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Monday, 15 September 2008
World May Face ‘Japan-Like’ Economic Stagnation, GIC’s Tan Says
The world may face “Japan-like” economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Government of Singapore Investment Corp. said. More in comments... PDF
World May Face ‘Japan-Like’ Economic Stagnation, GIC’s Tan Says
By Shamim Adam
Sept. 15 (Bloomberg) -- The world may face “Japan-like” economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Government of Singapore Investment Corp. said.
Global growth will probably be weak in the next few years, and protectionist and populist policies are likely to emerge, said Tony Tan, deputy chairman of GIC, in a speech in Geneva yesterday. The sovereign fund, which oversees more than $100 billion, has pumped billions into UBS AG and Citigroup Inc. after they posted writedowns linked to U.S. subprime mortgages.
“Policy responses so far have tried to minimize the likelihood of a Japan-like deflationary spiral but the adjustment could take a couple of years and be very painful,” Tan said. “Over the near term, debt deflation and deleveraging in the U.S. and other major developed economies will exert downward pressure on growth in many economies.”
An asset-price bubble in Japan burst in the early 1990s, triggering a property and stock market collapse that heralded a decade of stagnation in the world’s second-largest economy. Financial institutions worldwide have reported more than $500 billion in losses and writedowns since the beginning of 2007 and the credit-market collapse erased $11 trillion from global stocks in the past year.
The worst U.S. housing slump since the 1930s is showing little sign of abating and more than 10 lenders in the world’s largest economy have collapsed this year. The U.S. Treasury Department and the Federal Housing Finance Agency this month seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies.
‘More Severe’
“If house-price declines are significantly greater than expected, larger financial institutions could become insolvent, the credit crunch would be more severe and economic growth could weaken considerably,” Tan said. “A vicious deflationary cycle with falling house prices, failing financial institutions and weaker growth could then ensue.”
Lehman Brothers Holdings Inc. is preparing to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm, according to a person with direct knowledge of the firm’s plans.
Goldman Sachs Group Inc. last month estimated that half of the world economy already faces recession, with richer nations faring the worst as emerging markets continue to expand. The global economy faces a 25 percent chance of recession in the next year, according to UBS AG economists.
Emerging Markets
Japan’s economy shrank 3 percent last quarter, the steepest decline since 2001, while the euro-area economy contracted 0.2 percent in the same period. The U.S. economy, which expanded at a 3.3 percent annual pace in the second quarter, has lost 605,000 jobs in the first eight months of the year.
Emerging markets will account for more than half of the world’s growth in the next decade, from about a fifth in 2000, Tan predicts.
“Growth in emerging markets can be expected to remain relatively robust,” he said. “Emerging economies will displace the G-7 as the world’s largest economies over the next two to three decades.”
A rising “middle-class” in emerging markets will also increase demand for commodities and increase supply constraints that may spur competition for resources, he said.
Natural Resources
“International tensions could rise as countries compete for natural resources, especially food, energy and water,” Tan said. “Commodity-producing countries are likely to exert stronger control over their natural resources, potentially exacerbating supply concerns. Countries that are reliant on imports of commodities could be more aggressive in their pursuit of supplies.”
Weaker employment and income growth could lead to a rise in protectionist policies, especially in the U.S. and Europe, Tan said. Governments need to increase conflict-resolution mechanisms and boost cooperation to solve issues amid the emergence of new major economies, he said, citing the World Trade Organization Doha Round of talks as an example.
Trade ministers have tried and failed to reach a breakthrough in the so-called Doha Round talks in each of the past three years. A nine-day summit at the WTO in Geneva collapsed on July 29 after India and the U.S. disagreed over how poor nations could increase duties to protect their economies from surging farm imports.
“Significant stagnation as well as inflation risks suggest that challenges and potential conflicts arising from both protectionism as well as resource nationalism could seriously jeopardize globalization of production and markets,” Tan said.
By Carrick Mollenkamp, Susanne Craig, Serena Ng and Aaron Lucchetti Of THE WALL STREET JOURNAL September 15, 2008
Wall Street financial chaos roundup from overnight:
- Crisis on Wall Street as Lehman Totters
- Bank of America Reaches Deal for Merrill
- AIG Scrambles to Raise Cash, Talks to Fed
- Fed Plans Expanded Lending Facilities
- Banks Roll Out $70 Billion Loan Program
- UBS Faces Further $5 Bln Writedowns - Report
- Greenspan warns of more turmoil
The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. faced the prospect of liquidation, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.
The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers.
Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. On Sunday night, Bank of America struck an all-stock deal to buy Merrill Lynch for $29 a share, or $50 billion. Lehman was working on a possible bankruptcy filing that would allow most of its subsidiaries to continue operating as the firm is wound down.
Though it steered clear of a bailout, the Federal Reserve is expected to take new steps to stabilize the broader financial system. These steps, expected to be temporary, would make it easier for banks and securities firms to borrow from the central bank by using a wider range of collateral. Bankers say these financial institutions might need short-term funds as they unwind their many trading positions with Lehman.
In addition, 10 major commercial and investment banks announced Sunday night that they would pool $70 billion of their own money to create a borrowing facility. The 10 institutions, which include Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, could tap the pool to help them ride out the crisis. The banks also said they are mutually committed to trying to mitigate market volatility.
A sense of foreboding gripped Wall Street as top executives feared collateral damage from a Lehman liquidation. Attention was focused on Merrill Lynch, which boasts the largest force of retail brokers, and American International Group Inc., the insurance giant. Both firms have seen their stocks get hammered on worries that they needed capital.
"Monday will be a day of reckoning for the financial markets," said Carlos Mendez, senior managing director of ICP Capital, a boutique investment firm in New York. On Sunday, he said, "it was like a fire alarm went off and people ran in all directions."
AIG executives spent the weekend trying to raise $40 billion to avoid a costly downgrade of its credit rating. AIG Chief Executive Robert Willumstad made an extraordinary appeal to the Fed for temporary funding to tide it through the crisis.
As worries spread across Wall Street that Lehman wouldn't survive, brokerage firms, hedge funds and other traders moved to disentangle themselves from trades with Lehman. When hopes of a potential sale dimmed, a quiet Sunday on Wall Street turned into a mad rush. Executives and traders hurried to their offices or worked their phones to unwind outstanding contracts with Lehman and to gauge their overall exposure.
Merrill, whose brokerage force is known as the "thundering herd," entered into discussions with Bank of America, which has retail bank branches stretching from coast to coast and has long coveted Merrill. Wall Street executives said the Federal Reserve may have been involved in orchestrating the sale, figuring that it was "better to save the relatively healthy patient instead of the dying one," said a lawyer involved in the discussions.
Lehman, a 158-year-old firm that started as an Alabama cotton brokerage, and Merrill, with its trademark bull logo, have been pillars of Wall Street for much of the past century. With the demise of Bear Stearns, three of the Street's five major independent brokers could end up disappearing, leaving only Goldman Sachs Group Inc. and Morgan Stanley.
"We have never seen anything like this," said analyst Glenn Schorr, who covers the investment banks for UBS AG. "There have been tough situations like Long-Term Capital Management and the crash of 1987, but the problem here is there is leverage in the securities under the microscope and in the banks that own them. And to try and unwind it all at once creates a one-way market where there are only sellers, and no buyers."
The convulsions could lead to even tighter credit, higher borrowing costs and moribund capital markets, as securities firms and commercial banks try to further limit risk and preserve capital. Those moves could cause the U.S. economy to slow further.
The future of about 25,000 employees at Lehman and an additional 60,000 at Merrill is up in the air. Lehman's work force already has shrunk by about 3,000 in the past year. If the firm essentially goes out of business, most of the remaining employees are likely to lose their jobs. That would deal another blow to New York City's economy, resulting in lower tax revenues on personal income, real-estate transactions and corporate income.
The damage on Wall Street is the latest consequence of a storm that began last year with the sharp decline in American housing prices and losses on loans and other assets tied to home values. Massive capital infusions have failed to stem write-offs and losses, and financial firms are running out of options to escape the damage.
Regulators and others were preparing for a hectic Monday. The New York Stock Exchange prepared contingency plans over the weekend to reassign the approximately 200 blue-chip stocks that Lehman's specialist unit trades, according to people familiar with the matter. If Lehman is forced into liquidation, the exchange will likely transfer the stocks to one or more of the remaining specialist firms, most likely using the same technology and staff that currently trade the stocks.
Dozens of Wall Street desks have trades with Lehman. As word spread that the Barclays deal was falling apart, worries that the company could be thrown into bankruptcy mounted, and traders labored to get out of those contracts.
At approximately 2:30 p.m., government officials hosted a call, and a trading session was opened to ease fears. One trader said it was agreed that other brokers would pick up contracts that trading desks have with Lehman. If Lehman does open on Monday, the deals struck on Sunday, often at a worse price, would be void. "It is utter chaos here," the trader said.
At many Wall Street firms, traders of credit-default swaps -- contracts that act as insurance against debt defaults -- were told to come to work immediately. Concerned investors were rushing to buy swaps tied to other brokerages and corporations, sending the cost of protection on investment banks such as Goldman Sachs and others sharply higher.
In a statement Sunday, the International Swaps and Derivatives Association, a trade group whose members include many large dealers, said a "netting trading session" took place between 2 p.m. and 6 p.m. on Sunday. The idea was to allow firms to try to unwind their derivatives transactions with Lehman by finding other parties to step into Lehman's shoes.
"The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy filing," it said. It added that trades conducted during this period "are contingent on a bankruptcy filing on or before 11:59 p.m. New York time" on Sunday. If no filing takes place, the trades will be canceled, ISDA said.
Some traders said it was difficult to find new counterparties for many of their outstanding trades with Lehman. The snags included different terms and maturity dates on derivatives contracts, and market prices changed rapidly Sunday afternoon. "People were screaming at each other over the phone, asking: How can this work?" one trader said.
William Gross, chief investment officer at bond-fund giant Pacific Investment Management Co., said very few Lehman trades were offset. "There's an immediate risk related to the unwind of these positions," he said.
Many Wall Street firms are hopeful that a liquidation of Lehman's assets will proceed in an orderly fashion. If that happens, those firms could quickly buy real estate, securities and other investments, preventing the assets from flooding the market. Because of that, said people familiar with the situation, some participants in the New York Fed talks decided that liquidation was no worse an option than selling Lehman to a buyer such as Barclays.
"There will be an orderly wind down," said one banker involved in the matter. "This was the default option. It happens when you have no buyer."
The firms decided that instead of making guarantees for Barclays or some other purchaser of Lehman, they would prefer to pool their resources and buy the assets themselves, taking on the risks and carrying costs, along with the possibility of profiting down the road.
Those firms would likely then buy assets such as mortgage-backed securities, leveraged loans, private-equity positions and investments in real estate or hedge funds.
Roger Freeman, a nine-year Lehman employee who analyzes brokerage firms, spent the weekend gathering cellphone numbers and email addresses from colleagues who also are likely to lose their jobs. He plans to clean out his desk Monday morning. "We worked long hours here, we've made some of our best friends here. We're suddenly being ripped apart," he said. "It's just unbelievable."
---
Jon Hilsenrath, Jeffrey McCracken and David Enrich contributed to this article.
2 comments:
World May Face ‘Japan-Like’ Economic Stagnation, GIC’s Tan Says
By Shamim Adam
Sept. 15 (Bloomberg) -- The world may face “Japan-like” economic stagnation as turmoil in financial markets weighs on growth and challenges the ability of policy makers to manage the crisis, Government of Singapore Investment Corp. said.
Global growth will probably be weak in the next few years, and protectionist and populist policies are likely to emerge, said Tony Tan, deputy chairman of GIC, in a speech in Geneva yesterday. The sovereign fund, which oversees more than $100 billion, has pumped billions into UBS AG and Citigroup Inc. after they posted writedowns linked to U.S. subprime mortgages.
“Policy responses so far have tried to minimize the likelihood of a Japan-like deflationary spiral but the adjustment could take a couple of years and be very painful,” Tan said. “Over the near term, debt deflation and deleveraging in the U.S. and other major developed economies will exert downward pressure on growth in many economies.”
An asset-price bubble in Japan burst in the early 1990s, triggering a property and stock market collapse that heralded a decade of stagnation in the world’s second-largest economy. Financial institutions worldwide have reported more than $500 billion in losses and writedowns since the beginning of 2007 and the credit-market collapse erased $11 trillion from global stocks in the past year.
The worst U.S. housing slump since the 1930s is showing little sign of abating and more than 10 lenders in the world’s largest economy have collapsed this year. The U.S. Treasury Department and the Federal Housing Finance Agency this month seized control of Fannie Mae and Freddie Mac after the biggest surge in mortgage defaults in at least three decades threatened to topple the companies.
‘More Severe’
“If house-price declines are significantly greater than expected, larger financial institutions could become insolvent, the credit crunch would be more severe and economic growth could weaken considerably,” Tan said. “A vicious deflationary cycle with falling house prices, failing financial institutions and weaker growth could then ensue.”
Lehman Brothers Holdings Inc. is preparing to file for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the U.S. securities firm, according to a person with direct knowledge of the firm’s plans.
Goldman Sachs Group Inc. last month estimated that half of the world economy already faces recession, with richer nations faring the worst as emerging markets continue to expand. The global economy faces a 25 percent chance of recession in the next year, according to UBS AG economists.
Emerging Markets
Japan’s economy shrank 3 percent last quarter, the steepest decline since 2001, while the euro-area economy contracted 0.2 percent in the same period. The U.S. economy, which expanded at a 3.3 percent annual pace in the second quarter, has lost 605,000 jobs in the first eight months of the year.
Emerging markets will account for more than half of the world’s growth in the next decade, from about a fifth in 2000, Tan predicts.
“Growth in emerging markets can be expected to remain relatively robust,” he said. “Emerging economies will displace the G-7 as the world’s largest economies over the next two to three decades.”
A rising “middle-class” in emerging markets will also increase demand for commodities and increase supply constraints that may spur competition for resources, he said.
Natural Resources
“International tensions could rise as countries compete for natural resources, especially food, energy and water,” Tan said. “Commodity-producing countries are likely to exert stronger control over their natural resources, potentially exacerbating supply concerns. Countries that are reliant on imports of commodities could be more aggressive in their pursuit of supplies.”
Weaker employment and income growth could lead to a rise in protectionist policies, especially in the U.S. and Europe, Tan said. Governments need to increase conflict-resolution mechanisms and boost cooperation to solve issues amid the emergence of new major economies, he said, citing the World Trade Organization Doha Round of talks as an example.
Trade ministers have tried and failed to reach a breakthrough in the so-called Doha Round talks in each of the past three years. A nine-day summit at the WTO in Geneva collapsed on July 29 after India and the U.S. disagreed over how poor nations could increase duties to protect their economies from surging farm imports.
“Significant stagnation as well as inflation risks suggest that challenges and potential conflicts arising from both protectionism as well as resource nationalism could seriously jeopardize globalization of production and markets,” Tan said.
Wall St Crisis Rocks US Financial System
By Carrick Mollenkamp, Susanne Craig, Serena Ng and Aaron Lucchetti
Of THE WALL STREET JOURNAL
September 15, 2008
Wall Street financial chaos roundup from overnight:
- Crisis on Wall Street as Lehman Totters
- Bank of America Reaches Deal for Merrill
- AIG Scrambles to Raise Cash, Talks to Fed
- Fed Plans Expanded Lending Facilities
- Banks Roll Out $70 Billion Loan Program
- UBS Faces Further $5 Bln Writedowns - Report
- Greenspan warns of more turmoil
The American financial system was shaken to its core on Sunday. Lehman Brothers Holdings Inc. faced the prospect of liquidation, and Merrill Lynch & Co. agreed to be sold to Bank of America Corp.
The U.S. government, which bailed out Fannie Mae and Freddie Mac a week ago and orchestrated the sale of Bear Stearns Cos. to J.P. Morgan Chase & Co. in March, played much tougher with Lehman. It refused to provide a financial backstop to potential buyers.
Without such support, Barclays PLC and Bank of America, the two most interested buyers, walked away. On Sunday night, Bank of America struck an all-stock deal to buy Merrill Lynch for $29 a share, or $50 billion. Lehman was working on a possible bankruptcy filing that would allow most of its subsidiaries to continue operating as the firm is wound down.
Though it steered clear of a bailout, the Federal Reserve is expected to take new steps to stabilize the broader financial system. These steps, expected to be temporary, would make it easier for banks and securities firms to borrow from the central bank by using a wider range of collateral. Bankers say these financial institutions might need short-term funds as they unwind their many trading positions with Lehman.
In addition, 10 major commercial and investment banks announced Sunday night that they would pool $70 billion of their own money to create a borrowing facility. The 10 institutions, which include Citigroup Inc., Credit Suisse Group, Deutsche Bank AG, could tap the pool to help them ride out the crisis. The banks also said they are mutually committed to trying to mitigate market volatility.
A sense of foreboding gripped Wall Street as top executives feared collateral damage from a Lehman liquidation. Attention was focused on Merrill Lynch, which boasts the largest force of retail brokers, and American International Group Inc., the insurance giant. Both firms have seen their stocks get hammered on worries that they needed capital.
"Monday will be a day of reckoning for the financial markets," said Carlos Mendez, senior managing director of ICP Capital, a boutique investment firm in New York. On Sunday, he said, "it was like a fire alarm went off and people ran in all directions."
AIG executives spent the weekend trying to raise $40 billion to avoid a costly downgrade of its credit rating. AIG Chief Executive Robert Willumstad made an extraordinary appeal to the Fed for temporary funding to tide it through the crisis.
As worries spread across Wall Street that Lehman wouldn't survive, brokerage firms, hedge funds and other traders moved to disentangle themselves from trades with Lehman. When hopes of a potential sale dimmed, a quiet Sunday on Wall Street turned into a mad rush. Executives and traders hurried to their offices or worked their phones to unwind outstanding contracts with Lehman and to gauge their overall exposure.
Merrill, whose brokerage force is known as the "thundering herd," entered into discussions with Bank of America, which has retail bank branches stretching from coast to coast and has long coveted Merrill. Wall Street executives said the Federal Reserve may have been involved in orchestrating the sale, figuring that it was "better to save the relatively healthy patient instead of the dying one," said a lawyer involved in the discussions.
Lehman, a 158-year-old firm that started as an Alabama cotton brokerage, and Merrill, with its trademark bull logo, have been pillars of Wall Street for much of the past century. With the demise of Bear Stearns, three of the Street's five major independent brokers could end up disappearing, leaving only Goldman Sachs Group Inc. and Morgan Stanley.
"We have never seen anything like this," said analyst Glenn Schorr, who covers the investment banks for UBS AG. "There have been tough situations like Long-Term Capital Management and the crash of 1987, but the problem here is there is leverage in the securities under the microscope and in the banks that own them. And to try and unwind it all at once creates a one-way market where there are only sellers, and no buyers."
The convulsions could lead to even tighter credit, higher borrowing costs and moribund capital markets, as securities firms and commercial banks try to further limit risk and preserve capital. Those moves could cause the U.S. economy to slow further.
The future of about 25,000 employees at Lehman and an additional 60,000 at Merrill is up in the air. Lehman's work force already has shrunk by about 3,000 in the past year. If the firm essentially goes out of business, most of the remaining employees are likely to lose their jobs. That would deal another blow to New York City's economy, resulting in lower tax revenues on personal income, real-estate transactions and corporate income.
The damage on Wall Street is the latest consequence of a storm that began last year with the sharp decline in American housing prices and losses on loans and other assets tied to home values. Massive capital infusions have failed to stem write-offs and losses, and financial firms are running out of options to escape the damage.
Regulators and others were preparing for a hectic Monday. The New York Stock Exchange prepared contingency plans over the weekend to reassign the approximately 200 blue-chip stocks that Lehman's specialist unit trades, according to people familiar with the matter. If Lehman is forced into liquidation, the exchange will likely transfer the stocks to one or more of the remaining specialist firms, most likely using the same technology and staff that currently trade the stocks.
Dozens of Wall Street desks have trades with Lehman. As word spread that the Barclays deal was falling apart, worries that the company could be thrown into bankruptcy mounted, and traders labored to get out of those contracts.
At approximately 2:30 p.m., government officials hosted a call, and a trading session was opened to ease fears. One trader said it was agreed that other brokers would pick up contracts that trading desks have with Lehman. If Lehman does open on Monday, the deals struck on Sunday, often at a worse price, would be void. "It is utter chaos here," the trader said.
At many Wall Street firms, traders of credit-default swaps -- contracts that act as insurance against debt defaults -- were told to come to work immediately. Concerned investors were rushing to buy swaps tied to other brokerages and corporations, sending the cost of protection on investment banks such as Goldman Sachs and others sharply higher.
In a statement Sunday, the International Swaps and Derivatives Association, a trade group whose members include many large dealers, said a "netting trading session" took place between 2 p.m. and 6 p.m. on Sunday. The idea was to allow firms to try to unwind their derivatives transactions with Lehman by finding other parties to step into Lehman's shoes.
"The purpose of this session is to reduce risk associated with a potential Lehman Brothers Holdings Inc. bankruptcy filing," it said. It added that trades conducted during this period "are contingent on a bankruptcy filing on or before 11:59 p.m. New York time" on Sunday. If no filing takes place, the trades will be canceled, ISDA said.
Some traders said it was difficult to find new counterparties for many of their outstanding trades with Lehman. The snags included different terms and maturity dates on derivatives contracts, and market prices changed rapidly Sunday afternoon. "People were screaming at each other over the phone, asking: How can this work?" one trader said.
William Gross, chief investment officer at bond-fund giant Pacific Investment Management Co., said very few Lehman trades were offset. "There's an immediate risk related to the unwind of these positions," he said.
Many Wall Street firms are hopeful that a liquidation of Lehman's assets will proceed in an orderly fashion. If that happens, those firms could quickly buy real estate, securities and other investments, preventing the assets from flooding the market. Because of that, said people familiar with the situation, some participants in the New York Fed talks decided that liquidation was no worse an option than selling Lehman to a buyer such as Barclays.
"There will be an orderly wind down," said one banker involved in the matter. "This was the default option. It happens when you have no buyer."
The firms decided that instead of making guarantees for Barclays or some other purchaser of Lehman, they would prefer to pool their resources and buy the assets themselves, taking on the risks and carrying costs, along with the possibility of profiting down the road.
Those firms would likely then buy assets such as mortgage-backed securities, leveraged loans, private-equity positions and investments in real estate or hedge funds.
Roger Freeman, a nine-year Lehman employee who analyzes brokerage firms, spent the weekend gathering cellphone numbers and email addresses from colleagues who also are likely to lose their jobs. He plans to clean out his desk Monday morning. "We worked long hours here, we've made some of our best friends here. We're suddenly being ripped apart," he said. "It's just unbelievable."
---
Jon Hilsenrath, Jeffrey McCracken and David Enrich contributed to this article.
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