Friday 7 November 2008
China helps the world by helping itself first
As much of the world continues to move towards a recession that many fear will be deep and prolonged, eyes are increasingly turning to rising China in the hope that it can, somehow, help the rest of the world in its moment of need. Thus, The Economist reported that ‘China Moves to Centre Stage’, while Time magazine asked, ‘Can Chinese Cash Save the World’s Banks?’
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China helps the world by helping itself first
By FRANK CHING
7 November 2008
As much of the world continues to move towards a recession that many fear will be deep and prolonged, eyes are increasingly turning to rising China in the hope that it can, somehow, help the rest of the world in its moment of need. Thus, The Economist reported that ‘China Moves to Centre Stage’, while Time magazine asked, ‘Can Chinese Cash Save the World’s Banks?’
Late last month, leaders from 43 countries in Asia and Europe met in Beijing to discuss the worst economic meltdown since the 1930s. Even before the meeting, Jose Manuel Barroso, the president of the European Commission, called for cooperation from China, India and Japan to help avert a global recession. ‘I very much hope that China can make an important contribution to the solution to the financial crisis,’ he said. ‘It’s a great opportunity for China to show a sense of responsibility.’
Expectations were high because China has become a world engine of growth, with its economy having grown at an average of 9.6 per cent a year for the last 30 years. The country now holds the world’s largest foreign exchange reserves, which stand at US$1.9 trillion. Japan is in second place, with slightly more than half that amount.
In his keynote address at the Asia-Europe Meeting, President Hu Jintao declared that while China was willing to help, it was still a developing economy and what it could do was limited. ‘The Chinese economy is increasingly interconnected with the global economy,’ he said. ‘China’s sound economic growth is in itself a major contribution to global financial stability and economic growth. That is why we must first and foremost run our own affairs well.’
There might have been some disappointment when the Chinese leader said that his country’s first priority was to run its own affairs well, and that growth of the Chinese economy was itself a contribution to the global economy.
That is similar to China’s attitude towards alleviating world hunger. China says that it has helped reduce poverty in the world by lifting millions of its own people from poverty.
That is actually logical. On airliners, for instance, passengers are always told that in case of an emergency, they should put their own oxygen masks on before helping others, including their own children.
To help others, one must first be able to take care of oneself. China’s attitude is actually not that different from that of other countries, all of which are trying to protect their own economies. Japanese Prime Minister Taro Aso, for example, in an address to the United Nations General Assembly on Sept 25, had this to say about the global economy: ‘As I see it, the task ahead for Japan is already quite clear, namely, that Japan’s primary responsibility lies in invigorating its own economy.’
He went on: ‘In light of the size of the Japanese economy, the second-largest in the world, certainly this would be the most immediately effective contribution that Japan can deliver. I will work determinedly to realise this very contribution.’
The Chinese and Japanese attitudes certainly do not indicate any unwillingness to extend help to others. In fact, even before the Asia-Europe Meeting, China had agreed with Japan, South Korea and Asean members to create an US$80 billion fund to fight the global economic crisis.
Moreover, Beijing has already accepted the American invitation to attend an international summit in Washington on Nov 15 called by President George W Bush. It is understood that at the meeting, the developing economies, China in particular, will play a much bigger role than before as the world’s developed and developing economies recognise how much they need one another.
Beijing is deeply conscious that it is part of a globalised economy, and that it is in its own best interests to do what it can to help stabilise, if not rescue, the economies of the West. As President Hu said, China wants to act ‘with a sense of responsibility’.
China is already feeling the impact of the drop in overseas demand. Thousands of factories in the Pearl River Delta have shut down or are in severe difficulties. The Chinese economy grew by 11.9 per cent in 2007, but the growth rate slowed to 9 per cent in the third quarter of this year. The Chinese government has made it clear that it will stimulate domestic demand to maintain the economy’s growth, albeit at a slower rate. But with a population of 1.3 billion, there is a huge potential market.
The writer is a Hong Kong-based journalist and commentator
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情缘任它自然 爱恋会源源不断
旧的梦才完又有新的梦来圆 但初恋偏惹怀念
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恼恨爱恋偏偏多变 这快乐背后藏着了凄酸
相对再无言 若有交通定会倾诉没完
两颗心倘不可以相连 相见又如不见
情缘任它自然 爱恋会源源不断
旧的梦才完又有新的梦来圆 但初恋偏惹怀念
Down and Out in Beverly Hills: Rolexes, Picassos Hit Pawnshops
By Michael Janofsky
Nov. 7 (Bloomberg) -- The worse the economy gets, the better it is for Jordan Tabach-Bank.
``Business is booming,'' said Tabach-Bank, the chief executive officer of Beverly Loan Co. in Beverly Hills, California.
Beverly Loan is a pawnshop. Not just any pawnshop, but the kind that caters to people who hock Cartiers, Harley- Davidsons and Oscar statuettes when they need cash. They really need it now, Tabach-Bank said from a third-floor office, protected by bulletproof glass, off his showroom in the Bank of America building near Rodeo Drive.
``I've never seen so many bankers, lawyers, doctors and actors'' with valuable things to pawn, he said. He pointed to an 18-carat white gold bracelet with 69 diamonds ($2,900) and an 18-carat yellow gold Rolex Yachtmaster II (``a steal'' at $18,500).
With credit drying up at regular lenders, ``in many cases now, we're not just the bank of last resort,'' Tabach-Bank said. ``We're the bank of only resort.''
High-end pawnshops aren't like most of the 10,000 dealers affiliated with the National Pawnbrokers Association, a Keller, Texas-based trade group. The average U.S. pawn transaction is $75, according to the association's Web site.
$2.7 Million Necklace
At Tabach-Bank's shop, ``confidential collateral loans,'' as they're called, have been made on art works by Pablo Picasso, Andy Warhol and Jean-Michel Basquiat. Amounts loaned range from several thousand dollars to ``six- and seven-figure deals,'' he said, with clients using the money to cover the mortgage, make alimony payments or finance cosmetic surgery.
South Beverly Jewelry and Loan, also in Beverly Hills, has seen business triple in the past six months, said owner Yossi Dina. Some of the collateral is in a parking lot: About 60 cars, including Ferraris, Porsches and a Bentley.
``We're making loans today we never used to,'' Dina, 54, said. ``Millions -- never used to have that. We're selling a necklace now, the client wants $2.7 million.''
The thriving pawnshops show that hard times have reached even Beverly Hills, where the average per-capita income in 2006 was $50,218, almost triple that of all of Los Angeles County, according to the city of Beverly Hills Web site.
The median price for Beverly Hills homes sold in the 12 months through September was $1.3 million, according to Trulia.com, which tracks local residential sales. That was down 16 percent from the year-earlier period.
Climbing Defaults
The pawning surge has a drawback, according to shop owners. Just as falling real estate prices have led to record foreclosures in some cities, customer defaults have climbed by ``a couple of points over the last six months'' said Tabach- Bank.
At Collateral Lender Inc. of Beverly Hills, the redemption rate has fallen seven percentage points to 82 percent and will likely drop more during the next six months, said owner Tal Schmargal, 52.
People who fail to reclaim an item generally don't return to pawn another, brokers say. The ideal client is one who hocks a gold watch, redeems it by paying back the loan amount and interest, then hocks it again when the need arises.
``We want them to get their goods back,'' Tabach-Bank said.
Under California law, a pawned item remains in a shop for four months and 10 days, after which the client may get it back by paying off the loan or delay redemption by paying just the interest.
The state dictates interest rates for loans up to $2,500, lenders for loans higher than that. The usual rate at Beverly Loan is 4 percent a month, Tabach-Bank said.
Larger Diamonds
In downtown Los Angeles, King's Jewelry & Loan began seeing luxury business pick up about 18 months ago when variable-rate mortgages started resetting to higher payments, said owner Sam Shocket, 54, a member of the national association's board.
``We were seeing more Rolexes, Patek-Philippe watches, larger diamonds,'' said Shocket, who deals almost exclusively with jewelry.
``Instead of construction workers, we'd see major contractors,'' Shocket said of his customers. ``Instead of real estate agents, we'd see brokers. Instead of actors who played bit parts, we'd see someone you might recognize from `The Tonight Show.' ''
People who pawn in Beverly Hills confess to a wide variety of needs. Dina said he has loaned money to producers to finish movies. Tabach-Bank said clients have pawned items to pay for mortgages, emergency health-care, ``tummy tucks and face lifts'' and gambling debts, ``especially around Super Bowl season.''
Keeping Secrets
Some clients trade in things they just don't want anymore, leaving them for the shop to sell. Beverly Loan has several cases of jewelry, including a white gold bracelet that would retail for about $38,000, Tabach-Bank said. His price is $20,000.
The shop is also selling signed works by Picasso, Robert Rauschenberg, Norman Rockwell and Al Hirschfeld. Prices range from $2,500 for a Keith Haring to $250,000 for a Warhol print.
Brokers in Beverly Hills won't identify clients, citing confidentiality as a cornerstone of their success.
``We're like bartenders,'' Tabach-Bank said. ``People spill their guts to us even if it's embarrassing to them. They know we won't talk.''
Las Vegas Sands signals it may not survive downturn
Casino company's shares tumble on bankruptcy fears
By William Spain
Nov. 7, 2008
CHICAGO -- Shares of Las Vegas Sands Corp. crumbled more than 33% Thursday and another 11% Friday after the casino company said it will likely violate debt covenants this quarter, raising the specter that it might not survive the current economic crisis.
In a filing with the Securities and Exchange Commission, Sands -- controlled by billionaire Sheldon Adelson -- told regulators that the size of its debt is now above the agreed maximum leverage ratio. If it can't drum up more financing, the company said it could well default on its IOUs as its cash flow is "insufficient to cover fixed charges."
Shares of Sands plummeted $3.81 to close at $7.85 on Thursday and then gave up an additional $1.13 to $6.03 by the end of the Friday session. The stock had been rebounding lately on hopes that Adelson and his family would pump some of their own money to fund ongoing developments and operations at what was once a high-flying company. After running up to as high as $150 last year, the stock cratered at $4.32 last month.
Other gambling stocks, including MGM Mirage, Wynn Resorts Ltd., Boyd Gaming Corp. and Penn National Gaming Inc. also have seen their share prices hit the skids, though none has fallen quite so far and so fast as Sands.
Adelson controls almost two-thirds of the stock and has lost billions of his net worth over the last year.
The company's auditors, PricewaterhouseCoopers LLP, said in a filing that if Sands does default on debt covenants, lenders could demand to be repaid sooner -- something that "raises substantial doubt about the company's ability to continue as a going concern."
The economic meltdown has battered Las Vegas particularly hard as customers are staying away and the ones who do visit are spending less. In addition, Sands' properties in Macau have been hurt by new restrictions on visas for gamblers arriving from mainland China.
Further, casino operators rely on huge loans to fund aggressive expansion plans, and the credit crisis has all but dried up the money tap, forcing companies like MGM Mirage and Boyd to postpone or scale back some of their more ambitious development projects.
"The good times for the gaming industry are over -- at least in the short-term outlook," said Joseph Weinert, a senior vice president at Spectrum Gaming, an industry consultancy. "As we see with Las Vegas Sands, even the titans of the industry are having to make major concessions with respect to their financial structures, development plans and operations. This industry is not for the timid right now."
Sands' financial crunch also called into question the future of the company's multibillion-dollar project in Singapore, but Adelson said Friday that it's still on track.
"When we were selected to develop a [resort] at Marina Bay, we made a commitment to the Singapore government and the people of Singapore," he commented. "In light of recent turmoil in the global markets, I felt the need to personally reaffirm our commitment to the success of Marina Bay Sands. I am pleased to say that the Singapore government's support of our project remains strong."
Late Friday, Sands said it has tapped Kenneth Kay to be its chief financial officer effective Dec. 1. Kay comes to the company from commercial real estate giant CB Richard Ellis Group Inc. , where he has had been chief financial officer since 2002.
Houston's Franklin Bank closed, 18th failure this year
By John Letzing
Nov. 7, 2008
SAN FRANCISCO -- Houston, Texas-based Franklin Bank S.S.B. was closed by regulators Friday, the 18th bank failure this year amid the ongoing credit crisis. The Federal Deposit Insurance Corporation said in a statement that Franklin Bank had total assets of $5.1 billion as of Sep. 30, and $3.7 billion in total deposits. El Campo, Texas-based Prosperity Bank will assume Franklin Bank's deposits, and Franklin's 46 offices will reopen as Prosperity branches, the FDIC said.
Jobless rate at 14-year high as losses continue
By Glenn Somerville
Nov 7, 2008
WASHINGTON - The unemployment rate shot to a 14-1/2 year high last month as employers slashed jobs by an unexpectedly steep 240,000, suggesting President-elect Barack Obama will face a deep recession when he takes office.
The Labor Department said on Friday the jobless rate rose a steep four-tenths of a percent to 6.5 percent in October, the highest since March 1994, and that job losses in September and August were deeper than previously thought.
So far this year 1.2 million U.S. jobs have been lost, with 651,000 in the past three months alone as the slide in the national labor market picked up in intensity.
"We have entered the phase of serious recession conditions. Unfortunately we will encounter more of this," said Richard DeKaser, chief economist for National City Corp in Cleveland.
Goldman Sachs economist Jan Hatzius said the data implied the U.S. economy was sinking into a deep recession in which the jobless rate could climb to 8.5 percent by the end of 2009.
While the data was bleak, it was not as grim as some had feared. While the dollar fell, U.S. stocks rose after two days of sharp losses and prices of U.S. Treasuries turned lower.
KICKING THE ECONOMY
About 284,000 jobs were shed in September, the most since November 2001, shortly after the September 11 attacks on the United States, and 127,000 were lost in August. In all, 179,000 more jobs were cut in August and September than previously thought.
Michael Feroli, an economist with JPMorgan Chase, said the surprising weakness in August and September suggests the economy headed into recession even before the worst of the credit crisis hit.
"Whereas it had been thought the financial crisis pushed a teetering economy over the edge, it now looks like that crisis kicked an economy that was already down," Feroli said.
Fear about job security has led U.S. consumers to cut spending, and that has reverberated around the globe, with China and other low-cost goods producers feeling the impact of slacker American demand.
On Capitol Hill, Democratic Sen. Charles Schumer of New York described the job numbers as "shocking" and said they call for "a strong, deep and effective stimulus package."
General Motors Corp, which along with other domestic carmakers is pleading for government help, said it had a $4.2 billion operating loss in the third quarter.
In a telephone interview, Commerce Secretary Carlos Gutierrez said the economy "will go through several difficult months," but by the time Obama takes office in January a Treasury plan to buy bad assets from banks should be working. He predicted that will ease some economic pressures.
The Bush administration is "willing to listen to ideas (on stimulus) but most of what we've heard called stimulus doesn't meet our definition of stimulus," Gutierrez said.
Stimulus measures should be targeted to have immediate effect rather than designed for long-term impact like road building and other infrastructure projects, he added.
Obama was to huddle with his top economic advisers in the afternoon before holding his first news conference since being elected, and the data underscored the challenge he will face.
PAIN WIDESPREAD
The U.S. Federal Reserve has cut benchmark interest rates to a low 1 percent over the last 13 months in an effort to buffer the economy from the widening credit crisis, and financial markets expect rates to go lower still.
In a separate report, the Commerce Department said wholesale inventories dipped in September, but sales were off for a third straight month and a stocks-to-sales gauge suggested businesses were holding more inventory than desired.
The National Association of Realtors said pending sales of existing U.S. homes dropped 4.6 percent in September because of tighter credit and worsening economic conditions.
The jobs report showed the construction industry shed 49,000 jobs last month, the 16th straight monthly loss.
It also showed a whopping 90,000 manufacturing jobs were cut in October -- reflecting in part 27,000 striking workers at Boeing Co and marking the 28th consecutive month in which factory employment has fallen.
Earlier this year, job losses had been concentrated on the goods-producing side of the economy. But the latest data showed the pain spreading further into the vast services sector.
Service industries cut 108,000 jobs last month, on top of 201,000 lost in September.
GMAC Leaves Individuals Holding Car Lender's Junk
By Ari Levy and David Mildenberg
Nov. 7 (Bloomberg) -- GMAC LLC may leave thousands of individuals on the hook for about $15 billion of junk-rated debt unless the auto and home lender finds a way to pay its bills.
GMAC, the largest lender to car dealers of General Motors Corp., issued more than $25 billion of debt called SmartNotes over the past decade to retail investors. While GMAC has paid off the debts as they matured, five straight unprofitable quarters raised doubt about GMAC's survival, and SmartNotes due in July 2020 have lost about three-quarters of their value.
``An investment like this is totally unsuitable for the retail investor,'' said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania, who rates GMAC bonds junk, or below investment grade. ``You're selling it to the widows and orphans who think of GMAC as being this strong, long- standing corporation when the reality is far from that.''
GMAC's losses since mid-2007 total $7.9 billion, driven by record home foreclosures and auto sales that GM has called the worst since 1945. Stomaching some of Detroit-based GMAC's deficit are individuals who purchased SmartNotes through brokers at firms including Merrill Lynch & Co., Fidelity Investments and Citigroup Inc.'s Smith Barney unit.
Chuck Woodall, 66, who lives with his wife in Columbus, Ohio, amassed $200,000 of SmartNotes starting eight years ago, and they now equal about 25 percent of his investments. At the time, the securities were rated investment-grade and they paid more interest than government bonds or certificates of deposit. They also were backed by Detroit-based GM, the biggest U.S. automaker.
Safe Ride
Woodall, a former owner of apparel stores and a pet-supply business, holds SmartNotes due in 2018 that he says have lost about 80 percent of their value. He said his Merrill broker told him that in more than 20 years, no client had lost money on bonds.
``He assured me they were safe,'' Woodall said. ``I just wasn't aware enough and didn't have my hand on the pulse.''
GMAC said Nov. 5 its mortgage unit may fail and analysts have questioned the viability of the entire company, which is now 51 percent-owned by New York-based Cerberus Capital Management LP. GM controls the rest.
Of GMAC's $64 billion in debt outstanding at the end of June, about $15 billion was in SmartNotes. They rank equal to senior unsecured debt, which recovers an average of about 40 cents on the dollar in bankruptcy cases, according to Mariarosa Verde, an analyst at Fitch Ratings in New York.
GMAC spokeswoman Gina Proia said the company ``has honored its commitments and intends to continue honoring its commitments to investors.'' She declined to elaborate.
Bonds Drop
SmartNotes maturing in July 2020 fell 6.5 cents on the dollar, or 20 percent, to 26.7 cents at 4 p.m. New York time, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The debt yields 35.8 percent, or 32 percentage points more than similar-maturity Treasuries, Trace data show.
Brokers traditionally handle the task of determining whether an investment is suitable for a particular investor, depending on factors such as assets, sophistication and tolerance for losses. Merrill spokesman Mark Herr, Steve Austin from Fidelity and Citigroup's Alex Samuelson declined to comment.
SmartNotes were introduced in 1996 by ABN Amro Holding NV's Chicago-based LaSalle Bank, which is now part of Bank of America Corp. in Charlotte, North Carolina. The notes include features designed to appeal to investors seeking interest income -- a concern for older people and retirees.
Prosperous Times
The notes were sold in denominations of $1,000 and offered a ``survivor's option,'' allowing spouses to sell the bonds back to the issuer if the owner dies. The SmartNotes program opened to European investors in 2004.
GMAC and LaSalle said in statements from 1998 through 2003 that the notes were intended for individual investors. Patrick Kelly, a LaSalle managing director, described the buyers in a 2003 interview as ``mom-and-pop investors.''
``If Wal-Mart sold bonds, these would be the bonds they would sell,'' Kelly said.
Back then, SmartNotes may have been safer bets. GMAC debt was rated BBB by Standard & Poor's, GM and GMAC were profitable, and the lender was still a wholly owned unit of the automaker. Sales of GMAC SmartNotes reached $1 billion in 1998, doubled the following year and exceeded $25 billion in 2003, when GMAC was on its way to earning $2.8 billion for the year.
`Gold-Plated'
``GM was considered a can't-miss company,'' said Thomas Smicklas, a retired high school principal and now a homebuilder in Wadsworth, Ohio, who started buying SmartNotes in 2003. Smicklas said he owns about $75,000 of short-term SmartNotes and hasn't lost any money. ``When the GM name is on something, many investors assumed it's gold-plated.''
By 2005, GMAC's debt was reduced to junk -- Moody's Investors Service now rates the firm seven levels below investment grade -- and GMAC continued offering SmartNotes as late as 2007. Today, S&P downgraded GMAC to CCC from B-, citing the lender's ``dire situation.'' Analysts have also raised concerns about the survival of GM, which today reported a $4.2 billion third-quarter operating loss and said it may not have enough cash to make it through the year.
Tom Ricketts helped create SmartNotes at ABN Amro before leaving in 1999 to start Chicago-based Incapital LLC, which earlier this year bought LaSalle's retail bond unit. Ricketts said his firm doesn't issue GMAC notes and sticks with investment-grade bonds. He recommends that individuals who buy them own a wide variety of assets.
Circumstances Change
``When you don't diversify in any portfolio, you expose yourself to risk that you're not getting paid for,'' Ricketts, 43, said in an interview. ``Typically, investment-grade corporate bonds are very good investments.''
GMAC and underwriters of its debt were sued in a 2005 class action that claimed the lender misrepresented SmartNotes in financial statements. A federal judge in eastern Michigan dismissed the case in February 2007, and the plaintiffs are appealing.
``In corporate bonds, time has shown that volatility, credit ratings and potential deterioration in credit means you may own something very different than what you thought you owned,'' said Michael W. Boone, founder of MWBoone & Associates, an investment advisory and money management firm in Bellevue, Washington. Boone said individuals should hold corporate debt only in mutual funds, ``where they have instant diversification and management.''
Singapore's DBS cuts 900 jobs, reports 38 pct fall in Q3 profit
7 November 2008
SINGAPORE (AFP) — Singapore's DBS Group, Southeast Asia's biggest bank by assets, said Friday it was cutting 900 staff to trim costs amid the global credit crisis, and reported a slump in third quarter net profit.
Chief executive Richard Stanley said most of the cuts, accounting for six percent of the group's workforce, will be made by month's end in its Singapore and Hong Kong offices.
The job reductions were announced at a town hall-style meeting with staff on Friday.
"To be a streamlined organisation, I believe we must run a tighter ship... This is a painful decision for DBS and for me personally," Stanley told a news conference after the meeting.
"We have been vigilant on costs but as the economy enters a more difficult and uncertain phase, many financial institutions around the world and in Asia have made head count reductions," he added.
"To be more productive and efficient, we will restructure and streamline the organisation. Regrettably, this has resulted in the need to reduce our workforce."
DBS is the first major Singaporean firm to announce job cuts of such magnitude, and one analyst said it was a sign of more layoffs after the economy slipped into recession in the third quarter.
"Being the biggest local boy, it will send a very strong message to Singaporeans that what the government has been warning about (job losses) is happening already," CIMB-GK Research economist Song Seng Wun told AFP.
"There will be more retrenchments across all industries next year. Our view is that no industry will be spared."
Stanley, who was named to head DBS in February, said however that the cuts were not related to losses from its issuance of financial products linked to the collapsed US investment bank Lehman Brothers.
They also did not reflect the bank's financial position.
"DBS remains strong and sound," he said. "The tough measures we are taking now will enable us to confidently ride out this storm and emerge stronger when this global economic crisis is over."
DBS stocks closed 30 cents higher or 2.7 percent to 11.40 dollars (7.64 US), outperforming the main Straits Times Index which ended 2.43 percent up.
Earlier Friday DBS said net profit in the three months to September fell 38 percent as market-related income took a hit from the global financial crisis and bigger provisions.
Third quarter net profit totalled 379 million Singapore dollars (256 million US), down from 610 million dollars in the same period last year, it said in a statement.
Analysts polled by Dow Jones Newswires had predicted an average 572 million dollars net profit.
"The operating environment is increasingly challenging for financial institutions the world over," Stanley said.
Net interest income in the September quarter grew two percent to 1.07 billion dollars from last year but net fee and commission revenues dropped 22 percent to 316 million dollars.
Other non-interest income plunged 87 percent on the year to 11 million dollars.
The bank said it set aside 129 million dollars in provisions, compared with just 10 million dollars a year ago, partly to cover its collateralised debt obligations, securities backed by a range of assets including risky home mortgages.
It also set aside 70 million dollars as compensation to certain customers who bought its now worthless Lehman Brothers-linked products.
DBS was the last of three local banks to report earnings for the September quarter.
Oversea-Chinese Banking Corp said earlier this week third quarter net profit fell 13 percent while United Overseas Bank reported last week a 5.1 percent drop in profit for the same period.
Asia Hedge Funds, Among Worst Performers, Close at Faster Rate
By Netty Ismail
Sept. 30 (Bloomberg) -- Asia hedge-fund closures jumped 19 percent this year, with the industry set to shrink for the first time as clients withdraw more money after funds in the region underperformed rivals in the U.S. and Europe.
``It is likely that we'll see a net reduction in the number of Asian hedge funds through this current year,'' Peter Douglas, principal of Singapore-based hedge fund consulting firm GFIA Pte, said in an interview yesterday. ``Almost without exception, the managers that we talk to in Asia are seeing capital outflows, some of it is minor, some of it major.''
About 70 hedge funds in Asia have shut down as of August, an increase from 59 in the first eight months of last year, according to Eurekahedge. There are 618 Asia-focused managers managing 1,199 hedge funds, compared with 1,196 funds in December. Assets under management fell to $168 billion in August, from $176 billion at the end of 2007, according to the Singapore-based hedge fund research and publishing company.
Asia's hedge-fund managers -- more than half of whom trade only equities -- have underperformed their U.S. and European counterparts whose more diverse strategies allowed them to profit from turmoil in financial markets. Asia's hedge-fund average returns fell 12.6 percent this year, compared with declines of 0.1 percent in North America and 5.8 percent in Europe, Eurekahedge said. Asia gained 18 percent in 2007, outperforming both regions.
More Redemptions
Investors may pull more money out of funds after U.S. lawmakers rejected a $700 billion financial-rescue plan aimed at preventing the world's largest economy from slipping into a recession. The Standard & Poor's 500 Index had its biggest drop since 1987 after the package was voted down.
The legislation would have given Treasury Secretary Henry Paulson broad authority to buy troubled assets from financial companies to help ease a lending crunch triggered by the decline of the housing market.
``There will be more redemptions going forward,'' said Melvyn Teo, a director at the BNP Paribas Hedge Fund Centre at Singapore Management University who researches the industry. ``A lot of the investors in funds in Asia are from the West; with a U.S. recession, liquidity will dry up and they will have to redeem their hedge fund investments, even if those investments are doing okay because they need funds urgently.''
Attrition Rate Rising
Asian hedge funds have done better in preserving capital in the credit crisis than other regional investments such as mutual funds, which have lost 33 percent in the last 12 months, Douglas said. The stock market meltdown helped push Lehman Brothers Holdings Inc. into bankruptcy and Merrill Lynch & Co. into a takeover by Bank of America Corp.
``Up to now, attrition in the Asian industry has been low compared with global norms because it's a young industry,'' said Douglas, who is also Asia's representative to the Alternative Investment Management Association, the $1.9 trillion hedge fund industry's largest trade group. ``That's changed and the attrition rate in Asia has been accelerating towards developed- market standards, and may even overshoot.''
Unigestion Holding SA, which invests $3.5 billion in hedge funds worldwide, hasn't pulled money out of Asia because most of its investments are in managers that trade futures, and those who seek to profit from broad economic trends by trading stocks, bonds, currencies and commodities, said Stefano Pizzo, a Singapore-based managing director at the firm. These strategies have outperformed managers who bet on gains in stock prices, which Unigestion has had little ``exposure'' to, he said.
`Increasing Our Investments'
``Net-net, we're probably increasing our investments,'' Pizzo said in an interview yesterday. ``Redemptions are going to be selective, having a larger impact on the long-bias hedge funds than other strategies.''
Pizzo moved to Singapore last year from Geneva, where Unigestion is based, as the asset manager seeks to boost its investments in hedge funds in the region, beyond just Japan. The firm has increased its investments in Asia-focused hedge funds to 5 percent of its global portfolio in the last two years.
``The industry is going to mature,'' Pizzo said. ``You're going to see the difference between the long-bias strategies and more sophisticated propositions, between those who are really good and those who have been riding the wave and shouldn't be where they are.''
Hedge-fund assets in Asia have increased by more than three times and the number of funds more than doubled since December 2003 as share prices surged, until a year ago.
``Within the global hedge fund industry in the last two to three years, the hot place to be has been in Asia,'' said Douglas, who started GFIA a decade ago. ``It's inevitable that some of that froth comes off a bit.''
Running on fumes: GM could soon run out of cash
By TOM KRISHER
8 November 2008
DETROIT (AP) — The American auto industry is running on fumes. General Motors , the nation's largest automaker, warned Friday that it may run out of money by the end of the year after piling up billions in third-quarter losses and burning through cash at an alarming rate. Ford sustained heavy losses, too.
The situation is so severe, GM has suspended talks to acquire Chrysler and is appealing to the government for help as the slumping economy drags cars sales to their lowest level in a quarter century.
GM Chairman and CEO Rick Wagoner said the company will "take every action" possible to avoid bankruptcy.
"We're convinced that the consequences of bankruptcy would be dire," he said, adding that the company would use every source of potential funding. "We need to find a way to get through this, and that's really our focus," he said.
GM also planned more job cuts, including another 5,500 salaried and factory workers. But company officials cautioned that those measures alone would not be enough and that federal aid is essential.
Ford saw its cash supply decline rapidly and announced its own job cuts Friday. But it's in better shape because the company borrowed billions of dollars in 2007 by mortgaging its factories. The Dearborn-based manufacturer said it had enough cash to make it through 2009.
Friday's events called into question the future of Detroit's three automakers and heightened pressure on the government to take action.
President-elect Barack Obama on Friday indicated that help may be on the way. At a Chicago news conference, he said Congress must pass an economic stimulus measure either before or just after he takes office in January, and he mentioned aid for the auto industry.
Top executives of General Motors, Ford, Chrysler LLC and the president of the UAW met with Congressional leaders Thursday to discuss some $50 billion more in loans, participants said. The loans would include $25 billion to help the companies withstand the weak economy and another $25 billion for future. The money would be in addition to the $25 billion in loans that Congress passed in September to help retool auto plants to build more fuel-efficient vehicles.
IHS Global Insight analyst George Magliano said the cash problems reported by GM and Ford were worse than experts had thought. And that raised the risk of bankruptcy.
"It's close," he said about the possibility of one of the U.S. automakers filing for Chapter 11 protection. "Up until now, we knew the cash numbers were tough, but we didn't know how bad."
Companies that run out of cash generally can sell assets, cut costs or file for Chapter 11 bankruptcy protection to keep creditors at bay while they reorganize.
GM had said previously it could fall short of cash needed to operate in the first few months of next year, and Ford has said it has about seven months of money, Magliano noted.
If GM files for bankruptcy, Fitch Ratings analyst Mark Oline said there is "a very high risk" that it would pull in Ford and Chrysler, too, because GM probably would be forced to discount vehicles deeply to generate cash for creditors, and other automakers would be forced to follow.
GM said it lost $2.5 billion in the third quarter, but more important, it spent $6.9 billion more than it took in — nearly double the spending rate of the second quarter.
The news came just hours after Ford announced it had lost $129 million for the quarter. The company burned through $7.7 billion in cash, but said it could keep going through 2009. Ford also said it would cut another 2,260 white-collar workers in North America.
GM called off talks with Chrysler to concentrate on its own business.
Privately held Chrysler wouldn't comment on GM's remarks, but said it remains focused on returning to profitability. It also said it will continue to "explore multiple strategic alliances or partnerships."
GM's cuts included the indefinite layoff of about 3,600 workers beginning early next year as it slows production at 10 assembly plants to match anticipated weaker sales.
"We are cutting to the bone," said Fritz Henderson, GM's president and chief operating officer. "What we want to try to do is size the business for this kind of volume level ... and frankly, put us in much better shape when the industry improves."
GM reported a net loss of $4.45 per share during the quarter, compared with a record-setting loss of $39 billion, or $68.85 per share, a year earlier. Its automotive operations saw an adjusted loss of $2.8 billion.
Revenue fell to $37.9 billion from $43.7 billion.
The results exceeded Wall Street estimates. Analysts surveyed by Thomson Reuters predicted a loss of $3.70 per share on sales of $39.4 billion.
The company announced it would bolster its cash reserves by $5 billion by the end of next year through reduction of sales promotions and further production cuts in the first quarter.
GM will cut capital spending to $4.8 billion from $7.2 billion and delay several vehicle models. But GM said it will continue funding for the Chevrolet Volt electric car and the Chevrolet Cruze, a small fuel-efficient model. Both are due out in 2010.
GM also suspended its matching contribution for employee 401k plans, and suspended tuition reimbursement. In addition, salaried employees will not receive incentive pay next year for their work in 2008, GM said.
GM, which has about 123,000 employees in North America, will also cut another 1,900 salaried jobs on top of the 5,100 announced last summer.
But the cuts and delays may not be enough to keep the company's cash supply from falling dangerously low.
"GM's estimated liquidity during the remainder of 2008 will approach the minimum amount necessary to operate its business," the company said in a news release.
And the company's cash shortage in the first two quarters of 2009 could fall significantly short of the minimum amount unless industry conditions improve or GM gets government funding, GM said.
GM shares fell 44 cents, or 9.2 percent, to $4.36 in Friday trading. Ford shares rose 4 cents, or 2 percent, to $2.02.
Hedge Fund Selling Puts New Stress on Market
By JENNY STRASBURG and GREGORY ZUCKERMAN
7 November 2008
WSJ: Hedge funds are selling billions of dollars of securities to meet demands for cash from their investors and their lenders, contributing to the stock market's nearly 10% drop over the past two days.
The Dow Jones Industrial Average fell 443.48 points on Thursday, bringing its two-day drop to 929.49 points, its biggest two-day decline since Oct. 20, 1987. Coming amid steep drops in the retail and auto sectors, the decline wiped out a strong rally that ended on Election Day, and now the market is only 6% away from its lowest close of the year.
One of the biggest hedge funds, $16 billion Citadel Investment Group, is being asked by several major banks to post additional collateral to cover big losses on its investments, according to people familiar with the situation.
Citadel, which is run by Kenneth Griffin, was until recently considered a possible savior for troubled Wall Street firms. But his biggest hedge fund has fallen nearly 40% this year, prompting the firm to hold conversations with lenders including Goldman Sachs Group Inc., Deutsche Bank AG and Merrill Lynch & Co. that finance Citadel's trades.
Citadel executives say the calls for more cash are a normal part of business when securities they hold fall in value, and they emphasize they have significant amounts of cash to satisfy their lenders. They say they have met all the demands for collateral. Rumors that the firm was having problems led it to hold a conference call two weeks ago in which it said it was holding 30% of its capital in cash and Treasurys and had $8 billion in credit lines it has yet to tap. The firm also said some of its businesses are doing well this year, that it has reduced risk and its use of borrowed money, and that performance has improved recently.
Citadel Investment Group
SIZE: $16 billion
CEO: Ken Griffin, 40
YTD RETURNS: Biggest funds down about 39% through last Friday
HISTORICAL RETURNS: 18%-20% a year
NUMBER OF EMPLOYEES: More than 1,200
HISTORY: Mr. Griffin founded the Chicago-based firm in 1990 with $4.6 million, one year after graduating from Harvard University. The fund is known for buying assets of other investment firms in distress.
KEY INVESTMENTS: Assets of E*Trade, Enron Corp. and hedge funds Sowood Capital and Amaranth
Lenders are hoping regulators would orchestrate a settlement among the companies involved in Citadel's loans if necessary, according to a person familiar with the situation. "Citadel is a valued client, and we continue to do business with them as usual," said Ed Canaday, a Goldman spokesman.
Deutsche Bank spokesman Ted Meyer said, "Citadel is a valued customer and our relationship is business as usual."
Hedge funds have emerged as the latest serious problem in the global financial system. As their losses mount, they're selling off
securities to meet demands for cash from lenders and investors. Compounding the problem is a surge in notices from investors indicating they want out. Some hedge funds have been hoarding cash in preparation for these withdrawal requests. Hedge funds are sitting on a record amount of cash, estimated at about $400 billion, money that eventually could make its way into the market. Other managers are hoping that investors have second thoughts and don't go through with the withdrawals, or are telling their investors that they will sell securities over time rather than dump them as the market falls. But either way, the wave of requests is keeping money out of the market as hedge funds figure out their next moves.
Withdrawals from hedge funds and from mutual funds are one factor weighing on stocks, says Mary Ann Bartels, Merrill Lynch's chief strategist. "It's an overhang for the market," she says.
The recent rush of withdrawal notices to hedge funds comes as investors, including endowments, pension funds and wealthy individuals, see other investments shrink; in some cases these investors need cash to meet their own obligations. It also marks a sharp reversal of sentiment among these big institutional investors, which jumped into hedge funds and similar investments in recent years. The University of Virginia, with an endowment of $4 billion in mid-October, recently said it plans to sell $400 million of its $1.8 billion in hedge funds in the next couple of years to fulfill commitments to other investments.
The result is a downward spiral where hedge funds sell off thinly traded securities such as convertible bonds and corporate loans, driving down their prices, and leading to bigger losses and more demands for cash. Some $4.28 billion worth of corporate loans have been put up for sale in the past month, according to Standard & Poor's. When hedge funds can't meet the demands for cash, lenders seize their assets and try to sell them, further driving down prices and putting more funds in trouble.
Even the most established hedge funds are being hit by -- or girding for -- withdrawals from investors.
Carl Icahn, the billionaire activist, has received $1 billion of redemption notices from investors in his $7 billion hedge fund after posting losses that are a bit lower than the overall market this year. He's putting $250 million into the fund to help avoid selling shares to meet the requests.
Investors in Highbridge Capital Management, which manages $17 billion and is one of the largest hedge funds, have asked for 15% or more of their money back by the end of this year amid losses of at least 22% for Highbridge's biggest fund, according to people close to the matter. Och-Ziff Capital Management, a $28 billion firm down 12% in its biggest fund through October, will see withdrawals of 6% of its funds by the end of this year, according to Citigroup analyst Prashant Bhatia. A spokesman for Och-Ziff declined to comment.
"In mid-October, redemption levels were in the 5% range but all of a sudden now it's cranking up to as high as 25% for some funds," says Gregory Horn, president of Persimmon Capital Management, a $500 million Blue Bell, Pa., firm that invests in hedge funds. The firm has asked for about 20% of its total investments back. This "is the highest level of redemption requests" for the industry in at least 17 years, Mr. Horn says.
Some investors are withdrawing because they're more wary of hedge funds, which fell 20% this year, through October. That beats the 34% drop for the Standard & Poor's 500 but is nonetheless disappointing for an industry that has returned 13.8% annualized since 1990, above the 10.5% return of the S&P 500. San Francisco hedge-fund firm Farallon Capital Management LLC, which oversees about $27 billion, has seen its biggest hedge funds fall between 23% and 29% on investment declines this year, according to investors.
Citadel's Mr. Griffin, 40 years old, began trading convertible-bonds in his dorm room at Harvard University. He launched Citadel in 1990, a year after graduating, becoming one of the youngest investors to pocket billions of dollars as hedge funds scored huge profits during the past decade. In 2003, he married another hedge-fund trader, tying the knot at the palace of Versailles. Festivities in Paris included a party at the Louvre and a rehearsal dinner at the Musée D'Orsay.
Mr. Griffin built his firm into a behemoth in part by making traditional investments, such as buying stocks and convertible bonds, and investing in other funds. He also set up a unit to execute trades for other investors.
In recent years, Citadel profited by swooping in and buying investments sold by rivals in dire straits. Mr. Griffin emerged as a go-to player on Wall Street for firms in crisis and in need of quick cash. His traders picked through distressed assets and often made offers before others had a chance. Some bets paid off, such as when Citadel bought beaten-down securities sold by rival hedge funds Sowood Capital and Amaranth LLC, and those securities subsequently rose in value.
But more recently, Citadel has made some bad bets, such as holding convertible-bonds that fell in value. Last year, it invested $2.55 billion into discount brokerage firm E*Trade Financial Corp., which was struggling due to its holdings of risky mortgage securities. E*Trade shares have fallen 80% in the past year, closing at $1.87 on Thursday.
Perhaps more than others on Wall Street, Mr. Griffin has actually tried to set up his fund so that it's prepared for a crisis. Most of his investors are locked up for an extended period, meaning they can't ask for their money back whenever they get jittery. The fund also sold $500 million of bonds to investors, becoming the first hedge fund to do a bond deal, to raise more-permanent capital.
Many funds are dealing with deep losses, and because some of them have barred or limited withdrawals, investors now are turning to healthier funds to get their hands on cash.
Plainfield Asset Management, a $5 billion fund down just 8% through October, has told investors that in just the past few weeks it's received withdrawal requests amounting to as much as one-third of its assets. About one-quarter of the investors in Blue Mountain Capital Management, which has lost less than 3% this year, have asked to yank their money from the fund. Trafalgar Asset Managers, which has seen redemption requests of about 25% of the firm's $3 billion assets despite gains in most funds this year, has moved some assets into a separate vehicle, to sell them over time. "The main pressure on the firm has been redemptions, not performance," said a Trafalgar spokeswoman.
—Craig Karmin and Randall Smith contributed to this article.
Write to Jenny Strasburg at jenny.strasburg@wsj.com and Gregory Zuckerman at gregory.zuckerman@wsj.com
Copyright 2008 Dow Jones & Company, Inc. All Rights Reserved
A conversation between a woman and her ex-husband.
Woman: "You have not paid me the handphone bill. You promised that you would pay me $20 everyday, but till now I've not received any money from you!"
Ex-husband: "Recently I drive taxi for a living....but the taxi company took my taxi back because I did not pay the rental. But good news is, if you help me to pay the taxis rental of $600, I can take back my taxi and continue to drive and then I will be able to pay you the handphone bill by instalments. If you did not pay for me, then how can I pay you back if I didn't drive?"
Woman: "You're supposed to pay me back the handphone bill of $400++, which you owe me, yet you're trying to trick me to pay the taxis rental fee of $600 for you now? I used to trust you alot when you were still my husband then. But you had abused my trust. Until now you still think that I was the same foolish woman, again? And you dare say it's 'GOOD NEWS'? I didn't even have enough money to put food on the table for myself and my son, don't ever try to squeeze any drop of money from me, anymore!"
Another food crisis year looms, says FAO
By Javier Blas in London
November 6 2008
The world might face a repeat of this year’s food crisis as the credit crunch encroaches on the agricultural market, leading farmers to cut their planting because of falling prices and lack of finance to buy fertilisers, the United Nations warned on Thursday.
“Riots and instability could again capture the headlines,” the Food and Agriculture Organisation said.
The warning was made despite a fall in the price of most agricultural commodities as farmers harvest bumper crops.
The price of corn, wheat and rice has tumbled between 60 and 40 per cent from all-time highs earlier this year, but in its biennial Food Outlook report the FAO warned against a “false sense of security”.
“Under the current gloomy prospects for agricultural prices, high input costs and more difficult access to credit, farmers may cut their plantings, which might again result in a tightening of world food supplies,” the FAO said in the report.
This year saw agricultural commodity prices jump to a record high, triggering food riots from Haiti to Egypt to Bangladesh, and prompting appeals for food aid for more than 30 countries in sub-Saharan Africa.
Concepción Calpe, a senior economist at the FAO in Rome, said a price surge might take place in the 2009-10 harvesting season, “unleashing even more severe food crises than those experienced recently”.
Lower production and higher prices next year could add to developing countries’ problems in obtaining sufficient credit and foreign exchange to buy agricultural commodities. “Export finance is becoming more difficult to obtain, with banks tightening up the conditions for issuance of letters of credit,” the FAO said.
Thailand and Iran agreed last month to barter rice for oil, the clearest example yet of how the financial crisis, high fuel price and scarcity of food are reshaping global trade.
In spite of the continuing fall in food prices, the world’s food imports’ bill is set to surge above $1,000bn (€785bn, £633bn) for the first time ever, up 23 per cent from last year and 64 per cent higher than in 2006, the FAO said.
Developing countries will spend $343bn this year on food imports, up a record 35 per cent from last year’s $254bn. Some poor countries, the organisation said, were curtailing food imports in an effort to lower their bills.
Berkshire Hathaway profit tumbles 77 percent
By Jonathan Stempel
Nov 7, 2008
NEW YORK (Reuters) - Warren Buffett's Berkshire Hathaway Inc said on Friday third-quarter profit fell 77 percent, the fourth straight quarterly decline, hurt by weaker results from insurance underwriting and a big loss on derivatives contracts.
Net income for the Omaha, Nebraska-based insurance and investment company declined to $1.06 billion, or $682 per Class A share, from $4.55 billion, or $2,942, a year earlier.
Operating profit fell 18 percent to $2.07 billion, or $1,335 per share, from $2.56 billion, or $1,655. It fell short of analysts' average expectation for $1,429 per share, according to Reuters Estimates. Revenue fell 7 percent to $27.93 billion. Berkshire's net worth nevertheless rose to $120.2 billion from $118 billion at the end of June.
"You can look at the results as a glass half-full or half- empty," said Frank Betz, a principal at Carret/Zane Capital Management LLP in Warren, New Jersey, which owns Berkshire stock. "Earnings were down, but book value went up. Berkshire hasn't been battered by extraordinary insurance claims and there's nothing alarming in the results that's tied to Berkshire's exposure to the economy."
Berkshire is a roughly $175 billion conglomerate that owns several dozen businesses in such areas as insurance, energy, housing, kitchen supplies, clothing and food.
It also tries to invest in out-of-favor companies with strong earnings and management. Insurance typically generates half of results. Buffett is the second-richest American according to Forbes magazine and an economic adviser to President-elect Barack Obama.
HURRICANES HURT RESULTS
Profit from insurance underwriting fell 83 percent to $81 million, hurt by increased price competition and about $1.05 billion of losses tied to Hurricanes Gustav and Ike.
Berkshire boosted insurance premiums following Hurricane Katrina in 2005, but prices and profit margins have fallen. The 2007 hurricane season was also quiet, making this year's results look comparably worse.
Insurance investment income declined 12 percent in the quarter to $809 million and profit from other businesses declined 8 percent to $1.08 billion. The latter included a decline of 8 percent in utilities and energy and an increase of 3 percent in manufacturing, retailing and services.
Berkshire also had $1.26 billion of pre-tax losses from derivatives contracts. The bulk of this related to previously disclosed contracts tied to the long-term performance of the Standard & Poor's 500 .SPX and three foreign stock indexes and to the credit quality of high-yield bonds.
Accounting rules require Berkshire to regularly report unrealized gains and losses on the contracts.
But Berkshire can invest the cash it got up front to enter the contracts. It would also pay on the stock index contracts only if various indexes are lower between the 2019 and 2027 than when the contracts were created.
Buffett entered the contracts, although he has called derivatives "financial weapons of mass destruction."
Berkshire's Class A shares closed up $800 at $113,000 on Friday, while its Class B shares fell $14 to $3,686. The company released results after U.S. markets closed.
NO EYEDROPPER
Buffett has committed more than $27 billion of Berkshire's money this year to make acquisitions, finance takeovers and invest in blue-chip companies such as General Electric Co and Goldman Sachs Group Inc.
The investments give Berkshire new ways to grow as the credit crisis drives asset values down and makes it harder for other companies to borrow.
Despite the investments, Berkshire increased its cash stake to $33.37 billion as of September 30 from $31.16 billion in June, although it was down from $44.33 billion at the end of 2007.
"When you can move money from cash earning 2 percent to distressed assets that can earn 20 percent, it creates a lot of value," said James Armstrong, president of Henry H. Armstrong Associates in Pittsburgh, which owns Berkshire stock. "Buffett isn't doing it with an eyedropper."
Last month, Buffett pledged to move all his personal holdings apart from Berkshire stock, which is pledged to charity, into U.S. stocks from government bonds, citing long- term optimism in corporate America.
Within insurance, pre-tax underwriting gains at auto insurer Geico Corp fell 27 percent to $246 million, hurt by higher claims. Gains before taxes fell 66 percent to $54 million at General Re Corp, which rejected business where it did not believe it was getting paid enough.
Berkshire Hathaway Reinsurance Group, meanwhile, had a $166 million pre-tax loss, hurt by hurricanes and lower premiums.
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