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Monday, 24 November 2008
Worst of financial crisis yet to come, says IMF chief economist
The IMF’s chief economist has warned that the global financial crisis is set to worsen and that the situation will not improve until 2010, a report said Saturday.
Worst of financial crisis yet to come, says IMF chief economist
23 November 2008
ZURICH, Switzerland - The IMF’s chief economist has warned that the global financial crisis is set to worsen and that the situation will not improve until 2010, a report said Saturday.
Olivier Blanchard also warned that the institution does not have the funds to solve every economic problem.
“The worst is yet to come,” Blanchard said in an interview with the Finanz und Wirtschaft newspaper, adding that “a lot of time is needed before the situation becomes normal.”
He said economic growth would not kick in until 2010 and it will take another year before the global financial situation became normal again.
The International Monetary Fund on Friday promised to help Latvia deal with its economic crisis after it assisted Iceland, Hungary, Ukraine, Serbia and Pakistan.
But Blanchard said the IMF was not able to solve all financial issues, in particular problems of liquidity.
Withdrawals of capital leading to problems of liquidity “can be so significant that the IMF alone cannot counter them,” he said, adding that massive withdrawals of investments from emerging countries could represent “hundreds of billions of dollars.
“We do not have this money. We never had it,” he said.
The IMF had spent a fifth of its 250 billion dollar (200 billion euro) fund in the last two weeks, Blanchard added.
He also urged central banks around the world to cut interest rates, after the Swiss National Bank made a surprise one percentage point rate cut Thursday.
The central banks “should lower interest rates to as close to zero as possible,” he said.
As the world slips into recession, it is also on the brink of a synthetic CDO cataclysm that could actually save the global banking system.
It is a truly great irony that the world’s banks could end up being saved not by governments, but by the synthetic CDO time bomb that they set ticking with their own questionable practices during the credit boom.
Alternatively, the triggering of default on the trillions of dollars worth of synthetic CDOs that were sold before 2007 could be a disaster that tips the world from recession into depression. Nobody knows, but it won’t be a small event.
A synthetic CDO is a collateralised debt obligation that is based on credit default swaps rather physical debt securities.
CDOs were invented by Michael Milken’s Drexel Burnham Lambert in the late 1980s as a way to bundle asset backed securities into tranches with the same rating, so that investors could focus simply on the rating rather than the issuer of the bond.
About a decade later, a team working within JP Morgan Chase invented credit default swaps, which are contractual bets between two parties about whether a third party will default on its debt. In 2000 these were made legal, and at the same time were prevented from being regulated, by the Commodity Futures Modernization Act, which specifies that products offered by banking institutions could not be regulated as futures contracts.
This bill, by the way, was 11,000 pages long, was never debated by Congress and was signed into law by President Clinton a week after it was passed. It lies at the root of America’s failure to regulate the debt derivatives that are now threatening the global economy.
Anyway, moving right along – some time after that an unknown bright spark within one of the investment banks came up with the idea of putting CDOs and CDSs together to create the synthetic CDO.
Here’s how it works: a bank will set up a shelf company in Cayman Islands or somewhere with $2 of capital and shareholders other than the bank itself. They are usually charities that could use a little cash, and when some nice banker in a suit shows up and offers them money to sign some documents, they do.
That allows the so-called special purpose vehicle (SPV) to have “deniability”, as in “it’s nothing to do with us” – an idea the banks would have picked up from the Godfather movies.
The bank then creates a CDS between itself and the SPV. Usually credit default swaps reference a single third party, but for the purpose of the synthetic CDOs, they reference at least 100 companies.
The CDS contracts between the SPV can be $US500 million to $US1 billion, or sometimes more. They have a variety of twists and turns, but it usually goes something like this: if seven of the 100 reference entities default, the SPV has to pay the bank a third of the money; if eight default, it’s two-thirds; and if nine default, the whole amount is repayable.
For this, the bank agrees to pay the SPV 1 or 2 per cent per annum of the contracted sum.
Finally the SPV is taken along to Moody’s, Standard and Poor’s and Fitch’s and the ratings agencies sprinkle AAA magic dust upon it, and transform it from a pumpkin into a splendid coach.
The bank’s sales people then hit the road to sell this SPV to investors. It’s presented as the bank’s product, and the sales staff pretend that the bank is fully behind it, but of course it’s actually a $2 Cayman Islands company with one or two unknowing charities as shareholders.
It offers a highly-rated, investment-grade, fixed-interest product paying a 1 or 2 per cent premium. Those investors who bother to read the fine print will see that they will lose some or all of their money if seven, eight or nine of a long list of apparently strong global corporations go broke. In 2004-2006 it seemed money for jam. The companies listed would never go broke – it was unthinkable.
Here are some of the companies that are on all of the synthetic CDO reference lists: the three Icelandic banks, Lehman Brothers, Bear Stearns, Freddie Mac, Fannie Mae, American Insurance Group, Ambac, MBIA, Countrywide Financial, Countrywide Home Loans, PMI, General Motors, Ford and a pretty full retinue of US home builders.
In other words, the bankers who created the synthetic CDOs knew exactly what they were doing. These were not simply investment products created out of thin air and designed to give their sales people something from which to earn fees – although they were that too.
They were specifically designed to protect the banks against default by the most leveraged companies in the world. And of course the banks knew better than anyone else who they were.
As one part of the bank was furiously selling loans to these companies, another part was furiously selling insurance contracts against them defaulting, to unsuspecting investors who were actually a bit like “Lloyds Names” – the 1500 or so individuals who back the London reinsurance giant.
Except in this case very few of the “names” knew what they were buying. And nobody has any idea how many were sold, or with what total face value.
It is known that some $2 billion was sold to charities and municipal councils in Australia, but that is just the tip of the iceberg in this country. And Australia, of course, is the tiniest tip of the global iceberg of synthetic CDOs. The total undoubtedly runs into trillions of dollars.
All the banks did it, not just Lehman Brothers which had the largest market share, and many of them seem to have invested in the things as well (a bit like a dog eating its own vomit).
It is now getting very interesting. The three Icelandic banks have defaulted, as has Countrywide, Lehman and Bear Stearns. AIG has been taken over by the US Government, which is counted as a part-default, and Freddie Mac and Fannie Mae are in “conservatorship”, which is also a part default – a 'part default' does not count as a 'full default' in calculating the nine that would trigger the CDS liabilities.
Ambac, MBIA, PMI, General Motors, Ford and a lot of US home builders are teetering.
If the list of defaults – full and partial – gets to nine, then a mass transfer of money will take place from unsuspecting investors around the world into the banking system. How much? Nobody knows, but it’s many trillions.
It will be the most colossal rights issue in the history of the world, all at once and non-renounceable. Actually, make that mandatory.
The distress among those who lose their money will be immense. It will be a real loss, not a theoretical paper loss. Cash will be transferred from their own bank accounts into the issuing bank, via these Cayman Islands special purpose vehicles.
The repercussions on the losers and the economies in which they live, will be unpredictable but definitely huge. Councils will have to put up rates to continue operating. Charities will go to the wall and be unable to continue helping those in need. Individual investors will lose everything.
There will also be a tsunami of litigation, as dumbfounded investors try to get their money back, claiming to have been deceived by the sales people who sold them the products. In Australia, some councils are already suing the now-defunct Lehman Brothers, and litigation funder, IMF Australia, has been studying synthetic CDOs for nine months preparing for the storm.
But for the banks, it’s happy days. Suddenly, when the ninth reference entity tips over, they will be flooded with capital. It’s possible they will have so much new capital, they won’t know what to do with it.
This is entirely uncharted territory so it’s impossible to know what will happen, but it is possible that the credit crunch will come to sudden and complete end, like the passing of a tornado that has left devastation in its wake, along with an eerie silence.
The most important task for the incoming US Treasury Secretary, Tim Geithner, when he eventually comes in (apart from cleaning up the horrible mess his predecessor left on the TARP) will be to figure out what to do with synthetic CDOs.
Specifically: who decides when the right number of defaults has occurred to trigger total loss on these investments, and then who blows the whistle to signal that it’s time for ownership of that money to be transferred.
Synthetic collateralised debt obligations, you’ll recall, are complex credit default swap instruments where the investment is lost if and when between seven and nine companies out of a list of – usually – 100, default on their debt. The total companies on all the synthetic CDOs, runs into several hundred.
For the banks that sold them they are insurance contracts – they get paid when there are nine defaults from the list. For the investors who bought them they are ticking time bombs as, one by one, the companies fall over.
Many Australian local councils and charities have bought them from Lehman Brothers’ local subsidiary Grange Securities.
Mostly those who bought them had no idea what they were buying. They were sold by spivs paid a commission and presented as investment-grade fixed-interest securities paying a premium over similarly rated alternatives. It was a bit like buying a house on an old toxic waste dump that has had a nice lawn planted on top.
In any case, those who actually knew what they were buying had no reason to suspect in 2006 that nine of the world’s largest and most solid corporations would go bust. Now it is an entirely different story.
Here is a form guide on 31 companies that have either defaulted already and are most likely to do. I am indebted to IMF Australia, the litigation funder that has been studying synthetic CDOs, which provided the basis of list below, which I have updated and expanded.
American International Group
The US government lent $US123 billion to AIG in September and October, and by all accounts this has blown out to $US150 billion. In return for that the government got 80 per cent of the company’s equity. The company is now selling assets in an attempt to repay the loan, and while it is unlikely to raise enough cash to do that, it won’t default unless the government decides to let it.
AMBAC (a monoline insurer)
Last week Ambac was downgraded again by both Standard and Poor’s and Moody’s and the stock price fell 30 per cent to 83 US cents (it was $US24.74 last November). Then on Thursday the price soared 80 per cent after the company paid $US1 billion to get out of four CDO guarantees worth $US3.5 billion. Reuters reported that research firm Friedman, Billings, Ramsey said Ambac's contract cancellations were "positive," but did not "answer ongoing business model concerns." Still a likely default.
Bear Stearns
Taken over by JPMorgan Chase in March. If JPMorgan defaults (see below) this would therefore result in two defaults.
Beazer Homes (home builder)
Its share price has crashed from $US9 in September to just above $US1 now as house building in the US has virtually stopped. It’s due to post its annual results on December 2. In the meantime the Securities and Exchange Commission is investigating the company over accounting procedures. The SEC alleges that it fraudulently altered its earnings and improperly recorded $US100 million in earnings in 2006. Likely to default.
Centex (home builder)
The company lost $US171.9 million in the September quarter and the shares have fallen from $US30 to $US5.50. Centex is now selling land to survive.
Citigroup
Who would have thought we would be raising questions about the survival of Citigroup, but we are. Two weeks ago the CEO Vikram Pandit made 52,000 job cuts and last week the shares responded by falling 60 per cent. As the New York Times reported last week, only two months ago Citigroup emerged from the wreckage of the financial crisis as one of the few titans left standing; now it is on its knees. The NYT attributes much of its problems to the failure of its takeover of Wachovia, after Wells Fargo swooped in with a higher offer. May be too big to be allowed to fail, though the government will probably have to do an AIG with it.
Countrywide (mortgage broker)
Swallowed by Bank of America, and apparently guilty of fraud and dishonesty. It is now the subject of many lawsuits, including from the State of California. As with Bear Stearns, if Bank of America defaults, it will cause two defaults; that seems unlikely, but anything’s possible these days.
Fannie Mae (mortgage wholesaler)
This company was placed into conservatorship by the Federal Housing Finance Agency in early September 2008. The board of directors and senior management were expelled. Shares representing 80 per cent of the company were issued to the government. Dividends were suspended. This company has defaulted on its debt.
FGIC (insurance company)
Sold most of its business to MBIA (see below) in August. Although this was a positive move, it left the company with a lot of residential mortgage backed securities and CDOs that were sinking in value. This company seems likely to default eventually.
Freddie Mac
Like Fannie Mae it was placed in conservatorship in September, which was an act of default.
FSA (insurance company)
This used to be owned by the Belgian-French bank Dexia, and was sold this month to Assured Guaranty Ltd. However, its future is neither assured nor guaranteed, and parent and new subsidiary are under financial stress. Fitch Ratings has commented that FSA is still a separate entity for the purposes on default calculations.
Genworth Financial (insurance company)
The company announced a third quarter loss and was downgraded by Moody’s. Last sighted trying to buy a bank so it could get its hands on some of the $US700 billion TARP money from the government. Unlikely to make it.
Goldman Sachs (investment bank, now bank)
Having applied and been granted bank status, Goldman Sachs is very unlikely to fail, although it is reporting losses and its share price has slumped. That latest plan is to issue debt guaranteed by the government body, FDIC.
Hovnanian (home builder)
As with most US home builders in the list of 32 companies under pressure, Hovnanian is moving inexorably downwards. As at 10 November 2008, it was trading at $US3.36, down from above $US12 in May 2008. It is now being sued by Californian homeowners for fraud and breach of contract. Without government assistance, it is likely to fail.
JP Morgan
Shares fell 50 per cent last in sympathy with Citigroup, but probably too big to fail.
KB Homes (home builder)
A few months ago this company was trading at $US17.72. Since then, it has fallen as low as $US7, and is now $US8.02. In early November it cut its quarterly dividend by 75 per cent. As with all of the homebuilders this company will struggle through the housing downturn.
Lehman Brothers
Filed for bankruptcy on 15 September 2008, immediately causing a massive upheaval in financial markets. The company has $US613 billion in debt and is the third of these 30 companies to default. Investors are currently pushing for an independent investigation of fraudulent practices at the company.
Lennar (home builder)
This company is the second biggest homebuilder in the US and may be better positioned than most to survive a downturn.
Masco (home products)
Fitch has downgraded the company’s rating from BBB to BBB- and left the ratings on negative outlook. As the homebuilders struggle, those who supply them (such as Masco) will equally struggle.
MBIA (bond insurer)
On 5 November 2008, the company announced a third quarter loss of $US806 million. On 8 November 2008, Moody’s lowered the ratings on MBIA thus triggering payments by the company to third parties. Moody’s lowered the debt rating to junk level, citing a growing exposure to US mortgages. Without government intervention, it seems almost certain that this company will fail.
Merrill Lynch (investment bank)
On 14 September 2008, Bank of America announced that it had acquired Merrill Lynch subject to approval by regulators and shareholders. The company was sold for $US29 per share and the company is currently trading at $US8.34. It is down from over $US50 in May 2008. The acquisition of this company by Bank of America means that if Bank of America fails, then this will be a default by Bank of America, Countrywide and Merrill Lynch. Had Bank of America not made these two acquisitions, both Countrywide and Merrill Lynch would have failed by now.
MGIC (bond insurer)
On 17 October 2008, the company announced a third quarter loss of $US113 million after losses on Fannie Mae, Freddie Mac, Lehman Brothers and AIG. The company is currently trading at $US1.93, down from above $US10 two months ago. This company has a limited future unless the US government steps in to save it.
Morgan Stanley (investment bank)
The company’s shares have fallen from $US45 in September to $US10.05 today. It is clearly struggling but will not be permitted to fall, although it may be taken over by a stronger operator.
PMI (bond insurer)
On 3 November 2008, PMI announced a third quarter loss of $US229 million. The shares are down to $US1.37 from a high of $US17 and appear to be heading to oblivion unless the government intervenes. Local insurer QBE completed the acquisition of PMI Australia in late October.
Pulte Homes
Again, the shares have collapsed from above $US20 to $US7.12 in a couple of months. Analysts have recently started to downgrade this stock. In its quarterly report dated 6 November 2008, the company reported a net loss of $US280 million for the three months ended September 30, 2008. It will struggle to survive.
Radian Group (insurer)
The debt of this company has been reduced to junk status. Its shares are trading at $US1.50, down from as high as $US5.20 but are now back to $US3.32. Again, short of government intervention, this company seems doomed to failure.
Rescap (mortgage broker)
Rescap is owned by GMAC, which is itself in trouble. In turn, GMAC is owned by Cerebus and General Motors. Both of these firms are in trouble. In early September, Rescap announced it was shedding 60 per cent of its staff, having narrowly escaped bankruptcy. S&P has now downgraded both GMAC and Rescap to CC. On 5 November 2008, the Washington Post suggested that Rescap would fail. The newspaper quoted GMAC as the source of that information. It now appears that GMAC will not be required to support Rescap. In these circumstances, it seems almost certain that Rescap will fail. Rescap posted a third quarter loss of $US1.9 billion. This made a total loss for eight quarters of $US9 billion.
Standard Pacific (home builder)
On 30 October 2008, the company announced a third quarter loss of $US369 million.
UBS (investment bank)
This is one of the companies one would expect to survive the financial turmoil. In October, the company received a $US59.2 billion aid package from the Swiss government. This is the main reason why it is not likely to default. In European terms, it is too big to fail. The company has transferred the risk on $US60 billion of debt assets to the Swiss government. In the meantime, indictments could be issued against senior bank officers in the near future.
Washington Mutual (savings and loan company)
On 26 September 2008, this company became the largest US bank failure in history. After customers withdrew large sums, it was seized by the Office of Thrift Supervision and its branch network sold to JP Morgan. This is the fourth company to default in the list.
XL Capital (Monoline Insurer)
The debt of this company had been downgraded to junk status and the stock is trading at $US4.64, down from above $US20 in a couple of months. The chairman has been forced to sell to meet margin calls. The stock has been down 50 per cent one day and up 75 per cent the next. The company announced a loss of $US1.6 billion to 30 September 2008. This is another company whose future is cloudy without government intervention. (Its parent is now known as Syncora Holdings.)
Citigroup Saw No Red Flags Even as It Made Bolder Bets
By ERIC DASH and JULIE CRESWELL November 22, 2008
“Our job is to set a tone at the top to incent people to do the right thing and to set up safety nets to catch people who make mistakes or do the wrong thing and correct those as quickly as possible. And it is working. It is working.”
Charles O. Prince III, Citigroup’s chief executive, in 2006
In September 2007, with Wall Street confronting a crisis caused by too many souring mortgages, Citigroup executives gathered in a wood-paneled library to assess their own well-being.
There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was O.K.
Mr. Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.
For months, Mr. Maheras’s reassurances to others at Citigroup had quieted internal concerns about the bank’s vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup’s huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses.
Normally, a big bank would never allow the word of just one executive to carry so much weight. Instead, it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses.
But many Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings — and executives’ multimillion-dollar bonuses — failed to rein them in, these insiders say.
Today, Citigroup, once the nation’s largest and mightiest financial institution, has been brought to its knees by more than $65 billion in losses, write-downs for troubled assets and charges to account for future losses. More than half of that amount stems from mortgage-related securities created by Mr. Maheras’s team — the same products Mr. Prince was briefed on during that 2007 meeting.
Citigroup’s stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago.
Burdened by the losses and a crisis of confidence, Citigroup’s future is so uncertain that regulators in New York and Washington held a series of emergency meetings late last week to discuss ways to help the bank right itself.
And as the credit crisis appears to be entering another treacherous phase despite a $700 billion federal bailout, Citigroup’s woes are emblematic of the haphazard management and rush to riches that enveloped all of Wall Street. All across the banking business, easy profits and a booming housing market led many prominent financiers to overlook the dangers they courted.
While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. Earlier this year, the Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup.
The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.
Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.
When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.
And since joining Citigroup in 1999 as a trusted adviser to the bank’s senior executives, Mr. Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another.
Citigroup was ensnared in murky financial dealings with the defunct energy company Enron, which drew the attention of federal investigators; it was criticized by law enforcement officials for the role one of its prominent research analysts played during the telecom bubble several years ago; and it found itself in the middle of regulatory violations in Britain and Japan.
For a time, Citigroup’s megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading.
But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses.
To some, the misery at Citigroup is no surprise. Lynn Turner, a former chief accountant with the Securities and Exchange Commission, said the bank’s balkanized culture and pell-mell management made problems inevitable.
“If you’re an entity of this size,” he said, “if you don’t have controls, if you don’t have the right culture and you don’t have people accountable for the risks that they are taking, you’re Citigroup.”
Questions on Oversight
Though they carry less prestige and are paid less than Wall Street traders and bankers, risk managers can wield significant clout. Their job is to monitor trading floors and inquire about how a bank’s money is being invested, so they can head off potential problems before blow-ups occur. Though risk managers and traders work side by side, they can have an uncomfortable coexistence because the monitors can put a brake on trading.
That is the way it works in theory. But at Citigroup, many say, it was a bit different.
David C. Bushnell was the senior risk officer who, with help from his staff, was supposed to keep an eye on the bank’s bond trading business and its multibillion-dollar portfolio of mortgage-backed securities. Those activities were part of what the bank called its fixed-income business, which Mr. Maheras supervised.
One of Mr. Maheras’s trusted deputies, Randolph H. Barker, helped oversee the huge build-up in mortgage-related securities at Citigroup. But Mr. Bushnell, Mr. Maheras and Mr. Barker were all old friends, having climbed the bank’s corporate ladder together.
It was common in the bank to see Mr. Bushnell waiting patiently — sometimes as long as 45 minutes — outside Mr. Barker’s office so he could drive him home to Short Hills, N.J., where both of their families lived. The two men took occasional fly-fishing trips together; one expedition left them stuck on a lake after their boat ran out of gas.
Because Mr. Bushnell had to monitor traders working for Mr. Barker’s bond desk, their friendship raised eyebrows inside the company among those concerned about its controls.
After all, traders’ livelihoods depended on finding new ways to make money, sometimes using methods that might not be in the bank’s long-term interests. But insufficient boundaries were established in the bank’s fixed-income unit to limit potential conflicts of interest involving Mr. Bushnell and Mr. Barker, people inside the bank say.
Indeed, some at Citigroup say that if traders or bankers wanted to complete a potentially profitable deal, they could sometimes rely on Mr. Barker to convince Mr. Bushnell that it was a risk worth taking.
Risk management “has to be independent, and it wasn’t independent at Citigroup, at least when it came to fixed income,” said one former executive in Mr. Barker’s group who, like many other people interviewed for this article, insisted on anonymity because of pending litigation against the bank or to retain close ties to their colleagues. “We used to say that if we wanted to get a deal done, we needed to convince Randy first because he could get it through.”
Others say that Mr. Bushnell’s friendship with Mr. Maheras may have presented a similar blind spot.
“Because he has such trust and faith in these guys he has worked with for years, he didn’t ask the right questions,” a former senior Citigroup executive said, referring to Mr. Bushnell.
Mr. Bushnell and Mr. Barker did not return repeated phone calls seeking comment. Mr. Maheras declined to comment.
For some time after Sanford I. Weill, an architect of the merger that created Citigroup a decade ago, took control of Citigroup, he toned down the bank’s bond trading. But in late 2002, Mr. Prince, who had been Mr. Weill’s longtime legal counsel, was put in charge of Citigroup’s corporate and investment bank.
According to a former Citigroup executive, Mr. Prince started putting pressure on Mr. Maheras and others to increase earnings in the bank’s trading operations, particularly in the creation of collateralized debt obligations, or C.D.O.’s — securities that packaged mortgages and other forms of debt into bundles for resale to investors.
Because C.D.O.’s included so many forms of bundled debt, gauging their risk was particularly tricky; some parts of the bundle could be sound, while others were vulnerable to default.
“Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’ ”
It appeared to be a good time for building up Citigroup’s C.D.O. business. As the housing market around the country took flight, the C.D.O. market also grew apace as more and more mortgages were pooled together into newfangled securities.
From 2003 to 2005, Citigroup more than tripled its issuing of C.D.O.’s, to more than $20 billion from $6.28 billion, and Mr. Maheras, Mr. Barker and others on the C.D.O. team helped transform Citigroup into one of the industry’s biggest players. Firms issuing the C.D.O.’s generated fees of 0.4 percent to 2.5 percent of the amount sold — meaning Citigroup made up to $500 million in fees from the business in 2005 alone.
Even as Citigroup’s C.D.O. stake was expanding, its top executives wanted more profits from that business. Yet they were not running a bank that was up to all the challenges it faced, including properly overseeing billions of dollars’ worth of exotic products, according to Citigroup insiders and regulators who later criticized the bank.
When Mr. Prince was put in charge in 2003, he presided over a mess of warring business units and operational holes, particularly in critical areas like risk-management and controls.
“He inherited a gobbledygook of companies that were never integrated, and it was never a priority of the company to invest,” said Meredith A. Whitney, a banking analyst who was one of the company’s early critics. “The businesses didn’t communicate with each other. There were dozens of technology systems and dozens of financial ledgers.”
Problems with trading and banking oversight at Citigroup became so dire that the Federal Reserve took the unusual step of telling the bank it could make no more acquisitions until it put its house in order.
In 2005, stung by regulatory rebukes and unable to follow Mr. Weill’s penchant for expanding Citigroup’s holdings through rapid-fire takeovers, Mr. Prince and his board of directors decided to push even more aggressively into trading and other business that would allow Citigroup to continue expanding the bank internally.
One person who helped push Citigroup along this new path was Mr. Rubin.
Pushing Growth
Robert Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration.
Mr. Weill, as Citigroup’s chief, wooed Mr. Rubin to join the bank after Mr. Rubin left Washington. Mr. Weill had been involved in the financial services industry’s lobbying to persuade Washington to loosen its regulatory hold on Wall Street.
As chairman of Citigroup’s executive committee, Mr. Rubin was the bank’s resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues.
“By the time I finished at Treasury, I decided I never wanted operating responsibility again,” he said in an interview in April. Asked then whether he had made any mistakes during his tenure at Citigroup, he offered a tentative response.
“I’ve thought a lot about that,” he said. “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.”
Besides, he said, it was impossible to get a complete handle on Citigroup’s vulnerabilities unless you dealt with the trades daily.
“There is no way you would know what was going on with a risk book unless you’re directly involved with the trading arena,” he said. “We had highly experienced, highly qualified people running the operation.”
But while Mr. Rubin certainly did not have direct responsibility for a Citigroup unit, he was an architect of the bank’s strategy.
In 2005, as Citigroup began its effort to expand from within, Mr. Rubin peppered his colleagues with questions as they formulated the plan. According to current and former colleagues, he believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman, and he pushed to bulk up the bank’s high-growth fixed-income trading, including the C.D.O. business.
Former colleagues said Mr. Rubin also encouraged Mr. Prince to broaden the bank’s appetite for risk, provided that it also upgraded oversight — though the Federal Reserve later would conclude that the bank’s oversight remained inadequate.
Once the strategy was outlined, Mr. Rubin helped Mr. Prince gain the board’s confidence that it would work.
After that, the bank moved even more aggressively into C.D.O.’s. It added to its trading operations and snagged crucial people from competitors. Bonuses doubled and tripled for C.D.O. traders. Mr. Barker drew pay totaling $15 million to $20 million a year, according to former colleagues, and Mr. Maheras became one of Citigroup’s most highly compensated employees, earning as much as $30 million at the peak — far more than top executives like Mr. Bushnell in the risk-management department.
In December 2005, with Citigroup diving into the C.D.O. business, Mr. Prince assured analysts that all was well at his bank.
“Anything based on human endeavor and certainly any business that involves risk-taking, you’re going to have problems from time to time,” he said. “We will run our business in a way where our credibility and our reputation as an institution with the public and with our regulators will be an asset of the company and not a liability.”
Yet as the bank’s C.D.O. machine accelerated, its risk controls fell further behind, according to former Citigroup traders, and risk managers lacked clear lines of reporting. At one point, for instance, risk managers in the fixed-income division reported to both Mr. Maheras and Mr. Bushnell — setting up a potential conflict because that gave Mr. Maheras influence over employees who were supposed to keep an eye on his traders.
C.D.O.’s were complex, and even experienced managers like Mr. Maheras and Mr. Barker underestimated the risks they posed, according to people with direct knowledge of Citigroup’s business. Because of that, they put blind faith in the passing grades that major credit-rating agencies bestowed on the debt.
While the sheer size of Citigroup’s C.D.O. position caused concern among some around the trading desk, most say they kept their concerns to themselves.
“I just think senior managers got addicted to the revenues and arrogant about the risks they were running,” said one person who worked in the C.D.O. group. “As long as you could grow revenues, you could keep your bonus growing.”
To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person said, and the prospect that millions of homeowners could default on their mortgages. Such a downturn did come, of course, with disastrous consequences for Citigroup and its rivals on Wall Street.
Even as the first shock waves of the subprime mortgage crisis hit Bear Stearns in June 2007, Citigroup’s top executives expressed few concerns about their bank’s exposure to mortgage-linked securities.
In fact, when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.
Later that summer, when the credit markets began seizing up and values of various C.D.O.’s began to plummet, Mr. Maheras, Mr. Barker and Mr. Bushnell participated in a meeting to review Citigroup’s exposure.
The slice of mortgage-related securities held by Citigroup was “viewed by the rating agencies to have an extremely low probability of default (less than .01%),” according to Citigroup slides used at the meeting and reviewed by The New York Times.
Around the same time, Mr. Maheras continued to assure his colleagues that the bank “would never lose a penny,” according to an executive who spoke to him.
In mid-September 2007, Mr. Prince convened the meeting in the small library outside his office to gauge Citigroup’s exposure.
Mr. Maheras assured the group, which included Mr. Rubin and Mr. Bushnell, that Citigroup’s C.D.O. position was safe. Mr. Prince had never questioned the ballooning portfolio before this because no one, including Mr. Maheras and Mr. Bushnell, had warned him.
But as the subprime market plunged further, Citigroup’s position became more dire — even though the firm held onto the belief that its C.D.O.’s were safe.
On Oct. 1, it warned investors that it would write off $1.3 billion in subprime mortgage-related assets. But of the $43 billion in C.D.O.’s it had on its books, it wrote off only about $95 million, according to a person briefed on the situation.
Soon, however, C.D.O. prices began to collapse. Credit-rating agencies downgraded C.D.O.’s, threatening Citigroup’s stockpile. A week later, Merrill Lynch aggressively marked down similar securities, forcing other banks to face reality.
By early November, Citigroup’s anticipated write-downs ballooned to $8 billion to $11 billion. Mr. Barker and Mr. Maheras lost their jobs, as Mr. Bushnell did later on. And on Nov. 4, Mr. Prince told the board that he, too, would resign.
Although Mr. Prince received no severance, he walked away with Citigroup stock valued then at $68 million — along with a cash bonus of about $12.5 million for 2007.
Putting Out Fires
Mr. Prince was replaced last December by Vikram S. Pandit, a former money manager and investment banker whom Mr. Rubin had earlier recruited in a senior role. Since becoming chief executive, Mr. Pandit has been scrambling to put out fires and repair Citigroup’s deficient risk-management systems.
Earlier this year, Federal Reserve examiners quietly presented the bank with a scathing review of its risk-management practices, according to people briefed on the situation.
Citigroup executives responded with a 25-page single-spaced memo outlining a sweeping overhaul of the bank’s risk management.
In May, Brian Leach, Citigroup’s new chief risk officer, told analysts that his bank had greatly improved oversight and installed several new risk managers. He said he wanted to ensure “that Citi takes the lessons learned from recent events and makes critical enhancements to its risk management frameworks. A change in culture is required at Citi.”
Meanwhile, regulators have criticized the banking industry as a whole for relying on outsiders — in particular the ratings agencies — to help them gauge the risk of their investments.
“There is really no excuse for institutions that specialize in credit risk assessment, like large commercial banks, to rely solely on credit ratings in assessing credit risk,” John C. Dugan, the head of the Office of the Comptroller of the Currency, the chief federal bank regulator, said in a speech earlier this year.
But he noted that what caused the largest problem for some banks was that they retained dangerously big positions in certain securities — like C.D.O.’s — rather than selling them off to other investors.
“What most differentiated the companies sustaining the biggest losses from the rest was their willingness to hold exceptionally large positions on their balance sheets which, in turn, led to exceptionally large losses,” he said.
Mr. Dugan did not mention any specific bank by name, but Citigroup is the largest player in the C.D.O. business of any bank the comptroller regulates.
For his part, Mr. Pandit faces the twin challenge of rebuilding investor confidence while trying to fix the company’s myriad problems.
Citigroup has suffered four consecutive quarters of multibillion-dollar losses as it has written down billions of dollars of the mortgage-related assets it held on its books.
But investors worry there is still more to come, and some board members have raised doubts about Mr. Pandit’s leadership, according to people briefed on the situation.
Citigroup still holds $20 billion of mortgage-linked securities on its books, the bulk of which have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans. And it also faces a potential flood of losses on auto, mortgage and credit card loans as the global economy plunges into a recession.
Also, hundreds of billions of dollars in dubious assets that Citigroup held off its balance sheet is now starting to be moved back onto its books, setting off yet another potential problem.
The bank has already put more than $55 billion in assets back on its balance sheet. It now says an added $122 billion of assets related to credit cards and possibly billions of dollars of other assets will probably come back on the books.
Even though Citigroup executives insist that the bank can ride out its current difficulties, and that the repatriated assets pose no threat, investors have their doubts. Because analysts do not have a complete grip on the quality of those assets, they are warning that Citigroup may have to set aside billions of dollars to guard against losses.
In fact, some analysts say they believe that the $25 billion that the federal government invested in Citigroup this fall might not be enough to stabilize it.
Others say the fact that such huge amounts have yet to steady the bank is a reflection of the severe damage caused by Citigroup’s appetites.
“They pushed to get earnings, but in doing so, they took on more risk than they probably should have if they are going to be, in the end, a bank subject to regulatory controls,” said Roy Smith, a professor at the Stern School of Business at New York University. “Safe and soundness has to be no less important than growth and profits but that was subordinated by these guys.”
KUALA LUMPUR, Nov 23 (AFP) — The global economic slowdown has sent palm oil prices crashing, spelling misery for countless smallholders who have been forced to watch their harvests rot on the trees.
Hundreds of thousands of farmers in Indonesia and Malaysia, which produce 85 per cent of the world's palm oil, are reliant on the industry which has gone from boom to bust in just a few months.
Palm oil prices have plummeted from a March high of 4,486 ringgit (1,248 dollars) per tonne to less than 1,500 ringgit, due to the financial crisis and the falling price of crude oil-which reduces demand from the biodiesel industry.
Malaysia's deputy commodities minister Kohilan Pillay said today's prices were close to the production costs of most smallholders, squeezing their earnings and pushing them to the brink of bankruptcy.
Oil mills are causing further hardship by flouting laws that require them to buy fruits from smallholders, whatever the going rate, he said.
"Their excuse is that it is not economical for them to process CPO (crude palm oil) at this time as prices are too low so they just shut down production," Pillay told the agency.
"Many are waiting for the prices to hit rock bottom before purchasing and this is a problem as the fruits are perishable and so these independent smallholders end up with rotting, unprocessed fruits which they cannot sell."
Smallholders or independent oil palm farmers account for about 30-35 per cent of Malaysia's total palm oil output and around 25 per cent of Indonesia's production.
"The bigger companies can sustain themselves even if prices fall below 1,000 ringgit per tonne but it is the smallholders who suffer the most," Pillay said.
In Indonesia, the government is under pressure to help independent farmers who face big losses
"At present, oil palm growers are on the brink of bankruptcy in the wake of the sharp drop in the price of oil palm fruit bunches," Yulman Hadi from the West Sumatra Legislative Assembly told the state Antara news agency in October.
"Rescuing the growers from bankruptcy needs serious handling at the national level," he said, warning that the loss of revenue could create a ripple effect in the region's economy.
Achmad Ya'kub from the Indonesian Peasants Union said smallholders were facing the same kind of problems as their counterparts in Malaysia.
"The big CPO companies that also own plantations prioritise buying palm oil from their own plantations, so the smallholders are really having a hard time selling their stuff," he said according to Antara.
Reports from Malaysia's Sabah state on Borneo island, an important palm oil-growing district, indicate that rural families are already being hit hard by the price slump.
"These families have been suffering for the past two months. The federal or state government has to do something," said lawmaker Bung Mokhtar Radin, adding that just a few months ago farmers were making up to 600 ringgit per tonne.
"The last I heard, processing mills were willing to pay 190 ringgit per tonne, that is if they are buying any fruit at all. For the smallholders, this is a money- losing proposition," Bung Mokhtar told the Star newspaper.
Malaysia and Indonesia have announced plans to reduce supply by using the slump as an opportunity to replant old trees, and bolster demand by mandating the use of biodiesel.
Malaysia has also scrapped an import duty on fertilisers and plans to further cut fertiliser prices by 15 per cent to reduce production costs.
The hard times are here to stay, according to CLSA Asia- Pacific Markets, which has slashed its 2009 price forecast by 46 per cent to 1,000 ringgit (278 dollars), saying that measures to cut production will not be effective.
"Everybody has been at this game for their own interests; nobody is pure." — "人不为己,天诛地灭。"
Americans’ ’Hypocrisy’ in Auto Rescue Spurs Me-Too Trading Ire
By Jennifer M. Freedman
Nov. 22 (Bloomberg) -- A U.S.-triggered spate of global carmaker-bailout proposals may spark trade disputes over whether the Americans are unfairly trying to subsidize their industry or just making up for state aid that foreign rivals already enjoy.
As the U.S. considers a lifeline for its auto companies, officials in Europe, Canada and Asia are considering their own aid packages -- even as the European Union threatens to lodge a complaint against any U.S. bailout to protect manufacturers from Renault SA in France to Fiat SpA in Italy.
China also may complain, though the government is considering helping SAIC Motor Corp. and Guangzhou Automobile Group Co.
Any World Trade Organization complaints may open a Pandora’s Box, bringing to a head a long-simmering dispute over policies that U.S.-based General Motors Corp., Ford Motor Co. and Chrysler LLC say unfairly aid rivals, including state-financed health-care and retirement benefits, and currency policies.
“Frankly, it’s stones and glass houses,” said Garel Rhys, professor of automotive economics at Cardiff Business School in Wales. “Everybody has been at this game for their own interests; nobody is pure.”
Neelie Kroes, the European Union’s antitrust chief, weighed in on the debate yesterday, urging the bloc’s 27 nations to avoid the “costly trap of a subsidy race” that would give some countries unfair advantages.
Greater ‘Temptation’
“The temptation may be greater now for member states to give subsidies that can result in their economic problems being exported to their neighbors but that would only worsen the economic difficulties,” Kroes said at a conference in Brussels.
“The European economy and European taxpayers will be better off if politicians choose another, more effective, route,” Kroes added. She pointed to EU rules allowing limited aid that doesn’t distort competition, including grants for entrepreneurs, research, education and environmental projects.
The U.S. kicked off the bailout war. Congress is trying to reach a compromise on giving automakers $25 billion the companies say they need to survive the next year, either by speeding up the use of funds already approved to develop more fuel-saving technologies and models or by providing a new source of funds. President-elect Barack Obama, who complained during the campaign that South Korea created disadvantages for American carmakers, supports helping the industry.
A U.S. bailout would be “hypocrisy at the economic level and the political level,” said David Littmann, economist for the Mackinac Center for Public Policy in Michigan. “We tell others to open up their markets and reduce barriers, and we are doing the opposite.”
U.S. Grumbling
The U.S. long has grumbled about foreign governments, including China and Europe, subsidizing various industries.
“Since its creation 35 years ago, some Europeans have justified subsidies to Airbus as necessary to support an ‘infant’ industry,” then-U.S. Trade Representative Robert Zoellick said in 2004, announcing a WTO complaint against the Toulouse, France- based maker of commercial airplanes. “If that rationalization were ever valid, its time has long passed. Airbus now sells more large civil aircraft than Boeing.”
Now similar proposals are proliferating around the globe. “When one of the major powers grants subsidies to a high-profile industry, the other is inevitably led to react by defending its own interests,” said Pierre Kirch, a trade lawyer at Paul Hastings in Paris.
Lobbying for Loans
In Europe, where car sales fell almost 15 percent in October, the sixth consecutive monthly drop, auto companies are lobbying the EU for 40 billion euros ($50 billion) in loans. Society of Motor Manufacturers and Traders chief Paul Everitt responded to Kroes’s comments by calling for either “collective action” or individual country bailouts.
“If the U.S. gives aid to carmakers, it’s fair to have them in Europe as well,” said Gian Primo Quagliano, head of research at Bologna, Italy-based research firm Promotor.
EU officials are drafting a plan to provide loans through the European Investment Bank to promote clean-car technology. The bank plans to increase overall financing levels by as much as 15 billion euros next year, President Philippe Maystadt said Nov. 14; a portion would go to the auto industry.
German Chancellor Angela Merkel said her government will decide on an aid request from GM’s Opel unit by Christmas. Opel asked for “somewhat more than” 1 billion euros in credit guarantees, said Carl-Peter Forster, GM’s Europe chief. The state government in Hesse, where Opel employs 15,000 people, agreed to give the company and regional parts suppliers loan guarantees of as much as 500 million euros.
Tax Cuts, Funding
Carmakers in the U.K., where sales slid 23 percent in October, have asked for tax cuts and permission for their finance companies to access funding available to British banks. French Finance Minister Christine Lagarde called for national and European “actions” to “support” the industry on Nov. 17.
Canadian Prime Minister Stephen Harper said Nov. 15 that his government may follow any U.S. effort with an aid package for his country’s manufacturers and parts suppliers, including Magna International Inc. and Linamar Corp.
Chinese car companies also want aid. Slowing demand and rising competition have caused SAIC, the nation’s biggest domestic automaker, to tumble 78 percent this year in Shanghai trading.
Chen Jianguo, an official with China’s National Development and Reform Commission, has said the government is considering lowering sales taxes on alternative-energy vehicles. The government’s 4 trillion-yuan ($586 billion) stimulus package may also help, said Winfried Vahland, head of Chinese operations for German automaker Volkswagen AG.
‘Really Severe’
“The situation is really severe,” said Zeng Qinghong, general manager of Guangzhou, a partner of Japanese companies Toyota Motor Corp. and Honda Motor Co., on Nov. 18. “We hope the government can introduce policies to stimulate demand.”
Japanese Finance Minister Shoichi Nakagawa told Bloomberg Television his government probably won’t object to the U.S. helping GM because its collapse “would be huge, not just for America, but for Europe and Japan as well.”
That doesn’t mean Japanese carmakers won’t also put their hands out.
“If the money is given because bankruptcy would cause a lot of problems, this may be unfair,” said Takeshi Miyao, a Tokyo- based analyst at automotive consulting company CSM Worldwide. “The question of why the Japanese government isn’t helping the Japanese carmakers will definitely arise.”
Payments to Exporters
Any American package will be scrutinized by other countries to see if it runs afoul of WTO rules, which allow certain kinds of subsidies -- such as those that protect the environment -- but bar others, including payments to exporters.
The EU threatened to lodge a complaint against any U.S. auto package on Nov. 14, when European Commission President Jose Barroso said the bloc was examining the rescue proposal and would “certainly act at the WTO” if it contravenes trade rules.
Korean President Lee Myung-bak told CNN on Nov. 17 that he supports a U.S. bailout but warned that it must “give more serious consideration to the method” because it “could run counter to WTO rules and set a bad precedent. Then, other countries may follow the example of the U.S. to directly subsidize their automakers.”
China “quite possibly” may complain to the WTO if the U.S. bails out its industry, said Kirch, the trade lawyer. “It might also bring a case if Europe does.”
American automakers scoff at the notion that they may be accused of benefiting from unfair subsidies.
‘Strong Relationships’
“We’re the only country in the world that expects its auto industry to exist without some government support,” said Sean McAlinden, chief economist at the Center for Automotive Research, at a conference in Los Angeles. The Ann Arbor, Michigan-based group’s Web site says it “maintains strong relationships with industry” and others in the “international automotive community.”
One of the Americans’ biggest gripes involves Japan’s currency, which they claim is kept artificially cheap against the dollar. The Automotive Trade Policy Council, which represents GM, Ford and Chrysler, said in October 2007 that the weak yen at that time gave Japanese automakers a $4,000-a-car advantage on their imports to the U.S.
“This policy provides a subsidy to exporters, resulting in an unfair competitive advantage over American manufacturers,” said Senator Debbie Stabenow, a Michigan Democrat now helping lead the charge for a U.S. bailout, in a 2007 statement.
Quality, Value
Toyota dismisses that argument. “Our vehicles sell well and are profitable because our operations are efficient, because our vehicles represent quality and value, and because they represent the needs and wants of the public,” Toyota spokesman Bruce C. Ertmann wrote on a company blog in January. “Their profitability has nothing at all to do with some nefarious program of currency manipulation.”
GM Chief Executive Officer Rick Wagoner has repeatedly complained that his company is disadvantaged by pension and retiree-health costs -- benefits that are heavily subsidized in competitor countries including Italy, Germany and France. Italy also helps companies such as Fiat pay unemployment benefits, making temporary production cuts less expensive.
To be sure, taxes in those countries tend to be higher, offsetting the advantage.
Rhys, the automotive economics professor, notes that many European carmakers that were once state-controlled -- such as Renault, Volkswagen and Alfa Romeo -- got loans at preferential rates. Renault, which is still 15 percent-owned by the French government and has enjoyed the most state largesse, would have collapsed without it, Rhys said.
Many Rescues
“Just about every one of the European automakers, apart from Mercedes, have had a rescue of some sort or another,” Rhys said. And Toyota has benefited from Japan’s “incredible low cost of credit,” he added. “It wasn’t technically state aid, but it certainly wasn’t the sort of conditions companies in Europe or North America could borrow at.”
Any complaints that grow out of the current bailout-proposal war will be complicated by the industry’s web of cross-border subsidiaries, said Ed Kim, an analyst at consulting firm AutoPacific Inc. in Tustin, California.
If Ford gets U.S. help, that may indirectly benefit Hiroshima, Japan-based Mazda Motor Corp., because the American company owns 13 percent of it. GM controls GM Daewoo Auto & Technology Co. of Inchon, South Korea, and it acquired the bankrupt Daewoo Motor Co. in 2002. Chrysler is negotiating a partnership with China’s Chery Automobile Co. Chery already has agreed to provide a model for Chrysler to sell in South America.
Back in 1979, when the U.S. bailed out Chrysler, things were “remarkably straightforward” because the company lacked a significant international presence, said Maryann Keller, an independent automotive analyst and consultant in Greenwich, Connecticut.
“Chrysler today would be more complicated,” she said. “Do we subsidize Chrysler so they can work with Chery and create a stronger automotive competitor?”
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Worst of financial crisis yet to come, says IMF chief economist
23 November 2008
ZURICH, Switzerland - The IMF’s chief economist has warned that the global financial crisis is set to worsen and that the situation will not improve until 2010, a report said Saturday.
Olivier Blanchard also warned that the institution does not have the funds to solve every economic problem.
“The worst is yet to come,” Blanchard said in an interview with the Finanz und Wirtschaft newspaper, adding that “a lot of time is needed before the situation becomes normal.”
He said economic growth would not kick in until 2010 and it will take another year before the global financial situation became normal again.
The International Monetary Fund on Friday promised to help Latvia deal with its economic crisis after it assisted Iceland, Hungary, Ukraine, Serbia and Pakistan.
But Blanchard said the IMF was not able to solve all financial issues, in particular problems of liquidity.
Withdrawals of capital leading to problems of liquidity “can be so significant that the IMF alone cannot counter them,” he said, adding that massive withdrawals of investments from emerging countries could represent “hundreds of billions of dollars.
“We do not have this money. We never had it,” he said.
The IMF had spent a fifth of its 250 billion dollar (200 billion euro) fund in the last two weeks, Blanchard added.
He also urged central banks around the world to cut interest rates, after the Swiss National Bank made a surprise one percentage point rate cut Thursday.
The central banks “should lower interest rates to as close to zero as possible,” he said.
A tsunami of hope or terror?
Alan Kohler
19 Nov 2008
As the world slips into recession, it is also on the brink of a synthetic CDO cataclysm that could actually save the global banking system.
It is a truly great irony that the world’s banks could end up being saved not by governments, but by the synthetic CDO time bomb that they set ticking with their own questionable practices during the credit boom.
Alternatively, the triggering of default on the trillions of dollars worth of synthetic CDOs that were sold before 2007 could be a disaster that tips the world from recession into depression. Nobody knows, but it won’t be a small event.
A synthetic CDO is a collateralised debt obligation that is based on credit default swaps rather physical debt securities.
CDOs were invented by Michael Milken’s Drexel Burnham Lambert in the late 1980s as a way to bundle asset backed securities into tranches with the same rating, so that investors could focus simply on the rating rather than the issuer of the bond.
About a decade later, a team working within JP Morgan Chase invented credit default swaps, which are contractual bets between two parties about whether a third party will default on its debt. In 2000 these were made legal, and at the same time were prevented from being regulated, by the Commodity Futures Modernization Act, which specifies that products offered by banking institutions could not be regulated as futures contracts.
This bill, by the way, was 11,000 pages long, was never debated by Congress and was signed into law by President Clinton a week after it was passed. It lies at the root of America’s failure to regulate the debt derivatives that are now threatening the global economy.
Anyway, moving right along – some time after that an unknown bright spark within one of the investment banks came up with the idea of putting CDOs and CDSs together to create the synthetic CDO.
Here’s how it works: a bank will set up a shelf company in Cayman Islands or somewhere with $2 of capital and shareholders other than the bank itself. They are usually charities that could use a little cash, and when some nice banker in a suit shows up and offers them money to sign some documents, they do.
That allows the so-called special purpose vehicle (SPV) to have “deniability”, as in “it’s nothing to do with us” – an idea the banks would have picked up from the Godfather movies.
The bank then creates a CDS between itself and the SPV. Usually credit default swaps reference a single third party, but for the purpose of the synthetic CDOs, they reference at least 100 companies.
The CDS contracts between the SPV can be $US500 million to $US1 billion, or sometimes more. They have a variety of twists and turns, but it usually goes something like this: if seven of the 100 reference entities default, the SPV has to pay the bank a third of the money; if eight default, it’s two-thirds; and if nine default, the whole amount is repayable.
For this, the bank agrees to pay the SPV 1 or 2 per cent per annum of the contracted sum.
Finally the SPV is taken along to Moody’s, Standard and Poor’s and Fitch’s and the ratings agencies sprinkle AAA magic dust upon it, and transform it from a pumpkin into a splendid coach.
The bank’s sales people then hit the road to sell this SPV to investors. It’s presented as the bank’s product, and the sales staff pretend that the bank is fully behind it, but of course it’s actually a $2 Cayman Islands company with one or two unknowing charities as shareholders.
It offers a highly-rated, investment-grade, fixed-interest product paying a 1 or 2 per cent premium. Those investors who bother to read the fine print will see that they will lose some or all of their money if seven, eight or nine of a long list of apparently strong global corporations go broke. In 2004-2006 it seemed money for jam. The companies listed would never go broke – it was unthinkable.
Here are some of the companies that are on all of the synthetic CDO reference lists: the three Icelandic banks, Lehman Brothers, Bear Stearns, Freddie Mac, Fannie Mae, American Insurance Group, Ambac, MBIA, Countrywide Financial, Countrywide Home Loans, PMI, General Motors, Ford and a pretty full retinue of US home builders.
In other words, the bankers who created the synthetic CDOs knew exactly what they were doing. These were not simply investment products created out of thin air and designed to give their sales people something from which to earn fees – although they were that too.
They were specifically designed to protect the banks against default by the most leveraged companies in the world. And of course the banks knew better than anyone else who they were.
As one part of the bank was furiously selling loans to these companies, another part was furiously selling insurance contracts against them defaulting, to unsuspecting investors who were actually a bit like “Lloyds Names” – the 1500 or so individuals who back the London reinsurance giant.
Except in this case very few of the “names” knew what they were buying. And nobody has any idea how many were sold, or with what total face value.
It is known that some $2 billion was sold to charities and municipal councils in Australia, but that is just the tip of the iceberg in this country. And Australia, of course, is the tiniest tip of the global iceberg of synthetic CDOs. The total undoubtedly runs into trillions of dollars.
All the banks did it, not just Lehman Brothers which had the largest market share, and many of them seem to have invested in the things as well (a bit like a dog eating its own vomit).
It is now getting very interesting. The three Icelandic banks have defaulted, as has Countrywide, Lehman and Bear Stearns. AIG has been taken over by the US Government, which is counted as a part-default, and Freddie Mac and Fannie Mae are in “conservatorship”, which is also a part default – a 'part default' does not count as a 'full default' in calculating the nine that would trigger the CDS liabilities.
Ambac, MBIA, PMI, General Motors, Ford and a lot of US home builders are teetering.
If the list of defaults – full and partial – gets to nine, then a mass transfer of money will take place from unsuspecting investors around the world into the banking system. How much? Nobody knows, but it’s many trillions.
It will be the most colossal rights issue in the history of the world, all at once and non-renounceable. Actually, make that mandatory.
The distress among those who lose their money will be immense. It will be a real loss, not a theoretical paper loss. Cash will be transferred from their own bank accounts into the issuing bank, via these Cayman Islands special purpose vehicles.
The repercussions on the losers and the economies in which they live, will be unpredictable but definitely huge. Councils will have to put up rates to continue operating. Charities will go to the wall and be unable to continue helping those in need. Individual investors will lose everything.
There will also be a tsunami of litigation, as dumbfounded investors try to get their money back, claiming to have been deceived by the sales people who sold them the products. In Australia, some councils are already suing the now-defunct Lehman Brothers, and litigation funder, IMF Australia, has been studying synthetic CDOs for nine months preparing for the storm.
But for the banks, it’s happy days. Suddenly, when the ninth reference entity tips over, they will be flooded with capital. It’s possible they will have so much new capital, they won’t know what to do with it.
This is entirely uncharted territory so it’s impossible to know what will happen, but it is possible that the credit crunch will come to sudden and complete end, like the passing of a tornado that has left devastation in its wake, along with an eerie silence.
Synthetic enhancement falls flat
Alan Kohler
24 Nov 2008
The most important task for the incoming US Treasury Secretary, Tim Geithner, when he eventually comes in (apart from cleaning up the horrible mess his predecessor left on the TARP) will be to figure out what to do with synthetic CDOs.
Specifically: who decides when the right number of defaults has occurred to trigger total loss on these investments, and then who blows the whistle to signal that it’s time for ownership of that money to be transferred.
Synthetic collateralised debt obligations, you’ll recall, are complex credit default swap instruments where the investment is lost if and when between seven and nine companies out of a list of – usually – 100, default on their debt. The total companies on all the synthetic CDOs, runs into several hundred.
For the banks that sold them they are insurance contracts – they get paid when there are nine defaults from the list. For the investors who bought them they are ticking time bombs as, one by one, the companies fall over.
Many Australian local councils and charities have bought them from Lehman Brothers’ local subsidiary Grange Securities.
Mostly those who bought them had no idea what they were buying. They were sold by spivs paid a commission and presented as investment-grade fixed-interest securities paying a premium over similarly rated alternatives. It was a bit like buying a house on an old toxic waste dump that has had a nice lawn planted on top.
In any case, those who actually knew what they were buying had no reason to suspect in 2006 that nine of the world’s largest and most solid corporations would go bust. Now it is an entirely different story.
Here is a form guide on 31 companies that have either defaulted already and are most likely to do. I am indebted to IMF Australia, the litigation funder that has been studying synthetic CDOs, which provided the basis of list below, which I have updated and expanded.
American International Group
The US government lent $US123 billion to AIG in September and October, and by all accounts this has blown out to $US150 billion. In return for that the government got 80 per cent of the company’s equity. The company is now selling assets in an attempt to repay the loan, and while it is unlikely to raise enough cash to do that, it won’t default unless the government decides to let it.
AMBAC (a monoline insurer)
Last week Ambac was downgraded again by both Standard and Poor’s and Moody’s and the stock price fell 30 per cent to 83 US cents (it was $US24.74 last November). Then on Thursday the price soared 80 per cent after the company paid $US1 billion to get out of four CDO guarantees worth $US3.5 billion. Reuters reported that research firm Friedman, Billings, Ramsey said Ambac's contract cancellations were "positive," but did not "answer ongoing business model concerns." Still a likely default.
Bear Stearns
Taken over by JPMorgan Chase in March. If JPMorgan defaults (see below) this would therefore result in two defaults.
Beazer Homes (home builder)
Its share price has crashed from $US9 in September to just above $US1 now as house building in the US has virtually stopped. It’s due to post its annual results on December 2. In the meantime the Securities and Exchange Commission is investigating the company over accounting procedures. The SEC alleges that it fraudulently altered its earnings and improperly recorded $US100 million in earnings in 2006. Likely to default.
Centex (home builder)
The company lost $US171.9 million in the September quarter and the shares have fallen from $US30 to $US5.50. Centex is now selling land to survive.
Citigroup
Who would have thought we would be raising questions about the survival of Citigroup, but we are. Two weeks ago the CEO Vikram Pandit made 52,000 job cuts and last week the shares responded by falling 60 per cent. As the New York Times reported last week, only two months ago Citigroup emerged from the wreckage of the financial crisis as one of the few titans left standing; now it is on its knees. The NYT attributes much of its problems to the failure of its takeover of Wachovia, after Wells Fargo swooped in with a higher offer. May be too big to be allowed to fail, though the government will probably have to do an AIG with it.
Countrywide (mortgage broker)
Swallowed by Bank of America, and apparently guilty of fraud and dishonesty. It is now the subject of many lawsuits, including from the State of California. As with Bear Stearns, if Bank of America defaults, it will cause two defaults; that seems unlikely, but anything’s possible these days.
Fannie Mae (mortgage wholesaler)
This company was placed into conservatorship by the Federal Housing Finance Agency in early September 2008. The board of directors and senior management were expelled. Shares representing 80 per cent of the company were issued to the government. Dividends were suspended. This company has defaulted on its debt.
FGIC (insurance company)
Sold most of its business to MBIA (see below) in August. Although this was a positive move, it left the company with a lot of residential mortgage backed securities and CDOs that were sinking in value. This company seems likely to default eventually.
Freddie Mac
Like Fannie Mae it was placed in conservatorship in September, which was an act of default.
FSA (insurance company)
This used to be owned by the Belgian-French bank Dexia, and was sold this month to Assured Guaranty Ltd. However, its future is neither assured nor guaranteed, and parent and new subsidiary are under financial stress. Fitch Ratings has commented that FSA is still a separate entity for the purposes on default calculations.
Genworth Financial (insurance company)
The company announced a third quarter loss and was downgraded by Moody’s. Last sighted trying to buy a bank so it could get its hands on some of the $US700 billion TARP money from the government. Unlikely to make it.
Goldman Sachs (investment bank, now bank)
Having applied and been granted bank status, Goldman Sachs is very unlikely to fail, although it is reporting losses and its share price has slumped. That latest plan is to issue debt guaranteed by the government body, FDIC.
Hovnanian (home builder)
As with most US home builders in the list of 32 companies under pressure, Hovnanian is moving inexorably downwards. As at 10 November 2008, it was trading at $US3.36, down from above $US12 in May 2008. It is now being sued by Californian homeowners for fraud and breach of contract. Without government assistance, it is likely to fail.
JP Morgan
Shares fell 50 per cent last in sympathy with Citigroup, but probably too big to fail.
KB Homes (home builder)
A few months ago this company was trading at $US17.72. Since then, it has fallen as low as $US7, and is now $US8.02. In early November it cut its quarterly dividend by 75 per cent. As with all of the homebuilders this company will struggle through the housing downturn.
Lehman Brothers
Filed for bankruptcy on 15 September 2008, immediately causing a massive upheaval in financial markets. The company has $US613 billion in debt and is the third of these 30 companies to default. Investors are currently pushing for an independent investigation of fraudulent practices at the company.
Lennar (home builder)
This company is the second biggest homebuilder in the US and may be better positioned than most to survive a downturn.
Masco (home products)
Fitch has downgraded the company’s rating from BBB to BBB- and left the ratings on negative outlook. As the homebuilders struggle, those who supply them (such as Masco) will equally struggle.
MBIA (bond insurer)
On 5 November 2008, the company announced a third quarter loss of $US806 million. On 8 November 2008, Moody’s lowered the ratings on MBIA thus triggering payments by the company to third parties. Moody’s lowered the debt rating to junk level, citing a growing exposure to US mortgages. Without government intervention, it seems almost certain that this company will fail.
Merrill Lynch (investment bank)
On 14 September 2008, Bank of America announced that it had acquired Merrill Lynch subject to approval by regulators and shareholders. The company was sold for $US29 per share and the company is currently trading at $US8.34. It is down from over $US50 in May 2008. The acquisition of this company by Bank of America means that if Bank of America fails, then this will be a default by Bank of America, Countrywide and Merrill Lynch. Had Bank of America not made these two acquisitions, both Countrywide and Merrill Lynch would have failed by now.
MGIC (bond insurer)
On 17 October 2008, the company announced a third quarter loss of $US113 million after losses on Fannie Mae, Freddie Mac, Lehman Brothers and AIG. The company is currently trading at $US1.93, down from above $US10 two months ago. This company has a limited future unless the US government steps in to save it.
Morgan Stanley (investment bank)
The company’s shares have fallen from $US45 in September to $US10.05 today. It is clearly struggling but will not be permitted to fall, although it may be taken over by a stronger operator.
PMI (bond insurer)
On 3 November 2008, PMI announced a third quarter loss of $US229 million. The shares are down to $US1.37 from a high of $US17 and appear to be heading to oblivion unless the government intervenes. Local insurer QBE completed the acquisition of PMI Australia in late October.
Pulte Homes
Again, the shares have collapsed from above $US20 to $US7.12 in a couple of months. Analysts have recently started to downgrade this stock. In its quarterly report dated 6 November 2008, the company reported a net loss of $US280 million for the three months ended September 30, 2008. It will struggle to survive.
Radian Group (insurer)
The debt of this company has been reduced to junk status. Its shares are trading at $US1.50, down from as high as $US5.20 but are now back to $US3.32. Again, short of government intervention, this company seems doomed to failure.
Rescap (mortgage broker)
Rescap is owned by GMAC, which is itself in trouble. In turn, GMAC is owned by Cerebus and General Motors. Both of these firms are in trouble. In early September, Rescap announced it was shedding 60 per cent of its staff, having narrowly escaped bankruptcy. S&P has now downgraded both GMAC and Rescap to CC. On 5 November 2008, the Washington Post suggested that Rescap would fail. The newspaper quoted GMAC as the source of that information. It now appears that GMAC will not be required to support Rescap. In these circumstances, it seems almost certain that Rescap will fail. Rescap posted a third quarter loss of $US1.9 billion. This made a total loss for eight quarters of $US9 billion.
Standard Pacific (home builder)
On 30 October 2008, the company announced a third quarter loss of $US369 million.
UBS (investment bank)
This is one of the companies one would expect to survive the financial turmoil. In October, the company received a $US59.2 billion aid package from the Swiss government. This is the main reason why it is not likely to default. In European terms, it is too big to fail. The company has transferred the risk on $US60 billion of debt assets to the Swiss government. In the meantime, indictments could be issued against senior bank officers in the near future.
Washington Mutual (savings and loan company)
On 26 September 2008, this company became the largest US bank failure in history. After customers withdrew large sums, it was seized by the Office of Thrift Supervision and its branch network sold to JP Morgan. This is the fourth company to default in the list.
XL Capital (Monoline Insurer)
The debt of this company had been downgraded to junk status and the stock is trading at $US4.64, down from above $US20 in a couple of months. The chairman has been forced to sell to meet margin calls. The stock has been down 50 per cent one day and up 75 per cent the next. The company announced a loss of $US1.6 billion to 30 September 2008. This is another company whose future is cloudy without government intervention. (Its parent is now known as Syncora Holdings.)
Citigroup Saw No Red Flags Even as It Made Bolder Bets
By ERIC DASH and JULIE CRESWELL
November 22, 2008
“Our job is to set a tone at the top to incent people to do the right thing and to set up safety nets to catch people who make mistakes or do the wrong thing and correct those as quickly as possible. And it is working. It is working.”
Charles O. Prince III, Citigroup’s chief executive, in 2006
In September 2007, with Wall Street confronting a crisis caused by too many souring mortgages, Citigroup executives gathered in a wood-paneled library to assess their own well-being.
There, Citigroup’s chief executive, Charles O. Prince III, learned for the first time that the bank owned about $43 billion in mortgage-related assets. He asked Thomas G. Maheras, who oversaw trading at the bank, whether everything was O.K.
Mr. Maheras told his boss that no big losses were looming, according to people briefed on the meeting who would speak only on the condition that they not be named.
For months, Mr. Maheras’s reassurances to others at Citigroup had quieted internal concerns about the bank’s vulnerabilities. But this time, a risk-management team was dispatched to more rigorously examine Citigroup’s huge mortgage-related holdings. They were too late, however: within several weeks, Citigroup would announce billions of dollars in losses.
Normally, a big bank would never allow the word of just one executive to carry so much weight. Instead, it would have its risk managers aggressively look over any shoulder and guard against trading or lending excesses.
But many Citigroup insiders say the bank’s risk managers never investigated deeply enough. Because of longstanding ties that clouded their judgment, the very people charged with overseeing deal makers eager to increase short-term earnings — and executives’ multimillion-dollar bonuses — failed to rein them in, these insiders say.
Today, Citigroup, once the nation’s largest and mightiest financial institution, has been brought to its knees by more than $65 billion in losses, write-downs for troubled assets and charges to account for future losses. More than half of that amount stems from mortgage-related securities created by Mr. Maheras’s team — the same products Mr. Prince was briefed on during that 2007 meeting.
Citigroup’s stock has plummeted to its lowest price in more than a decade, closing Friday at $3.77. At that price the company is worth just $20.5 billion, down from $244 billion two years ago. Waves of layoffs have accompanied that slide, with about 75,000 jobs already gone or set to disappear from a work force that numbered about 375,000 a year ago.
Burdened by the losses and a crisis of confidence, Citigroup’s future is so uncertain that regulators in New York and Washington held a series of emergency meetings late last week to discuss ways to help the bank right itself.
And as the credit crisis appears to be entering another treacherous phase despite a $700 billion federal bailout, Citigroup’s woes are emblematic of the haphazard management and rush to riches that enveloped all of Wall Street. All across the banking business, easy profits and a booming housing market led many prominent financiers to overlook the dangers they courted.
While much of the damage inflicted on Citigroup and the broader economy was caused by errant, high-octane trading and lax oversight, critics say, blame also reaches into the highest levels at the bank. Earlier this year, the Federal Reserve took the bank to task for poor oversight and risk controls in a report it sent to Citigroup.
The bank’s downfall was years in the making and involved many in its hierarchy, particularly Mr. Prince and Robert E. Rubin, an influential director and senior adviser.
Citigroup insiders and analysts say that Mr. Prince and Mr. Rubin played pivotal roles in the bank’s current woes, by drafting and blessing a strategy that involved taking greater trading risks to expand its business and reap higher profits. Mr. Prince and Mr. Rubin both declined to comment for this article.
When he was Treasury secretary during the Clinton administration, Mr. Rubin helped loosen Depression-era banking regulations that made the creation of Citigroup possible by allowing banks to expand far beyond their traditional role as lenders and permitting them to profit from a variety of financial activities. During the same period he helped beat back tighter oversight of exotic financial products, a development he had previously said he was helpless to prevent.
And since joining Citigroup in 1999 as a trusted adviser to the bank’s senior executives, Mr. Rubin, who is an economic adviser on the transition team of President-elect Barack Obama, has sat atop a bank that has been roiled by one financial miscue after another.
Citigroup was ensnared in murky financial dealings with the defunct energy company Enron, which drew the attention of federal investigators; it was criticized by law enforcement officials for the role one of its prominent research analysts played during the telecom bubble several years ago; and it found itself in the middle of regulatory violations in Britain and Japan.
For a time, Citigroup’s megabank model paid off handsomely, as it rang up billions in earnings each quarter from credit cards, mortgages, merger advice and trading.
But when Citigroup’s trading machine began churning out billions of dollars in mortgage-related securities, it courted disaster. As it built up that business, it used accounting maneuvers to move billions of dollars of the troubled assets off its books, freeing capital so the bank could grow even larger. Because of pending accounting changes, Citigroup and other banks have been bringing those assets back in-house, raising concerns about a new round of potential losses.
To some, the misery at Citigroup is no surprise. Lynn Turner, a former chief accountant with the Securities and Exchange Commission, said the bank’s balkanized culture and pell-mell management made problems inevitable.
“If you’re an entity of this size,” he said, “if you don’t have controls, if you don’t have the right culture and you don’t have people accountable for the risks that they are taking, you’re Citigroup.”
Questions on Oversight
Though they carry less prestige and are paid less than Wall Street traders and bankers, risk managers can wield significant clout. Their job is to monitor trading floors and inquire about how a bank’s money is being invested, so they can head off potential problems before blow-ups occur. Though risk managers and traders work side by side, they can have an uncomfortable coexistence because the monitors can put a brake on trading.
That is the way it works in theory. But at Citigroup, many say, it was a bit different.
David C. Bushnell was the senior risk officer who, with help from his staff, was supposed to keep an eye on the bank’s bond trading business and its multibillion-dollar portfolio of mortgage-backed securities. Those activities were part of what the bank called its fixed-income business, which Mr. Maheras supervised.
One of Mr. Maheras’s trusted deputies, Randolph H. Barker, helped oversee the huge build-up in mortgage-related securities at Citigroup. But Mr. Bushnell, Mr. Maheras and Mr. Barker were all old friends, having climbed the bank’s corporate ladder together.
It was common in the bank to see Mr. Bushnell waiting patiently — sometimes as long as 45 minutes — outside Mr. Barker’s office so he could drive him home to Short Hills, N.J., where both of their families lived. The two men took occasional fly-fishing trips together; one expedition left them stuck on a lake after their boat ran out of gas.
Because Mr. Bushnell had to monitor traders working for Mr. Barker’s bond desk, their friendship raised eyebrows inside the company among those concerned about its controls.
After all, traders’ livelihoods depended on finding new ways to make money, sometimes using methods that might not be in the bank’s long-term interests. But insufficient boundaries were established in the bank’s fixed-income unit to limit potential conflicts of interest involving Mr. Bushnell and Mr. Barker, people inside the bank say.
Indeed, some at Citigroup say that if traders or bankers wanted to complete a potentially profitable deal, they could sometimes rely on Mr. Barker to convince Mr. Bushnell that it was a risk worth taking.
Risk management “has to be independent, and it wasn’t independent at Citigroup, at least when it came to fixed income,” said one former executive in Mr. Barker’s group who, like many other people interviewed for this article, insisted on anonymity because of pending litigation against the bank or to retain close ties to their colleagues. “We used to say that if we wanted to get a deal done, we needed to convince Randy first because he could get it through.”
Others say that Mr. Bushnell’s friendship with Mr. Maheras may have presented a similar blind spot.
“Because he has such trust and faith in these guys he has worked with for years, he didn’t ask the right questions,” a former senior Citigroup executive said, referring to Mr. Bushnell.
Mr. Bushnell and Mr. Barker did not return repeated phone calls seeking comment. Mr. Maheras declined to comment.
For some time after Sanford I. Weill, an architect of the merger that created Citigroup a decade ago, took control of Citigroup, he toned down the bank’s bond trading. But in late 2002, Mr. Prince, who had been Mr. Weill’s longtime legal counsel, was put in charge of Citigroup’s corporate and investment bank.
According to a former Citigroup executive, Mr. Prince started putting pressure on Mr. Maheras and others to increase earnings in the bank’s trading operations, particularly in the creation of collateralized debt obligations, or C.D.O.’s — securities that packaged mortgages and other forms of debt into bundles for resale to investors.
Because C.D.O.’s included so many forms of bundled debt, gauging their risk was particularly tricky; some parts of the bundle could be sound, while others were vulnerable to default.
“Chuck Prince going down to the corporate investment bank in late 2002 was the start of that process,” a former Citigroup executive said of the bank’s big C.D.O. push. “Chuck was totally new to the job. He didn’t know a C.D.O. from a grocery list, so he looked for someone for advice and support. That person was Rubin. And Rubin had always been an advocate of being more aggressive in the capital markets arena. He would say, ‘You have to take more risk if you want to earn more.’ ”
It appeared to be a good time for building up Citigroup’s C.D.O. business. As the housing market around the country took flight, the C.D.O. market also grew apace as more and more mortgages were pooled together into newfangled securities.
From 2003 to 2005, Citigroup more than tripled its issuing of C.D.O.’s, to more than $20 billion from $6.28 billion, and Mr. Maheras, Mr. Barker and others on the C.D.O. team helped transform Citigroup into one of the industry’s biggest players. Firms issuing the C.D.O.’s generated fees of 0.4 percent to 2.5 percent of the amount sold — meaning Citigroup made up to $500 million in fees from the business in 2005 alone.
Even as Citigroup’s C.D.O. stake was expanding, its top executives wanted more profits from that business. Yet they were not running a bank that was up to all the challenges it faced, including properly overseeing billions of dollars’ worth of exotic products, according to Citigroup insiders and regulators who later criticized the bank.
When Mr. Prince was put in charge in 2003, he presided over a mess of warring business units and operational holes, particularly in critical areas like risk-management and controls.
“He inherited a gobbledygook of companies that were never integrated, and it was never a priority of the company to invest,” said Meredith A. Whitney, a banking analyst who was one of the company’s early critics. “The businesses didn’t communicate with each other. There were dozens of technology systems and dozens of financial ledgers.”
Problems with trading and banking oversight at Citigroup became so dire that the Federal Reserve took the unusual step of telling the bank it could make no more acquisitions until it put its house in order.
In 2005, stung by regulatory rebukes and unable to follow Mr. Weill’s penchant for expanding Citigroup’s holdings through rapid-fire takeovers, Mr. Prince and his board of directors decided to push even more aggressively into trading and other business that would allow Citigroup to continue expanding the bank internally.
One person who helped push Citigroup along this new path was Mr. Rubin.
Pushing Growth
Robert Rubin has moved seamlessly between Wall Street and Washington. After making his millions as a trader and an executive at Goldman Sachs, he joined the Clinton administration.
Mr. Weill, as Citigroup’s chief, wooed Mr. Rubin to join the bank after Mr. Rubin left Washington. Mr. Weill had been involved in the financial services industry’s lobbying to persuade Washington to loosen its regulatory hold on Wall Street.
As chairman of Citigroup’s executive committee, Mr. Rubin was the bank’s resident sage, advising top executives and serving on the board while, he insisted repeatedly, steering clear of daily management issues.
“By the time I finished at Treasury, I decided I never wanted operating responsibility again,” he said in an interview in April. Asked then whether he had made any mistakes during his tenure at Citigroup, he offered a tentative response.
“I’ve thought a lot about that,” he said. “I honestly don’t know. In hindsight, there are a lot of things we’d do differently. But in the context of the facts as I knew them and my role, I’m inclined to think probably not.”
Besides, he said, it was impossible to get a complete handle on Citigroup’s vulnerabilities unless you dealt with the trades daily.
“There is no way you would know what was going on with a risk book unless you’re directly involved with the trading arena,” he said. “We had highly experienced, highly qualified people running the operation.”
But while Mr. Rubin certainly did not have direct responsibility for a Citigroup unit, he was an architect of the bank’s strategy.
In 2005, as Citigroup began its effort to expand from within, Mr. Rubin peppered his colleagues with questions as they formulated the plan. According to current and former colleagues, he believed that Citigroup was falling behind rivals like Morgan Stanley and Goldman, and he pushed to bulk up the bank’s high-growth fixed-income trading, including the C.D.O. business.
Former colleagues said Mr. Rubin also encouraged Mr. Prince to broaden the bank’s appetite for risk, provided that it also upgraded oversight — though the Federal Reserve later would conclude that the bank’s oversight remained inadequate.
Once the strategy was outlined, Mr. Rubin helped Mr. Prince gain the board’s confidence that it would work.
After that, the bank moved even more aggressively into C.D.O.’s. It added to its trading operations and snagged crucial people from competitors. Bonuses doubled and tripled for C.D.O. traders. Mr. Barker drew pay totaling $15 million to $20 million a year, according to former colleagues, and Mr. Maheras became one of Citigroup’s most highly compensated employees, earning as much as $30 million at the peak — far more than top executives like Mr. Bushnell in the risk-management department.
In December 2005, with Citigroup diving into the C.D.O. business, Mr. Prince assured analysts that all was well at his bank.
“Anything based on human endeavor and certainly any business that involves risk-taking, you’re going to have problems from time to time,” he said. “We will run our business in a way where our credibility and our reputation as an institution with the public and with our regulators will be an asset of the company and not a liability.”
Yet as the bank’s C.D.O. machine accelerated, its risk controls fell further behind, according to former Citigroup traders, and risk managers lacked clear lines of reporting. At one point, for instance, risk managers in the fixed-income division reported to both Mr. Maheras and Mr. Bushnell — setting up a potential conflict because that gave Mr. Maheras influence over employees who were supposed to keep an eye on his traders.
C.D.O.’s were complex, and even experienced managers like Mr. Maheras and Mr. Barker underestimated the risks they posed, according to people with direct knowledge of Citigroup’s business. Because of that, they put blind faith in the passing grades that major credit-rating agencies bestowed on the debt.
While the sheer size of Citigroup’s C.D.O. position caused concern among some around the trading desk, most say they kept their concerns to themselves.
“I just think senior managers got addicted to the revenues and arrogant about the risks they were running,” said one person who worked in the C.D.O. group. “As long as you could grow revenues, you could keep your bonus growing.”
To make matters worse, Citigroup’s risk models never accounted for the possibility of a national housing downturn, this person said, and the prospect that millions of homeowners could default on their mortgages. Such a downturn did come, of course, with disastrous consequences for Citigroup and its rivals on Wall Street.
Even as the first shock waves of the subprime mortgage crisis hit Bear Stearns in June 2007, Citigroup’s top executives expressed few concerns about their bank’s exposure to mortgage-linked securities.
In fact, when examiners from the Securities and Exchange Commission began scrutinizing Citigroup’s subprime mortgage holdings after Bear Stearns’s problems surfaced, the bank told them that the probability of those mortgages defaulting was so tiny that they excluded them from their risk analysis, according to a person briefed on the discussion who would speak only without being named.
Later that summer, when the credit markets began seizing up and values of various C.D.O.’s began to plummet, Mr. Maheras, Mr. Barker and Mr. Bushnell participated in a meeting to review Citigroup’s exposure.
The slice of mortgage-related securities held by Citigroup was “viewed by the rating agencies to have an extremely low probability of default (less than .01%),” according to Citigroup slides used at the meeting and reviewed by The New York Times.
Around the same time, Mr. Maheras continued to assure his colleagues that the bank “would never lose a penny,” according to an executive who spoke to him.
In mid-September 2007, Mr. Prince convened the meeting in the small library outside his office to gauge Citigroup’s exposure.
Mr. Maheras assured the group, which included Mr. Rubin and Mr. Bushnell, that Citigroup’s C.D.O. position was safe. Mr. Prince had never questioned the ballooning portfolio before this because no one, including Mr. Maheras and Mr. Bushnell, had warned him.
But as the subprime market plunged further, Citigroup’s position became more dire — even though the firm held onto the belief that its C.D.O.’s were safe.
On Oct. 1, it warned investors that it would write off $1.3 billion in subprime mortgage-related assets. But of the $43 billion in C.D.O.’s it had on its books, it wrote off only about $95 million, according to a person briefed on the situation.
Soon, however, C.D.O. prices began to collapse. Credit-rating agencies downgraded C.D.O.’s, threatening Citigroup’s stockpile. A week later, Merrill Lynch aggressively marked down similar securities, forcing other banks to face reality.
By early November, Citigroup’s anticipated write-downs ballooned to $8 billion to $11 billion. Mr. Barker and Mr. Maheras lost their jobs, as Mr. Bushnell did later on. And on Nov. 4, Mr. Prince told the board that he, too, would resign.
Although Mr. Prince received no severance, he walked away with Citigroup stock valued then at $68 million — along with a cash bonus of about $12.5 million for 2007.
Putting Out Fires
Mr. Prince was replaced last December by Vikram S. Pandit, a former money manager and investment banker whom Mr. Rubin had earlier recruited in a senior role. Since becoming chief executive, Mr. Pandit has been scrambling to put out fires and repair Citigroup’s deficient risk-management systems.
Earlier this year, Federal Reserve examiners quietly presented the bank with a scathing review of its risk-management practices, according to people briefed on the situation.
Citigroup executives responded with a 25-page single-spaced memo outlining a sweeping overhaul of the bank’s risk management.
In May, Brian Leach, Citigroup’s new chief risk officer, told analysts that his bank had greatly improved oversight and installed several new risk managers. He said he wanted to ensure “that Citi takes the lessons learned from recent events and makes critical enhancements to its risk management frameworks. A change in culture is required at Citi.”
Meanwhile, regulators have criticized the banking industry as a whole for relying on outsiders — in particular the ratings agencies — to help them gauge the risk of their investments.
“There is really no excuse for institutions that specialize in credit risk assessment, like large commercial banks, to rely solely on credit ratings in assessing credit risk,” John C. Dugan, the head of the Office of the Comptroller of the Currency, the chief federal bank regulator, said in a speech earlier this year.
But he noted that what caused the largest problem for some banks was that they retained dangerously big positions in certain securities — like C.D.O.’s — rather than selling them off to other investors.
“What most differentiated the companies sustaining the biggest losses from the rest was their willingness to hold exceptionally large positions on their balance sheets which, in turn, led to exceptionally large losses,” he said.
Mr. Dugan did not mention any specific bank by name, but Citigroup is the largest player in the C.D.O. business of any bank the comptroller regulates.
For his part, Mr. Pandit faces the twin challenge of rebuilding investor confidence while trying to fix the company’s myriad problems.
Citigroup has suffered four consecutive quarters of multibillion-dollar losses as it has written down billions of dollars of the mortgage-related assets it held on its books.
But investors worry there is still more to come, and some board members have raised doubts about Mr. Pandit’s leadership, according to people briefed on the situation.
Citigroup still holds $20 billion of mortgage-linked securities on its books, the bulk of which have been marked down to between 21 cents and 41 cents on the dollar. It has billions of dollars of giant buyout and corporate loans. And it also faces a potential flood of losses on auto, mortgage and credit card loans as the global economy plunges into a recession.
Also, hundreds of billions of dollars in dubious assets that Citigroup held off its balance sheet is now starting to be moved back onto its books, setting off yet another potential problem.
The bank has already put more than $55 billion in assets back on its balance sheet. It now says an added $122 billion of assets related to credit cards and possibly billions of dollars of other assets will probably come back on the books.
Even though Citigroup executives insist that the bank can ride out its current difficulties, and that the repatriated assets pose no threat, investors have their doubts. Because analysts do not have a complete grip on the quality of those assets, they are warning that Citigroup may have to set aside billions of dollars to guard against losses.
In fact, some analysts say they believe that the $25 billion that the federal government invested in Citigroup this fall might not be enough to stabilize it.
Others say the fact that such huge amounts have yet to steady the bank is a reflection of the severe damage caused by Citigroup’s appetites.
“They pushed to get earnings, but in doing so, they took on more risk than they probably should have if they are going to be, in the end, a bank subject to regulatory controls,” said Roy Smith, a professor at the Stern School of Business at New York University. “Safe and soundness has to be no less important than growth and profits but that was subordinated by these guys.”
Palm oil prices spells misery
KUALA LUMPUR, Nov 23 (AFP) — The global economic slowdown has sent palm oil prices crashing, spelling misery for countless smallholders who have been forced to watch their harvests rot on the trees.
Hundreds of thousands of farmers in Indonesia and Malaysia, which produce 85 per cent of the world's palm oil, are reliant on the industry which has gone from boom to bust in just a few months.
Palm oil prices have plummeted from a March high of 4,486 ringgit (1,248 dollars) per tonne to less than 1,500 ringgit, due to the financial crisis and the falling price of crude oil-which reduces demand from the biodiesel industry.
Malaysia's deputy commodities minister Kohilan Pillay said today's prices were close to the production costs of most smallholders, squeezing their earnings and pushing them to the brink of bankruptcy.
Oil mills are causing further hardship by flouting laws that require them to buy fruits from smallholders, whatever the going rate, he said.
"Their excuse is that it is not economical for them to process CPO (crude palm oil) at this time as prices are too low so they just shut down production," Pillay told the agency.
"Many are waiting for the prices to hit rock bottom before purchasing and this is a problem as the fruits are perishable and so these independent smallholders end up with rotting, unprocessed fruits which they cannot sell."
Smallholders or independent oil palm farmers account for about 30-35 per cent of Malaysia's total palm oil output and around 25 per cent of Indonesia's production.
"The bigger companies can sustain themselves even if prices fall below 1,000 ringgit per tonne but it is the smallholders who suffer the most," Pillay said.
In Indonesia, the government is under pressure to help independent farmers who face big losses
"At present, oil palm growers are on the brink of bankruptcy in the wake of the sharp drop in the price of oil palm fruit bunches," Yulman Hadi from the West Sumatra Legislative Assembly told the state Antara news agency in October.
"Rescuing the growers from bankruptcy needs serious handling at the national level," he said, warning that the loss of revenue could create a ripple effect in the region's economy.
Achmad Ya'kub from the Indonesian Peasants Union said smallholders were facing the same kind of problems as their counterparts in Malaysia.
"The big CPO companies that also own plantations prioritise buying palm oil from their own plantations, so the smallholders are really having a hard time selling their stuff," he said according to Antara.
Reports from Malaysia's Sabah state on Borneo island, an important palm oil-growing district, indicate that rural families are already being hit hard by the price slump.
"These families have been suffering for the past two months. The federal or state government has to do something," said lawmaker Bung Mokhtar Radin, adding that just a few months ago farmers were making up to 600 ringgit per tonne.
"The last I heard, processing mills were willing to pay 190 ringgit per tonne, that is if they are buying any fruit at all. For the smallholders, this is a money- losing proposition," Bung Mokhtar told the Star newspaper.
Malaysia and Indonesia have announced plans to reduce supply by using the slump as an opportunity to replant old trees, and bolster demand by mandating the use of biodiesel.
Malaysia has also scrapped an import duty on fertilisers and plans to further cut fertiliser prices by 15 per cent to reduce production costs.
The hard times are here to stay, according to CLSA Asia- Pacific Markets, which has slashed its 2009 price forecast by 46 per cent to 1,000 ringgit (278 dollars), saying that measures to cut production will not be effective.
"Everybody has been at this game for their own interests; nobody is pure." — "人不为己,天诛地灭。"
Americans’ ’Hypocrisy’ in Auto Rescue Spurs Me-Too Trading Ire
By Jennifer M. Freedman
Nov. 22 (Bloomberg) -- A U.S.-triggered spate of global carmaker-bailout proposals may spark trade disputes over whether the Americans are unfairly trying to subsidize their industry or just making up for state aid that foreign rivals already enjoy.
As the U.S. considers a lifeline for its auto companies, officials in Europe, Canada and Asia are considering their own aid packages -- even as the European Union threatens to lodge a complaint against any U.S. bailout to protect manufacturers from Renault SA in France to Fiat SpA in Italy.
China also may complain, though the government is considering helping SAIC Motor Corp. and Guangzhou Automobile Group Co.
Any World Trade Organization complaints may open a Pandora’s Box, bringing to a head a long-simmering dispute over policies that U.S.-based General Motors Corp., Ford Motor Co. and Chrysler LLC say unfairly aid rivals, including state-financed health-care and retirement benefits, and currency policies.
“Frankly, it’s stones and glass houses,” said Garel Rhys, professor of automotive economics at Cardiff Business School in Wales. “Everybody has been at this game for their own interests; nobody is pure.”
Neelie Kroes, the European Union’s antitrust chief, weighed in on the debate yesterday, urging the bloc’s 27 nations to avoid the “costly trap of a subsidy race” that would give some countries unfair advantages.
Greater ‘Temptation’
“The temptation may be greater now for member states to give subsidies that can result in their economic problems being exported to their neighbors but that would only worsen the economic difficulties,” Kroes said at a conference in Brussels.
“The European economy and European taxpayers will be better off if politicians choose another, more effective, route,” Kroes added. She pointed to EU rules allowing limited aid that doesn’t distort competition, including grants for entrepreneurs, research, education and environmental projects.
The U.S. kicked off the bailout war. Congress is trying to reach a compromise on giving automakers $25 billion the companies say they need to survive the next year, either by speeding up the use of funds already approved to develop more fuel-saving technologies and models or by providing a new source of funds. President-elect Barack Obama, who complained during the campaign that South Korea created disadvantages for American carmakers, supports helping the industry.
A U.S. bailout would be “hypocrisy at the economic level and the political level,” said David Littmann, economist for the Mackinac Center for Public Policy in Michigan. “We tell others to open up their markets and reduce barriers, and we are doing the opposite.”
U.S. Grumbling
The U.S. long has grumbled about foreign governments, including China and Europe, subsidizing various industries.
“Since its creation 35 years ago, some Europeans have justified subsidies to Airbus as necessary to support an ‘infant’ industry,” then-U.S. Trade Representative Robert Zoellick said in 2004, announcing a WTO complaint against the Toulouse, France- based maker of commercial airplanes. “If that rationalization were ever valid, its time has long passed. Airbus now sells more large civil aircraft than Boeing.”
Now similar proposals are proliferating around the globe. “When one of the major powers grants subsidies to a high-profile industry, the other is inevitably led to react by defending its own interests,” said Pierre Kirch, a trade lawyer at Paul Hastings in Paris.
Lobbying for Loans
In Europe, where car sales fell almost 15 percent in October, the sixth consecutive monthly drop, auto companies are lobbying the EU for 40 billion euros ($50 billion) in loans. Society of Motor Manufacturers and Traders chief Paul Everitt responded to Kroes’s comments by calling for either “collective action” or individual country bailouts.
“If the U.S. gives aid to carmakers, it’s fair to have them in Europe as well,” said Gian Primo Quagliano, head of research at Bologna, Italy-based research firm Promotor.
EU officials are drafting a plan to provide loans through the European Investment Bank to promote clean-car technology. The bank plans to increase overall financing levels by as much as 15 billion euros next year, President Philippe Maystadt said Nov. 14; a portion would go to the auto industry.
German Chancellor Angela Merkel said her government will decide on an aid request from GM’s Opel unit by Christmas. Opel asked for “somewhat more than” 1 billion euros in credit guarantees, said Carl-Peter Forster, GM’s Europe chief. The state government in Hesse, where Opel employs 15,000 people, agreed to give the company and regional parts suppliers loan guarantees of as much as 500 million euros.
Tax Cuts, Funding
Carmakers in the U.K., where sales slid 23 percent in October, have asked for tax cuts and permission for their finance companies to access funding available to British banks. French Finance Minister Christine Lagarde called for national and European “actions” to “support” the industry on Nov. 17.
Canadian Prime Minister Stephen Harper said Nov. 15 that his government may follow any U.S. effort with an aid package for his country’s manufacturers and parts suppliers, including Magna International Inc. and Linamar Corp.
Chinese car companies also want aid. Slowing demand and rising competition have caused SAIC, the nation’s biggest domestic automaker, to tumble 78 percent this year in Shanghai trading.
Chen Jianguo, an official with China’s National Development and Reform Commission, has said the government is considering lowering sales taxes on alternative-energy vehicles. The government’s 4 trillion-yuan ($586 billion) stimulus package may also help, said Winfried Vahland, head of Chinese operations for German automaker Volkswagen AG.
‘Really Severe’
“The situation is really severe,” said Zeng Qinghong, general manager of Guangzhou, a partner of Japanese companies Toyota Motor Corp. and Honda Motor Co., on Nov. 18. “We hope the government can introduce policies to stimulate demand.”
Japanese Finance Minister Shoichi Nakagawa told Bloomberg Television his government probably won’t object to the U.S. helping GM because its collapse “would be huge, not just for America, but for Europe and Japan as well.”
That doesn’t mean Japanese carmakers won’t also put their hands out.
“If the money is given because bankruptcy would cause a lot of problems, this may be unfair,” said Takeshi Miyao, a Tokyo- based analyst at automotive consulting company CSM Worldwide. “The question of why the Japanese government isn’t helping the Japanese carmakers will definitely arise.”
Payments to Exporters
Any American package will be scrutinized by other countries to see if it runs afoul of WTO rules, which allow certain kinds of subsidies -- such as those that protect the environment -- but bar others, including payments to exporters.
The EU threatened to lodge a complaint against any U.S. auto package on Nov. 14, when European Commission President Jose Barroso said the bloc was examining the rescue proposal and would “certainly act at the WTO” if it contravenes trade rules.
Korean President Lee Myung-bak told CNN on Nov. 17 that he supports a U.S. bailout but warned that it must “give more serious consideration to the method” because it “could run counter to WTO rules and set a bad precedent. Then, other countries may follow the example of the U.S. to directly subsidize their automakers.”
China “quite possibly” may complain to the WTO if the U.S. bails out its industry, said Kirch, the trade lawyer. “It might also bring a case if Europe does.”
American automakers scoff at the notion that they may be accused of benefiting from unfair subsidies.
‘Strong Relationships’
“We’re the only country in the world that expects its auto industry to exist without some government support,” said Sean McAlinden, chief economist at the Center for Automotive Research, at a conference in Los Angeles. The Ann Arbor, Michigan-based group’s Web site says it “maintains strong relationships with industry” and others in the “international automotive community.”
One of the Americans’ biggest gripes involves Japan’s currency, which they claim is kept artificially cheap against the dollar. The Automotive Trade Policy Council, which represents GM, Ford and Chrysler, said in October 2007 that the weak yen at that time gave Japanese automakers a $4,000-a-car advantage on their imports to the U.S.
“This policy provides a subsidy to exporters, resulting in an unfair competitive advantage over American manufacturers,” said Senator Debbie Stabenow, a Michigan Democrat now helping lead the charge for a U.S. bailout, in a 2007 statement.
Quality, Value
Toyota dismisses that argument. “Our vehicles sell well and are profitable because our operations are efficient, because our vehicles represent quality and value, and because they represent the needs and wants of the public,” Toyota spokesman Bruce C. Ertmann wrote on a company blog in January. “Their profitability has nothing at all to do with some nefarious program of currency manipulation.”
GM Chief Executive Officer Rick Wagoner has repeatedly complained that his company is disadvantaged by pension and retiree-health costs -- benefits that are heavily subsidized in competitor countries including Italy, Germany and France. Italy also helps companies such as Fiat pay unemployment benefits, making temporary production cuts less expensive.
To be sure, taxes in those countries tend to be higher, offsetting the advantage.
Rhys, the automotive economics professor, notes that many European carmakers that were once state-controlled -- such as Renault, Volkswagen and Alfa Romeo -- got loans at preferential rates. Renault, which is still 15 percent-owned by the French government and has enjoyed the most state largesse, would have collapsed without it, Rhys said.
Many Rescues
“Just about every one of the European automakers, apart from Mercedes, have had a rescue of some sort or another,” Rhys said. And Toyota has benefited from Japan’s “incredible low cost of credit,” he added. “It wasn’t technically state aid, but it certainly wasn’t the sort of conditions companies in Europe or North America could borrow at.”
Any complaints that grow out of the current bailout-proposal war will be complicated by the industry’s web of cross-border subsidiaries, said Ed Kim, an analyst at consulting firm AutoPacific Inc. in Tustin, California.
If Ford gets U.S. help, that may indirectly benefit Hiroshima, Japan-based Mazda Motor Corp., because the American company owns 13 percent of it. GM controls GM Daewoo Auto & Technology Co. of Inchon, South Korea, and it acquired the bankrupt Daewoo Motor Co. in 2002. Chrysler is negotiating a partnership with China’s Chery Automobile Co. Chery already has agreed to provide a model for Chrysler to sell in South America.
Back in 1979, when the U.S. bailed out Chrysler, things were “remarkably straightforward” because the company lacked a significant international presence, said Maryann Keller, an independent automotive analyst and consultant in Greenwich, Connecticut.
“Chrysler today would be more complicated,” she said. “Do we subsidize Chrysler so they can work with Chery and create a stronger automotive competitor?”
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