From Jan 1, hotel lobbies and carparks are out of bounds to them
By Jermyn Chow and Amresh Gunasingham 13 December 2008
The short list of public places still open to smokers will shrink even further next month when a nationwide smoking ban is extended to hotel lobbies and carparks, among other areas.
The ban, part of a drive to stamp out smoking that began nearly four decades ago, comes into effect on Jan 1.
It will include non-air-conditioned offices, lift lobbies, multi-storey carparks and anywhere within five metres of the entrances and exits of buildings.
The move is aimed at ‘protecting the public from second-hand smoke’, said Mr. Khoo Seow Poh, director-general of public health with the National Environment Agency (NEA).
He said the drive is part of a global initiative by the World Health Organisation (WHO), which has urged governments to push for smoke-free work places and public places.
Singapore is among the close to 150 countries that have signed the WHO’s Framework Convention on Tobacco Control. The Republic already meets its mandatory requirements, including a ban on tobacco advertising and health warnings on cigarettes.
Other places that have stubbed out smoking in public include Ireland, Sweden, Britain, India and Hong Kong.
In Singapore, smoking is already banned in all nightspots, hawker centres, restaurants and community clubs, among other places.
Casinos in the upcoming integrated resorts in Sentosa and Marina Bay have been exempted from the ban, though operators will have to draw up ‘house rules’ to protect non-smokers, the NEA said.
Any smoker who ignores the ban can be fined a maximum of $1,000. Operators who fail to advise their patrons against lighting up can also be fined.
The NEA said that between the Jul 1, 2007 nightspot stub-out and last month, 157 people were fined for lighting up outside designated smoking areas.
More than 3,000 people have been booked for doing the same at food outlets and coffee shops since a July 2006 ban.
To cope with the wider ban from Jan 1, more enforcement officers will be on the prowl.
The number of officers who will keep tabs on smokers - and also those who litter - will rise to 120 daily from 50 now, said Mr. S. Satish Appoo, director of NEA’s environmental health department. This is on top of the 500 NEA public health enforcement officers.
Ahead of the ban, hotels and building owners here already got a head start on going smoke-free.
Most hotels here have already banned smoking in their lobbies.
Suntec City and the 26-storey Carlton Hotel have moved smoking bins or designated smoking areas further away from their doors.
While some smokers were not enamoured of the ban, they conceded it has merit.
Advertising executive and smoker Lilian Pang, 36, said: ‘It maybe more inconvenient for us to light up but non-smokers shouldn’t be made to suffer.’
Along with more smoke-free areas from Jan 1, smokers here can only smoke specially-labelled cigarettes that will distinguish the duty-paid ones from their contraband counterparts.
Singapore has one of the lowest adult smoking rates in the world at about 13 per cent, according to a 2004 survey.
Troubled minibond investor attempts suicide: A 45-year-old widow - believed to have lost HK$5 million of her late husband's insurance money in Lehman minibonds - was discovered on Thursday night trying to kill herself....
Getting a loan is not easy even for those with perfect credit histories
By Maria Almenoar Dec 11, 2008
They may have perfect credit histories and earn around $3,000 a month, but many consumers are finding it hard to get a car loan.
Faced with gloomy economic conditions, banks and financial institutions seem unwilling to lend and are tightening the credit lines they do hand out, according to car dealers. Some said they have 'stacks' of letters from banks rejecting loan applications from potential customers.
Said Mr Glenn Tan, chief executive of Subaru agent MotorImage: 'It's not that (customers) don't want to buy a car. We have the bookings, but some cannot get the financing.'
One dealer estimated that up to 40 per cent of applications are now being rejected, compared with 15 per cent before the financial crisis. Other dealers put the rejection rate at about 25 per cent.
Even those who have secured loans cannot get full financing; many institutions are only offering to bankroll at most 80 per cent or 90 per cent of a car's purchase price, dealers said.
Mr Walter Koh, manager at Vertex Automobile, which sells China-made Chery cars, said customers are being rejected if their income is '$1 below the required level'. He has seen customers who earn good salaries being denied loans for even the most inexpensive cars, like the off-peak Chery QQ, which costs around $12,000. If spread out over a 10-year loan period at full financing, it would come up to only about $150 a month. 'It seems hard for customers,' said Mr Koh.
Some dealers also pointed out that loan applications are taking longer than usual to be processed. On average, it should take about three days, but for some, the process now lasts between 10 and 12 days.
Mr Richard Wan, general manager of TTS Chana Automobile, said banks are 'really scrutinising' new borrowers.
Some banks admit that the global economic crisis has dampened their borrowing. Many are cutting back on lending, despite a $2.3 billion injection from the Government to unfreeze credit markets.
GE Money, which specialises in car loans and personal loans, said that it was reducing its risk in this 'tough environment' in a number of ways, including tightening credit. Citibank and United Overseas Bank said that while they would continue to be prudent in their consumer credit assessment, those with a solid income and good credit records should not have problems getting an auto loan.
Economist David Cohen noted that many banks are likely being tighter with their credit, though some are loath to acknowledge it publicly.
'Given the recession that Singapore is in and the weakening in the labour market conditions, banks are going to be more stringent in who they lend out money to because it is risky lending to consumers,' said Mr Cohen, director of Asian economics forecasting at Action Economics.
The credit crunch is making some first-time car buyers nervous.
Civil servant Lim Chye Soon, 22, booked a new 1,500cc Toyota Vios. He made a loan application about two weeks ago after certificate of entitlement premiums hit a record low of $2. He had put a $10,000 down payment for his $31,000 off-peak car, and now needs a 70 per cent loan. 'My main concern is it won't be approved. If that's the case, I'll have to find more money to put down for the car.'
Meanwhile, wealthier buyers do not seem to be having the same problems. Performance Motors, which brings in the high-end BMWs, said it has not noticed any difference in its loan rejection rates.
Madoff's alleged $50 billion fraud hits other investors
By Jon Stempel and Christian Plumb Dec 12, 2008
NEW YORK (Reuters) – Investors scrambled to assess potential losses from an alleged $50 billion fraud by Bernard Madoff, a day after the arrest of the prominent Wall Street trader.
Prosecutors and regulators accused the 70-year-old, who was chairman of the Nasdaq Stock Market in the early 1990s, of masterminding a fraud of epic proportions through his investment advisory business, which managed at least one hedge fund.
Hundreds of people, investing with him through the firm's clients, entrusted Madoff with billions of dollars, industry experts said.
"Madoff's investors included captains of industry, corporations -- some of which are publicly traded -- that used Madoff almost as a high-yielding cash management account, endowments, universities, foundations and, importantly, many high-profile funds of funds," said Douglas Kass, who heads hedge fund Seabreeze Partners Management.
"It appears that at least $15 billion of wealth, much of which was concentrated in southern Florida and New York City, has gone to 'money heaven,'" he said.
For a list of companies exposed to Madoff's alleged fraud, please see:
Federal agents arrested Madoff at his apartment on Thursday after prosecutors said he told senior employees that his money management operations were "all just one big lie" and "basically, a giant Ponzi scheme."
A Ponzi scheme is an illegal investment vehicle that pays off old investors with money from new ones, and is dependent on a constant stream of new investment. Because the invested capital is not earning a sufficient return on its own, such schemes eventually collapse under their own weight.
Madoff is the founder of Bernard L. Madoff Investment Securities LLC, a market-making firm he launched in 1960. His separate investment advisory business had $17.1 billion of assets under management.
'BUSINESS AS USUAL?'
About a dozen angry investors gathered on Friday in the lobby of the Lipstick Building in midtown Manhattan, where the market-making firm and advisory business are headquartered, demanding to know the fate of their money.
One woman said that when she called the firm's offices on Thursday she was told it was "business as usual."
Another investor groused, "Business as usual? Of course it's business as usual. We're getting screwed left and right."
Police later evicted the small group from the building.
Individual investors were feeling the squeeze elsewhere.
"I expect to get back zero," said Floridian Susan Leavitt, who invested through Madoff. "When he tells the feds he has $200 million to $300 million left out of billions, what can you expect?"
Two law firms, Milberg LLP and Seeger Weiss LLP, said Friday they had been retained by "dozens of individual investors" in Madoff Securities.
The two most prominent hedge funds that invested with Madoff were the $7.3 billion Fairfield Sentry Ltd, run by Walter Noel's Fairfield Greenwich Group, and the $2.8 billion Kingate Global Fund Ltd, run by Kingate Management Ltd.
Fairfield Greenwich Group said it was trying to determine the extent of potential losses and vowed to pursue recovery of any lost assets. The firm said it had been working with Madoff for nearly 20 years.
Fairfield Sentry and Kingate Global were among a small group of hedge funds to report positive returns for 2008; the average hedge fund was down 18 percent, according to data from Hedge Fund Research.
"People who came to us for portfolio construction were often already invested with Bernie Madoff. He had hundreds of clients," said Charles Gradante, who invests in hedge funds as a principal at Hennessee Group LLC. "Now his whole legacy is destroyed. He was God to people."
Prior to Madoff's arrest, investors had wondered how he was able to generate annual returns in the low double digits in a variety of market environments. Many questioned how U.S. regulators were able to ignore numerous red flags with regard to Madoff's operations.
"Many of us questioned how that strategy could generate those kinds of returns so consistently," said Jon Najarian, an options trader who knows Madoff and is a co-founder of optionmonster.com.
In May 2001, Barron's reported that option strategists for major investment banks said they could not understand how Madoff managed to generate the returns that he did.
"We weren't comfortable with Madoff," said Brad Alford, president at investment adviser Alpha Capital in Atlanta. "We didn't understand how his strategy could generate the kind of returns it did. We will walk away from things like that."
MORE TO COME?
U.S. stocks tumbled in early trading on Friday, with some investors citing the Madoff case as well as the failure of talks in Congress on a rescue for the U.S. auto industry. The market later rebounded, with the Dow Jones industrial average closing 0.75 percent higher for the day.
Investors overseas were reeling from the alleged fraud.
Benedict Hentsch, a Swiss private bank, said it had 56 million Swiss francs ($47 million) of exposure to Madoff's investment advisory business.
Italian bank UniCredit SpA's fund management unit, Pioneer Investments, has exposure through its Primeo Select hedge fund, two people familiar with the matter said.
Bramdean Alternatives Ltd said almost 10 percent of its holdings were exposed to Madoff, sending shares in the UK asset manager crashing.
CNBC Television reported that Sterling Equities, which owns the New York Mets baseball team, had accounts managed by Madoff.
'UNFORTUNATE SET OF EVENTS'
Madoff said "there is no innocent explanation" for his activities, and that he "paid investors with money that wasn't there," according to the federal complaint.
Prosecutors also accused Madoff of wanting to distribute as much as $300 million to employees, family members and friends before turning himself in.
Charged with one count of securities fraud, he faces up to 20 years in prison and a $5 million fine. The U.S. Securities and Exchange Commission filed separate civil charges.
A hearing had been scheduled for Friday afternoon in U.S. District Court in Manhattan on the SEC's request to grant powers to the court-appointed receiver to oversee the entire firm, as well as on the commission's request for a firmwide asset freeze.
But the hearing was canceled after the matter was resolved, said a deputy for U.S. District Judge Louis Stanton. No other details were immediately available. The receiver, lawyer Lee Richards, had been appointed by the judge on Thursday to oversee assets and accounts of the firm held abroad.
Madoff's lawyer, Dan Horwitz, said on Thursday: "We will fight to get through this unfortunate set of events." His client was released on $10 million bond.
Madoff is a member of Nasdaq OMX Group Inc's nominating committee. His firm has said it is a market-maker for about 350 Nasdaq stocks.
He is also chairman of London-based Madoff Securities International Ltd, whose chief executive, Stephen Raven, said the firm was "not in any way part of" the New York-based market-maker.
All equity trades involving the market-making firm will be processed as usual, the Depository Trust Clearing Corp told Reuters on Friday.
Senate Rejects Auto Industry Bailout After Talks Fail
By Nicholas Johnston and John Hughes
Dec. 11 (Bloomberg) -- The Senate rejected a $14 billion bailout plan for U.S. automakers, in effect ending congressional efforts to aid General Motors Corp. and Chrysler LLC, which may run out of cash early next year.
“I dread looking at Wall Street tomorrow,” Majority Leader Harry Reid said before the vote in Washington. “It’s not going to be a pleasant sight.”
The Bush administration will “evaluate our options in light of the breakdown in Congress,” spokesman Tony Fratto said.
The Senate thwarted the bailout plan when a bid to cut off debate on the bill the House passed yesterday fell short of the required 60 votes. The vote on ending the debate was 52 in favor, 35 against. Earlier, negotiations on an alternate bailout plan failed.
GM said in a statement, “We are deeply disappointed that agreement could not be reached tonight in the Senate despite the best bipartisan efforts. We will assess all of our options to continue our restructuring and to obtain the means to weather the current economic crisis.”
Reid said millions of Americans, “not only the autoworkers, but people who sell cars, car dealerships, people who work on cars,” will be affected. “It’s going to be a very, very bad Christmas for a lot of people as a result of what takes place here tonight.”
Asian stocks and U.S. index futures immediately began falling after Reid’s comments. The MSCI Asia Pacific Index slumped 2.2 percent to 86.13 as of 12:33 p.m. Tokyo time, while March futures on the Standard & Poor’s 500 Index slipped 3.4 percent.
‘Deja Vu’
“Remember when the first financial bailout bill failed” in Congress in late September, said Martin Marnick, head of equity trading at Helmsman Global Trading Ltd. in Hong Kong. “The markets in Asia started the slide. Deja vu, this looks like it’s happening again.” Congress approved a financial-rescue plan weeks later.
Senator George Voinovich, an Ohio Republican, urged the Bush administration to save the automakers by tapping the $700 billion bailout fund approved earlier this year for the financial industry.
“If this is the end, then I think they have to step in and do it -- it’s needed even though they don’t want to do it,” Voinovich said.
Connecticut Democrat Christopher Dodd, who helped lead the negotiations, said the final unresolved issue was a Republican demand that unionized autoworkers accept a reduction in wages next year, rather than later, to match those of U.S. autoworkers who work for foreign-owned companies, such as Toyota Motor Corp.
‘Saddened’
“More than saddened, I’m worried this evening about what we’re doing with an iconic industry,” Dodd said. “In the midst of deeply troubling economic times we are going to add to that substantially.”
Republican Bob Corker of Tennessee, who negotiated with Dodd, said, “I think there’s still a way to make this happen.”
Earlier today, White House spokeswoman Dana Perino warned that an agreement was necessary for the U.S. economy.
“We believe the economy is in such a weakened state right now that adding another possible loss of 1 million jobs is just something” it cannot “sustain at the moment,” Perino said.
Also earlier, South Dakota Republican John Thune suggested that if talks collapsed, the Bush administration might aid automakers with funds from the financial-rescue plan approved by Congress in October.
“I think that is where they go next,” Thune said. “I wouldn’t be surprised if they explore all options.” The Bush administration thus far has opposed that option, which was favored by Democrats.
Citadel Suspends Withdrawals in Two Hedge Funds After 50% Drop
By Saijel Kishan and Katherine Burton
Dec. 12 (Bloomberg) -- Citadel Investment Group LLC, the Chicago-based hedge-fund firm run by Kenneth Griffin, halted year- end withdrawals from its two biggest funds after investors sought to take out $1.2 billion, according to a letter sent to clients.
The Kensington and Wellington funds, which together manage about $10 billion, have lost 49.5 percent of their value this year through Dec. 5. Withdrawals may resume as early as March 31, said the letter, signed by Griffin and sent to investors today.
“We have not made this decision lightly,” Griffin wrote. “We recognize how a suspension impacts our investors, especially those with current financial obligations of their own to meet.”
Citadel joins hedge funds including Fortress Investment Group LLC and Tudor Investment Corp. in limiting withdrawals as hedge funds head for their biggest annual losses since at least 1990. Hedge funds have declined 18 percent, on average, this year through Nov. 30, according to Chicago-based Hedge Fund Research Inc.
As of October, 18 percent of hedge-fund assets, or about $300 billion, managed by 5 percent of hedge funds, were subject to some sort of restriction on withdrawals, according to Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA Pte.
Citadel normally allows clients to withdraw up to 1/16th of their assets quarterly. If total withdrawals exceed 3 percent of the fund, investors must pay a fee back into the fund ranging from 5 percent to 9 percent. Redemptions have never before surpassed the limit.
Citadel will also absorb “a substantial portion” of the funds’ expenses this year, the letter said. Citadel clients usually pay these charges, which have traditionally amounted to about 3 percent to 4 percent of assets.
The fund is holding between 25 percent and 30 percent of its assets in cash.
Katie Spring, a spokeswoman for Chicago-based Citadel, declined to comment.
Before 2008, Citadel had posted just one losing year since Griffin started the firm in 1990, dropping 4 percent in 1994. Three Citadel funds, whose returns are tied to the firm’s market- making business, have climbed about 40 percent this year. Those funds manage about $3 billion.
TWO DBS RELATIONSHIP MANAGERS TALK ABOUT BEING RETRENCHED. ONE SAYS:
In five minutes, his life changed
By Benson Ang December 12, 2008
HE sees himself as a victim of the organisation's actions whereas another retrenched relationship manager sees himself as a victim of the market's collapse.
Alvin, a former DBS relationship manager, is bitter because he is jobless.
We are not using his real name because, under the terms of his retrenchment package, he cannot speak to the media.
Just one year ago, he had it all - cash, car, condominium and a challenging career.
In his heyday, the bachelor raked in more than $8,000 a month, drove a car, owned a condominium apartment, had three credits cards and a country-club membership.
Last month, his life changed - in just five minutes.
When news broke about three months ago that thousands of retail investors who bought structured products had lost their life savings, relationship managers like Alvin were perceived as the villains of the fiasco.
Now, he thinks he is the victim. Alvin, who is in his 30s, was laid off last month.
Other relationship managers were among the 450 Singapore employees let go by DBS last month.
They are also known as wealth managers, personal bankers or personal financial consultants.
DBS declined to reveal the exact number of such employees who were retrenched. A spokesman would only say that the staff cut was 'across different functions and ranks'.
Alvin was with DBS for more than three years, and is a graduate, although he declined to reveal in what field.
He claimed the first hint he had about DBS' retrenchment exercise was through the media last month.
'Then, I was worried. I knew the odds were not in our favour. But I tried not to think about it,' he said.
Bad news
A few days later, the bad news hit him.
His version of events, which could not be verified, is that he was told by a secretary from the bank to go down to the DBS head office in Shenton Way.
At the office, Alvin sat and waited with several other employees, whom he did not know. He was then called into a room with staff from the human resources department.
He recalled that he was told he no longer had to report for work, and had to return his access pass, staff pass and handphone SIM card on the spot.
His retrenchment benefits included a month's pay for each year of service.
Alvin added that DBS arranged for people to help him write his resume and gave him a list of over 20 companies that were hiring.
'That was it. The whole thing took five minutes,' he claimed.
Mr Lim Swee Say, secretary-general of the National Trades Union Congress, had criticised the bank then for not consulting its staff union about the layoffs and using retrenchment as a first resort.
In reply, DBS said that it had frozen hiring before deciding on the retrenchment, and gave reasons why the retrenchment exercise was necessary.
But Alvin still cannot understand the rationale.
'The company is showing profits, and the risk of products are mostly borne by investors,' he said.
Was he laid off because he was under-performing?
'I've been hitting targets, and was banded favourably for the past few years,' he claimed.
Did he mis-sell products? No, he asserted.
He said relationship managers were caught between a rock and a hard place. On one hand, they have to recommend suitable products to their clients. On the other, they have to meet sales targets to keep their jobs.
Alvin claimed that relationship managers must sell about $1 million in investments every month, which works to about $60,000 worth of products a day.
He admitted that relationship managers in general could have been overly-aggressive in pushing the products. (He does not think he himself is over-aggressive.)
He has sold some structured products to relatives of colleagues and does not know how to face them now.
He has yet to find a new job despite sending resumes to other banks. He also does not mind a job in a different industry or a lower-paying job.
Meanwhile, he says he is having problems paying his insurance bills and housing instalments, and has resorted to selling his car.
But he remains optimistic.
'I've been there, done that. I won't be jobless for too long.'
‘Already Bankrupt’ GM Won’t Be Rescued by U.S. Loan
By Doron Levin and John Helyar
Dec. 12 (Bloomberg) -- For General Motors Corp., the question is no longer whether it will get a government loan or if Chief Executive Officer Rick Wagoner will be replaced. It’s whether anything can prevent the largest U.S. automaker from sliding into bankruptcy.
Even an offer by the Treasury Department today to provide temporary relief, after the Senate rejected a bailout plan approved by the House, isn’t likely to offset the Dec. 10 announcement that GM’s 49 percent-owned affiliate, GMAC LLC, lacked the capital to become a bank holding company. That means the financing unit won’t be able to access Treasury’s Troubled Asset Relief Program to help make auto loans.
GMAC may now have to file for Chapter 11 protection, with or without a loan, joining GM’s biggest parts supplier, Delphi Corp., which is already in bankruptcy. The Detroit-based automaker, leaking $67 million a day -- enough to buy a fleet of 1,800 Cadillac CTS coupes -- may soon be sucked into the vortex.
“GM already is bankrupt and should file for bankruptcy,” said David Littman, senior economist for the Mackinac Center for Public Policy, a policy research organization in Midland, Michigan. “They have too much overhead and too little time left to reduce size to be a survivor in this industry.”
The company eschewed the Chapter 11 option for months, believing it would make consumers unwilling to buy their cars. Lead director George Fisher said last week that bankruptcy is “way down the list of options.” GM has been working with New York lawyer Martin Bienenstock of Dewey & LeBoeuf to devise an option for using the bankruptcy process to restructure, according to a person familiar with the contingency plan.
Cash Concerns
A bankruptcy filing in the U.S. wouldn’t necessarily include overseas subsidiaries such as GM Europe, which builds Opel and Vauxhall automobiles. It would, said Alan Baum, manager of forecasting for Planning Edge, a consulting firm in Birmingham, Michigan, make a foreign supplier or partner “fear that a GM bankruptcy might eat up its cash.”
The Senate thwarted the government bailout in a procedural vote after talks failed in a dispute with Republicans over how quickly auto-union wages should be cut. Only 10 Republicans voted to move forward on the rescue plan.
GM shares fell about 4 percent to $3.94 in New York Stock Exchange composite trading as of 5:30 p.m.
To GM’s critics, worries about cash are three years too late. The financial crisis wasn’t the culprit that brought the company to the brink of insolvency, as Wagoner told Congress last month. It was just the final straw in a succession of unresolved or unaddressed issues.
Shrinking Sales, Value
Since 2005, GM has lost a cumulative $72.4 billion, had its debt downgraded to junk, watched its share of U.S. auto sales shrink by almost 1 million vehicles and shed 90 percent of its market value. It introduced gas-guzzling vehicles as fuel prices rose, failed to slim down its product offerings and dealer networks quickly enough and wasn’t able to cap its labor costs in time to stem the bleeding. In September 2007, the company won the right to hire new workers at lower wages starting in 2010 -- too far down the road to avoid the consequences of a recession and a credit crunch that engulf it now.
“We made mistakes,” Wagoner conceded at a Senate hearing last week. Among the errors, he said, were “failing to build sufficient flexibility into our operations and not moving fast enough to invest in smaller, more fuel-efficient vehicles.”
100th Birthday
Wagoner, 55, who has been CEO since 2000 and declined to be interviewed for this article, was also slow to see the impact of the credit crisis. On Sept. 16, the day after Lehman Brothers Holdings Inc. filed the biggest bankruptcy in U.S. history, he told reporters at a party at Detroit’s Renaissance Center marking the company’s 100th birthday that he saw “no big impact” on consumers. The next month GM’s auto sales in the U.S. plunged 45 percent.
After 77 years as the world’s largest automaker, GM and its executives were unable to embrace change. The company continued to plow resources into sport-utility vehicles and make bad alternative-fuel bets, even after consumer buying habits shifted. It rejected an offer from Carlos Ghosn, CEO of Renault SA and Nissan Motor Co., to form a global alliance. And it dismissed calls for radical restructuring from former board member Jerome York and other critics.
Ignoring Advice
York, 70, a former Chrysler Corp. finance chief, was advising Tracinda Corp. CEO Kirk Kerkorian, who had amassed a 9.9 percent stake in GM. He told analysts in January 2006 that the time had come for the automaker “to go into a crisis mode and act accordingly.” York calculated that GM was burning through cash at a rate of $24 million a day, which meant it had about 1,000 days before it ran out -- in October 2008.
GM ignored York’s advice to reduce its number of models, including getting rid of the Hummer and Saab brands, and to cut both management and labor costs in what he called an “equality of sacrifice.” He resigned nine months later, in October 2006, frustrated by the board’s unwillingness to take action. Only after York left did GM decide to sell Hummer. Now it’s talking about getting rid of Saab and Saturn, as well as Pontiac.
“Three years ago I thought GM had the time and financial resources to save itself,” York, now CEO of Harwinton Capital LLC, said in an interview. “Now I’m not so sure. Who’s responsible? Top management and the board of directors.”
Auto Bubble
Although York’s prediction was prescient -- GM has told Congress it will run out of cash by the end of the year if it doesn’t get relief -- what no one could foresee then were two developments that sealed GM’s fate: a run-up in gasoline prices and a credit-market freeze that followed Lehman’s collapse.
The frozen credit markets signaled the end of an era of easy money that delayed GM’s day of reckoning. In a parallel to the housing bubble, GM and its Big Three brethren enjoyed a decade of artificially inflated sales. Finance companies did a booming business in subprime auto loans, a rarity in 2000, which accounted for 18 percent of new-car financing by 2005, according to CNW Market Research in Bandon, Oregon. And the automakers’ own subsidiaries offered low-interest financing that helped move cars off dealers’ lots.
That did nothing to stem GM’s steady loss of market share in the U.S., from 30 percent in 2000 to 22 percent today. It did help keep the industry’s annual U.S. sales at or near record levels, topping 17 million vehicles.
Managed for Cash
“They were trying to delay the draconian measures they needed to take,” said Ashvin Chotai, managing director of Intelligence Automotive Asia Ltd., a consulting firm in London.
GM gave the bubble a boost with a zero percent “Keep America Rolling” financing campaign started eight days after the Sept. 11 terrorist attacks. Sales jumped 42 percent in October. The program got the company even more hooked on incentives than it had been in the 1980s. “Keep America Rolling” was followed by “Employee Pricing,” “Red Tag Specials” and other low-interest and rebate deals that made discounting the norm.
“It was a great initiative to prop up the market, but it’s a trap they fell into,” said Chotai, who estimates that annual U.S. auto sales would have fallen to 13 million to 14 million without incentives. “Nobody believes list price anymore, so you’ve destroyed your pricing power and you’ve diluted your brand.”
That’s only one way GM executives were short-sighted. It’s not that Wagoner, who received an MBA from Harvard University in 1977, doesn’t know management. It’s that between dwindling liquidity and its sky-high fixed costs, the company was increasingly managed for cash, even at the expense of profit.
‘Alternate Universe’
GM continued to build unprofitable models because it needed the cash to meet financial obligations, such as a roughly $5 billion annual health-care bill for workers and retirees. In 2007, even though GM posted a $38.7 billion net loss, it managed to generate $189 million in free-cash flow. That’s equivalent to burning the furniture in order to stay warm.
“These are not stupid people, but they had created an alternate universe,” said James Womack, co-author of “The Machine That Changed the World,” a book about the Toyota Motor Corp. production system that bested Detroit’s. “They lived in a cocoon. GM was weak for reasons that were under the surface, and the financial crisis brought it all out.”
To John Shook, a former Toyota manager who worked at a joint-venture plant run by the Japanese company and GM in Fremont, California, that explains why the two automakers are in such different shape today. When it comes to engineering and manufacturing, Shook says, Toyota and GM are about equal. Where they differ is in their corporate cultures.
“Toyota is built on trial and error, on admitting you don’t know the future and that you have to experiment,” Shook said. “At GM, they say, ‘I’m senior management. There’s a right answer, and I’m supposed to know it.’ This makes it harder to try things.”
‘Increasing Certitude’
So while Toyota assumed it must continuously adapt if it wanted to succeed in the U.S., Shook says, GM believed it would forever be the market leader. Its managers brought Toyota’s manufacturing methods from Fremont to Detroit. They couldn’t duplicate Toyota’s zen: question everything.
Wagoner, a 31-year GM veteran, was the embodiment of its culture, an apostle of incremental change. Exciting as a Saturn, quotable as an owner’s manual, the one-time Duke University basketball player exuded quiet confidence about GM’s future.
“I know that things will turn around,” he told Fortune magazine in February 2006, after problems erupted at the automaker. The magazine concluded in a cover story that “the evidence points, with increasing certitude, to bankruptcy.”
“GM people tend to internalize, to think that they can figure things out on their own,” said Don Runkle, chairman of Inkster, Michigan-based battery maker EaglePicher Inc. and a former GM chief engineer.
Perot Appalled
Over the years, the occasional outsider who entered the company with notions of shaking it up has been rejected as a foreign organism. GM acquired Electronic Data Systems Corp. for $2.55 billion in 1984 and gave its chairman, H. Ross Perot, a seat on the board. The brash Texan, appalled at GM’s ways, shocked directors by challenging then-CEO Roger Smith in meetings and publicly ridiculing the company.
“The first EDS-er to see a snake kills it,” Perot told Business Week in 1986. “At GM, first thing you do is organize a committee on snakes. Then you bring in a consultant who knows a lot about snakes. Third thing you do is talk about it for a year.”
In 1986, GM paid Perot $700 million for his stock and his resignation from the board.
Even when GM did make changes, they weren’t revolutionary. In 1992, a year when the automaker posted a $23.5 billion loss, Chairman and CEO Robert Stempel resigned under pressure after 27 months on the job. It named director John Smale, the retired CEO of Procter & Gamble Co., as non-executive chairman and appointed Jack Smith, a GM lifer, as CEO.
‘Run Common, Run Lean’
Smith invested in SUVs and pickup trucks, starving cars, especially smaller models where Japanese automakers dominated. He rode a wave of prosperity, cheap gasoline and a strong North American housing market to eight straight years of profitability and a record share price of $93.62 in April 2000 before turning over the wheel to his protégé, Wagoner.
While Smith’s mantra was “run common, run lean,” he never achieved the goal of creating shared platforms and standards that might have slashed operating costs. GM has long been penalized, compared with its Japanese rivals, by its capital costs. It develops scores of chassis to meet different consumer preferences around the world. Yet it wasn’t until this year, after more than a decade of reorganization, that the company introduced its first common chassis for use worldwide. It will serve a mid-size Opel Insignia in Europe and a new Buick LaCrosse to be built in the U.S. next year.
Pontiac Aztek
Smith was also unable to drive sales with novel products. The Pontiac Aztek, a mid-size crossover introduced in 1999 as “the most versatile vehicle on the planet,” was so unsightly, so badly received, it was voted the ugliest car of all time in an August 2008 poll by the London Telegraph. The model was discontinued in 2004.
Challenged by 2001’s twin shocks of recession and 9/11, the new CEO, who had spent most of his career in finance, fell back on what he knew best. Through its GMAC LLC unit, GM attracted ever more buyers with creative financing gambits. One was the “incentivized lease,” requiring no money down and low monthly payments. While that lured customers and stoked production, when the leases expired, GM had to write off the difference between a vehicle’s assumed value, for lease purposes, and its true market value. Since resale prices had been reduced by the surfeit of GM product on the market, so was the company’s profit.
Shattered Illusion
The illusion of prosperity would vanish when the era of easy money passed. In the first quarter of 2005, after 12 straight years of profit, GM lost $1.3 billion. The company’s guidance on March 15 that a loss was coming startled Wall Street. Investors beat down the company’s shares by 24 percent over the next four weeks.
On May 4, Kerkorian, 91, who had reaped $3 billion on a 10 percent stake in Chrysler that he sold in 1998, disclosed that he had amassed 3.9 percent of GM’s shares and was launching a tender offer for more. The next day Standard & Poor’s knocked the company’s bonds down to one grade below investment quality. GM, once the bluest of blue-chips, now had junkers for bonds.
Turnaround Plan
Wagoner unveiled a “turnaround plan” in November 2005. It called for closing nine plants, eliminating 30,000 jobs, boosting employee contributions to GM’s health-care plan, increasing investment in its best-selling models such as the Hummer and revamping marketing efforts.
To Kerkorian and York, who joined GM’s board in February 2006, that wasn’t bold enough. The plant closings and health- care changes saved only $2 billion a year, they said, and the company’s idea of innovation was more versions of the same thing: the SUVs and trucks whose sales had been carrying GM.
Others had come to a similar conclusion. A month after Wagoner’s plan was announced, S&P again downgraded GM’s debt and called bankruptcy “not far-fetched.”
Wagoner found the crisis talk overblown. He dismissed a flurry of Chapter 11 questions by saying there was “no plan, strategy or intention for GM to file for bankruptcy.”
In April 2006, Wagoner took charge of GM’s North America division. That same month, he announced the sale of 51 percent of GMAC to New York-based private-equity firm Cerberus Capital Management LP for $7.4 billion. The move was intended to improve GM’s liquidity and protect GMAC’s access to credit markets, which had been threatened by the parent company’s ratings.
Confidence Vote
Wagoner sought a vote of confidence from the board that month and got it -- though not from GM’s newest director. York said he thought more sweeping changes were needed and that they weren’t going to come from within.
He and Kerkorian began to pursue Ghosn, 54, who had pulled Nissan back from the brink of bankruptcy. In May, Kerkorian met with Ghosn in Nashville, Tennessee, and asked him to consider an alliance. Renault and Nissan would each take a 10 percent stake in GM, share resources and collaborate as a way of cutting costs and spurring change. Ghosn was interested, according to York, and said he’d want a seat on the GM board. That would give him influence over the company’s strategy and perhaps position him to succeed Wagoner.
Kerkorian then sent a letter to Wagoner. In GM fashion, the proposal was studied for months and brought to the board. For directors, it was another opportunity to show their confidence in the incumbent CEO. On Oct. 4, they put an end to any alliance talks. Two days later, York quit the board.
“I haven’t found an environment in the boardroom that is very receptive to probing much beyond the materials provided by management,” York wrote in his letter of resignation.
Twin Pillars
GM shares dropped 6.3 percent on the news, and over the next two months Kerkorian unwound his position in GM. He netted $106 million on his $1.7 billion investment, according to regulatory filings.
In 2007, the two pillars holding up the company began to crumble, and not even the deal to reduce labor costs with the United Auto Workers could save it.
First, the subprime-loan market imploded, hurting GMAC’s Residential Capital LLC unit. On Nov. 1, 2007, GMAC reported a third-quarter loss of $1.6 billion as a result of subprime- mortgage writedowns. Over the next three weeks, GM lost one- third of its market value.
$4.11 a Gallon
Then gasoline prices began climbing, topping out at an average price of $4.11 a gallon in July 2008, ending America’s love affair with SUVs and pickup trucks -- the very categories that Wagoner had staked the company’s future on in his 2005 turnaround plan.
It’s not as if other automakers hadn’t also favored trucks in recent years. Gas-guzzlers were more profitable than light vehicles and, as long as fuel was cheap, far more popular.
The problem was that GM so skewed its model lineup away from sedans that it was out of position when the market turned. To make matters worse, at the moment many Americans became concerned with getting better gas mileage and going “green,” GM was years behind on developing alternative-energy cars.
Toyota and Honda Motor Co. each introduced gas-electric hybrid cars in 1997 -- the Prius and Insight, respectively. GM engineers scoffed at both. These were small, odd-looking and costly to produce. Why would people buy a car whose price outweighed the gas savings? GM executives told reporters the hybrids were public-relations gimmicks.
EV1’s Demise
GM discontinued its one alternative-energy vehicle -- the battery-powered EV1 -- in 2003, after spending more than $1 billion on a car with limited range that flopped with consumers. Company engineers believed that cars powered by hydrogen fuel cells were the real future in this field.
“They knew the home run was 20 years away, and they weren’t willing to settle for singles and doubles in the meantime,” said Shook, the former Toyota manager. “At Toyota, they said, ‘We don’t know the future; let’s try something we can do right now.’”
Today, with Prius a hit with consumers, GM is scrambling to catch up. It has several hybrid models of its own and, with Congress badgering him to produce more alternative-energy cars, Wagoner has made their development a major part of the restructuring program for which he’s seeking $10 billion.
GM Apologizes
He conceded the error of his ways in June, when GM’s board gave the go-ahead to market the electric-powered Chevrolet Volt in 2010. “Axing the EV1 electric-car program and not putting the right resources into hybrids,” Wagoner told Motor Trend magazine, when asked to name his greatest mistake as CEO. “It didn’t affect profitability, but it did affect image.”
The confession may have come too late. As did an ad GM placed on Dec. 8 in the Automotive News, an industry publication, acknowledging it had “disappointed” Americans in recent years with its quality, design and reliance on trucks.
Without a reduction in debt and lower labor costs, GM may not weather the current slowdown in U.S. vehicle sales. Congressional critics have argued that the rescue plan passed by the House on Dec. 10 doesn’t give the government leverage to force substantive changes on management and labor. Even a bridge loan, said Edward Altman, a finance professor at New York University’s Stern School of Business, “is destined to fail.”
“They’ve actually done some terrific stuff,” said Womack, the author, who is chairman of management-training firm Lean Enterprise Institute in Cambridge, Massachusetts. “It’s just that the scale is so large and the changes came so late in the game. The band was all tuned up, the brass was polished, but the ship had already hit the iceberg.”
Correa Defaults on Ecuador Bonds, Seeks Restructuring
By Stephan Kueffner
Dec. 12 (Bloomberg) -- Ecuadorean President Rafael Correa halted payment on foreign bonds he calls “illegal” and “illegitimate,” putting the South American country in default for a second time in a decade.
The government won’t make a $30.6 million interest payment by Dec. 15, when a monthlong grace period expires, Correa told reporters in his office in Guayaquil. The $510 million bonds due in 2012 plunged to 23 cents on the dollar from 31 yesterday and 97.5 cents three months ago.
“I have given the order that interest payments not be made,” Correa said. “The country is in default.”
By defaulting, Correa, a close ally of Venezuelan President Hugo Chavez, fulfills a threat he has made since a 2006 presidential campaign that ended in a landslide victory. His decision comes as a deepening global economic slump throttles demand for oil, the country’s biggest export. Ecuador, which defaulted in 1999, owes about $10 billion to bondholders, multilateral lenders and other countries.
“I couldn’t allow the continued payment of a debt that by all measures is immoral and illegitimate,” Correa said. “It is now time to bring in justice and dignity.”
‘Serial Defaulter’
Correa, 45, said the government will present a restructuring proposal in coming days. “We want creditors to recoup part of their money,” he said.
“Ecuador is moving further into isolation,” said Vicente Albornoz, head of the Cordes research institute in Quito. “The hardliners in the government won.”
A debt commission Correa formed last year said in a 172- page report in November that the global bonds due in 2012 and 2030 “show serious signs of illegality,” including issuance without proper government authorization. Correa invoked the 30- day grace period on the interest payment last month, saying he wanted to analyze the commission’s findings.
“Ecuador is a serial defaulter,” said Arturo Porzecanski, an international finance professor at American University in Washington. “They defaulted in the 1980s, 1990s and this decade. A lot of other countries have had one or two defaults, but Ecuador tops them all.”
Correa, who holds a doctorate in economics from the University of Illinois at Urbana-Champaign, has said he will not sacrifice spending on health and education to pay the debt. Ecuador’s foreign obligations are equal to 21 percent of its $44 billion gross domestic product. Argentina’s debt, by comparison, was equivalent to 150 percent of its GDP when it defaulted in 2001, according to Goldman Sachs Group Inc.
‘Just Political’
Oil, which has plunged 67 percent since July amid the global financial crisis, accounts for about 60 percent of Ecuador’s exports. Finance Minister Maria Elsa Viteri said on Nov. 18 the country’s fiscal accounts remain “strong and healthy.” Ecuador had $5.65 billion in cash reserves as of Dec. 5, according to the central bank.
The default was triggered by the combination of the decline in oil with “a ridiculous ideology,” said Claudio Loser, the former director of the International Monetary fund’s Western Hemisphere department, who now is a scholar at the Inter- American Dialogue. “The financial need wasn’t so great that it was forced to declare a default,” Loser said.
The South American country has defaulted six times since it separated from Gran Colombia in 1830, according to “Debt Defaults and Lessons from a Decade of Crises,” a book published in 2007 by Federico Sturzenegger and Jeromin Zettelmeyer.
“It’s a final blow to external investors, and particularly any energy investors that may have retained interest or had future plans to attempt an investment in Ecuador,” said Enrique Alvarez, head of Latin America fixed-income research at IDEAglobal Inc. in New York.
I am a passenger And I ride and I ride I ride through the city's backside I see the stars come out of the sky Yeah, they're bright in a hollow sky You know it looks so good tonight I am a passenger I stay under glass I look through my window so bright I see the stars come out tonight I see the bright and hollow sky Over the city's a rip in the sky And everything looks good tonight Singin' la la la la la-la-la la La la la la la-la-la la La la la la la-la-la la la-la Get into the car We'll be the passenger We'll ride through the city tonight See the city's ripped insides We'll see the bright and hollow sky We'll see the stars that shine so bright The sky was made for us tonight Oh the passenger How how he rides Oh the passenger He rides and he rides He looks through his window What does he see? He sees the sided hollow sky He see the stars come out tonight He sees the city's ripped backsides He sees the winding ocean drive And everything was made for you and me All of it was made for you and me 'cause it just belongs to you and me So let's take a ride and see what's mine Singing... Oh, the passenger He rides and he rides He sees things from under glass He looks through his window's eye He sees the things he knows are his He sees the bright and hollow sky He sees the city asleep at night He sees the stars are out tonight And all of it is yours and mine And all of it is yours and mine Oh, let's ride and ride and ride and ride... Singing...
Fallout from Lehman Brothers collapse still spreading
Christine Seib in New York December 13, 2008
When Dick Fuld left Lehman Brothers' headquarters at 745 Seventh Avenue for the last time on September 15, the broker-dealer he ran may have been defunct, but there were three like it still left. Three months after Lehman went bust, they are all gone and the reverberations of Lehman's collapse are still being felt across America.
All that remains of Lehman is bare bones. Two days after the bank declared itself bankrupt, Barclays bought Lehman's US investment banking business, its headquarters and two processing centres for $1.7 billion. Just over a week later, Nomura snapped up the European, Asian and Middle Eastern businesses. Last week, a management team gained control of the majority share of Lehman's coveted asset management arm.
The bank's fellow broker-dealers have also changed shape dramatically. On the day that Lehman went bust, Merrill Lynch announced that it would be bought by Bank of America in a $50 billion all-stock rescue deal. The so-called Thundering Herd had fallen into the hands of a conservative North Carolina-based financial behemoth.
The remaining two broker-dealers have become deposit-taking institutions. Fearful of another Lehman-style implosion, on September 22 the Federal Reserve gave Goldman Sachs and Morgan Stanley approval to morph into high street banks in the hope that a base of retail and commercial deposits would provide a much-needed cash buffer from the global financial storm.
Lehman's surprise collapse - the market had expected the US Government to rescue the stricken bank just as it had organised the sale of Bear Stearns to JPMorgan six months earlier - set off a chain reaction around the world. The bank's default on $165 billion in unsecured debt hit investors with an estimated $120 billion in losses. The credit default swap (CDS) market, of which Lehman had been a major player, dried up. The commercial paper market, where investors had bought Lehman's debt, froze. Companies began eating up unused portions of credit lines and stashing the money away in fear that their lenders would pull their funding. As a result, banks quickly ran out of liquidity.
However, Lehman was not just Wall Street's problem. AIG teetered on the brink of collapse as investors and counterparties panicked about the insurance giant's own exposure to the estimated $60 trillion global CDS market. As a result the Federal Reserve was forced to abandon the moral-hazard high ground and hand over $85 billion in emergency money to AIG.
It took only a day for Lehman to infect mom-and-pop investors. Money market funds try to ensure that their net asset value (NAV) never slips below $1 so that they appeal to people wanting stable homes for retirement savings. But on September 16 the Primary Reserve Fund, the oldest money market fund in America, told its investors that its NAV had dropped to 97cents because of losses on $900 million worth of Lehman debt. When Primary “broke the buck”, slashing pension pots, the panic hit its zenith.
Henry Paulson, the Treasury Secretary, needed something to douse the flames in Wall Street. By September 21 Congress was considering his request for $700 billion to buy troubled assets from financial institutions. But during the two weeks that it took to approve the necessary legislation, the markets continued to fall. By October 3, when the bailout was approved, Mr Paulson said that buying assets would not be enough - the US Government needed to take equity stakes in banks to strengthen their balance sheets.
The Treasury Secretary has since used about $335 billion of the bailout fund, disbursing the cash to at least 52 companies in 25 states, including an agreement with Citi to inject an extra $20 billion, on top of the $25 billion the bank received in October.
The flight to quality has sent the income from Treasury bonds to record lows. Investors have piled more than $100million into money market funds in the past month, pushing up demand for Treasury bills which this week were trading at a negative implied yield for the first time since 1940.
Three months after Lehman, the market for some assets remains dead. Figures compiled by Thompson Financial show that there have been only two issues of high-risk, high-yield debt since the bank went bust. Mortgage-backed debt has continued to sell in the past three months, although with far fewer issues per week. The market for sub-prime and Alt-A mortgage-backed securities, however, is gone. No one is buying collateralised loan obligations (CLOs) and the CDS market remains in tatters. Issuance of asset-backed securities is patchy, with at least three weeks since September 15 in which there were no sales. Yet investment grade debt has continued to sell at relatively normal levels.
Commercial paper, an important source of short-term funding for many companies, has picked up in the past six weeks, largely because of a Federal Reserve funding facility that has bought $300billion worth of the assets over the past seven weeks. For non-financial companies, the cost of borrowing using commercial paper is at a ten-year low. US bank lending, including commercial and consumer credit, is at record highs, indicating that households and companies are not struggling across the board to get loans. Local governments are issuing municipal bonds at the same level as before the credit crunch. And real estate lending hit a record high in October.
Octavio Marenzi, the head of Celent, a financial services consultancy, said: “Markets are very resilient. When people see opportunities, they'll jump in. People are being more cautious but in aggregate, they'll still participate. People still think more money is better than less money.
by Peter Schiff, Euro Pacific Capital December 12, 2008
Like many pragmatic economists I have always warned that rapid expansions of government debt would result in inflation and higher interest rates. The explanation was always simple: rising supply of government debt inflates the money supply and weakens the government’s ability to service its debt through legitimate means.
But in recent months, government has flooded the market with hundreds of new Treasury obligations and telegraphed its intention to increase the deluge even more. In response, both bond prices and the dollar have risen. This benign reaction has led many to the happy conclusion that the doom and gloomers are wrong and that bailouts and economic “stimuli” can be financed with deficit spending without any adverse consequences on interest rates or consumer prices. Recent action in the foreign exchange markets suggests these hopes will prove illusory. The renewed strength in gold, together with the long over do rupture of the correlation between the movements of foreign currencies and U.S. equities, is further evidence that recent market dynamics are changing.
When the financial crisis of 2008 kicked into high gear in September, the U.S. dollar began to rally furiously. While America’s economic ship was sinking from stem to stern, its currency was becoming the must have asset for public and private investors around the world. The dollar benefitted from the positive flows that result from massive global deleveraging. Treasuries got an added boost from a reflexive flight to “safety.” As a result, politicians were able to fill out their Christmas wish lists with complete confidence that Santa would deliver. However, as these dollar-positive forces appear to be giving way, the Grinch is about make an unwanted appearance.
Last weekend Barack Obama announced his intention to implement a New Deal-style stimulus and public works program. What he somehow forgot to mention is that the United States is wholly dependent on the willingness of foreign creditors to supply the funds. But a weakening dollar makes continued foreign purchase of U.S. Treasuries a much more difficult decision.
Once the dollar begins to collapse beneath the weight of all this new deficit spending, accumulation of contingency liabilities, and the socialization of our economy, commodity prices and interest rates will head skyward. In addition, once all the going out of business sales at U.S. retailers are over, and excess inventories have been reduced, watch for big price increases at the consumer level as well.
Once the government runs out of foreign and private sector bidders for new treasuries, the Federal Reserve will be the only buyer, and the hyper-inflation cat will be completely out of the bag. Sensing this, the Fed has recently indicated a desire to begin issuing its own bonds. However, since dollars are already recorded as liabilities on the Fed’s balance sheet (dollars are in actuality Federal Reserve Notes) the Fed already issues debt. The difference now is that they are proposing to issue interest bearing debt. Perhaps the Fed feels this will make holding its notes more appealing. However, since the interest will be paid in more of its own script, I do not believe this con will work.
In the end, rather than filling our stockings with Christmas goodies, our foreign creditors will likely substitute lumps of coal. Of course given how high coal prices will ultimately rise as a result of all this inflation, in Christmas Future perhaps our stockings will be stuffed with nothing but our own worthless currency. It might night burn as well as coal, but at least we will have plenty of it.
Fear triggers gold shortage, drives US treasury yields below zero
The investor search for a safe places to store wealth as the financial crisis shakes faith in the system has caused extraordinary moves in global markets over recent days, driving the yield on 3-month US Treasuries below zero and causing a rush for physical holdings of gold.
By Ambrose Evans-Pritchard 11 Dec 2008
"It is sheer unmitigated fear: even institutions are looking for mattresses to put their money until the end of the year," said Marc Ostwald, a bond expert at Insinger de Beaufort.
The rush for the safety of US Treasury debt is playing havoc with America's $7 trillion "repo" market used to manage liquidity. Fund managers are hoovering up any safe asset they can find because they do not know what the world will look like in January when normal business picks up again. Three-month bills fell to minus 0.01pc on Tuesday, implying that funds are paying the US government for protection.
"You know the US Treasury will give you your money back, but your bank might not be there," said Paul Ashworth, US economist for Capital Economics.
The gold markets have also been in turmoil. Traders say it has become extremely hard to buy the physical metal in the form of bars or coins. The market has moved into "backwardation" for the first time, meaning that futures contracts are now priced more cheaply than actual bullion prices.
It appears that hedge funds in distress are being forced to cash in profits on gold futures to cover losses elsewhere or to meet redemptions by clients. But smaller retail investors – and perhaps some big players – are buying bullion in record volumes to store in vaults.
The latest data from the World Gold Council shows that demand for coins, bars, and exchange traded funds (ETFs) doubled in the third quarter to 382 tonnes compared to a year earlier. This matches the entire set of gold auctions by the Bank of England between 1999 and 2002.
Peter Hambro, head Peter Hambro Gold, said the data reflects a "remarkable" shift in the structure of the market. The rush to safety reflects a mix of fears about the fragility of world finance and concerns that the move towards zero interest rates could set off an inflationary surge further down the road, and possibly call into question the worth of some paper currencies.
The near paralysis in the "repo" markets may prove to be no more than pre-Christmas jitters as banks square their books.
However, there are some signs that extreme monetary stimulus by the US Federal Reserve and other banks is starting to have unintended consequences.
The Bank of Japan is it is reluctant to cut its rates to zero again because of the damage this causes to the money markets, which serve as a key lubricant of the credit system. The US is now starting to face the same dilemma.
List of potential victims grows in $50 billion fraud case linked to NY adviser
Tom Hays, Larry Neumeister and David B. Caruso December 13, 2008
NEW YORK (AP) -- Investors who put their fortunes in the hands of arrested New York money manager Bernard Madoff are waiting to hear how much of their stake is left.
The roster of potential victims in what prosecutors said was a $50 billion Ponzi scheme has grown exponentially longer in the past few days.
Madoff, 70, said in regulatory filings that he only had around 25 clients, but it has become apparent that the list of people who lost money may number in the hundreds or even thousands.
Among those who have acknowledged potential losses so far: Former Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services.
A charity in Massachusetts that supports Jewish programs, the Robert I. Lappin Charitable Foundation, said it had invested its entire $8 million endowment with Madoff. The organization's executive director said she doesn't expect it to survive.
Other institutions that believed they had lost millions included The North Shore-Long Island Jewish Health System and the Texas-based Julian J. Levitt Foundation.
Hedge funds and other investment groups looked like big losers too. The Fairfield Greenwich Group said it had some $7.5 billion in investments linked to Madoff. A private Swiss bank, Banque Benedict Hentsch Fairfield Partners SA, said it had $47.5 million worth of client assets at risk.
The losses may have extended far beyond the coffers of the wealthy and powerful.
The town of Fairfield, Conn., said it placed nearly 15 percent of its retiree pension fund with Madoff. Officials were scrambling to determine how much of the $42 million remained.
Harry Susman, an attorney in Houston, said he represents a group of clients who had unknowingly become entangled in the scandal by investing in a hedge fund managed by Merkin, which then put almost all of its $1.8 billion in capital in Madoff's hands.
"They had no idea they had exposure," Susman said. He said his clients were now dumbfounded as to how the fund came to invest all of its holdings with just one man, especially since concerns had been circulating for years about Madoff's operations.
For decades, Madoff had dual reputations among investors. Many wealthy New Yorkers and Floridians considered him a reliable investment whiz. Others, more skeptical, had questioned whether his returns were real, pointing to the firm's secrecy and lack of a big-name auditor.
But when he met privately with a family member at his firm earlier this month, something clearly was amiss.
First, federal authorities say the 70-year-old Madoff surprised the unidentified family member by saying he wanted to pass out hefty annual bonuses two months earlier than usual, court papers said. Then, when challenged on the idea, he said he "wasn't sure he would be able to hold it together" if they continued the discussion at the office, and invited him to his apartment.
It was the beginning of a stunning meltdown for the former Nasdaq stock market chairman.
Madoff himself described his investment business as an unsophisticated "Ponzi scheme," according to investigators who interviewed him.
Perhaps more startling than the loss was that it apparently caught regulators and investigators off guard, only coming to light last week when Madoff's own family turned him in.
The core of the scheme -- taking investments from one client to pay returns to another -- "has been around since the beginning of time," said Marc Powers, a former Securities and Exchange Commission enforcement chief and head of the securities practice at Baker Hostetler.
The firm somehow pulled off the fraud despite being subject to examination by the SEC, Powers added. "You wonder how these things escaped the normally careful review of these regulatory organizations."
The latest dose of bad news in the world of finance has left Madoff's clients "panicked," said Stephen A. Weiss, a lawyer for several dozen investors. "These people are sorrowful. These people are angry. And many are now destitute."
The wave of ill will -- fuel for inevitable lawsuits -- was aimed at a man who had cultivated an image as a straight-shooter with a personal touch.
The day after his arrest, his company's Web site still boasted that "in an era of faceless organizations ... Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door."
It went on to say "Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."
Madoff's resume was the stuff of Wall Street legend: He founded his company in 1960 with $5,000 he earned in part working as a lifeguard on Long Island beaches while putting himself through Hofstra University Law School. It eventually became one of five broker-dealers that spearheaded the formation of the Nasdaq Stock Market, where he served as a member of the board of governors in the 1980s and as chairman of the board of directors in the early '90s.
By 2001, Madoff's firm was one of the three top market makers in Nasdaq stocks and the third-largest firm matching buyers and sellers of securities on the New York Stock Exchange, according to Baron's.
Investigators say Madoff's crime originated in a separate and secretive investment-advising business.
Madoff apparently kept the loss a secret even from his two sons and other family members who work at the firm until he and two of them retreated to his apartment occupying the entire 12th floor of an Upper East Side building on Dec. 9, according the complaint drawn up by an arresting FBI agent.
"It's all just one big lie," he told his family. He confided he had blown the money in what was "basically, a giant Ponzi scheme," the complaint added.
Several attorneys representing investors, however, have questioned how he could have acted alone, given the size of the alleged fraud and vast holdings of his firm.
According to the court complaint, Madoff told his family he expected to end up behind bars, but wanted to execute his own version of a bailout package by doling out $200 to $300 million he had left to family, friends and employees. After the meeting, a lawyer for the family contacted regulators, who alerted the federal prosecutors and the FBI.
Madoff was in a bathrobe when two FBI agents arrived at his door unannounced at 8:30 a.m. on Dec. 11. He invited them in, then confessed after being asked "if there's an innocent explanation," the complaint said.
Responded Madoff: "There is no innocent explanation."
Dec. 12 (Bloomberg) -- The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.
Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.
The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.
“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.
The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.
Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.
‘Been Bamboozled’
Congress is demanding more transparency from the Fed and Treasury on bailout, most recently during Dec. 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had “been bamboozled.”
Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said on June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit.
On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It filed suit Nov. 7.
In response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”
Data Provider
The Fed supplied copies of three e-mails in response to a request that it disclose the identities of those supplying data on collateral as well as their contracts.
While the senders and recipients of the messages were revealed, the contents were erased except for two phrases identifying a vendor as “IDC.” One of the e-mails’ subject lines refers to “Interactive Data -- Auction Rate Security Advisory May 1, 2008.”
Brian Willinsky, a spokesman for Bedford, Massachusetts- based Interactive Data Corp., a seller of fixed-income securities information, declined to comment.
“Notwithstanding calls for enhanced transparency, the Board must protect against the substantial, multiple harms that might result from disclosure,” Jennifer J. Johnson, the secretary for the Fed’s Board of Governors, said in a letter e-mailed to Bloomberg News.
‘Dangerous Step’
“In its considered judgment and in view of current circumstances, it would be a dangerous step to release this otherwise confidential information,” she wrote.
New York-based Citigroup Inc., which is shrinking its global workforce of 352,000 through asset sales and job cuts, is among the nine biggest banks receiving $125 billion in capital from the TARP since it was signed into law Oct. 3. More than 170 regional lenders are seeking an additional $74 billion.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.
The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn’t seek money damages.
‘Right to Know’
“There has to be something they can tell the public because we have a right to know what they are doing,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.
“It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed,” she said.
The Fed’s five-page response to Bloomberg may be “unprecedented” because the board usually doesn’t go into such detail about its position, said Lee Levine, a partner at Levine Sullivan Koch & Schulz LLP in Washington.
“This is uncharted territory,” said Levine during an interview from his New York office. “The Freedom of Information Act wasn’t built to anticipate this situation and that’s evident from the way the Fed tried to shoehorn their argument into the trade-secrets exemption.”
The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site.
Borrowers include the now-bankrupt Lehman Brothers Holdings Inc., Citigroup and New York-based JPMorgan Chase & Co., the country’s biggest bank by assets.
Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group, said in an interview last month.
‘Complete Truth’
“Americans don’t want to get blindsided anymore,” Mendez said in an interview. “They don’t want it sugarcoated or whitewashed. They want the complete truth. The truth is we can’t take all the pain right now.”
The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”
In response, the Fed argued that the trade-secret exemption could be expanded to include potential harm to any of the central bank’s customers, said Bruce Johnson, a lawyer at Davis Wright Tremaine LLP in Seattle. That expansion is not contained in the freedom-of-information law, Johnson said.
“I understand where they are coming from bureaucratically, but that means it’s all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system,” Johnson said.
The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
By JOHN HECHINGER and CRAIG KARMIN DECEMBER 4, 2008
Harvard University's endowment suffered investment losses of at least 22% in the first four months of the school's fiscal year, the latest evidence of the financial woes facing higher education.
The Harvard endowment, the biggest of any university, stood at $36.9 billion as of June 30, meaning the loss amounts to about $8 billion. That's more than the entire endowments of all but six colleges, according to the latest official tally.
Harvard said the actual loss could be even higher, once it factors in declines in hard-to-value assets such as real estate and private equity -- investments that have become increasingly popular among colleges. The university is planning for a 30% decline for the fiscal year ending in June 2009.
Other university endowments also are suffering, and many states are cutting public funding of higher education. Colleges are instituting hiring freezes, planning enrollment cuts and discussing steep tuition increases, intensifying worries about the impact of the recession and financial crisis on college access.
The federal government already has taken emergency steps to boost lending to students, and several well-off colleges have said they will maintain or boost financial aid to help families hurt by job losses, investments setbacks and borrowing problems. But not all colleges have the financial heft to withstand the many forces bearing down on them.
Joni Finney, a professor at the University of Pennsylvania who studies college economics, says she worries that public universities and less-wealthy, smaller private colleges may not be able to keep their doors open to all students. "If you go down the food chain of higher education, it's harder and harder to deal with these kinds of cuts," she says.
Private-college budgets are sensitive to investment declines because they typically tap their endowments each year to help cover operating expenses.
The University of Virginia Investment Management Co. said it lost nearly $1 billion, or 18%, of its endowment over the four-month period, reducing it to $4.2 billion. In Vermont, Middlebury College says its endowment fell 14.4%, to $724 million. In Iowa, Grinnell College's endowment dropped 25%, to $1.2 billion. In Massachusetts, Amherst College says its endowment, $1.7 billion as of June 30, also fell by 25%.
In a letter to Harvard's deans, university President Drew Gilpin Faust and another official blamed "severe turmoil in the world's financial markets" for the endowment loss. She said it would lead to budget cuts, and that the school would sell bonds to increase its financial flexibility.
The Harvard letter said the 22% loss, from July 1 through Oct. 31, understates the actual decline because it doesn't reflect assets such as real estate whose values couldn't yet be estimated. Currently, endowment income funds 35% of Harvard's $3.5 billion budget.
The 30% fiscal-year loss Harvard is planning for would eclipse the loss of 12.2% in 1974, its worst over the last 40 years.
Harvard's loss marks a sharp reversal from the endowment's formerly chart-topping performance. Harvard and Yale University -- which hasn't disclosed its endowment's recent performance -- pioneered an investment approach that de-emphasized U.S. stocks and bonds and placed large sums in more exotic and illiquid investments, including timberland, real estate and private-equity funds. That strategy, which was widely copied, helped the schools avoid significant losses after the technology boom ended in 2000.
But the current market has been far less favorable, partly because both Harvard and Yale have relatively small holdings of bonds, such as U.S. Treasurys, one of the few assets that have performed well. Harvard began its fiscal year with a target of having 33% invested in publicly traded shares, split among U.S. stocks, which have dropped 24% in the four months through October, and international stocks, which have fared worse.
Other investments, such as commodities, which were a boon to Harvard in past years, have turned negative in recent weeks. Harvard has sought to sell off about $1.5 billion in investments with private-equity firms, which typically use their assets to fund corporate takeovers, according to people familiar with the situation. That would be one of the largest sales ever of a private-equity stake. But its private-equity partnerships received bids of only around 50 cents on the dollar, say other people familiar with the matter.
Daniel Jick, chief executive officer at Boston-based HighVista Strategies, which handles money for some endowments, says that in some prior years, investments such as real estate and private equity have helped buffer endowments against losses on stocks.
In her letter, Harvard's Dr. Faust said the endowment loss has "major implications for our budgets and planning, especially since our other principal revenue streams also stand to be challenged by the economic crisis." Along with federal research funding, universities rely heavily on tuition and donations. Strained family finances could make it difficult for more families to afford tuition, while stock-market declines typically curb gifts.
To maintain its programs and commitments, the letter said, Harvard is expecting to spend a higher percentage of its endowment than it had recently. It said it was taking a "hard look at hiring, staffing levels and compensation," and was "reconsidering the scale and pace of planned capital projects."
Intelligent men produce better quality sperm, researchers have found. They say the discovery suggests an unexpectedly close relationship between intelligence and general evolutionary fitness.
The researchers, based at the Institute of Psychiatry in London, set out to test the controversial hypothesis that people with greater intelligence are healthier - not just because of lifestyle factors but because they are fitter in an underlying genetic sense.
"We took two characteristics that seemed, on the surface, unlikely to be associated with each other - intelligence and sperm quality - and tested whether there was a statistical relationship between them," said Rosalind Arden, lead author of the study, which was published on Friday in the journal Intelligence.
"We found a small positive relationship: brighter men had better sperm," added Ms Arden. "This association wasn't caused by habits like avoiding smoking or drinking - the big hitters of health."
The study was based on the analysis of 425 former US soldiers who had provided semen samples and undergone intensive testing for intelligence and lifestyle factors. After adjusting for lifestyle, the results show small but statistically significant correlations between intelligence and three measures of sperm quality.
"This does not mean that men who prefer Play-Doh to Plato always have poor sperm: the relationship we found was marginal," said Ms Arden. "But our results do support the theoretically important 'fitness factor' idea."
"Fitness factor" is the proposal that there is an underlying relationship across many inherited characteristics, including intelligence, that makes some people more successful than others at reproducing.
Your Memory Is Bigger and Better Than Scientists Expected
by Sunita Reed December 3rd, 2008
The Devil is in the Details
If you’re tired of hearing about memory loss, there’s some encouraging research from Massachusetts Institute of Technology http://web.mit.edu/ about how good people’s visual memory really is.
Psychologist Aude Oliva and graduate student Timothy Brady found inspiration for their study in Lionel Standing’s famous research conducted in the early 1970s. Standing’s study demonstrated that after viewing 10,000 images, people could look at pairs of images and remember which one they had seen with 83-percent accuracy. While it proved that people could recall large numbers of images, the study did not test how much detail within the pictures people could retain.
That’s what Oliva wanted to test. Her team asked volunteers, aged 18 to 35, to participate in a grueling memory test. Over the course of five hours, each volunteer watched a monitor as approximately 3,000 images of common objects–like corkscrews, donuts, and cell phones–appeared for just three seconds each. The researchers told volunteers to try to remember as many details as they could.
After a 20-minute break, they were shown pairs of images and had to determine if they had seen them before. However there was more to it than in Standing’s study. Volunteers had to remember very specific details of the images to get the answer correct. For example they had to determine not only whether they had seen a cell phone, but also whether it was open or closed.
Brady says before the study was conducted, the four members of the research team had to make written predictions about how well the volunteers would perform. While they all thought that volunteers would be able to remember, for instance, that they had seen a donut, none of them were betting that the volunteers would remember the small details.
“We all agreed that pretty much nobody would be able to remember all of the details of all of the objects,” says Brady. "But in fact they were able to do that."
Results showed that the volunteers were right almost 90-percent of the time.
If you’re thinking that the volunteers were MIT students and probably had a better memory than the average person, think again. Oliva says they were members of the local community from all walks of life. If these findings surprise you, imagine what the researchers thought. After all, if they had placed bets on their predictions, they all would have lost.
“Certainly it has changed my views about what’s possible in memory,” says Brady.
Tip For Better Memory
But if people’s memory for detailed information is so good, why do most people forget simple things like where they parked their car? Oliva says one key is making an effort to really look. After all, in the study the researchers instructed volunteers to remember as much as they could.
“Pay attention to the visual details. Pay attention where you put your keys, where you park your car,” advises Oliva.
She says spending those few extra moments to concentrate on details and use your visual memory could spare you from the many annoying lapses of memory. Next, Oliva plans to conduct brain imaging studies to see how the brain encodes those massive amounts of detail into memory.
18 comments:
Smoking Ban Extended
From Jan 1, hotel lobbies and carparks are out of bounds to them
By Jermyn Chow and Amresh Gunasingham
13 December 2008
The short list of public places still open to smokers will shrink even further next month when a nationwide smoking ban is extended to hotel lobbies and carparks, among other areas.
The ban, part of a drive to stamp out smoking that began nearly four decades ago, comes into effect on Jan 1.
It will include non-air-conditioned offices, lift lobbies, multi-storey carparks and anywhere within five metres of the entrances and exits of buildings.
The move is aimed at ‘protecting the public from second-hand smoke’, said Mr. Khoo Seow Poh, director-general of public health with the National Environment Agency (NEA).
He said the drive is part of a global initiative by the World Health Organisation (WHO), which has urged governments to push for smoke-free work places and public places.
Singapore is among the close to 150 countries that have signed the WHO’s Framework Convention on Tobacco Control. The Republic already meets its mandatory requirements, including a ban on tobacco advertising and health warnings on cigarettes.
Other places that have stubbed out smoking in public include Ireland, Sweden, Britain, India and Hong Kong.
In Singapore, smoking is already banned in all nightspots, hawker centres, restaurants and community clubs, among other places.
Casinos in the upcoming integrated resorts in Sentosa and Marina Bay have been exempted from the ban, though operators will have to draw up ‘house rules’ to protect non-smokers, the NEA said.
Any smoker who ignores the ban can be fined a maximum of $1,000. Operators who fail to advise their patrons against lighting up can also be fined.
The NEA said that between the Jul 1, 2007 nightspot stub-out and last month, 157 people were fined for lighting up outside designated smoking areas.
More than 3,000 people have been booked for doing the same at food outlets and coffee shops since a July 2006 ban.
To cope with the wider ban from Jan 1, more enforcement officers will be on the prowl.
The number of officers who will keep tabs on smokers - and also those who litter - will rise to 120 daily from 50 now, said Mr. S. Satish Appoo, director of NEA’s environmental health department. This is on top of the 500 NEA public health enforcement officers.
Ahead of the ban, hotels and building owners here already got a head start on going smoke-free.
Most hotels here have already banned smoking in their lobbies.
Suntec City and the 26-storey Carlton Hotel have moved smoking bins or designated smoking areas further away from their doors.
While some smokers were not enamoured of the ban, they conceded it has merit.
Advertising executive and smoker Lilian Pang, 36, said: ‘It maybe more inconvenient for us to light up but non-smokers shouldn’t be made to suffer.’
Along with more smoke-free areas from Jan 1, smokers here can only smoke specially-labelled cigarettes that will distinguish the duty-paid ones from their contraband counterparts.
Singapore has one of the lowest adult smoking rates in the world at about 13 per cent, according to a 2004 survey.
Troubled minibond investor attempts suicide: A 45-year-old widow - believed to have lost HK$5 million of her late husband's insurance money in Lehman minibonds - was discovered on Thursday night trying to kill herself....
迷債事主收銀行拒絕信自殺
2008年12月12日
一名迷債事主自殺不遂，其親友指迷債事件令她抑鬱症復發，而銀行一封拒絕賠償的信件是其自殺的導火線。
事件中的林姓事主，於昨晚在牛頭角樂雅苑停車場的私家車內燒炭自殺，並在擋風玻璃上張貼八頁遺書，當中提及自己被銀行誤導，購買517萬元雷曼債券，她為此「好痛苦」，終日躲在家中。
事主又提到，「訴訟是漫長的路，遙遙無期，而且花費龐大」，她感到「焦慮」和「恐懼」。
事主的18歲兒子稱，父親幾年前去世後，其母患上有抑鬱症，後來好轉。及至事主發現，自己把丈夫的五百萬保險金，全用來買了出事的迷債後，就開始抑鬱症復發。
事主的男性朋友指，她在11月28日收到銀行寄來的信件，當中指銀行職員已解釋清楚相關產品的特性和風險，銷售過程並無不當，銀行不會接受退回認購的要求。這名朋友指她接到這封信後，抑鬱加劇，最終萌生死念。
Banks driving car buyers up the wall
Getting a loan is not easy even for those with perfect credit histories
By Maria Almenoar
Dec 11, 2008
They may have perfect credit histories and earn around $3,000 a month, but many consumers are finding it hard to get a car loan.
Faced with gloomy economic conditions, banks and financial institutions seem unwilling to lend and are tightening the credit lines they do hand out, according to car dealers. Some said they have 'stacks' of letters from banks rejecting loan applications from potential customers.
Said Mr Glenn Tan, chief executive of Subaru agent MotorImage: 'It's not that (customers) don't want to buy a car. We have the bookings, but some cannot get the financing.'
One dealer estimated that up to 40 per cent of applications are now being rejected, compared with 15 per cent before the financial crisis. Other dealers put the rejection rate at about 25 per cent.
Even those who have secured loans cannot get full financing; many institutions are only offering to bankroll at most 80 per cent or 90 per cent of a car's purchase price, dealers said.
Mr Walter Koh, manager at Vertex Automobile, which sells China-made Chery cars, said customers are being rejected if their income is '$1 below the required level'. He has seen customers who earn good salaries being denied loans for even the most inexpensive cars, like the off-peak Chery QQ, which costs around $12,000. If spread out over a 10-year loan period at full financing, it would come up to only about $150 a month. 'It seems hard for customers,' said Mr Koh.
Some dealers also pointed out that loan applications are taking longer than usual to be processed. On average, it should take about three days, but for some, the process now lasts between 10 and 12 days.
Mr Richard Wan, general manager of TTS Chana Automobile, said banks are 'really scrutinising' new borrowers.
Some banks admit that the global economic crisis has dampened their borrowing. Many are cutting back on lending, despite a $2.3 billion injection from the Government to unfreeze credit markets.
GE Money, which specialises in car loans and personal loans, said that it was reducing its risk in this 'tough environment' in a number of ways, including tightening credit. Citibank and United Overseas Bank said that while they would continue to be prudent in their consumer credit assessment, those with a solid income and good credit records should not have problems getting an auto loan.
Economist David Cohen noted that many banks are likely being tighter with their credit, though some are loath to acknowledge it publicly.
'Given the recession that Singapore is in and the weakening in the labour market conditions, banks are going to be more stringent in who they lend out money to because it is risky lending to consumers,' said Mr Cohen, director of Asian economics forecasting at Action Economics.
The credit crunch is making some first-time car buyers nervous.
Civil servant Lim Chye Soon, 22, booked a new 1,500cc Toyota Vios. He made a loan application about two weeks ago after certificate of entitlement premiums hit a record low of $2. He had put a $10,000 down payment for his $31,000 off-peak car, and now needs a 70 per cent loan. 'My main concern is it won't be approved. If that's the case, I'll have to find more money to put down for the car.'
Meanwhile, wealthier buyers do not seem to be having the same problems. Performance Motors, which brings in the high-end BMWs, said it has not noticed any difference in its loan rejection rates.
Madoff's alleged $50 billion fraud hits other investors
By Jon Stempel and Christian Plumb
Dec 12, 2008
NEW YORK (Reuters) – Investors scrambled to assess potential losses from an alleged $50 billion fraud by Bernard Madoff, a day after the arrest of the prominent Wall Street trader.
Prosecutors and regulators accused the 70-year-old, who was chairman of the Nasdaq Stock Market in the early 1990s, of masterminding a fraud of epic proportions through his investment advisory business, which managed at least one hedge fund.
Hundreds of people, investing with him through the firm's clients, entrusted Madoff with billions of dollars, industry experts said.
"Madoff's investors included captains of industry, corporations -- some of which are publicly traded -- that used Madoff almost as a high-yielding cash management account, endowments, universities, foundations and, importantly, many high-profile funds of funds," said Douglas Kass, who heads hedge fund Seabreeze Partners Management.
"It appears that at least $15 billion of wealth, much of which was concentrated in southern Florida and New York City, has gone to 'money heaven,'" he said.
For a list of companies exposed to Madoff's alleged fraud, please see:
Federal agents arrested Madoff at his apartment on Thursday after prosecutors said he told senior employees that his money management operations were "all just one big lie" and "basically, a giant Ponzi scheme."
A Ponzi scheme is an illegal investment vehicle that pays off old investors with money from new ones, and is dependent on a constant stream of new investment. Because the invested capital is not earning a sufficient return on its own, such schemes eventually collapse under their own weight.
Madoff is the founder of Bernard L. Madoff Investment Securities LLC, a market-making firm he launched in 1960. His separate investment advisory business had $17.1 billion of assets under management.
'BUSINESS AS USUAL?'
About a dozen angry investors gathered on Friday in the lobby of the Lipstick Building in midtown Manhattan, where the market-making firm and advisory business are headquartered, demanding to know the fate of their money.
One woman said that when she called the firm's offices on Thursday she was told it was "business as usual."
Another investor groused, "Business as usual? Of course it's business as usual. We're getting screwed left and right."
Police later evicted the small group from the building.
Individual investors were feeling the squeeze elsewhere.
"I expect to get back zero," said Floridian Susan Leavitt, who invested through Madoff. "When he tells the feds he has $200 million to $300 million left out of billions, what can you expect?"
Two law firms, Milberg LLP and Seeger Weiss LLP, said Friday they had been retained by "dozens of individual investors" in Madoff Securities.
The two most prominent hedge funds that invested with Madoff were the $7.3 billion Fairfield Sentry Ltd, run by Walter Noel's Fairfield Greenwich Group, and the $2.8 billion Kingate Global Fund Ltd, run by Kingate Management Ltd.
Fairfield Greenwich Group said it was trying to determine the extent of potential losses and vowed to pursue recovery of any lost assets. The firm said it had been working with Madoff for nearly 20 years.
Fairfield Sentry and Kingate Global were among a small group of hedge funds to report positive returns for 2008; the average hedge fund was down 18 percent, according to data from Hedge Fund Research.
"People who came to us for portfolio construction were often already invested with Bernie Madoff. He had hundreds of clients," said Charles Gradante, who invests in hedge funds as a principal at Hennessee Group LLC. "Now his whole legacy is destroyed. He was God to people."
Prior to Madoff's arrest, investors had wondered how he was able to generate annual returns in the low double digits in a variety of market environments. Many questioned how U.S. regulators were able to ignore numerous red flags with regard to Madoff's operations.
"Many of us questioned how that strategy could generate those kinds of returns so consistently," said Jon Najarian, an options trader who knows Madoff and is a co-founder of optionmonster.com.
In May 2001, Barron's reported that option strategists for major investment banks said they could not understand how Madoff managed to generate the returns that he did.
"We weren't comfortable with Madoff," said Brad Alford, president at investment adviser Alpha Capital in Atlanta. "We didn't understand how his strategy could generate the kind of returns it did. We will walk away from things like that."
MORE TO COME?
U.S. stocks tumbled in early trading on Friday, with some investors citing the Madoff case as well as the failure of talks in Congress on a rescue for the U.S. auto industry. The market later rebounded, with the Dow Jones industrial average closing 0.75 percent higher for the day.
Investors overseas were reeling from the alleged fraud.
Benedict Hentsch, a Swiss private bank, said it had 56 million Swiss francs ($47 million) of exposure to Madoff's investment advisory business.
Italian bank UniCredit SpA's fund management unit, Pioneer Investments, has exposure through its Primeo Select hedge fund, two people familiar with the matter said.
Bramdean Alternatives Ltd said almost 10 percent of its holdings were exposed to Madoff, sending shares in the UK asset manager crashing.
CNBC Television reported that Sterling Equities, which owns the New York Mets baseball team, had accounts managed by Madoff.
'UNFORTUNATE SET OF EVENTS'
Madoff said "there is no innocent explanation" for his activities, and that he "paid investors with money that wasn't there," according to the federal complaint.
Prosecutors also accused Madoff of wanting to distribute as much as $300 million to employees, family members and friends before turning himself in.
Charged with one count of securities fraud, he faces up to 20 years in prison and a $5 million fine. The U.S. Securities and Exchange Commission filed separate civil charges.
A hearing had been scheduled for Friday afternoon in U.S. District Court in Manhattan on the SEC's request to grant powers to the court-appointed receiver to oversee the entire firm, as well as on the commission's request for a firmwide asset freeze.
But the hearing was canceled after the matter was resolved, said a deputy for U.S. District Judge Louis Stanton. No other details were immediately available. The receiver, lawyer Lee Richards, had been appointed by the judge on Thursday to oversee assets and accounts of the firm held abroad.
Madoff's lawyer, Dan Horwitz, said on Thursday: "We will fight to get through this unfortunate set of events." His client was released on $10 million bond.
Madoff is a member of Nasdaq OMX Group Inc's nominating committee. His firm has said it is a market-maker for about 350 Nasdaq stocks.
He is also chairman of London-based Madoff Securities International Ltd, whose chief executive, Stephen Raven, said the firm was "not in any way part of" the New York-based market-maker.
All equity trades involving the market-making firm will be processed as usual, the Depository Trust Clearing Corp told Reuters on Friday.
Senate Rejects Auto Industry Bailout After Talks Fail
By Nicholas Johnston and John Hughes
Dec. 11 (Bloomberg) -- The Senate rejected a $14 billion bailout plan for U.S. automakers, in effect ending congressional efforts to aid General Motors Corp. and Chrysler LLC, which may run out of cash early next year.
“I dread looking at Wall Street tomorrow,” Majority Leader Harry Reid said before the vote in Washington. “It’s not going to be a pleasant sight.”
The Bush administration will “evaluate our options in light of the breakdown in Congress,” spokesman Tony Fratto said.
The Senate thwarted the bailout plan when a bid to cut off debate on the bill the House passed yesterday fell short of the required 60 votes. The vote on ending the debate was 52 in favor, 35 against. Earlier, negotiations on an alternate bailout plan failed.
GM said in a statement, “We are deeply disappointed that agreement could not be reached tonight in the Senate despite the best bipartisan efforts. We will assess all of our options to continue our restructuring and to obtain the means to weather the current economic crisis.”
Reid said millions of Americans, “not only the autoworkers, but people who sell cars, car dealerships, people who work on cars,” will be affected. “It’s going to be a very, very bad Christmas for a lot of people as a result of what takes place here tonight.”
Asian stocks and U.S. index futures immediately began falling after Reid’s comments. The MSCI Asia Pacific Index slumped 2.2 percent to 86.13 as of 12:33 p.m. Tokyo time, while March futures on the Standard & Poor’s 500 Index slipped 3.4 percent.
‘Deja Vu’
“Remember when the first financial bailout bill failed” in Congress in late September, said Martin Marnick, head of equity trading at Helmsman Global Trading Ltd. in Hong Kong. “The markets in Asia started the slide. Deja vu, this looks like it’s happening again.” Congress approved a financial-rescue plan weeks later.
Senator George Voinovich, an Ohio Republican, urged the Bush administration to save the automakers by tapping the $700 billion bailout fund approved earlier this year for the financial industry.
“If this is the end, then I think they have to step in and do it -- it’s needed even though they don’t want to do it,” Voinovich said.
Connecticut Democrat Christopher Dodd, who helped lead the negotiations, said the final unresolved issue was a Republican demand that unionized autoworkers accept a reduction in wages next year, rather than later, to match those of U.S. autoworkers who work for foreign-owned companies, such as Toyota Motor Corp.
‘Saddened’
“More than saddened, I’m worried this evening about what we’re doing with an iconic industry,” Dodd said. “In the midst of deeply troubling economic times we are going to add to that substantially.”
Republican Bob Corker of Tennessee, who negotiated with Dodd, said, “I think there’s still a way to make this happen.”
Earlier today, White House spokeswoman Dana Perino warned that an agreement was necessary for the U.S. economy.
“We believe the economy is in such a weakened state right now that adding another possible loss of 1 million jobs is just something” it cannot “sustain at the moment,” Perino said.
Also earlier, South Dakota Republican John Thune suggested that if talks collapsed, the Bush administration might aid automakers with funds from the financial-rescue plan approved by Congress in October.
“I think that is where they go next,” Thune said. “I wouldn’t be surprised if they explore all options.” The Bush administration thus far has opposed that option, which was favored by Democrats.
Citadel Suspends Withdrawals in Two Hedge Funds After 50% Drop
By Saijel Kishan and Katherine Burton
Dec. 12 (Bloomberg) -- Citadel Investment Group LLC, the Chicago-based hedge-fund firm run by Kenneth Griffin, halted year- end withdrawals from its two biggest funds after investors sought to take out $1.2 billion, according to a letter sent to clients.
The Kensington and Wellington funds, which together manage about $10 billion, have lost 49.5 percent of their value this year through Dec. 5. Withdrawals may resume as early as March 31, said the letter, signed by Griffin and sent to investors today.
“We have not made this decision lightly,” Griffin wrote. “We recognize how a suspension impacts our investors, especially those with current financial obligations of their own to meet.”
Citadel joins hedge funds including Fortress Investment Group LLC and Tudor Investment Corp. in limiting withdrawals as hedge funds head for their biggest annual losses since at least 1990. Hedge funds have declined 18 percent, on average, this year through Nov. 30, according to Chicago-based Hedge Fund Research Inc.
As of October, 18 percent of hedge-fund assets, or about $300 billion, managed by 5 percent of hedge funds, were subject to some sort of restriction on withdrawals, according to Peter Douglas, principal of Singapore-based hedge-fund consulting firm GFIA Pte.
Citadel normally allows clients to withdraw up to 1/16th of their assets quarterly. If total withdrawals exceed 3 percent of the fund, investors must pay a fee back into the fund ranging from 5 percent to 9 percent. Redemptions have never before surpassed the limit.
Citadel will also absorb “a substantial portion” of the funds’ expenses this year, the letter said. Citadel clients usually pay these charges, which have traditionally amounted to about 3 percent to 4 percent of assets.
The fund is holding between 25 percent and 30 percent of its assets in cash.
Katie Spring, a spokeswoman for Chicago-based Citadel, declined to comment.
Before 2008, Citadel had posted just one losing year since Griffin started the firm in 1990, dropping 4 percent in 1994. Three Citadel funds, whose returns are tied to the firm’s market- making business, have climbed about 40 percent this year. Those funds manage about $3 billion.
TWO DBS RELATIONSHIP MANAGERS TALK ABOUT BEING RETRENCHED. ONE SAYS:
In five minutes, his life changed
By Benson Ang
December 12, 2008
HE sees himself as a victim of the organisation's actions whereas another retrenched relationship manager sees himself as a victim of the market's collapse.
Alvin, a former DBS relationship manager, is bitter because he is jobless.
We are not using his real name because, under the terms of his retrenchment package, he cannot speak to the media.
Just one year ago, he had it all - cash, car, condominium and a challenging career.
In his heyday, the bachelor raked in more than $8,000 a month, drove a car, owned a condominium apartment, had three credits cards and a country-club membership.
Last month, his life changed - in just five minutes.
When news broke about three months ago that thousands of retail investors who bought structured products had lost their life savings, relationship managers like Alvin were perceived as the villains of the fiasco.
Now, he thinks he is the victim. Alvin, who is in his 30s, was laid off last month.
Other relationship managers were among the 450 Singapore employees let go by DBS last month.
They are also known as wealth managers, personal bankers or personal financial consultants.
DBS declined to reveal the exact number of such employees who were retrenched. A spokesman would only say that the staff cut was 'across different functions and ranks'.
Alvin was with DBS for more than three years, and is a graduate, although he declined to reveal in what field.
He claimed the first hint he had about DBS' retrenchment exercise was through the media last month.
'Then, I was worried. I knew the odds were not in our favour. But I tried not to think about it,' he said.
Bad news
A few days later, the bad news hit him.
His version of events, which could not be verified, is that he was told by a secretary from the bank to go down to the DBS head office in Shenton Way.
At the office, Alvin sat and waited with several other employees, whom he did not know. He was then called into a room with staff from the human resources department.
He recalled that he was told he no longer had to report for work, and had to return his access pass, staff pass and handphone SIM card on the spot.
His retrenchment benefits included a month's pay for each year of service.
Alvin added that DBS arranged for people to help him write his resume and gave him a list of over 20 companies that were hiring.
'That was it. The whole thing took five minutes,' he claimed.
Mr Lim Swee Say, secretary-general of the National Trades Union Congress, had criticised the bank then for not consulting its staff union about the layoffs and using retrenchment as a first resort.
In reply, DBS said that it had frozen hiring before deciding on the retrenchment, and gave reasons why the retrenchment exercise was necessary.
But Alvin still cannot understand the rationale.
'The company is showing profits, and the risk of products are mostly borne by investors,' he said.
Was he laid off because he was under-performing?
'I've been hitting targets, and was banded favourably for the past few years,' he claimed.
Did he mis-sell products? No, he asserted.
He said relationship managers were caught between a rock and a hard place. On one hand, they have to recommend suitable products to their clients. On the other, they have to meet sales targets to keep their jobs.
Alvin claimed that relationship managers must sell about $1 million in investments every month, which works to about $60,000 worth of products a day.
He admitted that relationship managers in general could have been overly-aggressive in pushing the products. (He does not think he himself is over-aggressive.)
He has sold some structured products to relatives of colleagues and does not know how to face them now.
He has yet to find a new job despite sending resumes to other banks. He also does not mind a job in a different industry or a lower-paying job.
Meanwhile, he says he is having problems paying his insurance bills and housing instalments, and has resorted to selling his car.
But he remains optimistic.
'I've been there, done that. I won't be jobless for too long.'
‘Already Bankrupt’ GM Won’t Be Rescued by U.S. Loan
By Doron Levin and John Helyar
Dec. 12 (Bloomberg) -- For General Motors Corp., the question is no longer whether it will get a government loan or if Chief Executive Officer Rick Wagoner will be replaced. It’s whether anything can prevent the largest U.S. automaker from sliding into bankruptcy.
Even an offer by the Treasury Department today to provide temporary relief, after the Senate rejected a bailout plan approved by the House, isn’t likely to offset the Dec. 10 announcement that GM’s 49 percent-owned affiliate, GMAC LLC, lacked the capital to become a bank holding company. That means the financing unit won’t be able to access Treasury’s Troubled Asset Relief Program to help make auto loans.
GMAC may now have to file for Chapter 11 protection, with or without a loan, joining GM’s biggest parts supplier, Delphi Corp., which is already in bankruptcy. The Detroit-based automaker, leaking $67 million a day -- enough to buy a fleet of 1,800 Cadillac CTS coupes -- may soon be sucked into the vortex.
“GM already is bankrupt and should file for bankruptcy,” said David Littman, senior economist for the Mackinac Center for Public Policy, a policy research organization in Midland, Michigan. “They have too much overhead and too little time left to reduce size to be a survivor in this industry.”
The company eschewed the Chapter 11 option for months, believing it would make consumers unwilling to buy their cars. Lead director George Fisher said last week that bankruptcy is “way down the list of options.” GM has been working with New York lawyer Martin Bienenstock of Dewey & LeBoeuf to devise an option for using the bankruptcy process to restructure, according to a person familiar with the contingency plan.
Cash Concerns
A bankruptcy filing in the U.S. wouldn’t necessarily include overseas subsidiaries such as GM Europe, which builds Opel and Vauxhall automobiles. It would, said Alan Baum, manager of forecasting for Planning Edge, a consulting firm in Birmingham, Michigan, make a foreign supplier or partner “fear that a GM bankruptcy might eat up its cash.”
The Senate thwarted the government bailout in a procedural vote after talks failed in a dispute with Republicans over how quickly auto-union wages should be cut. Only 10 Republicans voted to move forward on the rescue plan.
GM shares fell about 4 percent to $3.94 in New York Stock Exchange composite trading as of 5:30 p.m.
To GM’s critics, worries about cash are three years too late. The financial crisis wasn’t the culprit that brought the company to the brink of insolvency, as Wagoner told Congress last month. It was just the final straw in a succession of unresolved or unaddressed issues.
Shrinking Sales, Value
Since 2005, GM has lost a cumulative $72.4 billion, had its debt downgraded to junk, watched its share of U.S. auto sales shrink by almost 1 million vehicles and shed 90 percent of its market value. It introduced gas-guzzling vehicles as fuel prices rose, failed to slim down its product offerings and dealer networks quickly enough and wasn’t able to cap its labor costs in time to stem the bleeding. In September 2007, the company won the right to hire new workers at lower wages starting in 2010 -- too far down the road to avoid the consequences of a recession and a credit crunch that engulf it now.
“We made mistakes,” Wagoner conceded at a Senate hearing last week. Among the errors, he said, were “failing to build sufficient flexibility into our operations and not moving fast enough to invest in smaller, more fuel-efficient vehicles.”
100th Birthday
Wagoner, 55, who has been CEO since 2000 and declined to be interviewed for this article, was also slow to see the impact of the credit crisis. On Sept. 16, the day after Lehman Brothers Holdings Inc. filed the biggest bankruptcy in U.S. history, he told reporters at a party at Detroit’s Renaissance Center marking the company’s 100th birthday that he saw “no big impact” on consumers. The next month GM’s auto sales in the U.S. plunged 45 percent.
After 77 years as the world’s largest automaker, GM and its executives were unable to embrace change. The company continued to plow resources into sport-utility vehicles and make bad alternative-fuel bets, even after consumer buying habits shifted. It rejected an offer from Carlos Ghosn, CEO of Renault SA and Nissan Motor Co., to form a global alliance. And it dismissed calls for radical restructuring from former board member Jerome York and other critics.
Ignoring Advice
York, 70, a former Chrysler Corp. finance chief, was advising Tracinda Corp. CEO Kirk Kerkorian, who had amassed a 9.9 percent stake in GM. He told analysts in January 2006 that the time had come for the automaker “to go into a crisis mode and act accordingly.” York calculated that GM was burning through cash at a rate of $24 million a day, which meant it had about 1,000 days before it ran out -- in October 2008.
GM ignored York’s advice to reduce its number of models, including getting rid of the Hummer and Saab brands, and to cut both management and labor costs in what he called an “equality of sacrifice.” He resigned nine months later, in October 2006, frustrated by the board’s unwillingness to take action. Only after York left did GM decide to sell Hummer. Now it’s talking about getting rid of Saab and Saturn, as well as Pontiac.
“Three years ago I thought GM had the time and financial resources to save itself,” York, now CEO of Harwinton Capital LLC, said in an interview. “Now I’m not so sure. Who’s responsible? Top management and the board of directors.”
Auto Bubble
Although York’s prediction was prescient -- GM has told Congress it will run out of cash by the end of the year if it doesn’t get relief -- what no one could foresee then were two developments that sealed GM’s fate: a run-up in gasoline prices and a credit-market freeze that followed Lehman’s collapse.
The frozen credit markets signaled the end of an era of easy money that delayed GM’s day of reckoning. In a parallel to the housing bubble, GM and its Big Three brethren enjoyed a decade of artificially inflated sales. Finance companies did a booming business in subprime auto loans, a rarity in 2000, which accounted for 18 percent of new-car financing by 2005, according to CNW Market Research in Bandon, Oregon. And the automakers’ own subsidiaries offered low-interest financing that helped move cars off dealers’ lots.
That did nothing to stem GM’s steady loss of market share in the U.S., from 30 percent in 2000 to 22 percent today. It did help keep the industry’s annual U.S. sales at or near record levels, topping 17 million vehicles.
Managed for Cash
“They were trying to delay the draconian measures they needed to take,” said Ashvin Chotai, managing director of Intelligence Automotive Asia Ltd., a consulting firm in London.
GM gave the bubble a boost with a zero percent “Keep America Rolling” financing campaign started eight days after the Sept. 11 terrorist attacks. Sales jumped 42 percent in October. The program got the company even more hooked on incentives than it had been in the 1980s. “Keep America Rolling” was followed by “Employee Pricing,” “Red Tag Specials” and other low-interest and rebate deals that made discounting the norm.
“It was a great initiative to prop up the market, but it’s a trap they fell into,” said Chotai, who estimates that annual U.S. auto sales would have fallen to 13 million to 14 million without incentives. “Nobody believes list price anymore, so you’ve destroyed your pricing power and you’ve diluted your brand.”
That’s only one way GM executives were short-sighted. It’s not that Wagoner, who received an MBA from Harvard University in 1977, doesn’t know management. It’s that between dwindling liquidity and its sky-high fixed costs, the company was increasingly managed for cash, even at the expense of profit.
‘Alternate Universe’
GM continued to build unprofitable models because it needed the cash to meet financial obligations, such as a roughly $5 billion annual health-care bill for workers and retirees. In 2007, even though GM posted a $38.7 billion net loss, it managed to generate $189 million in free-cash flow. That’s equivalent to burning the furniture in order to stay warm.
“These are not stupid people, but they had created an alternate universe,” said James Womack, co-author of “The Machine That Changed the World,” a book about the Toyota Motor Corp. production system that bested Detroit’s. “They lived in a cocoon. GM was weak for reasons that were under the surface, and the financial crisis brought it all out.”
To John Shook, a former Toyota manager who worked at a joint-venture plant run by the Japanese company and GM in Fremont, California, that explains why the two automakers are in such different shape today. When it comes to engineering and manufacturing, Shook says, Toyota and GM are about equal. Where they differ is in their corporate cultures.
“Toyota is built on trial and error, on admitting you don’t know the future and that you have to experiment,” Shook said. “At GM, they say, ‘I’m senior management. There’s a right answer, and I’m supposed to know it.’ This makes it harder to try things.”
‘Increasing Certitude’
So while Toyota assumed it must continuously adapt if it wanted to succeed in the U.S., Shook says, GM believed it would forever be the market leader. Its managers brought Toyota’s manufacturing methods from Fremont to Detroit. They couldn’t duplicate Toyota’s zen: question everything.
Wagoner, a 31-year GM veteran, was the embodiment of its culture, an apostle of incremental change. Exciting as a Saturn, quotable as an owner’s manual, the one-time Duke University basketball player exuded quiet confidence about GM’s future.
“I know that things will turn around,” he told Fortune magazine in February 2006, after problems erupted at the automaker. The magazine concluded in a cover story that “the evidence points, with increasing certitude, to bankruptcy.”
“GM people tend to internalize, to think that they can figure things out on their own,” said Don Runkle, chairman of Inkster, Michigan-based battery maker EaglePicher Inc. and a former GM chief engineer.
Perot Appalled
Over the years, the occasional outsider who entered the company with notions of shaking it up has been rejected as a foreign organism. GM acquired Electronic Data Systems Corp. for $2.55 billion in 1984 and gave its chairman, H. Ross Perot, a seat on the board. The brash Texan, appalled at GM’s ways, shocked directors by challenging then-CEO Roger Smith in meetings and publicly ridiculing the company.
“The first EDS-er to see a snake kills it,” Perot told Business Week in 1986. “At GM, first thing you do is organize a committee on snakes. Then you bring in a consultant who knows a lot about snakes. Third thing you do is talk about it for a year.”
In 1986, GM paid Perot $700 million for his stock and his resignation from the board.
Even when GM did make changes, they weren’t revolutionary. In 1992, a year when the automaker posted a $23.5 billion loss, Chairman and CEO Robert Stempel resigned under pressure after 27 months on the job. It named director John Smale, the retired CEO of Procter & Gamble Co., as non-executive chairman and appointed Jack Smith, a GM lifer, as CEO.
‘Run Common, Run Lean’
Smith invested in SUVs and pickup trucks, starving cars, especially smaller models where Japanese automakers dominated. He rode a wave of prosperity, cheap gasoline and a strong North American housing market to eight straight years of profitability and a record share price of $93.62 in April 2000 before turning over the wheel to his protégé, Wagoner.
While Smith’s mantra was “run common, run lean,” he never achieved the goal of creating shared platforms and standards that might have slashed operating costs. GM has long been penalized, compared with its Japanese rivals, by its capital costs. It develops scores of chassis to meet different consumer preferences around the world. Yet it wasn’t until this year, after more than a decade of reorganization, that the company introduced its first common chassis for use worldwide. It will serve a mid-size Opel Insignia in Europe and a new Buick LaCrosse to be built in the U.S. next year.
Pontiac Aztek
Smith was also unable to drive sales with novel products. The Pontiac Aztek, a mid-size crossover introduced in 1999 as “the most versatile vehicle on the planet,” was so unsightly, so badly received, it was voted the ugliest car of all time in an August 2008 poll by the London Telegraph. The model was discontinued in 2004.
Challenged by 2001’s twin shocks of recession and 9/11, the new CEO, who had spent most of his career in finance, fell back on what he knew best. Through its GMAC LLC unit, GM attracted ever more buyers with creative financing gambits. One was the “incentivized lease,” requiring no money down and low monthly payments. While that lured customers and stoked production, when the leases expired, GM had to write off the difference between a vehicle’s assumed value, for lease purposes, and its true market value. Since resale prices had been reduced by the surfeit of GM product on the market, so was the company’s profit.
Shattered Illusion
The illusion of prosperity would vanish when the era of easy money passed. In the first quarter of 2005, after 12 straight years of profit, GM lost $1.3 billion. The company’s guidance on March 15 that a loss was coming startled Wall Street. Investors beat down the company’s shares by 24 percent over the next four weeks.
On May 4, Kerkorian, 91, who had reaped $3 billion on a 10 percent stake in Chrysler that he sold in 1998, disclosed that he had amassed 3.9 percent of GM’s shares and was launching a tender offer for more. The next day Standard & Poor’s knocked the company’s bonds down to one grade below investment quality. GM, once the bluest of blue-chips, now had junkers for bonds.
Turnaround Plan
Wagoner unveiled a “turnaround plan” in November 2005. It called for closing nine plants, eliminating 30,000 jobs, boosting employee contributions to GM’s health-care plan, increasing investment in its best-selling models such as the Hummer and revamping marketing efforts.
To Kerkorian and York, who joined GM’s board in February 2006, that wasn’t bold enough. The plant closings and health- care changes saved only $2 billion a year, they said, and the company’s idea of innovation was more versions of the same thing: the SUVs and trucks whose sales had been carrying GM.
Others had come to a similar conclusion. A month after Wagoner’s plan was announced, S&P again downgraded GM’s debt and called bankruptcy “not far-fetched.”
Wagoner found the crisis talk overblown. He dismissed a flurry of Chapter 11 questions by saying there was “no plan, strategy or intention for GM to file for bankruptcy.”
In April 2006, Wagoner took charge of GM’s North America division. That same month, he announced the sale of 51 percent of GMAC to New York-based private-equity firm Cerberus Capital Management LP for $7.4 billion. The move was intended to improve GM’s liquidity and protect GMAC’s access to credit markets, which had been threatened by the parent company’s ratings.
Confidence Vote
Wagoner sought a vote of confidence from the board that month and got it -- though not from GM’s newest director. York said he thought more sweeping changes were needed and that they weren’t going to come from within.
He and Kerkorian began to pursue Ghosn, 54, who had pulled Nissan back from the brink of bankruptcy. In May, Kerkorian met with Ghosn in Nashville, Tennessee, and asked him to consider an alliance. Renault and Nissan would each take a 10 percent stake in GM, share resources and collaborate as a way of cutting costs and spurring change. Ghosn was interested, according to York, and said he’d want a seat on the GM board. That would give him influence over the company’s strategy and perhaps position him to succeed Wagoner.
Kerkorian then sent a letter to Wagoner. In GM fashion, the proposal was studied for months and brought to the board. For directors, it was another opportunity to show their confidence in the incumbent CEO. On Oct. 4, they put an end to any alliance talks. Two days later, York quit the board.
“I haven’t found an environment in the boardroom that is very receptive to probing much beyond the materials provided by management,” York wrote in his letter of resignation.
Twin Pillars
GM shares dropped 6.3 percent on the news, and over the next two months Kerkorian unwound his position in GM. He netted $106 million on his $1.7 billion investment, according to regulatory filings.
In 2007, the two pillars holding up the company began to crumble, and not even the deal to reduce labor costs with the United Auto Workers could save it.
First, the subprime-loan market imploded, hurting GMAC’s Residential Capital LLC unit. On Nov. 1, 2007, GMAC reported a third-quarter loss of $1.6 billion as a result of subprime- mortgage writedowns. Over the next three weeks, GM lost one- third of its market value.
$4.11 a Gallon
Then gasoline prices began climbing, topping out at an average price of $4.11 a gallon in July 2008, ending America’s love affair with SUVs and pickup trucks -- the very categories that Wagoner had staked the company’s future on in his 2005 turnaround plan.
It’s not as if other automakers hadn’t also favored trucks in recent years. Gas-guzzlers were more profitable than light vehicles and, as long as fuel was cheap, far more popular.
The problem was that GM so skewed its model lineup away from sedans that it was out of position when the market turned. To make matters worse, at the moment many Americans became concerned with getting better gas mileage and going “green,” GM was years behind on developing alternative-energy cars.
Toyota and Honda Motor Co. each introduced gas-electric hybrid cars in 1997 -- the Prius and Insight, respectively. GM engineers scoffed at both. These were small, odd-looking and costly to produce. Why would people buy a car whose price outweighed the gas savings? GM executives told reporters the hybrids were public-relations gimmicks.
EV1’s Demise
GM discontinued its one alternative-energy vehicle -- the battery-powered EV1 -- in 2003, after spending more than $1 billion on a car with limited range that flopped with consumers. Company engineers believed that cars powered by hydrogen fuel cells were the real future in this field.
“They knew the home run was 20 years away, and they weren’t willing to settle for singles and doubles in the meantime,” said Shook, the former Toyota manager. “At Toyota, they said, ‘We don’t know the future; let’s try something we can do right now.’”
Today, with Prius a hit with consumers, GM is scrambling to catch up. It has several hybrid models of its own and, with Congress badgering him to produce more alternative-energy cars, Wagoner has made their development a major part of the restructuring program for which he’s seeking $10 billion.
GM Apologizes
He conceded the error of his ways in June, when GM’s board gave the go-ahead to market the electric-powered Chevrolet Volt in 2010. “Axing the EV1 electric-car program and not putting the right resources into hybrids,” Wagoner told Motor Trend magazine, when asked to name his greatest mistake as CEO. “It didn’t affect profitability, but it did affect image.”
The confession may have come too late. As did an ad GM placed on Dec. 8 in the Automotive News, an industry publication, acknowledging it had “disappointed” Americans in recent years with its quality, design and reliance on trucks.
Without a reduction in debt and lower labor costs, GM may not weather the current slowdown in U.S. vehicle sales. Congressional critics have argued that the rescue plan passed by the House on Dec. 10 doesn’t give the government leverage to force substantive changes on management and labor. Even a bridge loan, said Edward Altman, a finance professor at New York University’s Stern School of Business, “is destined to fail.”
“They’ve actually done some terrific stuff,” said Womack, the author, who is chairman of management-training firm Lean Enterprise Institute in Cambridge, Massachusetts. “It’s just that the scale is so large and the changes came so late in the game. The band was all tuned up, the brass was polished, but the ship had already hit the iceberg.”
Correa Defaults on Ecuador Bonds, Seeks Restructuring
By Stephan Kueffner
Dec. 12 (Bloomberg) -- Ecuadorean President Rafael Correa halted payment on foreign bonds he calls “illegal” and “illegitimate,” putting the South American country in default for a second time in a decade.
The government won’t make a $30.6 million interest payment by Dec. 15, when a monthlong grace period expires, Correa told reporters in his office in Guayaquil. The $510 million bonds due in 2012 plunged to 23 cents on the dollar from 31 yesterday and 97.5 cents three months ago.
“I have given the order that interest payments not be made,” Correa said. “The country is in default.”
By defaulting, Correa, a close ally of Venezuelan President Hugo Chavez, fulfills a threat he has made since a 2006 presidential campaign that ended in a landslide victory. His decision comes as a deepening global economic slump throttles demand for oil, the country’s biggest export. Ecuador, which defaulted in 1999, owes about $10 billion to bondholders, multilateral lenders and other countries.
“I couldn’t allow the continued payment of a debt that by all measures is immoral and illegitimate,” Correa said. “It is now time to bring in justice and dignity.”
‘Serial Defaulter’
Correa, 45, said the government will present a restructuring proposal in coming days. “We want creditors to recoup part of their money,” he said.
“Ecuador is moving further into isolation,” said Vicente Albornoz, head of the Cordes research institute in Quito. “The hardliners in the government won.”
A debt commission Correa formed last year said in a 172- page report in November that the global bonds due in 2012 and 2030 “show serious signs of illegality,” including issuance without proper government authorization. Correa invoked the 30- day grace period on the interest payment last month, saying he wanted to analyze the commission’s findings.
“Ecuador is a serial defaulter,” said Arturo Porzecanski, an international finance professor at American University in Washington. “They defaulted in the 1980s, 1990s and this decade. A lot of other countries have had one or two defaults, but Ecuador tops them all.”
Correa, who holds a doctorate in economics from the University of Illinois at Urbana-Champaign, has said he will not sacrifice spending on health and education to pay the debt. Ecuador’s foreign obligations are equal to 21 percent of its $44 billion gross domestic product. Argentina’s debt, by comparison, was equivalent to 150 percent of its GDP when it defaulted in 2001, according to Goldman Sachs Group Inc.
‘Just Political’
Oil, which has plunged 67 percent since July amid the global financial crisis, accounts for about 60 percent of Ecuador’s exports. Finance Minister Maria Elsa Viteri said on Nov. 18 the country’s fiscal accounts remain “strong and healthy.” Ecuador had $5.65 billion in cash reserves as of Dec. 5, according to the central bank.
The default was triggered by the combination of the decline in oil with “a ridiculous ideology,” said Claudio Loser, the former director of the International Monetary fund’s Western Hemisphere department, who now is a scholar at the Inter- American Dialogue. “The financial need wasn’t so great that it was forced to declare a default,” Loser said.
The South American country has defaulted six times since it separated from Gran Colombia in 1830, according to “Debt Defaults and Lessons from a Decade of Crises,” a book published in 2007 by Federico Sturzenegger and Jeromin Zettelmeyer.
“It’s a final blow to external investors, and particularly any energy investors that may have retained interest or had future plans to attempt an investment in Ecuador,” said Enrique Alvarez, head of Latin America fixed-income research at IDEAglobal Inc. in New York.
The Passenger
I am a passenger
And I ride and I ride
I ride through the city's backside
I see the stars come out of the sky
Yeah, they're bright in a hollow sky
You know it looks so good tonight
I am a passenger
I stay under glass
I look through my window so bright
I see the stars come out tonight
I see the bright and hollow sky
Over the city's a rip in the sky
And everything looks good tonight
Singin' la la la la la-la-la la
La la la la la-la-la la
La la la la la-la-la la la-la
Get into the car
We'll be the passenger
We'll ride through the city tonight
See the city's ripped insides
We'll see the bright and hollow sky
We'll see the stars that shine so bright
The sky was made for us tonight
Oh the passenger
How how he rides
Oh the passenger
He rides and he rides
He looks through his window
What does he see?
He sees the sided hollow sky
He see the stars come out tonight
He sees the city's ripped backsides
He sees the winding ocean drive
And everything was made for you and me
All of it was made for you and me
'cause it just belongs to you and me
So let's take a ride and see what's mine
Singing...
Oh, the passenger
He rides and he rides
He sees things from under glass
He looks through his window's eye
He sees the things he knows are his
He sees the bright and hollow sky
He sees the city asleep at night
He sees the stars are out tonight
And all of it is yours and mine
And all of it is yours and mine
Oh, let's ride and ride and ride and ride...
Singing...
Fallout from Lehman Brothers collapse still spreading
Christine Seib in New York
December 13, 2008
When Dick Fuld left Lehman Brothers' headquarters at 745 Seventh Avenue for the last time on September 15, the broker-dealer he ran may have been defunct, but there were three like it still left. Three months after Lehman went bust, they are all gone and the reverberations of Lehman's collapse are still being felt across America.
All that remains of Lehman is bare bones. Two days after the bank declared itself bankrupt, Barclays bought Lehman's US investment banking business, its headquarters and two processing centres for $1.7 billion. Just over a week later, Nomura snapped up the European, Asian and Middle Eastern businesses. Last week, a management team gained control of the majority share of Lehman's coveted asset management arm.
The bank's fellow broker-dealers have also changed shape dramatically. On the day that Lehman went bust, Merrill Lynch announced that it would be bought by Bank of America in a $50 billion all-stock rescue deal. The so-called Thundering Herd had fallen into the hands of a conservative North Carolina-based financial behemoth.
The remaining two broker-dealers have become deposit-taking institutions. Fearful of another Lehman-style implosion, on September 22 the Federal Reserve gave Goldman Sachs and Morgan Stanley approval to morph into high street banks in the hope that a base of retail and commercial deposits would provide a much-needed cash buffer from the global financial storm.
Lehman's surprise collapse - the market had expected the US Government to rescue the stricken bank just as it had organised the sale of Bear Stearns to JPMorgan six months earlier - set off a chain reaction around the world. The bank's default on $165 billion in unsecured debt hit investors with an estimated $120 billion in losses. The credit default swap (CDS) market, of which Lehman had been a major player, dried up. The commercial paper market, where investors had bought Lehman's debt, froze. Companies began eating up unused portions of credit lines and stashing the money away in fear that their lenders would pull their funding. As a result, banks quickly ran out of liquidity.
However, Lehman was not just Wall Street's problem. AIG teetered on the brink of collapse as investors and counterparties panicked about the insurance giant's own exposure to the estimated $60 trillion global CDS market. As a result the Federal Reserve was forced to abandon the moral-hazard high ground and hand over $85 billion in emergency money to AIG.
It took only a day for Lehman to infect mom-and-pop investors. Money market funds try to ensure that their net asset value (NAV) never slips below $1 so that they appeal to people wanting stable homes for retirement savings. But on September 16 the Primary Reserve Fund, the oldest money market fund in America, told its investors that its NAV had dropped to 97cents because of losses on $900 million worth of Lehman debt. When Primary “broke the buck”, slashing pension pots, the panic hit its zenith.
Henry Paulson, the Treasury Secretary, needed something to douse the flames in Wall Street. By September 21 Congress was considering his request for $700 billion to buy troubled assets from financial institutions. But during the two weeks that it took to approve the necessary legislation, the markets continued to fall. By October 3, when the bailout was approved, Mr Paulson said that buying assets would not be enough - the US Government needed to take equity stakes in banks to strengthen their balance sheets.
The Treasury Secretary has since used about $335 billion of the bailout fund, disbursing the cash to at least 52 companies in 25 states, including an agreement with Citi to inject an extra $20 billion, on top of the $25 billion the bank received in October.
The flight to quality has sent the income from Treasury bonds to record lows. Investors have piled more than $100million into money market funds in the past month, pushing up demand for Treasury bills which this week were trading at a negative implied yield for the first time since 1940.
Three months after Lehman, the market for some assets remains dead. Figures compiled by Thompson Financial show that there have been only two issues of high-risk, high-yield debt since the bank went bust. Mortgage-backed debt has continued to sell in the past three months, although with far fewer issues per week. The market for sub-prime and Alt-A mortgage-backed securities, however, is gone. No one is buying collateralised loan obligations (CLOs) and the CDS market remains in tatters. Issuance of asset-backed securities is patchy, with at least three weeks since September 15 in which there were no sales. Yet investment grade debt has continued to sell at relatively normal levels.
Commercial paper, an important source of short-term funding for many companies, has picked up in the past six weeks, largely because of a Federal Reserve funding facility that has bought $300billion worth of the assets over the past seven weeks. For non-financial companies, the cost of borrowing using commercial paper is at a ten-year low. US bank lending, including commercial and consumer credit, is at record highs, indicating that households and companies are not struggling across the board to get loans. Local governments are issuing municipal bonds at the same level as before the credit crunch. And real estate lending hit a record high in October.
Octavio Marenzi, the head of Celent, a financial services consultancy, said: “Markets are very resilient. When people see opportunities, they'll jump in. People are being more cautious but in aggregate, they'll still participate. People still think more money is better than less money.
A Nightmare Before Christmas
by Peter Schiff, Euro Pacific Capital
December 12, 2008
Like many pragmatic economists I have always warned that rapid expansions of government debt would result in inflation and higher interest rates. The explanation was always simple: rising supply of government debt inflates the money supply and weakens the government’s ability to service its debt through legitimate means.
But in recent months, government has flooded the market with hundreds of new Treasury obligations and telegraphed its intention to increase the deluge even more. In response, both bond prices and the dollar have risen. This benign reaction has led many to the happy conclusion that the doom and gloomers are wrong and that bailouts and economic “stimuli” can be financed with deficit spending without any adverse consequences on interest rates or consumer prices. Recent action in the foreign exchange markets suggests these hopes will prove illusory. The renewed strength in gold, together with the long over do rupture of the correlation between the movements of foreign currencies and U.S. equities, is further evidence that recent market dynamics are changing.
When the financial crisis of 2008 kicked into high gear in September, the U.S. dollar began to rally furiously. While America’s economic ship was sinking from stem to stern, its currency was becoming the must have asset for public and private investors around the world. The dollar benefitted from the positive flows that result from massive global deleveraging. Treasuries got an added boost from a reflexive flight to “safety.” As a result, politicians were able to fill out their Christmas wish lists with complete confidence that Santa would deliver. However, as these dollar-positive forces appear to be giving way, the Grinch is about make an unwanted appearance.
Last weekend Barack Obama announced his intention to implement a New Deal-style stimulus and public works program. What he somehow forgot to mention is that the United States is wholly dependent on the willingness of foreign creditors to supply the funds. But a weakening dollar makes continued foreign purchase of U.S. Treasuries a much more difficult decision.
Once the dollar begins to collapse beneath the weight of all this new deficit spending, accumulation of contingency liabilities, and the socialization of our economy, commodity prices and interest rates will head skyward. In addition, once all the going out of business sales at U.S. retailers are over, and excess inventories have been reduced, watch for big price increases at the consumer level as well.
Once the government runs out of foreign and private sector bidders for new treasuries, the Federal Reserve will be the only buyer, and the hyper-inflation cat will be completely out of the bag. Sensing this, the Fed has recently indicated a desire to begin issuing its own bonds. However, since dollars are already recorded as liabilities on the Fed’s balance sheet (dollars are in actuality Federal Reserve Notes) the Fed already issues debt. The difference now is that they are proposing to issue interest bearing debt. Perhaps the Fed feels this will make holding its notes more appealing. However, since the interest will be paid in more of its own script, I do not believe this con will work.
In the end, rather than filling our stockings with Christmas goodies, our foreign creditors will likely substitute lumps of coal. Of course given how high coal prices will ultimately rise as a result of all this inflation, in Christmas Future perhaps our stockings will be stuffed with nothing but our own worthless currency. It might night burn as well as coal, but at least we will have plenty of it.
Fear triggers gold shortage, drives US treasury yields below zero
The investor search for a safe places to store wealth as the financial crisis shakes faith in the system has caused extraordinary moves in global markets over recent days, driving the yield on 3-month US Treasuries below zero and causing a rush for physical holdings of gold.
By Ambrose Evans-Pritchard
11 Dec 2008
"It is sheer unmitigated fear: even institutions are looking for mattresses to put their money until the end of the year," said Marc Ostwald, a bond expert at Insinger de Beaufort.
The rush for the safety of US Treasury debt is playing havoc with America's $7 trillion "repo" market used to manage liquidity. Fund managers are hoovering up any safe asset they can find because they do not know what the world will look like in January when normal business picks up again. Three-month bills fell to minus 0.01pc on Tuesday, implying that funds are paying the US government for protection.
"You know the US Treasury will give you your money back, but your bank might not be there," said Paul Ashworth, US economist for Capital Economics.
The gold markets have also been in turmoil. Traders say it has become extremely hard to buy the physical metal in the form of bars or coins. The market has moved into "backwardation" for the first time, meaning that futures contracts are now priced more cheaply than actual bullion prices.
It appears that hedge funds in distress are being forced to cash in profits on gold futures to cover losses elsewhere or to meet redemptions by clients. But smaller retail investors – and perhaps some big players – are buying bullion in record volumes to store in vaults.
The latest data from the World Gold Council shows that demand for coins, bars, and exchange traded funds (ETFs) doubled in the third quarter to 382 tonnes compared to a year earlier. This matches the entire set of gold auctions by the Bank of England between 1999 and 2002.
Peter Hambro, head Peter Hambro Gold, said the data reflects a "remarkable" shift in the structure of the market. The rush to safety reflects a mix of fears about the fragility of world finance and concerns that the move towards zero interest rates could set off an inflationary surge further down the road, and possibly call into question the worth of some paper currencies.
The near paralysis in the "repo" markets may prove to be no more than pre-Christmas jitters as banks square their books.
However, there are some signs that extreme monetary stimulus by the US Federal Reserve and other banks is starting to have unintended consequences.
The Bank of Japan is it is reluctant to cut its rates to zero again because of the damage this causes to the money markets, which serve as a key lubricant of the credit system. The US is now starting to face the same dilemma.
List of potential victims grows in NY fraud case
List of potential victims grows in $50 billion fraud case linked to NY adviser
Tom Hays, Larry Neumeister and David B. Caruso
December 13, 2008
NEW YORK (AP) -- Investors who put their fortunes in the hands of arrested New York money manager Bernard Madoff are waiting to hear how much of their stake is left.
The roster of potential victims in what prosecutors said was a $50 billion Ponzi scheme has grown exponentially longer in the past few days.
Madoff, 70, said in regulatory filings that he only had around 25 clients, but it has become apparent that the list of people who lost money may number in the hundreds or even thousands.
Among those who have acknowledged potential losses so far: Former Philadelphia Eagles owner Norman Braman, New York Mets owner Fred Wilpon and J. Ezra Merkin, the chairman of GMAC Financial Services.
A charity in Massachusetts that supports Jewish programs, the Robert I. Lappin Charitable Foundation, said it had invested its entire $8 million endowment with Madoff. The organization's executive director said she doesn't expect it to survive.
Other institutions that believed they had lost millions included The North Shore-Long Island Jewish Health System and the Texas-based Julian J. Levitt Foundation.
Hedge funds and other investment groups looked like big losers too. The Fairfield Greenwich Group said it had some $7.5 billion in investments linked to Madoff. A private Swiss bank, Banque Benedict Hentsch Fairfield Partners SA, said it had $47.5 million worth of client assets at risk.
The losses may have extended far beyond the coffers of the wealthy and powerful.
The town of Fairfield, Conn., said it placed nearly 15 percent of its retiree pension fund with Madoff. Officials were scrambling to determine how much of the $42 million remained.
Harry Susman, an attorney in Houston, said he represents a group of clients who had unknowingly become entangled in the scandal by investing in a hedge fund managed by Merkin, which then put almost all of its $1.8 billion in capital in Madoff's hands.
"They had no idea they had exposure," Susman said. He said his clients were now dumbfounded as to how the fund came to invest all of its holdings with just one man, especially since concerns had been circulating for years about Madoff's operations.
For decades, Madoff had dual reputations among investors. Many wealthy New Yorkers and Floridians considered him a reliable investment whiz. Others, more skeptical, had questioned whether his returns were real, pointing to the firm's secrecy and lack of a big-name auditor.
But when he met privately with a family member at his firm earlier this month, something clearly was amiss.
First, federal authorities say the 70-year-old Madoff surprised the unidentified family member by saying he wanted to pass out hefty annual bonuses two months earlier than usual, court papers said. Then, when challenged on the idea, he said he "wasn't sure he would be able to hold it together" if they continued the discussion at the office, and invited him to his apartment.
It was the beginning of a stunning meltdown for the former Nasdaq stock market chairman.
Madoff himself described his investment business as an unsophisticated "Ponzi scheme," according to investigators who interviewed him.
Perhaps more startling than the loss was that it apparently caught regulators and investigators off guard, only coming to light last week when Madoff's own family turned him in.
The core of the scheme -- taking investments from one client to pay returns to another -- "has been around since the beginning of time," said Marc Powers, a former Securities and Exchange Commission enforcement chief and head of the securities practice at Baker Hostetler.
The firm somehow pulled off the fraud despite being subject to examination by the SEC, Powers added. "You wonder how these things escaped the normally careful review of these regulatory organizations."
The latest dose of bad news in the world of finance has left Madoff's clients "panicked," said Stephen A. Weiss, a lawyer for several dozen investors. "These people are sorrowful. These people are angry. And many are now destitute."
The wave of ill will -- fuel for inevitable lawsuits -- was aimed at a man who had cultivated an image as a straight-shooter with a personal touch.
The day after his arrest, his company's Web site still boasted that "in an era of faceless organizations ... Bernard L. Madoff Investment Securities LLC harks back to an earlier era in the financial world: The owner's name is on the door."
It went on to say "Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing, and high ethical standards that has always been the firm's hallmark."
Madoff's resume was the stuff of Wall Street legend: He founded his company in 1960 with $5,000 he earned in part working as a lifeguard on Long Island beaches while putting himself through Hofstra University Law School. It eventually became one of five broker-dealers that spearheaded the formation of the Nasdaq Stock Market, where he served as a member of the board of governors in the 1980s and as chairman of the board of directors in the early '90s.
By 2001, Madoff's firm was one of the three top market makers in Nasdaq stocks and the third-largest firm matching buyers and sellers of securities on the New York Stock Exchange, according to Baron's.
Investigators say Madoff's crime originated in a separate and secretive investment-advising business.
Madoff apparently kept the loss a secret even from his two sons and other family members who work at the firm until he and two of them retreated to his apartment occupying the entire 12th floor of an Upper East Side building on Dec. 9, according the complaint drawn up by an arresting FBI agent.
"It's all just one big lie," he told his family. He confided he had blown the money in what was "basically, a giant Ponzi scheme," the complaint added.
Several attorneys representing investors, however, have questioned how he could have acted alone, given the size of the alleged fraud and vast holdings of his firm.
According to the court complaint, Madoff told his family he expected to end up behind bars, but wanted to execute his own version of a bailout package by doling out $200 to $300 million he had left to family, friends and employees. After the meeting, a lawyer for the family contacted regulators, who alerted the federal prosecutors and the FBI.
Madoff was in a bathrobe when two FBI agents arrived at his door unannounced at 8:30 a.m. on Dec. 11. He invited them in, then confessed after being asked "if there's an innocent explanation," the complaint said.
Responded Madoff: "There is no innocent explanation."
Fed Refuses to Disclose Recipients of $2 Trillion
By Mark Pittman
Dec. 12 (Bloomberg) -- The Federal Reserve refused a request by Bloomberg News to disclose the recipients of more than $2 trillion of emergency loans from U.S. taxpayers and the assets the central bank is accepting as collateral.
Bloomberg filed suit Nov. 7 under the U.S. Freedom of Information Act requesting details about the terms of 11 Fed lending programs, most created during the deepest financial crisis since the Great Depression.
The Fed responded Dec. 8, saying it’s allowed to withhold internal memos as well as information about trade secrets and commercial information. The institution confirmed that a records search found 231 pages of documents pertaining to some of the requests.
“If they told us what they held, we would know the potential losses that the government may take and that’s what they don’t want us to know,” said Carlos Mendez, a senior managing director at New York-based ICP Capital LLC, which oversees $22 billion in assets.
The Fed stepped into a rescue role that was the original purpose of the Treasury’s $700 billion Troubled Asset Relief Program. The central bank loans don’t have the oversight safeguards that Congress imposed upon the TARP.
Total Fed lending exceeded $2 trillion for the first time Nov. 6. It rose by 138 percent, or $1.23 trillion, in the 12 weeks since Sept. 14, when central bank governors relaxed collateral standards to accept securities that weren’t rated AAA.
‘Been Bamboozled’
Congress is demanding more transparency from the Fed and Treasury on bailout, most recently during Dec. 10 hearings by the House Financial Services committee when Representative David Scott, a Georgia Democrat, said Americans had “been bamboozled.”
Bloomberg News, a unit of New York-based Bloomberg LP, on May 21 asked the Fed to provide data on collateral posted from April 4 to May 20. The central bank said on June 19 that it needed until July 3 to search documents and determine whether it would make them public. Bloomberg didn’t receive a formal response that would let it file an appeal within the legal time limit.
On Oct. 25, Bloomberg filed another request, expanding the range of when the collateral was posted. It filed suit Nov. 7.
In response to Bloomberg’s request, the Fed said the U.S. is facing “an unprecedented crisis” in which “loss in confidence in and between financial institutions can occur with lightning speed and devastating effects.”
Data Provider
The Fed supplied copies of three e-mails in response to a request that it disclose the identities of those supplying data on collateral as well as their contracts.
While the senders and recipients of the messages were revealed, the contents were erased except for two phrases identifying a vendor as “IDC.” One of the e-mails’ subject lines refers to “Interactive Data -- Auction Rate Security Advisory May 1, 2008.”
Brian Willinsky, a spokesman for Bedford, Massachusetts- based Interactive Data Corp., a seller of fixed-income securities information, declined to comment.
“Notwithstanding calls for enhanced transparency, the Board must protect against the substantial, multiple harms that might result from disclosure,” Jennifer J. Johnson, the secretary for the Fed’s Board of Governors, said in a letter e-mailed to Bloomberg News.
‘Dangerous Step’
“In its considered judgment and in view of current circumstances, it would be a dangerous step to release this otherwise confidential information,” she wrote.
New York-based Citigroup Inc., which is shrinking its global workforce of 352,000 through asset sales and job cuts, is among the nine biggest banks receiving $125 billion in capital from the TARP since it was signed into law Oct. 3. More than 170 regional lenders are seeking an additional $74 billion.
Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson said in September they would meet congressional demands for transparency in a $700 billion bailout of the banking system.
The Freedom of Information Act obliges federal agencies to make government documents available to the press and public. The Bloomberg lawsuit, filed in New York, doesn’t seek money damages.
‘Right to Know’
“There has to be something they can tell the public because we have a right to know what they are doing,” said Lucy Dalglish, executive director of the Arlington, Virginia-based Reporters Committee for Freedom of the Press.
“It would really be a shame if we have to find this out 10 years from now after some really nasty class-action suit and our financial system has completely collapsed,” she said.
The Fed’s five-page response to Bloomberg may be “unprecedented” because the board usually doesn’t go into such detail about its position, said Lee Levine, a partner at Levine Sullivan Koch & Schulz LLP in Washington.
“This is uncharted territory,” said Levine during an interview from his New York office. “The Freedom of Information Act wasn’t built to anticipate this situation and that’s evident from the way the Fed tried to shoehorn their argument into the trade-secrets exemption.”
The Fed lent cash and government bonds to banks that handed over collateral including stocks and subprime and structured securities such as collateralized debt obligations, according to the Fed Web site.
Borrowers include the now-bankrupt Lehman Brothers Holdings Inc., Citigroup and New York-based JPMorgan Chase & Co., the country’s biggest bank by assets.
Banks oppose any release of information because that might signal weakness and spur short-selling or a run by depositors, Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group, said in an interview last month.
‘Complete Truth’
“Americans don’t want to get blindsided anymore,” Mendez said in an interview. “They don’t want it sugarcoated or whitewashed. They want the complete truth. The truth is we can’t take all the pain right now.”
The Bloomberg lawsuit said the collateral lists “are central to understanding and assessing the government’s response to the most cataclysmic financial crisis in America since the Great Depression.”
In response, the Fed argued that the trade-secret exemption could be expanded to include potential harm to any of the central bank’s customers, said Bruce Johnson, a lawyer at Davis Wright Tremaine LLP in Seattle. That expansion is not contained in the freedom-of-information law, Johnson said.
“I understand where they are coming from bureaucratically, but that means it’s all the more necessary for taxpayers to know what exactly is going on because of all the money that is being hurled at the banking system,” Johnson said.
The Bloomberg lawsuit is Bloomberg LP v. Board of Governors of the Federal Reserve System, 08-CV-9595, U.S. District Court, Southern District of New York (Manhattan).
Harvard Hit by Loss as Crisis Spreads to Colleges
By JOHN HECHINGER and CRAIG KARMIN
DECEMBER 4, 2008
Harvard University's endowment suffered investment losses of at least 22% in the first four months of the school's fiscal year, the latest evidence of the financial woes facing higher education.
The Harvard endowment, the biggest of any university, stood at $36.9 billion as of June 30, meaning the loss amounts to about $8 billion. That's more than the entire endowments of all but six colleges, according to the latest official tally.
Harvard said the actual loss could be even higher, once it factors in declines in hard-to-value assets such as real estate and private equity -- investments that have become increasingly popular among colleges. The university is planning for a 30% decline for the fiscal year ending in June 2009.
Other university endowments also are suffering, and many states are cutting public funding of higher education. Colleges are instituting hiring freezes, planning enrollment cuts and discussing steep tuition increases, intensifying worries about the impact of the recession and financial crisis on college access.
The federal government already has taken emergency steps to boost lending to students, and several well-off colleges have said they will maintain or boost financial aid to help families hurt by job losses, investments setbacks and borrowing problems. But not all colleges have the financial heft to withstand the many forces bearing down on them.
Joni Finney, a professor at the University of Pennsylvania who studies college economics, says she worries that public universities and less-wealthy, smaller private colleges may not be able to keep their doors open to all students. "If you go down the food chain of higher education, it's harder and harder to deal with these kinds of cuts," she says.
Private-college budgets are sensitive to investment declines because they typically tap their endowments each year to help cover operating expenses.
The University of Virginia Investment Management Co. said it lost nearly $1 billion, or 18%, of its endowment over the four-month period, reducing it to $4.2 billion. In Vermont, Middlebury College says its endowment fell 14.4%, to $724 million. In Iowa, Grinnell College's endowment dropped 25%, to $1.2 billion. In Massachusetts, Amherst College says its endowment, $1.7 billion as of June 30, also fell by 25%.
In a letter to Harvard's deans, university President Drew Gilpin Faust and another official blamed "severe turmoil in the world's financial markets" for the endowment loss. She said it would lead to budget cuts, and that the school would sell bonds to increase its financial flexibility.
The Harvard letter said the 22% loss, from July 1 through Oct. 31, understates the actual decline because it doesn't reflect assets such as real estate whose values couldn't yet be estimated. Currently, endowment income funds 35% of Harvard's $3.5 billion budget.
The 30% fiscal-year loss Harvard is planning for would eclipse the loss of 12.2% in 1974, its worst over the last 40 years.
Harvard's loss marks a sharp reversal from the endowment's formerly chart-topping performance. Harvard and Yale University -- which hasn't disclosed its endowment's recent performance -- pioneered an investment approach that de-emphasized U.S. stocks and bonds and placed large sums in more exotic and illiquid investments, including timberland, real estate and private-equity funds. That strategy, which was widely copied, helped the schools avoid significant losses after the technology boom ended in 2000.
But the current market has been far less favorable, partly because both Harvard and Yale have relatively small holdings of bonds, such as U.S. Treasurys, one of the few assets that have performed well. Harvard began its fiscal year with a target of having 33% invested in publicly traded shares, split among U.S. stocks, which have dropped 24% in the four months through October, and international stocks, which have fared worse.
Other investments, such as commodities, which were a boon to Harvard in past years, have turned negative in recent weeks. Harvard has sought to sell off about $1.5 billion in investments with private-equity firms, which typically use their assets to fund corporate takeovers, according to people familiar with the situation. That would be one of the largest sales ever of a private-equity stake. But its private-equity partnerships received bids of only around 50 cents on the dollar, say other people familiar with the matter.
Daniel Jick, chief executive officer at Boston-based HighVista Strategies, which handles money for some endowments, says that in some prior years, investments such as real estate and private equity have helped buffer endowments against losses on stocks.
In her letter, Harvard's Dr. Faust said the endowment loss has "major implications for our budgets and planning, especially since our other principal revenue streams also stand to be challenged by the economic crisis." Along with federal research funding, universities rely heavily on tuition and donations. Strained family finances could make it difficult for more families to afford tuition, while stock-market declines typically curb gifts.
To maintain its programs and commitments, the letter said, Harvard is expecting to spend a higher percentage of its endowment than it had recently. It said it was taking a "hard look at hiring, staffing levels and compensation," and was "reconsidering the scale and pace of planned capital projects."
Sperm quality linked to cleverness
By Clive Cookson, Science Editor
December 6 2008
Intelligent men produce better quality sperm, researchers have found. They say the discovery suggests an unexpectedly close relationship between intelligence and general evolutionary fitness.
The researchers, based at the Institute of Psychiatry in London, set out to test the controversial hypothesis that people with greater intelligence are healthier - not just because of lifestyle factors but because they are fitter in an underlying genetic sense.
"We took two characteristics that seemed, on the surface, unlikely to be associated with each other - intelligence and sperm quality - and tested whether there was a statistical relationship between them," said Rosalind Arden, lead author of the study, which was published on Friday in the journal Intelligence.
"We found a small positive relationship: brighter men had better sperm," added Ms Arden. "This association wasn't caused by habits like avoiding smoking or drinking - the big hitters of health."
The study was based on the analysis of 425 former US soldiers who had provided semen samples and undergone intensive testing for intelligence and lifestyle factors. After adjusting for lifestyle, the results show small but statistically significant correlations between intelligence and three measures of sperm quality.
"This does not mean that men who prefer Play-Doh to Plato always have poor sperm: the relationship we found was marginal," said Ms Arden. "But our results do support the theoretically important 'fitness factor' idea."
"Fitness factor" is the proposal that there is an underlying relationship across many inherited characteristics, including intelligence, that makes some people more successful than others at reproducing.
Your Memory Is Bigger and Better Than Scientists Expected
by Sunita Reed
December 3rd, 2008
The Devil is in the Details
If you’re tired of hearing about memory loss, there’s some encouraging research from Massachusetts Institute of Technology http://web.mit.edu/ about how good people’s visual memory really is.
Psychologist Aude Oliva and graduate student Timothy Brady found inspiration for their study in Lionel Standing’s famous research conducted in the early 1970s. Standing’s study demonstrated that after viewing 10,000 images, people could look at pairs of images and remember which one they had seen with 83-percent accuracy. While it proved that people could recall large numbers of images, the study did not test how much detail within the pictures people could retain.
That’s what Oliva wanted to test. Her team asked volunteers, aged 18 to 35, to participate in a grueling memory test. Over the course of five hours, each volunteer watched a monitor as approximately 3,000 images of common objects–like corkscrews, donuts, and cell phones–appeared for just three seconds each. The researchers told volunteers to try to remember as many details as they could.
After a 20-minute break, they were shown pairs of images and had to determine if they had seen them before. However there was more to it than in Standing’s study. Volunteers had to remember very specific details of the images to get the answer correct. For example they had to determine not only whether they had seen a cell phone, but also whether it was open or closed.
Brady says before the study was conducted, the four members of the research team had to make written predictions about how well the volunteers would perform. While they all thought that volunteers would be able to remember, for instance, that they had seen a donut, none of them were betting that the volunteers would remember the small details.
“We all agreed that pretty much nobody would be able to remember all of the details of all of the objects,” says Brady. "But in fact they were able to do that."
Results showed that the volunteers were right almost 90-percent of the time.
If you’re thinking that the volunteers were MIT students and probably had a better memory than the average person, think again. Oliva says they were members of the local community from all walks of life. If these findings surprise you, imagine what the researchers thought. After all, if they had placed bets on their predictions, they all would have lost.
“Certainly it has changed my views about what’s possible in memory,” says Brady.
Tip For Better Memory
But if people’s memory for detailed information is so good, why do most people forget simple things like where they parked their car? Oliva says one key is making an effort to really look. After all, in the study the researchers instructed volunteers to remember as much as they could.
“Pay attention to the visual details. Pay attention where you put your keys, where you park your car,” advises Oliva.
She says spending those few extra moments to concentrate on details and use your visual memory could spare you from the many annoying lapses of memory. Next, Oliva plans to conduct brain imaging studies to see how the brain encodes those massive amounts of detail into memory.
Post a Comment