm has commented on the reports.
Alt-A mortgages are home loans sold to borrowers with better credit than those who take out subprime mortgages, and they often require less information.
Delinquencies and foreclosures on Alt-A mortgages haven't climbed as high as subprime loans, but they have deteriorated faster than many expected.
Securities backed by Alt-A loans also built in less protection for investors than similar structures holding subprime mortgages. That's made the deterioration in Alt-A securities almost as painful as the subprime meltdown.
The massive Alt-A holdings at UBS, disclosed on Valentine's Day, have hit other firms, notably ensnaring Thornburg Mortgage Asset Corp. and hedge-fund manager Peloton Partners.
As for UBS, its shares dropped 2.6% in Zurich trading, more than offsetting gains made on Wednesday, when the fire-sale speculation first emerged. The Swiss-traded shares hit a 52-week low on Tuesday.
J.P. Morgan's Abouhossein revised higher his estimate for 2008 credit-crisis write-downs for UBS, increasing it to 18.5 billion francs from 15 billion francs.
But he also kept an overweight rating on the Swiss bank, citing "undiscounted value" in its wealth-management division.
S&P downgrades Washington Mutual, places on negative watch
By Wallace Witkowski
March 6, 2008
SAN FRANCISCO (MarketWatch) -- Standard & Poor's Ratings Services said Thursday it downgraded its long-term counterparty credit rating on Washington Mutual Inc. to BBB from BBB+, and its long-term counterparty credit rating on Washington Mutual Bank to BBB+ from A-. S&P placed all of Washington Mutual's ratings on a negative credit watch. "These rating actions reflect our expectations for a more severe residential mortgage credit cycle than we had anticipated at the start of 2008," said Victoria Wagner, an S&P credit analyst, in a statement. "We now believe that the severity of losses on all residential mortgages will be higher that we had thought and that the weak housing market will now be a longer cycle." Shares of Washington Mutual fell 6.5% to $11.96 in morning trading.
In Europe, Central Banking Is Different
By CARTER DOUGHERTY
March 6, 2008
FRANKFURT — On Jan. 21, the Federal Reserve chairman, Ben S. Bernanke, abruptly canceled plans to travel to New York so he could stay in Washington to engineer the largest one-day reduction of interest rates in recent times.
His counterpart at the European Central Bank, Jean-Claude Trichet, did not change his travel plans — or his policy.
Taking care to give the European bankers a heads-up before a public announcement, Mr. Bernanke sharply cut the Fed’s benchmark lending rate by 0.75 percentage point early the next morning, partly in response to plunging global share prices.
The next day, with Europe weathering market turmoil as well, Mr. Trichet coolly told the European Parliament in Brussels that the bank, based in Frankfurt, would keep rates steady despite the Fed’s move.
“There is no contradiction,” he said later that week, “between price stability and financial stability.”
The contrasting ways Mr. Bernanke and Mr. Trichet responded to the crisis in the markets reflect something more than the differing economic and financial conditions in the United States and Europe.
At a more fundamental level, they reflect surprisingly different views of how each economy responds to the underlying forces affecting growth and inflation.
The Fed’s mandate, balanced between fighting inflation and encouraging full employment, leads to a simple investor calculus: if growth sags, the Fed is virtually certain to cut interest rates.
Usefully for the Fed, which seems likely to cut its benchmark short-term rate below the current 3 percent, inflation in the United States tends to fall as demand slackens during a slowdown. And even though inflation has lately been rising to worrisome levels, the Fed appears to be counting on that rule to apply again.
The European bank, by contrast, is skeptical of the notion that inflation automatically falls when growth cools, and it has a mandate, inherited from the German central bank, to keep prices stable above all else. So the view from the European bank’s sleek silvery headquarters here is very different from the Fed’s perspective in Washington, whatever market participants may think about the inevitability of lower European interest rates.
Mr. Trichet is likely to drive home this point after the central bankers emerge from their monthly meeting here Thursday, when they are expected to leave rates unchanged at 4 percent.
Many investors remain convinced that the European bank has little choice but to follow the Fed’s lead, if only to ensure that recessionary conditions do not leach into Europe. As the Fed has cut rates, investors have bet that the bank here will follow and lower its benchmark rate, certainly by June and possibly earlier.
The rise of the euro, which breached the $1.50 threshold last week and settled in New York Wednesday at $1.5262, also increases the pressure on the bankers from European politicians to at least hint at lower borrowing costs. Falling interest rates in the United States have exerted a powerful force on currency values by damping the appeal of dollar-denominated assets.
“In the present circumstances, we are concerned about excessive exchange-rate moves,” Jean-Claude Juncker, Luxembourg’s prime minister, who is presiding over the group of 15 euro-zone finance ministers, said on Monday.
But what sets off alarm among some politicians in Europe is far less likely to raise hackles at the central bank. That is because the euro’s rise also helps curb inflation by lowering the cost of imported goods. And if the euro’s appreciation is smooth, it supports the bankers’ decision so far to stand pat.
At its core, the market expectations of a rate cut despite the European bank’s warnings that inflation remains its primary concern stems from the bank’s failure — nearly 10 years after it was created as the steward of the euro, now the common currency of 15 nations — to emerge from the Fed’s shadow.
“Markets tend to put a very high correlation on Fed interest rates and European interest rates,” said Klaus Baader, chief Europe economist at Merrill Lynch and one of a minority of European bank watchers who maintain that it will keep rates steady all year. “That was the case when European monetary policy was driven by the Bundesbank, and it is true now.”
While the central bank could end up lowering rates if conditions change significantly, it is struggling over how to change the perception that a European rate cut is inevitable.
Consider what happened when its council gathered behind closed doors in Frankfurt on Jan. 10 after a usual working dinner the night before. At that point, its members — the 6 top bank officials and 15 central bankers of member countries — found themselves embroiled in a lively and previously undisclosed debate linked to market expectations.
They had already decided to leave rates steady. As a result of rising energy and food prices, inflation was running at an annual pace around 3 percent, above the bank’s goal of keeping European inflation under 2 percent.
The council members were wrangling over a proposed statement that included a threat to act “pre-emptively” if labor unions tried to embed higher energy and food prices into new contracts, risking a new wage-price spiral.
Mr. Trichet has long held that central banks do their best work when their threats to raise interest rates deter inflationary actions in the first place, avoiding the need for excessive swings in the benchmark rate. In a speech at the annual meeting of central bankers in Jackson Hole, Wyo., in August 2005, Mr. Trichet called this concept “credible alertness.”
But there was another reason for including it. The central bankers had agreed that they had to offer a slightly more downbeat view of the euro area’s growth prospects in the opening paragraph of their monthly statement.
The financial market turmoil showed no sign of ending, and with each day, the risks rose that banks would constrict the flow of credit to the real economy, endangering business investment and consumer spending.
European Central Bank officials knew that a message about slower growth would inevitably fuel speculation that it was opening the door to lower rates. So against the wishes of some council members, the threat was added to help counterbalance the message on growth.
The episode has been widely viewed as a communications failure, and the word “pre-emptively” disappeared from the next month’s statement.
“In my view, this was a pretty clumsy move,” said Charles Wyplosz, a professor of international economics at the Graduate Institute of International Studies in Geneva. “They had to drop it unceremoniously when it didn’t work out.”
But despite the statement’s awkwardness, it reflected the central bank’s poorly understood view that strong employment protections coupled with muscular labor unions and generous social benefits act as a brake on falling demand. And if higher inflation is being imported through commodity prices, any automatic link between lower growth and lower inflation cannot be taken for granted.
Moreover, the ups and downs of the European economy — the distance it travels between strong growth and severe downturns — have been less than in the United States in recent decades. So even if recession seems imminent to some in the United States, central bankers here say, Europe need not expect a similar outcome.
“The U.S. economy is not the European economy,” Mr. Trichet said last month, “and both sides of the Atlantic are not in the same situation.”
After the end of the Internet boom and the terrorist attacks in September 2001, the European Central Bank never went as far as the Fed, which cut rates to 1 percent. Nor did it tighten rates as much as the Fed did when times got better.
“The E.C.B. never followed the Fed on the upside,” said Elga Bartsch, chief economist for the region at Morgan Stanley. “They never lowered as far and they never got into restrictive territory the way the Fed did. So all these notions that the E.C.B. has to follow the Fed are misguided.”
That did not stop investors from lurching to the conclusion early in February that a European rate cut might be imminent.
By the time of the bank’s Feb. 7 meeting, the outlook in Europe had dimmed, with real-time indicators showing a slight softening in the economy. That made any threat of a rate increase untenable, the council members concluded.
Nonetheless, at his monthly news conference, Mr. Trichet underscored the bank’s determination to focus on inflation.
“We have only one needle in our compass,” Mr. Trichet said, “which is that we have to deliver price stability.”
Despite that message, the markets bid up the odds for a rate cut, with some traders speculating that it could come as early as March. In response, Mr. Trichet, by then in Tokyo for a meeting of Group of 7 finance ministers and central bankers, stressed that not one central banker at the last meeting in Frankfurt had proposed lower rates.
“We had no call for an increase of rates, but we had no call for a decrease in rates,” Mr. Trichet said. “So I would think that it is important that the two messages be fully understood.”
US home foreclosures hit record high
March 6, 2008
WASHINGTON - US home foreclosures and the rate of homes entering the foreclosure process rose to record highs in the fourth quarter, led by failing sub-prime loans, the Mortgage Bankers Association said on Thursday.
The rate of failing loans swelled across most mortgage types but was led by a growing wave of sub-prime borrowers unable to make payments, the trade group said in its delinquency and foreclosure survey.
A record 0.83 per cent of US loans were entering the foreclosure process in the last three months of 2007 compared with 0.54 per cent in the same time a year earlier.
The US mortgage delinquency rate of 5.82 per cent was the highest since 1985 and up from the 4.95 per cent seen in the fourth quarter of 2006.
For sub-prime mortgage loans, the delinquency rate rose a full percentage point to 17.31 per cent from the previous quarter. The easy terms of sub-prime loans drew many borrowers with shaky credit, and those failing mortgages have stoked anxiety in credit markets worldwide.
Wall Street and policy-makers have worried that foreclosures will grow when many sub-prime loans face a built-in interest rate reset in coming months. But MBA's chief economist, Doug Duncan, blamed the current spree of failing loans on poor credit quality of the borrower rather than a rate spike.
'The current delinquencies are due to credit quality rather than resets,' he said. -- REUTERS
US housing woes: It's the affordability, stupid!
By ROBERT SAMUELSON
March 6, 2008
GLOOM. Doom. Calamity. Home prices are tumbling. We're bombarded by sombre reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last. It's elementary economics. Say, houses are apples. We have 1,000 apples, priced at US$1 each. They don't sell. We can either keep the price at US$1 and watch the apples rot. Or we can cut the price until people buy. Housing is no different.
Even many economists - who should know better - describe the present situation as an oversupply of unsold homes. True, there is about 10 months' supply of existing homes as opposed to four months a few years ago. But the real problem is insufficient demand. There aren't more homes than there are Americans who want homes; that would be a true surplus. There's so much supply because many prospective customers can't buy at today's prices. By definition, the 'housing bubble' meant that home prices got too high. Easy credit, lax lending standards and panic buying raised them to foolish levels. Weak borrowers got loans. People with good credit borrowed too much. Speculators joined the circus.
Look at some numbers from the (US) National Association of Realtors. From 2000 to 2006, median family income rose almost 14 per cent to US$57,612. Over the same period, the median-priced existing home increased about 50 per cent to US$221,900. By other indicators, the increase was even greater. But home prices could not rise faster than incomes forever. Inevitably, the bust arrived. Credit standards have now been tightened, and the (false) hope of perpetually rising home prices - along with the possibility of always selling at a profit - has evaporated. For many potential buyers, prices have to drop for housing to become affordable.
How much? No one really knows. There is no national housing market. Prices and family incomes vary by state, city and neighbourhood. Prices rose faster in some areas (Los Angeles, Miami, Phoenix) than in others (Dallas, Detroit, Minneapolis). Some economists now expect an average national decline of about 20 per cent. The Federal Reserve estimates that owner-occupied real estate is worth almost US$21 trillion. A 20 per cent reduction implies losses of about US$4 trillion.
The largest part would be paper losses for homeowners: values that rose spectacularly will now fall less spectacularly - back to roughly 2004 levels; that's still 30 per cent or so higher than in 2000. But hundreds of billions of dollars of other losses are already being suffered by builders (from the lower value of land and home inventories), mortgage lenders (from defaulting loans), speculators and homeowners (from lost homes). Mark Zandi of Moody's Economy.com estimates that mortgage defaults this year will exceed 2 million, up from 893,000 in 2006.
To be sure, all this weakens the economy. No one relishes evicting hundreds of thousands of families from their homes. Eroding real estate values make many consumers less willing to borrow and spend. Some economists fear a vicious downward spiral of home prices. More foreclosures depress prices, increasing foreclosures as people abandon houses where the mortgage exceeds the value. Losses to banks and other lenders rise, and they curb lending further. Particularly vulnerable would be Fannie Mae and Freddie Mac, the two government-sponsored housing lenders.
Up to a point, there's a case for providing relief to some mortgage borrowers. In many cases, everyone would gain if lenders and borrowers renegotiated loan terms to reduce monthly payments. Losses to both would be less than if their homes went into foreclosure and were sold. The Treasury has organised voluntary efforts. Some measures being considered by Congress (for example, overhauling the Federal Housing Administration) might help. But other proposals - particularly empowering bankruptcy judges to reduce mortgages unilaterally - would perversely hurt the housing market by raising the cost of mortgage credit. Lenders would increase interest rates or downpayments to compensate for the risk that a court might modify or nullify their loans.
The understandable impulse to minimise foreclosures should not serve as a pretext to prop up the housing market by rescuing too many strapped homeowners. Though cruel, foreclosures and falling home values have the virtue of bringing prices to a level where housing can escape its present stagnation. Helping today's homeowners makes little sense if it penalises tomorrow's homeowners. An unstoppable free fall of prices seems unlikely.
Slumping home construction and sales have left much pent-up demand. What will release that demand are affordable prices. -- The Washington Post Writers Group
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