A bank executive with cash access allegedly skimmed off 30 million yuan over four years to feed a gambling habit.
By staff reporter Fu Yanyan – Caijing Magazine 29 October 2008
After a six month investigation, prosecutors are preparing for the possible trial of a former executive for the Shenzhen Development Bank accused of embezzling millions of yuan for online gambling.
Caijing learned from the prosecutor’s office in Shenzhen’s Futian District that the suspect, a former bank supervisor identified only by his surname Zhang, allegedly stole more than 30 million yuan from the bank while working as director of the bank’s clearing center for branch cash collections.
Rumors about the case surfaced March 4 and led to a sharp selloff of the bank stock. The next day, a bank statement admitted irregular trading activities had been detected, and that a branch employee was suspected of embezzling capital through an internal account.
Investigators have found that Zhang was an online gambler who could not pay his debts. To support his habit, he allegedly used his position to make several transfers of bank funds to a person account.
Between March 2004 and August 2007, Zhang allegedly siphoned 25 million yuan. Then on February 27, investigators said, he transferred 7.25 million yuan to his account from a colleague’s operating account.
How could such a bank employee cover his tracks for four years? A source close to the bank told Caijing that “in the past, people could get access to the system of the bank’s clearing center only by a computer account, and the bank seldom checked its financial accounts. Therefore, Zhang, as director of the center, could easily cover any violation.
“But the bank later upgraded the system to require permission from two people to operate the system, which led the discovery of Zhang’s case.”
A bank spokesperson declined to provide further details now that the case has reached the Shenzhen People’s Procuratorate.
The bank’s March 5 statement said necessary measures have been taken to control losses, and that the expected loss from this case could be limited to 30 million yuan. “The case has little impact on the bank’s financial performance and operations,” the statement added.
A securities analyst told Caijing that holes in the internal management systems at some Chinese banks leaves room for this kind of case.
Indeed, the analyst said, the Shenzhen bank “must improve its risk control mechanism to avoid worse cases.”
A cowboy walks into a barbar shop, sits on the chair and says, "I'll have a shave and a shoe shine."
As the barber begins to lather the cowboy's face and sharpen the old straight edge, a woman with the biggest, firmest most beautiful breasts he has ever seen kneels and begins to shine his shoes.
The cowboy says, "Young lady, you and I should go and spend some time in a hotel room."
She replies, "I'm married and my husband wouldn't like that."
The cowboy says, "Tell him you're working overtime and I'll pay you the difference."
She says, "You tell him. He's the one holding a razor to your neck."
NEW YORK (Reuters Health) - Drinking red wine, but not white wine, may reduce lung cancer risk, especially among current and ex-smokers, new research indicates.
People who had ever smoked and who drank at least a glass of red wine daily were 60 percent less like to develop lung cancer than ever-smokers who didn't drink alcohol, Dr. Chun Chao of Kaiser Permanente Southern California in Pasadena and colleagues found.
But white wine didn't reduce risk, suggesting it could be compounds contained in red wine, such as resveratrol and flavonoids, rather than the healthier lifestyle associated with wine drinking, that may be protective, the researchers say.
Studies examining the relationship between lung cancer and alcohol consumption have had mixed results, they note in the journal Cancer Epidemiology, Biomarkers and Prevention. Much of this research has failed to adjust for factors like socioeconomic status that can influence both alcohol use and lung cancer risk.
In the current study, Chao and her colleagues looked at 84,170 men 45 to 69 years old covered by Kaiser Permanente California health plans. Between 2000 and 2006, 210 of them developed lung cancer.
After accounting for the influence of age, education, income, exposure to second-hand smoke, body weight, and other relevant factors, the researchers found that lung cancer risk steadily decreased with red wine drinking, with a 2 percent drop seen with each additional glass of red wine a man drank per month. No other type of alcoholic beverage, including white wine, was associated with lung cancer risk.
For men who were heavy smokers, the reduction in risk was greater, with a 4 percent lower likelihood of developing lung cancer seen for each glass of red wine consumed per month.
Research has shown that wine drinkers may have healthier lifestyles and tend to have more education and higher income than non-wine drinkers, the researchers note. But the fact that reduced lung cancer risk was seen only with red wine, not white, "lends support to a causal association for red wine and suggests that compounds that are present at high concentrations in red wine but not in white wine, beer or liquors may be protective against lung carcinogenesis," Chao and her team say.
SOURCE: Cancer Epidemiology, Biomarkers and Prevention, October 2008.
The Shipping News Suggests World Economy Is Toast: Mark Gilbert
Commentary by Mark Gilbert
Oct. 30 (Bloomberg) -- In the third quarter of 2007, Volvo AB booked 41,970 European orders for new trucks. Guess how many prospective purchases Volvo, the world's second-biggest maker of heavy rigs, received in the third quarter of this year?
Here's a clue. Picture a highway gridlocked by 41,815 abandoned trucks -- because Volvo's order book got destroyed to the tune of 99.63 percent, with customers signing up for just 155 vehicles in the three-month period, the Gothenburg, Sweden-based company said last week.
The pathogen that has fatally infected swathes of the banking industry is now contaminating non-financial companies. ``We're heading toward the sharpest downturn I've ever seen in Europe,'' said Chief Executive Officer Leif Johansson.
Volvo has company. Daimler AG, the world's biggest truckmaker, said earlier this month that its U.S. deliveries slumped by a third in the first half of the year.
After months of money-market madness, slumping stock markets, collapsing currencies and bank bailouts, the headlines from the broader economy are starting to roll in -- and the news is all bad and getting worse, fast.
Let's begin with the shipping news. If nobody is buying your trucks, you don't need to rent a vessel to carry that shiny new 18-wheeler to its new owner. Hence the Baltic Dry Index, which tracks the cost of shipping goods and commodities, fell below 1,000 this week for the first time in six years.
Slow Boats From China
Put another way, it is now almost 90 percent cheaper to ship goods over the oceans than it was at the beginning of the year. And because the huge vessels known as capesize ships can't currently charge much more than their daily operating cost of about $6,000 per day, their captains have slowed down to economize on fuel and save money, to about 8.68 knots from 10.33 knots in July, according to data compiled by Bloomberg.
It isn't just the oceans that are emptying. Air freight traffic dropped 7.7 percent in September, according to the latest figures from the International Air Transport Association. That's the steepest decline since the trade group began compiling the data in January 2003.
Figures this week showed U.S. consumer confidence collapsed to a record low in October; retail therapy probably isn't the cure. With Christmas looking like it might be canceled, why bother fighting with your bankers for the letters of credit you need to export the stocking-stuffers you make in the factory?
`Growing Anxiety'
``The October reading signals the deepening concern about the marked deterioration in the overall economy as well as the growing anxiety arising from the continued travails in the financial markets,'' David Resler, chief economist at Nomura Securities in New York, wrote in a research report. ``Confidence declined across all regions, all age groups and all income categories.''
One way in which the current recession/depression/meltdown (take your pick) will differ from previous economic collapses is the granularity of information now available. The world is awash with more data than ever before, generating a plethora of ways to scare yourself silly.
The Bank of England, for example, produces what it calls a Financial Market Liquidity Index, a global measure of stress that gauges how far a basket of nine indicators strays from its historical mean. The index gets updated twice a year; this week's bulletin, which recalculates the level up to Oct. 17, showed liquidity at its lowest level in at least 17 years.
Default Danger
The next wave of headlines to scare shoppers out of the mall is likely to come when companies find they can't pay their debts. Credit-rating company Moody's Investors Service predicts that the default rate among sub-investment grade borrowers will surge to 7.9 percent in a year, from 2.8 percent at the end of the second quarter of 2008 and from just 1.3 percent 12 months ago.
``With the global credit crisis intensifying and credit spreads widening, it is increasingly likely that corporate default rates will spike sharply in the next 12 months,'' Kenneth Emery, the director of default research at Moody's, said in a research report published earlier this month.
The Markit iTraxx Crossover index of credit-default swaps on mostly speculative-grade companies traded as high as 920 basis points this week. That level suggests investors and traders are anticipating more than half of the companies in the index will default, based on bondholders recouping 40 percent of their money from companies that fail to keep up their debt payments.
Going Bust
At a recovery rate of 20 percent, the implied default level is about 45 percent. At a salvage percentage of just 10 percent, the index is still suggesting about 40 percent of its members will renege on their commitments. It is hard to see how consumer confidence will recover when companies start going bust.
``Worries about defaults are mounting as liquidity is strained,'' Guy Stear and Claudia Panseri, analysts at Societe Generale SA, wrote in a research note this week. ``Earnings expectations still look optimistic, with analysts projecting 2009 earnings for the S&P 500 rising by 19 percent.''
There's a great scene in the film version of Annie Proulx's Pulitzer Prize-winning novel ``The Shipping News.'' A grizzled journalist explains to rookie hack Kevin Spacey how dark clouds on the horizon justify the hyperbolic headline ``Imminent Storm Threatens Village.''
``But what if no storm comes?'' Spacey asks. The veteran replies with a second-day headline: ``Village Spared From Deadly Storm.'' Unfortunately, the global village we live in is unlikely to survive unscathed.
The massive shopping mall in the Shanghai suburb of Xinzhuang is still under construction. Hand-written signs are plastered around the northern entrance notifying those without proper documentation that they will be refused entry.
A security guard with a Henan accent mans a small desk at the door and directs visitors to the southern entrance, where migrant workers hurry to plant trees and shrubbery beneath banners proclaiming the grand opening of the Xinzhuang Carrefour hypermarket.
Underground, the Carrefour, only 12 days old, is bustling.
A man in a pink polo shirt who gives his surname as Yin is buying household goods and cleaning supplies with his wife. He works for an IT company, and they are both in their late 20s.
“Our apartment is five minutes away, and we’ve been there two years,” he says as his wife fills up the shopping cart. “There are other places to shop in this area, but the selection here is much better.”
Price, he says, is not a big factor in his decision of where to shop.
A thousand miles away, in Nanning, Guangxi province, a woman named Jiang is shopping for handbags. Jiang, who co-owns a chemical plant with her husband, is a woman of expensive tastes: If it isn’t Louis Vuitton, Gucci or Chanel then it won’t do. Similar policies apply to the other items routinely found on her shopping list, namely designer clothing, jewelry, and cosmetics.
Jiang is also unworried about prices.
“My shopping habits may be influenced by my mood, but not by the economy,” she said. “I buy more when I’m happy and may buy less when I’m feeling down. But if I really love something, I will try my best to buy it.”
Lost in the doom and gloom of recent news about China’s economy – investors tormented by falling stock markets and softening real estate prices; producers squeezed by shrinking international demand and rising input costs – is the story of the Chinese consumer.
People like Yin and Jiang are helping to drive, and at the same time, change the picture of domestic demand. Amid a global economic slowdown, the Chinese consumer is resilient.
Compelling data
The numbers look clear enough: China’s retail sales volume, which rose 12.9% year-on-year in 2007 as a whole, accelerated to 14.3% between January and August of this year.
In value terms, retail sales grew 16.7% in 2007 but were up 21.7% year-on-year between January and August 2008. That’s despite a newly shortened May Day holiday cutting into a typically heavy shopping period, said Paul McKenzie, head of consumer research at brokerage CLSA.
In addition to the shorter holiday, McKenzie says there was some “temporary psychological fallout” from the May 12 Sichuan earthquake, which had a dampening effect on consumer spending. However, retail sales value growth rebounded to hit a 12-year high of 23.3% in July, and continued to post strong growth – 23.2% – in August.
That is not to say that these numbers tell the whole story. Official government retail sales numbers factor in wholesale and service trade figures, which serves to inflate the headline statistics. Nevertheless, the lines still point upwards: People are shopping.
Or, at least, most people are. One exception to the otherwise bright consumer picture is growth in the luxury goods segment. While a March report by consumer research firm Euromonitor listed rising demand for luxury goods as one of the key consumer trends to watch in China, other analysts claim demand for luxury goods and jewelry is slowing.
Underperforming capital markets have taken much of the blame for weaker luxury consumption growth. As Andy Xie, an independent economist, argues, the Shanghai Composite Index’s slide – it fell by more than 60% between January 1 and mid-September – combined with the woes of the property sector, have a real effect on luxury spending.
“So many profits were driven by the property market, not just for property developers but for other business as well,” said Xie.
Half-jokingly, he added that as small businesses profited from property investments, “a lot of small businesspeople essentially gave this money to their mistresses, who went out to buy LV bags and luxury cars ... that’s basically the trickle-down economy in China.”
Wealth destruction
Although CLSA’s McKenzie suggests that any perceived slowdown may merely be on a comparative basis to the incredible growth seen earlier in the year, he doesn’t discount the idea of wealth destruction as a result of poorly performing markets. Residents of first-tier cities like Shanghai, who account for a sizeable proportion of luxury consumers in China as a whole, have larger relative exposure to stock and property markets, and are more highly leveraged – all factors that would contribute to lower spending in a bear market, McKenzie said.
However, not everyone subscribes to the wealth destruction theory, and not just because people like Jiang, the chemical factory owner, say they buy regardless of the state of the economy.
“This is a real big discrepancy in thinking between, on one hand, the financial community, and on the other hand, people who work in retail,” said Paul French, chief China representative for market research firm Access Asia and a regular contributor to CHINA ECONOMIC REVIEW. “We don’t see that negative wealth effect kicking in. People who link everything to stock market performance and property market performance see that link ... but very few [urban consumers] are over-extended, and they’re not really worried.”
Instead, said French, luxury consumers are not buying less, but are buying less in mainland China. “That’s the big thing with luxury. You go down to Hong Kong and you’re getting it half price,” he said.
But if some affluent consumers are taking their money elsewhere, that effect is counterbalanced by the rise of a different consumer segment: the middle class.
Definitions of middle class consumers vary, but they can broadly be defined as those with household incomes of around US$4,000 a year. A typical middle class household can afford to raise a child, own an apartment and a small car, and have some money left over for discretionary purchases.
This description applies to a fast-growing segment of China’s population.
According to a report by forecasting firm Global Demographics, there are currently 212 million households in China earning between US$2,500 and US$10,000 per year. The firm expects that number to rise to 390 million in 2028, with 60% of those households making between US$5,000 and US$10,000. The total number of households in China is set to rise from the current 426 million to 549 million by 2028.
The growth of middle-class households is being spurred by rising incomes. Even as China’s consumer price index (CPI) growth spiked early this year due to rising food prices – hitting a 12-year high of 8.7% in February – wages have been growing more quickly than inflation. In 2007, urban incomes rose 12.2% in comparison to a CPI increase of 4.8%. Xie, the independent economist, said a tight labor market will ensure that high wages continue.
Lifestyle choices
With food prices falling, and with CPI growth down to 4.9% year-on-year in August, real income growth will continue to rise, said Wang Qian, an economist at J.P. Morgan in Hong Kong. Retailers are rising to meet the challenge of winning consumers’ hard-earned yuan.
“What we talk about targeting is lifestyle brands,” said Janet De Silva, CEO of Retail China, a Hong Kong-based retail brand management firm that directly operates and staffs retail locations in China. The company’s research on Chinese consumers led it to bypass luxury goods, which it sees as already well-represented, and focus instead on introducing foreign brands to the middle-class market.
“[Our target consumers] are young professionals under the age of 40, many are first-time homeowners, many are looking to fit out their homes with furnishings and style,” said De Silva.
“They have a very contemporary global look ... many of them are parents with needs for their children.”
Hoping to take advantage of the rising purchasing power of these young professionals, Retail China focuses on bringing new and different brand concepts to China. De Silva said that the introduction of La Vie En Rose, an upper mass-market swimwear and lingerie brand, is indicative of changing consumer preferences as domestic and international travel become more common.
By bringing unfamiliar brand concepts to China, the company is able to add what De Silva calls an “educational element” to shopping. Rather than simply selling products, La Vie En Rose salespeople are employed to help customers understand, for example, why certain kinds of swimwear work better for them, or how to combine different styles.
This approach also means the company’s brands can afford to charge a premium – one which consumers are increasingly willing to pay.
De Silva says Retail China’s brands are roughly 20-30% more expensive than domestic competitors. Even with that premium, Fruits & Passion, a bed, bath and household products brand, has seen annual sales growth of over 100%.
“For us, the challenge is how many stores we can locate in a particular market,” said De Silva.
Another beneficiary of changing consumption patterns is clothing manufacturer American Apparel. The company, which produces casual clothing in the US and is known for promoting progressive labor policies, has seen strong consumer interest in its Chinese stores.
“We are in China not just to sell a single piece of product,” said Wei Su, American Apparel’s China resident director. “We’re actually selling the American dreams and the American lifestyle … We’re selling our social responsibility and social awareness.”
Even the supermarket sector, typically known for its cutthroat competition, is benefiting from changes as consumers become open to premium product categories like organic foods. David Xie, a quality assurance manager at Wal-Mart China, said the company became aware of consumer willingness to pay more for organic foods in 2005. While overall sales remain low, Xie says the company is very optimistic about growth in the segment.
A report by the Boston Consulting Group sheds some light on the reasons for the success and optimism of upper mass-market retailers. In a 2007 survey of Chinese consumers, 59% said they planned to increase their spending within 12 months, with 11% planning to increase their spending by more than 20%.
In contrast, only 9% of consumers said they planned to decrease their overall spending. Furthermore, the desire to spend more on consumer goods exists across a wide range of product categories.
To the suburbs
As retailers discover that consumers are willing to trade up, they are not just looking for ways to attract new shoppers – they are increasingly going out to meet shoppers near their homes.
The mall around the Xinzhuang Carrefour, which will eventually host a Parkson department store, a B&Q home-improvement store and a wide range of smaller retailers, is part of a growing trend of retail properties expanding into middle-class areas in suburbs and second- and third-tier cities. Yin, the shopper at the Xinzhuang Carrefour, said that with his job and apartment both in Shanghai’s suburbs, he ventured into the city center once a month at most.
“The suburbs are no longer just dormitory communities and Americans who don’t really want to be in China,” said Access Asia’s French. “There are malls out in these places and everyone’s opening ... It’s pretty much the same price points as downtown. As far as the consumers are concerned, it’s not that different.”
Property developers, encouraged by lower land prices, are leading the charge. Of the 13 new malls and retail properties that Singaporean developer CapitaLand plans to open in China in 2008 and 2009, 12 are in suburbs and second- and third-tier cities such as Yiyang in Hunan, Yangzhou in Jiangsu, and Yibin in Sichuan. As malls move into less-expensive cities and suburbs, retailers benefit from consumers with more disposable income due to lower housing costs, and improved margins due to lower rents.
Lines of credit
Key to the growth of shopping malls is the larger demographic trend of urbanization. As CLSA’s McKenzie points out, China is still only 40% urbanized and is adding 10-20 million people to its cities each year. He sees this as a powerful driver of many consumer patterns.
One of these patterns is consumer credit growth.
“Your average Chinese household is just massively under-leveraged by any standard,” McKenzie said. The rapid rise in credit card ownership and usage over the last five years, and mortgage growth – still strong despite a slowing property market – is changing that.
“If China got to even a fraction of where Western consumers are indebted, that would underpin very high levels of consumption,” McKenzie added.
But there are obstacles in the way.
Despite the growth of an increasingly spendthrift Chinese middle class, the fact remains that Chinese consumers, as a whole, remain very price-sensitive.
“People always moan that the queues are long [in large supermarkets like Carrefour] even though people aren’t buying much. And you will be in a queue behind someone buying two cans of Coke because they’ll save 50 fen,” said French.
The wealth gap
High sensitivity to prices reflects an economy where wealth distribution remains very uneven.
“Basically, if you want to reach half the households earning over RMB80,000 (US$11,690), you only have to be in 11 cities in China,” said Clint Laurent, chief executive of Global Demographics.
At the same time, there are still more than 197 million households earning less than US$2,500 per year. While the percentage of such households is shrinking, Global Demographics predicts they will still number 103 million in 2028. These households will make up 51% of total rural households – down from 80% today – but only 3% of urban households.
But the large raw number of low-income households is overshadowed by the overall trend: China’s consumers are earning and buying more, and Beijing will likely support continued growth as it tries to build up the market at home to guard against potentially weak exports. CLSA’s McKenzie points to recent tax cuts and increases in tax thresholds, as well as reductions in import duties on consumer products, as examples of moves conducive to consumers.
“You will see consumption-friendly policies by the government over the next decade,” he said.
Xie, the independent economist, believes that higher consumption could strongly benefit China’s economy: If the consumer sector represents half of GDP and it grows at 10% a year, this equates to a 5% annual boost for the economy.
Logically, a sharp downturn in consumption would have a similarly sharp negative effect on the economy. But few market watchers expect this to happen.
“There’s nothing Chinese about China,” said Access Asia’s French. “They’re just people, and they’ve got a certain amount of money in their pockets. They’ll consume more when they’ve got more money in their pockets.”
The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.
“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.
Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.
But losses on that scale do not show up in the company’s financial filings. Instead, A.I.G. replenished its capital by issuing $20 billion in stock and debt in May and reassured investors that it had an ample cushion. It also said that it was making its accounting more precise.
Mr. Vickrey and other analysts are examining the company’s disclosures for clues that the cushion was threadbare and that company officials knew they had major losses months before the bailout.
Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company’s outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.
The internal auditor resigned and is now in seclusion, according to a former colleague. His account, from a prepared text, was read by Representative Henry A. Waxman, Democrat of California and chairman of the House Committee on Oversight and Government Reform, in a hearing this month.
These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.
Edward M. Liddy, the insurance executive brought in by the government to restructure A.I.G., has already said that although he does not want to seek more money from the Fed, he may have to do so.
Continuing Risk
Fear that the losses are bigger and that more surprises are in store is one of the factors beneath the turmoil in the credit markets, market participants say.
“When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.”
A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.
A.I.G. has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by A.I.G.’s many derivatives contracts.
No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.
Ms. Tavakoli said she thought that instead of pouring in more and more money, the Fed should bring A.I.G. together with all its derivatives counterparties and put a moratorium on the collateral calls. “We did that with ACA,” she said, referring to ACA Capital Holdings, a bond insurance company that filed for bankruptcy in 2007.
Of the two big Fed loans, the smaller one, the $38 billion supplementary lending facility, was extended solely to prevent further losses in the securities-lending business. So far, $18 billion has been drawn down for that purpose.
For securities lending, an institution with a long time horizon makes extra money by lending out securities to shorter-term borrowers. The borrowers are often hedge funds setting up short trades, betting a stock’s price will fall. They typically give A.I.G. cash or cashlike instruments in return. Then, while A.I.G. waits for the borrowers to bring back the securities, it invests the money.
In the last few months, borrowers came back for their money, and A.I.G. did not have enough to repay them because of market losses on its investments. Through the secondary lending facility, the insurer is now sending those investments to the Fed, and getting cash in turn to repay customers.
A spokesman for the insurer, Nicholas J. Ashooh, said A.I.G. did not anticipate having to use the entire $38 billion facility. At midyear, A.I.G. had a shortfall of $15.6 billion in that program, which it says has grown to $18 billion. Another spokesman, Joe Norton, said the company was getting out of this business. Of the government’s original $85 billion line of credit, the company has drawn down about $72 billion. It must pay 8.5 percent interest on those funds.
An estimated $13 billion of the money was needed to make good on investment accounts that A.I.G. typically offered to municipalities, called guaranteed investment contracts, or G.I.C.’s.
When a local government issues a construction bond, for example, it places the proceeds in a guaranteed investment contract, from which it can draw the funds to pay contractors.
After the insurer’s credit rating was downgraded in September, its G.I.C. customers had the right to pull out their proceeds immediately. Regulators say that A.I.G. had to come up with $13 billion, more than half of its total G.I.C. business. Rather than liquidate some investments at losses, it used that much of the Fed loan.
For $59 billion of the $72 billion A.I.G. has used, the company has provided no breakdown. A block of it has been used for day-to-day operations, a broad category that raises eyebrows since the company has been tarnished by reports of expensive trips and bonuses for executives.
The biggest portion of the Fed loan is apparently being used as collateral for A.I.G.’s derivatives contracts, including credit-default swaps.
The swap contracts are of great interest because they are at the heart of the insurer’s near collapse and even A.I.G. does not know how much could be needed to support them. They are essentially a type of insurance that protects investors against default of fixed-income securities. A.I.G. wrote this insurance on hundreds of billions of dollars’ worth of debt, much of it linked to mortgages.
Through last year, senior executives said that there was nothing to fear, that its swaps were rock solid. The portfolio “is well structured” and is subjected to “monitoring, modeling and analysis,” Martin J. Sullivan, A.I.G.’s chief executive at the time, told securities analysts in the summer of 2007.
Gathering Storm
By fall, as the mortgage crisis began roiling financial institutions, internal and external auditors were questioning how A.I.G. was measuring its swaps. They suggested the portfolio was incurring losses. It was as if the company had insured beachfront property in a hurricane zone without charging high enough premiums.
But A.I.G. executives, especially those in the swaps business, argued that any decline was theoretical because the hurricane had not hit. The underlying mortgage-related securities were still paying, they said, and there was no reason to think they would stop doing so.
A.I.G. had come under fire for accounting irregularities some years back and had brought in a former accounting expert from the Securities and Exchange Commission. He began to focus on the company’s accounting for its credit-default swaps and collided with Joseph Cassano, the head of the company’s financial products division, according to a letter read by Mr. Waxman at the recent Congressional hearing.
When the expert tried to revise A.I.G.’s method for measuring its swaps, he said that Mr. Cassano told him, “I have deliberately excluded you from the valuation because I was concerned that you would pollute the process.”
Mr. Cassano did not attend the hearing and was unavailable for comment. The company’s independent auditor, PricewaterhouseCoopers, was the next to raise an alarm. It briefed Mr. Sullivan late in November, warning that it had found a “material weakness” because the unit that valued the swaps lacked sufficient oversight.
About a week after the auditor’s briefing, Mr. Sullivan and other executives said nothing about the warning in a presentation to securities analysts, according to a transcript. They said that while disruptions in the markets were making it difficult to value its swaps, the company had made a “best estimate” and concluded that its swaps had lost about $1.6 billion in value by the end of November.
Still, PricewaterhouseCoopers appears to have pressed for more. In February, A.I.G. said in a regulatory filing that it needed to “clarify and expand” its disclosures about its credit-default swaps. They had declined not by $1.6 billion, as previously reported, but by $5.9 billion at the end of November, A.I.G. said. PricewaterhouseCoopers subsequently signed off on the company’s accounting while making reference to the material weakness.
Investors shuddered over the revision, driving A.I.G.’s stock down 12 percent. Mr. Vickrey, whose firm grades companies on the credibility of their reported earnings, gave the company an F. Mr. Sullivan, his credibility waning, was forced out months later.
The Losses Grow
Through spring and summer, the company said it was still gathering information about the swaps and tucked references of widening losses into the footnotes of its financial statements: $11.4 billion at the end of 2007, $20.6 billion at the end of March, $26 billion at the end of June. The company stressed that the losses were theoretical: no cash had actually gone out the door.
“If these aren’t cash losses, why are you having to put up collateral to the counterparties?” Mr. Vickrey asked in a recent interview. The fact that the insurer had to post collateral suggests that the counterparties thought A.I.G.’s swaps losses were greater than disclosed, he said. By midyear, the insurer had been forced to post collateral of $16.5 billion on the swaps.
Though the company has not disclosed how much collateral it has posted since then, its $447 billion portfolio of credit-default swaps could require far more if the economy continues to weaken. More federal assistance would then essentially flow through A.I.G. to counterparties.
“We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss,” said Bill Bergman, senior equity analyst at the market research company Morningstar.
Wild birds carry avian flu viruses to U.S.: report
Oct 28, 2008
WASHINGTON (Reuters) - Migrating waterfowl may be carrying avian influenza viruses from Asia to the Americas, U.S. government researchers reported on Tuesday.
They found genetic evidence that some non-dangerous influenza viruses infecting northern pintail ducks in Alaska are genetically more closely related to Asian strains of bird flu than to North American strains.
"Although some previous research has led to speculation that intercontinental transfer of avian influenza viruses from Asia to North America via wild birds is rare, this study challenges that," said Chris Franson, a research wildlife biologist at the U.S. Geological Survey, who helped lead the study.
USGS and U.S. Fish and Wildlife Service experts have been testing birds in Alaska for any evidence they may be carrying highly pathogenic H5N1 bird flu with them from Asia.
Writing in the journal Molecular Ecology, the USGS team said they had collected samples from more than 1,400 northern pintails from throughout Alaska and compared any viruses they found to virus samples taken from other birds in North America and eastern Asia where northern pintails spend the winter.
None of the samples were found to contain completely Asian-origin viruses and none were highly pathogenic. But certain parts of the genes of the viruses resembled Asian strains, they said.
Since 2003, H5N1 has swept through flocks in Indonesia, Korea, China and elsewhere in Asia, Europe, the Middle East and parts of Africa.
It has killed or forced the slaughter of more than 300 million birds.
Not only is it devastating to the poultry industry but it occasionally infects people and has killed 245 out of the 387 infected people so far, according to the World Health Organization.
Birds can carry dozens of different flu viruses, some dangerous and some not. So far there is no evidence any have carried H5N1 with them to North America from Asia.
Citadel Investment Group, the alternative investment house, is winding down its $1bn fund of hedge funds and redeploying the capital to support new hedge funds as they emerge in the coming months.
The move suggests Citadel is positioning itself to back managers who have quit the business or been forced to shut their funds in recent weeks as they launch new funds in the coming months.
Several analysts have recently been predicting the death of the hedge fund market because of redemptions, poor performance and severe pressure on funding.
Citadel's decision comes after the company last Friday hosted a conference call to quash market speculation that its funds would be forced to liquidate amid the market turmoil.
The funds of hedge funds business typically involves investing in established hedge fund managers as opposed to seeding start-ups.
The $1bn Fusion fund of hedge funds receives 95 per cent of its capital from Citadel and invests in more than 50 hedge funds.
That capital will be put into the two other areas that make up the Citadel Alternative Asset Management unit of Citadel. The remainder will be returned to outside investors.
The two areas are named Pioneer, an incubation unit that provides infrastructure support to emerging hedge fund managers, and Discovery, a seeding unit providing capital to standalone managers who have their own infrastructure.
Kenneth Griffin, chief executive and founder of Citadel, hosted the conference call for holders of $500m in Citadel debt. As many as 1,000 other callers jammed a line as Citadel rushed to add more phone lines.
"I've never seen a market as full of panic as we've seen in the last seven or eight weeks," Mr Griffin said.
WASHINGTON, Oct 30 (Reuters) - The U.S. Treasury Department is not negotiating with General Motors Corp and the owners of Chrysler LLC on a request to provide direct government aid to their proposed merger, a Bush administration official said on Thursday.
Instead, the administration is working to speed the distribution to automakers of $25 billion in factory retooling funds authorized by Congress last month, the official told Reuters.
Earlier this week, industry sources said GM had asked for roughly $10 billion in an unprecedented government rescue package to support its acquisition of Chrysler from Cerberus Capital Management [CBS.UL].
The request was viewed as over and above the $25 billion in funds to enable the automakers to produce fuel-efficient vehicles.
"Treasury is not negotiating with the automakers, the administration is working to get the $25 billion Congress already authorized to the industry," the official said.
A GM spokesman had no immediate comment.
The Treasury did confirm that automakers' financial companies, such as GMAC LLC and Chrysler Financial, would qualify to sell distressed assets to the Treasury when it launches reverse auctions under its $700 billion market bailout plan.
However, the finance arms would have to be registered as federally regulated bank holding companies for them to qualify for a capital injection under the $250 billion equity purchase portion of the program.
GMAC said on Thursday it was seeking the bank holding company designation.
GM has been lobbying for Treasury help and outside pressure on the government grew earlier on Thursday. Governors of Michigan and five other states urged the Treasury and the Federal Reserve to help the distressed U.S. auto industry.
GM, Ford Motor Co and Chrysler have faced increased scrutiny over their cash positions by creditors and investors who have questioned whether they have the liquidity that they need to ride out a severe slump in U.S. auto sales seen continuing through 2009.
Without federal assistance, the pressure from increased unemployment claims and diminished tax revenue from the "economic crisis" facing automakers "threatens to create an unmanageable disaster at the state level," the letter said.
Michigan's congressional delegation, led by House of Representatives Energy and Commerce Committee chairman John Dingell, has been lobbying the Bush administration hard to free up liquidity for industry. They suggested that direct capital injections might be appropriate.
The $25 billion in loans approved by lawmakers last month are dedicated to helping Detroit meet a government mandate to make more fuel efficient vehicles.
Bush administration officials said this week they are working hard to accelerate the timeframe for making those loans available to automakers. Regulations needed to administer government loan programs can take six to 18 months to finalize.
The Energy Department is writing those regulations for the auto loans and said on Thursday it was working as fast as possible to complete the effort.
Attempts to speed that process even further could be made when Congress returns for a short period after next week's election, lawmakers have said.
Separately on Thursday, Ford Motor Co is having ongoing discussions with policymakers and would expect a "degree of parity" if the administration wound up helping to facilitate a GM merger with Chrysler.
GM has been in talks with Cerberus since September about a merger with Chrysler.
Sources familiar with the discussions said Wednesday the two sides agreed on the major issues, but the final form of any deal would depend on government financing and what form it would take.
Without new borrowing or asset sales, GM is in danger of running dangerously low on cash in 2009, analysts have said.
The Bush administration has been reluctant in the past to entertain the notion of an automaker bailout. But it has held talks in recent weeks with industry officials -- including GM chief executive Rick Wagoner -- about some measure of help with the global credit crisis hurting Detroit especially hard.
Credit turmoil, costs and threat of a recession have left several Vancouver projects stranded or on hold
Nathan VanderKlippe October 29, 2008
VANCOUVER -- Holly Wood's first hint that something was "smelling fishy" in Vancouver's champagne-infused construction market came several weeks ago, when she discovered that the presentation centre for the city's most glamorous project was strangely closed.
The Ritz-Carlton hotel and condos is among the richest development to begin construction in Vancouver, a $2,500-per-square foot, 58-storey ultra-luxury tower with an eye-catching 45-degree twist designed by Arthur Erickson.
But that $500-million design is currently little more than a half-completed hole in the ground - the most glittering symbol of the troubled times that have humbled real estate development in Vancouver, a city that spent the last half-decade treating new condos like an evergreen money tree.
Credit turmoil, construction costs and the threat of a recession have left several towers stranded, unfinished and searching for either new designs or new money, while some developers are now threatening to sue buyers who are walking away from huge cash deposits, unwilling to commit to condos they pre-bought.
The problems have extended from suburbia to downtown Vancouver where Ms. Wood, an agent with Re/Max Masters Realty, had sold a unit in the Ritz-Carlton, a place where "cheap" begins in seven figures. But Holborn Group, the developer had not paid her commission. Concerned that something was terribly wrong, she did something that would have been unthinkable a year ago, in the days when real-estate was still quick money and worry-free.
She marched into the office of Holborn, sat in the board room and demanded her money.
"I said, ‘I'm not moving. I don't care how long it takes until I get my cheque'," she said. "I had nothing to lose. What's the worst thing they're going to give me, nothing? I'm not moving if I have to get arrested, do a hunger strike, or phone CTV news."
Thirty minutes later, after a conversation with the Simon Lim, Holborn's president and managing director, she left with her cheque. That night, local TV news carried a story that construction had been halted at the Ritz-Carlton. Mr. Lim's reason: the need to redesign the parkade. He denied financial troubles were to blame.
In a brief interview, Mr. Lim said, "it's my intent to resume [construction]," but declined further details. "It's a private site, I own it. It's a private enterprise. I don't think I have an obligation to disclose what my private business plans are to you."
Ms. Wood can't quite believe such a high-profile project could have problems.
"I'm just very shocked," she said. "I don't know what to say. I'm at a loss for words. Vancouver should be a strong market."
But signs of weakness are becoming increasingly obvious. As recently as August, Merril Lynch calculated that Vancouver - as has Toronto - had more multi-unit buildings under construction "than in all other Canadian cities combined a decade ago."
Today, some of that construction has ground to a halt. In the Vancouver suburb of Surrey, workers have abandoned a set of unfinished towers that stand at 21 and 25 storeys tall after the developer, who had secured some of his funding through Lehman Brothers, ran out of cash. (Work will resume if a new developer can be found to pay the $100-million in remaining costs; 560 of the towers' 690 units have been pre-sold.) In North Vancouver, work has stopped on two high-rises - one with seven storeys built, one still at the foundation stage - as the developer waits for a finalized subdivision plan. That work is expected to resume. One developer said a half-dozen other towers are vulnerable.
Across the Lower Mainland, developers who only months ago were gobbling up easy money to build wherever they could are now scrambling to rearrange construction schedules. They are adjusting to a new reality where credit is constricted; pre-sales, the lifeblood of the construction boom, are drying up; and buyers, amid forecasts of a 13% drop in housing values next year – after falling 10% this year – are growing too skittish to commit.
In the first nine months of 2007, the city of Vancouver issued building permits for 3,842 dwelling units. This year, it is down to 1,476. The Real Estate Board of Vancouver reported September sales were down 42.9% from last year, while listings were up 28.8%.
Even those major developments that have pulled back from the brink have not been spared. The Bowra Group Inc., a Vancouver firm that specializes in corporate rescues, has been ordered by the courts to take over management of four towers in the past year after their developers ran into problems. All of those are now either built or nearing completion, but Bowra now faces another problem: pre-sale buyers who left large deposits are walking away from sums as high as $40,000. Some estimate that fully 70% of condo buyers in recent years were speculators. With credit tightening, some are so over-extended they cannot get mortgages, while others simply no longer want to take on units they committed to at the frothy prices of the past few years.
"There's a lot people there to make a quick profit, and it backfired on them," said Mario Mainella, a vice-president at Bowra, whose firm is now contemplating legal action against some of those owners.
"The way most contacts are written, the developers can pursue a damages claim if the unit is sold for less than what it was sold for originally," Mr. Mainella said.
Problems with pre-sales have brought worried brows at the highest-profile project in the city, Millennium Water, Vancouver's Olympic Village project. Its developer, the Millennium Group, has already had to swallow a $60-million – or 6% – cost overrun on the 1,100-unit project, which is billed as Vancouver's last waterfront. But it now faces the challenge of marketing 60% of its units in a time of falling prices. Millennium has pre-sold more than 75% of the units it has already marketed, and Hank Jasper, the company's general manager of development and construction, said he is confident the remainder will sell thanks to their prime location and the long waiting lists already in place.
Still, he admitted that Millennium wants "to let the dust settle a little bit on what's going on out there right now" before it begins marketing those, likely next year.
"We're obviously concerned," he said. "We don't have a pre-sales requirement, so we could hold onto the product for as long as we need to. We don't believe that's going to occur. But that's always our failsafe."
Still, talk of failsafe plans is strong evidence that the radical shift in fortunes for the city's developers has tempered the thing that, until recently, flowed as fast as the money: pride.
"I've never seen anything so deep, so fast," said Eric Carlson, the CEO of Anthem Properties Corp. "I used to be a know-it-all. Now, I'm pretty humble."
B.C. housing sales will plunge 28 per cent: report
Expected recovery in 2009 depends on whether global financial crisis subsides
Derrick Penner October 29, 2008
Expect British Columbia real estate sales to have fallen substantially by the end of this year, but stage a modest recovery in 2009, according to the latest forecast of the B.C. Real Estate Association.
Sales recorded through the Multiple Listing Service should fall 28 per cent to 73,700 units across the province by the end of 2008, compared with 102,805 units in 2007, according to the forecast released Wednesday.
That's a more optimistic assessment than the forecast released last week by Central 1 Credit union, which predicted that sales will continue to fall through 2009, with steeper price declines, before recovering in 2010.
However, both forecasts agree that at whichever point the housing market turns up from the downturn will depend on the current world financial crisis subsiding, B.C. not slipping into recession and a return of at least a little bit of consumer confidence.
"I don't know that the [B.C. Real Estate Association] forecast is optimistic," Cameron Muir, BCREA's chief economist, said in an interview.
His prediction is that sales levels in 2009, while higher than 2008, will still be similar to levels seen in 2001 or 2002, which were still relatively low.
"It's not like they'll be bouncing back into this great market."
However, Muir added that real estate sales in B.C. have fallen further than the underlying economy suggests they should.
While Muir expects B.C.'s economy to slow further in 2009, he also believes it is possible consumers will have recovered a bit from their financial fears by the middle of next year enough to consider major purchases again.
And by then, Muir added that prices will have dropped enough to make housing more affordable to more potential buyers.
His forecast is for the provincial average home price to dip nine per cent in 2009 to $413,000 compared with 2008.
Muir's forecasts that the average price across all 12 months of 2008 to remain three-per-cent higher than 2007, however that masks the fact that prices peaked in March and have dropped since then.
"I would argue that the housing market has already been shocked," he said. "Prices have declined 14 per cent [on a month-to-month basis] between March and September."
At some point, Muir said, he expects inventories of unsold homes to decline as people decide they don't need to sell, and sales should pick up.
Helmut Pastrick, chief economist for Central 1 Credit Union, said that while his own forecast does not agree with the BCREA on the exact numbers, he does agree that B.C.'s economy won't go into recession, and consumers will get a bit of their wind back at some point in 2009.
"I guess we're talking about degrees here really, and magnitudes," Pastrick said in an interview.
By magnitude, Pastrick forecasts that B.C.'s MLS sales falling 30 per cent to 70,700 units by the end of 2008, and a further 17 per cent to 59,000 by the end of 2009.
On prices, Pastrick forecasts that prices will decline 13 per cent between 2008 and 2009 to reach $310,000, and a further five per cent to $366,000 in 2010.
However, forecasting market changes can be notoriously difficult, according to Tsur Somerville, director of the centre for urban economics and real estate at the Sauder School of Business at the University of B.C.
All that a series of forecasts with differing results can tell you, Somerville added, is the general direction of activity and suggest a range of views as to what might happen.
"We're good at predicting what's going to happen when we're moving in one direct path," Somerville said of economists. "We're really bad at predicting when markets are going to turn."
For example, Somerville said that in January, when oil was headed to its peak price of $147 US per barrel, few economists would have forecast that by October it would be $67 per barrel.
Americans slim down food spending as lean times force belt-tightening
Tom Bawden and Gary Duncan October 31, 2008
Belt-tightening has become a harsh reality for America’s hard-up consumers in more ways than one. In a stark sign of the toll on US households from recessionary times, big-eating Americans’ notorious appetites are feeling the squeeze, with their spending on food falling at the fastest pace in 50 years.
The startling trend emerged in official figures yesterday showing that a slump in US consumer spending left the American economy shrinking at the fastest rate for seven years in the past quarter.
Overall US consumer spending fell in the quarter at an annual 3.1 per cent rate, its deepest decline since 1980. But most striking was the drop in food spending, which plunged at an annual pace of 8.6 per cent. Spending on goods other than durable products plummeted at an annual 6.4 per cent that marked the fastest fall since 1950, while demand for durable goods fell by 14.1 per cent, the steepest drop since 1987.
Olga Munuz, a server at the Europa Café in central New York, has discerned a significant change in the behaviour of her customers as rising unemployment has knocked their confidence at the same time as increased ingredient costs have pushed up prices. “Before, they might have bought a coffee and a sandwich. Now many just buy a coffee. When I ask them why, they say they are bringing their own lunch from home,” Ms Munuz says.
Brian Horgan, a software consultant, lists “eating out less” as the most significant belt-tightening measure he has taken in the face of gloomy economic prospects.
“If I hadn’t have bought an apartment six months ago, that would have been the biggest difference to my spending, because I wouldn’t buy it now. Me and my girlfriend could still get the loan, but she works for a bank and, although she looks ok, you never know,” Mr Horgan added.
John Owens, a food analyst at Morningstar in Chicago, said that food and restaurant groups are being forced to fight back to win customers, most commonly by offering cheap deals. “People are eating out much less frequently and choosing cheaper options when they do,” Mr Owen says. “McDonald’s is pushing its $1 value meal much harder now and Taco Bell has introduced its 79 cents, 89 cents and 99 cents value menus.”
As always, some people are flourishing in the economic downturn. Don Ward, a shoeshiner, said that hard times have done wonders for his business. “People are not buying new shoes, but instead are refurbishing their old ones. And guess who they need to come to more often? Business is definitely up,” Mr Ward said, before shouting “Young man, look at those shoes, get over here” to a potential customer.
Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis
By William Patalon III October 30th, 2008
While the U.S. government’s plan to invest $250 billion into U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, the recapitalization plan is likely to have a secondary effect – one that whipsawed U.S. taxpayers likely won’t be very happy to learn about.
Those billions are a virtual lock to set off a merger tsunami in which the biggest banks use taxpayer money to get bigger – admittedly removing the smaller, weaker banks from the market, but ultimately also reducing the competition that benefited consumers and kept the explosion in banking fees from being far worse than it already is.
One last point: Experts say that takeovers financed by the government infusions are likely to have less of a beneficial impact on the economy than an actual increase in lending levels would have. And because so much of this money will be used for buyouts, the reduction in the benchmark Federal Funds target rate announced yesterday (Wednesday) by central bank policymakers will likely do very little to actually spur lending, experts say.
Fueled by this taxpayer-supplied capital, the wave of consolidation deals is “absolutely” going to accelerate, Louis Basenese, a mergers-and-acquisitions (M&A) expert and the editor of The Takeover Trader newsletter, told Money Morning.“When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.”
Lining Up for Deal Money
Late last week, the Pittsburgh-based PNC Financial Services Group Inc. (PNC) became the first U.S. bank to make use of the government’s Troubled Assets Relief Program (TARP), announcing plans to purchase the beleaguered National City Corp. (NCC) for $5.2 billion. To help finance the purchase, PNC will sell $7.7 billion worth of preferred stock and warrants to the U.S. Treasury Department, as part of that department’s bank-recapitalization program.
With regards to that program, U.S. Treasury Secretary Henry M. “Hank” Paulson recently said – yet again – that the government’s goal was to restore the public’s confidence in the U.S. financial services sector – especially banks – so that private investors would be willing to advance money to banks and banks, in turn, would be willing to lend, The Wall Street Journal reported.
“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital,” Paulson said last week.
Whatever the Treasury Department’s actual intent, the reality is that banks are already sniffing out buyout targets, thanks to the TARP money. Indeed, they’ve been quite open about it during conference calls related to quarterly earnings, or in media interviews.
Take the Winston-Salem, N.C.-based BB&T Corp. (BBT). During a conference call that dealt with the bank’s third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank “will probably participate” in the bailout program, accepting federal infusions. Allison didn’t say whether the federal money would induce BB&T to boost its lending. But he did say the bank would probably accept the money in order to finance its expansion plans, The Wall Street Journal said.
“We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill],” Allison said during the conference call.
Talk about brazen. However, he’s not alone. For instance, there’s also Zions Bancorporation (ZION), a Salt Lake City-based bank that’s feeling the pain due to losses from bad real-estate loans. On Tuesday, Zions announced it would be receiving $1.4 billion in capital from the Treasury Department – cash it would use to boost lending and keep paying a dividend, albeit at a reduced rate.
“As a strong regional bank with a major focus on financing small and middle-market businesses, we are pleased to have this additional capital to better serve the lending needs of customers throughout the Western United States,” Chairman and CEO Harris H. Simmons said. “We expect to deploy this new capital in the form of prudent lending in the markets we serve. This new lending will be good for our country’s economy, our customers and our company.”
However, during a recent earnings conference call, Zions Chief Financial Officer Doyle L. Arnold said that while new capital might allow it to boost lending, the increase wouldn’t necessarily be a dramatic one. The Journal said. Besides, Zions will also use the money “to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters.”
Buyouts Already Accelerating
The reality is that – with all the liquidity the world’s governments and central banks have injected into the global financial system – the global game of “Let’s Make a Deal” has already become a reality.
Indeed, as WSJ.com reported a week ago, global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer this year than it did a year ago.
This time around, the new kings of deal making aren’t such highly compensated “Masters of the Universe” as The Blackstone Group (BX) LP’s Stephen A. Schwarzman, or KKR & Co. LP’s Henry R. Kravis, The Journal’s blog reported. Instead, they are the much-lower-paid – but decidedly more powerful – civil servants of the U.S. and U.K. governments: Treasury Secretary Paulson, U.S. Federal Reserve Chairman Ben S. Bernanke, U.K. Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling, the Web site stated.
At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments have ignited record levels of financial sector deal making.
According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $125 billion the U.S. government is investing in the large U.S. banks as part of its rescue package, the similar amount it may invest in smaller banks, or other deals that the feds are helping engineer (JPMorgan Chase & Co.’s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ) are two such examples).) [For a better understanding of just how dramatic this upswing in deal making has been, check out the accompanying chart, “Packing a Punch.”]
When the dust settles on this buyout boom, we may well have a record in hand that’s even less beatable than Joe DiMaggio’s 56-game hitting streak. That’s because with the Fed, the U.K. and other governments and central banks doling out the capital, there’s no financial-sector equivalent of Kenny Keltner to bring this buyout fest to an abrupt close. That means that the “hits” – the buyout deals – will just keep coming.
If You Can’t Beat ‘em… Buy ‘em?
When it comes to identifying possible buyout targets, M&A experts such as The Takeover Trader’s Basenese say there are some very clear frontrunners.
“I’d put regional banks with solid footprints in the Southeast high on the list, and for two reasons,” Basenese said. “First, demographics point to stronger growth [in this region] as retirees migrate to warmer climes – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (STI) would provide a distinct competitive advantage.”
With a lot of bigger deals already in the books, many analysts agree with Basenese’s assessment, and are now watching to see if regional banks will be the next to succumb to the dealmaker’s bid. Indeed, earlier this month, Matthew Schultheis, a senior analyst at Boenning & Scattergood Inc., told a reporter that he expected this to be a “trend that continues at least through the first half of ’09, unless some of these [companies] stabilize. It could even last beyond that.”
There’s a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It’s toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors. Regional banks have a tougher time, says Doug Landy, a partner in the U.S. banking practice of the law firm of Allen & Overy.
“A regional bank lacks both the international access and the local character,” Landy told The Associated Press.
Several big regional banks at least acknowledged the possibility of buyouts on recent earnings conference calls, The Journal reported.
The Cincinnati-based Fifth Third Bancorp (FITB) talked about raising $1 billion in capital by selling non-core assets. Bank executives said that a difficult 2009 is “a view that continues to seem likely to us.” They confirmed discussions with a number of possible investors or asset-purchasers, and said they were “confident that an attractive transaction would be available to us as the opportunity and timing are appropriate including the ability to generate capital in excess of our original expectations.” Earlier this week, however, it announced that it was getting $3.4 billion in TARP funds, the Cleveland Plain Dealer newspaper reported.
Clearly, the bank isn’t thinking in terms of an outright sale, or at least doesn’t admit to that publicly.
One other potential buyout candidate includes Huntington Bancshares Inc. (HBAN), a Columbus, Ohio-based regional that just received a $1.4 billion federal infusion of its own, the Plain Dealer said.
Who will be doing the buying? The Takeover Trader’s Basenese tells investors to “also look for banks with foreign ownership” to be on the prowl for acquisitions.
“Just like Spain’s Banco Santander SA (ADR: STD) [which earlier this month said it would buy the 76% of Philadelphia-based Sovereign Bancorp Inc. (SOV) it didn’t already own for about $1.9 billion], foreign-based banks will likely jump at the opportunity to expand their U.S. presence at a discount,” Basenese said. “M&T Bank Corp. (MTB) fits the bill, as Allied Irish Banks PLC (ADR: AIB) already owns a 24% stake.”
Then there’s the Minneapolis-based U.S. Bancorp (USB), which is one of the few regionals still in a strong position. CEO Richard K. Davis has reportedly rejected the idea of buying large banks that are already in trouble and was asked if the new rescue plans might change his mind.
“It makes it a little easier to do those things,” Davis told The Journal. “But first and foremost, whether the capital is less expensive or the opportunity that TARP is present, we’ll continue to look at deals on an accretive basis where they make sense and where they would fit into this company’s long-term structure. So it would definitely make it more attractive, and so some of our positioning and our targets look more attractive and our valuation is easier now.” There’s something else to consider, Davis said.
“To the extent that [a deal] has to hit all of the normal bellwether marks and the expectations we have for the near term and long term, it still has to be a good deal. So it doesn’t really change our philosophy, but it does make it easier to find our way to partnerships that might be more accretive sooner.”
Basenese, the M&A expert, believes that Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) will be “big spenders,” using the TARP funds to help accelerate their conversions from an investment bank to a bank holding company – a transition that will require them to bulk up their deposit bases. And the quickest way to do that is to buy other banks, Basenese says.
“One thing [the wave of deals] does is to restore confidence in the sector,” Basenese said, “It will go a long way in convincing CEOs that it’s safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank.”
U.S. banks getting more than $163 billion from the Treasury Department for new lending are on pace to pay more than half of that sum to their shareholders, with government permission, over the next three years.
The government said it was giving banks more money so they could make more loans. Dollars paid to shareholders don't serve that purpose, but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program.
Critics, including economists and members of Congress, question why banks should get government money if they already have enough money to pay dividends -- or conversely, why banks that need government money are still spending so much on dividends.
"The whole purpose of the program is to increase lending and inject capital into Main Street. If the money is used for dividends, it defeats the purpose of the program," said Sen. Charles E. Schumer (D-N.Y.), who has called for the government to require a suspension of dividend payments.
The Treasury plans to invest up to $250 billion in a wide swath of U.S. banks in return for ownership stakes, which the government will relinquish when it is repaid.
Among other restrictions, participating institutions cannot increase dividend payments without government permission. They also are barred from repurchasing stock, which increases the value of outstanding shares.
The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury's investment over the initial three-year term.
"The terms of our capital purchase program were set to encourage participation by a broad array of financial institutions so they strengthen their financial positions," Treasury spokeswoman Michele Davis said.
The Treasury's approach contrasts with decisions by foreign governments, including Britain and Germany, to require banks that accept public investments to suspend dividend payments until the government is repaid. The U.S. government similarly required Chrysler to suspend its dividend payments as a condition of the government's 1979 bailout.
The legislation passed by Congress authorizing the Treasury's current bailout program is silent on the issue.
The first nine participants were major banks, some running short on capital, that were told by Treasury officials earlier this month to sign on to the program for the good of the country. Their major shareholders are primarily institutional investors, such as pension funds and mutual funds, although a few wealthy individuals hold large stakes, such as Warren Buffett in Wells Fargo and Prince Alwaleed bin Talal in Citigroup.
Several banks are on pace to pay more in dividends than they get from the government. The Bank of New York Mellon got $3 billion from the government on Tuesday. It will pay out $275 million to shareholders this quarter, and a projected $3.3 billion over the next three years. A spokesman declined to comment.
At least a few banks have committed to reduce dividend payments at the same time they accepted government investments. SunTrust of Atlanta, which accepted $3.5 billion from the government, cut its quarterly dividend payments to about $188 million each quarter from about $272 million. The company described the cut in a statement as "the responsible thing to do."
Zions Bancorp, which accepted $1.4 billion from the government, reduced its dividends by about 26 percent to $34 million.
"This modification to our dividend will allow us to further strengthen our capital base," said chief executive Harris Simmons.
Other banks participating in the government program said that they will not use the Treasury's money to pay dividends. They said dividends will be paid from other capital, primarily from their new profits in each quarter.
Washington Federal, a Seattle thrift, accepted $200 million from the government. The company will pay its shareholders about $18 million in dividends this quarter, which puts it on pace for $216 million over the next three years.
Chief executive Roy Whitehead said the company pays dividends from its quarterly profits, rather than its capital reserves. He said there was only one exception in the past three decades. Last quarter, he said, the company used $11 million in capital to maintain a consistent dividend payment.
Still, Whitehead said "categorically" that the company would not use the government's investment to make dividend payments.
Some experts questioned the distinction drawn by Whitehead between profits and capital.
"Thinking of them as separate things is kind of a spurious argument. It's all capital," said David Scharfstein, a finance professor at the Harvard Business School who has called for the government to require banks to suspend dividend payments. "Money that goes out the door is money that isn't available to shore up the banks' balance sheet."
Scharfstein and others said that many banks clearly need to buttress their balance sheets. Large losses on mortgage-related investments have drained capital, and investors no longer have much interest in giving more money to banks. But several of the institutions accepting government money have continued to pay dividends in recent quarters even as they post large losses.
Scharfstein said many banks should suspend dividend payments voluntarily. Some industry analysts, however, say that cutting dividends will make it even harder for banks to find new investors.
Capital is basically the money a company keeps in its vaults. A dividend is a distribution of some of that money to shareholders. Companies typically pay dividends four times each year.
The stability of dividend payments is important to investors. Some treat dividends as a source of regular income, others as a barometer of corporate health. As a result, companies generally try to match or raise their dividends each quarter. Some banks entered the current crisis with unblemished dividend histories dating back 30 years and more.
The resistance to dividend cuts in part reflects the reality that the Treasury program is serving at least two purposes. In some cases, the money is going to companies that need help to survive. In other cases, the government is helping healthy companies to expand.
Ed Yingling, chief executive of the American Bankers Association, said he was increasingly hearing from banking executives who feel they should not be forced to accept money with so many strings attached. He said these banks don't need the money, but they are willing to use it to increase lending, so long as they are not punished for doing so.
"The government really needs to make up its mind what this program is," Yingling said.
"But whether they care or not, the fact is that last week the Federal Reserve boosted Total Fed Credit, namely the amount of fresh credit that appears on the books of the banks, by another staggering $245.4 billion! In One Freaking Week (OFW)!"
Reserved Seats for Big Credit Spenders
by The Mogambo Guru October 28, 2008
When I come to my senses, I find that I am in some dingy little bar on the other side of town, stinking drunk; and the bartender has grabbed me by the front of my shirt to haul me unceremoniously halfway across the bar, and is rudely in my face, telling me through gritted teeth that if I want to stay there, I am going to have to "Shut the hell up about the Federal Reserve creating so much money and credit in the banks, as there is nobody in this whole freaking bar who gives a rat's ass about Total Fed Credit one way or the other."
I look to my left and see a drunken woman named Shirley (I think to myself, "How do you know her name is Shirley?") winking at me and saying, "Give 'em hell, Tiger! Now, let's all have another drinkie-poo! Hic!"
I look around, and I can see that the bartender was right, as there doesn't seem to be anybody here who can even say "Total Fed Credit" without slurring the words and probably getting some of their foul breath on me, stinking of cigarettes and (sniff, sniff) onions and garlic with a hint of pepperoni.
But whether they care or not, the fact is that last week the Federal Reserve boosted Total Fed Credit, namely the amount of fresh credit that appears on the books of the banks, by another staggering $245.4 billion! In One Freaking Week (OFW)!
And this whopping increase in TFC is just the beginning of the credit-becomes-money-through-debt cycle, where this original $245.4 billion is multiplied, theoretically, by infinity, as there has not been an increase in Required Reserves in the bank since 1994, and it always hovers around $43 billion, which is still exactly what Required Reserves is today, too! Hahaha!
You can see how this constant, piddly $43 billion in reserves is chump change when compared to how Non-Borrowed Reserves in the banks has surprisingly zoomed to a NEGATIVE $363.1 billion! Hahaha! Hell, Free Reserves, which used to always run about $1.5 billion or so, is now a NEGATIVE $407 billion! Hahahaha! We are so freaking doomed!
And, just as you would expect, the Monetary Base has exploded to $984.717 billion from $911.454 billion last week, and which is up from $827.367 billion just 12 months before! Money is being expanded at unbelievable, unbelievable, Freaking Unbelievable Rates (FUR)!
And most of it is being used by the government, as the Treasury Gross National Debt is now $10.326 trillion, up from $10.245 trillion the week before, and up by a staggering $1.271 trillion from the $9.055 trillion in national debt only 12 months ago! Yikes! We're freaking doomed!
All of this mountain of money and credit will have disastrous consequences, which I was going to turn into a long, eerie wail, like a hungry banshee keening from beyond the dead as a "performance art" thing that I have been working on in my spare time, but instead we have John Embry of Sprott Asset Management jolting me back to reality, which is the fact that I can't change anything, and so I am only in this to make a lot of money betting on the stupidity and failure of the Federal Reserve and the Congress abusing their stupid fiat currency and stupid central bank to finance some bizarre regime of perpetual deficit-spending.
To this end he succeeded admirably, and he captured my full attention with his essay's title "Rescue Will Send Gold To Surreal Price Level", mostly because I am so familiar with things surreal, like my wife coming home early and yelling, "Why in the hell aren't you at work, and who's been eating all the Girl Scout Thin Mint cookies like the big, fat pig that he is?" which makes it sound like there are two people involved when there is only one! Weird! See what I mean about my experiencing "surreal" first hand?
I noticed that Mr. Embry was appreciably staggered, although it turns out he was not affected by my surreal experience, but about how "The recent events that have occurred on the U.S. financial scene can only be described as mind-boggling."
Such as, perhaps, noting the extreme differentials between the prices of sold and silver futures versus the prices of gold and silver bullion, and in the case of silver, sometimes there's a difference of up to 100%! People are reportedly paying up to $20 - and more! - for an ounce of silver when the futures price for silver is less than $10!
Anyway, whatever the reason, Jim Willie of the Hat Trick Letter concludes that we should "Expect defaults in the COMEX with gold & silver, whose prices for paper vastly diverge from physical, to the anger of foreigners watching" because those foreigners "hold massive precious metals assets" which I figure shows just how much smarter they are than we Americans, thus giving me something else to worry about.
He figures that these defaults will constitute a "breath-taking discontinuity event", to which I say, "Whee!" as the result will be a Big, Big, BIG Profit (BBBP) for those who own gold and silver, and this will all happen thanks to the arbitrageurs, who are pouncing all over this huge price disparity by buying in the cheap futures market and simultaneously selling in the expensive bullion market to pocket the difference, and who will make a lot of money, too.
And one of them is Jason Hommel of SilverStockReport.com, who announced that he, too, is starting a new arbitrage business to take advantage of that surprising disparity by buying silver on the Comex at the manipulated low, low price, then taking delivery, having it minted into individual ounces and small bars, and then auctioned off at prices that more approximate supply and demand, making a profit, and everybody is theoretically happy! Perfect! Effortlessly capitalizing on the governments' regulatory corruption and the rules of Comex that apparently allow it! Hahaha! Go silver!
And it will continue until the price disparity disappears to the point where arbitrageurs can no longer make a profit at it, either because the price of bullion went down or the price of a futures contract in silver went up.
I know which way I am betting, and soon, I am wistfully wasting the day away, marveling at the lovely, lovely profits I will make and all the wonderful, wonderful things I will buy, and all the lovely, wonderful things I will do with all that lovely, lovely, wonderful, wonderful money when silver zooms in price as it must. Sigh.
And then, lost in a reverie of such sweetness, secret sins and delicious depravities, nothing seems all that important anymore. Like finishing this stupid column. Sigh.
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Shenzhen Bank Traces Losses to Gambler
A bank executive with cash access allegedly skimmed off 30 million yuan over four years to feed a gambling habit.
By staff reporter Fu Yanyan – Caijing Magazine
29 October 2008
After a six month investigation, prosecutors are preparing for the possible trial of a former executive for the Shenzhen Development Bank accused of embezzling millions of yuan for online gambling.
Caijing learned from the prosecutor’s office in Shenzhen’s Futian District that the suspect, a former bank supervisor identified only by his surname Zhang, allegedly stole more than 30 million yuan from the bank while working as director of the bank’s clearing center for branch cash collections.
Rumors about the case surfaced March 4 and led to a sharp selloff of the bank stock. The next day, a bank statement admitted irregular trading activities had been detected, and that a branch employee was suspected of embezzling capital through an internal account.
Investigators have found that Zhang was an online gambler who could not pay his debts. To support his habit, he allegedly used his position to make several transfers of bank funds to a person account.
Between March 2004 and August 2007, Zhang allegedly siphoned 25 million yuan. Then on February 27, investigators said, he transferred 7.25 million yuan to his account from a colleague’s operating account.
How could such a bank employee cover his tracks for four years? A source close to the bank told Caijing that “in the past, people could get access to the system of the bank’s clearing center only by a computer account, and the bank seldom checked its financial accounts. Therefore, Zhang, as director of the center, could easily cover any violation.
“But the bank later upgraded the system to require permission from two people to operate the system, which led the discovery of Zhang’s case.”
A bank spokesperson declined to provide further details now that the case has reached the Shenzhen People’s Procuratorate.
The bank’s March 5 statement said necessary measures have been taken to control losses, and that the expected loss from this case could be limited to 30 million yuan. “The case has little impact on the bank’s financial performance and operations,” the statement added.
A securities analyst told Caijing that holes in the internal management systems at some Chinese banks leaves room for this kind of case.
Indeed, the analyst said, the Shenzhen bank “must improve its risk control mechanism to avoid worse cases.”
Joke of the month:
Shining Blunder
A cowboy walks into a barbar shop, sits on the chair and says, "I'll have a shave and a shoe shine."
As the barber begins to lather the cowboy's face and sharpen the old straight edge, a woman with the biggest, firmest most beautiful breasts he has ever seen kneels and begins to shine his shoes.
The cowboy says, "Young lady, you and I should go and spend some time in a hotel room."
She replies, "I'm married and my husband wouldn't like that."
The cowboy says, "Tell him you're working overtime and I'll pay you the difference."
She says, "You tell him. He's the one holding a razor to your neck."
全球贸易总额明年恐缩水
来源：联合新闻网
发布时间：2008-10-30
信用市场急冻已冲击全球贸易，各国进出口业者难以获取银行信用状，全球贸易总额明年可能出现18年来首见的缩减。
经济指针之一的波罗的海干货指数(BDI)28日跌破1,000点整数大关，为六年来首见，累计今年来跌幅近90%。
世界银行经济学家柏恩斯说，全球贸易总额明年可能缩减2%，为1982年来首见，过去年间每年都有5%至10%成长。
信贷紧缩的效应从8月就已出现，当时韩国两家造船厂因买主无法筹足头期款，取消订单。最近美国乔治亚木材商柏奈特在上海的买主，也因为拿不到银行信用状而取消交易，他说今年因订单取消的损失约达400万美元，占营收预测的三分之一，他被迫裁员应对。
奥斯陆船运经纪商史约夫说，“这种震撼只有战争爆发或1970年代石油危机才见得到，信用紧缩打击到整个经济，我们是银行之后的第二波受害者。”
而出口商对信不过的买主要求付款保证，使过去几年使用率下降的信用状再度流行。但船运和大宗商品市场传言满天飞，说银行拒绝兑付其他银行开立的信用状，也拒绝为大宗商品的买卖双方，提供金属或软物料运输所需的担保。
穆迪公司Economy.com站点分析师鲁宾森指出：“全球贸易的流水线全仰赖信用状，没有信用状就没有交易，没有交易意味没有国际贸易。”德意志银行金融机构业务主管诺尔说，中国、土耳其、巴基斯坦和阿根廷等新兴国家的信用状风险溢价最近上涨一至两倍。
巴西全国工业总会(CNDI)发现，所有的公司都面临融资困难的问题。该会首席经济学家“要提振出口，就需要资金，但在过去几周，融资几乎枯竭。”
Red wine may ward off lung cancer: study
Oct 9, 2008
NEW YORK (Reuters Health) - Drinking red wine, but not white wine, may reduce lung cancer risk, especially among current and ex-smokers, new research indicates.
People who had ever smoked and who drank at least a glass of red wine daily were 60 percent less like to develop lung cancer than ever-smokers who didn't drink alcohol, Dr. Chun Chao of Kaiser Permanente Southern California in Pasadena and colleagues found.
But white wine didn't reduce risk, suggesting it could be compounds contained in red wine, such as resveratrol and flavonoids, rather than the healthier lifestyle associated with wine drinking, that may be protective, the researchers say.
Studies examining the relationship between lung cancer and alcohol consumption have had mixed results, they note in the journal Cancer Epidemiology, Biomarkers and Prevention. Much of this research has failed to adjust for factors like socioeconomic status that can influence both alcohol use and lung cancer risk.
In the current study, Chao and her colleagues looked at 84,170 men 45 to 69 years old covered by Kaiser Permanente California health plans. Between 2000 and 2006, 210 of them developed lung cancer.
After accounting for the influence of age, education, income, exposure to second-hand smoke, body weight, and other relevant factors, the researchers found that lung cancer risk steadily decreased with red wine drinking, with a 2 percent drop seen with each additional glass of red wine a man drank per month. No other type of alcoholic beverage, including white wine, was associated with lung cancer risk.
For men who were heavy smokers, the reduction in risk was greater, with a 4 percent lower likelihood of developing lung cancer seen for each glass of red wine consumed per month.
Research has shown that wine drinkers may have healthier lifestyles and tend to have more education and higher income than non-wine drinkers, the researchers note. But the fact that reduced lung cancer risk was seen only with red wine, not white, "lends support to a causal association for red wine and suggests that compounds that are present at high concentrations in red wine but not in white wine, beer or liquors may be protective against lung carcinogenesis," Chao and her team say.
SOURCE: Cancer Epidemiology, Biomarkers and Prevention, October 2008.
The Shipping News Suggests World Economy Is Toast: Mark Gilbert
Commentary by Mark Gilbert
Oct. 30 (Bloomberg) -- In the third quarter of 2007, Volvo AB booked 41,970 European orders for new trucks. Guess how many prospective purchases Volvo, the world's second-biggest maker of heavy rigs, received in the third quarter of this year?
Here's a clue. Picture a highway gridlocked by 41,815 abandoned trucks -- because Volvo's order book got destroyed to the tune of 99.63 percent, with customers signing up for just 155 vehicles in the three-month period, the Gothenburg, Sweden-based company said last week.
The pathogen that has fatally infected swathes of the banking industry is now contaminating non-financial companies. ``We're heading toward the sharpest downturn I've ever seen in Europe,'' said Chief Executive Officer Leif Johansson.
Volvo has company. Daimler AG, the world's biggest truckmaker, said earlier this month that its U.S. deliveries slumped by a third in the first half of the year.
After months of money-market madness, slumping stock markets, collapsing currencies and bank bailouts, the headlines from the broader economy are starting to roll in -- and the news is all bad and getting worse, fast.
Let's begin with the shipping news. If nobody is buying your trucks, you don't need to rent a vessel to carry that shiny new 18-wheeler to its new owner. Hence the Baltic Dry Index, which tracks the cost of shipping goods and commodities, fell below 1,000 this week for the first time in six years.
Slow Boats From China
Put another way, it is now almost 90 percent cheaper to ship goods over the oceans than it was at the beginning of the year. And because the huge vessels known as capesize ships can't currently charge much more than their daily operating cost of about $6,000 per day, their captains have slowed down to economize on fuel and save money, to about 8.68 knots from 10.33 knots in July, according to data compiled by Bloomberg.
It isn't just the oceans that are emptying. Air freight traffic dropped 7.7 percent in September, according to the latest figures from the International Air Transport Association. That's the steepest decline since the trade group began compiling the data in January 2003.
Figures this week showed U.S. consumer confidence collapsed to a record low in October; retail therapy probably isn't the cure. With Christmas looking like it might be canceled, why bother fighting with your bankers for the letters of credit you need to export the stocking-stuffers you make in the factory?
`Growing Anxiety'
``The October reading signals the deepening concern about the marked deterioration in the overall economy as well as the growing anxiety arising from the continued travails in the financial markets,'' David Resler, chief economist at Nomura Securities in New York, wrote in a research report. ``Confidence declined across all regions, all age groups and all income categories.''
One way in which the current recession/depression/meltdown (take your pick) will differ from previous economic collapses is the granularity of information now available. The world is awash with more data than ever before, generating a plethora of ways to scare yourself silly.
The Bank of England, for example, produces what it calls a Financial Market Liquidity Index, a global measure of stress that gauges how far a basket of nine indicators strays from its historical mean. The index gets updated twice a year; this week's bulletin, which recalculates the level up to Oct. 17, showed liquidity at its lowest level in at least 17 years.
Default Danger
The next wave of headlines to scare shoppers out of the mall is likely to come when companies find they can't pay their debts. Credit-rating company Moody's Investors Service predicts that the default rate among sub-investment grade borrowers will surge to 7.9 percent in a year, from 2.8 percent at the end of the second quarter of 2008 and from just 1.3 percent 12 months ago.
``With the global credit crisis intensifying and credit spreads widening, it is increasingly likely that corporate default rates will spike sharply in the next 12 months,'' Kenneth Emery, the director of default research at Moody's, said in a research report published earlier this month.
The Markit iTraxx Crossover index of credit-default swaps on mostly speculative-grade companies traded as high as 920 basis points this week. That level suggests investors and traders are anticipating more than half of the companies in the index will default, based on bondholders recouping 40 percent of their money from companies that fail to keep up their debt payments.
Going Bust
At a recovery rate of 20 percent, the implied default level is about 45 percent. At a salvage percentage of just 10 percent, the index is still suggesting about 40 percent of its members will renege on their commitments. It is hard to see how consumer confidence will recover when companies start going bust.
``Worries about defaults are mounting as liquidity is strained,'' Guy Stear and Claudia Panseri, analysts at Societe Generale SA, wrote in a research note this week. ``Earnings expectations still look optimistic, with analysts projecting 2009 earnings for the S&P 500 rising by 19 percent.''
There's a great scene in the film version of Annie Proulx's Pulitzer Prize-winning novel ``The Shipping News.'' A grizzled journalist explains to rookie hack Kevin Spacey how dark clouds on the horizon justify the hyperbolic headline ``Imminent Storm Threatens Village.''
``But what if no storm comes?'' Spacey asks. The veteran replies with a second-day headline: ``Village Spared From Deadly Storm.'' Unfortunately, the global village we live in is unlikely to survive unscathed.
China's consumers on a shopping spree
October 2008
The massive shopping mall in the Shanghai suburb of Xinzhuang is still under construction. Hand-written signs are plastered around the northern entrance notifying those without proper documentation that they will be refused entry.
A security guard with a Henan accent mans a small desk at the door and directs visitors to the southern entrance, where migrant workers hurry to plant trees and shrubbery beneath banners proclaiming the grand opening of the Xinzhuang Carrefour hypermarket.
Underground, the Carrefour, only 12 days old, is bustling.
A man in a pink polo shirt who gives his surname as Yin is buying household goods and cleaning supplies with his wife. He works for an IT company, and they are both in their late 20s.
“Our apartment is five minutes away, and we’ve been there two years,” he says as his wife fills up the shopping cart. “There are other places to shop in this area, but the selection here is much better.”
Price, he says, is not a big factor in his decision of where to shop.
A thousand miles away, in Nanning, Guangxi province, a woman named Jiang is shopping for handbags. Jiang, who co-owns a chemical plant with her husband, is a woman of expensive tastes: If it isn’t Louis Vuitton, Gucci or Chanel then it won’t do. Similar policies apply to the other items routinely found on her shopping list, namely designer clothing, jewelry, and cosmetics.
Jiang is also unworried about prices.
“My shopping habits may be influenced by my mood, but not by the economy,” she said. “I buy more when I’m happy and may buy less when I’m feeling down. But if I really love something, I will try my best to buy it.”
Lost in the doom and gloom of recent news about China’s economy – investors tormented by falling stock markets and softening real estate prices; producers squeezed by shrinking international demand and rising input costs – is the story of the Chinese consumer.
People like Yin and Jiang are helping to drive, and at the same time, change the picture of domestic demand. Amid a global economic slowdown, the Chinese consumer is resilient.
Compelling data
The numbers look clear enough: China’s retail sales volume, which rose 12.9% year-on-year in 2007 as a whole, accelerated to 14.3% between January and August of this year.
In value terms, retail sales grew 16.7% in 2007 but were up 21.7% year-on-year between January and August 2008. That’s despite a newly shortened May Day holiday cutting into a typically heavy shopping period, said Paul McKenzie, head of consumer research at brokerage CLSA.
In addition to the shorter holiday, McKenzie says there was some “temporary psychological fallout” from the May 12 Sichuan earthquake, which had a dampening effect on consumer spending. However, retail sales value growth rebounded to hit a 12-year high of 23.3% in July, and continued to post strong growth – 23.2% – in August.
That is not to say that these numbers tell the whole story. Official government retail sales numbers factor in wholesale and service trade figures, which serves to inflate the headline statistics. Nevertheless, the lines still point upwards: People are shopping.
Or, at least, most people are. One exception to the otherwise bright consumer picture is growth in the luxury goods segment. While a March report by consumer research firm Euromonitor listed rising demand for luxury goods as one of the key consumer trends to watch in China, other analysts claim demand for luxury goods and jewelry is slowing.
Underperforming capital markets have taken much of the blame for weaker luxury consumption growth. As Andy Xie, an independent economist, argues, the Shanghai Composite Index’s slide – it fell by more than 60% between January 1 and mid-September – combined with the woes of the property sector, have a real effect on luxury spending.
“So many profits were driven by the property market, not just for property developers but for other business as well,” said Xie.
Half-jokingly, he added that as small businesses profited from property investments, “a lot of small businesspeople essentially gave this money to their mistresses, who went out to buy LV bags and luxury cars ... that’s basically the trickle-down economy in China.”
Wealth destruction
Although CLSA’s McKenzie suggests that any perceived slowdown may merely be on a comparative basis to the incredible growth seen earlier in the year, he doesn’t discount the idea of wealth destruction as a result of poorly performing markets. Residents of first-tier cities like Shanghai, who account for a sizeable proportion of luxury consumers in China as a whole, have larger relative exposure to stock and property markets, and are more highly leveraged – all factors that would contribute to lower spending in a bear market, McKenzie said.
However, not everyone subscribes to the wealth destruction theory, and not just because people like Jiang, the chemical factory owner, say they buy regardless of the state of the economy.
“This is a real big discrepancy in thinking between, on one hand, the financial community, and on the other hand, people who work in retail,” said Paul French, chief China representative for market research firm Access Asia and a regular contributor to CHINA ECONOMIC REVIEW. “We don’t see that negative wealth effect kicking in. People who link everything to stock market performance and property market performance see that link ... but very few [urban consumers] are over-extended, and they’re not really worried.”
Instead, said French, luxury consumers are not buying less, but are buying less in mainland China. “That’s the big thing with luxury. You go down to Hong Kong and you’re getting it half price,” he said.
But if some affluent consumers are taking their money elsewhere, that effect is counterbalanced by the rise of a different consumer segment: the middle class.
Definitions of middle class consumers vary, but they can broadly be defined as those with household incomes of around US$4,000 a year. A typical middle class household can afford to raise a child, own an apartment and a small car, and have some money left over for discretionary purchases.
This description applies to a fast-growing segment of China’s population.
According to a report by forecasting firm Global Demographics, there are currently 212 million households in China earning between US$2,500 and US$10,000 per year. The firm expects that number to rise to 390 million in 2028, with 60% of those households making between US$5,000 and US$10,000. The total number of households in China is set to rise from the current 426 million to 549 million by 2028.
The growth of middle-class households is being spurred by rising incomes. Even as China’s consumer price index (CPI) growth spiked early this year due to rising food prices – hitting a 12-year high of 8.7% in February – wages have been growing more quickly than inflation. In 2007, urban incomes rose 12.2% in comparison to a CPI increase of 4.8%. Xie, the independent economist, said a tight labor market will ensure that high wages continue.
Lifestyle choices
With food prices falling, and with CPI growth down to 4.9% year-on-year in August, real income growth will continue to rise, said Wang Qian, an economist at J.P. Morgan in Hong Kong. Retailers are rising to meet the challenge of winning consumers’ hard-earned yuan.
“What we talk about targeting is lifestyle brands,” said Janet De Silva, CEO of Retail China, a Hong Kong-based retail brand management firm that directly operates and staffs retail locations in China. The company’s research on Chinese consumers led it to bypass luxury goods, which it sees as already well-represented, and focus instead on introducing foreign brands to the middle-class market.
“[Our target consumers] are young professionals under the age of 40, many are first-time homeowners, many are looking to fit out their homes with furnishings and style,” said De Silva.
“They have a very contemporary global look ... many of them are parents with needs for their children.”
Hoping to take advantage of the rising purchasing power of these young professionals, Retail China focuses on bringing new and different brand concepts to China. De Silva said that the introduction of La Vie En Rose, an upper mass-market swimwear and lingerie brand, is indicative of changing consumer preferences as domestic and international travel become more common.
By bringing unfamiliar brand concepts to China, the company is able to add what De Silva calls an “educational element” to shopping. Rather than simply selling products, La Vie En Rose salespeople are employed to help customers understand, for example, why certain kinds of swimwear work better for them, or how to combine different styles.
This approach also means the company’s brands can afford to charge a premium – one which consumers are increasingly willing to pay.
De Silva says Retail China’s brands are roughly 20-30% more expensive than domestic competitors. Even with that premium, Fruits & Passion, a bed, bath and household products brand, has seen annual sales growth of over 100%.
“For us, the challenge is how many stores we can locate in a particular market,” said De Silva.
Another beneficiary of changing consumption patterns is clothing manufacturer American Apparel. The company, which produces casual clothing in the US and is known for promoting progressive labor policies, has seen strong consumer interest in its Chinese stores.
“We are in China not just to sell a single piece of product,” said Wei Su, American Apparel’s China resident director. “We’re actually selling the American dreams and the American lifestyle … We’re selling our social responsibility and social awareness.”
Even the supermarket sector, typically known for its cutthroat competition, is benefiting from changes as consumers become open to premium product categories like organic foods. David Xie, a quality assurance manager at Wal-Mart China, said the company became aware of consumer willingness to pay more for organic foods in 2005. While overall sales remain low, Xie says the company is very optimistic about growth in the segment.
A report by the Boston Consulting Group sheds some light on the reasons for the success and optimism of upper mass-market retailers. In a 2007 survey of Chinese consumers, 59% said they planned to increase their spending within 12 months, with 11% planning to increase their spending by more than 20%.
In contrast, only 9% of consumers said they planned to decrease their overall spending. Furthermore, the desire to spend more on consumer goods exists across a wide range of product categories.
To the suburbs
As retailers discover that consumers are willing to trade up, they are not just looking for ways to attract new shoppers – they are increasingly going out to meet shoppers near their homes.
The mall around the Xinzhuang Carrefour, which will eventually host a Parkson department store, a B&Q home-improvement store and a wide range of smaller retailers, is part of a growing trend of retail properties expanding into middle-class areas in suburbs and second- and third-tier cities. Yin, the shopper at the Xinzhuang Carrefour, said that with his job and apartment both in Shanghai’s suburbs, he ventured into the city center once a month at most.
“The suburbs are no longer just dormitory communities and Americans who don’t really want to be in China,” said Access Asia’s French. “There are malls out in these places and everyone’s opening ... It’s pretty much the same price points as downtown. As far as the consumers are concerned, it’s not that different.”
Property developers, encouraged by lower land prices, are leading the charge. Of the 13 new malls and retail properties that Singaporean developer CapitaLand plans to open in China in 2008 and 2009, 12 are in suburbs and second- and third-tier cities such as Yiyang in Hunan, Yangzhou in Jiangsu, and Yibin in Sichuan. As malls move into less-expensive cities and suburbs, retailers benefit from consumers with more disposable income due to lower housing costs, and improved margins due to lower rents.
Lines of credit
Key to the growth of shopping malls is the larger demographic trend of urbanization. As CLSA’s McKenzie points out, China is still only 40% urbanized and is adding 10-20 million people to its cities each year. He sees this as a powerful driver of many consumer patterns.
One of these patterns is consumer credit growth.
“Your average Chinese household is just massively under-leveraged by any standard,” McKenzie said. The rapid rise in credit card ownership and usage over the last five years, and mortgage growth – still strong despite a slowing property market – is changing that.
“If China got to even a fraction of where Western consumers are indebted, that would underpin very high levels of consumption,” McKenzie added.
But there are obstacles in the way.
Despite the growth of an increasingly spendthrift Chinese middle class, the fact remains that Chinese consumers, as a whole, remain very price-sensitive.
“People always moan that the queues are long [in large supermarkets like Carrefour] even though people aren’t buying much. And you will be in a queue behind someone buying two cans of Coke because they’ll save 50 fen,” said French.
The wealth gap
High sensitivity to prices reflects an economy where wealth distribution remains very uneven.
“Basically, if you want to reach half the households earning over RMB80,000 (US$11,690), you only have to be in 11 cities in China,” said Clint Laurent, chief executive of Global Demographics.
At the same time, there are still more than 197 million households earning less than US$2,500 per year. While the percentage of such households is shrinking, Global Demographics predicts they will still number 103 million in 2028. These households will make up 51% of total rural households – down from 80% today – but only 3% of urban households.
But the large raw number of low-income households is overshadowed by the overall trend: China’s consumers are earning and buying more, and Beijing will likely support continued growth as it tries to build up the market at home to guard against potentially weak exports. CLSA’s McKenzie points to recent tax cuts and increases in tax thresholds, as well as reductions in import duties on consumer products, as examples of moves conducive to consumers.
“You will see consumption-friendly policies by the government over the next decade,” he said.
Xie, the independent economist, believes that higher consumption could strongly benefit China’s economy: If the consumer sector represents half of GDP and it grows at 10% a year, this equates to a 5% annual boost for the economy.
Logically, a sharp downturn in consumption would have a similarly sharp negative effect on the economy. But few market watchers expect this to happen.
“There’s nothing Chinese about China,” said Access Asia’s French. “They’re just people, and they’ve got a certain amount of money in their pockets. They’ll consume more when they’ve got more money in their pockets.”
A Question for A.I.G.: Where Did the Cash Go?
By MARY WILLIAMS WALSH
October 29, 2008
The American International Group is rapidly running through $123 billion in emergency lending provided by the Federal Reserve, raising questions about how a company claiming to be solvent in September could have developed such a big hole by October. Some analysts say at least part of the shortfall must have been there all along, hidden by irregular accounting.
“You don’t just suddenly lose $120 billion overnight,” said Donn Vickrey of Gradient Analytics, an independent securities research firm in Scottsdale, Ariz.
Mr. Vickrey says he believes A.I.G. must have already accumulated tens of billions of dollars worth of losses by mid-September, when it came close to collapse and received an $85 billion emergency line of credit by the Fed. That loan was later supplemented by a $38 billion lending facility.
But losses on that scale do not show up in the company’s financial filings. Instead, A.I.G. replenished its capital by issuing $20 billion in stock and debt in May and reassured investors that it had an ample cushion. It also said that it was making its accounting more precise.
Mr. Vickrey and other analysts are examining the company’s disclosures for clues that the cushion was threadbare and that company officials knew they had major losses months before the bailout.
Tantalizing support for this argument comes from what appears to have been a behind-the-scenes clash at the company over how to value some of its derivatives contracts. An accountant brought in by the company because of an earlier scandal was pushed to the sidelines on this issue, and the company’s outside auditor, PricewaterhouseCoopers, warned of a material weakness months before the government bailout.
The internal auditor resigned and is now in seclusion, according to a former colleague. His account, from a prepared text, was read by Representative Henry A. Waxman, Democrat of California and chairman of the House Committee on Oversight and Government Reform, in a hearing this month.
These accounting questions are of interest not only because taxpayers are footing the bill at A.I.G. but also because the post-mortems may point to a fundamental flaw in the Fed bailout: the money is buoying an insurer — and its trading partners — whose cash needs could easily exceed the existing government backstop if the housing sector continues to deteriorate.
Edward M. Liddy, the insurance executive brought in by the government to restructure A.I.G., has already said that although he does not want to seek more money from the Fed, he may have to do so.
Continuing Risk
Fear that the losses are bigger and that more surprises are in store is one of the factors beneath the turmoil in the credit markets, market participants say.
“When investors don’t have full and honest information, they tend to sell everything, both the good and bad assets,” said Janet Tavakoli, president of Tavakoli Structured Finance, a consulting firm in Chicago. “It’s really bad for the markets. Things don’t heal until you take care of that.”
A.I.G. has declined to provide a detailed account of how it has used the Fed’s money. The company said it could not provide more information ahead of its quarterly report, expected next week, the first under new management. The Fed releases a weekly figure, most recently showing that $90 billion of the $123 billion available has been drawn down.
A.I.G. has outlined only broad categories: some is being used to shore up its securities-lending program, some to make good on its guaranteed investment contracts, some to pay for day-to-day operations and — of perhaps greatest interest to watchdogs — tens of billions of dollars to post collateral with other financial institutions, as required by A.I.G.’s many derivatives contracts.
No information has been supplied yet about who these counterparties are, how much collateral they have received or what additional tripwires may require even more collateral if the housing market continues to slide.
Ms. Tavakoli said she thought that instead of pouring in more and more money, the Fed should bring A.I.G. together with all its derivatives counterparties and put a moratorium on the collateral calls. “We did that with ACA,” she said, referring to ACA Capital Holdings, a bond insurance company that filed for bankruptcy in 2007.
Of the two big Fed loans, the smaller one, the $38 billion supplementary lending facility, was extended solely to prevent further losses in the securities-lending business. So far, $18 billion has been drawn down for that purpose.
For securities lending, an institution with a long time horizon makes extra money by lending out securities to shorter-term borrowers. The borrowers are often hedge funds setting up short trades, betting a stock’s price will fall. They typically give A.I.G. cash or cashlike instruments in return. Then, while A.I.G. waits for the borrowers to bring back the securities, it invests the money.
In the last few months, borrowers came back for their money, and A.I.G. did not have enough to repay them because of market losses on its investments. Through the secondary lending facility, the insurer is now sending those investments to the Fed, and getting cash in turn to repay customers.
A spokesman for the insurer, Nicholas J. Ashooh, said A.I.G. did not anticipate having to use the entire $38 billion facility. At midyear, A.I.G. had a shortfall of $15.6 billion in that program, which it says has grown to $18 billion. Another spokesman, Joe Norton, said the company was getting out of this business. Of the government’s original $85 billion line of credit, the company has drawn down about $72 billion. It must pay 8.5 percent interest on those funds.
An estimated $13 billion of the money was needed to make good on investment accounts that A.I.G. typically offered to municipalities, called guaranteed investment contracts, or G.I.C.’s.
When a local government issues a construction bond, for example, it places the proceeds in a guaranteed investment contract, from which it can draw the funds to pay contractors.
After the insurer’s credit rating was downgraded in September, its G.I.C. customers had the right to pull out their proceeds immediately. Regulators say that A.I.G. had to come up with $13 billion, more than half of its total G.I.C. business. Rather than liquidate some investments at losses, it used that much of the Fed loan.
For $59 billion of the $72 billion A.I.G. has used, the company has provided no breakdown. A block of it has been used for day-to-day operations, a broad category that raises eyebrows since the company has been tarnished by reports of expensive trips and bonuses for executives.
The biggest portion of the Fed loan is apparently being used as collateral for A.I.G.’s derivatives contracts, including credit-default swaps.
The swap contracts are of great interest because they are at the heart of the insurer’s near collapse and even A.I.G. does not know how much could be needed to support them. They are essentially a type of insurance that protects investors against default of fixed-income securities. A.I.G. wrote this insurance on hundreds of billions of dollars’ worth of debt, much of it linked to mortgages.
Through last year, senior executives said that there was nothing to fear, that its swaps were rock solid. The portfolio “is well structured” and is subjected to “monitoring, modeling and analysis,” Martin J. Sullivan, A.I.G.’s chief executive at the time, told securities analysts in the summer of 2007.
Gathering Storm
By fall, as the mortgage crisis began roiling financial institutions, internal and external auditors were questioning how A.I.G. was measuring its swaps. They suggested the portfolio was incurring losses. It was as if the company had insured beachfront property in a hurricane zone without charging high enough premiums.
But A.I.G. executives, especially those in the swaps business, argued that any decline was theoretical because the hurricane had not hit. The underlying mortgage-related securities were still paying, they said, and there was no reason to think they would stop doing so.
A.I.G. had come under fire for accounting irregularities some years back and had brought in a former accounting expert from the Securities and Exchange Commission. He began to focus on the company’s accounting for its credit-default swaps and collided with Joseph Cassano, the head of the company’s financial products division, according to a letter read by Mr. Waxman at the recent Congressional hearing.
When the expert tried to revise A.I.G.’s method for measuring its swaps, he said that Mr. Cassano told him, “I have deliberately excluded you from the valuation because I was concerned that you would pollute the process.”
Mr. Cassano did not attend the hearing and was unavailable for comment. The company’s independent auditor, PricewaterhouseCoopers, was the next to raise an alarm. It briefed Mr. Sullivan late in November, warning that it had found a “material weakness” because the unit that valued the swaps lacked sufficient oversight.
About a week after the auditor’s briefing, Mr. Sullivan and other executives said nothing about the warning in a presentation to securities analysts, according to a transcript. They said that while disruptions in the markets were making it difficult to value its swaps, the company had made a “best estimate” and concluded that its swaps had lost about $1.6 billion in value by the end of November.
Still, PricewaterhouseCoopers appears to have pressed for more. In February, A.I.G. said in a regulatory filing that it needed to “clarify and expand” its disclosures about its credit-default swaps. They had declined not by $1.6 billion, as previously reported, but by $5.9 billion at the end of November, A.I.G. said. PricewaterhouseCoopers subsequently signed off on the company’s accounting while making reference to the material weakness.
Investors shuddered over the revision, driving A.I.G.’s stock down 12 percent. Mr. Vickrey, whose firm grades companies on the credibility of their reported earnings, gave the company an F. Mr. Sullivan, his credibility waning, was forced out months later.
The Losses Grow
Through spring and summer, the company said it was still gathering information about the swaps and tucked references of widening losses into the footnotes of its financial statements: $11.4 billion at the end of 2007, $20.6 billion at the end of March, $26 billion at the end of June. The company stressed that the losses were theoretical: no cash had actually gone out the door.
“If these aren’t cash losses, why are you having to put up collateral to the counterparties?” Mr. Vickrey asked in a recent interview. The fact that the insurer had to post collateral suggests that the counterparties thought A.I.G.’s swaps losses were greater than disclosed, he said. By midyear, the insurer had been forced to post collateral of $16.5 billion on the swaps.
Though the company has not disclosed how much collateral it has posted since then, its $447 billion portfolio of credit-default swaps could require far more if the economy continues to weaken. More federal assistance would then essentially flow through A.I.G. to counterparties.
“We may be better off in the long run letting the losses be realized and letting the people who took the risk bear the loss,” said Bill Bergman, senior equity analyst at the market research company Morningstar.
Wild birds carry avian flu viruses to U.S.: report
Oct 28, 2008
WASHINGTON (Reuters) - Migrating waterfowl may be carrying avian influenza viruses from Asia to the Americas, U.S. government researchers reported on Tuesday.
They found genetic evidence that some non-dangerous influenza viruses infecting northern pintail ducks in Alaska are genetically more closely related to Asian strains of bird flu than to North American strains.
"Although some previous research has led to speculation that intercontinental transfer of avian influenza viruses from Asia to North America via wild birds is rare, this study challenges that," said Chris Franson, a research wildlife biologist at the U.S. Geological Survey, who helped lead the study.
USGS and U.S. Fish and Wildlife Service experts have been testing birds in Alaska for any evidence they may be carrying highly pathogenic H5N1 bird flu with them from Asia.
Writing in the journal Molecular Ecology, the USGS team said they had collected samples from more than 1,400 northern pintails from throughout Alaska and compared any viruses they found to virus samples taken from other birds in North America and eastern Asia where northern pintails spend the winter.
None of the samples were found to contain completely Asian-origin viruses and none were highly pathogenic. But certain parts of the genes of the viruses resembled Asian strains, they said.
Since 2003, H5N1 has swept through flocks in Indonesia, Korea, China and elsewhere in Asia, Europe, the Middle East and parts of Africa.
It has killed or forced the slaughter of more than 300 million birds.
Not only is it devastating to the poultry industry but it occasionally infects people and has killed 245 out of the 387 infected people so far, according to the World Health Organization.
Birds can carry dozens of different flu viruses, some dangerous and some not. So far there is no evidence any have carried H5N1 with them to North America from Asia.
Citadel winds down $1bn fund
By Anuj Gangahar
Oct 30 2008
Citadel Investment Group, the alternative investment house, is winding down its $1bn fund of hedge funds and redeploying the capital to support new hedge funds as they emerge in the coming months.
The move suggests Citadel is positioning itself to back managers who have quit the business or been forced to shut their funds in recent weeks as they launch new funds in the coming months.
Several analysts have recently been predicting the death of the hedge fund market because of redemptions, poor performance and severe pressure on funding.
Citadel's decision comes after the company last Friday hosted a conference call to quash market speculation that its funds would be forced to liquidate amid the market turmoil.
The funds of hedge funds business typically involves investing in established hedge fund managers as opposed to seeding start-ups.
The $1bn Fusion fund of hedge funds receives 95 per cent of its capital from Citadel and invests in more than 50 hedge funds.
That capital will be put into the two other areas that make up the Citadel Alternative Asset Management unit of Citadel. The remainder will be returned to outside investors.
The two areas are named Pioneer, an incubation unit that provides infrastructure support to emerging hedge fund managers, and Discovery, a seeding unit providing capital to standalone managers who have their own infrastructure.
Kenneth Griffin, chief executive and founder of Citadel, hosted the conference call for holders of $500m in Citadel debt. As many as 1,000 other callers jammed a line as Citadel rushed to add more phone lines.
"I've never seen a market as full of panic as we've seen in the last seven or eight weeks," Mr Griffin said.
US Treasury not negotiating aid for GM merger
By David Lawder
WASHINGTON, Oct 30 (Reuters) - The U.S. Treasury Department is not negotiating with General Motors Corp and the owners of Chrysler LLC on a request to provide direct government aid to their proposed merger, a Bush administration official said on Thursday.
Instead, the administration is working to speed the distribution to automakers of $25 billion in factory retooling funds authorized by Congress last month, the official told Reuters.
Earlier this week, industry sources said GM had asked for roughly $10 billion in an unprecedented government rescue package to support its acquisition of Chrysler from Cerberus Capital Management [CBS.UL].
The request was viewed as over and above the $25 billion in funds to enable the automakers to produce fuel-efficient vehicles.
"Treasury is not negotiating with the automakers, the administration is working to get the $25 billion Congress already authorized to the industry," the official said.
A GM spokesman had no immediate comment.
The Treasury did confirm that automakers' financial companies, such as GMAC LLC and Chrysler Financial, would qualify to sell distressed assets to the Treasury when it launches reverse auctions under its $700 billion market bailout plan.
However, the finance arms would have to be registered as federally regulated bank holding companies for them to qualify for a capital injection under the $250 billion equity purchase portion of the program.
GMAC said on Thursday it was seeking the bank holding company designation.
GM has been lobbying for Treasury help and outside pressure on the government grew earlier on Thursday. Governors of Michigan and five other states urged the Treasury and the Federal Reserve to help the distressed U.S. auto industry.
GM, Ford Motor Co and Chrysler have faced increased scrutiny over their cash positions by creditors and investors who have questioned whether they have the liquidity that they need to ride out a severe slump in U.S. auto sales seen continuing through 2009.
Without federal assistance, the pressure from increased unemployment claims and diminished tax revenue from the "economic crisis" facing automakers "threatens to create an unmanageable disaster at the state level," the letter said.
Michigan's congressional delegation, led by House of Representatives Energy and Commerce Committee chairman John Dingell, has been lobbying the Bush administration hard to free up liquidity for industry. They suggested that direct capital injections might be appropriate.
The $25 billion in loans approved by lawmakers last month are dedicated to helping Detroit meet a government mandate to make more fuel efficient vehicles.
Bush administration officials said this week they are working hard to accelerate the timeframe for making those loans available to automakers. Regulations needed to administer government loan programs can take six to 18 months to finalize.
The Energy Department is writing those regulations for the auto loans and said on Thursday it was working as fast as possible to complete the effort.
Attempts to speed that process even further could be made when Congress returns for a short period after next week's election, lawmakers have said.
Separately on Thursday, Ford Motor Co is having ongoing discussions with policymakers and would expect a "degree of parity" if the administration wound up helping to facilitate a GM merger with Chrysler.
GM has been in talks with Cerberus since September about a merger with Chrysler.
Sources familiar with the discussions said Wednesday the two sides agreed on the major issues, but the final form of any deal would depend on government financing and what form it would take.
Without new borrowing or asset sales, GM is in danger of running dangerously low on cash in 2009, analysts have said.
The Bush administration has been reluctant in the past to entertain the notion of an automaker bailout. But it has held talks in recent weeks with industry officials -- including GM chief executive Rick Wagoner -- about some measure of help with the global credit crisis hurting Detroit especially hard.
Cracks appearing in condo land
Credit turmoil, costs and threat of a recession have left several Vancouver projects stranded or on hold
Nathan VanderKlippe
October 29, 2008
VANCOUVER -- Holly Wood's first hint that something was "smelling fishy" in Vancouver's champagne-infused construction market came several weeks ago, when she discovered that the presentation centre for the city's most glamorous project was strangely closed.
The Ritz-Carlton hotel and condos is among the richest development to begin construction in Vancouver, a $2,500-per-square foot, 58-storey ultra-luxury tower with an eye-catching 45-degree twist designed by Arthur Erickson.
But that $500-million design is currently little more than a half-completed hole in the ground - the most glittering symbol of the troubled times that have humbled real estate development in Vancouver, a city that spent the last half-decade treating new condos like an evergreen money tree.
Credit turmoil, construction costs and the threat of a recession have left several towers stranded, unfinished and searching for either new designs or new money, while some developers are now threatening to sue buyers who are walking away from huge cash deposits, unwilling to commit to condos they pre-bought.
The problems have extended from suburbia to downtown Vancouver where Ms. Wood, an agent with Re/Max Masters Realty, had sold a unit in the Ritz-Carlton, a place where "cheap" begins in seven figures. But Holborn Group, the developer had not paid her commission. Concerned that something was terribly wrong, she did something that would have been unthinkable a year ago, in the days when real-estate was still quick money and worry-free.
She marched into the office of Holborn, sat in the board room and demanded her money.
"I said, ‘I'm not moving. I don't care how long it takes until I get my cheque'," she said. "I had nothing to lose. What's the worst thing they're going to give me, nothing? I'm not moving if I have to get arrested, do a hunger strike, or phone CTV news."
Thirty minutes later, after a conversation with the Simon Lim, Holborn's president and managing director, she left with her cheque. That night, local TV news carried a story that construction had been halted at the Ritz-Carlton. Mr. Lim's reason: the need to redesign the parkade. He denied financial troubles were to blame.
In a brief interview, Mr. Lim said, "it's my intent to resume [construction]," but declined further details. "It's a private site, I own it. It's a private enterprise. I don't think I have an obligation to disclose what my private business plans are to you."
Ms. Wood can't quite believe such a high-profile project could have problems.
"I'm just very shocked," she said. "I don't know what to say. I'm at a loss for words. Vancouver should be a strong market."
But signs of weakness are becoming increasingly obvious. As recently as August, Merril Lynch calculated that Vancouver - as has Toronto - had more multi-unit buildings under construction "than in all other Canadian cities combined a decade ago."
Today, some of that construction has ground to a halt. In the Vancouver suburb of Surrey, workers have abandoned a set of unfinished towers that stand at 21 and 25 storeys tall after the developer, who had secured some of his funding through Lehman Brothers, ran out of cash. (Work will resume if a new developer can be found to pay the $100-million in remaining costs; 560 of the towers' 690 units have been pre-sold.) In North Vancouver, work has stopped on two high-rises - one with seven storeys built, one still at the foundation stage - as the developer waits for a finalized subdivision plan. That work is expected to resume. One developer said a half-dozen other towers are vulnerable.
Across the Lower Mainland, developers who only months ago were gobbling up easy money to build wherever they could are now scrambling to rearrange construction schedules. They are adjusting to a new reality where credit is constricted; pre-sales, the lifeblood of the construction boom, are drying up; and buyers, amid forecasts of a 13% drop in housing values next year – after falling 10% this year – are growing too skittish to commit.
In the first nine months of 2007, the city of Vancouver issued building permits for 3,842 dwelling units. This year, it is down to 1,476. The Real Estate Board of Vancouver reported September sales were down 42.9% from last year, while listings were up 28.8%.
Even those major developments that have pulled back from the brink have not been spared. The Bowra Group Inc., a Vancouver firm that specializes in corporate rescues, has been ordered by the courts to take over management of four towers in the past year after their developers ran into problems. All of those are now either built or nearing completion, but Bowra now faces another problem: pre-sale buyers who left large deposits are walking away from sums as high as $40,000. Some estimate that fully 70% of condo buyers in recent years were speculators. With credit tightening, some are so over-extended they cannot get mortgages, while others simply no longer want to take on units they committed to at the frothy prices of the past few years.
"There's a lot people there to make a quick profit, and it backfired on them," said Mario Mainella, a vice-president at Bowra, whose firm is now contemplating legal action against some of those owners.
"The way most contacts are written, the developers can pursue a damages claim if the unit is sold for less than what it was sold for originally," Mr. Mainella said.
Problems with pre-sales have brought worried brows at the highest-profile project in the city, Millennium Water, Vancouver's Olympic Village project. Its developer, the Millennium Group, has already had to swallow a $60-million – or 6% – cost overrun on the 1,100-unit project, which is billed as Vancouver's last waterfront. But it now faces the challenge of marketing 60% of its units in a time of falling prices. Millennium has pre-sold more than 75% of the units it has already marketed, and Hank Jasper, the company's general manager of development and construction, said he is confident the remainder will sell thanks to their prime location and the long waiting lists already in place.
Still, he admitted that Millennium wants "to let the dust settle a little bit on what's going on out there right now" before it begins marketing those, likely next year.
"We're obviously concerned," he said. "We don't have a pre-sales requirement, so we could hold onto the product for as long as we need to. We don't believe that's going to occur. But that's always our failsafe."
Still, talk of failsafe plans is strong evidence that the radical shift in fortunes for the city's developers has tempered the thing that, until recently, flowed as fast as the money: pride.
"I've never seen anything so deep, so fast," said Eric Carlson, the CEO of Anthem Properties Corp. "I used to be a know-it-all. Now, I'm pretty humble."
B.C. housing sales will plunge 28 per cent: report
Expected recovery in 2009 depends on whether global financial crisis subsides
Derrick Penner
October 29, 2008
Expect British Columbia real estate sales to have fallen substantially by the end of this year, but stage a modest recovery in 2009, according to the latest forecast of the B.C. Real Estate Association.
Sales recorded through the Multiple Listing Service should fall 28 per cent to 73,700 units across the province by the end of 2008, compared with 102,805 units in 2007, according to the forecast released Wednesday.
That's a more optimistic assessment than the forecast released last week by Central 1 Credit union, which predicted that sales will continue to fall through 2009, with steeper price declines, before recovering in 2010.
However, both forecasts agree that at whichever point the housing market turns up from the downturn will depend on the current world financial crisis subsiding, B.C. not slipping into recession and a return of at least a little bit of consumer confidence.
"I don't know that the [B.C. Real Estate Association] forecast is optimistic," Cameron Muir, BCREA's chief economist, said in an interview.
His prediction is that sales levels in 2009, while higher than 2008, will still be similar to levels seen in 2001 or 2002, which were still relatively low.
"It's not like they'll be bouncing back into this great market."
However, Muir added that real estate sales in B.C. have fallen further than the underlying economy suggests they should.
While Muir expects B.C.'s economy to slow further in 2009, he also believes it is possible consumers will have recovered a bit from their financial fears by the middle of next year enough to consider major purchases again.
And by then, Muir added that prices will have dropped enough to make housing more affordable to more potential buyers.
His forecast is for the provincial average home price to dip nine per cent in 2009 to $413,000 compared with 2008.
Muir's forecasts that the average price across all 12 months of 2008 to remain three-per-cent higher than 2007, however that masks the fact that prices peaked in March and have dropped since then.
"I would argue that the housing market has already been shocked," he said. "Prices have declined 14 per cent [on a month-to-month basis] between March and September."
At some point, Muir said, he expects inventories of unsold homes to decline as people decide they don't need to sell, and sales should pick up.
Helmut Pastrick, chief economist for Central 1 Credit Union, said that while his own forecast does not agree with the BCREA on the exact numbers, he does agree that B.C.'s economy won't go into recession, and consumers will get a bit of their wind back at some point in 2009.
"I guess we're talking about degrees here really, and magnitudes," Pastrick said in an interview.
By magnitude, Pastrick forecasts that B.C.'s MLS sales falling 30 per cent to 70,700 units by the end of 2008, and a further 17 per cent to 59,000 by the end of 2009.
On prices, Pastrick forecasts that prices will decline 13 per cent between 2008 and 2009 to reach $310,000, and a further five per cent to $366,000 in 2010.
However, forecasting market changes can be notoriously difficult, according to Tsur Somerville, director of the centre for urban economics and real estate at the Sauder School of Business at the University of B.C.
All that a series of forecasts with differing results can tell you, Somerville added, is the general direction of activity and suggest a range of views as to what might happen.
"We're good at predicting what's going to happen when we're moving in one direct path," Somerville said of economists. "We're really bad at predicting when markets are going to turn."
For example, Somerville said that in January, when oil was headed to its peak price of $147 US per barrel, few economists would have forecast that by October it would be $67 per barrel.
B.C. real estate estimates
. 2007 MLS sales: 102,805
. 2008 MLS sales forecast: 73,700
. 2009 MLS sales forecast: 76,500
. 2007 average price: $438,975
. 2008 average price forecast: $453,000
. 2009 average price forecast: $413,000
Source: B.C. Real Estate Association
Americans slim down food spending as lean times force belt-tightening
Tom Bawden and Gary Duncan
October 31, 2008
Belt-tightening has become a harsh reality for America’s hard-up consumers in more ways than one. In a stark sign of the toll on US households from recessionary times, big-eating Americans’ notorious appetites are feeling the squeeze, with their spending on food falling at the fastest pace in 50 years.
The startling trend emerged in official figures yesterday showing that a slump in US consumer spending left the American economy shrinking at the fastest rate for seven years in the past quarter.
Overall US consumer spending fell in the quarter at an annual 3.1 per cent rate, its deepest decline since 1980. But most striking was the drop in food spending, which plunged at an annual pace of 8.6 per cent. Spending on goods other than durable products plummeted at an annual 6.4 per cent that marked the fastest fall since 1950, while demand for durable goods fell by 14.1 per cent, the steepest drop since 1987.
Olga Munuz, a server at the Europa Café in central New York, has discerned a significant change in the behaviour of her customers as rising unemployment has knocked their confidence at the same time as increased ingredient costs have pushed up prices. “Before, they might have bought a coffee and a sandwich. Now many just buy a coffee. When I ask them why, they say they are bringing their own lunch from home,” Ms Munuz says.
Brian Horgan, a software consultant, lists “eating out less” as the most significant belt-tightening measure he has taken in the face of gloomy economic prospects.
“If I hadn’t have bought an apartment six months ago, that would have been the biggest difference to my spending, because I wouldn’t buy it now. Me and my girlfriend could still get the loan, but she works for a bank and, although she looks ok, you never know,” Mr Horgan added.
John Owens, a food analyst at Morningstar in Chicago, said that food and restaurant groups are being forced to fight back to win customers, most commonly by offering cheap deals. “People are eating out much less frequently and choosing cheaper options when they do,” Mr Owen says. “McDonald’s is pushing its $1 value meal much harder now and Taco Bell has introduced its 79 cents, 89 cents and 99 cents value menus.”
As always, some people are flourishing in the economic downturn. Don Ward, a shoeshiner, said that hard times have done wonders for his business. “People are not buying new shoes, but instead are refurbishing their old ones. And guess who they need to come to more often? Business is definitely up,” Mr Ward said, before shouting “Young man, look at those shoes, get over here” to a potential customer.
Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis
By William Patalon III
October 30th, 2008
While the U.S. government’s plan to invest $250 billion into U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, the recapitalization plan is likely to have a secondary effect – one that whipsawed U.S. taxpayers likely won’t be very happy to learn about.
Those billions are a virtual lock to set off a merger tsunami in which the biggest banks use taxpayer money to get bigger – admittedly removing the smaller, weaker banks from the market, but ultimately also reducing the competition that benefited consumers and kept the explosion in banking fees from being far worse than it already is.
One last point: Experts say that takeovers financed by the government infusions are likely to have less of a beneficial impact on the economy than an actual increase in lending levels would have. And because so much of this money will be used for buyouts, the reduction in the benchmark Federal Funds target rate announced yesterday (Wednesday) by central bank policymakers will likely do very little to actually spur lending, experts say.
Fueled by this taxpayer-supplied capital, the wave of consolidation deals is “absolutely” going to accelerate, Louis Basenese, a mergers-and-acquisitions (M&A) expert and the editor of The Takeover Trader newsletter, told Money Morning.“When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.”
Lining Up for Deal Money
Late last week, the Pittsburgh-based PNC Financial Services Group Inc. (PNC) became the first U.S. bank to make use of the government’s Troubled Assets Relief Program (TARP), announcing plans to purchase the beleaguered National City Corp. (NCC) for $5.2 billion. To help finance the purchase, PNC will sell $7.7 billion worth of preferred stock and warrants to the U.S. Treasury Department, as part of that department’s bank-recapitalization program.
With regards to that program, U.S. Treasury Secretary Henry M. “Hank” Paulson recently said – yet again – that the government’s goal was to restore the public’s confidence in the U.S. financial services sector – especially banks – so that private investors would be willing to advance money to banks and banks, in turn, would be willing to lend, The Wall Street Journal reported.
“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital,” Paulson said last week.
Whatever the Treasury Department’s actual intent, the reality is that banks are already sniffing out buyout targets, thanks to the TARP money. Indeed, they’ve been quite open about it during conference calls related to quarterly earnings, or in media interviews.
Take the Winston-Salem, N.C.-based BB&T Corp. (BBT). During a conference call that dealt with the bank’s third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank “will probably participate” in the bailout program, accepting federal infusions. Allison didn’t say whether the federal money would induce BB&T to boost its lending. But he did say the bank would probably accept the money in order to finance its expansion plans, The Wall Street Journal said.
“We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill],” Allison said during the conference call.
Talk about brazen. However, he’s not alone. For instance, there’s also Zions Bancorporation (ZION), a Salt Lake City-based bank that’s feeling the pain due to losses from bad real-estate loans. On Tuesday, Zions announced it would be receiving $1.4 billion in capital from the Treasury Department – cash it would use to boost lending and keep paying a dividend, albeit at a reduced rate.
“As a strong regional bank with a major focus on financing small and middle-market businesses, we are pleased to have this additional capital to better serve the lending needs of customers throughout the Western United States,” Chairman and CEO Harris H. Simmons said. “We expect to deploy this new capital in the form of prudent lending in the markets we serve. This new lending will be good for our country’s economy, our customers and our company.”
However, during a recent earnings conference call, Zions Chief Financial Officer Doyle L. Arnold said that while new capital might allow it to boost lending, the increase wouldn’t necessarily be a dramatic one. The Journal said. Besides, Zions will also use the money “to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters.”
Buyouts Already Accelerating
The reality is that – with all the liquidity the world’s governments and central banks have injected into the global financial system – the global game of “Let’s Make a Deal” has already become a reality.
Indeed, as WSJ.com reported a week ago, global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer this year than it did a year ago.
This time around, the new kings of deal making aren’t such highly compensated “Masters of the Universe” as The Blackstone Group (BX) LP’s Stephen A. Schwarzman, or KKR & Co. LP’s Henry R. Kravis, The Journal’s blog reported. Instead, they are the much-lower-paid – but decidedly more powerful – civil servants of the U.S. and U.K. governments: Treasury Secretary Paulson, U.S. Federal Reserve Chairman Ben S. Bernanke, U.K. Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling, the Web site stated.
At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments have ignited record levels of financial sector deal making.
According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $125 billion the U.S. government is investing in the large U.S. banks as part of its rescue package, the similar amount it may invest in smaller banks, or other deals that the feds are helping engineer (JPMorgan Chase & Co.’s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ) are two such examples).) [For a better understanding of just how dramatic this upswing in deal making has been, check out the accompanying chart, “Packing a Punch.”]
When the dust settles on this buyout boom, we may well have a record in hand that’s even less beatable than Joe DiMaggio’s 56-game hitting streak. That’s because with the Fed, the U.K. and other governments and central banks doling out the capital, there’s no financial-sector equivalent of Kenny Keltner to bring this buyout fest to an abrupt close. That means that the “hits” – the buyout deals – will just keep coming.
If You Can’t Beat ‘em… Buy ‘em?
When it comes to identifying possible buyout targets, M&A experts such as The Takeover Trader’s Basenese say there are some very clear frontrunners.
“I’d put regional banks with solid footprints in the Southeast high on the list, and for two reasons,” Basenese said. “First, demographics point to stronger growth [in this region] as retirees migrate to warmer climes – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (STI) would provide a distinct competitive advantage.”
With a lot of bigger deals already in the books, many analysts agree with Basenese’s assessment, and are now watching to see if regional banks will be the next to succumb to the dealmaker’s bid. Indeed, earlier this month, Matthew Schultheis, a senior analyst at Boenning & Scattergood Inc., told a reporter that he expected this to be a “trend that continues at least through the first half of ’09, unless some of these [companies] stabilize. It could even last beyond that.”
There’s a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It’s toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors. Regional banks have a tougher time, says Doug Landy, a partner in the U.S. banking practice of the law firm of Allen & Overy.
“A regional bank lacks both the international access and the local character,” Landy told The Associated Press.
Several big regional banks at least acknowledged the possibility of buyouts on recent earnings conference calls, The Journal reported.
The Cincinnati-based Fifth Third Bancorp (FITB) talked about raising $1 billion in capital by selling non-core assets. Bank executives said that a difficult 2009 is “a view that continues to seem likely to us.” They confirmed discussions with a number of possible investors or asset-purchasers, and said they were “confident that an attractive transaction would be available to us as the opportunity and timing are appropriate including the ability to generate capital in excess of our original expectations.” Earlier this week, however, it announced that it was getting $3.4 billion in TARP funds, the Cleveland Plain Dealer newspaper reported.
Clearly, the bank isn’t thinking in terms of an outright sale, or at least doesn’t admit to that publicly.
One other potential buyout candidate includes Huntington Bancshares Inc. (HBAN), a Columbus, Ohio-based regional that just received a $1.4 billion federal infusion of its own, the Plain Dealer said.
Who will be doing the buying? The Takeover Trader’s Basenese tells investors to “also look for banks with foreign ownership” to be on the prowl for acquisitions.
“Just like Spain’s Banco Santander SA (ADR: STD) [which earlier this month said it would buy the 76% of Philadelphia-based Sovereign Bancorp Inc. (SOV) it didn’t already own for about $1.9 billion], foreign-based banks will likely jump at the opportunity to expand their U.S. presence at a discount,” Basenese said. “M&T Bank Corp. (MTB) fits the bill, as Allied Irish Banks PLC (ADR: AIB) already owns a 24% stake.”
Then there’s the Minneapolis-based U.S. Bancorp (USB), which is one of the few regionals still in a strong position. CEO Richard K. Davis has reportedly rejected the idea of buying large banks that are already in trouble and was asked if the new rescue plans might change his mind.
“It makes it a little easier to do those things,” Davis told The Journal. “But first and foremost, whether the capital is less expensive or the opportunity that TARP is present, we’ll continue to look at deals on an accretive basis where they make sense and where they would fit into this company’s long-term structure. So it would definitely make it more attractive, and so some of our positioning and our targets look more attractive and our valuation is easier now.” There’s something else to consider, Davis said.
“To the extent that [a deal] has to hit all of the normal bellwether marks and the expectations we have for the near term and long term, it still has to be a good deal. So it doesn’t really change our philosophy, but it does make it easier to find our way to partnerships that might be more accretive sooner.”
Basenese, the M&A expert, believes that Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) will be “big spenders,” using the TARP funds to help accelerate their conversions from an investment bank to a bank holding company – a transition that will require them to bulk up their deposit bases. And the quickest way to do that is to buy other banks, Basenese says.
“One thing [the wave of deals] does is to restore confidence in the sector,” Basenese said, “It will go a long way in convincing CEOs that it’s safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank.”
Banks to Continue Paying Dividends
Bailout Money Is for Lending, Critics Say
By Binyamin Appelbaum
October 30, 2008
U.S. banks getting more than $163 billion from the Treasury Department for new lending are on pace to pay more than half of that sum to their shareholders, with government permission, over the next three years.
The government said it was giving banks more money so they could make more loans. Dollars paid to shareholders don't serve that purpose, but Treasury officials say that suspending quarterly dividend payments would have deterred banks from participating in the voluntary program.
Critics, including economists and members of Congress, question why banks should get government money if they already have enough money to pay dividends -- or conversely, why banks that need government money are still spending so much on dividends.
"The whole purpose of the program is to increase lending and inject capital into Main Street. If the money is used for dividends, it defeats the purpose of the program," said Sen. Charles E. Schumer (D-N.Y.), who has called for the government to require a suspension of dividend payments.
The Treasury plans to invest up to $250 billion in a wide swath of U.S. banks in return for ownership stakes, which the government will relinquish when it is repaid.
Among other restrictions, participating institutions cannot increase dividend payments without government permission. They also are barred from repurchasing stock, which increases the value of outstanding shares.
The 33 banks signed up so far plan to pay shareholders about $7 billion this quarter. Companies generally try to pay consistent dividends and, at the present pace, those dividends will consume 52 percent of the Treasury's investment over the initial three-year term.
"The terms of our capital purchase program were set to encourage participation by a broad array of financial institutions so they strengthen their financial positions," Treasury spokeswoman Michele Davis said.
The Treasury's approach contrasts with decisions by foreign governments, including Britain and Germany, to require banks that accept public investments to suspend dividend payments until the government is repaid. The U.S. government similarly required Chrysler to suspend its dividend payments as a condition of the government's 1979 bailout.
The legislation passed by Congress authorizing the Treasury's current bailout program is silent on the issue.
The first nine participants were major banks, some running short on capital, that were told by Treasury officials earlier this month to sign on to the program for the good of the country. Their major shareholders are primarily institutional investors, such as pension funds and mutual funds, although a few wealthy individuals hold large stakes, such as Warren Buffett in Wells Fargo and Prince Alwaleed bin Talal in Citigroup.
Several banks are on pace to pay more in dividends than they get from the government. The Bank of New York Mellon got $3 billion from the government on Tuesday. It will pay out $275 million to shareholders this quarter, and a projected $3.3 billion over the next three years. A spokesman declined to comment.
At least a few banks have committed to reduce dividend payments at the same time they accepted government investments. SunTrust of Atlanta, which accepted $3.5 billion from the government, cut its quarterly dividend payments to about $188 million each quarter from about $272 million. The company described the cut in a statement as "the responsible thing to do."
Zions Bancorp, which accepted $1.4 billion from the government, reduced its dividends by about 26 percent to $34 million.
"This modification to our dividend will allow us to further strengthen our capital base," said chief executive Harris Simmons.
Other banks participating in the government program said that they will not use the Treasury's money to pay dividends. They said dividends will be paid from other capital, primarily from their new profits in each quarter.
Washington Federal, a Seattle thrift, accepted $200 million from the government. The company will pay its shareholders about $18 million in dividends this quarter, which puts it on pace for $216 million over the next three years.
Chief executive Roy Whitehead said the company pays dividends from its quarterly profits, rather than its capital reserves. He said there was only one exception in the past three decades. Last quarter, he said, the company used $11 million in capital to maintain a consistent dividend payment.
Still, Whitehead said "categorically" that the company would not use the government's investment to make dividend payments.
Some experts questioned the distinction drawn by Whitehead between profits and capital.
"Thinking of them as separate things is kind of a spurious argument. It's all capital," said David Scharfstein, a finance professor at the Harvard Business School who has called for the government to require banks to suspend dividend payments. "Money that goes out the door is money that isn't available to shore up the banks' balance sheet."
Scharfstein and others said that many banks clearly need to buttress their balance sheets. Large losses on mortgage-related investments have drained capital, and investors no longer have much interest in giving more money to banks. But several of the institutions accepting government money have continued to pay dividends in recent quarters even as they post large losses.
Scharfstein said many banks should suspend dividend payments voluntarily. Some industry analysts, however, say that cutting dividends will make it even harder for banks to find new investors.
Capital is basically the money a company keeps in its vaults. A dividend is a distribution of some of that money to shareholders. Companies typically pay dividends four times each year.
The stability of dividend payments is important to investors. Some treat dividends as a source of regular income, others as a barometer of corporate health. As a result, companies generally try to match or raise their dividends each quarter. Some banks entered the current crisis with unblemished dividend histories dating back 30 years and more.
The resistance to dividend cuts in part reflects the reality that the Treasury program is serving at least two purposes. In some cases, the money is going to companies that need help to survive. In other cases, the government is helping healthy companies to expand.
Ed Yingling, chief executive of the American Bankers Association, said he was increasingly hearing from banking executives who feel they should not be forced to accept money with so many strings attached. He said these banks don't need the money, but they are willing to use it to increase lending, so long as they are not punished for doing so.
"The government really needs to make up its mind what this program is," Yingling said.
"But whether they care or not, the fact is that last week the Federal Reserve boosted Total Fed Credit, namely the amount of fresh credit that appears on the books of the banks, by another staggering $245.4 billion! In One Freaking Week (OFW)!"
Reserved Seats for Big Credit Spenders
by The Mogambo Guru
October 28, 2008
When I come to my senses, I find that I am in some dingy little bar on the other side of town, stinking drunk; and the bartender has grabbed me by the front of my shirt to haul me unceremoniously halfway across the bar, and is rudely in my face, telling me through gritted teeth that if I want to stay there, I am going to have to "Shut the hell up about the Federal Reserve creating so much money and credit in the banks, as there is nobody in this whole freaking bar who gives a rat's ass about Total Fed Credit one way or the other."
I look to my left and see a drunken woman named Shirley (I think to myself, "How do you know her name is Shirley?") winking at me and saying, "Give 'em hell, Tiger! Now, let's all have another drinkie-poo! Hic!"
I look around, and I can see that the bartender was right, as there doesn't seem to be anybody here who can even say "Total Fed Credit" without slurring the words and probably getting some of their foul breath on me, stinking of cigarettes and (sniff, sniff) onions and garlic with a hint of pepperoni.
But whether they care or not, the fact is that last week the Federal Reserve boosted Total Fed Credit, namely the amount of fresh credit that appears on the books of the banks, by another staggering $245.4 billion! In One Freaking Week (OFW)!
And this whopping increase in TFC is just the beginning of the credit-becomes-money-through-debt cycle, where this original $245.4 billion is multiplied, theoretically, by infinity, as there has not been an increase in Required Reserves in the bank since 1994, and it always hovers around $43 billion, which is still exactly what Required Reserves is today, too! Hahaha!
You can see how this constant, piddly $43 billion in reserves is chump change when compared to how Non-Borrowed Reserves in the banks has surprisingly zoomed to a NEGATIVE $363.1 billion! Hahaha! Hell, Free Reserves, which used to always run about $1.5 billion or so, is now a NEGATIVE $407 billion! Hahahaha! We are so freaking doomed!
And, just as you would expect, the Monetary Base has exploded to $984.717 billion from $911.454 billion last week, and which is up from $827.367 billion just 12 months before! Money is being expanded at unbelievable, unbelievable, Freaking Unbelievable Rates (FUR)!
And most of it is being used by the government, as the Treasury Gross National Debt is now $10.326 trillion, up from $10.245 trillion the week before, and up by a staggering $1.271 trillion from the $9.055 trillion in national debt only 12 months ago! Yikes! We're freaking doomed!
All of this mountain of money and credit will have disastrous consequences, which I was going to turn into a long, eerie wail, like a hungry banshee keening from beyond the dead as a "performance art" thing that I have been working on in my spare time, but instead we have John Embry of Sprott Asset Management jolting me back to reality, which is the fact that I can't change anything, and so I am only in this to make a lot of money betting on the stupidity and failure of the Federal Reserve and the Congress abusing their stupid fiat currency and stupid central bank to finance some bizarre regime of perpetual deficit-spending.
To this end he succeeded admirably, and he captured my full attention with his essay's title "Rescue Will Send Gold To Surreal Price Level", mostly because I am so familiar with things surreal, like my wife coming home early and yelling, "Why in the hell aren't you at work, and who's been eating all the Girl Scout Thin Mint cookies like the big, fat pig that he is?" which makes it sound like there are two people involved when there is only one! Weird! See what I mean about my experiencing "surreal" first hand?
I noticed that Mr. Embry was appreciably staggered, although it turns out he was not affected by my surreal experience, but about how "The recent events that have occurred on the U.S. financial scene can only be described as mind-boggling."
Such as, perhaps, noting the extreme differentials between the prices of sold and silver futures versus the prices of gold and silver bullion, and in the case of silver, sometimes there's a difference of up to 100%! People are reportedly paying up to $20 - and more! - for an ounce of silver when the futures price for silver is less than $10!
Anyway, whatever the reason, Jim Willie of the Hat Trick Letter concludes that we should "Expect defaults in the COMEX with gold & silver, whose prices for paper vastly diverge from physical, to the anger of foreigners watching" because those foreigners "hold massive precious metals assets" which I figure shows just how much smarter they are than we Americans, thus giving me something else to worry about.
He figures that these defaults will constitute a "breath-taking discontinuity event", to which I say, "Whee!" as the result will be a Big, Big, BIG Profit (BBBP) for those who own gold and silver, and this will all happen thanks to the arbitrageurs, who are pouncing all over this huge price disparity by buying in the cheap futures market and simultaneously selling in the expensive bullion market to pocket the difference, and who will make a lot of money, too.
And one of them is Jason Hommel of SilverStockReport.com, who announced that he, too, is starting a new arbitrage business to take advantage of that surprising disparity by buying silver on the Comex at the manipulated low, low price, then taking delivery, having it minted into individual ounces and small bars, and then auctioned off at prices that more approximate supply and demand, making a profit, and everybody is theoretically happy! Perfect! Effortlessly capitalizing on the governments' regulatory corruption and the rules of Comex that apparently allow it! Hahaha! Go silver!
And it will continue until the price disparity disappears to the point where arbitrageurs can no longer make a profit at it, either because the price of bullion went down or the price of a futures contract in silver went up.
I know which way I am betting, and soon, I am wistfully wasting the day away, marveling at the lovely, lovely profits I will make and all the wonderful, wonderful things I will buy, and all the lovely, wonderful things I will do with all that lovely, lovely, wonderful, wonderful money when silver zooms in price as it must. Sigh.
And then, lost in a reverie of such sweetness, secret sins and delicious depravities, nothing seems all that important anymore. Like finishing this stupid column. Sigh.
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