The graft trial of former Taiwanese president Chen Shui-bian is scheduled to begin later this month under a new judge - the third in the case - after his lawyers lodged a fresh appeal yesterday.
The Taipei District Court would hold preliminary hearings from January 19 to 21 in Chen’s trial on money laundering and other charges, the island’s official Central News Agency said. It said the procedures would include opening statements from Chen’s lawyers and officials from the Supreme Prosecutors’ Office. The trial would resume in February after the Lunar New Year holiday. The judge will be Chen Fung-chun, the third judge appointed to preside over Chen’s case.
Chen was taken back into custody, after a 12-hour bail hearing in the court last Tuesday, because prosecutors feared he might flee or collude with witnesses.
But his lawyers said he would not flee, as he had never been absent from any trials or hearings. Judge Chou Chan-chun ordered Chen’s release on December 13, the day after his indictment. He had been in custody for more than a month.
Judge Chou also allowed his initial ruling to stand after the island’s High Court ordered a review, prompting the High Court to order a second rehearing and appoint Judge Tsai Shou-hsun to take over the case.
Chen’s legal team vowed yesterday to get him home to spend Lunar New Year with his family.
Chen’s lawyers contend the case had been influenced by politics because his return to the detention centre was decided by Judge Tsai, who is also in charge of former first lady Wu Shu-chen’s corruption case and two other related cases.
“Indeed, it’s the High Court that ordered Judge Tsai to handle the case,” lawyer Shih Yi-lin said. “We believe the administration’s influence has stepped into our judicial system this time.
“We can’t agree with it because there are conflicts with the two independent cases merged together, since then.”
Chen, 57, is charged with collaborating with his wife to embezzle, forge documents and launder money.
According to the 209-page indictment, the amounts included NT$141 million (HK$33 million) in embezzled secret state funds, and bribes of NT$100 million and US$8.73 million from developers of two projects.
Chen told visitors to his detention centre that he had been busy writing a book called Letters to 50 People, including his successor as Taiwanese president, Ma Ying-jeou, and President Hu Jintao .
“In this book, Chen said he would advise all Democratic Progressive Party members to unite and have the foresight to make sure that our enemy is ... Hu Jintao, not Mr. Ma,” said DPP legislator Ke Chien-min, who accompanied Chen’s son, Chen Chih-ching, and daughter-in-law, Huang Jui-ching, in a visit yesterday.
After a year of epic financial crisis, 2009 will — if all goes well — be a time for digging ourselves out of the mess and figuring out how to prevent a repeat. Before we can do that, we have to have some idea of what went wrong. People are still arguing about what caused the Depression of the 1930s, so don't expect a definitive diagnosis anytime soon. But here's my current list of blame, or at least the first dozen items on it, in descending order of culpability.
Hardly anyone expected things to go wrong because things hadn't gone truly, pants-wettingly, oh-my-god wrong on the financial front in the U.S. since the 1930s. Yes, there had been deep stock-market slumps in the 1970s and early 2000s, real estate busts in the 1980s and early 1990s and occasional short-lived financial scares like the Asian crisis of 1997. But the U.S. hadn't been through a serious panic in the memory of most everyone on Wall Street and in government. We began to behave as if one couldn't happen; we were told it couldn't. Blithe behavior begat trouble. The upside is that everybody is now so shellshocked that we probably don't have to worry about a repeat anytime soon.
2. Alan Greenspan
It was to smother financial panics that Congress created the Federal Reserve in 1913. During Greenspan's tenure as chairman, the Fed jumped in to keep the 1987 stock-market crash, the 1998 Long-Term Capital Management scare and the 2000-01 tech-stock collapse from spiraling into something worse. But that very successful firefighting fostered the risk-ignoring attitudes that brought on a conflagration. There are some — like 2008 presidential candidate Ron Paul — who argue that the lesson here is that we'd be better off without the Fed. A more palatable interpretation is that if the Fed is going to step in to prevent panics, it needs to do more to deflate the bubbles that inevitably precede those panics. Fed policy over the past quarter-century has been asymmetrical: it bailed institutions out of trouble but did ever less to restrain them during fulsome times. That has to change.
3. Twisted Regulation
What has happened in the financial sector since the 1970s isn't exactly deregulation. Banks have remained as closely supervised as ever. But new institutions that grant mortgages, lend money, fund deals — businesses once monopolized by banks — have been allowed to grow with little oversight. Lawmakers and regulators responded in the 1990s not by setting parameters for these new players — investment banks, hedge funds, private-equity funds, etc. — but by giving bank holding companies more freedom to enter underregulated lines of business. The perverse result was that the new and untested gained an unfair advantage over the tried and true.
4. Wall Street
The shift of financial activity from bank balance sheets to the off-balance-sheet realm of securitization and derivatization loosely defined as Wall Street wouldn't have been such a disaster if it had actually worked as advertised — spreading risk, encouraging innovation, bringing the best minds to bear on the biggest financial problems. Instead, Wall Street's leaders did an atrocious job — rewarding the foolhardy, steering capital to the least productive uses and running away from responsibility for their errors. And they got paid tens of millions of dollars a year for it.
5. The Home Ownership Obsession
During the 2008 election campaign, Republicans attempted to pin blame for the crisis on the Community Reinvestment Act (CRA) and mortgage giants Fannie Mae and Freddie Mac. Nice try: there's virtually no evidence to back up the CRA charge, and while Fannie and Freddie aren't blameless, they were mostly sidelined during the worst of the mortgage frenzy, from 2003 to 2006. But the decades-long, bipartisan government effort to encourage homeownership — of which CRA, Fannie and Freddie were but a small part — did tragically overshoot the mark. Homeownership generally is a good thing. Massively subsidizing it via the tax code might not be so smart. And turning a blind eye to crazy lending practices because they seem to encourage it definitely is not.
6. Too Much Money
Lots of people worried for years that the gigantic trade deficits the U.S. ran up with first Japan and then China were hurting domestic manufacturers. But the flip side of those trade deficits — gigantic capital flows into the U.S. — may have been even more dangerous. It was the capital gusher from China in particular that inflated the 2000s real estate bubble.
7. The Myth of the Rational Market
For decades, the accepted academic response to concerns that the economy might be on an unsustainable trajectory was that financial markets knew best. Got a backup? Markets are spectacularly efficient processors of information and opinion. But they also have a by-now-well-documented tendency to overshoot on both the upside and the downside.
8. You and Me
None of this would have happened if millions of us hadn't come to believe we could get something for nothing by taking on debts we couldn't repay. That this misconception was fostered by lenders and politicians is a partial excuse but not a complete one. Thanks to the Panic of 2008, though, we can count on nobody making this mistake again, at least not for a while.
9. George W. Bush
A lot of the government decisions that led to our current pass were bipartisan. Some were the doing of Democrats. But you can't be a two-term president with your own party in charge of Congress for most of your time in office and escape blame for the economic debacle that unfolds as you prepare to leave town. The specific Bush act that probably contributed most to today's difficulties? His reckless disregard for sound fiscal policy, as his tax cuts and war spending combined to turn budget surpluses into chronic deficits.
10. Commodity Futures Modernization Act
If you had to pick a single government move that did more than any other to muck things up it was this probably this bill, passed by a Republican Congress and signed into law by lame-duck President Bill Clinton in December 2000. It effectively banned regulators from sticking their noses into over-the-counter derivatives like credit default swaps. There's no guarantee that regulators would have sniffed out the dangers in time. But banning them from even looking sent a pretty clear anything-goes message to OTC derivatives markets.
11. The Rating Agencies
Their failings were part of the larger inability of Wall Street to do securitization right, and their employees didn't get paid nearly as much as the investment bank guys engineering the dodgy investment products they rated. That's why the rating agencies don't make the top ten. But the willingness of Moody's, S&P and Fitch to grant top ratings to untested new securities like collateralized debt obligations made possible a lot of staggeringly dumb deals that otherwise would never have seen the light of day.
12. Letting Lehman Go
This is a hard one — given that I've already taken the Fed to task for bailing us out so often. But once the precedent had been established with Bear Stearns, Fannie Mae and Freddie Mac, letting Lehman go under in disorderly fashion in September shocked markets and seems to have led to the near financial meltdown that followed. It's not clear exactly how, given the laws in place at the time and the lack of a buyer, the Fed and Treasury could have managed a better Lehman conclusion. But what we got was pure bad news.
Treasuries Fall Amid Concern U.S. to Sell Record Amount of Debt
By Dakin Campbell
Jan. 6 (Bloomberg) -- Treasuries were little changed after President-elect Barack Obama said the U.S. will soon face budget deficits near $1 trillion, raising concern that a record level of securities will be needed to finance the shortfalls.
The Treasury’s sale of $8 billion in inflation-indexed notes at auction today drew the most demand in nine years, suggesting investors are concerned that inflation may accelerate along with government spending.
“If anything, the auction showed demand for inflation protection, which is ultimately bearish for the Treasury market,” said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, a Greenwich Capital, one of 17 primary dealers that are required to bid at government debt auctions.
The two-year note yielded 0.77 percent at 5:12 p.m. in New York, according to BGCantor Market Data. The price of the 0.875 percent security due in December 2010 traded at 100 6/32. The five-year note yielded 1.65 percent.
The auction of Treasury Inflation Protected Securities, or TIPS, drew a yield of 2.245 percent. The so-called bid-to-cover ratio, a gauge of demand, was 2.48, the highest since Jan. 12, 2000, when it was 3.07. The amount of notes sold on a non- competitive basis, mainly to individual investors, was the highest since at least 2003.
This week’s debt sales also include a record $30 billion of three-year notes tomorrow and $16 billion of 10-year conventional debt the next day.
30-Year Bond
“People do anticipate more supply going forward; that’s not new, but it’s here,” said Tom Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment- banking arm of Canada’s biggest lender. “We are trying to settle back into a range where people can determine value.”
Thirty-year bonds rose late today as companies selling corporate debt removed so-called rate lock agreements, in which they bet on Treasury prices falling to guard against the effect higher yields would have on the planned debt sale. Once the debt is sold, they end the agreements and buy back Treasuries.
“People have been short and are now making some money back in Treasuries,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, another primary dealer. “We just refer to it as an unwind of rate lock hedges.” So-called short positions are bets that Treasury prices will fall.
Anheuser-Busch InBev NV, the world’s largest brewer, and Brazil led 11 issuers offering at least $18.5 billion of dollar- denominated bonds today.
‘Years to Come’
Obama said that a “trillion-dollar deficit will be here before we even start the next budget.” Similar shortfalls are in store “for years to come,” he said after meeting in Washington today with his economic advisers.
Federal Reserve officials saw “substantial” risks to the slumping economy last month as they cut the benchmark interest rate to a range of zero to 0.25 percent and pledged to expand emergency loans if necessary, according to the minutes of the Dec. 15-16 Federal Open Market Committee meeting released in Washington. Some officials saw “the distinct possibility of a prolonged contraction” stemming partly from stresses in financial markets.
Investors and companies snapped up Treasuries in December amid concern the credit crisis, which has generated $1 trillion in losses, would lead to a cash crunch at year-end. Ten-year Treasuries are becoming “bubble like,” and the risk of an “unruly unwind of long positions” will increase as the first quarter progresses, Barclays Plc strategists including Jordan Kotick in New York said in a note yesterday.
Higher-Yielding Assets
This month, investors and traders have bought higher- yielding assets and sold government debt. Company debt yielded 5.96 percentage points more than benchmark Treasuries yesterday, down from 6.04 percentage points Dec. 31, according to Merrill Lynch & Co.’s Corporate Master Index.
The Federal Reserve Bank of New York started buying mortgage-backed securities yesterday as part of a $500 billion program to support the U.S. housing market.
Fed officials are focused on driving down the spreads between Treasury yields and consumer and corporate loans, in a bid to further ease the lending squeeze. Fifteen-year fixed-rate mortgages were 5.06 percent last week, 2.59 percentage points above 10-year Treasury yields; the spread averaged 0.88 point in 2003, when the central bank slashed rates to 1 percent.
‘Unfreezing of Credit’
Yields suggest banks are becoming more willing to lend. The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 1.28 percentage points, down from a peak of 4.64 percentage points in October and the least since Sept. 11.
“We’re seeing an unfreezing of credit,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “The incredible rally we had on the Treasury side, which was virtually all panic-driven, is being partly reversed.”
Payrolls fell 500,000 in December, bringing last year’s job losses to 2.4 million, the most since 1945, according to the median estimate of 69 economists surveyed by Bloomberg News. The data is due Jan. 9 from the Department of Labor.
The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 40.6 in December from a record-low 37.3 the prior month, the Tempe, Arizona-based ISM said today. Readings below 50 signal contraction. The median forecast in a Bloomberg News survey of economists was for a drop to 36.5.
“Because the United States is such a huge part of the global economy, there’s real reason to worry that an American financial virus could mark the beginning of a global economic contagion.” – Nouriel Roubini, March 2008
Last year’s worst-case scenarios came true. The global financial pandemic that I and others had warned about is now upon us. But we are still only in the early stages of this crisis. My predictions for the coming year, unfortunately, are even more dire: The bubbles, and there were many, have only begun to burst.
The prevailing conventional wisdom holds that prices of many risky financial assets have fallen so much that we are at the bottom. Although it’s true that these assets have fallen sharply from their peaks of late 2007, they will likely fall further still. In the next few months, the macroeconomic news in the United States and around the world will be much worse than most expect. Corporate earnings reports will shock any equity analysts who are still deluding themselves that the economic contraction will be mild and short.
Severe vulnerabilities remain in financial markets: a credit crunch that will get worse before it gets any better; deleveraging that continues as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus leading to cascading falls in asset prices, margin calls, and further deleveraging; other financial institutions going bust; a few emerging-market economies entering a full-blown financial crisis, and some at risk of defaulting on their sovereign debt.
Certainly, the United States will experience its worst recession in decades. The formerly mainstream notion that the U.S. contraction would be short and shallow—a V-shaped recession with a quick recovery like the ones in 1990–91 and 2001—is out the window. Instead, the U.S. contraction will be U-shaped: long, deep, and lasting about 24 months. It could end up being even longer, an L-shaped, multiyear stagnation, like the one Japan suffered in the 1990s.
As the U.S. economy shrinks, the entire global economy will go into recession. In Europe, Canada, Japan, and the other advanced economies, it will be severe. Nor will emerging-market economies—linked to the developed world by trade in goods, finance, and currency—escape real pain.
What constitutes a “recession” will depend on the country in question. For China, a hard landing would mean annual growth falls from 12 to 6 percent. China must grow by 10 percent or more each year to bring 12 to 15 million poor rural farmers into the modern world. For other emerging markets, such as Brazil or South Korea, growth below 3 percent would represent a hard landing. The most vulnerable countries, such as Ecuador, Hungary, Latvia, Pakistan, or Ukraine may experience an outright financial crisis and will require massive external financing to avoid a meltdown.
For the wealthiest countries, a debilitating combination of economic stagnation and deflation might happen as markets for goods go slack because aggregate demand falls. Given how sharply production capacity has risen due to overinvestment in China and other emerging markets, this drop in demand would likely lead to lower inflation. Meanwhile, job losses would mount and unemployment rates would rise, putting downward pressure on wages. Weakening commodity markets—where prices have already fallen sharply since their summer peak and will fall further in a global recession—would lead to still lower inflation. Indeed, by early 2009, inflation in the advanced economies could fall toward the 1 percent level, too close to deflation for comfort.
This scenario is dangerous for many reasons. A number of central banks will be close enough to setting interest rates of zero that their economies fall into a triple whammy: a liquidity trap, a deflation trap, and debt deflation. In a liquidity trap, the banks lose their ability to stimulate the economy because they cannot set nominal interest rates below zero. In a deflation trap, falling prices mean that real interest rates are relatively high, choking off consumption and investment. This leads to a vicious circle wherein incomes and jobs are falling, with demand dropping still further. Finally, in debt deflation, the real value of nominal debts rises as prices fall—bad news for countries such as the United States and Japan that have high ratios of debt to GDP.
As orthodox monetary tools become ineffective, policymakers will turn to unorthodox approaches. We’ll see traditional fiscal policy, in the form of tax cuts and spending increases, but also worldwide bailouts of lenders, investors, and financial institutions, as well as borrowers. Central banks will inject massive amounts of cash into financial systems to unclog the liquidity crunch. More radical actions, such as outright purchases of corporate and government bonds or subsidization of mortgage rates, might also be necessary to get credit markets functioning properly again.
This crisis is not merely the result of the U.S. housing bubble’s bursting or the collapse of the United States’ subprime mortgage sector. The credit excesses that created this disaster were global. There were many bubbles, and they extended beyond housing in many countries to commercial real estate mortgages and loans, to credit cards, auto loans, and student loans. There were bubbles for the securitized products that converted these loans and mortgages into complex, toxic, and destructive financial instruments. And there were still more bubbles for local government borrowing, leveraged buyouts, hedge funds, commercial and industrial loans, corporate bonds, commodities, and credit-default swaps—a dangerous unregulated market wherein up to $60 trillion of nominal protection was sold against an outstanding stock of corporate bonds of just $6 trillion.
Taken together, these amounted to the biggest asset and credit bubble in human history; as it goes bust, the overall credit losses could reach as high as $2 trillion. Unless governments move with more alacrity to recapitalize banks and other financial institutions, the credit crunch will become even more severe. Losses will mount faster than companies can replenish their balance sheets.
Thanks to the radical actions of the G-7 and others, the risk of a total systemic financial meltdown has been reduced. But unfortunately, the worst is not behind us. This will be a painful year. Only very aggressive, coordinated, and effective action by policymakers will ensure that 2010 will not be even worse than 2009 is likely to be.
Nouriel Roubini is professor of economics at New York University’s Stern School of Business and chairman of RGE Monitor (www.rgemonitor.com), an economic and financial consultancy.
Rebecca Sinderbrand and Mark Preston January 7, 2009
WASHINGTON (CNN) — Another major American industry is asking for assistance as the global financial crisis continues: Hustler publisher Larry Flynt and Girls Gone Wild CEO Joe Francis said Wednesday they will request that Congress allocate $5 billion for a bailout of the adult entertainment industry.
“The take here is that everyone and their mother want to be bailed out from the banks to the big three,” said Owen Moogan, spokesman for Larry Flynt. “The porn industry has been hurt by the downturn like everyone else and they are going to ask for the $5 billion. Is it the most serious thing in the world? Is it going to make the lives of Americans better if it happens? It is not for them to determine.”
Francis said in a statement that “the US government should actively support the adult industry's survival and growth, just as it feels the need to support any other industry cherished by the American people."
“We should be delivering [the request] by the end of today to our congressmen and [Secretary of the Treasury Henry] Paulson asking for this $5 billion dollar bailout,” he told CNN Wednesday.
Flynt and Francis concede the industry itself is in no financial danger — DVD sales have slipped over the past year, but Web traffic has continued to grow.
But the industry leaders said the issue is a nation in need. "People are too depressed to be sexually active," Flynt said in the statement. "This is very unhealthy as a nation. Americans can do without cars and such but they cannot do without sex."
"With all this economic misery and people losing all that money, sex is the farthest thing from their mind. It's time for congress to rejuvenate the sexual appetite of America. The only way they can do this is by supporting the adult industry and doing it quickly."
So far, there has been no congressional reaction to the request.
Disclosure after DSP Merrill Lynch discovers irregularities; Company sets up SWAT team.
In one of the darkest days in India’s corporate history, Satyam Computer Services Founder and Chairman B Ramalinga Raju resigned after saying he falsified earnings and assets.
The revelation comes soon after Raju was forced to reverse a decision to invest almost Rs 8,000 crore in two other promoter-owned infrastructure and property companies mid-December, following strong shareholder protests. The company has been in crisis since, after four independent directors resigned from Satyam’s board as a result of widespread criticism of their role in the decision.
Today’s disclosures, however, prompted a collapse in the stock of India’s fourth-largest software services company. Satyam, whose name means “the truth” in Sanskrit, plunged a record 78 per cent on the Bombay Stock Exchange (BSE), dragging down the Sensitive Index in a scandal described as “horrifying” by Securities and Exchange Board of India (Sebi) Chairman C B Bhave.
The National Stock Exchange has excluded Satyam, which has received several prominent awards for corporate governance in the past, from the Nifty 50 and S&P CNX 500 with effect from January 12.
A BSE spokesman said the bourse will examine whether to remove Satyam from the Sensitive Index, which tumbled 7.3 per cent today. Meanwhile, the New York Stock Exchange (NYSE) today halted trading in Satyam stock. In the pre-market trade, the company’s American Depository Receipt (ADR) had crashed 91 per cent on the NYSE.
Raju’s letter to the company’s board said he tried to sell two promoter-related firms to Satyam last month, in a final attempt to plug Rs 5,500 crore of “fictitious” cash on the company’s balance sheet. Profits have been “inflated for several years,” Raju said.
TRUE LIES (What Raju owned up to)
* Inflated cash and bank balances of Rs 5,040 crore
* Non-existent accrued interest of Rs 376 crore
* Understated liabilities of Rs 1,230 crore on account of funds arranged by Raju
* Overstated debtor position of Rs 490 crore
* Q2 ‘08-09 profit stated as Rs 2,700 crore and operating margin of 24% revenues. Actuals: Rs 2,112 crore profit and 3% of revenues
* Profits inflated over “last several years”; attained unmanageable levels as company grew
* Aborted Maytas deal was “an attempt to fill the fictitious assets with real ones”
Source: Letter to Bombay Stock Exchange
Of Satyam’s reported cash and bank balances of Rs 5,361 crore on September 30, Rs 5,004 crore was non-existent, Raju said in the letter. Operating margin for the quarter ending September 30 was 3 per cent of revenue, instead of the reported 24 per cent, he said. The company’s revenue was Rs 2,100 crore, 22 per cent less than the inflated figure of Rs 2,700 crore that had been reported.
Raju arranged Rs 1,230 crore “to keep operations going” at Satyam over the last two years by pledging the founders’ shares and raising funds from other sources, he said.
“What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years,” Raju said. “It was like riding a tiger, not knowing how to get off without being eaten.”
Raju, who was barricaded in his Hyderabad office all day today, said his concern was that poor performance, combined with the fact that promoters held a small stake in the company, would make Satyam an easy target for a takeover, exposing the inflated figures.
B Rama Raju, managing director of the company, also resigned today. Both will, however, continue in the position till the current board is expanded. Ram Mynampati, president (commercial and healthcare business), has been appointed interim CEO.
Meanwhile, the company has formed a SWAT team consisting of senior leaders — many of them Satyam veterans with a minimum experience of 10 years in the company and more than 20 years in the industry — to steer the company through the crisis.
Swift action: After Raju’s disclosure this morning, the government and regulators swung into action quickly. Sebi said a probe team will visit Satyam’s offices in Hyderabad Thursday to inspect the company’s accounts. Meanwhile, the corporate affairs ministry has given the Registrar of Companies (RoC), Hyderabad, time till January 14 to submit a report on the statement sent by Raju. Minister of Corporate Affairs Premchand Gupta said: “No leniency will be shown to those found guilty.”
Satyam’s auditors — PricewaterhouseCoopers — also came under fire, with the Institute of Chartered Accountants saying it will take action after investigations.
Sources familiar with the developments said Raju was forced to make this revelation after DSP Merrill Lynch, which was appointed by Satyam to look for a partner or buyer for the company a week ago, terminated its engagement with the company after it found financial irregularities. Merrill Lynch is also understood to have sent the information and the reason for their termination of the contract to the BSE, Sebi and even the New York Stock Exchange, on which Satyam is listed. This left Raju with no other option but to resign.
Raju said he was “submitting himself to the laws of the land and the consequences thereof” but corporate lawyers said the Companies Act, 1956, provides for imprisonment for up to two years for providing false statements. Section (628) also has provision for a fine. In addition, the government has the power to suspend the entire board in the interest of the shareholders and appoint directors.
The government can either initiate suo motu action against the company, based on reports available so far, or wait for the report from RoC before taking action. The ministry of corporate affairs has a serious fraud office (SFO), which was set up to investigate offences of this nature.
“This is a clear criminal breach of trust,” said Somasekhar Sundaresan, partner of J Sagar Associates, adding that the company violated Sebi (Prohibition of Fradulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003, under which “making a statement or purveying information by a person which he does not believe to be true is an offence”.
Assessing the damage: “This quarter will be tumultuous for us,” interim CEO Ram Mynampati said in an emailed statement to Satyam’s employees. “Rumours will abound and it would be fair to assume that competition will try to leverage it to their advantage.”
Mynampati, who has been mandated by the board to steer the company through this crisis, expressed “shock” at the disclosures. “We recognise that our associates have committed a significant part of their careers to build Satyam. We will pursue all avenues to secure their future in the company,” Mynampati added.
Satyam will hold a press conference at its headquarters in Hyderabad in the next 24 hours.
Employees confused: However, Satyam’s over 53,000 employees are not impressed. “We have been trying to get in touch with our seniors but they have simply vanished,” said a mid-managerial level employee. The top management, said employees, have been “avoiding talks with junior and mid-level employees”.
They maintain that the management didn’t bother clarifying matters when independent directors resigned from Satyam, nor were they forthcoming about Raju’s resignation.
Most Satyam employees were shocked to see Raju owning up to fraud. An employee, who has been working in Satyam for seven months, said, “He was our hero and we felt privileged to be a part of the Satyam family. But now, we can only worry about what our position will be if another company takes over.”
Future tense: Satyam may also lose clients, and become an unattractive proposition — both for investors and outsourcing companies, analysts said. Sudin Apte of Forrester asserts that “30 to 50 per cent of Satyam’s clients will review their deals”. These, he explained, are primarily the 100-odd clients that have deals of around $1 million or less. He added that “Satyam’s attraction as a company has decreased, and this also result in a slightly lower enthusiasm to buy from Indian players”. But will India’s outsourcing/offshoring image also take a hit? Nasscom president Som Mittal, said: “We are shocked with the disclosure of both the magnitude and content of fraud. The IT-BPO industry has high sets of corporate governance and this is an isolated case of governance failure. We are closely working with the Task Force set up by Satyam and our priority at this point is the 50,000 employees and customers of the company.”
Commenting on whether the software body will take any action against Satyam, Mittal said, “There are enough provisions in the law and we are not taking any action. The company will remain on Nasscom’s list. Also, the blame for such an isolated incident should not be put on the entire country or industry because such incidents have taken place in Europe and more recently, in the US.”
Funds exit: Some of the big institutional shareholders have already started exiting the company. On the BSE and NSE today, these shareholders sold 8.62 per cent of their combined holdings. Abardeen, one of the largest shareholders, sold the entire 5.6 per cent stake it had in Satyam, and Swiss Finance also exited. Stock Exchange data showed huge sales by Morgan Stanley and Fidelity as well.
Shock & dismay: The reaction from India Inc was one of shock and dismay. Infosys, India’s second-largest software company, called the incident “deplorable,” R C Bhargava, Chairman, Maruti Suzuki (and an independent director on many boards) admitted that “the Satyam episode has tarnished the image of independent directors at Satyam.” He wondered how the internal audit committee (mostly populated by independent directors) could have missed the irregularities.
JJ Irani, Chairman of expert committee to draft the new Companies Act, Director of Tata Sons, said, “This is a lesson for corporate houses and they should wake up to reality. In the new companies Act, we proposed to give more powers to independent directors. They are completely in the dark. They should be well informed and kept active.”
Rajeev Chandrasekhar, MP and President, Ficci, said, “This fraud on the investors and employees of the company shows a systemic breakdown in the audit and board oversight of the company. Questions will need to be asked about how this happened and who caused it to happen,” he added.
CII Director General Chandrajit Banerjee said the developments at Satyam need to be seen as exceptions to the rule because standards of corporate governance in India are among the highest in the world today.
Brokerage houses, on their part, were blunt. Hitesh Agrawal, Head (Research), Angel Broking, said: “This has shaken the confidence of investors — both domestic and global — the repercussions of which could be felt over the medium-term”.
In its note to its investors on Wednesday, CLSA, a brokerage house covering the Asia-Pacific markets, said: “In this scenario, the January 10 board meeting of Satyam now becomes irrelevant. When there is no cash, how can there be a buyback? And where did the cash go? Only an investigation can tell.”
A Credit Suisse statement, too, said the Satyam episode “clearly indicates that the current financials of Satyam cannot be relied upon. As such, we are unable to issue any further investment advice on Satyam and suspend our coverage of the stock”.
By Saskia Scholtes and Greg Farrell January 7 2009
Temasek, the Singapore state investment fund, is sitting on significant paper losses related to its stake in Merrill Lynch, the investment bank acquired by Bank of America last week.
The state agency’s unrealised losses could amount to more than $2bn, excluding any hedges, according to a Financial Times analysis based on publicly available filings.
The loss is emblematic of the damage the financial crisis has wrought on sovereign wealth fund investments in the banking sector and helps explain why funds have been reluctant to commit further capital to banks.
Some 40 per cent of Temasek’s portfolio is in the financial sector, and it has suffered paper losses on other investments, including Barclays, Bank of China and China Construction Bank.
Temasek on Monday disclosed it had converted its 13.7 per cent stake in Merrill into BofA shares following the acquisition.
On December 31, the last day of trading before the deal closed, Temasek’s remaining stake in Merrill, for which it paid an average of $23 a share, had dropped to $12.10.
After ploughing $5bn into Merrill between December 2007 and February 2008, and with a further $900m commitment last summer, Temasek owns 189m BofA shares, according to Monday’s disclosure. At Wednesday’s opening price, they were worth $2.7bn.
However, Temasek appears to have sold more than 30m shares of Merrill stock in the first and third quarters of 2008, according to regulatory filings. Even if Temasek sold at the lowest possible prices in these periods, the sales would have generated a modest profit to defray some of Temasek’s unrealised loss.
Temasek declined to comment.
It could have been worse. Temasek’s initial investment allowed it to buy more than 104m shares at $48 per share.
But after Merrill was forced to raise further capital in July, the terms of Temasek’s original investment were reset. This effectively bought Temasek 151m new shares in Merrill for just under $6 per share, bringing the average price paid per Merrill share to a little over $23.
Temasek’s investment suffered again in September, as Merrill shares plunged on concerns about the US banking sector.
But any losses seemed to vanish when BofA agreed to buy Merrill in an all-stock deal which valued the latter at $29 a share. BofA’s shares have since slumped, however.
Many details of Obama's rescue plan remain uncertain. But it's likely to cost at least $700 billion - and that would push Uncle Sam's bailouts near $8 trillion.
By David Goldman January 6, 2009
NEW YORK — Sitting down? It's time to tally up the federal government's bailout tab.
There was $29 billion for Bear Stearns, $345 billion for Citigroup. The Federal Reserve put up $600 billion to guarantee money market deposits and has aggressively driven down interest rates to essentially zero.
The list goes on and on. All told, Congress, the Treasury Department, the Federal Reserve and other agencies have taken dozens of steps to prop up the economy.
Total price tag so far: $7.2 trillion in investment and loans. That puts a lot of taxpayer money at risk. Now comes President-elect Barack Obama's economic stimulus plan, some details of which were made public on Monday. The tally is getting awfully close to $8 trillion.
Obama's plan would combine tax cuts with infrastructure job creation efforts. Economists say it could serve as an integral piece to the government's remaining economic recovery puzzle.
"This plan will be the first direct tool to make additions to disposable income," said Lyle Gramley, an economist with Stanford Group and former Fed governor. "None of the other efforts have done that directly."
Gramley said that a stimulus program from the government is a necessary complement to the Fed's traditional rate-cutting tool. Together with existing actions, stimulus can provide a wider reach to the government's economic intervention.
"Monetary stimulus alone is not enough - it must be combined with fiscal stimulus if you want more bang for your buck," he noted.
But the new program, which Obama aides have said could total $775 billion, will also weigh heavily on the ballooning federal deficit. The current fiscal year is barely a few months old and already the government is running a deficit exceeding $400 billion -- nearly the same amount as all of last year. Many economists believe it will top $1 trillion, not even counting stimulus.
Some say that the benefits of massive spending outweigh the cost of inaction.
"While it seems like quite a lot, we don't really need to focus on the cost due to the depth of the recession," said Mark Vitner, economist with Wachovia.
Others, while saying that government action is needed, question the vast sums that are being allocated and proposed.
"The government says it can spend the money better than you can, but that hasn't been the case in the past," said Bill Beach, director of the center for data analysis at the conservative-leaning Heritage Foundation. "That will really show up when they have to raise taxes in the future to make up for the increasing deficit."
Step 1: Trying to stave off the recession So where does Obama's plan fit in with Uncle Sam's unprecedented onslaught of efforts to stabilize the economy?
The story begins more than a year ago with the Federal Reserve.
In September 2007, with the housing market in its early decline and credit markets showing signs of trouble, the Fed began to lower its key fund rates from 5.25% in an attempt to boost economic activity and ward off a recession.
The economy nevertheless entered a recession in December 2007. Though the Fed rate is now at a targeted level of close to 0%, economists have noticed little change by way of increased availability of credit, lower private interest rates or a booming stock market.
"None of those things have happened," said Gramley. "Fed policy has not had any kind of impact like it normally has, even as the Fed lowered the funds rate a long way."
Concerned about the threat of a recession, lawmakers passed $168 billion in tax breaks to consumers and businesses in February of last year. The aim: boost spending, which accounts for more than two-thirds of the nation's gross domestic product.
The rebates had a short-lived impact, helping to boost GDP 2.8% in the second quarter of 2008, compared to a measly 0.9% in the first quarter. But last summer's rapidly rising fuel prices undid the spending trend, sending GDP down 0.5% in the third quarter.
Step 2: Stopping the bleeding The credit crisis that began in mid-September unwound any hopes of staving off a recession. The government's focus instead became a massive effort to keep systemically significant institutions from collapsing.
After Bear Stearns' $29 billion bailout in March, and the $200 billion government takeover of mortgage finance giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) in early September, the Treasury and Fed shifted bailout efforts into top gear after Sep. 15. They bailed out AIG for $152.5 billion, Citigroup for $325 billion and the automakers for $23.4 billion in just the past few months.
Treasury also took hold of the $700 billion Emergency Economic Stabilization Act, dedicating $250 billion to capital investments in banks.
In a status report delivered last week, Treasury said its efforts have prevented widespread failure of financial institutions, but they conceded that the credit crisis won't ease until the economy recovers.
"The financial system is fundamentally more stable than it was when Congress passed the legislation," said the report. "As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans."
Step 3: Recovery efforts To help the economy heal, the government has committed record sums since September 2008 in an attempt to restore the flow of credit, boost the job and housing markets and - with Obama's plan - get consumers spending again.
In the past three months, the Federal Reserve launched a $600 billion money market guarantee program, a $1.4 trillion program to boost the commercial paper market - a key source of short-term business financing, a $200 billion consumer loan-backed securities purchasing program, a $500 billion mortgage-backed securities purchasing program and a $100 billion program to buy up Fannie and Freddie debt.
As a result, the Fed's balance sheet - the total worth of the assets the Fed obtained as a result of its lending - currently totals $2.3 trillion, up from $933 billion on the week before Lehman Brothers collapsed.
Obama's estimated $775 billion plan could serve as the next step in the recovery efforts. While most of the Fed's programs have been aimed at boosting lending, Obama's economic stimulus plan is aimed primarily at job creation and consumer spending.
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Chen Shui-bian given trial date for graft charges
Third judge in corruption hearing
Minnie Chan
6 January 2009
The graft trial of former Taiwanese president Chen Shui-bian is scheduled to begin later this month under a new judge - the third in the case - after his lawyers lodged a fresh appeal yesterday.
The Taipei District Court would hold preliminary hearings from January 19 to 21 in Chen’s trial on money laundering and other charges, the island’s official Central News Agency said. It said the procedures would include opening statements from Chen’s lawyers and officials from the Supreme Prosecutors’ Office. The trial would resume in February after the Lunar New Year holiday. The judge will be Chen Fung-chun, the third judge appointed to preside over Chen’s case.
Chen was taken back into custody, after a 12-hour bail hearing in the court last Tuesday, because prosecutors feared he might flee or collude with witnesses.
But his lawyers said he would not flee, as he had never been absent from any trials or hearings. Judge Chou Chan-chun ordered Chen’s release on December 13, the day after his indictment. He had been in custody for more than a month.
Judge Chou also allowed his initial ruling to stand after the island’s High Court ordered a review, prompting the High Court to order a second rehearing and appoint Judge Tsai Shou-hsun to take over the case.
Chen’s legal team vowed yesterday to get him home to spend Lunar New Year with his family.
Chen’s lawyers contend the case had been influenced by politics because his return to the detention centre was decided by Judge Tsai, who is also in charge of former first lady Wu Shu-chen’s corruption case and two other related cases.
“Indeed, it’s the High Court that ordered Judge Tsai to handle the case,” lawyer Shih Yi-lin said. “We believe the administration’s influence has stepped into our judicial system this time.
“We can’t agree with it because there are conflicts with the two independent cases merged together, since then.”
Chen, 57, is charged with collaborating with his wife to embezzle, forge documents and launder money.
According to the 209-page indictment, the amounts included NT$141 million (HK$33 million) in embezzled secret state funds, and bribes of NT$100 million and US$8.73 million from developers of two projects.
Chen told visitors to his detention centre that he had been busy writing a book called Letters to 50 People, including his successor as Taiwanese president, Ma Ying-jeou, and President Hu Jintao .
“In this book, Chen said he would advise all Democratic Progressive Party members to unite and have the foresight to make sure that our enemy is ... Hu Jintao, not Mr. Ma,” said DPP legislator Ke Chien-min, who accompanied Chen’s son, Chen Chih-ching, and daughter-in-law, Huang Jui-ching, in a visit yesterday.
The Financial Crisis Blame Game
Pointing Fingers
By JUSTIN FOX
6 January 2009
1. Good Times
After a year of epic financial crisis, 2009 will — if all goes well — be a time for digging ourselves out of the mess and figuring out how to prevent a repeat. Before we can do that, we have to have some idea of what went wrong. People are still arguing about what caused the Depression of the 1930s, so don't expect a definitive diagnosis anytime soon. But here's my current list of blame, or at least the first dozen items on it, in descending order of culpability.
Hardly anyone expected things to go wrong because things hadn't gone truly, pants-wettingly, oh-my-god wrong on the financial front in the U.S. since the 1930s. Yes, there had been deep stock-market slumps in the 1970s and early 2000s, real estate busts in the 1980s and early 1990s and occasional short-lived financial scares like the Asian crisis of 1997. But the U.S. hadn't been through a serious panic in the memory of most everyone on Wall Street and in government. We began to behave as if one couldn't happen; we were told it couldn't. Blithe behavior begat trouble. The upside is that everybody is now so shellshocked that we probably don't have to worry about a repeat anytime soon.
2. Alan Greenspan
It was to smother financial panics that Congress created the Federal Reserve in 1913. During Greenspan's tenure as chairman, the Fed jumped in to keep the 1987 stock-market crash, the 1998 Long-Term Capital Management scare and the 2000-01 tech-stock collapse from spiraling into something worse. But that very successful firefighting fostered the risk-ignoring attitudes that brought on a conflagration. There are some — like 2008 presidential candidate Ron Paul — who argue that the lesson here is that we'd be better off without the Fed. A more palatable interpretation is that if the Fed is going to step in to prevent panics, it needs to do more to deflate the bubbles that inevitably precede those panics. Fed policy over the past quarter-century has been asymmetrical: it bailed institutions out of trouble but did ever less to restrain them during fulsome times. That has to change.
3. Twisted Regulation
What has happened in the financial sector since the 1970s isn't exactly deregulation. Banks have remained as closely supervised as ever. But new institutions that grant mortgages, lend money, fund deals — businesses once monopolized by banks — have been allowed to grow with little oversight. Lawmakers and regulators responded in the 1990s not by setting parameters for these new players — investment banks, hedge funds, private-equity funds, etc. — but by giving bank holding companies more freedom to enter underregulated lines of business. The perverse result was that the new and untested gained an unfair advantage over the tried and true.
4. Wall Street
The shift of financial activity from bank balance sheets to the off-balance-sheet realm of securitization and derivatization loosely defined as Wall Street wouldn't have been such a disaster if it had actually worked as advertised — spreading risk, encouraging innovation, bringing the best minds to bear on the biggest financial problems. Instead, Wall Street's leaders did an atrocious job — rewarding the foolhardy, steering capital to the least productive uses and running away from responsibility for their errors. And they got paid tens of millions of dollars a year for it.
5. The Home Ownership Obsession
During the 2008 election campaign, Republicans attempted to pin blame for the crisis on the Community Reinvestment Act (CRA) and mortgage giants Fannie Mae and Freddie Mac. Nice try: there's virtually no evidence to back up the CRA charge, and while Fannie and Freddie aren't blameless, they were mostly sidelined during the worst of the mortgage frenzy, from 2003 to 2006. But the decades-long, bipartisan government effort to encourage homeownership — of which CRA, Fannie and Freddie were but a small part — did tragically overshoot the mark. Homeownership generally is a good thing. Massively subsidizing it via the tax code might not be so smart. And turning a blind eye to crazy lending practices because they seem to encourage it definitely is not.
6. Too Much Money
Lots of people worried for years that the gigantic trade deficits the U.S. ran up with first Japan and then China were hurting domestic manufacturers. But the flip side of those trade deficits — gigantic capital flows into the U.S. — may have been even more dangerous. It was the capital gusher from China in particular that inflated the 2000s real estate bubble.
7. The Myth of the Rational Market
For decades, the accepted academic response to concerns that the economy might be on an unsustainable trajectory was that financial markets knew best. Got a backup? Markets are spectacularly efficient processors of information and opinion. But they also have a by-now-well-documented tendency to overshoot on both the upside and the downside.
8. You and Me
None of this would have happened if millions of us hadn't come to believe we could get something for nothing by taking on debts we couldn't repay. That this misconception was fostered by lenders and politicians is a partial excuse but not a complete one. Thanks to the Panic of 2008, though, we can count on nobody making this mistake again, at least not for a while.
9. George W. Bush
A lot of the government decisions that led to our current pass were bipartisan. Some were the doing of Democrats. But you can't be a two-term president with your own party in charge of Congress for most of your time in office and escape blame for the economic debacle that unfolds as you prepare to leave town. The specific Bush act that probably contributed most to today's difficulties? His reckless disregard for sound fiscal policy, as his tax cuts and war spending combined to turn budget surpluses into chronic deficits.
10. Commodity Futures Modernization Act
If you had to pick a single government move that did more than any other to muck things up it was this probably this bill, passed by a Republican Congress and signed into law by lame-duck President Bill Clinton in December 2000. It effectively banned regulators from sticking their noses into over-the-counter derivatives like credit default swaps. There's no guarantee that regulators would have sniffed out the dangers in time. But banning them from even looking sent a pretty clear anything-goes message to OTC derivatives markets.
11. The Rating Agencies
Their failings were part of the larger inability of Wall Street to do securitization right, and their employees didn't get paid nearly as much as the investment bank guys engineering the dodgy investment products they rated. That's why the rating agencies don't make the top ten. But the willingness of Moody's, S&P and Fitch to grant top ratings to untested new securities like collateralized debt obligations made possible a lot of staggeringly dumb deals that otherwise would never have seen the light of day.
12. Letting Lehman Go
This is a hard one — given that I've already taken the Fed to task for bailing us out so often. But once the precedent had been established with Bear Stearns, Fannie Mae and Freddie Mac, letting Lehman go under in disorderly fashion in September shocked markets and seems to have led to the near financial meltdown that followed. It's not clear exactly how, given the laws in place at the time and the lack of a buyer, the Fed and Treasury could have managed a better Lehman conclusion. But what we got was pure bad news.
Treasuries Fall Amid Concern U.S. to Sell Record Amount of Debt
By Dakin Campbell
Jan. 6 (Bloomberg) -- Treasuries were little changed after President-elect Barack Obama said the U.S. will soon face budget deficits near $1 trillion, raising concern that a record level of securities will be needed to finance the shortfalls.
The Treasury’s sale of $8 billion in inflation-indexed notes at auction today drew the most demand in nine years, suggesting investors are concerned that inflation may accelerate along with government spending.
“If anything, the auction showed demand for inflation protection, which is ultimately bearish for the Treasury market,” said Ian Lyngen, an interest-rate strategist in Greenwich, Connecticut, a Greenwich Capital, one of 17 primary dealers that are required to bid at government debt auctions.
The two-year note yielded 0.77 percent at 5:12 p.m. in New York, according to BGCantor Market Data. The price of the 0.875 percent security due in December 2010 traded at 100 6/32. The five-year note yielded 1.65 percent.
The auction of Treasury Inflation Protected Securities, or TIPS, drew a yield of 2.245 percent. The so-called bid-to-cover ratio, a gauge of demand, was 2.48, the highest since Jan. 12, 2000, when it was 3.07. The amount of notes sold on a non- competitive basis, mainly to individual investors, was the highest since at least 2003.
This week’s debt sales also include a record $30 billion of three-year notes tomorrow and $16 billion of 10-year conventional debt the next day.
30-Year Bond
“People do anticipate more supply going forward; that’s not new, but it’s here,” said Tom Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment- banking arm of Canada’s biggest lender. “We are trying to settle back into a range where people can determine value.”
Thirty-year bonds rose late today as companies selling corporate debt removed so-called rate lock agreements, in which they bet on Treasury prices falling to guard against the effect higher yields would have on the planned debt sale. Once the debt is sold, they end the agreements and buy back Treasuries.
“People have been short and are now making some money back in Treasuries,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, another primary dealer. “We just refer to it as an unwind of rate lock hedges.” So-called short positions are bets that Treasury prices will fall.
Anheuser-Busch InBev NV, the world’s largest brewer, and Brazil led 11 issuers offering at least $18.5 billion of dollar- denominated bonds today.
‘Years to Come’
Obama said that a “trillion-dollar deficit will be here before we even start the next budget.” Similar shortfalls are in store “for years to come,” he said after meeting in Washington today with his economic advisers.
Federal Reserve officials saw “substantial” risks to the slumping economy last month as they cut the benchmark interest rate to a range of zero to 0.25 percent and pledged to expand emergency loans if necessary, according to the minutes of the Dec. 15-16 Federal Open Market Committee meeting released in Washington. Some officials saw “the distinct possibility of a prolonged contraction” stemming partly from stresses in financial markets.
Investors and companies snapped up Treasuries in December amid concern the credit crisis, which has generated $1 trillion in losses, would lead to a cash crunch at year-end. Ten-year Treasuries are becoming “bubble like,” and the risk of an “unruly unwind of long positions” will increase as the first quarter progresses, Barclays Plc strategists including Jordan Kotick in New York said in a note yesterday.
Higher-Yielding Assets
This month, investors and traders have bought higher- yielding assets and sold government debt. Company debt yielded 5.96 percentage points more than benchmark Treasuries yesterday, down from 6.04 percentage points Dec. 31, according to Merrill Lynch & Co.’s Corporate Master Index.
The Federal Reserve Bank of New York started buying mortgage-backed securities yesterday as part of a $500 billion program to support the U.S. housing market.
Fed officials are focused on driving down the spreads between Treasury yields and consumer and corporate loans, in a bid to further ease the lending squeeze. Fifteen-year fixed-rate mortgages were 5.06 percent last week, 2.59 percentage points above 10-year Treasury yields; the spread averaged 0.88 point in 2003, when the central bank slashed rates to 1 percent.
‘Unfreezing of Credit’
Yields suggest banks are becoming more willing to lend. The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 1.28 percentage points, down from a peak of 4.64 percentage points in October and the least since Sept. 11.
“We’re seeing an unfreezing of credit,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “The incredible rally we had on the Treasury side, which was virtually all panic-driven, is being partly reversed.”
Payrolls fell 500,000 in December, bringing last year’s job losses to 2.4 million, the most since 1945, according to the median estimate of 69 economists surveyed by Bloomberg News. The data is due Jan. 9 from the Department of Labor.
The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 40.6 in December from a record-low 37.3 the prior month, the Tempe, Arizona-based ISM said today. Readings below 50 signal contraction. The median forecast in a Bloomberg News survey of economists was for a drop to 36.5.
Warning: More Doom Ahead
By Nouriel Roubini
January/February 2009
“Because the United States is such a huge part of the global economy, there’s real reason to worry that an American financial virus could mark the beginning of a global economic contagion.” – Nouriel Roubini, March 2008
Last year’s worst-case scenarios came true. The global financial pandemic that I and others had warned about is now upon us. But we are still only in the early stages of this crisis. My predictions for the coming year, unfortunately, are even more dire: The bubbles, and there were many, have only begun to burst.
The prevailing conventional wisdom holds that prices of many risky financial assets have fallen so much that we are at the bottom. Although it’s true that these assets have fallen sharply from their peaks of late 2007, they will likely fall further still. In the next few months, the macroeconomic news in the United States and around the world will be much worse than most expect. Corporate earnings reports will shock any equity analysts who are still deluding themselves that the economic contraction will be mild and short.
Severe vulnerabilities remain in financial markets: a credit crunch that will get worse before it gets any better; deleveraging that continues as hedge funds and other leveraged players are forced to sell assets into illiquid and distressed markets, thus leading to cascading falls in asset prices, margin calls, and further deleveraging; other financial institutions going bust; a few emerging-market economies entering a full-blown financial crisis, and some at risk of defaulting on their sovereign debt.
Certainly, the United States will experience its worst recession in decades. The formerly mainstream notion that the U.S. contraction would be short and shallow—a V-shaped recession with a quick recovery like the ones in 1990–91 and 2001—is out the window. Instead, the U.S. contraction will be U-shaped: long, deep, and lasting about 24 months. It could end up being even longer, an L-shaped, multiyear stagnation, like the one Japan suffered in the 1990s.
As the U.S. economy shrinks, the entire global economy will go into recession. In Europe, Canada, Japan, and the other advanced economies, it will be severe. Nor will emerging-market economies—linked to the developed world by trade in goods, finance, and currency—escape real pain.
What constitutes a “recession” will depend on the country in question. For China, a hard landing would mean annual growth falls from 12 to 6 percent. China must grow by 10 percent or more each year to bring 12 to 15 million poor rural farmers into the modern world. For other emerging markets, such as Brazil or South Korea, growth below 3 percent would represent a hard landing. The most vulnerable countries, such as Ecuador, Hungary, Latvia, Pakistan, or Ukraine may experience an outright financial crisis and will require massive external financing to avoid a meltdown.
For the wealthiest countries, a debilitating combination of economic stagnation and deflation might happen as markets for goods go slack because aggregate demand falls. Given how sharply production capacity has risen due to overinvestment in China and other emerging markets, this drop in demand would likely lead to lower inflation. Meanwhile, job losses would mount and unemployment rates would rise, putting downward pressure on wages. Weakening commodity markets—where prices have already fallen sharply since their summer peak and will fall further in a global recession—would lead to still lower inflation. Indeed, by early 2009, inflation in the advanced economies could fall toward the 1 percent level, too close to deflation for comfort.
This scenario is dangerous for many reasons. A number of central banks will be close enough to setting interest rates of zero that their economies fall into a triple whammy: a liquidity trap, a deflation trap, and debt deflation. In a liquidity trap, the banks lose their ability to stimulate the economy because they cannot set nominal interest rates below zero. In a deflation trap, falling prices mean that real interest rates are relatively high, choking off consumption and investment. This leads to a vicious circle wherein incomes and jobs are falling, with demand dropping still further. Finally, in debt deflation, the real value of nominal debts rises as prices fall—bad news for countries such as the United States and Japan that have high ratios of debt to GDP.
As orthodox monetary tools become ineffective, policymakers will turn to unorthodox approaches. We’ll see traditional fiscal policy, in the form of tax cuts and spending increases, but also worldwide bailouts of lenders, investors, and financial institutions, as well as borrowers. Central banks will inject massive amounts of cash into financial systems to unclog the liquidity crunch. More radical actions, such as outright purchases of corporate and government bonds or subsidization of mortgage rates, might also be necessary to get credit markets functioning properly again.
This crisis is not merely the result of the U.S. housing bubble’s bursting or the collapse of the United States’ subprime mortgage sector. The credit excesses that created this disaster were global. There were many bubbles, and they extended beyond housing in many countries to commercial real estate mortgages and loans, to credit cards, auto loans, and student loans. There were bubbles for the securitized products that converted these loans and mortgages into complex, toxic, and destructive financial instruments. And there were still more bubbles for local government borrowing, leveraged buyouts, hedge funds, commercial and industrial loans, corporate bonds, commodities, and credit-default swaps—a dangerous unregulated market wherein up to $60 trillion of nominal protection was sold against an outstanding stock of corporate bonds of just $6 trillion.
Taken together, these amounted to the biggest asset and credit bubble in human history; as it goes bust, the overall credit losses could reach as high as $2 trillion. Unless governments move with more alacrity to recapitalize banks and other financial institutions, the credit crunch will become even more severe. Losses will mount faster than companies can replenish their balance sheets.
Thanks to the radical actions of the G-7 and others, the risk of a total systemic financial meltdown has been reduced. But unfortunately, the worst is not behind us. This will be a painful year. Only very aggressive, coordinated, and effective action by policymakers will ensure that 2010 will not be even worse than 2009 is likely to be.
Nouriel Roubini is professor of economics at New York University’s Stern School of Business and chairman of RGE Monitor (www.rgemonitor.com), an economic and financial consultancy.
Porn industry seeks federal bailout
Rebecca Sinderbrand and Mark Preston
January 7, 2009
WASHINGTON (CNN) — Another major American industry is asking for assistance as the global financial crisis continues: Hustler publisher Larry Flynt and Girls Gone Wild CEO Joe Francis said Wednesday they will request that Congress allocate $5 billion for a bailout of the adult entertainment industry.
“The take here is that everyone and their mother want to be bailed out from the banks to the big three,” said Owen Moogan, spokesman for Larry Flynt. “The porn industry has been hurt by the downturn like everyone else and they are going to ask for the $5 billion. Is it the most serious thing in the world? Is it going to make the lives of Americans better if it happens? It is not for them to determine.”
Francis said in a statement that “the US government should actively support the adult industry's survival and growth, just as it feels the need to support any other industry cherished by the American people."
“We should be delivering [the request] by the end of today to our congressmen and [Secretary of the Treasury Henry] Paulson asking for this $5 billion dollar bailout,” he told CNN Wednesday.
Flynt and Francis concede the industry itself is in no financial danger — DVD sales have slipped over the past year, but Web traffic has continued to grow.
But the industry leaders said the issue is a nation in need. "People are too depressed to be sexually active," Flynt said in the statement. "This is very unhealthy as a nation. Americans can do without cars and such but they cannot do without sex."
"With all this economic misery and people losing all that money, sex is the farthest thing from their mind. It's time for congress to rejuvenate the sexual appetite of America. The only way they can do this is by supporting the adult industry and doing it quickly."
So far, there has been no congressional reaction to the request.
Raju confesses to fraud, quits
BS Reporters/New Delhi/Mumbai
January 8, 2009
Disclosure after DSP Merrill Lynch discovers irregularities; Company sets up SWAT team.
In one of the darkest days in India’s corporate history, Satyam Computer Services Founder and Chairman B Ramalinga Raju resigned after saying he falsified earnings and assets.
The revelation comes soon after Raju was forced to reverse a decision to invest almost Rs 8,000 crore in two other promoter-owned infrastructure and property companies mid-December, following strong shareholder protests. The company has been in crisis since, after four independent directors resigned from Satyam’s board as a result of widespread criticism of their role in the decision.
Today’s disclosures, however, prompted a collapse in the stock of India’s fourth-largest software services company. Satyam, whose name means “the truth” in Sanskrit, plunged a record 78 per cent on the Bombay Stock Exchange (BSE), dragging down the Sensitive Index in a scandal described as “horrifying” by Securities and Exchange Board of India (Sebi) Chairman C B Bhave.
The National Stock Exchange has excluded Satyam, which has received several prominent awards for corporate governance in the past, from the Nifty 50 and S&P CNX 500 with effect from January 12.
A BSE spokesman said the bourse will examine whether to remove Satyam from the Sensitive Index, which tumbled 7.3 per cent today. Meanwhile, the New York Stock Exchange (NYSE) today halted trading in Satyam stock. In the pre-market trade, the company’s American Depository Receipt (ADR) had crashed 91 per cent on the NYSE.
Raju’s letter to the company’s board said he tried to sell two promoter-related firms to Satyam last month, in a final attempt to plug Rs 5,500 crore of “fictitious” cash on the company’s balance sheet. Profits have been “inflated for several years,” Raju said.
TRUE LIES
(What Raju owned up to)
* Inflated cash and bank balances of Rs 5,040 crore
* Non-existent accrued interest of Rs 376 crore
* Understated liabilities of Rs 1,230 crore on account of funds arranged by Raju
* Overstated debtor position of Rs 490 crore
* Q2 ‘08-09 profit stated as Rs 2,700 crore and operating margin of 24% revenues. Actuals: Rs 2,112 crore profit and 3% of revenues
* Profits inflated over “last several years”; attained unmanageable levels as company grew
* Aborted Maytas deal was “an attempt to fill the fictitious assets with real ones”
Source: Letter to Bombay Stock Exchange
Of Satyam’s reported cash and bank balances of Rs 5,361 crore on September 30, Rs 5,004 crore was non-existent, Raju said in the letter. Operating margin for the quarter ending September 30 was 3 per cent of revenue, instead of the reported 24 per cent, he said. The company’s revenue was Rs 2,100 crore, 22 per cent less than the inflated figure of Rs 2,700 crore that had been reported.
Raju arranged Rs 1,230 crore “to keep operations going” at Satyam over the last two years by pledging the founders’ shares and raising funds from other sources, he said.
“What started as a marginal gap between actual operating profit and the one reflected in the books of accounts continued to grow over the years,” Raju said. “It was like riding a tiger, not knowing how to get off without being eaten.”
Raju, who was barricaded in his Hyderabad office all day today, said his concern was that poor performance, combined with the fact that promoters held a small stake in the company, would make Satyam an easy target for a takeover, exposing the inflated figures.
B Rama Raju, managing director of the company, also resigned today. Both will, however, continue in the position till the current board is expanded. Ram Mynampati, president (commercial and healthcare business), has been appointed interim CEO.
Meanwhile, the company has formed a SWAT team consisting of senior leaders — many of them Satyam veterans with a minimum experience of 10 years in the company and more than 20 years in the industry — to steer the company through the crisis.
Swift action: After Raju’s disclosure this morning, the government and regulators swung into action quickly. Sebi said a probe team will visit Satyam’s offices in Hyderabad Thursday to inspect the company’s accounts. Meanwhile, the corporate affairs ministry has given the Registrar of Companies (RoC), Hyderabad, time till January 14 to submit a report on the statement sent by Raju. Minister of Corporate Affairs Premchand Gupta said: “No leniency will be shown to those found guilty.”
Satyam’s auditors — PricewaterhouseCoopers — also came under fire, with the Institute of Chartered Accountants saying it will take action after investigations.
Sources familiar with the developments said Raju was forced to make this revelation after DSP Merrill Lynch, which was appointed by Satyam to look for a partner or buyer for the company a week ago, terminated its engagement with the company after it found financial irregularities. Merrill Lynch is also understood to have sent the information and the reason for their termination of the contract to the BSE, Sebi and even the New York Stock Exchange, on which Satyam is listed. This left Raju with no other option but to resign.
Raju said he was “submitting himself to the laws of the land and the consequences thereof” but corporate lawyers said the Companies Act, 1956, provides for imprisonment for up to two years for providing false statements. Section (628) also has provision for a fine. In addition, the government has the power to suspend the entire board in the interest of the shareholders and appoint directors.
The government can either initiate suo motu action against the company, based on reports available so far, or wait for the report from RoC before taking action. The ministry of corporate affairs has a serious fraud office (SFO), which was set up to investigate offences of this nature.
“This is a clear criminal breach of trust,” said Somasekhar Sundaresan, partner of J Sagar Associates, adding that the company violated Sebi (Prohibition of Fradulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003, under which “making a statement or purveying information by a person which he does not believe to be true is an offence”.
Assessing the damage: “This quarter will be tumultuous for us,” interim CEO Ram Mynampati said in an emailed statement to Satyam’s employees. “Rumours will abound and it would be fair to assume that competition will try to leverage it to their advantage.”
Mynampati, who has been mandated by the board to steer the company through this crisis, expressed “shock” at the disclosures. “We recognise that our associates have committed a significant part of their careers to build Satyam. We will pursue all avenues to secure their future in the company,” Mynampati added.
Satyam will hold a press conference at its headquarters in Hyderabad in the next 24 hours.
Employees confused: However, Satyam’s over 53,000 employees are not impressed. “We have been trying to get in touch with our seniors but they have simply vanished,” said a mid-managerial level employee. The top management, said employees, have been “avoiding talks with junior and mid-level employees”.
They maintain that the management didn’t bother clarifying matters when independent directors resigned from Satyam, nor were they forthcoming about Raju’s resignation.
Most Satyam employees were shocked to see Raju owning up to fraud. An employee, who has been working in Satyam for seven months, said, “He was our hero and we felt privileged to be a part of the Satyam family. But now, we can only worry about what our position will be if another company takes over.”
Future tense: Satyam may also lose clients, and become an unattractive proposition — both for investors and outsourcing companies, analysts said. Sudin Apte of Forrester asserts that “30 to 50 per cent of Satyam’s clients will review their deals”. These, he explained, are primarily the 100-odd clients that have deals of around $1 million or less. He added that “Satyam’s attraction as a company has decreased, and this also result in a slightly lower enthusiasm to buy from Indian players”. But will India’s outsourcing/offshoring image also take a hit? Nasscom president Som Mittal, said: “We are shocked with the disclosure of both the magnitude and content of fraud. The IT-BPO industry has high sets of corporate governance and this is an isolated case of governance failure. We are closely working with the Task Force set up by Satyam and our priority at this point is the 50,000 employees and customers of the company.”
Commenting on whether the software body will take any action against Satyam, Mittal said, “There are enough provisions in the law and we are not taking any action. The company will remain on Nasscom’s list. Also, the blame for such an isolated incident should not be put on the entire country or industry because such incidents have taken place in Europe and more recently, in the US.”
Funds exit: Some of the big institutional shareholders have already started exiting the company. On the BSE and NSE today, these shareholders sold 8.62 per cent of their combined holdings. Abardeen, one of the largest shareholders, sold the entire 5.6 per cent stake it had in Satyam, and Swiss Finance also exited. Stock Exchange data showed huge sales by Morgan Stanley and Fidelity as well.
Shock & dismay: The reaction from India Inc was one of shock and dismay. Infosys, India’s second-largest software company, called the incident “deplorable,” R C Bhargava, Chairman, Maruti Suzuki (and an independent director on many boards) admitted that “the Satyam episode has tarnished the image of independent directors at Satyam.” He wondered how the internal audit committee (mostly populated by independent directors) could have missed the irregularities.
JJ Irani, Chairman of expert committee to draft the new Companies Act, Director of Tata Sons, said, “This is a lesson for corporate houses and they should wake up to reality. In the new companies Act, we proposed to give more powers to independent directors. They are completely in the dark. They should be well informed and kept active.”
Rajeev Chandrasekhar, MP and President, Ficci, said, “This fraud on the investors and employees of the company shows a systemic breakdown in the audit and board oversight of the company. Questions will need to be asked about how this happened and who caused it to happen,” he added.
CII Director General Chandrajit Banerjee said the developments at Satyam need to be seen as exceptions to the rule because standards of corporate governance in India are among the highest in the world today.
Brokerage houses, on their part, were blunt. Hitesh Agrawal, Head (Research), Angel Broking, said: “This has shaken the confidence of investors — both domestic and global — the repercussions of which could be felt over the medium-term”.
In its note to its investors on Wednesday, CLSA, a brokerage house covering the Asia-Pacific markets, said: “In this scenario, the January 10 board meeting of Satyam now becomes irrelevant. When there is no cash, how can there be a buyback? And where did the cash go? Only an investigation can tell.”
A Credit Suisse statement, too, said the Satyam episode “clearly indicates that the current financials of Satyam cannot be relied upon. As such, we are unable to issue any further investment advice on Satyam and suspend our coverage of the stock”.
Temasek’s Merrill losses could exceed $2bn
By Saskia Scholtes and Greg Farrell
January 7 2009
Temasek, the Singapore state investment fund, is sitting on significant paper losses related to its stake in Merrill Lynch, the investment bank acquired by Bank of America last week.
The state agency’s unrealised losses could amount to more than $2bn, excluding any hedges, according to a Financial Times analysis based on publicly available filings.
The loss is emblematic of the damage the financial crisis has wrought on sovereign wealth fund investments in the banking sector and helps explain why funds have been reluctant to commit further capital to banks.
Some 40 per cent of Temasek’s portfolio is in the financial sector, and it has suffered paper losses on other investments, including Barclays, Bank of China and China Construction Bank.
Temasek on Monday disclosed it had converted its 13.7 per cent stake in Merrill into BofA shares following the acquisition.
On December 31, the last day of trading before the deal closed, Temasek’s remaining stake in Merrill, for which it paid an average of $23 a share, had dropped to $12.10.
After ploughing $5bn into Merrill between December 2007 and February 2008, and with a further $900m commitment last summer, Temasek owns 189m BofA shares, according to Monday’s disclosure. At Wednesday’s opening price, they were worth $2.7bn.
However, Temasek appears to have sold more than 30m shares of Merrill stock in the first and third quarters of 2008, according to regulatory filings. Even if Temasek sold at the lowest possible prices in these periods, the sales would have generated a modest profit to defray some of Temasek’s unrealised loss.
Temasek declined to comment.
It could have been worse. Temasek’s initial investment allowed it to buy more than 104m shares at $48 per share.
But after Merrill was forced to raise further capital in July, the terms of Temasek’s original investment were reset. This effectively bought Temasek 151m new shares in Merrill for just under $6 per share, bringing the average price paid per Merrill share to a little over $23.
Temasek’s investment suffered again in September, as Merrill shares plunged on concerns about the US banking sector.
But any losses seemed to vanish when BofA agreed to buy Merrill in an all-stock deal which valued the latter at $29 a share. BofA’s shares have since slumped, however.
The $8 trillion bailout
Many details of Obama's rescue plan remain uncertain. But it's likely to cost at least $700 billion - and that would push Uncle Sam's bailouts near $8 trillion.
By David Goldman
January 6, 2009
NEW YORK — Sitting down? It's time to tally up the federal government's bailout tab.
There was $29 billion for Bear Stearns, $345 billion for Citigroup. The Federal Reserve put up $600 billion to guarantee money market deposits and has aggressively driven down interest rates to essentially zero.
The list goes on and on. All told, Congress, the Treasury Department, the Federal Reserve and other agencies have taken dozens of steps to prop up the economy.
Total price tag so far: $7.2 trillion in investment and loans. That puts a lot of taxpayer money at risk. Now comes President-elect Barack Obama's economic stimulus plan, some details of which were made public on Monday. The tally is getting awfully close to $8 trillion.
Obama's plan would combine tax cuts with infrastructure job creation efforts. Economists say it could serve as an integral piece to the government's remaining economic recovery puzzle.
"This plan will be the first direct tool to make additions to disposable income," said Lyle Gramley, an economist with Stanford Group and former Fed governor. "None of the other efforts have done that directly."
Gramley said that a stimulus program from the government is a necessary complement to the Fed's traditional rate-cutting tool. Together with existing actions, stimulus can provide a wider reach to the government's economic intervention.
"Monetary stimulus alone is not enough - it must be combined with fiscal stimulus if you want more bang for your buck," he noted.
But the new program, which Obama aides have said could total $775 billion, will also weigh heavily on the ballooning federal deficit. The current fiscal year is barely a few months old and already the government is running a deficit exceeding $400 billion -- nearly the same amount as all of last year. Many economists believe it will top $1 trillion, not even counting stimulus.
Some say that the benefits of massive spending outweigh the cost of inaction.
"While it seems like quite a lot, we don't really need to focus on the cost due to the depth of the recession," said Mark Vitner, economist with Wachovia.
Others, while saying that government action is needed, question the vast sums that are being allocated and proposed.
"The government says it can spend the money better than you can, but that hasn't been the case in the past," said Bill Beach, director of the center for data analysis at the conservative-leaning Heritage Foundation. "That will really show up when they have to raise taxes in the future to make up for the increasing deficit."
Step 1: Trying to stave off the recession
So where does Obama's plan fit in with Uncle Sam's unprecedented onslaught of efforts to stabilize the economy?
The story begins more than a year ago with the Federal Reserve.
In September 2007, with the housing market in its early decline and credit markets showing signs of trouble, the Fed began to lower its key fund rates from 5.25% in an attempt to boost economic activity and ward off a recession.
The economy nevertheless entered a recession in December 2007. Though the Fed rate is now at a targeted level of close to 0%, economists have noticed little change by way of increased availability of credit, lower private interest rates or a booming stock market.
"None of those things have happened," said Gramley. "Fed policy has not had any kind of impact like it normally has, even as the Fed lowered the funds rate a long way."
Concerned about the threat of a recession, lawmakers passed $168 billion in tax breaks to consumers and businesses in February of last year. The aim: boost spending, which accounts for more than two-thirds of the nation's gross domestic product.
The rebates had a short-lived impact, helping to boost GDP 2.8% in the second quarter of 2008, compared to a measly 0.9% in the first quarter. But last summer's rapidly rising fuel prices undid the spending trend, sending GDP down 0.5% in the third quarter.
Step 2: Stopping the bleeding
The credit crisis that began in mid-September unwound any hopes of staving off a recession. The government's focus instead became a massive effort to keep systemically significant institutions from collapsing.
After Bear Stearns' $29 billion bailout in March, and the $200 billion government takeover of mortgage finance giants Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) in early September, the Treasury and Fed shifted bailout efforts into top gear after Sep. 15. They bailed out AIG for $152.5 billion, Citigroup for $325 billion and the automakers for $23.4 billion in just the past few months.
Treasury also took hold of the $700 billion Emergency Economic Stabilization Act, dedicating $250 billion to capital investments in banks.
In a status report delivered last week, Treasury said its efforts have prevented widespread failure of financial institutions, but they conceded that the credit crisis won't ease until the economy recovers.
"The financial system is fundamentally more stable than it was when Congress passed the legislation," said the report. "As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans."
Step 3: Recovery efforts
To help the economy heal, the government has committed record sums since September 2008 in an attempt to restore the flow of credit, boost the job and housing markets and - with Obama's plan - get consumers spending again.
In the past three months, the Federal Reserve launched a $600 billion money market guarantee program, a $1.4 trillion program to boost the commercial paper market - a key source of short-term business financing, a $200 billion consumer loan-backed securities purchasing program, a $500 billion mortgage-backed securities purchasing program and a $100 billion program to buy up Fannie and Freddie debt.
As a result, the Fed's balance sheet - the total worth of the assets the Fed obtained as a result of its lending - currently totals $2.3 trillion, up from $933 billion on the week before Lehman Brothers collapsed.
Obama's estimated $775 billion plan could serve as the next step in the recovery efforts. While most of the Fed's programs have been aimed at boosting lending, Obama's economic stimulus plan is aimed primarily at job creation and consumer spending.
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