If international financial centres could be created by government decree alone, then Singapore would have eaten Hong Kong’s lunch in the mid-1990s, and any remaining crumbs would have been gobbled up by Shanghai in the early years of the present decade.
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Shaky Shanghai poses no threat to Hong Kong
Tom Holland
15 April 2009
Oh, the gnashing of teeth and tearing of hair!
The announcement last month by the State Council that Shanghai will become a major international financial centre by 2020 has prompted the usual bout of agonised soul-searching among Hong Kong-based commentators.
“How can Hong Kong hold its own against such a mighty competitor backed by the all-powerful central government?” they wail, usually before going on to suggest that the city should throw itself on the mainland’s mercy and either plead for special favours of its own from a benevolent Beijing or accept its fate and agree to complete amalgamation with Guangzhou as soon as possible.
You’d think they should know better by now.
If international financial centres could be created by government decree alone, then Singapore would have eaten Hong Kong’s lunch in the mid-1990s, and any remaining crumbs would have been gobbled up by Shanghai in the early years of the present decade.
But great financial centres are not conjured into existence by government diktat. Down the ages they have all - Venice, Amsterdam, London, New York and Hong Kong itself - grown up servicing centres of vibrant private enterprise.
So instead of worrying that Shanghai is about to usurp Hong Kong’s position, observers here might like to take a closer look at Shanghai’s economic structure. The picture is revealing and, for Hong Kong, reassuring.
Far from launching its bid for financial supremacy from a position of strength, Shanghai is finding the weaknesses of its model cruelly exposed by the current economic slump.
Although there is no commoner symbol of China’s thrusting new entrepreneurial economy than the Pudong skyline in Shanghai, the image is misleading.
Shanghai is far from being a hotbed of enterprise. Ever since Jiang Zemin and Zhu Rongji took over the city’s government in the late 1980s, Shanghai’s economic policy has been aimed overwhelmingly at promoting state sector and foreign investment.
For years, the government funded massive investment programmes by requisitioning and auctioning land, paying minimal compensation, and ploughing the proceeds into state-owned industries. Meanwhile, every effort was made to attract investments from foreign manufacturers of high technology by offering generous tax breaks and other incentives.
In some ways, the policy was a roaring success. Between 2000 and 2004, the city’s heavy industry grew at a 25 per cent annual rate, and today Shanghai is China’s leading producer of cars, power generating equipment, personal computers and many important chemicals.
But the city paid a heavy price. Discriminated against by tax and other regulations, denied access to land and tied up in red tape, local private entrepreneurs got squeezed out. According to Massachusetts Institute of Technology professor Huang Yasheng, the local private sector’s share of Shanghai’s fixed asset investments fell from a high of 10 per cent in the mid-1980s to a negligible amount this decade (see the first chart).
As a result, private income growth was suppressed. Although today Shanghai’s per capita gross domestic product is around five times the national average, disposable household income is only about 1.8 times the mean (see the second chart).
The concentration of so much wealth in the hands of the state and foreign-invested businesses has acted as a further disincentive to private enterprise. Today, according to Mr. Huang, Shanghai not only has relatively fewer private companies than almost any other province in China, but they are smaller too.
The policy may have generated impressive headline growth during the fat years, but as Mr. Huang warned last year: “The Shanghai model will come back to haunt Shanghai if there is an external shock.”
Today, with China suffering massive overcapacity in many heavy industries, with exports through Shanghai’s port down 10 per cent year on year and local government revenues also down by about 10 per cent, that shock is now here and Shanghai’s economy is looking vulnerable.
The city’s response has been to ask Beijing for special favours to promote its financial sector. But with no private sector to speak of and a woefully inadequate regulatory regime, Shanghai is challenging from a position of weakness, not strength. Despite all the breast-beating, Hong Kong has little to fear.
Banks Ramp Up Foreclosures
Increase Poses Threat to Home Prices; Delinquent Borrowers Face New Scrutiny
By RUTH SIMON
APRIL 15, 2009
Some of the nation's largest mortgage companies are stepping up foreclosures on delinquent homeowners. That will likely lead to more Americans losing their homes just as the Obama administration's housing-rescue plan gets into gear.
J.P. Morgan Chase & Co., Wells Fargo & Co., Fannie Mae and Freddie Mac all say they have increased foreclosure activity in recent weeks. Those companies say they have lifted internal moratoriums which temporarily halted foreclosures.
Some mortgage companies had stopped foreclosing on borrowers as they waited for details of the Obama administration's housing-rescue plan, announced in February, which provides incentives for mortgage companies and investors to reduce borrowers' payments to affordable levels. Others had temporarily halted foreclosures while they put their own programs in place, or in response to changes in state laws.
Now, they have begun to determine which troubled borrowers are candidates for help, and to move the rest through the foreclosure process.
The resulting increase in the supply of foreclosed homes could further depress home prices and put additional pressure on bank earnings as troubled loans are written off.
Some of the mortgage companies are themselves receiving funds under the government's financial-sector bailout, which could make their actions politically sensitive. But mortgage companies say they are taking steps to keep borrowers in their homes, and are only resorting to foreclosure when there are no other options.
Foreclosure sales had dropped in the second half of 2008 as mortgage companies delayed taking action against delinquent borrowers. But sales have been edging up this year, according to LPS Applied Analytics, which tracks loan performance. Foreclosure-related filings increased by nearly 6% in February from the month earlier, and were up almost 30% from February 2008, according to RealtyTrac. The backlog of seriously delinquent loans has been growing.
In California, notices of trustee sales, which are preludes to foreclosure sales, climbed by more than 80% to 33,178 in March, from February, according to data from ForeclosureRadar.com and the Field Check Group. The increase reflects both the expiration of foreclosure moratoriums and a California law enacted late last year that temporarily delayed default and foreclosure notices, says Mark Hanson, president of the Field Check Group, a research firm.
Ronald Temple, co-director of research at Lazard Asset Management, expects home prices to fall 22% to 27% from their January levels. More than 2.1 million homes will be lost this year because borrowers can't meet their loan payments, up from about 1.7 million in 2008, according to Moody's Economy.com.
Mortgage-servicing companies, such as J.P. Morgan Chase and Wells Fargo, collect mortgage payments and work with troubled borrowers, both for loans they own and those held by investors.
J.P. Morgan Chase has increased foreclosure actions since the expiration of a moratorium on new foreclosures that began on Oct. 31, and a later moratorium put in place at President Obama's request. The Oct. 31 moratorium delayed foreclosures on more than $22 billion of Chase-owned mortgages involving more than 80,000 homeowners.
"We had stopped putting additional loans into the foreclosure process so we could be sure that delinquent borrowers would have every opportunity to take advantage of new initiatives that we were putting in place," a Chase spokesman says. Borrowers who are now receiving foreclosure-sale notices, he said, "own vacant properties, have not been in contact with us and/or do not qualify for the modification programs."
Citigroup Inc. says it stopped all foreclosures until March 12, at the Obama administration's request, on loans serviced for Fannie and Freddie. Since then, says a spokesman, it has "reverted to our previous business-as-usual moratorium." Under that policy, it will not initiate a foreclosure sale for any borrower who is working with Citigroup and is a good candidate for a loan modification, provided Citigroup owns the loan or has investor approval. "For borrowers who do not qualify under these criteria and where no other options are available, we will move forward with foreclosures," the spokesman says.
Wells Fargo has also increased foreclosure actions since the expiration of its foreclosure moratorium, put into place while it awaited details on the administration's plan. Wells Fargo "will continue to work with our customers to find solutions up to the actual point of a foreclosure sale," a Wells Fargo spokesman says. "But the expiration of foreclosure moratoriums is having an impact."
Both Fannie and Freddie have stepped up sales of foreclosed properties since their moratoriums ended on March 31. Freddie says it has started to complete some foreclosure sales, such as those involving investment properties or second homes, though it continues to delay foreclosures on loans that may be eligible for modification under the Obama plan.
Fannie has told servicers that "a foreclosure sale may not occur on a Fannie Mae loan until the loan servicer verifies that the borrower is ineligible" for a loan modification under the Obama administration's plan, "and all other foreclosure prevention alternatives have been exhausted," a Fannie spokeswoman says.
GMAC's mortgage division, which had temporarily halted foreclosures while awaiting details of the Obama plan, is now reviewing loans to see which ones will qualify under the program. So far, about 10% of borrowers in some stage of foreclosure appear to be eligible for the federal program, a company spokeswoman says. Although GMAC may be able to work with investors who own these loans to come up with another solution, she says, many borrowers who don't qualify for help under the federal program are likely to wind up in foreclosure.
Mortgage companies are sorting through loan files to determine which borrowers are candidates for help. "At the time a moratorium expires, we have a team of folks who will pore through all of those loans where borrowers have not paid before we will take the next step in the process," says Jim Davis, executive vice president for American Home Mortgage Servicing Inc. "If there is any borrower contact, we will hold off on the foreclosure process until we've exhausted every effort to assist that borrower."
Still, some borrowers who are currently talking to their mortgage companies are also likely to wind up in foreclosure once their files are reviewed. "We are getting so many of these cases where people don't fit the new [Obama] program," says Michael Thompson, director of Iowa Mediation Service, which works with troubled borrowers. Many borrowers are unemployed or underemployed or have credit problems that go well beyond their mortgage troubles, he says.
Many have been "playing for time" while the moratoriums have been in place, he says. But the delays have only increased the amount of interest and fees they owe, making their loans "nonviable in the long run."
Many troubled loans will ultimately wind up in foreclosure because the borrower doesn't have sufficient income to make even a reduced mortgage payment, or doesn't respond to the mortgage company's requests for information. "Certainly half of the loans that would have wound up in foreclosure before the foreclosure moratoriums went in place" will ultimately wind up in foreclosure, says Michael Brauneis, director of regulatory risk consulting at Protiviti Inc., a consulting firm.
While many troubled loans are held by hedge funds, pension funds and other investors, the expiration of foreclosure moratoriums could also put a dent in bank profits, says Frederick Cannon, an analyst with Keefe, Bruyette & Woods. The moratoriums "have to some degree postponed the realization of problems" and "may help bank earnings in the first quarter" by delaying charge-offs of some troubled loans, he says.
Sales-Tax Revenue Falls at Fastest Pace in Year
By CONOR DOUGHERTY
APRIL 15, 2009
State and local sales-tax revenue fell more sharply in the fourth quarter of 2008 than at any time in the past half century, and has continued to erode through the beginning of 2009, according to a report released Tuesday.
The report by the Nelson A. Rockefeller Institute of Government at the State University of New York underscores how swiftly the consumer slowdown has eaten into municipal budgets. The drop in tax revenue has forced cities and towns of all sizes to cut everything from police to summer pool hours, and has sent legislatures scrambling for federal economic-stimulus funds to help ease budget gaps.
"The sales tax has been absolutely hammered," said Don Boyd, senior fellow at the institute.
State and local sales taxes, among the largest sources of revenue for municipalities, fell 6.1% in the fourth quarter of last year, as consumers bought fewer clothes, ate out less and canceled vacations. Revenue from personal income taxes was down 1.1% in the fourth quarter; corporate income taxes dropped 15.5%, reflecting weaker profits.
The declines have continued through the beginning of this year. In the first two months of 2009, the 41 states that have reported tax revenue saw total receipts decline 12.8%, versus the same period a year ago.
States have so far been hit harder than towns and cities. Overall, states' taxes declined 4% in the final three months of 2008 versus the same period in 2007, the first decline in six years, according to the analysis of state data by the Rockefeller Institute. Local tax collections rose 3.2%, as gains in property taxes offset falling sales taxes.
While income and property taxes have generally fared better than sales taxes, those revenues are also under stress. Property taxes typically lag behind real-estate prices, because it takes municipalities a year or longer to reassess the home values on which those levies are calculated. With home prices still falling, property taxes are also set to grow more slowly or in some cases decrease.
Carnage in the stock market also is likely to substantially reduce income-tax collections. With tax day on Wednesday, this is the time of year when high-income earners start writing checks to cover capital gains and other investment-based income taxes that have accrued over the past year. "This time around, the checks will be much smaller, and some [people] may be seeking refunds," Mr. Boyd said.
Further declines in tax revenue could force legislatures -- which in many cases used heavy cuts to balance this year's budget -- to make further reductions later this year.
Did Goldman Goose Oil?
How Goldman Sachs was at the center of the oil trading fiasco that bankrupted pipeline giant Semgroup.
Christopher Helman and Liz Moyer
April 13, 2009
When oil prices spiked last summer to $147 a barrel, the biggest corporate casualty was oil pipeline giant Semgroup Holdings, a $14 billion (sales) private firm in Tulsa, Okla. It had racked up $2.4 billion in trading losses betting that oil prices would go down, including $290 million in accounts personally managed by then chief executive Thomas Kivisto. Its short positions amounted to the equivalent of 20% of the nation's crude oil inventories. With the credit crunch eliminating any hope of meeting a $500 million margin call, Semgroup filed for bankruptcy on July 22.
But now some of the people involved in cleaning up the financial mess are suggesting that Semgroup's collapse was more than just bad judgment and worse timing. There is evidence of a malevolent hand at work: oil price manipulation by traders orchestrating a short squeeze to push up the price of West Texas Intermediate crude to the point that it would generate fatal losses in Semgroup's accounts.
"What transpired at Semgroup was no less than a $500 billion fraud on the people of the world," says John Catsimatidis, the billionaire grocer turned oil refiner who is attempting to reorganize Semgroup in bankruptcy court. The $500 billion is how much the world would have overpaid for crude had a successful scam pushed up oil prices by $50 a barrel for 100 days.
What's the evidence of this? Much is circumstantial. Proving oil-trading manipulation is difficult. But numerous people familiar with the events insist that Citibank, Merrill Lynch and especially Goldman Sachs had knowledge about Semgroup's trading positions from their vetting of an ill-fated $1.5 billion private placement deal last spring. "Nothing's been proven, but if somebody has your book and knows every trade, it would not be difficult to bet against that book and put the company into a tremendous liquidity squeeze," says John Tucker, who is representing Kivisto.
What's known for sure is that Goldman Sachs, through J. Aron & Co., its commodities trading arm, was in prime position to use such data--and profited handsomely from Semgroup's fall. J. Aron was Semgroup's biggest counterparty, trading both physical oil flowing through pipelines and paper oil, in the form of options and futures.
When crude oil peaked in July, Semgroup ran out of cash to meet margin requirements on options contracts it had with Aron, contracts on which it had paper losses of $350 million. Desperate to survive, Semgroup asked Aron to pony up $430 million it owed on physical oil. Aron said no, declared Semgroup in default on its contracts and demanded immediate payment of losses.
Some answers may emerge in late March when former FBI director Louis Freeh releases a report on the trading surrounding Semgroup's demise. He was hired by Semgroup and given subpoena power by the bankruptcy court judge in Delaware. Meanwhile the Securities & Exchange Commission is investigating, and lawyers involved in the bankruptcy say that Manhattan District Attorney Robert Morgenthau's office is looking into the actions of New York firms in the collapse. His office declines to comment.
Goldman says only that any allegations of oil price manipulation are "without foundation." Merrill and Citi declined comment.
Goldman and Aron (where Goldman Chief Executive Lloyd Blankfein got his start) have had a deep connection with Semgroup. In 2004 two former Goldman bankers bought a 30% stake in Semgroup for $75 million through their New York private equity firm, Riverstone. Both men, Pierre Lapeyre and David Leuschen, had helped form Goldman's commodity trading business, and Leuschen had been a director at Aron.
In late 2007 Semgroup entered into an oil-trading agreement with Aron. The companies began trading both oil futures and physical crude. Aron sent much of the oil it bought from Semgroup to a Coffeyville, Kans. refinery in which Goldman owns a 30% stake.
Semgroup's troubles mounted in the first quarter of 2008, when it had to post $2 billion in margin to cover losses. Goldman offered to underwrite a $1.5 billion private placement. Kivisto's attorney Tucker and others believe that it was in the Wall Street research for this offering that Semgroup's trading bets became fatally exposed. In April the banks (Merrill Lynch and Citibank were co-underwriters) required that Semgroup submit its trading positions to a stress test, a process one source describes as a "proctology exam." Goldman ended up abandoning the placement as investors balked at braving the liquidity crunch.
Meanwhile the futures markets had gotten wacky. On June 5, with no news catalysts, oil futures spiked $5 a barrel, the biggest one-day jump since the outbreak of the first Gulf war. The next day, on no news, the price jumped another $10 to $138. Traders say that in the days leading up to the $147 peak on July 12 there was the smell of blood in the water. "We just kept bidding the market higher," one trader says.
According to a trading summary submitted with court documents, Semgroup had entered into some terribly costly trades with Aron. In February 2008 Semgroup sold Aron call options on 500,000 barrels of oil for July delivery with a strike price of $96 per barrel. That meant that at the peak Semgroup's loss on each of those barrels was $51, or $25.5 million on that trade. Goldman says it "can't comment on the trading positions of counterparties."
Shortly before it filed for bankruptcy, Semgroup sold its trading book to Barclays Capital. Barclays' bold bet was that the price of crude would fall, erasing the losses. It is believed that 30 days later Barclays was sitting on a $1 billion gain as oil indeed fell, to $114 a barrel. Barclays wouldn't comment other than to confirm it still owns the book. That prices plunged after Semgroup failed is more evidence of manipulation, says Catsimatidis: "With the portfolio in Barclays' hands they could not squeeze the shorts anymore. The jig was up, and oil collapsed."
Since the bankruptcy, Aron has agreed to pay Semgroup only $90 million to settle up accounts. That's not enough for the dozens of oil producers who still haven't been paid for $430 million in oil that Semgroup delivered to Aron. "We sued J. Aron because Semgroup didn't do it," says Phillip Tholen, chief financial officer of oil company Samson Resources. "I can't fathom why they wouldn't file against J. Aron for those monies."
One possible answer: the Goldman connection. Going after Aron's cash would complicate matters with Riverstone, which still wields sway over the board. The creditors have reason to keep Riverstone and Goldman happy; the duo has teamed up to buy myriad energy assets in recent years, most notably a $22 billion leveraged buyout of pipeline king Kinder Morgan. They are likely to team up again to buy choice Semgroup assets out of bankruptcy.
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