And how correct Mr. Schiff was -{7EFFEE03-A6D2-470D-AD7D-A7D861C4537F}&pid={76040855-7D4D-4933-A7AC-4069867D1D8D}

"The party is over," said Peter Schiff, president of Euro Pacific Capital. "The current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow-and-spend culture that has all but defined us for a generation. ... The sooner we come to grips with this, the better."


Not the same MBA degree your grandfather got!  Or your mother, either.  Housing crisis looming?  FoodGasOil SupplyWall Street woes?   A.I.G.?

CAPTIONS TO PHOTOS/HOT LINKS, ABOVE (l. to r.):  Definitions of "arbitrageur" - e.g., "Credit Default Swaps" (a "synthetic" instrument) AND/OR "Collateralized Debt Obligations" or "CDO's"here. newly developed.  EU more here Municipal and County defaults coming (2012)?  Dollar downgrade?  BRIC economies next?


“I think there’s some chance that we get a deal done in the early weeks of January, which technically means you’re going over the cliff,” Representative Jim Himes, Democrat of Connecticut, said on CNBC on Wednesday.

Uncharted waters ahead for  Wall Street?  Main Street, too?

The Long Island Sound is home to sailors from all tax brackets - learners from Youth sailing program (l).

OK, it is four years later...
Putting a Speed Limit on the Stock Market
October 8, 2013

When Brad Katsuyama was running the U.S. trading desk for the Royal Bank of Canada, his clients would send in orders every day, but every day, when Katsuyama went to buy or sell, something would go wrong. When he wanted to buy, offers to sell shares would suddenly vanish, and the price of the stock would shoot up. When he wanted to sell, the same thing would happen in reverse. “I started to realize that, day in and day out, I was getting screwed,” Katsuyama told me recently.

The problem was that he was often too slow. Back then, in 2007, the stock market was in the middle of a significant shift. A combination of new technology and new regulations had led to the rise of firms focused on high-speed, computer-driven operations known as high-frequency trading. With the help of complex algorithms and ultrafast Internet connections, the new traders could buy and sell stocks in fractions of seconds, looking to make a seemingly infinite number of quick, tiny profits that added up. By 2009, high-frequency traders were making billions of dollars a year, and their transactions accounted for about 60 percent of U.S. stock trades.

Some of these traders acted like useful stock-market middlemen, constantly buying and selling, bridging the bid-ask gap between other buyers and sellers. But plenty of others used the new technology to foil long-term investors by trading ahead of the slower players. A trader’s algorithm might detect that Katsuyama was trying to buy 100,000 shares of a stock and then immediately start buying it to drive up the price. Indeed, certain high-frequency traders were forcing long-term investors, including those who managed funds that held ordinary people’s retirement accounts, to constantly buy higher and sell lower. The game seemed rigged.

At first, Katsuyama responded by creating an algorithm intended to make it harder for high-frequency traders to race in front of his trades. But then, he told me, he realized his clients’ real problem was not the traders themselves; it was the stock exchanges. As high-frequency traders proliferated, these platforms were adding clever services to attract their business. “If you want to solve the problem, you go to its root,” Katsuyama said. “And at the root, the problem is the market.” So last year, he and a few of his colleagues decided to leave the bank and start a new place for investors to trade. Rather than woo high-frequency traders, they would limit their advantages. Their trading platform, IEX, is set to open later this month.

The rise of high-frequency trading is often told as a technology story. Hedge funds, Wall Street banks and other firms used increasing computing power to write ever-smarter, ever-faster trading algorithms; fantastically expensive fiber-optic lines were built to increase transaction times by milliseconds. But the rise of high-frequency trading is also a result of the unintended consequences of regulation. Back in the ’90s and mid-aughts, a series of S.E.C. rules were designed to help ordinary investors by forcing stock exchanges to compete against one another. Exchanges could no longer hoard orders; if a better offer existed on another trading platform, they’d have to send it there.

It was a well-intentioned idea designed to better match buyers and sellers, but it wound up complicating things. New exchanges quickly arose to attract customers, and what is blandly referred to as the stock market soon became a complex web of more than a dozen separate exchanges. Today, it’s not just the familiar New York Stock Exchange and Nasdaq, but also lesser-known ones with names like BATS and Direct Edge. Exchanges are now basically just technology companies, rooms full of computers that match buyers and sellers. There are also roughly 50 so-called dark pools, which allow traders to trade the same stocks that change hands on ordinary exchanges but don’t require participants to post as much information. (IEX will be a dark pool with plans to grow into a full-fledged exchange.) “I don’t think anybody who was putting these rules together envisioned we would have 13 exchanges,” Charles Jones, a finance professor at Columbia Business School, told me.

The recent proliferation of places to trade has forced exchanges to compete more aggressively for business. And because exchanges make money partly based on volume, it was natural that they would compete against one another to court high-speed traders. (High-speed trading has fallen off a bit from its peak a few years ago, but it still accounts for about half of all stock trades.) This competition, Katsuyama says, led the exchanges to put the needs of high-frequency traders before those of long-term investors. They created a new system of rebates and fees for different traders that, according to one analysis, cost long-term investors billions of dollars. Exchanges also started renting out space right next to the computers that powered the exchanges. Since information takes time to travel over networks, traders whose computers were next to the exchange’s computer would know what was happening on the exchange fractions of a second before traders whose computers were farther away. And those fractions of seconds could mean billions of dollars. No wonder Katsuyama felt cheated.

The beauty of the stock market is that it’s an astonishingly easy place for buyers and sellers to connect with one another. If you want to sell almost any stock, you can find a buyer within seconds and know within a few cents how much the buyer will pay. (Compare that with selling a house or a car or even an old piece of furniture on Craigslist.) In the old days, the stock market worked because there were people — so-called market makers — whose job was to ensure that there was almost always a willing buyer and seller for every stock. In the past decade, their jobs have been largely replaced by high-frequency traders who provide this middleman service. Over time, this shift to technology has generally made it cheaper for everyone, including long-term investors, to buy and sell stocks. But there are notable exceptions. A trader using a high-speed connection to jump in front of a deal between a willing buyer and seller is driving up costs for the buyer and isn’t really improving the market.

The goal with IEX, whose owners include mutual-fund companies and other big investors, is to attract only the high-frequency traders who add liquidity and keep away those looking for the kinds of advantages that Katsuyama says are unfair. IEX’s computers will be set up so that, no matter how far away traders’ machines are, everyone will get market information at the same time. IEX also won’t offer many of the special order types favored by high-frequency traders. Other exchanges have created complex structures of fees and rebates that have led to payouts for some traders and higher fees for others; at IEX, everyone who trades will pay the same amount. “People are always looking for ways to game the market,” Katsuyama says. “They’re always looking for ways to get an edge. It’s our job to make sure that edge doesn’t exist.”

Other trading platforms have tried, in recent years, to appeal to big investors who feel as if they’re getting shortchanged. But they’ve had a hard time attracting enough business to make it easy for buyers and sellers to connect, according to Manoj Narang, of the high-frequency trading firm Tradeworx. In practice, it can be difficult to distinguish between high-frequency traders who are simply adding liquidity and the ones who are profiting from unfair advantages. Promising to create an exchange that attracts one but not the other “is a marketing ploy designed to capitalize on paranoia,” Narang says.

Many other market experts agree that the image of high-frequency traders as market manipulators is way overblown. Still, if IEX makes ordinary investors even a little more confident in the workings of the market, that alone could be a good thing for the economy. People have always worried that the market isn’t fair, but as high-frequency trading took off, those worries only seemed to increase. The share of Americans who own stocks has fallen for five straight years, according to Gallup, and just hit a 15-year low, even as the market has reached record highs. People scared away by a market that seems unfair or incomprehensible are missing out on those tremendous gains. “It should be a given that the markets work,” Katsuyama says. “The fact that they don’t is the opportunity we saw and why we started the company.”

The Only Way Out Is to Devalue
By Richard Russell,
Created 4 Oct 2012

The following is an excerpt from Richard Russell's Dow Theory Letters [1]

"Political power grows out of the barrel of a gun." Mao Tse-Tung

The US national debt is now over $16 trillion — and growing at the rate of more than $1.2 trillion a year. This is clearly unsustainable. But how to cut the debt? One way is to cut entitlements, which are growing exponentially. Will they cut Medicare? Cut food stamps? Cut any entitlements at all? No politician would dare make extensive cuts in entitlements.

OK, then raise taxes sky high for everyone, and I mean for everyone. Are you kidding? If we raised everyone's taxes to the hilt, that still wouldn't solve the US's deficit problem. Furthermore, no politician would dare vote to raise taxes sky high!

Really, then how are we going to solve the debt and deficit problems?

It is not going to be solved. The temporary "solution" will be put off for as long as our pols can put it off. But how will they put it off? It will be put off in only one way — by devaluing the currency. And surprise, that's what they're doing now.

Let me give you an example. I took out a $10,000 GI insurance policy in 1945. The payments were $20 a month. That $20 a month was a great hardship for me in 1945. In the time since, the Fed has driven up inflation at the rate of 2% a year. 75 years have elapsed since I took out that policy. Today, paying that $20 a month would be a piece of cake for me. I could pay it easily.

And that shows how they're going to "handle" the debt. They'll do it by devaluing the dollar. Twenty years from now, there'll be so many dollars floating around that our national debt will look a lot easier to handle. By printing dollars by the billions or probably trillions, the US will render the national debt much easier to deal with.

But what about the dollar? What will happen to the dollar if the Fed continues its 2% inflation program each and every year?

Answer —
The purchasing power of the dollar will slowly erode. And all other fiat currencies will decline with the dollar as they compete for exports against the dollar.

Ultimately, the whole strategy will collapse the purchasing power of the dollar. And the various fiat currencies will have lost all their purchasing power.

When will that happen?

It's happening now — but slowly. "QE to infinity" was a big step towards it happening.

In the end, it will take more and more of any given fiat currency to buy anything — a quart of milk, a shirt, a loaf of bread, a car, a house — anything. The rising debt and the government's efforts to "handle" the debt will destroy the entire monetary system. Only one form of wealth will remain — gold.

Gold? Why gold?

Gold does not need the backing of any sovereign power, gold has no counter-party — gold in itself represents pure, eternal wealth. The total world quantity of gold is limited, nobody can manufacture it — although for centuries alchemists have tried, nobody can increase it by the flick of a computer. In the end, gold will be the only true wealth. Fiat paper, the products of the central banks, will represent a symbol of man's egotism, greed and thirst for power. The only existing wealth will be the currency that men (bankers) cannot control or manufacture — gold.

Question —
Who are these people who you say thirst for power?

Answer —
They are the secretive bankers who created the Federal Reserve. The Fed was created by bankers and for bankers. As recently announced by Ben Bernanke, the Fed will buy $40 billion a month of mortgage-backed securities from the banks. In this way, the Fed will take these junk mortgage-backed securities from the banks and in return give the banks dollars. Thus, they will reliquify the banks with acceptable money, while taking these junk mortgage-backed securities off the hands of the banks.

Question —
Where will the Fed get the money to buy all these mortgage-backed securities?

Answer —
The Fed will conjure up the money out of thin air.

Question —
If all that you say is true, then why not advise your subscribers to put all their assets into physical gold?

Answer —
Because that would be inconvenient, perhaps inconvenient for a long time. The scenario I'm talking about could take place in a matter of years. In the meantime, you and I are forced to do all our transactions with fiat dollars (which are the only legal tender). If I tried to pay my restaurant bill with a small gold coin, I would be turned down, and the police would be called in.

Besides, if the current monetary system collapsed, the government in its desperation could pass a law making it a felony to transact any business transactions with gold. In that way, the government could force people to deal with Fed-created junk dollars. Which is why some analysts suggest holding your gold in a foreign country. In that case, our government could imitate France where it is against the law to take any gold out of the country. Yes, the government (or the Fed) will do whatever it takes to force us to use the Fed's unbacked junk paper.

Unintended consequences — Bernanke in his mad efforts to drive the Dow up, is doing Americans no favor. Instead of preparing for hard times as they should be doing, Americans look at the climbing Dow and say to themselves, "Things are fine and getting better. The Dow's going up, and if anything 'bad' does happen, the Fed will step in and make everything good again."

Question —
Russell, you keep talking about hard times. Why do you keep repeating that fantasy?

Answer —
I repeat it because it's starting to happen. From Friday's WSJ — "DP Warns Over Slowing Global Economy." "Trade Slows Around the World" from last week's WSJ and "Making the Best of a World Slowdown" from the Ivey Journal. Europe is in recession. China is slowing down. The smaller Asian nations are hurting. The entire global economy is deflating and deleveraging. The Fed and the government can manipulate the news and the data — but they can't manipulate the world economy. The primary trend of the world is bearish and the news is getting out.

The world is in a slow-growing economic slump and the US is part of the world. But the Fed is masking the picture with its furious money printing. As I said, the Fed is doing Americans no favor with its monetary manipulations.

From the front page of the October 2 NY Times — "Leaders At Work On Plans to Avert Mandatory Cuts Facing Jan. 1 Deadline. Efforts Take Shape In the Senate to Avoid the Fiscal Cliff."

The Fiscal Cliff is a symptom and a result of the massive US deficits. But instead of addressing the deficit problem directly, Washington's politicians will try to AVOID the symptoms, which we call the fiscal cliff.

The Times writes, "But lawmakers and aides say that a bipartisan group of senators is coalescing around an ambitious three-step process to avert a series of automatic tax increases and deep spending cuts. The process is supposed to save $4 trillion over a ten year period. Russell comment — note that the politicians' cuts and tax increases would occur over a ten year period, which is a handy way of kicking the can out a full decade...

SEC finalizes derivative definition rules
Sarah N. Lynch | Reuters
9 July 2012

WASHINGTON (Reuters) - Securities regulators on Monday finalized rules that define what kinds of derivatives products will be regulated under the new regime created by the 2010 Dodd-Frank Wall Street reform law.

The Securities and Exchange Commission voted unanimously behind closed doors to approve definitions for terms such as "swap" and "security-based swap," according to a statement.

The rules still must be jointly approved by the Commodity Futures Trading Commission, which is slated to vote on Tuesday morning at a public meeting.  The rules are a critical part of the Dodd-Frank reforms because they trigger a countdown for compliance dates that big swap players like banks will have to follow.  Once the CFTC signs off on the rules and they are published in the Federal Register, swap dealers will have two months to sign up with the regulator.

Other regulatory requirements, such as record-keeping and reporting, will also kick in after the two-month window.  The SEC did not provide any details on the final rules.  But regulators are expected to closely follow the swap definition that is laid out in the text of the Dodd-Frank law.

Critics have accused the SEC and CFTC of tackling the various Dodd-Frank derivatives rules out of order, saying they should have focused on defining a swap before moving on to craft other regulations.

Lots of resonating going on - link above left (and there are many more like it on this website), including some old articles about Treasury Secretary, planning to go home after January.

Sheila Bair Sees “Significant More Fallout” from LIBOR Scandal: “It’s Outrageous”

By Aaron Task | Daily Ticker – Thu, Jul 12, 2012 12:05 PM EDT

The U.S. market hasn't yet paid much attention to the LIBOR scandal that's gripped London, but it's getting harder and harder to ignore.

This week, the chair of the Senate Banking Committee announced he is calling Fed chairman Ben Bernanke and Treasury Secretary Tim Geithner to testify about allegations big banks manipulated LIBOR, a key lending rate in global finance. Separately, the chair of the House Financial Services subcommittee's on investigations petitioned the New York Fed for information about whether the central bank knew banks were low-balling their LIBOR rates during the crisis.

"I assume there is going to be significant more fallout" from the LIBOR scandals, says former FDIC chairwoman Sheila Bair, now a senior adviser to the Pew Charitable Trusts. "How severe and pervasive we just don't know yet."

There are actually two separate scandals here, Bair notes. The first is whether the NY Fed ignored reports of irregularities in the LIBOR market during the financial crisis, as U.K. regulators are alleged to have done.

"The Federal Reserve Bank of New York may have known as early as August 2007 that the setting of global benchmark interest rates was flawed," Reuters reports. "Following an inquiry with British banking group Barclays Plc in the spring of 2008, it shared proposals for reform of the system with British authorities."

The second is that, according to a CFTC complaint, traders at big banks actively colluded to manipulate the price of LIBOR from 2005-2008.

While declaring "it was all wrong," Bair says the allegations of price collusion among big banks is far worse than regulators condoning the low-balling of LIBOR rates during the dark days of 2008.

"Even at the height of the crisis you need to get accurate information out but I might be more understanding of that motivation vs. this collusive trading activity that was purely generated by greed," she says.

Games Bankers Play

Last week, Barclays paid roughly $450 million to settle charges by U.S. and U.K. regulators that its traders manipulated LIBOR. Most observers believe Barclays is just the first firm to settle; global regulators are investigating more than 10 other big banks, including UBS (UBS), JPMorgan (JPM) and Citigroup (C), and a federal grand jury is gathering evidence for potential criminal charges against individual traders, Reuters reports.

Led by the City of Baltimore, several U.S. municipalities have already filed lawsuits, seeking damages for interest rate swaps that were pegged to LIBOR. Analysts at Nomura Equity Research warn banks could be liable for "tens of billions" in related claims, The NY Times reports.

The Commodity Futures Trading Commission estimates over $800 trillion of financial instruments are pegged to LIBOR, including $350 trillion in swaps.

"Interest rate swaps are widely used and a very legitimate hedging tool," Bair says. "But you need integrity in the pricing mechanism. When they were based on LIBOR, at least from 2005-2008, there were a lot of games being played."

Echoing the comments here by Cumberland's David Kotok, Bair says this LIBOR scandal "absolutely" hurts confidence in the integrity of the financial market. However, she rejects the view -- commonly heard in conservative circles -- that regulators were to blame.

"Banks are responsible for their own actions," she says. "I cannot believe any regulators knew about what Paul Tucker called a 'cesspit'." (Tucker, a deputy governor at the Bank of England, testified before U.K. Parliament Monday after Barclays executives suggested he condoned LIBOR manipulation back in 2008.)

"It's sad there's not a culture of higher integrity" in the financial services industry, Bair says. "It just underscores why regulators can't defer to the industry itself when they have a self-interested conflict. You had a survey methodology [to determine LIBOR] that lent itself to manipulation. That never should have occurred."

For the record, Bair says she was unaware of any problems with LIBOR during her time at the FDIC. Still, she recalls press reports from 2007 and 2008 raising related concerns because LIBOR rates were set by a survey rather than specific transactions.

"My impression was the survey methodology left itself open to judgment," she says. "That said, this goes far beyond exercising subjectivity. These traders were actively colluding with others to submit information to the survey to manipulate the rates. It's outrageous."

It's an outrageous allegation, to be sure, and one that deserves a wider public hearing. Expect this LIBOR story to move to the front-burner in the days and week's ahead.

In Caymans, It’s Simple to Fill a Hedge Fund Board
1 July, 2012

GEORGETOWN, Cayman Islands — Just off the tarmac at the Grand Cayman International Airport, visitors were recently greeted by colorful banners advertising the Caribbean island’s sunny offerings: waterfront seafood restaurants, tax-free shopping — and hedge fund directors for hire.

In the last decade, as hedge funds ballooned in size and number to become a dominant force in the investing universe, directorship services have grown from a cottage industry into a big business on the Cayman Islands. Many funds run by United States money managers have their legal residence here for tax reasons. And because of a quirk in the island’s tax code, these funds must appoint a board.

As a result, dozens of operations have sprouted up on the Caymans to supply directors, from one-man bucket shops to powerhouse law firms. Directors are often Cayman-based professionals: accountants, lawyers and administrators of hedge funds.

They are rarely investors, though. Ostensibly, directors offer guidance and oversight to the funds. In return, a director is typically paid anywhere from $5,000 to $30,000 a year. With more than 9,000 funds domiciled on the tiny island, business is booming.

And so is a debate. Major investors and others are starting to question the value of offshore directors, especially in light of recent hedge fund frauds, liquidations and missteps. An analysis of thousands of United States securities filings by The New York Times shows that dozens of directors sit on the boards of 24 or more funds in the Caymans, which individually are supposed to be overseeing tens of billions of dollars in assets. Some hold more than 100 directorships, and one particularly busy director sits on the boards of about 260 hedge funds.

“You might as well save your $5,000 and buy a rubber stamp,” said Luke Dixon, a senior investment manager at the British pension fund USS, which oversees more than £32 billion ($50 billion).

Directors have also been the target of lawsuits. A recent fraud case found two directors, who happened to be relatives of the hedge fund manager, liable for $111 million. The subject of directors has become an industry obsession, headlining hedge fund conferences, including one in April at the Grand Cayman Ritz Carlton.

The rise of the director-for-hire business — and the questions that surround it — underscore a transition for hedge funds. As the industry sheds its cowboy culture for a more button-down approach, it is adopting the structure and practices of mainstream investment firms. But even as funds hire compliance officers and marketers, some corners of the industry remain in a state of arrested development.

“The hedge fund industry is still trying to figure out what it wants to be when it grows up,” said Greg Robbins, the chief operating officer at a unit of Mesirow Financial. “Like any industry, it is just going to have to get embarrassed along the way to stop doing the silly stuff it used to do.”

The data for this article was drawn largely from filings made with the Securities and Exchange Commission as part of its new oversight of hedge funds. Yet the filings do not paint a full picture. The directorships cited are only for funds with American investors, omitting thousands of funds that manage strictly overseas money.

Mesirow and other hedge fund investors, including USS and Man Group, have been clamoring for greater disclosure on how many boards directors serve on. They have taken their grievances to the Cayman Islands Monetary Authority, the local regulator, which has so far declined to release the information. Financial services are the island’s lifeblood, accounting for more than 35 percent of its gross domestic product and employing about 15 percent of the work force, according to a 2008 study by Oxford Economics, an economics consultancy.

At the heart of the hedge fund business here is Don Seymour, who has financed a mini-empire on the island with his directorship services company, DMS Management. Mr. Seymour, a onetime hedge fund auditor at PricewaterhouseCoopers, declines to say how many boards he sits on, though he says he selectively tells investors. A review of the S.E.C. filings shows Mr. Seymour occupies roughly 180 board seats, according to the Foundation for Fund Governance.

Mr. Seymour likens his work as a hedge fund director to that of a top doctor, who can see hundreds of patients a year. Just as every patient is not equally sick, every directorship is not equal, he says. He points to proprietary computer systems that track information about the hedge funds served by DMS directors. And associate directors at his firm handle much of the day-to-day responsibilities.

The growing debate, Mr. Seymour says, is driven by competitors eager to snag a share of his business.

“We have a bit of a Goldman Sachs problem,” he reflected from his company’s offices at DMS House, a slate-colored stucco building resembling the White House. “We are the worldwide leader in fund governance.”

A rival firm, IMS, also serves a large swath of the hedge fund industry. Its founder, Paul Harris, says focusing on numbers won’t tell investors whether a director can fulfill his responsibilities.

“Sometimes two boards are too much,” said Mr. Harris, who does not require his directors to disclose how many boards they serve on.

Mr. Seymour served as the head of investment services at the Cayman Island Monetary Authority, starting in 1998. While at PricewaterhouseCoopers, he says he audited the funds of the investor George Soros.

“I’m the guy that actually created the regulatory framework for hedge funds here,” he said in a wood-paneled conference room at DMS House, flanked by nearly a dozen staff members. Outside, a rooster crowed in the distance.

While in that post, Mr. Seymour recognized there was a huge business opportunity in staffing boards, and in 2000, he left the regulator to start DMS.

Mutual funds also have directors, charged with responsibilities similar to those of their hedge fund brethren. And they, too, have also come under fire for failing to protect investors. But while some directors oversee dozens of funds, those funds are typically operated by the same mutual fund company.

With hedge funds, directors sit on the boards of dozens of distinct hedge fund managers. And directors face far fewer requirements than mutual fund directors.

Some large hedge fund firms don’t even bother with outsiders for their Caymans funds board, choosing to stock their boards with people who work for the hedge funds or their lawyers.

In addition to firms like DMS and IMS, law firms like Ogier on the Cayman Islands offer hedge funds director services. That has raised questions about the dual role they can play, representing the hedge fund as counsel, and the investors of the same fund as directors.

Citing in part those potential conflicts of interest, the prominent law firm Walkers recently sold its directorship business. Before that, two Walkers directors had come under scrutiny for their oversight of two collapsed hedge funds of Bear Stearns Asset Management, which the law firm also counted as a legal services client.

“There is a trend toward complete independence,” said Ingrid Pierce, a partner at Walkers. “I think we’ll see more of that.”

Calls to toughen regulation follow JPMorgan loss
Associated Press
11 May 2012

WASHINGTON (AP) — JPMorgan Chase faced intense criticism Friday for claiming that a surprise $2 billion loss by one of its trading groups was the result of a sloppy but well-intentioned strategy to manage financial risk.

More than three years after the financial industry almost collapsed, the colossal misfire was cited as proof that big banks still do not understand the threats posed by their own speculation.

"It just shows they can't manage risk — and if JPMorgan can't, no one can," said Simon Johnson, the former chief economist for the International Monetary Fund.

JPMorgan is the largest bank in the United States and was the only major bank to remain profitable during the 2008 financial crisis. That lent credibility to its tough-talking CEO, Jamie Dimon, as he opposed stricter regulation in the aftermath.

But Dimon's contention that the $2 billion loss came from a hedging strategy that backfired, not an opportunistic bet with the bank's own money, faced doubt on Friday, if not outright ridicule.

"This is not a hedge," said Sen. Carl Levin, D-Mich., chair of a subcommittee that investigated the crisis. He said the trades were instead a "major bet" on the direction of the economy, as published reports suggested.

On Friday, Dimon told NBC News, for an interview airing Sunday on "Meet the Press," that he did not know whether JPMorgan had broken any laws or regulatory rules. He said the bank was "totally open" to regulators.

The head of the Securities and Exchange Commission, Mary Schapiro, told reporters that the agency was focused on the JPMorgan loss but declined to comment further.

JPMorgan's disclosure Thursday recharged a debate about how to ensure that banks are strong and competitive without allowing them to become so big and complex that they threaten the financial system when they falter.

The JPMorgan loss did not cause anything close to the panic that followed the September 2008 failure of the Lehman Brothers investment bank. But it shook the confidence of the financial industry.

Within minutes after trading began on Wall Street, JPMorgan stock had lost almost 10 percent, wiping out about $15 billion in market value. It closed down 9.3 percent.

Fitch Ratings downgraded the bank's credit rating by one notch, while Standard & Poor's cut its outlook JPMorgan to "negative," indicating a credit-rating downgrade could follow.

Morgan Stanley and Citigroup closed down more than 4 percent, and Goldman Sachs closed down almost 4 percent. The broader stock market was down only slightly for the day.

Dimon gave few details about the trades Thursday beyond saying they involved "synthetic credit positions," a type of the complex financial instruments known as derivatives.

Enhanced oversight of derivatives was a pillar of the 2010 financial overhaul law, known as Dodd-Frank, but the implementation has been delayed repeatedly and will not take effect until the end of this year at the earliest.

JPMorgan's trades show that the derivatives market remains too opaque for regulators to oversee effectively, said Rep. Barney Frank, D-Mass., one of the law's namesakes.

"When a supposedly responsible, well-run organization could make such an enormous mistake with derivatives, that really blows up the argument, 'Oh, leave us alone, we don't need you to regulate us,'" he said.

Criticism of the bank did not stop with its traditional chorus of detractors. It also came from Sen. Bob Corker, R-Tenn., a prominent member of the Senate Banking Committee who has received $10,000 since January 2011 from JPMorgan's political action committee, the most any candidate has received.

Corker, a leader of a failed effort last year to block a Federal Reserve rule that slashed bank profits from debit cards, called for a hearing "as expeditiously as possible" into the events surrounding JPMorgan's loss.

Tim Ryan, president of the Securities Industry and Financial Markets Association, a trade group, said it was impossible to legislate or regulate risk out of the financial system.

"My hope is that this is viewed as bona fide hedging, but it went wrong," he said in an interview. "A mistake was made. Money is going to be lost. It's not customer money. It's not government money. It's JPMorgan's money, the shareholders of JPMorgan."

No one seemed to suggest Friday that JPMorgan had broken a law. But the mistake added a wrinkle to the still-unsettled discussion about how the financial industry should be regulated in the aftermath of 2008.

"This just tells you that we are a long, long way from getting our arms around this whole 'too big to fail' issue," said Cliff Rossi, a former top risk executive for Citigroup, Countrywide and other big financial companies.

Immediately after the crisis, a time of popular outrage over bailouts and investment losses, there was broad public support for an overhaul of bank regulations.

The changes promoted by the Obama administration were in many cases similar to what the financial industry had sought before the crisis: Consolidation of regulators and oversight of the multi-trillion-dollar marketplace for derivatives.

Regulators are still drafting hundreds of rules under the 2010 law. As Wall Street has returned to record profits, and executives to million-dollar bonuses, banks have fought to soften those rules.

In particular, the industry has fought hard against a few provisions that might have prevented the problems at JPMorgan.

One is the so-called Volcker rule, which will prohibit banks from trading for their own profit. The rule is still being written, and the Federal Reserve has said it will begin enforcement in 2014.

JPMorgan said that its bets were made only to hedge against financial risk. Dimon conceded that the strategy was "egregious" and poorly monitored. But analysts, former bank executives and many lawmakers disagreed.

"This is an exact description of proprietary trading-style activity," Sen. Jeff Merkley, D-Ore., told reporters Friday. "This really is a textbook illustration of why we need a strong Volcker rule firewall."

Nancy Bush, a longtime bank analyst at NAB Research and a contributing editor at SNL Financial, said the trades probably crossed that line because they were making money for JPMorgan.

"So they made money on hedges and then they hedged some more," she said. "At some point it goes from being a hedge to being a moneymaker."

JPMorgan was seen as a savior of weaker banks during the financial crisis and the only big bank to escape relatively unscathed. His reputation enhanced, Dimon, 56, has been emboldened to challenge efforts to toughen regulation.

In an interview with the Fox Business Network earlier this year, Dimon said that Paul Volcker, the former Federal Reserve chairman for whom the rule is named "doesn't understand capital markets."

Last year, he questioned the current Fed chair, Ben Bernanke, about the rules and said they might be delaying the recovering of the financial system and the broader economy.

"Has anyone bothered to study the cumulative effect of all these things?" he asked.

Dimon, who grew up in the Queens borough of New York and was groomed by the former Citigroup chief executive Sanford Weill, has also chafed against Occupy Wall Street protesters.

"Acting like everyone who's been successful is bad and that everyone who is rich is bad — I just don't get it," he said at a conference earlier this year.

On Thursday, at about the same time he was breaking news of the $2 billion loss to Wall Street, Dimon sent an email to JPMorgan's 270,000 worldwide employees assuring them that the company was "very strong."

Is MF Global Getting a Free Pass?
March 12, 2012

It’s sure starting to look as if Jon Corzine is going to get away with it.

By now, it has been well established that Corzine’s former firm, MF Global, committed the sin of sins for a broker-dealer. In late October, during the final, desperate days before it entered bankruptcy proceedings, its executives took money from segregated customer accounts — money that belonged not to MF Global but to the farmers and commodities traders that were its clients — and used it to prop up its rapidly collapsing business. Nor was this petty cash: of the $6.9 billion in customer assets that MF Global held, a stunning $1.6 billion is missing. There is virtually no chance that the full amount will ever be recovered.

Let’s not mince words here. These executives committed a crime. Virtually every knowing violation of the Commodities Exchange Act is a crime, but taking money from segregated customer accounts is at the top of the list. And for good reason. Customer money is supposed to be sacrosanct. If a broker-dealer goes bankrupt, the segregated accounts are supposed to remain safe, a little like the way bank deposits remain protected if a bank goes under. Indeed, customers need to be able to trust the fact that their money is segregated and protected at all times. Otherwise, the markets can’t function.

Yet, a few weeks ago, Azam Ahmed and Ben Protess, who have done a remarkable job covering the MF Global bankruptcy for The Times, wrote an article suggesting that prosecutors were having trouble putting together a criminal case against anyone at MF Global. So far, wrote Ahmed and Protess, they’d been “unable to find a smoking gun.” In fact, they continued, “a number of federal prosecutors have expressed doubts” that MF Global “intentionally misused customer money.” Apparently, the current theory is that it was all just a big accident, the chaos of those final days causing the firm’s executives to tap into customer funds without realizing it.

Excuse me while I roll my eyes. Of course there isn’t a smoking gun. As a general rule, financial professionals tend not to write e-mails that say, “Hey, we’re desperate. Let’s break into the customer accounts!” And, of course, they are always going to say it was unintentional. They are saying it already, starting with Corzine, who told Congress last year that “there was no intention to violate segregation rules.”

As for the chaos, you bet it was chaotic at the end. How could it not have been? Last month, James W. Giddens, the bankruptcy trustee for the broker-dealer arm of MF Global, issued a report that vividly described the scene: “The rush to meet funding needs ... led to billions of dollars in securities sales, draws on credit facilities and a web of intercompany loans. ... The company’s computer systems and employees had trouble keeping up. ... A number of transactions were recorded erroneously or not at all. ...” And so on.

Well, fine. But is it really plausible that you can take $1.6 billion — nearly 25 percent of the customer assets under management — and not know you’ve used customer money? It is not. One theory, which is implicitly suggested in the trustee’s report, is that the executives “borrowed” the money thinking they would be able to replace the funds quickly, which they then couldn’t because the counterparties wouldn’t give back the collateral. That’s still a crime.

I understand that bringing complex financial cases in front of a jury is not easy. But what prosecutors don’t seem to understand is that the country needs them to bring these cases. When they took a pass on Angelo Mozilo, the former chairman and chief executive of Countrywide, and Richard Fuld, who was chief executive of Lehman Brothers when it went bankrupt, they sent a signal that the highly paid executives who gave us the financial crisis would not be held to account.

A failure to prosecute anyone at MF Global would be, if anything, even worse. It would mean that executives at a broker-dealer can indeed steal customer money and get away with it — so long as it was “unintentional.” And it would only deepen the cynicism so many people feel about government. I’ve heard it suggested, for instance, that the Justice Department won’t prosecute Corzine because it would hurt President Obama. (Corzine, the former governor of New Jersey, had been a big fund-raiser for the president.) I don’t happen to subscribe to that theory, but I certainly understand why others might.

To be sure, it is early yet. Federal investigators are still digging into the facts surrounding MF Global’s failure, no doubt searching for that elusive smoking gun. But if, in the end, they decide they can’t make a case, I hope they understand what they are telling the rest of us. Giving the big guys a pass isn’t good for the financial markets. And it isn’t good for democracy either

Analysis: Pension funds in new crisis as deficit hole grows
By Natsuko Waki
5 September 2011

LONDON (Reuters) - Pension funds in developed economies are facing a new crisis as falling equities and tumbling bond yields widen their deficits, threatening the incomes and retirement dates of future retirees.

At the heart of their problems is a steady move by pension plans in the United States, euro zone, Japan and the UK to cut exposure to risk after the financial crisis.  But this "de-risking" may end up depressing their long-term returns from stock market investment and challenge the conventional wisdom that shares generate higher returns than bonds.  With weaker holdings and increased liabilities, companies will find it more difficult to fund existing pension schemes. They may cut new business investments as they use more cash to pay pensions.

For future pensioners, it means they will potentially face a lower retirement income and a longer working life -- or both.  This year has been a nightmare for many in the industry -- which controls $35 trillion, or a third of global financial assets -- and funding deficits are posting double-digit rises.

"We had a credit crisis and government bond crisis, and the third one we have is the pension crisis. This is the one where everything is going wrong and there's no obvious way out," said Kevin Wesbroom, UK head of global risk services at consultancy Aon Hewitt.

The sharp retreat in stocks through the summer has hurt them again by weakening their asset positions and threatening to erode stock market recoveries seen since the equity collapse surrounding the 2007-2009 credit crisis.  Even lower bond yields are proving to be a new headache.

"The real killer is liabilities are going up because in the flight to quality everyone gets out of equities and runs for cover in safe assets like government bonds, and yields are falling," said Wesbroom.

Many defined benefit(DB) pension plans -- where benefits are pre-determined -- pay a fixed stream of income to retirees.  The low-yielding environment makes it harder for the funds to meet these bond-like liabilities, forcing them to accumulate even more fixed income instruments to try to meet their obligations, creating a vicious circle.


Recent data on pension deficits highlight the plight of many pension funds.  In the United States, funding deficits of the 100 largest DB plans rose $68 billion to $254 billion in July, according to the Milliman Pension Fund Index. July marked the 10th largest deficit rise in the index's 11 year history.

Even if these companies were to achieve an optimistic annual return of as much as 8 percent and keep the current benchmark yield of 5.12 percent, their funding status is not estimated to improve beyond 93 percent by end-2013 from the current 83 percent.

Aon Hewitt estimates deficits of DB pension plans for FTSE 350 companies as of end-August rose 20 billion pounds from July to a 2011 high of 58 billion pounds. Their funding ratio stands at 89.8 percent, down from 94.1 percent three years ago.

The drop in the funding ratio is driven by a rally in the fixed income market. In Europe, the double-A rated corporate bond yield -- one of the benchmark rates used by regulators -- fell 300 basis points in the last three years to 3.55 percent, according to Barclays Capital.  The widely used rule of thumb is that a 50 basis points fall in the discount rate roughly results in a 10 percent increase in liabilities.

"Things look substantially worse now than they were during the credit crisis," said Pat Race, senior partner at investment consultancy Mercer.

In reaction to the past few years of an equity decline and volatility, many pension funds are indeed planning to buy more bonds, a move highlighted by Mercer's survey of over 1,000 European DB pension funds in May.

"Trustees do want to de-risk but financial directors have irrational desire to have equities. They are too wedded to equity markets," Race said.

"You still have massive uncertainties with a potential for another dip into recession. I don't see any reversion to days when equities are dominant part of DB plans."

JP Morgan's data shows pension funds and insurance companies in the United States, euro zone, Japan and UK bought $173 billion of bonds in the first quarter, boosting their bond buying for the third quarter in a row.  At the same time, they cut equity buying for a fifth quarter in a row, selling $22 billion of stocks in Q1.

In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.


Growing pension funds deficits on corporate balance sheets may make it more difficult for companies to access credit and discourage firms which are already hoarding cash from spending cash to expand business.

For wider financial markets, the giant industry's gradual move away from stocks could hit equity risk premium -- excess return of equities over risk-free securities which compensates investors for taking on the relatively higher risk.

This may reinvigorate an academic debate where some economic analysis suggests the equity risk premium should be small, in most cases less than half a percentage point, as opposed to the widely-used range of 4-6 percent.

Indeed, 10-year U.S. Treasuries gave higher total returns in the past 10 years on a rolling basis than world stocks.

"The puzzle... is that for the past 20 years, there has been no net equity risk premium. With the recent sell-off in risk and the rally in bonds, I think there might have been a net premium on bonds," Stephen Jen, managing partner at SLJ Macro Partners, said in a note to clients.

"This has turned financial theory on its head, and managers of pension funds and sovereign wealth funds need to think about this very carefully."

Bank of England cuts mortgage support to avoid housing bubble
By David Milliken and Huw Jones
Nov. 28, 2013 10:47am EST

LONDON (Reuters) - The Bank of England moved to head off the risk of a bubble in house prices on Thursday, making a surprise announcement that it would put the brakes on a scheme launched last year to boost mortgage lending.

Shares in British construction firms tumbled after the central bank said it would refocus the Funding for Lending Scheme (FLS) on helping small firms that find it hard to borrow.

Britain's economy and its housing market have staged an unexpectedly strong turnaround since FLS was launched by the BoE and finance ministry in July 2012 to spur lending to home-buyers and businesses.

Another, much-criticized, government program to aid the housing market, Help to Buy, remains in place.

"We did not see an immediate threat coming from the housing market but we are concerned about the prospective evolution of the housing market," BoE Governor Mark Carney said.

"The concern is where this could go. We definitely see some short-term momentum," he said, adding the BoE was prepared to take "larger measures" to tame rising house prices if needed.

Carney said it would "no longer be appropriate or necessary for us to have our foot on the accelerator" in terms of spurring mortgage lending. "It's better to shift into neutral."

Sterling rose after the announcement, while construction firms lost more than 1 billion pounds ($1.63 billion) in value. Barratt Developments, Britain's biggest housebuilder by volume, saw its shares slump by as much as 9.6 percent.

Finance minister George Osborne said he backed the changes to the FLS scheme.

British house prices are likely to rise nearly 6 percent in 2014 on top of a similar a increase this year, according to a Reuters poll of economists published earlier this week.

James Knightley, an economist with ING, said the shift in policy was not a precursor to an interest rate hike by the BoE, which has kept borrowing costs at a record low since 2009.

"Such measures have been undertaken elsewhere, and there the sense is that by taking such action it can actually limit the need for direct monetary policy tightening," Knightley said.

A representative of British mortgage lenders said the industry was well placed to cope without the scheme's support.

"Although the changes to the FLS may be a surprise, they are not a shock. Mortgage lenders are well equipped to meet their funding needs, as wholesale funding market conditions have improved and retail deposits are robust," said Paul Smee, director general of the Council of Mortgage Lenders.

Carney said the changes to the FLS did not have implications for Help to Buy, which aims to lift construction and aid home-buyers without large mortgage deposits, and which the BoE will review next September.


Earlier this week Carney faced questions from lawmakers worried that a house price bubble is forming, and that a lack of lending to small firms is hampering Britain's economic recovery.

"We should refocus the FLS so that it continues to support lending to the business sector, without adding further broad support to household lending at a time when that is no longer necessary," Carney said in a letter to Osborne.

Economic growth in the three months to September was the fastest in three years, banks have far easier access to finance, and house prices are rising at their fastest for three years.

Most of the increase in house prices has been concentrated in London and nearby areas, but Carney said price rises now seem to be spreading more broadly across the country.

Under the FLS, banks and building societies can access cheap credit from the BoE in proportion to how much they lift lending.

On Thursday, the BoE said banks would not be able to claim the cheap funding for new lending to households from January 1, 2014, although existing entitlements would not be affected. Fees charged to banks for business finance would be reduced to the lowest point on the existing scale, 0.25 percent.

The BoE also said that favorable capital treatment for new home loans made under the FLS would end on December 31. Five, mainly small, lenders benefit from this at present.

Carney also said he was ready to take further action to cool housing if need be, including recommending a cap on how big mortgages can be relative to property values and borrowers' salaries.

Currently the BoE lacks the power to force banks to follow its recommendations on such caps, but it could instead require banks to hold extra capital against risky lending - another option that it outlined.

Away from housing, the BoE said a stronger economic outlook meant that risks to financial stability appeared lower.

Risks remained, however, as many countries, firms and individuals were highly indebted and vulnerable if a sharp rise in interest rates outpaced any increase in their incomes.

"...The curious incident of the dog in the night-time." 

Analysis: Global Inflation: The Dog That Doesn't and Won't Bark

Reporting by Alan Wheatley, editing by Mike Peacock
August 12, 2011

LONDON/NEW YORK (Reuters)- An anorexic under doctor's orders to put on weight might fret unnecessarily about getting fat one day.

Today's generally subdued inflation prompts similar worries. Surely the extraordinary steps central banks are taking to jump start growth will eventually push prices sharply higher, inflating away the debts hobbling the global economy?  To monetarists wedded to Milton Friedman's mantra that inflation is always and everywhere a monetary phenomenon, the bloated balance sheets of the Federal Reserve and other major central banks are so much dry tinder ready to catch fire.

"The Fed says long-term inflation projections are stable, but when I look at things I see money growth has gone way up, the dollar has depreciated even against weak currencies like the euro and now productivity growth has slowed. Those are not comfortable signs," said Allan Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh, Pennsylvania.  Only the sort of outcry from Main Street that prompted U.S. President Jimmy Carter to appoint Paul Volcker as Fed chairman in 1979 with a mandate to crush inflation could prevent prices from spiraling higher, he said.

"That message has to come from the public. We won't get it from the bond vigilantes and not from the Fed and not from this administration," said Meltzer, author of A History of the Federal Reserve.

Yet the solid consensus is that inflationary worries are misplaced given the dim outlook for growth that prompted the Fed this week to say it intended to keep short-term interest rates close to zero until 2013.

"When it comes to most of the developed world, there are no domestically generated inflationary pressures," said Richard Cookson, global chief investment officer at Citi Private Bank in London.


Cookson says many countries find themselves in the position Japan has been in for the past two decades: as the private sector pays down unsustainably high debt, consumers and businesses are loath to borrow and spend.  Under such circumstances, the mechanism whereby newly created central bank reserves are multiplied into loans and bank deposits breaks down. Moreover, cash is flowing through the economy much more slowly than usual, removing another potential generator of inflation.

At some point, the money multiplier will function normally once more, but not any time soon, Cookson said. "The problem is that it could take many years because balance sheets are so ravaged," he said.  With yields on conventional U.S., German and British bonds languishing at historic lows, markets seem to share the view that economic recovery will be gradual.

"I think the Fed correctly came to the realization that it is going to be a long slow slog, and long slow slogs generally don't generate a lot of inflation," said Michael Feroli, an economist with J.P. Morgan in New York and a former Fed staffer.

Harm Bandholz, chief U.S. economist at UniCredit Research in New York, said the Fed's easing, taken in isolation, could be viewed as adding to price pressures.

"But general inflationary pressure is not high in this type of environment of continued slow growth and deleveraging," he said.


A weak U.S. labor market is Exhibit A in making the low-growth, low-inflation case.

So many Americans have given up the search for a job that only 58 percent of the working-age population was employed in July, a 28-year low.  Moreover, those in work saw their inflation-adjusted hourly compensation drop 1.2 percent in the second quarter from a year earlier, confirming the trend of real wage stagnation that has marked the U.S. economy since the 1970s.

Economists at Standard Chartered Bank said they expected the jobless rate, now at 9.2 percent, would still be at 8.5 percent at the end of 2012. "This means weak wage growth and low inflation pressure," they said in a report.  True, the spread between 10-year nominal and inflation-linked U.S. Treasury yields, a key indicator of inflation expectations, is much higher than in early 2009 when fear of deflation was raging at the height of the global financial crisis.

And gold, a classic hedge against inflation, scaled a record high this week and is up 24 percent so far this year.  But John Higgins, senior market economist at Capital Economics, a London consultancy, said inflation expectations were likely to recede as commodities lose altitude.

"What might trigger that is further signs of economic weakness and signs that inflation itself is subsiding," Higgins said.

Oil has fallen about $20 a barrel since April and copper, another super-sensitive barometer of global economic demand, fell to an eight-month low this week.  The retreat in key commodities partly reflects slowing growth in China brought on by steady monetary tightening.

This in turn has fanned expectations that China's own stubbornly high inflation, which touched 6.5 percent in the year to July, is close to cresting. [ID:nB9E7H902X] Indeed, economists at J.P. Morgan reckon inflation across emerging markets has probably peaked.  But that does not mean policymakers in developing countries can lower their inflation guard. Talk of currency wars has not gone away. Beijing for one has voiced anger that the Fed, with its latest easing, could once again export inflation by fuelling capital inflows and cheapening the dollar.

"The recent correction in global commodity prices could help to ease some of the inflationary pressure in the short run, but in the medium run loose monetary policy in the West may heighten imported inflation concerns," Jianguang Shen, chief China economist at Mizuho Securities in Hong Kong, said in a note.

A Rush to Assess S.& P. Downgrade of Credit Rating

August 6, 2011

WASHINGTON — A day after Standard & Poor’s took the unprecedented step of downgrading the credit worthiness of the United States government while offering criticism of the “political deadlock” in Washington, American lawmakers and political leaders overseas scrambled to assess the impact of the move on the already troubled world economy.

Democrats and Republicans both claimed to find validation for their policies in the decision by the ratings agency, which on Friday downgraded the nation’s long-term credit rating one notch, to AA+, even as the Obama administration and some of its allies questioned the significance of the decision. The administration mocked S.& P. for making a mathematical error, caught by the Treasury Department, that caused the company to delay its announcement of the downgrade for several hours on Friday. The administration noted that investors had flocked to Treasury securities in recent weeks as among the world’s safest investments.

Congressional leaders in both parties said that the announcement underscored the need for reforms — even as they disagreed about which reforms.

“Unfortunately, decades of reckless spending cannot be reversed immediately, especially when the Democrats who run Washington remain unwilling to make the tough choices required to put America on solid ground,” Speaker John A. Boehner, an Ohio Republican, said in a statement.

Senate Majority Leader Harry Reid said the decision should set the tone for a committee created last week to create a plan for reducing the federal debt by $1.5 trillion. He said it affirmed the need for the Democratic approach, which would combine spending cuts with tax increases.

The decision, he said, “shows why leaders should appoint members who will approach the committee’s work with an open mind — instead of hardliners who have already ruled out the balanced approach that the markets and rating agencies like S.& P. are demanding.”

News of the downgrade reverberated across the world. Chinese leaders weighed in with a attack on the country’s free-spending ways while European officials voice skepticism of the rating agency’s rationale for the ratings decision.

China, the largest foreign holder of United States debt, said on Saturday that Washington needed to “cure its addiction to debts” and “live within its means,” just hours after the rating agency Standard & Poor’s downgraded America’s long-term debt. Though Beijing has few options other than to continue to buy United States Treasury securities, Chinese officials are clearly concerned that China’s substantial holdings of American debt, worth at least $1.1 trillion, are being devalued.

“The U.S. government has to come to terms with the painful fact that the good old days when it could just borrow its way out of messes of its own making are finally gone,” read the commentary, which was published in Chinese newspapers.

While Europeans had girded for a possible downgrade, the news that Standard & Poor’s had actually yanked the United States’ AAA rating was nonetheless received with a degree of alarm in the corridors of power across the Continent. Finance Minister François Baroin of France questioned the move Saturday, noting that the figures used by Standard & Poor’s didn’t match those of the Treasury, and overstated the federal debt by about $2 trillion.

Standard & Poor’s defended its decision in a lengthy statement issued late Friday and deployed a spokesman onto national television to make its case. It described the decision as a judgment about the nation’s leaders, writing that “the gulf between the political parties” had reduced its confidence in the government’s ability to manage its finances. In its statement, the agency said the recent deficit-cutting that accompanied the raising of the debt ceiling “fell well short of the comprehensive fiscal consolidation program that some proponents had envisaged.” It also said that “elected officials remain wary of tackling the structural issues required to effectively address the rising U.S. public debt.”

The downgrade puts new pressure on the super committee created by Congress to handle the next phase in deficit reduction. It could also lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for governments, businesses and home buyers. But many analysts say the impact could be modest, in part because the other ratings agencies, Moody’s and Fitch, have decided not to downgrade the government at this time.

Underlying the ratings decision, economists say, is he failure of the United States and Europe to make progress in resolving the fundamental problem, that their economies are weighted down by debtors who cannot afford to pay what they owe and creditors who cannot afford to walk away.

The great hope of governments on both sides of the Atlantic, and of many investors, was that renewed growth would resolve the problems, allowing some debts to be paid and others to be forgiven.

The oscillations of financial markets over the last few weeks, driven by jolts of grim economic news, suggest that this hope is starting to lose its hold on the imagination of investors.

The movements of markets are collective predictions about future prosperity. They are echoing now what some economists have been saying for years, that the debt crisis cannot be bypassed, and resolving it is a lengthy and painful process.

There is no surplus of economic strength to throw at the problem. The United States and Europe ran up great debts in the years of plenty, living well and promising to pay later, even as they made expansive promises to aging populations about future spending.

And there appears to be little confidence in the capacity of political leaders to perform the necessary work of allocating losses, either in the United States, where lenders are pitted against homeowners, or across the Atlantic, where lenders are pitted against the nations of southern Europe.

“The restorative forces of the economy are very weak and the immediate forces that will be in place are worsening the problem,” said Joseph E. Stiglitz, an economist at Columbia University. “We already know it’s not going to be a V-shaped recovery. I had said in my book that it would be more of an L-shaped, slow recovery. I think the answer now is a Japan-style malaise.”

The weakness of the American economy is most evident in the lack of jobs. Only 55 percent of working-age adults held full-time jobs in July, the lowest level in modern times. Some 25 million American adults want but cannot find full-time work, the government said Friday. The unemployment rate fell slightly, but mostly because 193,000 people stopped searching for jobs.

Consumer spending makes up 70 percent of the nation’s economic activity, and people without jobs spend less money. For more than a year the government has reported that the economy was expanding more quickly than employment, seeding hope that hiring would follow. But last week the government said in a new estimate that it was mistaken, and that the economy actually expanded at an annual rate of only 0.8 percent during the first half of the year — about the rate of population growth.

Kenneth Rogoff, an economist at Harvard University, said that forecasters had been consistently upbeat over the last year, only to be perpetually disappointed by the data. “This recession has been pulling away the football from forecasters like Lucy and Charlie Brown,” he said.

Liz Alderman contributed reporting from Paris, Jack Ewing from Frankfurt and David Barboza from Shanghai.

Greek track and field body suspends operations
Associated Press
4 April 2012

ATHENS, Greece (AP) — Greece's track and field authority suspended all athletic operations Wednesday due to severe spending cuts — a major embarrassment for the nation that hosted the Summer Olympics only eight years ago.

The move — the latest twist in Greece's nearly three-year financial freefall — is the first such action by any of the country's major sports bodies. It immediately halts all domestic track and field competitions, including track meets May 12-13 in several Greek cities.

The decision will not, however, affect the May 10 flame-lighting ceremony at Ancient Olympia, in southern Greece, for the 2012 London Olympics, or have any immediate effect on the selection of Greek athletes for those games.

"The Board of Athletics Federation ... unanimously decided to suspend all domestic sporting activity until decisions to make unfair and selective cuts in funding are reviewed," a federation statement said.

The agency is expected to meet again in two weeks and could toughen its stance even further to include international meets like the European Championships if the Greek government fails to respond.

The federation "calls on the sporting leadership ... to intervene and avert the economic dead-end and the disintegration of track and field," it said.

Federation President Vassilis Sevastis told The Associated Press on Tuesday that deep cuts in state funding have left coaches and suppliers unpaid for up to 10 months. He said the federation was unable to cover its basic needs.

Officials said the federation's budget was cut by nearly a third in 2011 and by a similar amount in 2012. It has around €6.5 million ($8.7 million) to spend this year.

"Around €2 million ($2.7 million) was cut last year — that's money we owe to athletes, coaches, sporting associations and suppliers. After more cuts were brought in this year, we're at a dead end financially," Sevastis told the AP. "We want the government to reverse its decisions."

With both a Greek election and the London Olympics looming, that could give the federation some leverage for its demands.

Faced with the threat of bankruptcy since finding severe financial shortfalls in late 2009, Greece abruptly slashed funding for sports, health care and public services and raised a wide range of taxes. Since May 2010, the country has been surviving on billions in emergency loans from the International Monetary Fund and other countries that use the shared euro currency.

Greece's debt problems have fueled the entire continent's sovereign debt crisis and shaken confidence in the euro currency used by 17 nations.

The country has been operating under a technocratic-led coalition government since the Socialist government fell last fall and is facing new elections in late April or early May. The government so far has refused to roll back any of its main austerity measures despite near-daily strikes and protests that have often degenerated into riots.

Several high-profile athletes have complained recently that training facilities created for the 2004 Athens Olympics have been poorly maintained due to funding cuts.

"The most significant problem is the financial one," Olympic hammer throw athlete Alexandra Papageorgiou told the AP while training at coastal facilities Tuesday.

"After that it's the facilities. You see it here. Everything is falling apart," she said. "I've lived through the best moments of Greek athletics and now I'm living through the worst."

Contracts Cloud Who Has Exposure in Greek Crisis
June 22, 2011

It’s the $616 billion question: Does the euro crisis have a hidden A.I.G.?

No one seems to be sure, in large part because the world of derivatives is so murky, but the possibility that some company out there may have insured billions of dollars of European debt has added a new wrinkle to the sovereign default debate.

In years past, when financial crises in Argentina and Russia left those countries unable to make good on their government debts, they simply defaulted. But this time around, swaps and other sorts of contracts have become so common and so intertwined in the financial markets that there are fears among regulators and financial players about how a Greek default would play out among derivatives holders.

The looming question is whether these contracts — which insure against possibilities like a Greek default — are concentrated in the hands of a few companies, and if these companies will be able to pay out billions of dollars to cover losses during a default. If there were a single company standing behind many of these contracts, that company would be akin to the American International Group of the euro crisis. The American insurer needed a $182 billion federal bailout during the financial crisis because it had insured the performance of mortgage bonds through derivatives and couldn’t pay on all of them.

Even regulators seem unsure of whether a Greek default would reveal such concentrated risk in the hands of just a few companies. Spokeswomen for the central banks of both Europe and the United States would not say whether their researchers had studied holdings of such contracts among nonbank entities like insurance companies and hedge funds — and they would not say what would occur among large players if Greece or another European country defaulted.

Derivatives traders and analysts are debating just how much money is involved in these derivatives and what sort of threat they pose to markets in Europe and the United States. On the one hand, just over $5 billion is tied up in credit-default swap contracts that will pay out if Greece defaults, according to Markit, a financial data firm based in London. That’s less than 1 percent the size of Greece’s economy, but that is a conservative calculation that counts protections banks have in place offsetting their positions, and is called the net exposure. The less conservative figure, the gross exposure, is $78.7 billion for Greece, according to Markit. And there are many other types of contracts, like about $44 billion in other guarantees tied to Greece, according to the Bank of International Settlements.

The gross exposure of the five most financially pressed European Union countries — Portugal, Italy, Ireland, Greece and Spain — is about $616 billion. And the broader figure on all derivatives from those countries is unknown.

The pervasiveness of these opaque contracts has complicated negotiations for European officials, and it underscores calls for more transparency in the derivatives market.

The uncertainty, financial analysts say, has led European officials to push for a “voluntary” bond financing solution that may sidestep a default, rather than the forced deals of other eras. “There’s not any clarity here because people don’t know,” said Christopher Whalen, editor of The Institutional Risk Analyst. “This is why the Europeans came up with this ridiculous deal, because they don’t know what’s out there. They are afraid of a default. The industry is still refusing to provide the disclosure needed to understand this. They’re holding us hostage. The Street doesn’t want you to see what they’ve written.”

Regulators are aware of this problem. Financial reform packages on both sides of the Atlantic mandated many changes to the derivatives market, and regulators around the globe are drafting new rules for these contracts that are meant to add transparency as well as security. But they are far from finished and could take years to put into effect.

Darrell Duffie, a professor who has studied derivatives at the Graduate School of Business at Stanford University, said that he was concerned that regulators may not have adequately studied what contagion might occur among swaps holders, in the case of a Greek default.

Regulators, he said, “have access to everything they need to have. Whether they’ve collected all the information and analyzed it is different question. I worry because many of those leaders have said there’s no way we’re going to let Greece default. Does that mean they haven’t had conversations about what happens if Greece defaults? Is their commitment so severe that they haven’t had real discussions about it in the backrooms?”

Regulators aren’t saying much. When asked what data the Federal Reserve had collected on American financial companies and their swaps tied to European debt, Barbara Hagenbaugh, a spokeswoman, referred to a speech made by the Federal Reserve chairman, Ben S. Bernanke, in May in which he did not mention derivatives tied to Greece. And she said in a statement that the Fed had researched the “full range of exposures” at the companies it supervises — the banks — and is “monitoring the situation more broadly.”

At the European Central Bank, Eszter Miltenyi, a spokeswoman, said : “This is much too sensitive I think for us to have a conversation on this.”

On Wall Street, traders are debating whether the industry’s process for unwinding credit-default swaps would run smoothly if Greece defaulted. The process is tightly controlled by a small group of bankers who meet in an industry group called the International Swaps and Derivatives Association. .

The process is fairly well developed, but it has been little tested on the debt of countries. For the most part, Wall Street has cashed in on credit-default swaps tied to corporations’ debt.

Only one country has defaulted on its debt in the last few years — Ecuador at the end of 2009 — and its debt was so small and its economy so isolated that it was hardly a notable event.

For most purposes, determining whether a default occurred in a country’s debt falls to ratings agencies like Fitch and Moody’s. But for the derivatives market, a committee of I.S.D.A. makes the call.

If the committee decides there was a default, it passes the baton to Markit, which is partly owned by the banks. Markit holds an auction to determine the amount of value that has been lost on the debt, and that determines how much money is paid out to the parties that purchased the insurance.

Marc Barrachin, who runs the auctions, said there was no reason to worry about the process.

“We’ve had over 100 auctions since 2005,” said Mr. Barrachin, the director of credit products at Markit. “The process is very smooth, very well understood by market participants. I mean if you go back to 2008 right in the fall, in five days we had auctions for Fannie Mae, Freddie Mac and Lehman Brothers, and two weeks after that you had Washington Mutual. I go back to that period of stress and the orderly settlements of large amounts of credit derivatives, for names that were widely followed, were testament of the efficiency of the auction system.”

In the case of A.I.G., there was not an unwind process run by I.S.D.A. because A.I.G.’s contracts were tied to mortgage bonds. Those sorts of derivatives pay out money over time, whereas derivatives tied to a country’s debt pay out on one occasion: if a default occurs. That makes sovereign derivatives more similar to derivatives on corporate bonds and different in some ways from the situation at A.I.G.

But the smoothness of the process would be irrelevant if the risk were concentrated in just a few weak institutions.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, a boutique banking firm in New York, said the uncertainty around how a sovereign default would course through the derivatives market had greatly increased the price premiums banks were charging to put on new derivatives trades related to European countries.

“There is lack of transparency and visibility in these products, and that increases the risk,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman, a boutique banking firm in New York. “For many people, even if the Greek can be unwound in an orderly place, people look at Greece, and they see the future of Portugal and Ireland and maybe even Spain.”

If Greece’s debt ends up leading to payouts on its derivatives, it may never be known who the beneficiaries are, since derivatives are private contracts. Some analysts suggest that some of the banks involved in financial transactions in Greece several years ago may have had early knowledge about the weakness of the country’s financial condition, especially since some of the banks helped mask that weakness using derivatives.

Watch that red ink

Bank Said No? Hedge Funds Fill a Void in Lending
June 8, 2011, 8:55 pm Hedge Funds

Hedge fund managers have been called plenty of names.

Now, they can add another: local banker.

When Rentech, a clean energy business in Los Angeles, was rejected by its long-time banker last year, it asked a hedge fund for money instead. “You have to take what’s available at the time,” said D. Hunt Ramsbottom, chief executive of Rentech, which has since borrowed $100 million in this unconventional way.

With traditional lenders still avoiding risky borrowers in the wake of the financial crisis, hedge funds and other opportunistic investors are stepping into the void. They are going after midsize businesses that cannot easily raise money in the bond markets like their bigger brethren.

The support is critical in a recovery characterized by high unemployment and anemic growth. These middle-market companies, which generate $6 trillion in revenue a year and employ 32 million people in the United States, are borrowing billions of dollars from the hedge funds for product development, strategic acquisitions and even day-to-day operations like payroll and utilities.

But the lending force also poses a significant risk to the companies and the broader economy, given the unregulated nature of this shadow banking system.

These lenders of last resort typically charge interest rates that are several percentage points higher than banks. Loaded up with high-cost loans, borrowers could find themselves falling deeper into debt or worse, into bankruptcy. Over the last year, Rentech has borrowed from a group of funds, led by Highbridge Capital Management and Goldman Sachs, at an interest rate of 12.5 percent.

“On the one hand, the cost of money is more expensive than what some businesses might be used to,” Mr. Ramsbottom said. “On the other, if the money is not available, the cost is infinite.”

The lending activity is also stoking fears that speculative activities — like those that contributed to the crisis — are shifting from banks to loosely regulated firms that play by their own rules. While policy makers are moving to increase capital and other standards for banks to prevent another disaster, hedge funds and the like are not subject to the same oversight.

If firms load up on debt and the market goes into a tailspin again, the shadow banking system could implode and threaten the entire economy.

“These institutions are essentially servicing a part of the market where banks are not lending,” said Debarshi Nandy, a professor at York University’s business school in Toronto. “The million-dollar question is, Are we benefiting?”

Hedge funds offered a crucial lifeline for Rentech. The company is hoping to build a facility about 60 miles east of Los Angeles to transform yard clippings into fuel, enough for 75,000 cars. If it works, the project would represent Rentech’s first commercial success in its nearly 30-year history.

Unprofitable for decades, Rentech is a risky proposition for a traditional lender. While large corporations with healthy balance sheets can easily tap into the bond markets or borrow from banks, their smaller counterparts with shakier credit have fewer options.

Middle-market companies, with revenue of $25 million to $1 billion, do not typically sell bonds. And their main financing sources, specialty lenders like CIT Group and regional banks, have not fully recovered. Last year, debt securities focused on this segment stood at $12 billion, down from $35 billion in 2005, according Standard & Poor’s Leveraged Commentary and Data.

Hedge funds and other investors are flush with capital. Last year, Highbridge, which is owned by JPMorgan Chase, started a $1.6 billion fund that lends money to midsize companies. The private equity firm Blackstone Group started a $3 billion fund. Even FrontPoint, the firm hobbled by an insider trading investigation, has raised $1 billion for a lending fund and plans to double the size, according to a person with knowledge of the matter.

The concern is that hedge funds are looking for quick payoffs rather than long-term opportunities — and will bolt if there is trouble. A previous wave of money managers that jumped into lending after the collapse of Lehman Brothers in 2008 saw their loans sour. The firms, mainly smaller, fringe players, have since disappeared.

“The new funds rushing into direct lending now will learn the hard way that it is easy to make what appear to be sound loans as the economy is improving, but it becomes brutal to either collect the loans or foreclose when the downturn comes,” said Max Holmes, the founder of Plainfield Asset Management, whose lending-focused fund, once as large as $5 billion, is winding down.

Unlike their predecessors, players today say they are operating like community bankers, focusing on multiyear deals backed by significant collateral and capital. They are also locking up investors’ money for years rather than quarters. This can alleviate some short-term pressures.

“The people who last are those with a relationship-oriented business, not those who view it as a trade,” said Rob Ladd of D. E. Shaw, which manages $1.7 billion in lending strategies.

Stephen J. Czech of FrontPoint spent weeks researching Emerald Performance Materials. He scoured the chemical manufacturer’s financials, visited several facilities, and met with executives — all of which gave him the confidence to lend the company money.

Emerald used the loan to buy a European rival. “All types of financing were considered,” said Candace Wagner, Emerald’s president, but the company preferred the “flexibility and certainty” of FrontPoint.

Some who borrowed from hedge funds have not been so satisfied. Hedge funds have been lumped with payday lenders that charge usury rates. Plainfield has been accused of predatory lending in civil suits, and local and federal authorities have looked into the firm’s practices. Plainfield said it won or settled all of the suits and investigators closed their inquiries without taking action.

The creditors of Radnor Holdings, a disposable-cup company that defaulted on a roughly $100 million loan, claimed Tennenbaum Capital Partners charged excessively high rates as a takeover tactic, a strategy referred to as “loan to own.” After a protracted legal battle, the fund took control of Radnor in 2006, renaming it WinCup.

Tennenbaum did not return calls for comment.

Another worry is that funds will trade on nonpublic information they receive as lenders. A March study in The Journal of Financial Economics found a spike in investors betting against the shares of companies that took hedge fund loans. Businesses that borrow from banks did not experience the same activity, according to the authors, including Professor Nandy.

For Mr. Ramsbottom of Rentech, the benefits outweighed the risks. While the company could end up losing the profitable fertilizer plant it put up as collateral on the loan, Rentech can continue to pursue the clean energy venture.

“An entrepreneur will pay whatever,” he said, “to keep his business alive.”

No more NYSE guys
New York POST
Last Updated: 4:40 AM, February 11, 2011
Posted: 11:59 PM, February 10, 2011

The New York Stock Exchange's likely sale to Frankfurt Stock Exchange is a sad event for the country, which is losing an icon of global finance to the Germans -- including possibly the NYSE name, once one of the best-known brands in corporate America.

But the merger (slated to be announced on Tuesday, I'm told) is even sadder for New Yorkers. What little is left of our economic dominance as the "Empire State" has now been shattered by a deadly combination of global competition that is ruthless in picking winners and losers and the high taxes and vast spending of the New York nanny state.

Despite these burdens, the financial sector -- the big banks and investment houses and the NYSE -- managed to survive, providing plentiful jobs for blue-collar and back-office workers, as well as highly paid bankers and traders. But recent regulations, including those in the name of "financial reform," have imposed so many fees and costs on investment houses that operating in the New York area, with its high taxes on business and individuals, has become increasingly difficult even for the biggest big banks that still call New York their home.

In response, these institutions have either moved out of New York or transferred major chunks of their businesses to lower-cost areas -- or, as the NYSE is trying to do, simply sold to a larger, more competitive foreign player.

The saddest part of this sad story is that there appears little anyone can do, given the clueless crew in Albany. Consider: The state Assembly and its powerful public-union cronies are not only resisting Gov. Cuomo's much-needed spending cuts, but want to make it even more difficult for people who create jobs and contribute to what's left of New York's economy, by extending a "millionaire's" tax on the so-called rich.

The folly of this tax starts with its name -- only in New York do we count "millionaires" as people making a penny more than $200,000 a year, which is where this income-tax surcharge begins. Worse is its futility: It will be further incentive for people who make money and start businesses to pack up and go elsewhere, leaving the state with fewer revenues to close its endless budget holes.

There are many reasons why the NYSE needed to sell to the Germans. The business of matching buyers and sellers of stocks (the cornerstone of any exchange) is rapidly changing. The old brokers on the NYSE floor have been replaced by computers that do that function at lightening speeds.

The NYSE computer-trading system now competes with exchanges across the country and the globe. In fact, stocks -- including those listed to trade on the NYSE's "Big Board" -- don't even need to be matched by the NYSE computer, one of its remaining floor traders or at any exchange, for that matter: A firm like Goldman Sachs can simply bring buyers and sellers together on its own trading desk.

Meanwhile, in 2003, the guy who knew more than anyone else about how to run the NYSE, its former chairman Dick Grasso, was run out of town following the disclosure of his huge pay package -- despite everything he'd done to make the exchange one of the world's best-known brands. Since then, the symbol of New York's and the country's economic dominance has struggled under feckless management that gave away many competitive advantages.

But the biggest reasons why the exchange really didn't have a fighting chance to compete are economic: the high cost of doing business in New York, combined with the burdensome regulations that appear every time the markets crumble.

The costs to businesses from the Sarbanes-Oxley overhaul, enacted after the Internet bubble and the Enron scandal, didn't stop Bernie Madoff from stealing tens of billions -- but those burdens forced many firms to flee the NYSE and register their shares in places like Frankfurt.

The more recent Dodd-Frank overhaul has so many hidden costs and regulations, executives at the big banks still can't figure them out. With that, they've begun shedding such businesses as proprietary trading, in which a bank risks its own money to buy and sell stocks, even though these had little to do with the '08 financial collapse.

Put this all together, and the question isn't why the NYSE is giving up the fight -- but why it took so long.

19 September 2010 Last updated at 08:33 ET
China official rebuffs Geithner over yuan

An adviser to China's central bank has rebuffed criticism from the US over Beijing's exchange rate policy.  In a speech in Beijing, Li Daokui said China "will not appreciate the yuan solely because of external pressure".

His comments follow strong criticism in America that the yuan is significantly undervalued, damaging US exports.  Last week US the Treasury Secretary, Timothy Geithner, said he was considering ways to press China to let the yuan appreciate.

In June, after months of pressure from the US, China pledged to relax its grip on its currency.

But on Thursday Mr Geithner renewed the criticism, saying that the yuan's value was "essentially" unchanged because of "very substantial" intervention by authorities.

China denies keeping its currency artificially cheap, and has warned against foreign pressure over what Beijing regards as an internal matter.

Mr Li said: "China as it stands now is not Japan in 1985, it is not a country that completely relies on external demand."

That was a reference to a 1985 accord where Japan agreed to let its yen currency appreciate against the dollar.
Mobilising support

US manufacturers in particular have pressed President Barack Obama to do something, as a low yuan benefits Chinese exports and is a barrier to imports.

Since June the yuan has appreciated about 1.6% against the dollar and gained about 0.7% last week.

On Thursday Mr Geithner told a key committee of senators that he was examining what mix of tools would encourage China to let the yuan appreciate more quickly.

Mr Geithner said he would try to bring in other world powers to push China for trade and currency reforms, saying the US would use a G20 summit in Seoul in November to try to mobilise trading partners to get Beijing to let the yuan strengthen faster.

He said: "We are concerned, as are many of China's trading partners, that the pace of appreciation has been too slow and the extent of appreciation too limited."
'Currency manipulator'

Congress is pressuring the Obama administration to take a tougher stand with China over its trade practices.

Some members of the committee have called China a currency manipulator.

Senator Richard Shelby, the committee's most senior Republican, said, "There is no question that China manipulates its currency in order to subsidize its exports. The only question is: Why is the administration protecting China by refusing to designate it as a currency manipulator?"

How are world's economies doing summer 2010?

We ask again, how does this relate to anything the Town of Weston is doing in O.P.E.B. project?
SEC accuses money manager of fraud

21 June 2010

WASHINGTON – Federal regulators have filed civil fraud charges against an investment adviser and his firm in connection with complex securities tied to mortgages during the housing market bust.

The Securities and Exchange Commission on Monday accused Thomas Priore and ICP Asset Management of fraudulently managing the securities in a way that cost investors tens of millions of dollars. The SEC also says Priore and the New York firm improperly reaped millions in fees and undisclosed profits at the expense of clients.

The allegations involve four multibillion-dollar collateralized debt obligations.

Wall Street firms packaged and sold C-D-O's tied to mortgages to investors at the height of the housing boom

Lawmaker: Local officials lost $1.7B due to Lehman
By ALAN ZIBEL, AP Business Writer
20 April 2010

WASHINGTON – A lawmaker says the collapse of Lehman Brothers cost 40 municipalities nationwide around $1.7 billion and devastated local services in a county she represents.

Rep. Anna Eshoo, D-Calif., is telling House lawmakers Tuesday that San Mateo County lost $155 million as a result of the Wall Street firm's meltdown in September 2008.

She says county officials were "not rolling the dice to optimize their dollars. They invested in the safest, most conservative instruments."

Lehman's collapse was the biggest corporate bankruptcy in U.S. history. It threw global financial markets into crisis.

The hearing will examine what led to the collapse of Lehman and will probe a bankruptcy examiner's report that the firm masked $50 billion in debt.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP's earlier story is below.

WASHINGTON (AP) — The former chief executive of Lehman Brothers will tell House lawmakers Tuesday that he has no memory of an accounting maneuver that a bankruptcy examiner says the company used to mask its perilous financial condition.

Richard Fuld, Lehman's former CEO, said he has "absolutely no recollection whatsoever" of any documents related to the so-called Repo 105 accounting maneuver, according to testimony prepared for a hearing of the House Financial Services Committee.

Last month, an examiner appointed by the bankruptcy court to investigate the Lehman debacle issued a 2,200-page report finding that the firm masked $50 billion in debt.

Since the report came out, interest has grown on Capitol Hill among lawmakers seeking to find out if the accounting gimmick was widely used by Wall Street firms to hide their debt.

The government was unable to engineer a private-sector rescue of the failing firm or come up with some other solution. Lehman was forced to declare bankruptcy — the biggest in U.S. history — in the fall of 2008. That threw financial markets in the United States and around the globe into crisis.

Fuld, who hasn't appeared before Congress since October 2008, said in prepared remarks that the report "distorted the relevant facts" and that the accounting complied with standard practices.

"The result is that Lehman and its people have been unfairly vilified," he said.

The examiner, Anton Valukas, however, criticized the company and the Securities and Exchange Commission. Lehman, he said, "was significantly and persistently in excess of its own risk limits," he said in prepared remarks. The SEC, meanwhile, "was aware of these excesses and simply acquiesced."

In his report last month, Valukas disclosed that Lehman put together complex transactions that allowed the firm to sell "toxic" securities — mainly those made up of mortgages — at the end of a quarter. That wiped them off its balance sheet, avoiding the scrutiny of regulators and shareholders. Then the bank quickly repurchased them — hence the term "repo."

Treasury Secretary Timothy Geithner will testify at the hearing that Lehman's collapse highlights why the Obama administration's proposal to reform the financial system is needed. That legislation includes a mechanism to allow the government to safely wind down ailing financial companies whose collapse could take down the entire financial system and the broader economy.

"Lehman's disorderly bankruptcy was profoundly disruptive," Geithner said, according to prepared remarks. "It magnified the dimensions of the financial crisis, requiring a greater commitment of government resources than might otherwise have been required. Without better tools to wind down firms in an orderly manner, we are left with no good options."

Geithner's predecessor, Henry Paulson, is not appearing at Tuesday's hearing. In written remarks, he supported several pieces of the Obama administration's proposed financial reforms, without mentioning the bill itself.

"The government must have the authority to wind-down, and eventually liquidate, nonbank financial institutions in a manner that prevents harm to the system as a whole," Paulson wrote. "We sorely felt the need for this authority at the time of Lehman's failure, and, had we had it, I think the situation would have ended quite differently."

The chairman of the SEC, Mary Schapiro, also is scheduled to testify. She will say that after Lehman's rival Bear Stearns nearly collapsed two years ago in a government-managed sale, the SEC had little ability to prevent Lehman from going under.

She did, however, concede that the SEC "did not do enough" to oversee the five largest investment banks, even though it had authority over them since 2004. That oversight program, she said, was "insufficiently resourced, staffed, and managed from its inception."

Lawmakers are also likely to question Schapiro about the SEC's case against Goldman Sachs. The agency filed civil charges Friday against the venerable Wall Street firm, claiming the bank misled investors about mortgage-linked securities.

Federal Reserve Chairman Ben Bernanke, also scheduled to testify, said the central bank wasn't aware that Lehman used the accounting move. And even if the Fed did know, it wouldn't have changed the Fed's view that the company was in bad financial shape, according to Bernanke's prepared remarks.

Although the SEC was Lehman's chief regulator, the Fed began to monitor the firm after trouble surfaced in the financial industry.

Two Fed employees were placed at Lehman to keep tabs of the company's cash position and its general financial condition, Bernanke explained. Beyond information gathering, the employees had no authority to regulate Lehman's disclosures, capital standards, risk-management practices or other business activity, Bernanke pointed out.

More collapsing economies here.
Kaupthing Bank sign
Kaupthing was nationalised in 2008 (r)

Iceland arrests ex-chief of collapsed bank Kaupthing
Page last updated at 18:25 GMT, Thursday, 6 May 2010 19:25 UK

The former chief executive of the collapsed Icelandic bank Kaupthing has been arrested, authorities say.

Hreidar Mar Sigurdsson is suspected of embezzlement, trading irregularities, and other breaches of banking laws, the special prosecutor's office has said.

It is the first high-profile arrest since the country's financial collapse in 2008.

Mr Sigurdsson is being held by police until a bail hearing on Friday at the Reykjavik District Court.

Kaupthing, once Iceland's biggest bank, collapsed under a mountain of debt at the height of the country's banking crisis.

It was taken over by the government in October 2008, along with Iceland's two other biggest banks, Landsbanki and Glitnir.

Prosecutor Olafur Hauksson said Mr Sigurdsson was suspected of falsifying documents, embezzlement, breach of trading laws, market manipulation, and other laws.

Mr Hauksson was appointed by Iceland's post-crisis government to investigate any criminal activity in the lead up to the crash that has crippled Iceland's economy.

Britain's Serious Fraud Office is carrying out its own investigation into suspected fraud at Kaupthing, with a focus on the bank's efforts to attract British investors to its "high yield" deposit account, Kaupthing Edge.

And Mother Nature voted "no" as well...
Iceland votes 'no' to debt deal for collapsed bank

By GUDJON HELGASON and JILL LAWLESS, Associated Press Writers
March 7, 2010

REYKJAVIK, Iceland – Voters in tiny Iceland defied their parliament and international pressure, resoundingly rejecting a $5.3 billion plan to repay Britain and the Netherlands for debts spawned by the collapse of an Icelandic bank.

According to results released Sunday, just over 93 percent of voters said "no" in Saturday's ballot, while only 1.8 percent voted "yes," according to a count of all but 2,500 of the 143,784 votes cast. The rest were blank or spoiled ballots.

Britain and the Netherlands want to be reimbursed for money they paid their citizens with deposits in Icesave, an Internet bank that collapsed in 2008, along with most of Iceland's banking sector. Ordinary Icelanders say the repayment schedule was too onerous.

The overwhelming margin reflects Icelanders' simmering anger at bankers and politicians as the island nation struggles to recover from a financial meltdown. Some Icelanders set off fireworks in the center of the capital, Reykjavik, as the referendum results were announced.

President Olafur R. Grimsson — who sparked the referendum by refusing to sign the repayment deal agreed by Iceland's parliament — said Icelanders resented having to pay for the actions of a few "greedy bankers."

He said, however, the British and Dutch would get their money back eventually. The two countries have already offered Iceland more favorable repayment terms than the deal voted on Saturday.

"The referendum was not about refusing to pay back the money," Grimsson told the BBC. "Iceland is willing to reimburse those two governments, but it has to be on fair terms."

Iceland, a volcanic island with a population of just 320,000, went from economic wunderkind to fiscal basket case almost overnight when the credit crunch took hold.

After a decade of dizzying economic growth that saw Icelandic banks and companies snap up assets around the world, the global financial crisis wreaked political and economic havoc. Iceland's banks collapsed within a week in October 2008, its krona currency plummeted and a wave of popular protest toppled the government.

The new left-of-center government has been trying to negotiate a plan to repay $3.5 billion to Britain and $1.8 billion to the Netherlands as compensation for funds that those governments paid to around 340,000 of their citizens who had accounts with Icesave, an Icelandic Internet bank that offered high interest rates before it failed along with its parent, Landsbanki.

Last minute talks broke down last week, despite the debtor countries saying they had offered better terms for a new deal — including a significant cut on the 5.5 percent interest rate in the original deal.

That would have required each Icelander to pay around $135 a month for eight years — about a quarter of an average four-member family's salary.

Despite the referendum result, both sides said they were confident a deal would eventually be reached.

The Icelandic government said in a statement there had been "steady progress toward a deal" in the past few weeks, and Prime Minister Johanna Sigurdardottir said officials would resume talks with Britain and the Netherlands now that the referendum was over.

British Treasury chief Alistair Darling said his country was prepared to be flexible, and acknowledged it would be "many, many years" before Britain was repaid.

Many Icelanders remain angry at Britain for invoking anti-terrorist legislation to freeze the assets of Icelandic banks at the height of the crisis, prompting the worst diplomatic spat between the two countries since the Cod Wars of the 1970s over fishing rights.

Darling struck a conciliatory note Sunday.

"You couldn't just go to a small country like Iceland with a population the size of (the English town of) Wolverhampton and say: 'Look, repay all that money immediately,'" he told the BBC. "So we've tried to be reasonable. The fundamental point for us is that we get our money back."

Iceland braces for consequences of Icesave vote
By JANE WARDELL and GUDJON HELGASON, Associated Press Writers
March 6, 2010

REYKJAVIK, Iceland – A proposal to use taxpayer funds to pay off Iceland's substantial debts to foreign governments seemed likely to be defeated in a national referendum Saturday.  Opinion polls indicated that a strong majority intend to reject the $5.3 billion plan to compensate the governments of Britain and the Netherlands for money those governments paid out to depositors in their countries who lost savings in a failed Icelandic bank.

"I voted no," said Rognvaldur Hoskuldsson, a 36-year-old machine technologist, after casting his vote Saturday morning. "It makes no sense to say yes when the UK and Dutch have put a better deal on the table in talks this week. Also we have to send a message that these countries are not going to profit from this situation."

Many Icelanders who have been badly hurt by the country's financial collapse say they don't want to be bullied by larger nations seeking to profit from Iceland's severe economic problems.

A rejection of the deal because of the public backlash would create another obstacle on Iceland's difficult road out of a deep recession. A "no" vote could further jeopardize its credit rating and make it harder to access much-needed bailout money from the International Monetary Fund.

It could also harm Iceland's chances of being granted entry to the European Union.  Some voters seemed undecided even after the polls opened. Kristofer Hannesson, 27, said he was not yet sure but was leaning toward voting against the plan.

"I feel that I should go and vote no to send the message to the British and the Dutch that we, the innocent Icelandic public, are not going to let them walk all over us," he said.

Iceland has been desperately seeking a revised deal with its European creditors since President Olafur R. Grimsson tapped into public anger and used a rarely invoked power to refuse to sign the so-called Icesave bill into law in January, triggering the national poll.  At the heart of the dispute is the payment of $3.5 billion to Britain and $1.8 billion to the Netherlands as compensation for funds that those governments paid out to around 340,000 nationals with savings in the collapsed Icesave internet bank.

Britain and the Netherlands offered better terms last week — including a floating interest rate on the debt plus 2.75 percent, representing a significant cut on the 5.5 percent under the original deal hammered out at the end of last year.  The British say their "best and final offer has been turned down."

But Iceland continues to hold out for more, aware that any new deal must win substantial political and public support to avoid another veto by the president.

Locals largely view the deal both as intimidation by bigger nations and an unfair result of their own government's failure to curtail the excessive spending of a handful of bank executives that led the country into its current malaise.  Because of Iceland's tiny population, around 320,000, the original deal would have required each person to pay around $135 a month for eight years — the equivalent of a quarter of an average four-member family's salary.

That's a step too far for many ordinary Icelanders who resent forking out the money to compensate for losses incurred by potentially wealthier foreign investors who chased the high interest rates offered by Icesave.
There's also residual anger that Britain invoked anti-terrorist legislation to freeze the assets of Icelandic banks at the height of the crisis, prompting the worst diplomatic spat between the two countries since Cod Wars of the 1970s over fishing rights in the North Atlantic.

"I am going to say no on Saturday because it's not fair and justifiable that the Icelandic nation should pay for other people's mistakes," said Benedikt Mewes, 33, a cashier at the National Post Office in Reykjavik.

Officials within Iceland's Social Democrat-Left Green coalition government, whose authority is being challenged by the weekend poll, acknowledge the repercussions of a failure to settle the dispute.  Although the International Monetary Fund has never explicitly linked delivery of a $4.6 billion loan to the reaching of an Icesave deal, it is committed to Iceland repaying its international debt — the months taken to reach the original Icesave deal were responsible for holding up the first tranche of IMF funds last year.

There are also fears that Britain and the Netherlands will take a hard-line stance on Iceland's application to join the EU and refuse to approve the start of accession talks until an Icesave deal is signed into law.

Up, up and away?  For interest rates, that is...

Stock futures down after Fed rate hike
By IEVA M. AUGSTUMS, AP Business Writer
Feb. 19, 2010

The stock market headed for a lower open Friday after the Federal Reserve surprised investors by raising the interest rate it charges banks for emergency loans.

Markets around the world also fell as investors feared that the Fed's move will raise borrowing costs and slow the economic recovery. It has been widely expected that the central bank would begin pulling back on its economic stimulus measures. But late Thursday's quarter-point increase in the discount rate to 0.75 percent came sooner than expected.

The Fed said its action should not be seen as a sign that it will soon raise rates for consumers and businesses. But the stock market, which tends to trade on expectations for what the economy will be like in six to nine months, seems to be anticipating that rates will rise.

Asian stocks were down nearly 2 percent in earlier trading and the dollar, which is supported by higher interest rates, extended its advance. European markets were mixed.

Dow Jones industrial average futures fell 40, or 0.4 percent, to 10,335. Standard & Poor's 500 index futures dropped 6.30, or 0.6 percent, to 1,099.30, while Nasdaq 100 index futures fell 6.25, or 0.3 percent, to 1,814.50.

Whether the Fed can move slowly on future rate increases may become clearer when the Labor Department releases its consumer price report later Friday morning.

Economists surveyed by Thomson Reuters expect the CPI, which measures inflation at the consumer level, rose 0.3 percent in January, faster than December's 0.1 percent increase. They expect that core inflation, which excludes energy and food, will rise by a more moderate 0.1 percent in January, the same as in December.

A jump in inflation could put the Fed in a position of having to raise interest rates to fight the rising prices.

The report is expected at 8:30 a.m. EST.

Bond prices were mixed Friday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.80 percent from 3.81 percent late Thursday. The yield on the three-month T-bill, considered one of the safest investments, rose to 0.11 percent from 0.08 percent late.

The dollar rose against other major currencies. Gold and oil prices fell.

Overseas, Japan's Nikkei stock average fell 2.1 percent. In afternoon trading, Britain's FTSE 100 slipped less than 0.1 percent, Germany's DAX index was down 0.1 percent, while France's CAC-40 was up 0.3 percent.

Page last updated at 16:18 GMT, Friday, 29 January 2010

Davos 2010: Central bankers seethe behind closed doors
By Tim Weber, Business editor, BBC News website, in Davos

Davos 2010
The regulators are talking, but are the bankers listening?

Davos has a new blood sport: banker bashing.

Everybody at the World Economic Forum is tearing into them, from President Nicolas Sarkozy to investing legend George Soros.

It may be clean good fun (and a great spectator sport), but all the tough talk has a very serious edge.

Slowly, the outlines of a consensus are emerging for far-reaching reforms of the financial sector. The bankers here are fighting a rearguard action - seemingly without realising that they are making their situation even worse.

My colleague Robert Peston reported the astounding comments from a leading banker, suggesting that he and his colleagues can't possibly have been paid too much.

It's exactly these kind of comments that are goading regulators and politicians to get tough.

Angry central bankers

Central bankers don't do public tantrums.

But the measured tones of the European central bankers here in Davos barely hide how angry they are over what they see as being taken for a ride.

We wanted to see sensible behaviour by banks, but we didn't see it, so we need collective action
A European central banker

Look at the UK's 50% tax on bankers' bonuses, says one. "This was not designed to generate revenue, but to avoid it. But the banks still paid their bonuses. A better tax rate would have been 100%."

The bankers, he implies, clearly didn't get the message.

Backed by the G20, regulators are currently doing some detailed work on a global regulatory framework - looking at various options and the impact they will have. The framework is scheduled to be ready by the end of the year.

Over lunch, one of the top central bankers guiding the process promised us pretty comprehensive reforms. "The new world will look more like the 'new new', not the 'new normal'," he threatens.

He ticked off a list of potential changes, from new accounting rules to new counterparty arrangements to liquidity buffers.

The central banker particularly dwelled on a plan to introduce "capital requirement charges" to punish banks that don't save money for a rainy day.

Why such drastic action?

"The banks had a great year," he says. "The good results were only driven by the 'for free' insurance that the governments sold to them." But did the banks use the windfall to bolster their balance sheets? No, "everybody is putting it into bonuses and dividends".

And, turning slightly red, he says: "We wanted to see sensible behaviour by banks, but we didn't see it, so we need collective action."


Bankers are quick to point out what could go wrong.

Too much regulation, too high taxes, and banks could not afford to lend any money at all, even if they would want to. It would be a certain way of choking any economic recovery.

The central bankers acknowledge that, and promise that all the new rules and regulations, the "de-risking" and "de-leveraging" of the banking sector would be slowly phased in.

Davos 2010
Everyone is getting a chance to vent in private

"This won't be a one-size-fits-all model," says one of them.

Politicians, too, see the benefits of being tough on banks.

A parade of politicians from around the world here in Davos has lavished praise on the principles (if not always the detail) of US President Barack Obama's plan to reform the banks.

The leader of the UK opposition, David Cameron, reiterated his support for a global financial insurance levy, to make sure it was the banks who would finance the next bail-out, not the taxpayer.

And he loves regulation too, promising to turn the Bank of England into the UK's centralised City watchdog, should his party win this year's general election.

The next catastrophe

Andrei Kostin, chief executive of Russia's VTB Bank, quotes Ronald Reagan: "The most terrible words in the English language are: I'm from the government and I'm here to help" - but acknowledged that the crisis proved this adage wrong.

Rather, says Jean-Claude Trichet, president of the European Central Bank, without government intervention the world would have faced a "catastrophe".

The complaints from bankers that poor regulation caused the crisis is like you have a massive fire, the fire brigade comes in and you blame them for flooding the house
John Evans, advisor to the OECD

"In my opinion," he says, "it is currently underestimated that we were very close to a full-fledged depression."

"We need to find a global solution" to fix the "fragile" global financial system, Mr Trichet argues, and warns that merely "local, national solutions" would be a "recipe for [the next] catastrophe".

Some bankers have got the message.

"The relationship between banks, government and society has changed irreversibly," says Peter Sands, chief executive of Standard Chartered bank.

"The bankers," he admits, "have not helped themselves at all. We've been simultaneously tone-deaf and shooting ourselves in the foot."

But he also warns that there is a trade-off between how safe we want to make the banking system, and how efficient and effective it can be to support the real economy.

Still, there's so much blame to go around, it would do more bankers good to accept some of it, says John Evans, who advises the OECD on trade union issues.

"The complaints from bankers that poor regulation caused the crisis is like you have a massive fire, the fire brigade comes in and you blame them for flooding the house."

Page last updated at 11:32 GMT, Sunday, 13 December 2009
Target in Whack a Banker game
Players have to hit pop-up bankers with a mallet

Bankers 'whacked' in arcade game

An arcade game that allows people to vent their anger at bankers has proved so popular the owner keeps having to replace worn out mallets.

Inventor Tim Hunkin introduced "Whack a Banker", which is based on the older "Whack a Mole" game, at his arcade on Southwold pier in Suffolk.

Instead of players hitting pop-up moles with a mallet, within a set time, the target is pop-up bald figures.

Mr Hunkin said the game was "proving very popular".

"I keep having to replace worn-out mallets," he said.

"The bankers are bald and all look the same because that's how I think people see bankers, as faceless."

Players, who are promised a "truly rewarding banking experience", pay 40p to hit as many bankers as they can in 30 seconds.

When a customer wins a voice says: "You win. We retire. Thank you very much to the taxpayer for paying our pensions."

Moody's US credit warning spooks world markets
By PAN PYLAS, AP Business Writer
Dec. 8, 2009

LONDON – European and U.S. stock markets fell sharply Tuesday after worse than expected German industrial production data and a warning from a leading credit ratings agency that the U.S. government needs to get its public finances in shape soon.

In Europe, the FTSE 100 index of leading British shares was down 90.20 points, or 1.7 percent, at 5,220.46 while Germany's DAX fell 105.61 points, or 1.8 percent, at 5,679.14. The CAC-40 in France was 54.10 points, or 1.4 percent, lower at 3,785.95.

On Wall Street, the Dow Jones industrial average was down 106.86 points, or 1 percent, at 10,283.25 soon after the open while the broader Standard & Poor's 500 index slid 11.43 points, or 1 percent, to 1,091.82.

Market sentiment, already subdued after U.S. Federal Reserve chairman Ben Bernanke said the world's largest economy was facing "formidable headwinds, was knocked further by the warning from Moody's Investor Services that the United States and Britain must get a grip on their public finances to avoid threats to their top triple-A credit ratings.

In an assessment of eight triple-A countries, Moody's Investors Services said the public finances in both countries are deteriorating considerably and may therefore "test the Aaa boundaries" in the future.

The Moody's report comes a day after rival Standard & Poor's warned Greece that it likely faced a credit rating downgrade and as skepticism grew about how Dubai World plans to restructure its debt.

"It's fair to say that investor sentiment has been rattled and concerns about sovereign credit risks have been escalating," said Neil Mackinnon, global strategist at VTB Capital.

"All in all, it's an unattractive brew for equities," he said.

In addition, a 1.8 percent fall in German industrial output in October, largely as a result of weaker production of machinery and cars, reminded investors that recovery in Europe's largest economy will be gradual. The consensus in the markets was for a 1.1 percent monthly advance.

Trading was expected to become increasingly volatile due to the upcoming year-end — many investors are looking to book profits made over the nine-month bull run as they settle down for the Christmas break.

The main piece of economic data this week will be Friday's U.S. retail sales figures for November, which will give an early indication into how the Christmas trading period has begun. The state of household spending in the U.S. is key for the global economic recovery — U.S. consumer spending accounts for around 70 per cent of the nation's economy.

Earlier in Asia, Nikkei 225 stock average lost 27.13 points, or 0.3 percent, to 10,140.47 while Hong Kong's Hang Seng dropped 264.44 points, or 1.2 percent, to 22,060.52.

The news that Japan was moving ahead with $81 billion in new stimulus spending did little to enthuse markets. The world's No. 2 economy grew for the second straight quarter in the July-September period, but falling prices have raised concerns about a cycle of deflation that could hinder the country's rebound.

Elsewhere, Shanghai's market lost 1.1 percent to 3,296.66 while markets in Australia and Taiwan fell about 0.1 percent.

Bucking the downward move, South Korea's key stock measure rose 0.8 percent to 1,627.78.

Oil prices fell along with stocks, with benchmark crude for January delivery down 86 cents to $73.07 a barrel. The contract fell $1.54 to settle at $73.93 on Monday.

Gold prices were down $16.20, or 1.4 percent, at $1,147.80 an ounce — way down on last week's record high above $1,225.

The dollar, meanwhile, gave up a large chunk of its recent gains against the yen, falling 1.3 percent at 88.34 yen. However, it was faring better against the euro, which was trading 0.4 percent lower at $1.4758.

CONTRASTS IN THE EMIRATES:  Dubai default coming?  Stormy weathe to rain on the parade?

Abu Dhabi gives Dubai $10 billion in surprise bailout

By John Irish and Thomas Atkins
Mon Dec 14, 2:02 am ET

DUBAI (Reuters) – Abu Dhabi bailed out neighboring Dubai on Monday with $10 billion in surprise aid for debt-laden Dubai World, driving stock markets higher, but Dubai said creditors still needed to approve a standstill on outstanding debt.

Dubai said $4.1 billion of the money received from Abu Dhabi was allocated to property developer Nakheel to repay its Islamic bond maturing on Monday. Nakheel said it would repay the bond over the next two weeks.

The excess funds would be used to help government-controlled holding company Dubai World, which has asked creditors to agree to restructure $26 billion of its debt, up until the end of April 2010, a Dubai government statement said.

"The (agreement is) on condition of the company being successful in negotiating a standstill previously announced with remaining creditors," a government source said in a conference call with journalists.

"The fund will also be used for the satisfaction of obligations to trade creditors and contractors and discussions with contractors will begin shortly," the source said.

Dubai's benchmark stock index led a surge on regional markets, jumping more than 10 percent, while Abu Dhabi rose 7 percent in early trading.

The move was the least expected of all options Dubai had on the table after requesting a standstill on $26 billion in Dubai World debt on November 25, alarming global financial markets and shaking the image of the emirate as a regional business hub.

Dubai's creditors, which include London-listed Standard Chartered, HSBC, Lloyds and Royal Bank of Scotland, along with United Arab Emirates lenders Abu Dhabi Commercial Bank and Emirates NBD, effectively have until Dec 28 to agree to the standstill, when the Nakheel bond's grace period ends.

"This is kind of above and beyond what people expected. It is a crucial and essential lifeline ... at a time when the markets really needed it," said John Sfakianakis, chief economist at Banque Saudi Fransi-Credit Agricole. "That should bring in a lot of confidence. Basically Abu Dhabi is footing the bill.

"It will take time for the implications to unfold. I highly doubt this kind of money has no strings attached. There was no other choice for Abu Dhabi but to bailout Dubai, the federation would have been at stake."

Abu Dhabi is the largest member of the United Arab Emirates federation and a big oil exporter.

Sheikh Ahmed bin Saaed al-Maktoum, chairman of Dubai's fiscal committee, said Dubai's government would act at all times in accordance with market principles and internationally accepted business practices and the emirate would remain a strong and vibrant global financial center.

"Our best days are yet to come," he said in a media statement.

The yen fell sharply against other currencies on the news, while the dollar shot up to 88.90 yen and the euro also jumped to 130.43 yen.

U.S. S&P stock futures jumped 0.7 percent, reversing early losses, and European shares were also called higher. Hong Kong's Hang Seng index shot up 300 points in the last minutes of morning trade to finish in positive territory, while other markets across Asia also pushed higher.


Dubai also announced a new bankruptcy law that it said could be used in case Dubai World and creditors failed to reach an agreement on debt maturing in the future.

The Dubai government source said the law, which would be in effect from Dec 14, could allow Dubai World to file for bankruptcy if its restructuring was not successful.

Dubai has ring-fenced prized assets such as Emirates airline from the $26 billion debt restructuring of Dubai World.

The government source said the restructuring process could include asset sales, but they would be limited to Nakheel and Limitless, excluding Istithmar World assets, which owns U.S. luxury retailer Barneys, or its port operator DP World.

"Dubai will do asset sales and markets will be relieved, said Saud Masud at UBS.

"But we've still got $35 billion due in bonds, loans and repayment over the next couple of years, so this is only one thing. We've got almost 10 times this amount to come. The big question is how are they are going to do this next step?"

The government source said other government related entities such as Borse Dubai, which has $2.5 billion of debt maturing in February, and Dubai Holding, which has about $1.9 billion maturing in the first half of 2010, would be assessed on a "case by case basis" and the Dubai World deal was not an indication of future deals.

Dubai crisis jolts markets, but early fears ease
November 27, 2009

NEW YORK – Dubai's debt crisis rattled world financial markets Friday, raising concerns that some banks could further tighten lending and hamper the global economic recovery.

The possible spillover effects from Dubai fed fears that international banks could suffer big losses if the debt-laden emirate is forced to default. That sent stock and commodity markets tumbling in New York, London and Asia as investors flocked to the U.S. dollar as a safe haven.

But earlier concerns that the crisis might trigger another major financial meltdown seemed to ease Friday after some analysts downplayed the risks for U.S. banks. U.S. stocks rebounded from their earlier lows as investors grew confident that the damage might be contained.

"I don't think the collateral damage is going to be that great," said Jeffrey Saut, chief investment strategist at Raymond James. "People will dig into this over the weekend, but I think balance sheets have healed enough to withstand a shock like this."

Still, the unfolding crisis in Dubai pointed to the vulnerability of the global economy despite recent signs of recovery.

A year after the global slump derailed Dubai's explosive growth, the city-state's main investment arm, Dubai World, revealed this week it was asking for at least a six-month delay on paying back its $60 billion debt. Major credit agencies responded by slashing debt ratings on Dubai's state companies, saying they might consider the plan a default.

In recent years, Dubai has expanded with ambitious, eye-catching projects like the Gulf's palm-shaped islands and the world's tallest skyscraper in hopes of becoming a tourist friendly and cosmopolitan Middle Eastern metropolis. In the process, however, the state-backed networks nicknamed Dubai Inc. have racked up $80 billion in red ink, and the emirate may now need another bailout from its oil-rich neighbor Abu Dhabi, the capital of the United Arab Emirates.

Following a rout in Europe, Asia's stock markets tumbled Friday, while the dollar hit a fresh 14-year low against the yen as investors piled into currencies perceived as safer. Crude oil at one point fell more than 6 percent.

With Dubai World hard pressed to pay its bills, banks could take the biggest hit, analysts said.

Heavyweight London-based lenders HSBC Holdings and Standard Chartered could face losses of $611 million and $177 million respectively, according to early estimates from analysts at Goldman Sachs. Both have substantial Middle East operations.

In Asia, Japan's Sumitomo Mitsui Financial Group, the country's No. 3 bank, could be exposed to Dubai World's indebted property arm to the tune of several hundred million dollars, according to a person familiar with the matter.

South Korea estimated the country's financial institutions have just $88 million exposure. Construction firms from Japan, Australia and South Korea behind Dubai's recent development boom also might be on the hook.

While most have the wherewithal to absorb any losses, Dubai's troubles could lead banks to reevaluate and scale back their lending. That could make it more difficult for companies to borrow money and hold down a world economy still emerging from the throes of its deepest recession in decades, analysts said.

Equally unsettling for investors was the uncertainty over which companies were exposed and how much money they might actually lose. European banks alone have $87 billion at risk in the U.A.E.

"It touched investors' sensitive nerves," said Cai Junyi, an analyst for Shanghai Securities. "The world is watching whether that will have any substantial impact ... Dubai World is just like a small window that might reflect another financial tsunami."

Emerging markets in the Middle East and elsewhere have attracted massive amounts of capital in recent years amid investor enthusiasm for regions with rapid economic growth. This year, financial markets in Asia and Latin America have vastly outperformed ones in the U.S. and Europe. But Dubai's woes could bring a temporary end to the promiscuous buying behind the boom, analysts said.

"I think it will make investors realize they need to be more discriminating about emerging markets," said Arjuna Mahendran, head of Asian investment strategy at HSBC Private Bank in Singapore. "In the longer term we have no doubt that things are going to recover."

HSBC declined to comment. Calls to Standard Chartered representatives were not returned.

Among other companies with Dubai ties, South Korean construction firms have about 40 projects there whose remaining work is valued at as much as $3 billion. South Korea's government expected the problems to have minimal impact.

Dubai debt difficulties hammer stocks
By Jeremy Gaunt, European Investment Correspondent
Thursday, Nov. 26, 2009 (Thanksgiving Day, U.S. - markets closed)

LONDON (Reuters) – Debt problems in Dubai struck financial markets hard on Thursday, sinking global stocks, lifting safe-haven bonds and driving the dollar higher.

Gold climbed to a new record high but fell back as the dollar rose. European shares had their worst daily loss in seven months.  Banking stocks came under particular pressure because of potential exposure to any bad debt in the Gulf, as did shares in European car companies, some of which are part-owned by sovereign wealth funds from the region.

Markets were trading without much input from the United States, where it was the Thanksgiving holiday.  Dubai said on Wednesday it wanted creditors of Dubai World and property group Nakheel to agree a debt standstill as it restructures Dubai World, the conglomerate that spearheaded the emirate's breakneck growth.  The announcement triggered widespread concern about the once-booming Gulf region's financial health, although some investors differentiated between leveraged Dubai and other more solidly wealthy emirates and countries in the region.

But the worries fed directly into a general nervousness in financial markets about the real state of the world economy at a time when investors are also seeking to lock in 2009 profits.

"The Dubai worries have played a major role in rattling market sentiment at a time when the U.S. is closed and we are not getting anything from anywhere else," said Peter Dixon, economist at Commerzbank.

"It is a day in which market uncertainty has been provoked again."

Others, such as Royal Bank of Scotland, said Dubai's bombshell meant investors would now have to "re-appraise the quality of sovereign support for state-owned entities in the region."

Dubai sought to ease some concerns about international port operator DP World (DPW.DI), saying its debt was not included in the restructuring.  But markets stayed nervous and the cost of insuring debt through credit default swaps around the Gulf rose.


MSCI's emerging market stock index (.MSCIEF) was down 2.1 percent, underperforming the broader all-country world index (.MIWD00000PUS), which was down 1.5 percent.  There were sharp losses in Europe, where the pan-European FTSEurofirst 300 index (.FTEU3) closed down a preliminary 3.2 percent, its biggest daily loss in seven months.

Banks were the biggest drag on the index, but the interlinking of world finance showed up elsewhere.

Shares in London Stock Exchange (LSE.L) fell as traders cited concern that Bourse Dubai held a substantial stake in the company.  Porsche (PSHG_p.DE) and Daimler (DAIGn.DE) also lost ground. Qatar Investment Authority holds a 10 percent stake in the former, Aabar Investments from Abu Dhabi and Kuwait own 9.1 percent and 6.9 percent stakes, respectively, in the latter.

"It (the Dubai credit issue) does bring to the fore that much of what we have seen in the markets really has been supported by liquidity," said Georgina Taylor, equity strategist, Legal & General Investment Management.

"It shows how vulnerable the market still is to newsflow," she said. "But it should be seen as a country-specific issue. It's not something systemic. It's about risk appetite."

Within the Gulf, regional bonds sold off and ratings agency Standard & Poor's placed four Dubai-based banks on negative outlook.

"Anything from Dubai or Abu Dhabi is getting absolutely hosed," a bond trader in London said. "There is massive pressure across the board, exacerbated by the thin liquidity."

Gulf markets were closed for Eid holidays.


The dollar gained sharply as investors shed riskier assets in the Dubai debt storm.

But the euro was also hit also when France's Economy Minister Christine Lagarde said that its strength against other currencies was hurting European exporters.  It hovered near the day's low of $1.4960, down 1.1 percent on the day.

The dollar index, a barometer of its performance against six major currencies, rose 0.9 percent on the day, up from a 15-month low.  Risk aversion also lifted the dollar off a 14-year low against the Japanese yen.

Euro zone government bond prices were sharply higher. The yield on two year debt fell 8 basis points.

Bund futures rose so high they broke out of a trading range that has been in place since June.

O.E.C.D. Sees Bumpy Path to Recovery
November 20, 2009

China has helped to pull countries in the Organization for Economic Cooperation and Development back toward economic recovery, but the path to sustained growth will be bumpy, the association said Thursday in a cautious assessment of the global economy.

“Growth in the O.E.C.D. area has resumed after the most virulent recession in decades,” the 30-nation association of free-market democracies said in its twice-yearly Economic Outlook.

“The upturn in the major non-O.E.C.D. countries, especially in Asia and particularly in China, is now a well-established source of strength for the more feeble O.E.C.D. recovery.”

But it noted that economic growth among its members would most likely “fluctuate around a modest underlying rate for some time to come.”

The countries that belong to the organization accounted for about 71 percent of global gross domestic product in 2007, according to the World Bank. Several of the faster-growing developing nations, including China, Brazil and India, are not members of the organization.

The Chinese economy, bolstered by easy bank lending and a stimulus package of 4 trillion yuan, or $585 billion, has been expanding at a strong pace in comparison with other large economies. The International Monetary Fund forecasts the Chinese economy will grow 8.5 percent this year.

While the economies in the O.E.C.D. are growing again, the combined gross domestic product of the member nations will still decline by 3.5 percent for 2009, the report said, recovering to 1.9 percent growth next year and 2.5 percent growth in 2011.

It said unemployment was expected to rise from 8.2 percent this year to 9 percent next year and then decline to 8.8 percent in 2011.

While the world economy has come back from the edge of the abyss at which it stood early in the year, the O.E.C.D. said, efforts to repay debts by households, banks, companies “and, eventually, governments” will keep downward pressure on economic growth. As a result, it said, “unemployment is set to move higher and already-low inflation will be under further downward pressure. It is only some time down the line that the recovery will become sufficiently strong to begin to reduce unemployment.”

The organization, which is based in Paris, noted that its projections could prove too optimistic if households sought to repair their finances more quickly than anticipated and that the forecasts might prove too modest if business investment were to rebound significantly.

It projected the U.S. economy would contract this year by 2.5 percent. But thanks to government stimulus efforts, improving financial conditions and export demand, a return to normal inventory levels and a more stable housing market, it forecast the United States would post growth of 2.5 percent next year and 2.8 percent in 2011.

“Employment should respond quickly to economic activity and unemployment may peak in the first half of 2010,” it said.

The Japanese economy is expected to shrink 5.3 percent this year, it said, and grow 1.8 percent next year and 2 percent in 2011.

“Japan is well positioned to benefit from strong growth in the rest of Asia,” the O.E.C.D. noted, but in the absence of renewed domestic demand, unemployment will remain high and deflation will linger in Japan.

The 16-member euro-zone economy is forecast to contract 5.3 percent this year, the O.E.C.D. said, and grow 1.8 percent in 2010 and 2 percent in 2011.

“With unemployment not set to peak before the end of 2010 or the beginning of 2011, household confidence is likely to be weak and sap the strength of the recovery,” the O.E.C.D. said. World trade will contract by 12.5 percent this year, it estimated, and trade will increase next year by 6 percent and by 7.7 percent in 2011.

With interest rates at or near historic lows in most member nations, the organization said monetary policy was appropriate for current conditions, and rates should move back to normal levels only “by the time inflationary pressures begin to be felt.” And it said fiscal measures to bolster demand should not be withdrawn in a manner that undermined output. Still, governments need to consider how they will end fiscal stimulus measures and raise interest rates toward normal levels, the report said.

“Well-articulated exit strategies will increase confidence that there is a way out,” it said, adding that it was “regrettable that so few exit strategies have so far been articulated.”

September trade gap widened 18.2%
Washington Times
David M. Dickson
Saturday, November 14, 2009

The U.S. trade deficit expanded in September by the most in a decade as rising imports of petroleum, autos and manufactured goods from China wiped out an otherwise impressive gain in exports, which reached their highest level since December.

The trade gap jumped 18.2 percent, widening from $30.8 billion in August to $36.5 billion in September, the Commerce Department reported Friday. It was the largest monthly imbalance since January but it remains well below the peak deficit of $65.9 billion in July 2008, when oil prices reached record levels just before trade flows collapsed around the world.

Some economists hailed September's significant expansion of overall U.S. trade activity, including both imports and exports, as further evidence that the deepest U.S. and global downturns since the Great Depression have turned the corner.

"The report was stunning in its description of an economy showing strong signs of recovery across the board," said Christopher Cornell of Moody's

"Exports have risen for five consecutive months, which reflects stronger growth in the rest of the world," said Jay H. Bryson, global economist for Wells Fargo.

Exports in September were up 2.9 percent to $131.9 billion, while imports climbed 5.8 percent to $168.4 billion.

"The trade figures signal a strong rebound in global trade," said Nigel Gault, chief U.S. economist for IHS Global Insight. "However, the widening deficit is a warning that as U.S. domestic demand increases, imports will bounce more than exports. That means that the trade deficit will keep widening, and that trade will be a drag on growth."

As a result of September's unexpectedly big increase in the trade deficit, Mr. Gault said the annual rate of economic growth for the third quarter will likely be revised downward from the initially reported 3.5 percent to 2.9 percent.

More than two-thirds of the increased deficit resulted from a $4 billion jump in the nation's monthly petroleum deficit, which reached $20.5 billion. Not only did the average price of imported crude oil increase from $64.75 per barrel to $68.17, but imports of petroleum rose from 10.9 million barrels per day in August to 12.1 million barrels per day in September.

"This month's trade report supports the hypothesis that rising oil prices are tied to increasing demand for crude oil from a recovering global economy," Mr. Cornell said.

Oil prices increased to $80 per barrel in October, signaling another big petroleum-related rise in the trade deficit ahead. Oil prices peaked near $150 per barrel in July 2008.

Auto imports increased by $1.7 billion in September as dealers restocked their inventories after the federal "clash for clunkers" program.

The monthly trade deficit with China, where President Obama will arrive Sunday for several days of meetings, increased by 9.2 percent, or nearly $2 billion, reaching $22.1 billion in September and $165.8 billion for the first nine months of 2009. The trade deficit with China is on track to exceed $200 billion this year for the fifth year in a row.

The September trade deficit with Japan, where Mr. Obama arrived Friday in his first stop on his Asian tour, declined slightly to $4.1 billion. The gap with Japan trails only China and Mexico ($4.6 billion). The merchandise trade deficit with South Korea, where Mr. Obama will visit next week, nearly doubled to $770 million in September.

"If President Obama really wants to create more good American jobs, he doesn't have to wait for the [jobs] summit he's planned upon his return from Asia," said Alan Tonelson of the U.S. Business and Industry Council, whose members mainly include family owned domestic manufacturing companies. "He can tell the Chinese and other regional leaders that he'll be acting unilaterally to slash America's massive job-killing Asia trade deficits with strong measures to combat the region's pervasive trade cheating."

Due largely to rising unemployment, which jumped to 10.2 percent in October, consumer confidence unexpectedly declined in early November, according to the Reuters/University of Michigan preliminary index of consumer sentiment. The index fell from 70.6 to 66, returning to its July and August level.

SEC sees evolution in insider trading
By Jonathan Stempel and Rachelle Younglai
November 6, 2009

NEW YORK (Reuters) – A top U.S. securities regulator said some funds may now view insider trading as a central tenet of their business models, rather than as a one-time opportunity for big rewards as sometimes happened in the 1980s.

Robert Khuzami, head of enforcement at the U.S. Securities and Exchange Commission, spoke on Friday, a day after the SEC, the Department of Justice and the FBI announced dozens of new charges in what was already the biggest hedge fund insider-trading scandal ever.

Investigators have been examining trading involving Galleon Group and a variety of hedge funds.

The SEC says it has uncovered $53 million of illegal profits through its investigation. Last month, the agency charged the billionaire Raj Rajaratnam, founder of the Galleon hedge fund firm, in connection with the probe. The Sri Lanka native also faces criminal charges.

"We are already seeing a significant expansion as to where this investigation is leading," Khuzami told reporters on Friday at a Practising Law Institute securities conference in New York. He declined to say whether others might be implicated.

Speaking more generally, Khuzami said that in recent years, more people who have set up hedge funds, a largely unregulated industry, may have done so after working at firms that lacked strong compliance oversight, or after leaving firms that did.

He also distinguished the current environment from the 1980s, in that some people may now be more likely to trade on advance knowledge of routine corporate information, such as earnings forecasts, rather than wait for more dramatic events such as mergers.

"A lot of insider-trading cases in the past tended to be more opportunistic: you had a particular announcement and someone with access to information and they traded on that," he said.

"Here, at least with respect to some of the funds, you see a much more systemic, concerted effort to cultivate sources of information within issuers and elsewhere as ... more of a business model approach, as a regular way of doing business."

That, he said, could herald more problems.

"I can't predict or tell you how widespread the conduct is," he said. "I can only tell you that the change in market structure represented by the rise of hedge funds, particularly operating in an unregulated sphere, and markets that are less transparent represent warning signs that this kind of misconduct may occur more frequently. And that is why we are focused on those areas."

Life Without Fannie Mae and Freddie Mac
September 5, 2013

Talk of doing away with Fannie Mae and Freddie Mac is still just that — talk. But as Congress considers whether and how to get rid of these agencies, consumers ought to be aware of how a substantial reduction in the government’s role in housing finance could affect their ability to borrow in the future.

“What’s at stake here is access to mortgages at an affordable price,” said Julia Gordon, the director of housing finance and policy at the Center for American Progress in Washington.

Fannie and Freddie have been much maligned since their heavy investment in risky loans resulted in a $188-billion taxpayer bailout during the financial crisis. Having since refocused on guaranteeing and securitizing prime mortgages, while also acting as a fill-in for fleeing private capital, the agencies now own or guarantee a majority of the country’s home loans.

As the housing market strengthens, Congress is interested in transferring some or all of that risk back to the private sector. Last month, President Obama voiced support for a bipartisan effort in the Senate to replace the government-sponsored agencies with a new agency with a much-reduced role.

A competing bill in the House would go even further to almost completely privatize the mortgage market.

If a winding down of the two agencies is inevitable, some government guarantee should remain to ensure lending is widely available and safe, Ms. Gordon said.

“The private market likes to look at every single loan — they only want the loans that are the crème de la crème,” she said. “If you scale back the government guarantee too much, then you end up with a really segmented market where people who have pristine credit scores and lots of money can get good, safe, well-priced mortgages, but everybody else can’t.”

A former administrator at the Federal Housing Finance Agency, Ms. Gordon cited analyses that estimate a half-percentage-point rise in borrowing costs if a “fairly robust” government guarantee stays in place, and an increase of at least a whole percentage point if it is dropped completely. The reason for the added expense is that “the market is going to perceive greater risk associated with the loans,” said Alan MacEachin, the corporate economist for the Navy Federal Credit Union, a four million-member banking institution in Virginia. “If there’s greater risk, the markets have to be compensated, and that compensation is higher interest rates, or risk premiums, if you will.”

With a greatly reduced government backstop, borrowers would likely have to contend with higher down payment requirements, Mr. MacEachin said. And, he added, “lending conditions would be more reactionary to what’s going on in the market. We could only imagine what could have happened had the government not stepped in during the mortgage crisis.”

Any reform isn’t likely to happen for at least a couple of years, especially since the now-profitable agencies are repaying the government for the bailout “rather handsomely,” Mr. MacEachin said.

Despite widespread negative perceptions of Fannie and Freddie, the conversations about reform have, in a “refreshing twist,” drawn attention to the positive role the agencies play, noted Alex Matjanec, a founder of, a personal finance Web site.

A central argument for eliminating Fannie and Freddie is to get taxpayers off the hook for any further bailouts. But Mr. Matjanec thinks that professed taxpayer protection may be false assurance.

“If a major bank fails,” he said, “I think the government will treat them like a General Motors and bail them out anyway.”

Freddie Mac loses $7.8B in 4Q
By ALAN ZIBEL, AP Real Estate Writer
Feb. 24, 2010

WASHINGTON – Freddie Mac lost $7.8 billion in the final three months of last year, but the mortgage finance company didn't need a federal cash infusion for the third quarter in a row.

Freddie Mac, which has been controlled by federal regulators since September 2008, lost $2.39 a share, the company said Wednesday. The loss included $1.3 billion in dividends paid to the Treasury Department, which has an almost 80 percent stake in the McLean, Va., company.

The results were a marked improvement over the fourth quarter 2008 when Freddie lost $23.9 billion, or $7.37 a share.

During the most recent quarter, Freddie suffered $7.1 billion in credit losses and a $3.4 billion write-down in low income tax credit investments. That move "increases the likelihood" that the company will require more cash from the Treasury Department, the company warned in a regulatory filing.

Freddie Mac and its sister company Fannie Mae play a vital role in the mortgage market by purchasing mortgages from lenders and selling them to investors. Freddie Mac, for example, purchased or guaranteed about one in four home loans made last year and helped almost 2 million borrowers refinance.

For taxpayers, stabilizing the two companies has been one of the costliest consequences of the financial meltdown. Freddie Mac has received about $51 billion from taxpayers to date, and the Obama administration has pledged to cover unlimited losses through 2012.

The government projects the pair will tap a combined $188 billion by the fall of 2011, up from the current level of $111 billion.

Together, Fannie and Freddie own or guarantee almost 31 million home loans worth about $5.5 trillion. That's about half of all mortgages.

The two companies, however, loosened their lending standards for borrowers during the real estate boom and are reeling from the consequences. Nearly 4 percent of Freddie's borrowers have missed at least three payments.

"The housing recovery remains fragile," CEO Charles "Ed" Haldeman said in a statement. He noted the risks posed by high unemployment could lead to even more foreclosures.

For all of 2009, Freddie Mac lost $25.7 billion, or $7.89 a share, including $4.1 billion in dividends paid to the Treasury Department.

Freddie Mac posts $5 billion loss
By Al Yoon
Fri Nov 6, 7:00 pm ET

NEW YORK (Reuters) – Freddie Mac (FRE.N) (FRE.P), the second largest provider of U.S. residential mortgage funding, on Friday posted a loss of $5 billion in the third quarter and predicted it would need more government support amid a "prolonged deterioration" in housing.

Increases in the value of securities Freddie Mac held over the period helped buoy its net worth, however, erasing its need to tap government funds for a second straight quarter to stay solvent while continuing to buy and guarantee home loans.

Including a $1.3 billion dividend payment on senior preferred stock bought by the Treasury in previous quarters, Freddie Mac's third-quarter loss increases to $6.3 billion.

The home funding company's loss comes amid a rise in provisions for credit losses to $7.6 billion in the quarter, up 46 percent compared with the previous quarter, as delinquencies worsened on loans it guarantees. Provisions will remain high this quarter, it added.

"I would say we are just beginning to see the impact of the chargeoffs on their guarantee book," said Janaki Rao, vice president of mortgage research at Morgan Stanley in New York.

Its larger rival Fannie Mae (FNM.N) (FNM.P) on Thursday said it would need $15 billion from the U.S. Treasury after a whopping $18.9 billion third-quarter loss.

Results at Freddie Mac and Fannie Mae are widely watched as a barometer of the U.S. housing market since they own or back nearly half of outstanding mortgages.

The losses have presented a dilemma to Congress as it wants to protect taxpayers' money but is also counting on the companies to undertake foreclosure prevention efforts which are significantly adding to expenses.

In order to ease the terms of loans under the Obama administration's Making Home Affordable refinancing program, the companies must buy the mortgages out of securities, and write down their value. Seeking alternatives to foreclosures also means bad loans sit on their books longer.

Despite signs of recovery in home sales and prices, rising delinquencies and unemployment levels mean the housing market is still fragile, Freddie said. High unemployment, foreclosures and excess inventory will impede the recovery "for some time" and push house prices lower, the company said.

This means that Freddie Mac's survival will continue to depend on support from the government, which forced the company and Fannie Mae into conservatorship in September 2008.

Freddie Mac has taken $51.7 billion since then while Fannie Mae's draw will rise to $60.9 billion.

For Freddie Mac, "the positive net worth without the help from the Treasury is significant, but it is too early to say whether an end to conservatorship is ahead," Rao said.

Starting in 2010, the company will begin accounting for $1.8 trillion in mortgage-backed securities it guarantees on its balance sheet to meet new guidelines. This will increase interest income and interest expenses, and could have a significant negative impact on net worth, it said.

Shares of Freddie Mac were flat at $1.23 in light after-hours trading following the results.

Fannie Mae posts $18.9 billion Q3 loss, taps Treasury
November 5, 2009

NEW YORK (Reuters) – Fannie Mae, the largest provider of funding for U.S. home loans, on Thursday said it would again tap the Treasury to plug a net worth deficit after bad mortgages and foreclosure prevention efforts resulted in a $18.9 billion net loss in the third quarter.

Shares of Fannie Mae tumbled 7.1 percent after it reported results in extended after-hours trade.

Fannie Mae (FNM.P) (FNM.N) , which was seized by the government last year, said the quarterly loss stemmed from $22 billion in credit-related expenses, including charges on impaired loans it bought from mortgage-backed securities as it modified loans under President Barack Obama's foreclosure prevention plan.

The company also boosted its provision for credit losses in future quarters.

Fannie's regulator will request $15 billion from the Treasury under a senior preferred stock agreement, which will increase the total government support to $60.9 billion.

Bank chiefs urge UK's FSA to slow pace of change
By Matt Turner
Nov. 1, 2009, 12:04 p.m. EST

Leading U.K. bankers have urged the Financial Services Authority to slow down its efforts to reform markets, according to documents seen by Financial News, which demonstrates the level of discomfort within the industry at the pace of change.

In letters to the U.K. market regulators chairman, Lord Turner, and its chief executive, Hector Sants, bank executives warned too little analysis had been conducted, and raised concerns that reform proposals would stifle business by suffocating banks with too much regulation. They also expressed fears that opportunities for regulatory arbitrage would be rife if the U.K. pressed ahead with reform before securing international co-operation.

Stephen Hester, chief executive of Royal Bank of Scotland (NYSE:RBS) , and his counterpart at Barclays Plc (NYSE:BCS) , John Varley, warned the FSA of the dangers of proceeding too quickly with changes to regulation.

Writing in a letter to Sants in the summer, Hester said: Little substantive impact analysis has yet been undertaken of the individual proposals, their aggregate impacts, or the extent to which they may duplicate (or cut across) each other. Varley, writing to Turner soon after, said: The review gives no overview as to how these will operate together as a congruent prudential regime.

He said he feared there was a danger of regulatory overshoot without sufficient co-ordination.

HSBC Holdings Plc (NYSE:HBC) Chairman Stephen Green drilled down into four topics covered in the review. One of the concerns he raised was that proposals for banks based outside Europe to operate as subsidiaries in the U.K. could see other countries retaliate with protectionist barriers.

The letters were part of submissions made by several banks in extensive feedback to the FSA's Turner Review and show the concern in the industry about some reform efforts. As well as Barclays, RBS, and HSBC, the banks that submitted feedback included Goldman Sachs Group Inc. (NYSE:GS) and JP Morgan Chase & Co. (NYSE:JPM) . Although the feedback was submitted in the summer, sources close to the banks confirmed they hadn't changed their positions.

The FSA, which released a summary of the banks' views on its Web site at the end of September but not the letters themselves, declined to comment beyond its statement at the time that the majority of respondents have offered clear support for its main recommendations. Its statement said: The strongest concern was the need for international consistency in formulation and implementation of the regulatory policy response to the crisis.

Some believe the banks may be trying to slow down much-needed reform. Tommaso Padoa-Schioppa, European chairman of regulation advisers Promontory Group, said: Banks that say reform is proceeding too fast are dragging their feet. It is another way of saying they don't want reform.

While most banks shared concerns that the FSA could act too fast, they differed in their positions on individual recommendations in the Turner Review, including proposals on bank capital and liquidity regulations, the potential introduction of a cap on leverage and the monitoring of systemic risk.

The revelations of the banks views come as the FSA on Monday prepares to host its second conference on the Turner Review in Westminster, with Deutsche Bank AG (NYSE:DB) Chief Executive Josef Ackermann and Swiss central banker Philipp Hildebrand due to speak. The FSA has to date issued codes on financial reporting and remuneration at banks, as well as last month finalizing rules on liquidity management. Last week it issued a discussion paper on how to regulate banks that are too big to fail. The proposals included calls for institutions to draw up living wills that would enable them to be wound down in an orderly fashion in the event of collapse.

Banks have until Feb. 1 next year to respond, after which new rules are likely to be implemented. All the banks and the London Investment Banking Association declined to comment beyond what was contained in the submissions.

Web site:

Page last updated at 15:34 GMT, Sunday, 1 November 2009

Across the pond, RBS to be "broken up" - how does that affect Stamford, CT operation?

High Street banks to be broken up
Chancellor Alistair Darling has confirmed that Lloyds, RBS and Northern Rock will be broken up and parts sold to new entrants to the banking sector.

He said there could be three new High Street banks in the UK over the next three to four years as a result.

But the chancellor said he would only sell parts of the banks when "the time is right", to ensure taxpayers get their money back.

There is speculation that buyers might include Tesco and Virgin.

'Clean sheet'

In order to boost competition, the banks' assets will only be sold to new entrants to the UK banking market and not to existing financial institutions.

The new banks will be standard retail operations concentrating on deposits and mortgages.

Joe Lynam, business correspondent
Joe Lynam, BBC business correspondent

As part of the stipulations of EU state aid rules, the UK was always facing the prospect of having to sell off at least parts of those banks which it bailed out last year.

Now it looks as if that sell off process is to begin in earnest.

Though the Chancellor says he has not yet decided which brands are to be hived off, RBS, Northern Rock and Lloyds Banking Group (LBG) will now be broken up in some form.

This means that individual brands within those banks, such as Cheltenham & Gloucester and the TSB (LBG), as well as Williams and Glyn (RBS), could be sold off.

The unanswered question now is whether the Treasury jumped or was about to be pushed by Brussels.

Mr Darling said this was the best way to ensure "proper competition and choice". He said having just "half a dozen big providers was not acceptable".

The new entrants would "have a clean sheet to come in and do things differently", he added.

The chancellor also said the government would be splitting up Northern Rock into two parts by the end of the year, with a view to selling off one part within the next three to four years.

The government had already said it wants to sell off the part of Northern Rock that holds savers' money, carries out new lending and holds some existing mortgages.

He also said the government was keen to divest some of its holdings in RBS and Lloyds.

The government currently holds a 70% stake in RBS and a 43% stake in Lloyds after last October's bail-outs.

'Unnecessary distraction'

BBC business correspondent Joe Lynam says the latest move represents "a gilt-edged opportunity for non-UK retail banks, especially from the US, to get a firm foothold in the highly profitable British banking market for as low a price as could be imagined a few years ago".

The Conservatives said the break up of the state-owned banks had already been "well trailed".

A spokesman added: "We have called for more competition in banking, and for government stakes to be used to strategic effect to that end."

The Lib Dems Treasury spokesman Vince Cable welcomed more competition in the banking sector but said there should be no urgency to the sales.

"We need to be careful that when these split-ups occur, the prime cuts are not offered to private investors and the scraps left to taxpayers," he said.

Treasury select committee chairman John McFall MP said the assets should not be sold off for less than their market value.

"It is important to ensure that we get taxpayer return for this bail-out. I'm relaxed about the timescale. I do not want to sell off [bank assets] at a cheap price, I don't want a fire sale," he told the BBC.

Peter McNamara, former head of personal banking at Lloyds TSB and managing director of the Alliance and Leicester, said that restructuring the banks in the current climate could in fact prove counter productive.

"Half the banks in the UK are suddenly going to be reorganised when you could argue their day job is to support industry and consumers during the recession. Without that support, we are more likely to have a steeper rise in unemployment," he said.

Intense discussions

The government needs permission to break-up the banks from European competition commissioner Neelie Kroes.

She has also set tough conditions on Dutch and German banks receiving state aid and is keen that should only be given in exchange for re-structuring and increased competition within the banking market.

Recent reports have suggested that Lloyds would sell Cheltenham and Gloucester, Lloyds TSB Scotland and Intelligent Finance - an online division of Bank of Scotland.

RBS is understood to be preparing to put its network of around 300 RBS-branded branches in England up for sale, under the Williams and Glyn brand they used until 1985.

According to a source close to the negotiations, RBS is also "near 100% certain" to be putting its insurance division back on the market, including Churchill, Direct Line and Green Flag.

There could be further divestments required of RBS, but these are not expected to include its extensive activities in the US, including its ownership of Citizens Bank.

Hedge funders grouse over Obama speech
Greenwich TIME
Neil Vigdor, Staff Writer
Updated 11:35 p.m., Tuesday, July 26, 2011

The toast of this suburban hedge fund hub four years ago, when Paul Tudor Jones II and George Soros opened their Rolodexes for him at a star-studded fundraiser in Greenwich, these days President Barack Obama is testing the loyalty of some of those very allies in the financial sector.

Insiders of the notoriously circumspect industry bristled Tuesday at the president's comments one night earlier during his televised speech to the nation on debt ceiling negotiations, when Obama questioned whether hedge fund executives are paying their fair share of taxes.

"How can we ask a student to pay more for college before we ask hedge fund managers to stop paying taxes at a lower rate than their secretaries?" Obama said.

Obama was reacting to a House Republican plan to pare back the nation's $14.3 trillion debt.

The president's comments came on the eve of a major hedge fund networking event at the Indian Harbor Yacht Club, the next promontory over from where Obama campaigned in 2007 at the palatial waterfront compound of Jones.

"Do I think there could be buyer's remorse by the those people? Absolutely. Do I know that for a fact? You'll have to ask them," said Bruce McGuire, president of the Connecticut Hedge Fund Association.

The trade organization represents 50 hedge funds in Connecticut, which McGuire said has the third-highest concentration of hedge funds after New York and London.

"I think sometimes the hedge funds make for an easy target," McGuire said.

The White House press office did not return messages seeking comment from Obama's administration Tuesday.

Jones, an industry pioneer and founder of Tudor Investment Corp. in Greenwich, declined to comment Tuesday through a spokesman.

A message seeking comment from Soros was left at his eponymous New York City-based hedge fund, which announced Tuesday that it is closing itself to outside investors.

Under the Wall Street reform act crafted by former U.S. Sen. Christopher Dodd, D-Conn., and U.S. Rep. Barney Frank, D-Mass., hedge funds must register with the Securities and Exchange Commission by March 2012.

Exempt are hedge funds that exclusively manage the portfolios of associated family members, however.

Hedge funds, which invest in stocks, commodity futures, options and emerging market debt, are sophisticated investment pools that cater to high-net-worth individuals.

A number of people inside and outside the industry interpreted Obama's comments to be a reference to whether carried interest -- the profits earned by hedge fund managers -- should be taxed as capital gains at 15 percent or as personal income at up to 35 percent.

"Obviously, the president is just trying to highlight in the starkest terms that the Republicans have ruled out asking, as he pointed out, corporations and high earners to help solve the fiscal mess," said U.S. Rep. Jim Himes, D-Conn.

A member of the House Financial Services Committee who came into office with Obama in 2008, Himes was photographed with the then-Illinois senator at the Jones fundraiser in 2007.

"The vast bulk of Americans believe that the wealthy should contribute to solving our challenges here," Himes said. "A fair number of Republicans in Congress agree with that."

Himes favors taxing management fees as personal income, unless the fund manager puts their own assets at risk or is subject to having to give money back to investors as part of a performance-based incentive or "clawback" provision.

"Fees for managing other people's money should be taxed as ordinary income," Himes said. "If there are clawback provisions or, in the real estate world, you can be called on to provide contingent equity, there is an argument to be made that there is money at risk, and I have supported a blended rate between personal income and capital gains."

U.S. Sen. Richard Blumenthal, D-Conn., characterized the issue of hedge-fund taxation as a moot point with respect to the current debt ceiling negotiations.

The freshman declared his support for a deficit reduction plan crafted by Senate Majority Leader Harry Reid, D-Nev., which he said includes spending cuts to cover the amount of debt ceiling increases dollar for dollar with no new taxes.

"No one should be concerned about tax increases in the Reid proposal," Blumenthal said Tuesday. "Hence, the hedge fund tax and all of the other revenue-taxation issues are not really immediately on the table."

While Blumenthal said he opposes ethanol fuel subsidies for corn growers and giveaways to oil companies and corporations, Blumenthal stopped short of calling carried interest a giveaway.

"What I'm hearing from folks on Wall Street is we need to get this job done," Blumenthal said. "We need to raise the debt ceiling."

Blumenthal estimated that the number of telephone calls from his constituents has quadrupled since Obama's primetime speech, with many urging Congress to raise the debt ceiling.

"We're a week away from the precipice of economic disaster," Blumenthal said.

A spokesman for U.S. Sen. Joe Lieberman, a Connecticut Independent who caucuses with the Democrats, said that the retiring incumbent isn't ruling anything out.

"Senator Lieberman believes that all revenue proposals should be on the table as part of a comprehensive and balanced approach to reducing the deficit," Lieberman office spokesman Marshall Wittmann said.

Dan Mahony, a Wilton resident who runs Myrmikan Capital LLC, a New York City hedge fund specializing in investments in gold, said there is no doubt that Obama was referring to the carried interest debate in his speech Monday.

"All this stuff is theater," Mahony said, sipping on a Heineken at the Indian Harbor Yacht Club hedge fund networking event.

Mahony conceded that it's hard to argue with the president's point about hedge fund managers paying their fair share, however.

"He's correct," Mahony said.

Hanming Rao, chief investment officer of Global Sigma Group, a Stamford-based firm that acts like a hedge fund and specializes in equity index futures, said hedge funds don't deserve to be made a poster child what's wrong with the federal tax code.

"You single out hedge funds, and that's not fair," Rao said.

Himes said that the significance of the hedge fund industry is not lost on him.

"I'm certainly conscious that my district, like New York City and other areas, does derive a lot of its income from trading profits and carried interest," Himes said.

Goldman the goat
Last Updated: 4:35 AM, May 2, 2010
Posted: 12:18 AM, May 2, 2010

Former President Bill Clinton says he’s “not at all sure” Goldman Sachs “violated the law.” But try telling that to his fellow Democrats, let alone the Securities and Exchange Commission.

And to the Justice Department, which has jumped aboard the “get Wall Street” bandwagon by opening a criminal probe.

Looks like Dems, led by the bombastic Sen. Carl Levin, have found their campaign issue for the fall elections. And in Goldman Sachs, they found their bogeyman.

Indeed, Dems’ “blame the banks” demagogy, and wholly unjustified scapegoating of Goldman Sachs for the economic meltdown, even has Republicans running scared. Which might explain why the GOP ditched its filibuster of President Obama’s Wall Street overhaul after just three days.

Sure, Levin & Co. got a boost last week from the often-evasive congressional testimony of Goldman Sachs execs; the latter seem not to have learned from the PR debacle that grew out of last year’s cross-examination of US automakers.

But in between his sophomoric repeated repetition of a four-letter expletive from an internal Goldman Sachs e-mail — think “Howard Stern Goes to Washington” — neither Levin nor any of his colleagues made any real case against the firm.

And with good reason: What Goldman Sachs did in betting on subprime mortgage securities may sound unreasonable, but it’s really not. And it helped Goldman lose less money than other major Wall Street firms, some of which no longer exist.

Yet playing into, and even stoking, populist rage against “the bankers” neither explains why America went into deep recession nor does much to prevent a repeat.  Fact is, Wall Street was just one factor in the economic downturn; Congress itself deserves a fair share of the blame.

The subprime mortgage collapse was driven primarily by a three-decade bipartisan push for home ownership — whether or not prospective buyers could afford those homes or the pricey mortgages that financed them.  And it was made worse by congressional Democrats and federal regulators who turned a blind eye to growing instability at Fannie Mae and Freddie Mac, which guaranteed those mortgages.

If Congress truly wants to understand why the US economy collapsed, it would have to turn the mirror on itself — which is not likely to happen in an election year.  Instead, senators like Carl Levin sit in haughty moral judgment, mouthing crude gibes at easy targets.

Feds open criminal probe of Goldman
By MARCY GORDON, AP Business Writer
30 April 2010

WASHINGTON – Stepping up the pressure on Goldman Sachs two days after its executives were grilled and publicly rebuked by lawmakers, the Justice Department has opened a criminal investigation of the Wall Street powerhouse over mortgage securities deals it arranged.

The criminal inquiry follows civil fraud charges filed by the government against Goldman two weeks ago and as Congress pushes toward enacting sweeping legislation aimed at preventing another near-meltdown of the financial system.

The investigation by the U.S. attorney's office in Manhattan stems from a criminal referral by the Securities and Exchange Commission, a knowledgeable person said Thursday. The person spoke on condition of anonymity because the inquiry is in a preliminary phase.

The SEC brought civil fraud charges against Goldman and a trader in connection with the transactions in 2006 and 2007. The agency alleged the firm misled investors by failing to tell them the subprime mortgage securities had been chosen with help from a Goldman hedge fund client, Paulson & Co., that was betting the investments would fail. Goldman and the trader, Fabrice Tourre, have denied wrongdoing and said they will contest the allegations in court.

Word of the Justice Department action came a day after a group of 62 House lawmakers, including Judiciary Committee Chairman John Conyers, D-Mich., asked Justice to conduct a criminal probe of Goldman. "On the face of the SEC filing, criminal fraud on a historic scale seems to have occurred in this instance," the lawmakers, mostly Democrats, said in a letter to Attorney General Eric Holder.

SEC spokesman John Nester declined any comment on the matter, as did Yusill Scribner, a spokeswoman for the U.S. attorney's office in Manhattan.

Goldman spokesman Lucas van Praag said, "Given the recent focus on the firm, we're not surprised by the report of an inquiry. We would cooperate fully with any request for information."

The Justice Department move was the latest in a dramatic series of turns in the Goldman saga, which has pitted the culture of Wall Street against angry lawmakers in an election year, in the wake of the financial crisis that plunged the country into the most severe recession since the Great Depression of the 1930s.

At the Capitol Thursday, following days of failed test votes, the Senate lurched into action on sweeping legislation backed by the Obama administration that would clamp down on Wall Street and the sort of high-risk investments that nearly brought down the economy in 2008.

And two days earlier, a daylong showdown before a Senate investigative panel put Goldman's defense of its conduct in the run-up to the financial crisis on display before indignant lawmakers and a national audience. The panel, which investigated Goldman's activities for 18 months, alleges that the Wall Street powerhouse bet against its clients — and the housing market — by taking short positions on mortgage securities and failed to tell investors that the securities it was selling were at very high risk of default.

Goldman CEO Lloyd Blankfein testily told the investigative subcommittee that clients who bought the subprime mortgage securities from the firm in 2006 and 2007 came looking for risk "and that's what they got." Blankfein said the company didn't bet against its clients — and can't survive without their trust. He repeated the company's assertion that it lost $1.2 billion in the residential mortgage meltdown in 2007 and 2008. He also argued that Goldman wasn't making an aggressive negative bet — or short — on the mortgage market's slide.

In addition to the $2 billion so-called collateralized debt obligation that is the focus of the SEC's charges against Goldman, the subcommittee analyzed five other such transactions, totaling around $4.5 billion. All told, they formed a "Goldman Sachs conveyor belt," the panel said, that dumped toxic mortgage securities into the bloodstream of the financial system.

A collateralized debt obligation or CDO is a pool of securities, tied to mortgages or other types of debt, that Wall Street firms packaged and sold to investors at the height of the housing boom. Buyers of CDOs, mostly banks, pension funds and other big investors, made money off the investments if the underlying debt was paid off. But as U.S. homeowners started falling behind on their mortgages and defaulted in droves in 2007, CDO buyers lost billions.

It wasn't immediately known whether the Justice Department's inquiry also encompasses the five other transactions.

The investigation, even though at a preliminary stage, opens a momentous new front in the legal aftermath of the near-meltdown of the financial system.

The Justice Department and the SEC have previously launched wide-ranging investigations of companies across the financial services industry. But a year after the crisis struck, charges haven't yet come in most of the probes. In addition to fallen mortgage lender Countrywide Financial Corp. and bailed-out insurance giant American International Group Inc., the investigations also have targeted government-owned mortgage lenders Fannie Mae and Freddie Mac and crisis casualty Lehman Brothers.

Last August, a federal jury in New York convicted former Credit Suisse broker Eric Butler of conspiracy and securities fraud for his role in a $1 billion subprime mortgage fraud. But the swift acquittal in November of two former Bear Stearns executives in the government's criminal case tied to the financial meltdown showed how tough it can be to prove that investment bank executives committed fraud by lying to investors. The SEC sued the two executives in a civil suit, and that case is still pending.

The government must show that executives were actually committing fraud and not simply doing their best to manage the worst financial crisis in decades, some legal experts say.

The SEC civil fraud case against Goldman — even with the lower required burden of proof than in a criminal case — also could be difficult and faces pitfalls, in the view of some experts. To prove it, they say, the agency must show that Goldman misled investors or failed to tell them facts that would have affected their financial decisions. The greatest challenge, the experts say, will be boiling the case down to a simple matter of fraud: the issues involved are so complex that Goldman may be able to introduce enough complicating factors to shed some doubt on the SEC's claims.

Political intrigue has swirled around the SEC suit, meanwhile, as some Republicans have accused the agency of timing the April 16 announcement of fraud charges against Goldman to bolster prospects for the financial overhaul legislation while it was at a critical stage in the Senate.

The speculation was heightened by the revelation that the SEC commissioners approved filing of the charges on a 3-2 vote, along party lines, with both Republicans opposing the move.

SEC Chairman Mary Schapiro has insisted there was no connection between the timing of the agency lawsuit, which followed a monthslong investigation of the firm, and the push for the legislation in the Senate. Last week, President Barack Obama denied any White House involvement in the timing of the SEC case.

"We don't time our enforcement actions by the legislative calendar or by anybody else's wishes," Schapiro told a Senate Appropriations subcommittee on Wednesday. "We bring our cases when we have the law and the facts we believe support bringing our cases."

Goldman Sachs Messages Show It Thrived as Economy Fell
April 24, 2010

In late 2007 as the mortgage crisis gained momentum and many banks were suffering losses, Goldman Sachs executives traded e-mail messages saying that they were making “some serious money” betting against the housing markets.

The e-mails, released Saturday morning by the Senate Permanent Subcommittee on Investigations, appear to contradict some of Goldman’s previous statements that left the impression that the firm lost money on mortgage-related investments.

In the e-mails, Lloyd C. Blankfein, the bank’s chief executive, acknowledged in November of 2007 that the firm indeed had lost money initially. But it later recovered from those losses by making negative bets, known as short positions, enabling it to profit as housing prices fell and homeowners defaulted on their mortgages. “Of course we didn’t dodge the mortgage mess,” he wrote. “We lost money, then made more than we lost because of shorts.”

In another message, dated July 25, 2007, David A. Viniar, Goldman’s chief financial officer, remarked on figures that showed the company had made a $51 million profit in a single day from bets that the value of mortgage-related securities would drop. “Tells you what might be happening to people who don’t have the big short,” he wrote to Gary D. Cohn, now Goldman’s president.

The messages were released Saturday ahead of a Congressional hearing on Tuesday in which seven current and former Goldman employees, including Mr. Blankfein, are expected to testify. The hearing follows a recent securities fraud complaint that the Securities and Exchange Commission filed against Goldman and one of its employees, Fabrice Tourre, who will also testify on Tuesday.  Actions taken by Wall Street firms during the housing meltdown have become a major factor in the contentious debate over financial reform. The first test of the administration’s overhaul effort will come Monday when the Senate majority leader, Harry Reid, is to call a procedural vote to try to stop a Republican filibuster.

Republicans have contended that the renewed focus on Goldman stems from Democrats’ desire to use anger at Wall Street to push through a financial reform bill.

Carl Levin, Democrat of Michigan and head of the Permanent Subcommittee on Investigations, said that the e-mail messages contrast with Goldman’s public statements about its trading results. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Mr. Levin said in a statement Saturday when his office released the documents. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.”

A Goldman spokesman did not immediately respond to a request for comment.

The Goldman messages connect some of the dots at a crucial moment of Goldman history. They show that in 2007, as most other banks hemorrhaged losses from plummeting mortgage holdings, Goldman prospered.  At first, Goldman openly discussed its prescience in calling the housing downfall. In the third quarter of 2007, the investment bank reported publicly that it had made big profits on its negative bet on mortgages.

But by the end of that year, the firm curtailed disclosures about its mortgage trading results. Its chief financial officer told analysts at the end of 2007 that they should not expect Goldman to reveal whether it was long or short on the housing market. By late 2008, Goldman was emphasizing its losses, rather than its profits, pointing regularly to write-downs of $1.7 billion on mortgage assets and leaving out the amount it made on its negative bets.

Goldman and other firms often take positions on both sides of an investment. Some are long, which are bets that the investment will do well, and some are shorts, which are bets the investment will do poorly. If an investor’s positions are balanced — or hedged, in industry parlance — then the combination of the longs and shorts comes out to zero.

Goldman has said that it added shorts to balance its mortgage book, not to make a directional bet that the market would collapse. But the messages released Saturday appear to show that in 2007, at least, Goldman’s short bets were eclipsing the losses on its long positions. In May 2007, for instance, Goldman workers e-mailed one another about losses on a bundle of mortgages issued by Long Beach Mortgage Securities. Though the firm lost money on those, a worker wrote, there was “good news”: “we own 10 mm in protection.” That meant Goldman had enough of a bet against the bond that, over all, it profited by $5 million.

Documents released by the Senate committee appear to indicate that in July 2007, Goldman’s daily accounting showed losses of $322 million on positive mortgage positions, but its negative bet — what Mr. Viniar called “the big short” — came in $51 million higher.  As recently as a week ago, a Goldman spokesman emphasized that the firm had tried only to hedge its mortgage holdings in 2007 and said the firm had not been net short in that market.  The firm said in its annual report this month that it did not know back then where housing was headed, a sentiment expressed by Mr. Blankfein the last time he appeared before Congress.

“We did not know at any minute what would happen next, even though there was a lot of writing,” he told the Financial Crisis Inquiry Commission in January.

It is not known how much money in total Goldman made on its negative housing bets. Only a handful of e-mail messages were released Saturday, and they do not reflect the complete record.  The Senate subcommittee began its investigation in November 2008, but its work attracted little attention until a series of hearings in the last month. The first focused on lending practices at Washington Mutual, which collapsed in 2008, the largest bank failure in American history; another scrutinized deficiencies at several regulatory agencies, including the Office of Thrift Supervision and the Federal Deposit Insurance Corporation.

A third hearing, on Friday, centered on the role that the credit rating agencies — Moody’s, Standard & Poor’s and Fitch — played in the financial crisis. At the end of the hearing, Mr. Levin offered a preview of the Goldman hearing scheduled for Tuesday.

“Our investigation has found that investment banks such as Goldman Sachs were not market makers helping clients,” Mr. Levin said, referring to testimony given by Mr. Blankfein in January. “They were self-interested promoters of risky and complicated financial schemes that were a major part of the 2008 crisis. They bundled toxic and dubious mortgages into complex financial instruments, got the credit-rating agencies to label them as AAA safe securities, sold them to investors, magnifying and spreading risk throughout the financial system, and all too often betting against the financial instruments that they sold, and profiting at the expense of their clients.”

The transaction at the center of the S.E.C.’s case against Goldman also came up at the hearings on Friday, when Mr. Levin discussed it with Eric Kolchinsky, a former managing director at Moody’s. The mortgage-related security was known as Abacus 2007-AC1, and while it was created by Goldman, the S.E.C. contends that the firm misled investors by not disclosing that it had allowed a hedge fund manager, John A. Paulson, to select mortgage bonds for the portfolio that would be most likely to fail. That charge is at the core of the civil suit it filed against Goldman.

Moody’s was hired by Goldman to rate the Abacus security. Mr. Levin asked Mr. Kolchinsky, who for most of 2007 oversaw the ratings of collateralized debt obligations backed by subprime mortgages, if he had known of Mr. Paulson’s involvement in the Abacus deal.

“I did not know, and I suspect — I’m fairly sure that my staff did not know either,” Mr. Kolchinsky said.

Mr. Levin asked whether details of Mr. Paulson’s involvement were “facts that you or your staff would have wanted to know before rating Abacus.” Mr. Kolchinsky replied: “Yes, that’s something that I would have personally wanted to know.”

Mr. Kolchinsky added: “It just changes the whole dynamic of the structure, where the person who’s putting it together, choosing it, wants it to blow up.”

The Senate announced that it would convene a hearing on Goldman Sachs within a week of the S.E.C.’s fraud suit. Some members of Congress questioned whether the two investigations had been coordinated or linked.  Mr. Levin’s staff said there was no connection between the two investigations. They pointed out that the subcommittee requested the appearance of the Goldman executives and employees well before the S.E.C. filed its case.

Editorial:  After Goldman

April 22, 2010

After the government sued Goldman Sachs for fraud, a lot of politicians vowed to finally clean up the system. In an important committee vote on Wednesday, 13 senators — including one Republican for a refreshing change — approved a measure that would go a long way toward regulating derivatives, the complex instruments at the heart of the bubble, the bust, the bailouts and the Goldman case.

It is still not tough enough to avoid another catastrophe. While the bill rightly calls for most derivatives deals — currently private contracts — to be traded on regulated exchanges, it has too many loopholes. And it doesn’t ban the sort of excessive speculation that characterized the Goldman deal.

The taxpayers are gaining, but the banks — which make a lot of money on derivatives — are still way ahead.

The bill would allow too many trades to be done off the exchanges. Regulators would be able to police them, but there would be no ongoing investor oversight. There are carve-outs for certain corporate users of derivatives and for contracts tailored to unique purposes. The bill also would allow the Treasury secretary to exempt an entire type of derivative known as foreign exchange swaps.

Corporate pension funds that invest in derivatives would be subjected to less scrutiny than is required of many other investors. The financing arms of major manufacturers would also escape full scrutiny. All of that is going in the wrong direction.

Which brings us back to Goldman. A court will have to decide if the bank committed fraud. The Securities and Exchange Commission says that Goldman designed a derivative — a “synthetic collateralized debt obligation,” or C.D.O. — that would have a high chance of falling in value, at the request of a hedge fund client who wanted to bet against it. The S.E.C. charges that Goldman misled investors by not revealing the hedge fund’s role in selecting the investments. Goldman says it was not obligated to do so.

The current reforms being considered by Congress might at least have made Goldman think twice about that obligation. Both the agriculture and banking committees’ bills impose business conduct standards that would require dealers to disclose conflicts of interest.

It is not clear if the current bills would require synthetic C.D.O.’s to be exchange-traded. If they were, that would give investors a fighting chance to figure out the game. In addition to providing information about prices and volumes, exchange trading would subject derivatives to a full range of regulations, including disclosure and reporting requirements and stricter antifraud rules.

The bills also call for regulators to set adequate capital requirements for major dealers and participants so that there would be a cushion when derivative investments go bad.

What all those proposals don’t address is whether the type of derivative Goldman was selling should even be allowed to exist. The Goldman deal was nothing more than a bet on the mortgage market, in which one side was destined to win and the other to lose, without “investing” anything in the real economy. The C.D.O. did not hold actual mortgage-related bonds, but rather allowed the participants to stake a position on whether bonds owned by others would perform well, or tank. And that helped to further inflate the housing bubble.

That is not investing. It is gambling, and it is abusive. It has no place in banks that can bring down the system if they fail.

Yet none of the pending reform bills would ban abusive derivatives. Instead, regulators would be limited to gathering information about potential abuses and reporting their concerns to Congress.

The bill does say that the regulator cannot approve “gaming contracts.” But C.D.O.’s are often so complex that it may be difficult to figure out if they are, in fact, gaming or a threat to the broader economy.

Congress should ban both gaming and abusive derivatives. That would help clarify the difference between pure speculation and true hedging. It would start to restore what has been lost in the crisis: public confidence in the integrity of financial markets.

Goldman case likely to unleash torrent of lawsuits
By DANIEL WAGNER, AP Business Writer
17 April 2010

WASHINGTON – The fraud charges against Goldman Sachs & Co. that rocked financial markets Friday are no slam dunk, as hazy evidence and strategic pitfalls could easily trip up government lawyers.

Yet that hardly matters, experts say, because the allegations will kick off a new era of litigation that could entangle Goldman and other banks for years to come.

The charges against Goldman relate to a complex investment tied to the performance of pools of risky mortgages. In a complaint filed Friday, the Securities and Exchange Commission alleged that Goldman marketed the package to investors without disclosing a major conflict of interest: The pools were picked by another client, a prominent hedge fund that was betting the housing bubble would burst.

Goldman said the charges are "unfounded in law and fact." In a written response to the charges, the bank said it had provided "extensive disclosure" to investors and that the largest investor had selected the portfolio — not the hedge fund client. Goldman said it lost $90 million on the deal.

That doesn't contradict the SEC complaint, which says the largest investor selected the mortgage investments from a list provided by the hedge fund. And the fact that Goldman lost money has no impact on the fraud charges.

The charges will unleash a torrent of lawsuits, and likely signal that the government is prepared to file more lawsuits related to the overheated market that preceded the financial crisis, experts said.

"This is just the tip of the iceberg," said James Hackney, a professor at Northeastern University School of Law. "There are a lot of folks out there in different deals who played similar roles, and once it starts building steam, plaintiffs' lawyers will figure out this is where the money is and there should be a lot of action."

Among the legal action expected in the coming months:

• Class-action suits by Goldman shareholders who believe Goldman alleged misconduct made their stakes less valuable could come as early as Monday. Such suits are common when companies are accused of wrongdoing. Goldman shares fell almost 13 percent Friday as the bank lost $12.5 billion in market capitalization.

• Suits by investors who believe Goldman sold them on deals that were doomed to fail. The investors in the transaction at the heart of the SEC case could sue first, followed by others who believe their losses were similar.

• Possible criminal charges, if the SEC's civil case reveals evidence that meets the higher standard of "proof beyond a reasonable doubt." Experts said it's unlikely the company as a whole will face criminal charges, but evidence could emerge that would expose the Goldman executive named in the SEC complaint, 31-year-old Fabrice Tourre, to criminal prosecution.

• Charges by regulators about other mortgage investments at Goldman and elsewhere. SEC enforcement chief Robert Khuzami told reporters Friday the agency is racking up evidence on other deals in the overheated market that preceded the financial crisis.

Already the case has provoked legal questions from foreign governments, according to published reports. That's because the financial crisis forced many countries to bail out banks that lost money on investments arranged by Goldman.

German regulators are considering legal action against Goldman, newspaper Welt am Sonntag reported, quoting a spokesman for Chancellor Angela Merkel.

The charges would be on behalf of IKB Deutsche Industriebank AG — an early victim of the financial crisis that was rescued by the state-owned KfW development bank among others. IKB invested in the deal regulators are targeting.

The flurry of legal activity is likely to proceed separately from the SEC's case against Goldman, which experts said faces numerous pitfalls.

To prove its fraud case against Goldman, the government must show that Goldman misled investors or failed to tell them facts that would have affected their financial decisions.

The government's greatest challenge, experts said, will be boiling the case down to a simple matter of fraud. The issues involved are so complex that Goldman may be able to introduce enough complicating factors to shed some doubt on the government's claims.

"If you wanted to go after Goldman with a complaint that wouldn't stick, this would be perfect," said Janet Tavakoli, president of Tavakoli Structured Finance, a Chicago consulting firm. "If you look at these products, almost all of them look like hoaxes because of the junk inside."

Legal experts pointed to the paucity of evidence in the government's lawsuit, which contains short excerpts from e-mails but lacks key information about what the various investors knew and what actions they took.

The quality of the evidence was not clear from the complaint, said Jacob Frenkel, a former SEC enforcement lawyer now with Shulman, Rogers, Gandal, Pordy & Ecker PA.

Frenkel said there's been an uptick in "cases where the government chooses select excerpts from e-mails as the basis for its allegations only to find the balance of the text or other e-mails prove otherwise."

For example, prosecutors last fall tried unsuccessfully to use a series of e-mails to convict two Bear Stearns hedge fund executives. They wanted to convince jurors that there was behind-the-scenes alarm at the hedge funds as investments in complex securities tied to mortgages began to slide.

The jurors were not swayed. After the verdict, some jurors told reporters they found the evidence against the two executives flimsy and contradictory. Others suggested the pair were being blamed for market forces beyond their control.

Goldman already has advanced a similar argument. "Any investor losses result from the overall negative performance of the entire sector, not because of which particular securities" were in the investment pool, the bank said in a written response to the charges Friday.

That's part of a time-honored tradition of defusing accusations by bringing in details that may or may not be relevant, said James Cohen, a professor at Fordham University School of Law.

"Traditionally it's in the interest of the party that has Goldman's role to muddy the waters — it's rarely in their interest to have the picture as sharp as HDTV," Cohen said.

Several legal experts suggested Goldman and the SEC had reached an impasse over a settlement before the charges were announced. They speculated that Goldman was unwilling to admit that it allowed the hedge fund to create a portfolio of securities that was designed to fail because that admission could do irreparable harm to Goldman's reputation.

"Goldman could've easily paid a fine already," said John Coffee, a securities law professor at Columbia University. "So I don't think it's money they're fighting over."

The case has been assigned to U.S. District Judge Barbara Jones of New York. Jones is the federal judge who five years ago presided over the $11 billion criminal fraud case that toppled WorldCom Corp. and sent its former CEO Bernard Ebbers to prison for 25 years.

Page last updated at 20:53 GMT, Friday, 16 April 2010 21:53 UK

Goldman Sachs, the Wall Street powerhouse, has been accused of defrauding investors by America's financial regulator.

The Securities and Exchange Commission (SEC) alleges that Goldman failed to disclose conflicts of interest.

The claims concern Goldman's marketing of sub-prime mortgage investments just as the US housing market faltered.

Goldman rejected the SEC's allegations, saying that it would "vigorously" defend its reputation.

News that the SEC was pressing civil fraud charges against Goldman and one of its London-based vice presidents, Fabrice Tourre, sent shares in the investment bank tumbling 12%.

The narrative of what transpired, as set out by the SEC, is quite the financial thriller
Robert Peston, BBC Business Editor

The SEC says Goldman failed to disclose "vital information" that one of its clients, Paulson & Co, helped choose which securities were packaged into the mortgage portfolio.

These securities were sold to investors in 2007.

But Goldman did not disclose that Paulson, one of the world's largest hedge funds, had bet that the value of the securities would fall.

The SEC said: "Unbeknownst to investors, Paulson... which was posed to benefit if the [securities] defaulted, played a significant role in selecting which [securities] should make up the portfolio."

"In sum, Goldman Sachs arranged a transaction at Paulson's request in which Paulson heavily influenced the selection of the portfolio to suit its economic interests," said the Commission.

Housing collapse

The SEC alleges that investors in the mortgage securities, packaged into a vehicle called Abacus, lost more than $1bn (£650m) in the US housing collapse.

The whole building is about to collapse anytime now... Only potential survivor, the fabulous Fabrice...
Email by Fabrice Tourre

Mr Tourre was principally behind the creation of Abacus, which agreed its deal with Paulson in April 2007, the SEC said.

The Commission alleges that Mr Tourre knew the market in mortgage-backed securities was about to be hit well before this date.

The SEC's court document quotes an email from Mr Tourre to a friend in January 2007. "More and more leverage in the system. Only potential survivor, the fabulous Fab[rice Tourre]... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstrosities!!!"

Goldman denied any wrongdoing, saying in a brief statement: "The SEC's charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation."

The firm said that, rather than make money from the deal, it lost $90m.

The two investors that lost the most money, German bank IKB and ACA Capital Management, were two "sophisticated mortgage investors" who knew the risk, Goldman said.

And nor was there any failure of disclosure, because "market makers do not disclose the identities of a buyer to a seller and vice versa."

John Paulson
John Paulson made billions of dollars in the financial markets

Calls to Mr Tourre's office were referred to the Goldman press office. Paulson has not been charged.

Asked why the SEC did not also pursue a case against Paulson, Enforcement Director Robert Khuzami told reporters: "It was Goldman that made the representations to investors. Paulson did not."

The firm's owner, John Paulson - no relation to former US Treasury Secretary Henry Paulson - made billions of dollars betting against sub-prime mortgage securities.

In a statement, Paulson & Co. said: "As the SEC said at its press conference, Paulson is not the subject of this complaint, made no misrepresentations and is not the subject of any charges."

'Regulation risk'

Goldman, arguably the world's most prestigious investment bank, had escaped relatively unscathed from the global financial meltdown.

This is the first time regulators have acted against a Wall Street deal that allegedly helped investors take advantage of the US housing market collapse.

The charges come as US lawmakers get tough on Wall Street practices that helped cause the financial crisis. Among proposals being considered by Congress is tougher rules for complex investments like those involved in the alleged Goldman fraud.

Observers said the SEC's move dealt a blow to Goldman's standing. "It undermines their brand," said Simon Johnson, a professor at the Massachusetts Institute of Technology and a Goldman critic. "It undermines their political clout."

Analyst Matt McCormick of Bahl & Gaynor said that the allegation could "be a fulcrum to push for even tighter regulation".

"Goldman has a fight in front of it," he said.

Goldman drawn into insider-trading probe, WSJ reports
By Alistair Barr, MarketWatch
April 15, 2010, 11:33 a.m. EDT

SAN FRANCISCO (MarketWatch) -- Goldman Sachs Group Inc. is being drawn into the Galleon Group insider-trading investigation, The Wall Street Journal reported Thursday.

Prosecutors are examining whether Goldman (NYSE:GS) director Rajat Gupta shared inside information with Raj Rajaratnam, founder of hedge fund firm Galleon, from June 2008 to October 2008, at the height of the financial crisis, the newspaper said, citing unidentified people close to the situation.
Goldman director in Galleon probe

Ken Brown discusses a new development in the Galleon insider-trading case, namely prosecutors are examining whether a Goldman Sachs board member gave inside information about the firm to Galleon hedge-fund founder, Raj Rajaratnam.

Gupta, the former head of consulting firm McKinsey & Co., was a close associate of Rajaratnam's, the Journal said. See First Take on Goldman Sachs.

Goldman's name emerged in a government letter listing companies whose trading, by Rajaratnam and others in the Galleon case, the U.S. is investigating, the newspaper reported.

The March 22 letter said the government is scrutinizing trades by Rajaratnam and others in Goldman Sachs from June 2008 to October 2008, the newspaper said.

No criminal charges or other allegations have been filed against Gupta, and there's no indication that investigators are looking at his own stock trading, the Journal reported. Rajaratnam has pleaded not guilty to criminal charges in the biggest hedge fund insider-trading case ever pursued by U.S. authorities.

A Goldman spokesman told The Wall Street Journal that "Mr. Gupta is unaware of any examination of any such issue and has done nothing wrong."

Goldman shares edged up 4 cents to $184.96.

The government had no problem persecuting the owner of these houses on "insider trading" - long before anyone even whispered about the wrong-doing of the industry.  So how fair was that?

Galleon case reveals Wall Street's connections:  Commentary: Ties between elite, difficulty in proving insider cases

By MarketWatch
April 15, 2010, 10:43 a.m. EDT

NEW YORK (MarketWatch) -- Goldman Sachs Group Inc.'s role in the Galleon hedge fund insider-trading probe is great headline fodder, but the takeaways from the case shed light on an industry-wide issue.

Rajat Gupta, a current Goldman (NYSE:GS) director and former head of McKinsey & Co., is being examined by investigators for his role in Galleon trading in the firm's shares during the height of the financial crisis, according to a report Thursday in The Wall Street Journal. Read Wall Street Journal report on Goldman and Galleon.

Gupta hasn't been charged and the report clearly states his own portfolio isn't under review. Still, the widening probe of Galleon offers a rare look at the connections and difficulty regulators have when pursing insider cases.  

      --Wall Street's elite are extremely well-connected and because of that the environment is ripe for insider information to be passed. Gupta had a close working relationship with Galleon founder Raj Rajaratnam. Goldman traded with Galleon, and Rajaratnam was close to many at the bank. Gupta was invited to Galleon parties, underscoring how social circles play a role. 

      --Because of those connections -- both social and professional -- investigators have traditionally had a difficult time finding evidence information was passed. A cocktail party conversation or a phone call can be easily overheard and impossible to trace.  

      --Investigators are ramping up their techniques to pursue cases. The Galleon case relies heavily on wire taps, a method more used in pursing organized crime or terror suspects.

Whether Goldman had a role in the alleged insider trading or was just a bystander is something prosecutors will determine. But the Feds are employing more tools in trying to find out. If suspicions turn to convictions, Wall Street will feel the chill. Phone conversations and other communication could come with a question: who's listening?

Rajaratnam to provide SEC with wiretaps
Feb. 9, 2010

NEW YORK (Reuters) – Galleon hedge fund founder Raj Rajaratnam and co-defendant Danielle Chiesi, indicted in a sweeping insider trading case, must hand over wiretap evidence to U.S. market regulators, a judge ruled on Tuesday.

As many as 14,000 interceptions of phone calls were made in the criminal investigation involving Wall Street and Silicon Valley firms that was announced in October last year.

Lawyers for Rajaratnam, Chiesi and others accused in the probe had asked U.S. District Court Judge Jed Rakoff in New York to prevent use of the recordings from the criminal probe in the civil fraud trial scheduled to start in August.

But the judge said Rajaratnam and Chiesi, who were both indicted on charges of conspiracy and securities fraud in the criminal probe, had until February 15 to provide wiretap recordings to the Securities and Exchange Commission.

"The notion that only one party to a litigation should have access to some of the most important non-privileged evidence bearing directly on the case runs counter to basic principles of civil discovery in an adversary system," Rakoff's written order said in part.

While the SEC and criminal prosecutors often coordinate with each other, there are limits on the information they can share in parallel civil and criminal cases, which is why the defense was ordered to provide the material and not the prosecutors.

Prosecutors have described the case as the biggest hedge fund insider trading case in the United States.

Galleon's Rajaratnam free on bail
By Steve Gelsi, MarketWatch
Oct. 17, 2009, 3:07 p.m. EDT

NEW YORK (MarketWatch) -- Galleon Group founder Raj Rajaratnam has been released on $100 million bail on criminal charges in an alleged insider-trading scheme that federal prosecutors claim netted millions in illegal profits.

Rajaratnam, 52, who helped build Galleon into a major hedge fund managing $3.7 billion, was one of six people charged Friday with crimes related to the alleged scheme. The Securities and Exchange Commission also filed a civil complaint against him.

U.S. Magistrate Judge Douglas Eaton approved bail, secured by $20 million in cash and property, for Rajaratnam at an arraignment hearing late Friday. Rajaratnam was charged with four counts of conspiracy and seven counts of securities fraud in an alleged insider trading scam that netted at least $20 million.

Conviction of one count alone of securities fraud carries a penalty of up to 20 years in prison and a fine of up to $5 million, or twice the gross gain or loss of an illegal trade.

Eaton said Rajaratnam must limit his travel to a radius of 110 miles of New York City. Rajaratnam, a citizen of both Sri Lanka and the U.S., surrendered travel documents to the court, according to media reports.

A lawyer from the U.S. Attorney's office told the judge that Rajaratnam posed a flight risk.

"A court's going to learn there's a lot more to this case -- there is no way that this man is going to flee," Rajaratnam's lawyer, Jim Walden, told the judge, according to a published report.

Fellow defendant Anil Kumar of Saratoga, Calif., a director at McKinsey & Company, was released on a $5 million bond, according to reports

Mark Kurland, 60, of Mount Kisco, N.Y., a senior managing director and general partner at New Castle, was released on a $3 million bond.

Robert Moffat, 53, of Ridgefield, Conn. , a senior vice president at IBM and Danielle Chiesi, 43, of New York, a portfolio manager at New Castle Funds, were released on $2 million bond.

In California, Rajiv Goel, 51, a managing director at Intel Capital , the tech company's investment arm, posted $300,000 cash for bail.

Rajaratnam's lawyer did not immediately return a telephone call from MarketWatch on Saturday and representatives of the U.S. attorney's office couldn't be reached.

The SEC filed a civil complaint Friday alleging Rajaratnam tapped into his network of friends and close business associates to obtain insider tips and confidential news about corporate earnings or takeover activity at companies, including Google Inc. , the Hilton chain, which was taken private in 2007; and Sun Microsystems . See full story.

"What we have uncovered in the trading activities of Raj Rajaratnam is that the secret of his success is not genius trading strategies," Robert Khuzami, director of the SEC's Division of Enforcement said in a statement. "He is not the astute study of company fundamentals or marketplace trends that he is widely thought to be. Raj Rajaratnam is not a master of the universe, but rather a master of the Rolodex."

On Sept. 30, Rajaratnam was ranked as No. 236 on the Forbes list of richest Americans with a net worth of $1.5 billion.
Copyright © 2009 MarketWatch, Inc. All rights reserved.

Hedge-funder in stox-scam bust

Last Updated: 11:53 AM, October 17, 2009
Posted: 4:25 AM, October 17, 2009

This pirate is sunk.

The fat-cat founder of Wall Street hedge-fund giant Galleon -- one of the world's richest men -- looked more knee-buckling than swashbuckling as he and a crew of five investment and corporate big shots were charged with scamming $20 million in illicit booty through insider trading.  Raj Rajaratnam, 52, was arrested at his mammoth Upper East Side condo before he could flee to London, to where he had booked a flight after learning that a former employee had been "wearing a wire," a criminal complaint says.

"Raj Rajaratnam is not a master of the universe, but rather a master of the Rolodex," said Robert Khuzami, director of enforcement at the Securities and Exchange Commission.

"He cultivated a network of high-ranking corporate executives and insiders, and then tapped into this ring to obtain confidential details about quarterly earnings and takeover activity."

Magistrate Douglas Eaton set a $100 million bond for Rajaratnam -- whom Forbes recently listed as the world's 559th richest person with a net worth of $1.3 billion. He was expected to be released last night but was told he must come up with a "significant" amount of the cash by next week.  The feds said the Sri Lankan native was the ringleader of an insider-trading scam that included two former hedge-fund managers from Bear Stearns and executives from IBM and McKinsey & Co.

Officials called it the largest hedge-fund insider-trading case in history -- and the first time they had used wiretaps to go after dirty traders.  Manhattan US Attorney Preet Bharara said the busts should serve as a "wakeup call to Wall Street" that investigators are now going after financial crimes with the "same investigative techniques that have worked so successfully against the mob and drug cartels."

Rajaratnam's lawyer, Jim Walden, said his client is innocent and ready to fight the charges. He insisted prosecutors "misunderstand words like 'use your Rolodex'. . . because they don't understand the business."

The arrests came after a three-year probe prompted by an SEC tip about "suspicious" trading. That investigation was helped by a cooperating witness who had known Rajaratnam since the 1990s, court papers say.
The former employee approached the Galleon Management head in 2005 about going back to work for him, and Rajaratnam asked him to identify companies where he had an "edge," the filings say.  The witness passed inside information about Google -- info that netted Rajaratnam and Galleon more than $9 million in profits, the filings say.

The informant began working with the feds in November 2007 and investigators began tapping Rajaratnam's cellphone on March 7, 2008.  Other alleged members of the ring include Danielle Chiesi and Mark Kurland of New Castle Funds, a former Bear Stearns Asset Management hedge fund; Rajiv Goel, a director at Intel Capital, the investment arm of Intel Corp.; Anil Kumar, a director at consulting giant McKinsey & Co.; and Robert Moffat, a senior vice president at IBM.

Rajaratnam, Goel, 51, Kumar, 51, and Chiesi, 43, were charged with securities fraud and face up to 20 years in prison if convicted. Moffat, 53, and Kurland, 60, were charged with conspiracy to commit securities fraud and face up to five years in prison.

Moffat's lawyer, Kerry Lawrence, said, "He's shocked that he was charged with a crime and looks forward to resolving the case favorably."

Kumar's lawyer, Isabelle Kirshner, said her client was "distraught."

Additional reporting by Dareh Gregorian, Kaja Whitehouse and Post Wire Services

Who's Who:

Raj Rajaratnam, 52
Rajaratnam is the richest son of Sri Lanka. His $1.3 billion fortune puts him at No. 559 on Forbes’ list of the world’s richest people, 236th among Americans.  Until his arrest, he was having a good year — his hedge funds in the Galleon Group had returned 20 percent.  After graduating from a prestigious Sri Lankan school, Rajaratnam studied engineering at the University of Sussex in England.  He moved to the US in 1981, enrolling in the Wharton School of Business at the University of Pennsylvania, where he got an MBA in 1983.  He began his career as a securities analyst and founded Galleon in 1997.  Rajaratnam, an Upper East Side resident, has given more than $100,000 to Democratic politicians, including Sen. Charles Schumer and then-Sen. Hillary Rodham Clinton. He also donated $30,800 to a PAC that backed President Obama last year.  He is a dual citizen of the US and Sri Lanka.

Anil Kumar, 51
Kumar, of Santa Clara, Calif., is a director at McKinsey & Co. Inc., a management-consulting firm. A top expert on outsourcing research work overseas, he’s accused of providing insider information about McKinsey clients.

Mark Kurland, 60
Kurland, of New York, is a general partner at New Castle Funds LLC, a top hedge fund. He was a top executive at the firm for years when it was part of Bear Stearns Asset Management.

Robert Moffat, 53
Moffat, of Ridgefield, Conn., is a senior vice president at IBM, where he’s worked for 31 years. He’s the chief of IBM’s systems and technology group and oversees its sales of computer hardware.

Rajiv Goel, 51
Goel, of Los Altos, Calif., is a director of strategic investments at Intel Capital, the investment arm of chip- maker Intel Corp. He provided inside information about Intel investments to Rajaratnam, the feds say.

Japan Bails Out Struggling Chip Maker With $1.7 Billion Package
July 1, 2009

TOKYO — In its first major industry bailout since the start of the global financial crisis, Japan said Tuesday that it had put together a package of $1.7 billion in public and private money to shore up a troubled chip maker, Elpida Memory.

By using public money to prop up Elpida, Japan hopes to salvage its only major maker of dynamic random access memory chips, or DRAM, considered vital to its electronics industry. The aid package also protects the nearly 6,000 workers at Elpida, which suffered record losses last year as the demand for semiconductors fell sharply.

But in using taxpayers’ money, the government also risks keeping feeble companies on life support, which ultimately could hurt Japan’s competitiveness, analysts said. Japan has set aside 2 trillion yen, or $21 billion, in public funds to aid companies hurt in the economic slowdown.

“It’s a fine balance,” said Shinichi Ichikawa, the chief equity strategist for Japan at Credit Suisse. “Japan has decided it must save Elpida for the sake of Japanese industry,” but “going too far means keeping zombie companies alive.”

The bailout follows similar moves in other countries. The United States has poured billions of dollars in taxpayer money into the automakers General Motors and Chrysler, while Germany has shored up the automaker Opel with taxpayer money.

Japan’s rescue plan comes during its worst recession since World War II. On Tuesday, the government said Japan’s unemployment rate rose 0.2 percentage points to 5.2 percent in May, the highest level in nearly six years.

The Japanese economy has contracted for 12 consecutive months, despite government efforts to jump-start growth with stimulus spending. Weak domestic demand and a dwindling population mean that recovery remains at the mercy of its struggling exporters, concentrated in autos and electronics.

As a maker of DRAM chips, which are used in PCs, Elpida is seen as especially important to the country’s electronics industry. Japanese officials fear that Elpida’s demise would force domestic manufacturers to rely on overseas rivals like Samsung Electronics of South Korea, the market leader.

Elpida is reeling amid an oversupply in chips that has caused prices to plummet and a collapse in demand. It suffered a 179 billion yen loss in the year to March, after a 24 billion yen shortfall a year earlier. Weaker players, like Spansion of the United States and Germany’s Qimonda filed for bankruptcy protection earlier this year.

“Elpida is Japan’s only DRAM maker, and it has been hit by extremely severe conditions amid the global economic slump, despite its superior technology,” the trade minister, Toshihiro Nikai, said Tuesday. “Securing a supply of DRAM is very important for Japan’s industry and livelihood.”

Elpida’s aid package of 160 billion yen includes 40 billion yen in public funds and loans from the state-run Development Bank of Japan, and 100 billion yen in loans from private banks, according to a statement by the trade ministry.

Taiwan Memory, a chip maker set up by the Taiwan government to reorganize the island’s own struggling chip sector, will also invest 20 billion yen in Elpida, the ministry said. Taiwan Memory had recently announced it would partner with Elpida to develop memory chips for cellphones.

Elpida’s bailout is the first under an emergency measure that makes public money available to businesses hurt in the global economic crisis, part of the economic stimulus plans championed by Prime Minister Taro Aso. Companies that accept public money are required to develop strategies to turn around their businesses in three years.

Elpida will use the bailout to invest in cutting-edge technologies, the company’s chief executive, Yukio Sakamoto, said.

“In the competitive DRAM industry, companies without the capacity to invest are sure to lose out,” Mr. Sakamoto told reporters after the rescue package was announced. The challenge for Japan is how to handle companies seeking public funding that are shouldered with woes that go beyond the financial crisis.

Another company, Pioneer, a long-struggling electronics maker, is expected to seek billions of yen in aid, for example. Excessive government intervention “hampers necessary consolidation and industry shake-out, sapping the nation’s industrial vigor,” the Nikkei, Japan’s largest business daily, wrote in a recent editorial. “The government fosters moral hazard if it extends a helping hand too readily.”

A Brief History of General Motors Corp.
May 27, 2009Filed at 12:32 p.m. ET

As General Motors Corp. prepares to celebrate its 100th anniversary, some key events in the giant automaker's history:

Sept. 16, 1908 - General Motors Company founded by William C. Durant.

1909 - GM sells 25,000 cars and trucks.

1910 - Durant brings the Buick, Olds, Pontiac, Cadillac, Champion ignition, AC spark plug and other companies into GM. Sales rise 60 percent, but earnings lag. Durant is ousted by bankers as company sinks into debt.

1911 - Electric self-starter first appears on a Cadillac.

1916 - GM incorporated as General Motors Corp. Durant, after founding company that builds Chevrolets, regains control.

1917-19 - GM shifts most truck production to war effort.

1920 - Durant resigns, later files personal bankruptcy and dies running bowling alleys.

1920s - GM creates product policy aiming Buick, Pontiac, Chevrolet, Oldsmobile and Cadillac at five different groups of buyers.

1921 - GM accounts for 12 percent of U.S. car market.

1923 - Alfred P. Sloan named president and chief executive.

1925 - GM acquires Vauxhall Motors Ltd. of Great Britain.

1929 - GM acquires Adam Opel AG of Germany.

1937 - Violent sit-down strikes by GM hourly workers in Flint, Mich., shake company, lead to United Auto Workers representation.

1941 - GM market share grows to 41 percent.

1942 - Civilian auto production halted and plants turned to war effort.

1945-46 - Workers strike for 113 days.

1948 - First automobile fins unveiled, on a Cadillac.

1949 - After purchase of National City Lines of Los Angeles, GM accused of buying streetcar companies since 1920s and replacing them with bus systems. GM is convicted just once, of conspiracy in the Los Angeles case.

1953 - Air conditioning first offered, on a Cadillac.

1954 - GM's U.S. market share reaches 54 percent. Company makes 50 millionth car.

1955 - GM introduces Chevrolet V-8 engine.

1956 - Sloan retires as chairman.

1960 - Reacting to invasion of small European cars, GM introduces Chevrolet Corvair. Car later attacked by Ralph Nader, who wrote book ''Unsafe at Any Speed'' that led to congressional auto safety hearings.

1979 - GM's U.S. employment peaks at 618,365, making it the largest private employer in the country. Worldwide employment is 853,000. Decade features sales decline, recession, Arab oil embargo and gains by Japanese automakers.

1980 - Roger B. Smith named chairman. GM loses more than $750 million as car and truck sales plunge 26 percent.

1981 - GM consolidates truck, bus and van operations. Auto workers bash Japanese cars with sledge hammers. Company earns $333.4 million on $62.7 billion in revenue.

1983 - GM and Toyota Motor Corp. of Japan form joint venture to build cars at a GM-owned plant in Fremont, Calif. Smith announces Saturn project to fight Japanese cars. GM makes $3.7 billion.

1984 - GM overhauls North American organization; acquires Electronic Data Systems Corp., owned by Texas billionaire H. Ross Perot, for $2.5 billion. Earnings rise to $4.5 billion on revenue of $84.9 billion.

1985 - Company forms new Saturn Corp. subsidiary. GM acquires Hughes Aircraft Co. for $5 billion. GM makes $4 billion.

1986 - GM announces plans to close 11 U.S. plants. Employment grows to 877,000 as earnings fall to $3.9 billion. After infighting, Perot resigns from board and gets $700 million in severance.

1987 - GM and UAW reach contract prohibiting closure of a plant unless its product sales fall. Earnings rise to $3.6 billion.

1988 - Earnings rise to $4.6 billion and revenue hits $123.6 billion. Employment drops to 766,000.

1989 - GM complies with federal regulations and equips about 15 percent of fleet with driver's air bags, blames devices for boosting car prices. Profits fall to $4.2 billion.

1990 - GM and Saab-Scania AB of Sweden form joint venture to make cars in Europe. Smith retires as chairman, succeeded by President Robert Stempel. GM launches Saturn, takes $2.1 billion charge for four plant closings, and profits fall to $102 million as auto sales plummet.

1991 - Company loses industry record $4.45 billion. Stempel announces GM will close 21 plants over the next few years and eliminate 9,000 salaried and 15,000 hourly jobs in 1992, in addition to layoffs at shuttered plants.

1992 - Board strips some of Stempel's authority. Stempel later resigns, saying rumors about his future compromised his ability to lead. Jack Smith gets title of chief executive officer and outside director John Smale is named chairman.

1996 - GM spins off Electronic Data Systems as a separate company.

1997 - GM sells defense electronics business of Hughes Electronics to Raytheon and merges Hughes' auto parts business with Delphi Automotive Systems (now Delphi Corp.).

1998 - Strikes at two Michigan parts plants shut down almost all North American production.

1999 - Delphi is spun off as a separate company. GM purchases rights to the Hummer brand from AM General.

2000 - President Rick Wagoner replaces Smith as CEO. GM cuts 10 percent of white-collar employment.

2002 - GM spends $251 million on 42 percent stake in South Korea's bankrupt Daewoo Motor and names it GM Daewoo Auto & Technology Co. Stake later increased to 51 percent.

2003 - GM sells defense unit to General Dynamics Corp. for $1.1 billion and sells 20 percent stake in Hughes Electronics to News Corp. for $3.1 billion.

2004 - Last model year for Oldsmobile.

2006 - About 47,600 GM and Delphi hourly workers take buyout or early retirement offers. GM investor Kirk Kerkorian suggests alliance with Nissan and Renault, which GM's board examines and rejects; Kerkorian sells much of his stake. GM sells 51 percent stake in GMAC Financial Services to group led by Cerberus Capital Management LP for $14 billion.

2007 - GM loses $38.7 billion, including $39 billion third-quarter charge for unused tax credits. It's the largest annual loss in auto industry history. GM reaches historic contract with United Auto Workers that shifts billions in retiree health care expenses to union-administered trust. Company agrees to pay $33.7 billion into trust. Contract also lets company pay some new hires $14 per hour. U.S. market share is 23.7 percent. GM sells Allison Transmission to The Carlyle Group and Onex Corp. for $5.6 billion.

2008 - Gas prices hit $4 per gallon and truck sales plummet. GM announces plan to close four pickup and sport utility vehicle factories, plans to shed 8,350 jobs. Hummer brand put up for sale. By fall, executives begin asking congressional leaders for aid. GM and Chrysler talk about a merger, but talks die down as both companies' sales continue to fall on U.S. and worldwide recession woes. By December, GM tells Congress it needs $18 billion to stay afloat. It receives $13.4 billion, and racks up a $30.9 billion annual loss and burns through $19.2 billion.

2009 - The Obama administration takes over the Treasury. By February, GM says it will need a total of $30 billion. On March 31, President Barack Obama -- a day after firing CEO Rick Wagoner -- tells GM it hasn't done enough to restructure and gives the company until June 1 to make aggressive cuts. Chief Operating Officer Fritz Henderson takes over as CEO. Board member Kent Kresa becomes interim chairman. GM's Saab unit files for bankruptcy in Sweden. GM says it will sell off Saturn and will end the Pontiac line. Under the Treasury Department's orders, GM asks 90 percent of its bondholders to participate in a debt-for-equity swap to rid the company of $24 billion in debt for stock and a combined 10 percent stake in the company. By May, GM says it will end contracts with about 1,100 dealers. UAW agrees to job cuts, 14 plant closures, and a 20 percent equity stake in the company to cover retiree health care costs. Bankruptcy appears likely, as GM tries to get all parties to agree to new, leaner terms before June 1. Bondholders reject debt exchange offer, making bankruptcy filing almost inevitable. Government loans now total $19.4 billion.

Sources: Associated Press archives, Hoover's, General Motors Corp.

"G.M." stands for "government motors" but we ask, which government?
Debt Exchange Falls Short; G.M. Moves to Sell Units
May 28, 2009

Bondholders at General Motors on Wednesday rejected an offer to exchange $27 billion in debt for a small amount of stock, as G.M. prepared for a bankruptcy filing that could come as soon as this weekend.  In Europe, the company moved to combine its main operations under the umbrella of Adam Opel, its German business, to simplify the sale of the unit.

In a statement about the bondholders, G.M. did not give vote totals for the tender offer, which began on April 27 and expired at 12:01 a.m. Wednesday. G.M. had required 90 percent of bondholders to agree to exchange their debt, said said Wednesday morning that the notes tendered were “substantially less than the amount required.”

Without approval, G.M. had said it would seek bankruptcy protection. But it made no announcement of its plans. The company said it had withdrawn its offer, and that its board would meet to decide further steps.

The company is expected to spend the next few days finishing its bankruptcy case. One important element before it files is securing the approval by the United Automobile Workers union of a new set of concessions.  Workers are voting on the proposal in meetings on Wednesday. It would form the basis of a labor contract between the union and the new version of G.M. that is expected to emerge from bankruptcy protection.

In Europe, the combination of G.M.’s businesses, which is contingent on Berlin’s approval, would help to “ring fence” the assets from a bankruptcy filing of the parent company, and would make German government and General Motors equal partners, a G.M. spokeswoman in Zurich, Karin Kirchner, said.

“The intention is to pool the Opel and Vauxhall assets under the Adam Opel unit,” Ms. Kirchner said. “We’re doing this in preparation for a trustee model that has been proposed by the German government.”The simplified structure could ease the way to the next step, which is expected to be a sale of Opel to either Fiat, the Italian carmaker, or Magna International, the Canadian auto parts maker, which is backed by the Russian lender Sberbank. The winning bidder will most likely be announced later Wednesday, the German finance minister Peer Steinbrück told journalists in Berlin.

Chancellor Angela Merkel and other top German politicians, including governors from states with Opel plants, were to meet with Fiat and Magna executives, as well as representatives of G.M. and the United States government.  Mr. Steinbrück said the interest expressed by a Chinese company, widely reported to be Beijing Automotive, might have come too late. Beijing Automotive officials could not be reached for comment and G.M. and the German government declined to further identify the Chinese bidder.

RHJ International, a Belgian-listed investment company, has also proffered a bid, but German officials have signaled that the Magna or Fiat bids were considered the most serious.

“The chancellor has to examine the offer by Magna very closely because in my opinion, as far as I’m informed, it’s the most realistic, the best offer,” said Peter Struck, the parliamentary leader of the Social Democrats, who, with the Christian Democratic Union of Merkel, form the governing coalition.  German state and federal governments have put together a loan guarantee package of 1.5 billion euros, or $2.1 billion, to pave the way for a deal for Opel.

As skepticism about Fiat’s offer has spread, Magna executives have mounted a campaign to assuage German officials in matters where its own offer had ruffled feathers.

For example, Magna’s bid initially foresaw the elimination of 2,200 jobs in Bochum, in northwestern Germany, a step that drew the ire of Juergen Ruettgers, the governor of North Rhine-Westphalia, where Bochum is located. Magna wants to cut 2,600 jobs in Germany overall.  Magna has since floated the idea of moving production of the Opel Astra, a line of small family sedans, from Antwerp, Belgium, to Bochum, allowing it to keep more positions there.

German officials said that Fiat stuck to its plans to keep Opel’s three assembly plants, but close the engine plant in Kaiserslautern.

The Magna offer would put 35 percent of Opel in the hands of Sberbank, a Russian bank, and include cooperation with GAZ, a Russian automaker. Oleg Deripaska, an ally of Prime Minister Vladimir V. Putin, is the controlling shareholder in GAZ.

Nelson D. Schwartz contributed reporting from Paris, Micheline Maynard from Detroit and Keith Bradsher from Hong Kong.

Metrics: Guccis or Gadgets?
September 7, 2008

When you have some extra cash padding your wallet, do you reach for the latest jeans or the sleekest new music player? Much of that decision, it seems, depends on where you live.  If you live in Greece, Italy or Egypt, you'll probably choose textiles over technology. Greeks spend almost 13 times more money on clothing as they do on electronics.

"Italians and other Europeans love fashion; the greatest designs in the world come from those regions," said Todd D. Slater, a retail analyst for Lazard Capital Markets in New York.

If you live in Australia or Taiwan, you might be more tempted by a new laptop computer or flat-screen television. Australians spend only 1.4 times more cash on clothes than they do on consumer electronics.

"Some areas in the Pacific Basin are technologically savvy, and clothing is very casual," Mr. Slater said. "In Australia, what else do you need besides a bathing suit and a pair of Uggs?"


Editorial: Trade and Hard Times
May 26, 2009

Foreign trade has been a potent force for good over more than half a century. It propelled Japan’s emergence from the ashes of World War II and helped it become an industrial powerhouse. It is the cornerstone of development strategies from China to Brazil. It is what links countries all over the world in a network of production that underpins global prosperity.

Today, trade is collapsing, one more casualty of the global financial crisis. That is especially bad news for countries that are dependent on trade for economic growth, including many developing nations that had nothing to do with the financial mess.

Exports from the United States declined 30 percent and imports 34 percent in the first quarter of the year from the previous three months. Imports into countries that use the euro from outside the area were down 21 percent compared with the first quarter of last year. At this rate, the World Trade Organization’s dire projection in March that global trade would decline 9 percent this year will soon start to look outright boastful.

The drop in trade is spreading economic weakness across the world, as one country’s drop in imports translates into a fall in exports, and production, in another.

Japan, whose economy depends heavily on sales to the United States, saw exports plunge 45.5 percent in March compared with March of 2008. In the first quarter, its economy contracted 15.2 percent at an annual rate, the worst performance since 1955. Exports from China and Brazil both fell 20 percent in the first quarter, compared with the year before. Mexico — linked tightly to the United States market through Nafta — saw exports collapse almost 29 percent while the Mexican economy contracted 21.5 percent at an annual rate, more than three times the rate of decline in the United States.

The main forces clobbering trade seem to be the fall in demand and investment that started in the United States and Europe, and the seizing up of trade finance, which funds up to 90 percent of the world’s merchandise trade, worth some $16 trillion.

The impact has been magnified by the far-flung nature of multinational companies’ production networks — where a factory in one country makes parts that are used by a plant in another country. As demand for their products has declined, the pain has moved across countries up the chain of production. The thawing of credit markets has helped resuscitate trade finance some. Governments of the 20 biggest economies agreed to nudge it along, ensuring $250 billion of trade finance would be available over the next two years. They should keep those pledges, and they may have to do more.

Protectionism also remains a serious danger. With voters insisting that politicians protect their own, many countries have already imposed new restrictions on imports. So far they have been relatively modest. But as unemployment continues to rise, the temptation — and the pressure — will grow. Earlier this year, the Global Monitoring Report by the World Bank and the International Monetary Fund noted that “a pattern is beginning to emerge of increases in import licensing, import tariffs and surcharges, and trade remedies to support industries facing difficulties early on in the crisis.”

Of particular concern are attempts by governments — including in the United Kingdom, the Netherlands and Switzerland — to ensure that banks bailed out by taxpayers favor domestic borrowers. While the Obama administration has not imposed similar requirements, there is pressure from Congress and the public to make American banks that receive TARP money lend primarily, if not exclusively, to American borrowers. That would be a mistake. One of the sure ways to prolong the global recession is to create even more barriers to global trade.

Dollar At 5 - Month Lows as Safe - Haven Luster Fades
May 29, 2009Filed at 2:09 p.m. ET

NEW YORK (Reuters) - The U.S. dollar fell to five-month lows against a basket of currencies on Friday as an advance in global equities and signs of an easing global recession drove investors to snap up higher-yielding currencies and riskier assets.

Global stocks rose and some equities markets posted 2009 highs, diminishing the safe-haven allure of dollar assets and sending the euro to a 2009 high against the dollar.

A government report showed the U.S. economy contracted in the first quarter slightly less than initially estimated, but the market had expected evidence of a shallower recession.

"The dollar is being slapped around," said Boris Schlossberg, director of foreign exchange research at GFT in New York.

Analysts such as Schlossberg noted that as global risk appetite increases, the dollar may start reacting negatively to lackluster domestic economic reports.

"The market is now getting realistic about this (U.S.) recovery," he said.

Other reports showed business activity in the U.S. Midwest contracted in May at a sharper rate than expected, while a measure of consumer confidence improved in May.

"There will be a recovery, but it will be tepid," Schlossberg added.

In midday trading in New York, the dollar index <.DXY>, a gauge of the U.S. currency's performance against six major currencies, was 1.4 percent lower at 79.400, having earlier hit 79.287, its lowest since mid-December.

It is now down more than 6 percent for the month, on track for its biggest monthly fall since 1985.

The euro was also heading for its largest monthly gain since December and struck its highest level this year against the dollar at $1.4166, according to Reuters data. It was last up 1.4 percent at $1.4121.

The Australian dollar is up more than 10 percent in May, on pace for a record monthly gain. It last traded up 1.6 percent at US$0.7980.

Month-end fixings by corporations and pension funds also pushed the dollar lower, traders said.

"We've hit some pretty significant technical levels recently in many currency pairs, which are all adding a bit of selling pressure on the dollar," said Jessica Hoversen, fixed income and currency analyst at MF Global Ltd. in Chicago.


The dollar tumbled last week on concerns U.S. government debt may lose its top triple-A rating as a result of the rising debt levels needed to fix the economy and rehabilitate the financial sector.

Those worries, though still at the back of investors' minds, receded somewhat after Moody's Investors Service affirmed the country's credit rating and the U.S. Treasury was able to sell over $100 billion of government debt.

Now, adding further pressure on the dollar, South Korea's National Pension Service said on Friday it would reduce exposure to U.S. government bonds and equities in its five-year portfolio.

U.S. government bonds account for 83 percent of the pension fund's direct holdings of foreign bonds, which are currently worth $6.5 billion.

"Money is flowing out of the dollar," said Hoversen at MF Global. "There was a lot of institutional money sitting on the sidelines during the worst of the crisis that now is looking for (higher) yields."

The dollar fell 1.4 percent to 95.55 yen, due partly to selling by Japanese exporters but was well above a two-month trough of 93.85 yen marked last week.

The yen was sold against most currencies apart from the dollar, as investors favored the high-yielders.

Op-Ed Contributor
The Almighty Renminbi?
May 14, 2009

THE 19th century was dominated by the British Empire, the 20th century by the United States. We may now be entering the Asian century, dominated by a rising China and its currency. While the dollar’s status as the major reserve currency will not vanish overnight, we can no longer take it for granted. Sooner than we think, the dollar may be challenged by other currencies, most likely the Chinese renminbi. This would have serious costs for America, as our ability to finance our budget and trade deficits cheaply would disappear.

Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined — and the pound lost its status as the main global reserve currency — when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time.

But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi.

China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund’s special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.

At the moment, though, the renminbi is far from ready to achieve reserve currency status. China would first have to ease restrictions on money entering and leaving the country, make its currency fully convertible for such transactions, continue its domestic financial reforms and make its bond markets more liquid. It would take a long time for the renminbi to become a reserve currency, but it could happen. China has already flexed its muscle by setting up currency swaps with several countries (including Argentina, Belarus and Indonesia) and by letting institutions in Hong Kong issue bonds denominated in renminbi, a first step toward creating a deep domestic and international market for its currency.

If China and other countries were to diversify their reserve holdings away from the dollar — and they eventually will — the United States would suffer. We have reaped significant financial benefits from having the dollar as the reserve currency. In particular, the strong market for the dollar allows Americans to borrow at better rates. We have thus been able to finance larger deficits for longer and at lower interest rates, as foreign demand has kept Treasury yields low. We have been able to issue debt in our own currency rather than a foreign one, thus shifting the losses of a fall in the value of the dollar to our creditors. Having commodities priced in dollars has also meant that a fall in the dollar’s value doesn’t lead to a rise in the price of imports.

Now, imagine a world in which China could borrow and lend internationally in its own currency. The renminbi, rather than the dollar, could eventually become a means of payment in trade and a unit of account in pricing imports and exports, as well as a store of value for wealth by international investors. Americans would pay the price. We would have to shell out more for imported goods, and interest rates on both private and public debt would rise. The higher private cost of borrowing could lead to weaker consumption and investment, and slower growth.

This decline of the dollar might take more than a decade, but it could happen even sooner if we do not get our financial house in order. The United States must rein in spending and borrowing, and pursue growth that is not based on asset and credit bubbles. For the last two decades America has been spending more than its income, increasing its foreign liabilities and amassing debts that have become unsustainable. A system where the dollar was the major global currency allowed us to prolong reckless borrowing.

Now that the dollar’s position is no longer so secure, we need to shift our priorities. This will entail investing in our crumbling infrastructure, alternative and renewable resources and productive human capital — rather than in unnecessary housing and toxic financial innovation. This will be the only way to slow down the decline of the dollar, and sustain our influence in global affairs.

Retail Sales Drop Unexpectedly in April
Filed at 10:25 a.m. ET

May 13, 2009

WASHINGTON (AP) -- Retail sales fell for a second straight month in April, a disappointing performance that raised doubts about whether consumers were regaining their desire to shop. A rebound in consumer demand is a necessary ingredient for ending the recession.

The Commerce Department said Wednesday that retail sales fell 0.4 percent last month. Many economists had expected a flat reading, and the April weakness followed a 1.3 percent drop in March that was worse than first estimated.  Retail sales had posted gains in January and February after falling for six straight months, raising hopes that the all-important consumer sector of the economy might be stabilizing. But the setbacks in March and April could darken some forecasts because consumer spending accounts for about 70 percent of economic activity.

The hope had been that consumers were starting to feel better about spending, helped by the start of tax breaks included in the $787 billion stimulus bill. Households had spent the fall hunkered down in the face of thousands of job layoffs and the worst financial crisis since the 1930s.

The latest retail data ''are yet another illustration that, although the worst is now over, there is still no evidence of an actual recovery,'' Paul Dales, U.S. economist with Capital Economics in Toronto, wrote in a research note.

While anecdotal evidence suggests some improvement in sales in recent weeks, ''to offset the plunge in wealth, the household saving rate still needs to double from the current rate of 4 percent,'' Dales wrote. ''With falling employment hitting incomes, this can only be achieved by a further retrenchment in spending.''

The jobless rate rose to 8.9 percent in April when a net total of 539,000 jobs were lost and 13.7 million people were unemployed, the Labor Department said last week.  Wall Street tumbled after the weaker-than-expected retail sales report. The Dow Jones industrial average lost about 130 points in morning trading, and broader indices also fell.

In a separate report, the Commerce Department said business inventories fell 1 percent in March, a decline that matched economists' expectations. It marked the seventh straight decrease, the longest stretch since businesses cut inventories for 15 straight months in 2001 and 2002, a period that covered the last recession.

Businesses are continuing to cut their stockpiles in the face of declining sales, a development that has intensified the current economic downturn. Still, the reductions in stockpiles held on shelves and in backlots eventually should help businesses get their inventories more in line with reduced sales. If that is the case, any strengthening in consumer demand should lead to increased production.

The April retail sales dip came despite a 0.2 percent increase in auto sales, which fell 2 percent in March. Excluding autos, the drop in retail sales would have been 0.5 percent, much worse than the 0.2 percent gain economists expected.  Sales outside of autos showed widespread weakness last month. Demand at department stores and general merchandise stores fell 0.1 percent and sales at specialty clothing stores dropped 0.5 percent.

Department store operator Macy's Inc. on Wednesday reported a wider loss for the first quarter due partly to restructuring charges. Still, the company expects to see an improvement in sales from its localization efforts beginning in the fourth quarter of 2009, and in the spring of 2010.  Liz Claiborne Inc. reported a first-quarter loss that was worse than Wall Street expected. The apparel maker said its quarterly loss swelled on restructuring charges and a drop in same-store sales stemming from lower consumer spending and an extra week of sales in the year-ago period.

Sales also fell in April at furniture stores, electronic and appliance stores, food and beverage stores and gasoline stations, according to the Commerce Department.

The performance at department stores and specialty clothing stores came as a surprise since the nation's big chain stores had reported better-than-expected results for April. Same-store sales, rose 0.7 percent last month compared with April 2008. It was the first overall increase in six months, according to the tally by Goldman Sachs and the International Council of Shopping Centers.

For April, some mall-based clothing stores saw their declines level off and Wal-Mart Stores Inc., the world's largest retailer, had reported its same-store sales rose 5 percent, excluding fuel, which beat expectations. Same-store sales, or sales in stores open at least one year, is considered a key metric of a retailer's financial health.  The chain store sales report last week showed that Gap, American Eagle and Wet Seal posted smaller sales declines at their established locations than analysts had forecast.  The Children's Place, T.J. Maxx owner TJX Cos. Inc. and teen retailer The Buckle saw bigger gains than expected. But luxury stores again were hard hit as their higher-end wares find fewer takers.

Consumer spending grew 2.2 percent in the first quarter of the year, after posting back-to-back quarterly declines in the last half of 2008.

Economists believe the overall economy, as measured by the gross domestic product, will show a decline of around 2 percent in the current quarter. That would represent an improvement from the steep declines of 6.3 percent in the fourth quarter of last year and 6.1 percent in the first three months of this year, the worst six-month performance in a half-century.

Global economy is worst since Depression, report says 
By Jeannine Aversa 
Published on 4/23/2009

Washington - The global economy is expected to lurch into reverse this year for the first time since World War II with appalling consequences for nations large and small - trillions of dollars in lost business, millions of people thrust into hunger and homelessness and crime on the rise.

And the pain won't stop this year, the International Monetary Fund declared Wednesday, for what it said was “by far the deepest global recession since the Great Depression.” To cushion the blow and head off further damage next year, the IMF is calling for more stimulus projects from the word's governments, including major spending for public works projects.

Even with many countries taking bold steps to turn things around, the global economy will shrink 1.3 percent this year, the IMF predicted in its dour forecast.

”We can be fairly confident that in 2010 or even 2011, economies will not be back to normal,” said IMF chief economist Olivier Blanchard. “Which means that governments should today basically think at least about contingent plans for infrastructure spending. ... Next year will be too late.”

In the U.S., President Barack Obama's $787 billion stimulus includes money for fixing roads and bridges and other infrastructure projects. IMF officials said there's room for Germany and other countries to do more in terms of fiscal stimulus, and the United States, too, has prodded the Europeans to ramp up efforts.

Without the help of countries' stimulative fiscal policies - such as tax reductions or increased government spending - the blow to the global economy would be even worse, Blanchard said: “We would be in the middle of something very close to a depression.”

Even the projected 1.3 percent drop could leave at least 10 million more people around the world jobless, some private analysts said.  Allen Sinai, chief global economist at Decision Economics, thinks the global decline will be worse - closer to 2 percent, which would mean 15 million to 25 million more people out of work.

”The global downturn guarantees that countries all over the world will be hit with extraordinarily high unemployment rates,” Sinai said. “And, with the tremendous number of unemployed people comes the possibility of political unrest.”

Also rising crime as millions more are forced into poverty and out of their homes, he and others said.

”By any measure,” the downturn is the deepest since the Great Depression of the 1930s, the IMF said in its latest World Economic Outlook. “All corners of the globe are being affected.”

All told, lost output worldwide could reach as high as $4 trillion this year alone, U.S. Treasury Secretary Timothy Geithner estimated in a speech Wednesday.

”The world economy is going through the most severe crisis in generations,” he said. “We each face somewhat different challenges and thus are not all in the same boat. But we are all in the same storm.”

Geithner did not mention any further commitments the U.S. might seek on Friday at meetings with other economic powers or during weekend meetings of the IMF and the World Bank in Washington. Analysts say those discussions are unlikely to produce any further major proposals.  Obama this week sent Congress a request for a tenfold increase in U.S. commitments to an emergency IMF loan fund, to $100 billion. That would represent the U.S. share of a $500 billion goal for the program. The European Union, China and Japan also have made pledges, but more donors will be needed to reach the goal.

The IMF's outlook for the U.S. is even bleaker than for the world as a whole: It predicts the American economy will shrink 2.8 percent this year, the biggest decline since 1946.

That's generally in line with the predictions of many U.S. analysts, who expect a figure in the range of 2.5 percent to 3 percent.  Besides trillions in lost business, a sinking world economy means far fewer trade opportunities for individual countries.

”This looks like the most synchronized recession in world history: We are all going down together,” said David Wyss, chief economist of Standard and Poor's.

”In a lot of previous recessions, smaller countries can use exports to pull out of the recession. But you can't do that this time because nobody is buying,” he said.

To get out of this global downturn, the United States - the world's largest economy - will need to lead the way, many analysts said.  Global powerhouse China is a big lever for restoring growth in Asia. But Sinai said, “For the world economy to recover, you need the U.S. to recover.”

The notion of “decoupling” - that the world economy was becoming less dependent on the United States for growth or better insulated from U.S. economic troubles - has been dealt a setback by the current recession.
The financial crisis erupted in the United States in August 2007 and spread around the globe. It entered a tumultuous new phase last fall, shaking confidence in global financial institutions and markets. Total worldwide losses from the financial crisis from 2007 to 2010 could reach nearly $4.1 trillion, the IMF estimated in a separate report Tuesday.

Among the major industrialized nations studied for Wednesday's report, Japan is expected to suffer the sharpest contraction this year: 6.2 percent. Russia's economy would shrink 6 percent, Germany 5.6 percent and Britain 4.1 percent. Mexico's economic activity would contract 3.7 percent and Canada's 2.5 percent.

Still growing, China is expected to see its expansion slow to 6.5 percent this year. India's growth is likely to slow to 4.5 percent.

The jobless rate in the United States is expected to average 8.9 percent this year and climb to 10.1 percent next year, the IMF said.

Next year, the IMF predicts the world economy will grow again - but just 1.9 percent. It said this would be consistent with its findings that economic recoveries after financial crises “are significantly slower” than ordinary recoveries typically are.

In 2010, the IMF predicts the U.S. economy will be flat, neither shrinking nor growing. Germany's and Britain's economies, meanwhile, will shrink by 1 percent and 0.4 percent respectively.

Other countries, such as Japan, Russia, Canada and Mexico, are projected to grow again. And China and India should pick up speed.

Credit Suisse Starts Shutting U.S. Offshore Accounts: Report
Filed at 8:29 a.m. ET
April 12, 2009

ZURICH (Reuters) - Swiss bank Credit Suisse <CSGN.VX> has started closing down the offshore accounts of U.S. clients who have not declared the money to the U.S. authorities, a newspaper reported on Sunday.

The Sonntagszeitung newspaper said the bank had about 2,500-5,000 U.S. clients with undeclared offshore accounts worth about 3 billion francs, without citing its sources.

The paper said Credit Suisse had started parting company with its U.S. offshore clients, giving them the option of moving their accounts to its CS Private Advisors subsidiary, which would report the accounts to the U.S. tax authorities, or writing them a check.

It quoted an unnamed Credit Suisse manager as saying the bank was only applying the new "zero tolerance" policy in individual cases for now but was considering a more general withdrawal from the U.S. offshore business.

Credit Suisse was not immediately available for comment on the article. Sonntagszeitung quoted a spokesman as declining to confirm the report, but noting the tougher approach of foreign authorities on offshore wealth management in recent times.

"CS sticks to all valid rules and regulations in various countries," a spokesman told the newspaper.

The move comes after rival UBS <UBSN.VX><UBS.N> said last year it would stop offering offshore services to U.S. citizens after U.S. authorities alleged that the Swiss bank has helped rich Americans hide money away from the taxman in Swiss accounts.

A newspaper reported earlier this year that Credit Suisse was writing to its U.S. clients holding Swiss accounts asking them to sign a form that would reveal them to U.S. tax authorities.

Options for Fannie, Freddie May Include ‘Wind-Down’ (Update2)
By Dawn Kopecki

May 11 (Bloomberg) -- Options for overhauling Fannie Mae and Freddie Mac, the government-run mortgage-finance companies, may eventually include liquidating their assets, according to an analysis released today by the Obama administration.

The Office of Management and Budget also projected today in its budget analysis for fiscal 2010 that the companies, which have received or requested $78.8 billion in aid since their federal takeover in September, will need at least $92.2 billion more. The Treasury Department doubled an emergency capital commitment for each company in February to $200 billion. The 2010 fiscal year ends Sept. 30, 2010.

Alternatives range from “a gradual wind-down of their operations and liquidation of their assets,” to returning the two companies to their previous status as government-sponsored enterprises that seek to maximize shareholder returns while pursuing public-policy goals, according to OMB’s analysis of President Barack Obama’s proposed federal budget.

“The last entities that are going to be set free will be Fannie and Freddie because they’re so key to the housing market,” said Bradley Hintz, an analyst at Sanford C. Bernstein & Co. in New York, in a phone interview today.

The companies are coming under increasing strain as the Obama administration leans on them to help refinance and modify loans at risk of foreclosure amid the worst housing market since the Great Depression, Fannie Mae and Freddie Mac have said in securities filings. The government-sponsored enterprises pose a risk to the economy, though the federal takeover and Treasury backing have “substantially reduced” that threat, OMB said.

‘Vital Parts’ of Economy

“The GSEs borrow huge amounts from various types of investors, and the health of the housing market critically affects the overall economic activity,” the budget office said. “Thus, financial trouble at one or more of the GSEs could unsettle not only the mortgage finance markets but also other vital parts of the financial system and economy.”

Fannie Mae and Freddie Mac may be nationalized, dissolved and broken up into several smaller companies, revamped as public utilities with the full faith and credit of the U.S. government or converted into insurers for covered bonds backed by U.S. mortgages, OMB said.

Washington-based Fannie Mae has booked seven consecutive quarters of losses totaling $86.8 billion as of March 31. McLean, Virginia-based Freddie Mac, which is expected to report its first-quarter results this week, has reported six straight quarters of losses totaling $53.8 billion as of Dec. 31.

Like many other U.S. financial institutions, Fannie Mae and Freddie Mac face “market risk, credit risk and operational risk,” according to the budget office.

Obama’s Housing Program

The companies play a leading role in Obama’s Making Home Affordable program to curb mortgage defaults. The government initiatives, announced in February, have yet to curtail the surge in foreclosures and delinquencies. A record 803,489 U.S. properties received a default or auction notice or were seized in the first quarter, 24 percent more than a year earlier, as employers cut jobs and temporary programs to assist homeowners came to an end, RealtyTrac Inc. said April 16.

Fannie Mae and smaller competitor Freddie Mac, which own or guarantee almost half of the U.S. residential mortgage debt, were seized by regulators in September because the two were at risk of failing and regulators feared that may threaten the health of the broader U.S. economy.

Treasury’s capital commitment for the companies expires on Dec. 31. While the companies won’t have to repay their federal aid by then, they won’t be able to borrow more unless Congress extends the date.

Makes AIG look like a piker!  Let's see, who do you think...may be the names are all Democrats this time?  From Chicago?
Fannie and Freddie Detail Retention Bonuses
Cyrus Sanati and Peter Edmonston

April 3, 2009, 11:11 am; Updated at 12:25 p.m.

Just a few weeks after retention bonuses at American International Group became a national scandal, Fannie Mae and Freddie Mac, the two mortgage-financing giants that the government rescued last fall, have outlined plans to pay an additional $159 million in bonuses to retain employees in 2009 and 2010, on top of the nearly $51 million already paid out last year.

James B. Lockhart of the Office of Federal Housing Enterprise Oversight, which now oversees the two companies, disclosed the bonus programs in a letter to Sen. Charles Grassley, the ranking member of the Senate Finance Committee.

In the letter, Mr. Lockhart defended the payouts as a way to “keep key staff without rewarding poor performance.” (Download the full letter below.)

Lawmakers have harshly criticized some bailed-out companies that later offered bonuses to workers, and the House passed legislation this week that would seek to limit compensation and bonuses at such firms.

Last month, Mr. Grassley called on Fannie and Freddie to justify their bonus retention programs, and demanded they release the names and titles of any employee who received, or was set to receive, a retention bonus of more than $100,000.

Mr. Lockhart did not provide the names in his letter, citing “personal privacy and safety reasons.”

A spokesman for Fannie Mae declined to comment on the letter. Representatives for Freddie Mac weren’t immediately available for comment.

Fannie and Freddie lost a total of nearly $110 billion in 2008. Last month, the Treasury Department agreed to provide the two companies with up to $200 billion in additional capital, on top of the $200 billion in government funds already pledged to them.

Speaking about Fannie and Freddie on Friday, Sen. Grassley said in a statement provided to DealBook that “it’s hard to see any common sense in management decisions that award hundreds of millions in bonuses when their organizations lost more than $100 billion in a year.”

“It’s an insult that the bonuses were made with an infusion of cash from taxpayers,” he said. “Poor performance and at taxpayer expense do a lot of damage to public confidence and support for the economic recovery effort.”

Mr. Lockhart, in his letter, defended the bonuses as necessary for protecting the taxpayers’ investment.

“Keeping the enterprises operating at full speed was best for the housing markets and best for the economy, which clearly also made it best for the taxpayer,” he said. “And that would only be possible if we retained the Fannie Mae and Freddie Mac teams.”

Part of the retention packages were already paid out in 2008, the letter said. They consisted of $17.3 million to Freddie employees, with 19 employees receiving more than $100,000, and $33.5 million to Fannie employees, with 20 receiving more than $100,000.

The total bonuses at both companies is expected to be about $146 million in 2009, and $13 million in 2010, for a total of about $210 million.

The retention plans cover 4,057 employees at Freddie Mac and 3,545 employees at Fannie Mae, the letter said.

The government seized Fannie and Freddie last fall, to make sure that neither company would collapse because of the plunging values of mortgages that they owned or guaranteed.

Editorial: The Economic Summit
April 3, 2009

In normal times we don’t expect a lot from summit meetings. But with the global economy imploding, leaders at Thursday’s meeting of the world’s top 20 economic powers had an urgent responsibility to come up with concrete policies to fix the global financial system and restore growth. They fell short.

The meeting certainly produced more than the usual photo ops and spin — and its participants did not go away yelling at one another as they have in the past. The leaders pledged to fight protectionism and to help badly battered developing countries and — putting their money where their mouths are — committed $1 trillion for loans and trade guarantees. The group also agreed to crack down on tax havens and, on a country-by-country basis, impose stricter financial regulations on hedge funds and rating agencies — necessary though insufficient steps to avoid a repeat of the current disaster.

Where they fell dangerously short was their refusal to commit to spend the hundreds of billions of dollars in additional fiscal stimulus that the world economy needs to pull out of its frighteningly steep dive. With consumer spending and business investment collapsing around the world, rich countries are the only ones that have the resources to do what is needed.

European leaders — most notably Germany’s chancellor, Angela Merkel — made clear going into the meeting that they were not going to give in on that issue. German politicians are historically afraid of touching off inflation with too much deficit spending. But inflation is not the danger Europe faces today, and German history should make them equally wary of the disastrous consequences of a new depression.

President Obama has rightly warned the Europeans that they cannot count on American consumer spending alone to drive a global recovery. But he apparently decided that a battle would be too destructive.

After years of watching former President George W. Bush hector and alienate this country’s closest friends, we were relieved to see Mr. Obama in full diplomatic mode. We fear, however, that this is not the time or the issue on which to hold back. If world growth continues to decline — and all signs suggest that it will — the president will have to take on this fight soon.

Stimulus spending wasn’t the only area of fundamental disagreements. The Europeans came to the meeting stressing the need for comprehensive cross-border regulation of financial markets, participants and products. Mr. Obama and his team seem more committed to domestic regulation than their predecessors — but fiercely resistant to the idea of a global regulator.

The group compromised with its call for more transparency and better early-warning systems for systemic risks. We suspect that it will take considerably more than that to reassure investors that markets are safe.

The world’s wealthy nations must come to a common understanding of the causes of this crisis and a common vision of the future role of financial markets. From there, they need to write new rules and regulatory regimes that address the real dangers. In the end, necessary regulation will not be transnational enough for European tastes and too binding for American tastes. When both sides grumble about the result, rather than praise it, you will know that progress is being made.

The British prime minister, Gordon Brown, declared at the meeting’s end that “this is the day the world came together to fight back against the global recession.” As host, he had to. To pull out of the current crisis, it will take a lot more than was done in London.

Geithner gaffe roils markets
Washington Times
Patrice Hill
Thursday, March 26, 2009

An unguarded comment by Treasury Secretary Timothy F. Geithner on Wednesday set off a sudden drop in the dollar and contributed to a chain of market-rocking events that included a setback in the stock market and a sharp uptick in interest rates.

Mr. Geithner appeared to lend his support to a proposal by China's central bank governor to replace the dollar as the world's reserve currency with a basket of currencies that would be managed by the International Monetary Fund. In an appearance before the Council on Foreign Relations in New York on Wednesday morning, Mr. Geithner raised eyebrows by saying that "we're actually quite open to that," only a day after both he and President Obama had vehemently rejected the idea and affirmed their strong support for the U.S. currency.

The dollar plummeted by as much as 1.3 percent against the euro within 10 minutes of his remarks. But then the greenback quickly recouped most of its losses after Mr. Geithner retracted his statement and said, "I think the dollar remains the world's dominant reserve currency." Later in the day, as concern weighed down the dollar again, White House spokesman Robert Gibbs chimed in to the now universal chorus from top officials that the administration expects the dollar to be the world reserve currency for "a long, long time."

But the damage may already have been done. By afternoon, a poor showing of buyers at a Treasury bond auction sent interest rates sharply higher, raising fears about the U.S. ability to sell a massive load of $2.5 trillion of debt this year. Buyers may have been spooked not only by the Treasury secretary's remarks but also by the unveiling of budget plans on Capitol Hill that would double the amount of debt the Treasury has to sell in the next five years to nearly $12 trillion.

"They are opening the spigots and flooding the market, and there is no end in sight to the deluge of supply" of Treasury bonds, said Louise Purtle, analyst at CreditSights.

"The poor communication from the Treasury Department has complicated the market for Treasuries," said Jeffrey Caughron, chief market analyst at the Baker Group investment firm.

The mounting worries about the debt also snuffed out a rally in the stock market that had been fueled by reports showing the U.S. economy may be stabilizing after a free fall this winter. The Dow Jones Industrial Average plummeted from a gain of nearly 200 points to a 108-point loss within minutes after Treasury announced the auction results. But by the end of a day of big swings in trading, muted optimism about the outlook for the economy had returned and enabled the Dow to eke out a 90-point gain.

The day of tossing and turning in global markets illustrated the risks for the Treasury secretary, who like his predecessors, has to be careful about what he says about the dollar as global markets follow his every word. It also shows the dangers for the United States as it goes deeply into debt to try to stimulate the economy out of a severe recession and rescue its ailing banking sector.

Mr. Geithner has tangled with markets before in his short two months in office, sparking a plunge in global stocks last month when he unveiled a bank cleanup plan that was vague and unconvincing, while spawning a nearly 500-point surge in the Dow on Monday when he offered a more detailed and credible plan.

James McCormick, Citigroup´s global head of foreign exchange, said he was surprised that Mr. Geithner expressed openness to the proposal by People´s Bank of China Governor Zhou Xiaochuan after acknowledging he had not read it. Mr. Zhou proposed creation of a "super-sovereign reserve currency" that is disconnected from any nation by increasing the use of special drawing rights at the IMF, a kind of currency the fund offers to its members.

"If I´m running the Treasury, I would want to have been briefed on that" before commenting on it, Mr. McCormick said. Markets have been particularly sensitive to any discussion of the Chinese proposal in the run-up to the Group of 20 meeting in London next week. IMF Managing Director Dominique Strauss-Kahn on Wednesday added his voice to the debate by calling the Chinese proposal "legitimate," although he said he doesn't expect the dollar to be replaced any time soon.

Investors were stunned by Mr. Geithner's remarks in light of a strong defense of the dollar given by Mr. Geithner and Federal Reserve Chairman Ben S. Bernanke on Capitol Hill on Tuesday. President Obama, in a Tuesday night news conference, also rejected calls for a new global currency in proclaiming that "the dollar is extraordinarily strong" because investors are confident in the ability of the U.S. to lead the world out of recession.

The value of the dollar is as important to global investors as it is to U.S. citizens, particularly those who buy Treasury bonds. Any fall in the dollar immediately erases some of the value of their holdings - a concern raised earlier this month by China, which is the biggest investor in Treasury bonds.

China and other investors recently have taken to worrying about whether the United States may debase its currency in its drive to address economic problems. Borrowing to counter the recession and finance the economic stimulus and bank bailouts is expected to peak at $2.5 trillion this year and start to decline under budget outlines offered by Mr. Obama and Congress. But investors worry about the lingering effects of the legacy of debt and the inflationary impact of the Federal Reserve's program to help finance that debt with $300 billion of Treasury bond purchases.

Apprehension about these matters is apparently what led to the Treasury's difficulty in selling $24 billion of five-year notes Wednesday afternoon.

To attract buyers, the Treasury had to pay interest rates that were significantly higher than its previous auction, touching off fears about the nation's ability to finance ever bigger loads of debt in the future.

It didn't help that Britain on Tuesday experienced its first failed bond auction in nearly seven years - a bad portent since Britain, like the United States, has gone deeply into debt to finance large economic stimulus and bank bailout programs. The poor showing came despite the Fed's move to help Treasury by purchasing $7.5 billion of the notes just before the auction.

But CreditSights' Ms. Purtle said the most serious problem the Treasury faces is the lack of buyers worldwide for its growing mountain of debt. In particular, countries like China and Japan that invested their trillions of dollars in export earnings in the Treasury market have been hit by plummeting exports, which means they have less money to invest in Treasury bonds, she said.

Also, nations that generated huge surpluses from exports of oil and other commodities, including Brazil, Russia and Saudi Arabia, were major buyers of U.S. debt during the commodity boom last year. But they now are earning much less on those commodities and have less money to invest, she said.

"Trade surpluses are being turned into trade deficits on the back of a global recession, and the funds simply aren't available to continue the purchases," she said.

Perhaps among the main global actors in the meltdown?

Switzerland Eases Its Stance on Bank Secrecy Rules
March 14, 2009

PARIS — The Swiss government bowed to pressure on Friday and agreed to exchange information on suspected cases of tax evasion, but it maintained that its principle of banking secrecy was intact...more.

9 March 2009

Wilting flower exports hit Zambia
By Steve Schifferes
Economics reporter, BBC News, Lusaka, Zambia

Watze and Angelique Elsinga grow roses for export
Watze and Angelique Elsinga grow roses for export

On the outskirts of Lusaka, Angelique and Watze Elsinga have been growing roses for export for the last 14 years.

But now the speed of the global downturn is forcing them to give up the business, threatening the livelihoods of hundreds of workers and their dependents.

The sudden collapse of the prices paid for roses in Europe, due to diminishing demand and oversupply, has made their business uneconomic.

And they are being forced to sell their farm as they can no longer keep up their loan payments to Barclays Bank, which is demanding immediate repayment.

Happy Valentine's Day
Roses for export from Zambia
40m roses exported per year
7 hectares of greenhouses
189 workers employed
Total Zambia rose exports: 4,200 tonnes worth $40m in 2008
Total employment: 12,000

"It's a sad day," says Angelique Elsinga as she walks round her farm with its eight giant greenhouses - which produced 40 million roses for export last year.

"It's cheaper for us to destroy the roses now than send them to Europe."

They are shutting off the irrigation pipes in seven of those greenhouses, growing only for the local market and switching some of their production to vegetables.

The demand for roses - and the price - normally peaks at Christmas and Valentine's Day.

But this year was very different.

"We had to shut down production during the two weeks before Christmas, something we had never done before," said Watze Elsinga.

"And just before Valentine's Day, our suppliers told us not to send any more roses - their warehouses were full."

"We have never seen such low prices."

Sudden collapse
Abandoned greenhouses mark the collapse of the flower export market
Abandoned greenhouses mark the collapse of the flower export market

Yet just six months before, their business had seemed secure when they signed a long-term supply deal with a leading Dutch wholesaler, Blooms.

But in October, the company suddenly told them it was terminating the contract because of falling demand.

It was the first sign of the sharp slowdown that has gathered pace ever since.

"We have been surprised that this crisis has happened so fast," said Mr Elsinga.

"As growers, we cannot control either the prices we are paid, the exchange rate, or many of our external costs, even though we have managed to keep our own costs under control."

Social gains
World leaders will meet next month in London to discuss measures to tackle the downturn. See our in-depth guide to the G20 summit.
Only one African country will be represented at summit.
This week BBC World News and World Service Radio will be examining how Africa is coping with the crisis, with our blog and reports from the continent

For the Elsingas, who came to Zambia from the Netherlands 14 years ago, the farm was a social enterprise as well as a business.

They have constructed housing for their workers, and built a community centre and a school for 600 children on the premises.

And they have provided year-round employment for nearly 200 workers.

Now they will have to lay off all the workers at the rose farm, with only a few finding employment in the vegetable business which they hope to continue at another location.

Difficult conditions

According to Luke Mbewe, chief executive of the Zambia Export Growers Association (Zega), flower exporters in Zambia face more difficult conditions than their rivals in other African countries such as Kenya, Tanzania, and Uganda.

Flower exporters are dependent on a secure supply chain, with the fresh flowers kept refrigerated and disease-free as they are moved quickly from the farm to markets in Europe within 48 hours.

But in Zambia, transport costs are higher, because of the higher cost of petrol and jet fuel that has to be imported into this land-locked country.

And the lack of a substantial scheduled air freight service has meant that they have had to charter flights to take their flowers to market.

They have also faced problems with electricity supply, with Zambia's government-owned electricity company Zesco introducing rolling power cuts throughout the country over the past year.

The sharp drop in the value of the Zambian currency has raised the cost of fertilisers, fuel and other farm inputs.

Mr Mbewe says he knows of a number of other farms that have gone out of production, and he now fears for the future of the industry.

Economic hopes
Rupiah Banda
President Rupiah Banda wants to encourage economic diversification

Zambia remains one of the world's poorest countries, with more than 60% of the population living on less than $2 a day.

Now its prospects for economic growth have been dented by the decline in the world price of copper, which makes up 90% of the country's exports and provides thousands of jobs.

Zambia's President, Rupiah Banda, says that the way for Zambia to cope with the global recession is by diversification, moving away from dependence on copper.

But the problems of the flower industry show how difficult this could be.

To become competitive, Zambia's flower growers will need more, not less aid to improve infrastructure - either from the government or outside sources.

But it is still unclear whether any global measures to cope with the downturn, to be discussed at the G20 summit of world leaders in London in April, will reach the flower growers of Zambia in time.

World Bank Says Global Economy Will Shrink in ’09
March 9, 2009

WASHINGTON — The economic crisis that started with junk mortgages in the United States is causing havoc for poorer countries around the world, not only stifling their growth but choking off their access to credit as well, the World Bank said on Sunday.  In a bleaker assessment than those of most private forecasters, the World Bank also predicted that the global economy would shrink in 2009 for the first time since World War II. The bank did not provide a specific estimate, but bank officials said its economists would be publishing one in the next several weeks.

Until now, even extremely pessimistic forecasters have predicted that the global economy would eke out a tiny expansion but had warned that even a growth rate of 5 percent in China would be a disastrous slowdown, given the enormous pressure there to create jobs for its rural population. The World Bank also warned that global trade would shrink for the first time since 1982, and that the decline would be the biggest since the 1930s.

The report, released on Sunday, was prepared for a meeting next week of finance ministers from the 20 industrialized and large developing countries. It warned that the financial disruptions are all but certain to overwhelm the ability of institutions like itself and the International Monetary Fund to provide a buffer.  The bank, which provides low-cost lending for economic development projects in poorer countries, pleaded for wealthy governments to create a “vulnerability fund” and set aside a fraction of what they spend on stimulating their own economies for assisting other countries.

“This global crisis needs a global solution and preventing an economic catastrophe in developing countries is important for global efforts to overcome this crisis,” said Robert B. Zoellick, the World Bank’s president. “We need investments in safety nets, infrastructure, and small and medium size companies to create jobs and to avoid social and political unrest.”

The bank said that developing countries, many of which had been growing rapidly in recent years, are being devastated by plunging exports, falling commodity prices, declining foreign investment and vanishing credit.

The impact of the global slowdown varies widely among countries, and the drop in prices for oil and other commodities has created both winners and losers, But as a whole, the bank said, the so-called emerging-market countries face a combined financing gap of at least $270 billion and as much as $700 billion over the next year or two.  The report detailed the variety of ways in which the global slowdown has hammered poorer countries in Latin America, Central Europe, Asia and Africa.

Central European countries like Poland, Hungary and the Czech Republic are hurting from diminished exports to western Europe as well as a severe credit crunch among major European banks, which have suffered huge losses on American mortgages and mortgage-backed securities.  East Asian countries are reeling from plunging global trade. Demand for cheap manufactured goods has plunged in the United States. That slump has hit many Asian countries both directly and indirectly, through plunging demand by China for raw materials and component products.

Lower commodity prices have caused great problems in many African and Latin American countries. The plunge in oil prices — 69 percent from July to December of 2008 — has boosted growth in poorer oil-importing countries but caused immense difficulty in poorer oil-exporting countries.  Brazil, an exporter of oil as well as many other commodities and manufactured goods, reported its first trade deficit in eight years as exports dropped 28 percent in 2008.

Under the “vulnerability fund” proposal, rich countries would set aside 0.7 percent of the money they spend to stimulate their own economies to help stabilize poorer countries.  Mr. Zoellick said the fund could then make the money available to countries through the World Bank, the United Nations or other international financial institutions like the International Monetary Fund.  He said the World Bank has the potential to triple its own lending in 2009 to $35 billion, even though that would still be a small fraction of even the most optimistic estimate on the shortfall facing poor countries.

Guess why everyone is having problems (our opinion)?

Germany Rejects Bailout Plan for Eastern Europe

Filed at 10:03 a.m. ET
March 1, 2009

BRUSSELS (AP) -- Germany rejected appeals Sunday for a single multibillion euro (dollar) bailout of eastern Europe, even after Hungary begged EU leaders not to let a new ''Iron Curtain'' divide the continent into rich and poor.

The swift, strong comments by German Chancellor Angela Merkel dampened hopes that leaders at Sunday's European Union summit could forge a unified stance to tackle the worsening economic crisis.  As Europe's largest economy, Germany has been under rising pressure to take the lead in rescuing eastern EU members, but Merkel insisted that a one-size-fits-all bailout was unwise.

''Saying that the situation is the same for all central and eastern European states, I don't see that,'' said Merkel, adding ''you cannot compare'' the dire situation in Hungary with that of other countries.

Hungarian Prime Minister Ferenc Gyurcsany, saying the credit crunch was hitting the eastern members hardest, had called for an EU fund of up to euro190 billion ($241 billion) to help restore trust and solvency in those nations.

''We should not allow that a new Iron Curtain should be set up and divide Europe,'' Gyurcsany told reporters. ''In the beginning of the nineties we reunified Europe, now the challenge is whether we will be able to reunify Europe financially.''

EU nations are all grappling with a worsening recession, compounded by a severe credit crunch that has left many EU countries looking ever more inward to protect jobs and companies from international competition. Those policies are now undermining the open market cornerstone on which the EU is founded.  Ahead of the summit, the leaders of nine countries -- Poland, Hungary, Slovakia, the Czech Republic, Bulgaria, Romania and the three Baltic states -- forged a common stand to pressure richer members in the 27-nation bloc to back up vague pledges of support with action.

Polish Prime Minister Donald Tusk said the nine leaders called for ''a spirit against protectionism and egoism.''

Hungary, Poland and the Baltic countries of Estonia, Latvia and Lithuania also want the EU to fast-track their bids to join the euro-currency, which could offer them a stable financial anchor. Latvia's government has already collapsed amid the economic fallout.  Other EU members, like Sweden, want to coordinate a Europe-wide bailout plan for car producers.

Prime Minister Mirek Topolanek of the Czech Republic, which holds the EU presidency, has called on his counterparts to act together.  A draft summit conclusion centered a commitment to ''make the maximum possible use'' of the EU's cherished free market ''as the engine for recovery.''

''(The EU) not want any new dividing lines. We do not want a Europe divided along a North-South or an East-West line, pursuing a beggar-thy-neighbour policy is unacceptable,'' Topolanek said.

The crisis has sorely tested solidarity among EU nations.  The Czech Republic has accused France of trying to protect its local car plants at the expense of foreign subsidiaries, while Germany rejected earlier calls to help bail out economies in Ireland, Greece and Portugal.  Sunday's talks are meant to restore a unified purpose and help prepare for the April 2 Group of 20 nations summit in London.  Once-booming east European economies have been hit hard by the economic downturn. As cheap credit dried up their export markets shrank, causing eastern currencies to sink and triggering more financial turmoil.

Gyurcsany said eastern EU countries could need up to euro300 billion ($380 billion), or 30 percent of the region's gross domestic production this year.

He warned that failure to offer bigger bailouts ''could lead to massive contractions'' in their economies and lead to ''large-scale defaults'' that would affect Europe as a whole. It could also trigger political unrest and immigration pressures as jobless rates soar, he said.

EU governments have already spent euro300 billion ($380 billion) in bank recapitalizations and put up euro2.5 trillion ($3.18 trillion) to guarantee loans of many banks in the EU and neighboring states.

On Friday, the European Bank of Reconstruction and Development, the European Investment Bank and the World Bank said they will jointly provide euro24.5 billion ($31.1 billion) in emergency aid to shore up the battered finances of eastern European nations.

Simon Property Results Top Expectations
Filed at 9:48 a.m. ET
January 30, 2009

* Fourth-quarter FFO $1.86/share
* Board votes to pay dividend in cash and stock
* Sees full-year FFO $6.40-$6.60/share
* Stock down 1.2 percent
(Adds occupancy and sales details, CEO quote, investor quote, dividend and stock information)

NEW YORK (Reuters) - Simon Property Group Inc (NYSE:SPG PRJ) (NYSE:SPG PRF) (NYSE:SPG PRG) (NYSE:SPG PRI) (NYSE:SPG) , the largest U.S. mall owner and operator, reported a 6.5 percent increase in quarterly funds from operations on Friday, citing cost controls and curtailed spending on development.

Also, Simon's board voted to pay a quarterly dividend of 90 cents per share in 10 percent cash and 90 percent stock. The company, which had previously paid all-cash dividends, said the move would allow it to retain $925 million in cash in 2009.

"The retail environment has been and will continue to be challenging in the upcoming months, however, we are experienced in working through difficult economic cycles," Chief Executive David Simon said in a statement. "This decision is a reflection of our conservative stance on capital allocation and liability management and is not in response to the current retail operating environment."

But the move could temper some investors' interest in shares of Simon as well as of other real estate investment trust stocks.

"From a cash management standpoint I think it's good for companies to keep an eye on every piece of cash and be shepherding capital as well as they can," said Joseph Betlej, portfolio manager at Advantus Capital Management.

"But from the prospective of the REIT industry, there's a lot of investors that care about that dividend," he added, "and the idea that we're going to be paying these things now in stock lessens the attractiveness of REITs to the investing public, both retail and institutional investors."

At the end of the quarter, Simon had about $1.1 billion of cash on hand, including its share of joint ventures, and more than $2.4 billion of available capacity on its revolving credit facility.

For the fourth quarter, Simon's FFO, a performance measure for real estate investment trusts, rose to $540.5 million, or $1.86 per share, from $507.7 million, or $1.76 per share, a year earlier.

The latest results beat the average of analysts' forecasts of $1.85, according to Reuters Estimates. The results include an impairment charge of $21.2 million, or 7 cents per share for the write-off of certain predevelopment projects that have been abandoned as well as for a property in operation.

FFO removes from net earnings the profit-reducing effect of depreciation, a noncash accounting item. Under Generally Accepted Accounting Principles, Simon posted net income of $145.2 million, or 64 cents per share.

For 2009, the Indianapolis-based company said it expected FFO of $6.40 to $6.60 per share. Analysts have forecast $6.57, according to Reuters Estimates.

Simon has a stake in 386 malls and high-end outlet centers and shopping centers in the United States, Europe and Asia.

The consumer-led U.S. recession has rocked retailers, who have closed more than 6,000 stores. The dismal holiday shopping season failed to give a last-ditch boost, with sales in that period falling 2.2. percent -- the worst result since the International Council of Shopping Centers trade group began compiling such data in 1970.

Vacancies at U.S. regional malls in the fourth quarter rose to a decade high of 7.1 percent, according real estate research firm Reis Inc. (NASDAQ:REIS)

For Simon, occupancy at its U.S. malls fell 1.1 percentage points to 92.4 percent. Average rent at its mall stores rose 6.5 percent to $39.49 per square foot. For stores open more than a year, sales fell 4.3 percent to $470 per square foot.

At Simon's Chelsea Premier outlet centers, occupancy fell 0.8 percentage points to 98.9 percent and rent rose 7.7 percent to $27.65 per square foot. For outlet stores open more than a year, sales rose 1.8 percent to $513 per square foot.

Simon shares fell 1.2 percent to $43.93 in early New York Stock Exchange trade.

Madoff on this page;  also here and here.

New York real estate crisis?  GASB link - and even a Fairfield County connection!

Madoff: Had 'too much credibility' with SEC
By MARCY GORDON, AP Business Writer
Sat Oct 31, 2009, 6:26 am ET

WASHINGTON – As Bernard Madoff sat in jail a few months after pleading guilty to fraud, he sounded faintly boastful.

The only problem with officials at the Securities and Exchange Commission's Washington headquarters, he said, is that he had "too much credibility with them and they dismissed" the idea that he was scheming people out of billions of dollars.

A document released Friday details a prison interview conducted June 17 by the SEC inspector general in which Madoff says he had the impression that "it never entered the SEC's mind that it was a Ponzi scheme."

Madoff seemed convinced SEC staff did not suspect him, despite the agency's numerous probes of his business. He said in the interview that the SEC examiners "never asked" for basic records to corroborate his operations.

The disgraced financier also confided that he didn't bring an attorney with him when he testified in an inquiry by the SEC's enforcement division because he believed he didn't need one — and he was trying to fool the government investigators into thinking he had nothing to hide.

The details emerged in a summary of Inspector General David Kotz's interview with Madoff at the Metropolitan Correctional Center in New York, released along with hundreds of other documents related to Kotz's extensive investigation of the SEC's stunning failure to detect Madoff's fraudulent scheme for 16 years.

Kotz also issued a statement Friday saying his probe found no evidence to support Madoff's claim of having a "close relationship" with SEC Chairman Mary Schapiro, who previously headed the Financial Industry Regulatory Authority, the brokerage industry's self-policing organization. In the interview, Madoff called Schapiro a "dear friend," saying she "probably thinks, I wish I never knew this guy."

Like the SEC, FINRA made periodic exams of Madoff's brokerage operation, which functioned separately from his investment business hidden from regulators' view. An internal review by FINRA found a regulatory breakdown on the part of the organization in the Madoff case.

As the SEC inspectors carried out probe after probe of his business, Madoff said in the interview he was "worried every time" that he'd be caught. "It was a nightmare for me," he said. "I wish they caught me six years ago, eight years ago."

Madoff, 71, a former Nasdaq stock market chairman, pleaded guilty in March to charges that his secretive investment-adviser operation was a multibillion-dollar Ponzi scheme that destroyed thousands of people's life savings and wrecked charities. It was possibly the largest-ever Ponzi: the classic scheme in which investors are paid with other investors' money rather than actual profits on their investment.

He is serving a 150-year sentence in federal prison in North Carolina.

The new details from Kotz's inquiry came the same day as word that Madoff's longtime auditor is expected to plead guilty next week in a cooperation deal. Prosecutors told a federal judge in New York that accountant David Friehling was expected to offer a guilty plea at a conference Tuesday to revised charges that accuse him of securities fraud, investment adviser fraud, making false filings to the SEC, and obstructing or impeding administration of the Internal Revenue laws.

The charges carry a prison term of up to 108 years, though significant cooperation with prosecutors can bring leniency.

In his interview with Kotz, Madoff said the SEC never asked him about his tiny accounting firm. It seemed incongruous that, with more than $65 billion in private investments he claimed he oversaw for thousands of people, Madoff used what seemed to be a small-time auditor with a minuscule office in suburban New City, N.Y. Authorities say that Friehling appeared to have rubber-stamped Madoff's records.

Kotz's report of his investigation, made public in early September, painstakingly detailed how the agency's investigations of Madoff were bungled, with disputes among inspection staffers over the findings, lack of communication among SEC offices in various cities and repeated failures to act on credible complaints from outsiders forming a sea of red flags.

An inspection of Madoff's operation in 2003-04, for example, "was put on the back burner" even though the exam team still had unresolved questions, Kotz found.

Madoff's former finance chief, Frank DiPascali, is cooperating with prosecutors after pleading guilty in August to helping Madoff carry out his fraud. Madoff was asked in the interview whether he was concerned about DiPascali's testimony. His answer: "No, he didn't know anything was wrong, either."

Another View: The Government Is Madoff’s Biggest Winner

NYTIMES "Deal Book"
Andrew N. Lerman, a certified public accountant in White Plains, N.Y., argues that the biggest beneficiary of the Bernard L. Madoff scandal was the federal government through the taxes it collected. Mr. Lerman, who is working for several victims of the fraud, has spoken to several United States senators, including Robert Menendez of New Jersey and Charles Schumer of New York.

March 12, 2009, 9:30 am

Over the past two months, Congressional committees have held three hearings to address and investigate Bernard L. Madoff’s fraud. The overwhelming majority of these hearings have been focused on some of the lapses that may have taken place by government regulators and potential changes that were proposed to prevent frauds of this nature.

At the most recent hearing, Harry Markopolos, the now-famous whistleblower, provided his recounting of this historic scam: “There was an abject failure by the regulatory agencies we entrust as our watchdog.” In addition, he concluded “that the S.E.C. securities’ lawyers, if only through their ineptitude and financial illiteracy, colluded to maintain large frauds such as the one to which Madoff later confessed.”

He made several other condemnations as to the government’s failures. What should also be noted and has gone somewhat unnoticed is the fact that Mr. Markopolos had contact with the Securities and Exchange Commission no less than 50 times!

Unfortunately, the hearings have failed to address the depth and gravity of the tax problems created by the Madoff fraud. The single biggest beneficiary of the Madoff Ponzi scheme was and is the United States government. There is no simpler way to state it.

For what possibly could be decades, Madoff investors have been paying taxes to the Internal Revenue Service on the phantom dividends, interest and appreciation gains which were reported to them by Mr. Madoff. Thus, the government has probably received billions of dollars in tax revenue from defrauded investors.

The government cannot ignore the fact that, but for the failure of the S.E.C. to detect this fraud, it would have been deprived of this revenue stream. Federal regulators had the opportunity to stop this scheme and for whatever the reason, did not or were not able to. Should the government be the beneficiary of that?

The question for our lawmakers is simple. Can the government enact policy so that the victims of the fraud are treated fairly and equitably?

There are many technical and complicated tax elements that relate to the Madoff fraud. Suffice to say, there are significant and material questions, among many, that include the proper treatment of previously reported phantom income, the correct deductibility of theft losses, and from which year or years the losses may be deducted.

An administrative compulsion exists for the resolution of the above issues. There are potentially 10,000 or more victims and without a consistent filing procedure, the Treasury will be faced with up to 40,000 — 10,000 for each year — or more claims for 2005 through 2008. These may be subject to 40,000 or more audits, subject to up to 40,000 or more appeals and finally subject to 40,000 or more court cases.

Further, these claims may be filed taking several different technical positions. Does the Internal Revenue Service and our court system have the resources to handle this? Only by providing for an organized and uniform policy will this fiasco be avoided.

Where do we go from here? This can’t be left to a guessing game or chess game for lawyers, accountants and the I.R.S. There is no single right answer. Ambiguity leads to uncertainty and it is in the victims’ and government’s best interests for there to be clarity. The I.R.S. can’t be left to whistle past the graveyard, hoping that no one notices the potentially billions of dollars in taxes that it has collected over the decades on phantom income. The S.E.C.’s impact on this is now well-documented.

Without Congress and the Treasury Department proactively providing a clear and concise means for taxpayers to recoup their tax losses, a very real potential for absolute chaos exists, as the less fortunate, who have nothing left in their lives, would not know what to do or where to turn.

If it is not possible for some victims to be able to receive tax refunds until 2010 or thereafter, there is also the risk that we may have some personal tragedies that we will be reading and hearing about in the media.

We face many critical issues as Americans these days, and all are significant and important. It would be tragic for innocent, hard-working Americans who have been hurt by the Madoff scandal to be further hurt by to the lack of clarity and guidance in our tax system.

This is not about creating a Madoff bailout or recovery fund. It may not be reasonable to think that the government should restore the victims’ investment. Rather, the immediate priority should be to establish procedures and clarity so that victims may deduct the appropriate losses and the taxes that they paid can be refunded without delay.

Hey Ponzi: What’s Your Exit Strategy, Exactly?
By Catherine Rampell

December 17, 2008, 11:33 am

I have never understood why someone would ever start a Ponzi scheme when, by definition, there’s no way to end it.

The scam works by bringing in new unwitting investors to pay off the old unwitting ones. Since there’s no actual investment involved — just a transfer of money backward, with some portion presumably pocketed by the Ponzi schemer — keeping the scheme going requires an endless supply of new investors. The schemer’s liabilities only get bigger as time goes on, and there’s no way to end the ploy. Other than jail, that is. Or death. Or perhaps faking one’s own death.

Take Bernard Madoff, who, it is said, concocted a $50 billion Ponzi scheme. How could he be financially sophisticated enough to (1) con some of the richest, most financially literate investors around, and (2) build a complex paper trail hiding his investments, but also be (3) financially unsophisticated enough not to realize there’s no way to end such a ploy?

I recently asked a few experts what such Ponzi perpetrators might envision their “exit strategies” to be. They generally fell into four categories:

1) Cut and run. This strategy is usually used by small-time crooks taking aim at lower- to middle-class investors.

These swindlers are the Harold Hills of the world. They walk into Rock Island with the intention of ripping everyone off, changing their identities, hopping back on the train, and then proceeding da capo in River City. (Unless they fall in love with a comely librarian along the way, of course.)

“There’s a certain type of sociopathy to many schemers,” says Mitchell Zuckoff, a journalism professor at Boston University and author of “Ponzi’s Scheme: The True Story of a Financial Legend.”

Few of the big-time Ponzi schemers go this route, though. This is because big Ponzi schemes are almost always based on exploiting the trust of a tightly knit social network. The victims are usually members of ethnic communities, elite country clubs, churches or other social hubs where people are unlikely to do their due diligence because they trust their friend, family member, clubmate or neighbor, and have seen others in the same social circle get rich through the proposed “investment opportunity.” In Mr. Madoff’s case, for example, the victims appear to be primarily rich Jewish investors, whom he met through elite groups like the Palm Beach Country Club. The Foundation for New Era Philanthropy, a notorious Philadelphia-area Ponzi scheme, preyed on Christian religious organizations and charities.

If you’re well-connected enough to create a large-scale Ponzi scheme, you’re probably too well-connected to be able to, or perhaps even want to, cut yourself loose.

Charles Ponzi himself had ample opportunities to disappear back to his Italian homeland unnoticed, Mr. Zuckoff said.

“He was bringing his mother over to Boston, from Rome,” he said. “He set her up here. He was canceling the honeymoon he’d planned to take to Italy with his new wife. He could have taken the money and run, but instead he chose to put down roots. He even invested in local banks.”

2) Turn (or return) the business into something legitimate. Unlike the schemers in #1, these Ponzi architects likely started out with some hope for legitimacy. They wanted seed money to kick off some brilliant investment idea. But then the “brilliant” idea falls through. They are then in the position of having to pay off initial investors. Rather than declare failure, they recruit new investors to pay off the old ones.

They may be stuck in a rut, but they have confidence (or perhaps, self-delusion) that they’re so clever that they’ll come up with another, better idea and strike it rich that way.

This was more or less Charles Ponzi’s strategy.

He had grand plans for arbitrage of international postal reply coupons, a sort of postage stamp that was recognized by post offices around the world. He planned to buy the coupons cheaply in Italy and then resell them in the United States at a several-hundred-percent profit. He couldn’t work out the logistics, though, and ended up collecting more and more “seed money” to finance his brilliant idea. Mr. Zuckoff said Ponzi eventually started looking for another brilliant plan but failed.

“He truly thought he could eventually turn around and go legitimate,” Mr. Zuckoff said.

As in Ponzi’s case, this exit strategy pretty much always fails because the schemers are looking for the big scalp — and there’s never an investment profitable enough to fill that deepening pocket of debt.

3) No exit. These schemers, usually from relatively humble backgrounds, are deeply insecure. They have felt like impostors their whole lives, whether in the country club or on the trading floor. They expect to be exposed for something, sometime, somewhere, which allows them to rationalize fraudulent behavior. They focus on denying and delaying the inevitable for as long as they can — and living well until they get caught.

“They have classic impostor syndrome issues,” said James Walsh, author of “You Can’t Cheat an Honest Man: How Ponzi Schemes and Pyramid Frauds Work … and Why They’re More Common Than Ever.” “It’s a classic case of overconfidence as a mask for underconfidence. It’s Freud 101.”

4) Get elected to Parliament. After scamming millions of Russians in the 1990s, Sergei Mavrodi promised his broke investors that he would get their money back with taxpayer funds if they elected him to the Russian Duma. He was, in fact, elected. And voilà, his election gave him parliamentary immunity from criminal prosecution.

Admittedly, this exit strategy has limited applicability. It didn’t even work for very long for Mr. Mavrodi, whose parliamentary immunity was revoked and who eventually landed in prison.


There is more overlap than the simple categories I’ve laid out here would imply; Mr. Ponzi, for example, had other run-ins with the law involving financial dishonesty, so it’s not as if he was exactly hell-bent on legitimacy.

It’s also hard to say, based on the limited information available, where within this array of strategies Mr. Madoff fell (assuming the allegations against him are true). He probably was banking on exit strategy #2, the turn (or return) to legitimacy.

Most Ponzi schemes last a year at most, experts say. (Charles Ponzi’s lasted just nine months.) This indicates that Mr. Madoff, who had been investing clients’ funds since at least 1960, probably started out legitimate or semi-legitimate.

“I don’t know the ins and outs of what happened here,” said Stephen P. Zeldes, a professor of finance and economics at Columbia Business School. “He may have initially had a few bad years, or a few bad quarters, and not wanted to tell that to investors,” Mr. Zeldes said. “Maybe he then pretended that returns were better than they were, thinking he could make it up some future years. Maybe he was thinking he could gamble a bit, get a good return, and no one would ever know.”

In other words, Ponzi schemers don’t necessarily start out as such, and as sophisticated as they are, they may not consciously accept the fact that they’re engaging in a Ponzi scheme. They fool themselves into thinking that the Ponzi scheme is merely a stop-gap measure to hide their losses until they (theoretically) come up with something brilliant.

“I don’t think he originally started thinking he was going to scam his investors,” says Utpal Bhattacharya, a finance professor at the Kelley School of Business at Indiana University who studies financial crime. “His original motive was probably to hide his losses.”

Top investors 'hit by $50bn con'

Some of the world's wealthiest private and corporate investors are reported to be victims of an alleged $50bn fraud by Wall Street broker Bernard Madoff.

Mr Madoff is alleged to have confessed to a huge Ponzi scheme (pyramid fraud).  Reports say the main owner of the New York Mets baseball team, Fred Wilpon, and former American football team owner Norman Braman are among the victims.  Others facing losses reportedly include French bank BNP Paribas, Japan's Nomura Holdings and Zurich's Neue Privat Bank.

Prosecutors say Mr Madoff, ex-head of the Nasdaq stock market, has described the fraud as "one big lie".

A federal judge has appointed a receiver to oversee Mr Madoff firm's assets and customer accounts, while the 70-year-old banker has been released on $10m bail.

Shares drop

Hundreds of people are thought to have invested with Mr Madoff, among them international banks, hedge funds and wealthy private investors - who are all trying to find out the cost of the alleged fraud. 

Spanish newspapers said the leading bank Santander had invested with Mr Madoff.

Bramdean Alternatives, a UK-based asset management company run by Nicola Horlick, saw its share value drop by over 35% after it revealed that nearly 10% of its holding was exposed to the New York broker.

One hedge fund, Fairfield Greenwich Group, said its clients had invested $7.5bn with the firm.

'Major disaster'

Lawyers for worried investors fearful that they had lost their savings, attended court on Friday for a hearing on the disposition of Mr Madoff's remaining assets.  The hearing was cancelled after an agreement was reached to appoint a receiver. 

Brad Friedman, a lawyer for some of the investors, said: "There are people who were very, very well off a few days ago who are now virtually destitute.

"They have nothing left but their apartments or homes - which they are going to have to sell to get money to live on," he told the New York Times.

One investor, Lawrence Velvel, 69, told the Associated Press that he and a friend may have lost millions of dollars between them.

"This is a major disaster for a lot of people. You work all your life, you finally manage to save up something ... lots of people are getting fully or partially wiped out."

'Pyramid scheme'

Mr Madoff founded Bernard L. Madoff Investment Securities in 1960, but also ran a separate hedge fund business.

According to the US Attorney's criminal complaint filed in court, Mr Madoff told at least three employees on Wednesday that the hedge fund business - which served up to 25 clients and had $17.1bn under management - was a fraud and had been insolvent for years, losing at least $50bn.

He said he was "finished", that he had "absolutely nothing" and that "it's all just one big lie", and that it was "basically, a giant Ponzi scheme", the complaint said.  He told them that he planned to surrender to the authorities but not before he used his last $200m-$300m to pay "selected employees, family and friends".

Under a Ponzi scheme, also known as a pyramid scheme, investors are promised very high returns on their investment, while in reality early investors are paid with money collected from later investors.

If found guilty, US prosecutors say he could face up to 20 years in prison and a fine of up to $5m.

Dire Forecast for Global Economy and Trade
December 10, 2008

WASHINGTON — The world economy is on the brink of a rare global recession, the World Bank said in a forecast released Tuesday, with world trade projected to fall next year for the first time since 1982 and capital flows to developing countries forecast to plunge 50 percent.

The projections are among the most dire in a litany of recent gloomy prognostications for the world economy, and officials at the World Bank warned that if they proved accurate, the downturn could throw many developing countries into crisis and keep tens of millions of people in poverty.  Even more troubling, several economists said, there is no obvious locomotive to propel a recovery.

American consumers are unlikely to return to their old spending habits, even after the United States climbs out of its current financial crisis. With growth in China slowing sharply, consumers there are not about to pick up the slack from the Americans. The collapse in oil prices — a side-effect of the crisis — has knocked the wind out of consumers in oil-exporting countries.

“The financial crisis is likely to result in the most serious recession since the Great Depression,” said Justin Lin, the chief economist of the World Bank, summarizing the projections.

The bank forecasts the global economy will eke out growth of 0.9 percent in 2009, down from 2.5 percent this year and 4 percent in 2006. That is the slowest pace since 1982, when global growth was 0.3 percent. Developing countries will grow an average of 4.5 percent next year — a pace that economists said constituted a recession, given the need of these countries to grow rapidly to generate enough jobs for their swelling populations.

“You don’t need negative growth in developing countries to have a situation that feels like recession,” said Hans Timmer, who directs the bank’s international economic analyses and projections. He predicted rising joblessness and shuttered factories in many developing countries.

The volume of world trade, which grew 9.8 percent in 2006 and an estimated 6.2 percent this year, will contract by 2.1 percent in 2009, the report said. That drop would be deeper than the last major contraction in trade: 1.9 percent in 1975.  Net private flows of capital to developing countries are projected to decline to $530 billion in 2009, from $1 trillion in 2007.

The loss of that capital will sharply constrict investment in emerging-market economies, the report said, with annual investment growth slowing to 3.4 percent in 2009 from 13 percent in 2007.

Several countries are also being hurt by the decline in the prices of oil and other commodities — a phenomenon the World Bank characterizes as the end of a five-year commodities boom — though the decline in food and fuel costs has relieved the pressure on people in other countries.

The sudden drop in capital flows poses a particular danger to oil exporters, some of whom have run up heavy debts.

“They’ll have to roll over that debt, one way or the other,” said Simon Johnson, a former chief economist of the International Monetary Fund. “That’s going to put a huge squeeze on these countries.”

Mr. Johnson said the calmer atmosphere in foreign markets belied the gravity of the situation. Spreads on credit default swaps — a common yardstick for whether a country’s government is in danger of default — continue to signal potential trouble for Ireland, Italy, and Greece.

The authorities in Greece are battling violent street protests in Athens and its suburbs, fueled in part by the deteriorating economy.

Reflecting what is by now conventional wisdom, the World Bank recommended that countries undertake large fiscal stimulus programs to cushion the downturn. The bank itself has committed up to $100 billion in aid to developing countries over three years.

If there is a silver lining amid the gloom, it is the relief that lower food and fuel prices mean for poorer countries. While the prices of almost all commodities have fallen sharply since July, they remain higher than in the 1990s, which the bank says should prevent future supply shortages.

As the World Bank’s experts struggled to find a historical analog for the slump, they said it had more in common with the Depression of the 1930s than with the severe recessions of the 1970s or 1980s.

“It is not just a supply shock,” Mr. Lin said. “It is not just a drop in demand; it is a lack of availability of credit.”

Deutsche Bank, in a forecast issued this week, was even more pessimistic. It said global growth would drop to 0.2 percent in 2009, with the United States, Europe, and Japan in recessions of roughly equal severity.

China, which grew 11.9 percent in 2007, will slow to 7 percent this year, the bank projects, and 6.6 percent in 2010, when the rest of the world is slowly recovering. “It’s not going to be the spark that reignites global demand,” said Thomas Mayer, the chief European economist for Deutsche Bank. “We’re almost in an air pocket, where we don’t have a new global driver of growth.”

The paradox of thrift
By Steve Schifferes
Economics reporter, BBC News 
24 November 2008

Should we save or should we spend?

The gloomy economic news and the rapid fall in the value of houses and shares has worried many households.  With many having borrowed heavily during the boom, there may a strong temptation to pay off debt or save more for a rainy day - something which until now has not characterised the UK economy.

But if this happens, will the government's plan to boost the economy through greater spending work?

Paradox of thrift

According to the economist John Maynard Keynes, writing in the midst of the Great Depression in the 1930s, thrift may be a virtue for an individual, but not necessarily for the economy as a whole.

He argued that the more people saved, the more they reduced effective demand, thus further slowing the economy.  This was one reason, he pointed out, that a recession can become self-reinforcing.

Keynes also argued that, faced with slowing demand, businesses would not necessarily use the extra savings available in the economy to invest.  He wrote that "up to the point where full employment prevails, the growth of capital [investment] depends not at all on a low propensity to consume but is, on the contrary, held back by it."

And, in the Keynesian theory, as the slump in demand cascaded through the economy, the resulting slowdown would mean that everyone had less income - ultimately reducing the absolute amount of savings, even if people increase the proportion of their income they put aside.

As unemployment grew, investment would fall, whatever the level of savings.

Government help needed

But how can we persuade the reluctant consumer to spend, and the reluctant businessman to invest?

Keynes' answer was that it was only the government that could overcome the collective paradox that what was good for the individual would weaken the economy.  This is now the theory being embraced by the chancellor, who has abandoned his fiscal rules for the time being in order to pour money back into the economy.  And cuts in interest rates by the Bank of England are also designed to encourage businesses to continue to invest.

But the freeze in the credit markets is making these less effective, making the need for a cash injection into the economy stronger - at least according to Mervyn King, the governor of the Bank of England.

Spectre of deflation

There is another reason why the government wants to give a jolt to the economy now.  It is the fear that prices will actually start to fall as the slowdown gets going.

And deflation - falling prices - would certainly reinforce the paradox of thrift.

If consumers expect prices to drop further in the future, then they have an even stronger incentive to delay their purchases until later, when they can benefit from lower prices.  Deflation, especially in asset prices like houses, can be very long-lasting, as recent experience in Japan suggests.

So one reason the government may want to temporarily cut VAT now is to convince people that prices are going to go up later, thus encouraging them to spend.

Rational expectations

Will these measures work?

One reason Keynesian explanations of the economy fell out of favour in the last few decades was the rise of a new economic theory - rational expectations.

This argued that people were aware that any government borrowing would have to be paid back later. As a result they adjust their expectations accordingly, and do not spend as much as predicted.

Since this time, the government will be signalling its intentions to claw back the money it spends in future budgets, perhaps we will all save more to cover our future loss of income.

This theory may well apply to the financial markets, which are making the price of UK debt more expensive on the grounds it is likely to expand dramatically.

But the psychology of individuals may be different.

In the first place, some people may not be able save much whatever their expectations. Money that goes to pensioners surviving on the state pension, for example, may go straight into spending.

And some psychological research suggests that people do not "discount" very effectively in the long term.

So we may be under-estimating the attractiveness of spending even in the midst of a recession.

This, at least, has to be the government's hope as it embarks on its most audacious economic U-turn since Labour came to office in 1997.

U.S. Agrees to Raise Its Stake in Citigroup

February 28, 2009
In its most daring bid yet to stabilize Citigroup, one of the nation’s largest and most troubled financial institutions, the Treasury Department announced on Friday that it would vastly increase its ownership of the struggling company.

After two multibillion-dollar lifelines failed to shore up Citigroup, the government will increase its stake in the company to 36 percent from 8 percent.

As part of the deal, Citi will shake up its board so that it has a majority of independent directors, Richard Parsons, the bank’s chairman, said in a statement.

Under the deal, Citibank said that it would offer to exchange common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 a share, a 32 percent premium over Thursday’s closing price.

The government will match this exchange up to a maximum of $25 billion of its preferred stock at the same price.

In its statement, the Treasury Department said the dollar-for-dollar match with private preferred holders was intended to strengthen Citigroup’s capital base. The government of Singapore Investment Corporation, Saudi Arabian Prince Alwaleed Bin Talal, Capital Research Global Investors and Capital World Investors have agreed to participate in the exchange, Citibank said in a statement.

Citibank also said that it would record a goodwill impairment charge of about $9.6 billion write-down because of deterioration in the financial markets.

The transaction, which does not involve putting more government cash into the bank, will not increase the amount of Treasury’s investment in Citigroup, the Treasury said. The portion of the preferred securities that are not converted to common shares will be placed into new trust preferred securities, Citi said, and with an 8 percent annual return.

The bank will also suspend dividends on its preferred shares and its common stock.

“This securities exchange has one goal — to increase our tangible common equity,” Citi’s chief executive, Vikram Pandit, said. “This transaction — which requires no additional investment from U.S. taxpayers — does not change Citi’s strategy, operations or governance. Our clients and partners will not be affected and will continue to receive the high level of service they expect from Citi around the world."

The Obama administration deliberately stopped short of securing a majority or controlling interest in Citigroup, but will probably come under intense pressure to take a much larger role in shaping the bank’s direction. Taxpayers, after pumping more than $45 billion into the bank, will now become Citigroup’s single largest shareholder.

The move is one of the most drastic steps federal officials have taken to prevent the collapse of an institution deemed “too big too fail,” as its downfall could send shockwaves through the global markets. The government also took a major ownership stake in the American International Group, and seized control of Fannie Mae and Freddie Mac last September. So far, none of those deals have worked out well.

The administration has tried to keep the banks in private hands and tried to stamp out talk of nationalization. But Citigroup’s plunging share price and its desperate need for capital made it almost inevitable the government would have to raise its stake.

The deal is expected to serve as a model for other financial institutions. Other major banks could find themselves in a similar position in the coming weeks if a new “stress test” shows they do not have sufficient capital, or the right amount of common stock, to appease regulators. Administration officials say they will convert the government’s existing preferred stock investments into common shares and, if necessary, make additional investments to stabilize the banks.

The Citigroup deal tries to address a potential shortfall of common stock, which investors and regulators now demand. With the conversion of preferred shares to common shares, the government’s stake will rise to 36 percent from 8 percent, giving taxpayers more risk, but more potential for profit if the company recovers.

Still it will severely dilute Citigroup’s existing shareholders.

Citigroup’s common shareholders include longtime investors like Saudi Prince Walid bin Talal and Sanford I. Weill, its former chairman, and many large asset management and pension funds that manage money for ordinary investors. For example, Fidelity Investments, which more than doubled its position in Citigroup late last year, has a stake of more than $1 billion.

By retiring the debt and issuing new shares of common stock, Citigroup can bolster it common equity position. So far, no preferred shareholders have agreed to swap their shares. And without the government alongside them, it is an even tougher sell because of fear their positions might get wiped out.

Feds to rescue Citigroup by pumping $20B into firm
New Haven Register
Associated Press
Monday, November 24, 2008 5:22 AM EST

WASHINGTON — The government unveiled a bold plan Sunday to rescue troubled Citigroup, including taking a $20 billion stake in the firm as well as guaranteeing hundreds of billions of dollars in risky assets.

The action, announced jointly by the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp., is aimed at shoring up a huge financial institution whose collapse would wreak havoc on the already crippled financial system and the U.S. economy.

The sweeping plan is geared to stemming a crisis of confidence in the company, whose stocks has been hammered in the past week on worries about its financial health.

“With these transactions, the U.S. government is taking the actions necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy,” the three agencies said in a statement issued Sunday night. “We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery and to manage risks,” they said.

The $20 billion cash injection by the Treasury Department will come from the $700 billion financial bailout package. The capital infusion follows an earlier one — of $25 billion — in Citigroup in which the government received an ownership stake.

In addition, Treasury and the FDIC will guarantee against the “possibility of unusually large losses” on up to $306 billion of risky loans and securities backed by commercial and residential mortgages.

Citigroup is such a large, interconnected player in the financial system that if it were to collapse it would wreak havoc on already fragile financial and economic conditions. The company has operations in more than 100 countries.

Analysts consider Citigroup the most vulnerable among the major U.S. banks — especially after it failed to nab Wachovia Corp., which was bought instead by Wells Fargo & Co. That was a missed opportunity for Citi to gets its hands on much-needed U.S. deposits that would bolster its cash position.

Fund Managers See Need for Some Tighter Restrictions
November 14, 2008

Five prominent hedge fund managers testified Thursday before a House committee that they supported tighter regulation of their industry.

The managers — Philip A. Falcone, Kenneth C. Griffin, John Paulson, James Simons and George Soros — all said they would support rules that required hedge funds to provide information about their funds to a regulator, provided the information was not divulged to the public.  Their support of greater disclosure represented a significant change for an industry that has historically fought more regulation.

But the managers, who were paid on average $1 billion last year, varied in their support of regulation. Mr. Soros, well-known for his liberal views, was the strongest supporter of rules to reign in the nearly $2 trillion industry. Mr. Griffin, the founder of Citadel Investment Group, was the most hesitant, stating that he would “not be averse” to such disclosure rules when asked if they were needed.

The hearing, held by the House Committee on Oversight and Government Reform, is part of a series of investigations in what caused the financial industry. Earlier on Thursday, two prominent academics testified that they believe hedge funds should face greater regulation.  The managers’ support for greater disclosure — though it would not be public disclosure — may surprise some peers. Hedge fund managers have generally shunned disclosure rules, and one manager successfully sued the government to block the Securities and Exchange Commission from requiring all hedge funds to register with the agency.

At the same time, the five disagreed over whether the tax treatment of their funds should be changed, and they disagreed on whether there should be rules about their use of leverage, or borrowed money.

Mr. Griffin, who has long indicated that his company will become a diversified financial services company, said that if hedge funds were pushed into a new “paradigm,” the rules must be made very clear.

“So long as I know what the rules are, I can conduct my business to be well within the lines,” Mr. Griffin said.

After the hearing, some lawmakers said witnesses had had made clear that hedge funds have the potential to cause risk to broader markets.

“All of them went on record in support of more regulation, all of them went on record in support of more transparency,” Representative Carolyn B. Maloney, a Democrat from New York, said.

It was less clear how the government would go about using additional disclosure from hedge funds. During the morning, Andrew Lo, a professor at the Sloan School of Management at the Massachusetts Institute of Technology, and David Ruder, a professor emeritus at Northwestern University School of Law, said hedge funds needed to disclose more information. But Mr. Lo went as far as suggest that the information should be public, while Mr. Ruder, chairman of the S.E.C. in the late 1980s, said it should be kept confidential.

Mr. Lo, who has studied hedge funds for a decade, said more information was needed for him to determine how much risk hedge funds brought to the markets.

“The fact is that we cannot come to any firm conclusion because we simply don’t have the data,” said Mr. Lo, who is affiliated with an asset management company that manages several hedge funds. “Additional transparency, even now, will provide some sense of what we’re likely to see over the next year or two.”

The House committee asked the five managers to provide information about their most highly paid employees, their fund’s financial returns and their holdings of some mortgage assets. The committee also wanted e-mail messages about the tax treatment of their compensation.  A spokeswoman for the committee said earlier this week that the five managers submitted the information, and that the committee was still determining what to release.

One witness, Houman Shadab, a senior research fellow at The Mercatus Center at George Mason University, said that more disclosure could be harmful.

“When that type of information is created by regulators it creates a false sense of security among market participants that these risks are being adequately monitored and managed,” Mr. Shadab said.

Another topic of the panel was the tax treatment of hedge fund managers’ earnings. Currently, part of their earnings is taxed as capital gains, which has a far lower rate than the income tax. Mr. Soros and Mr. Simons both supported forcing managers’ earnings to be taxed as ordinary income. But Mr. Griffin, Mr. Paulson and Mr. Falcone did not.

“You make a billion dollars, but your rate can be a as low as 15 percent,” said Representative Elijah E. Cummings, a Democrat of Maryland. “Is that fair?”

Now there are runs on countries

Robert Peston 23 Oct 08, 10:11 AM

The sickness afflicting the global financial economy has entered a new and worrying phase.

It started last summer with the closing down of big chunks of the wholesale money and securities markets.  Then we saw a succession of crises at individual banks, as institutional providers of funds withdrew their cash from banks they perceived as weak (culminating here in the nationalisations of Northern Rock and Bradford & Bingley, and the rescue takeover of HBOS).

In September the entire banking system was on the brink of total meltdown, because of semi-rational fears that almost no bank was safe from collapse.

And now we're seeing a massive flight of capital out of economies perceived to have been living beyond their means - either because they have a substantial reliance on foreign borrowings, or because they are net importers of good and services, or both.

Commercial lenders to these economies - banks, hedge funds, mutual funds and so on - want their money back now. That's driving down their currencies, pushing up the cost of borrowing for their respective governments and undermining the strength of their respective banking systems.  So they need financial help to tide them over - and with the global economy slowing down, those economies perceived as lacking the resources to cope on their own may need support for months and years.

Queuing up for the intensive care ward are Iceland, Hungary, Pakistan, Ukraine and Belarus, all of which are in discussions about accessing special loans from the International Monetary Fund, the emergency medical service for the global economy.  But there has also been a substantial withdrawal of capital from South Africa, Argentina and - most worrying of all - South Korea.

Let's put this into some kind of context.

The annual economic output of Pakistan, Hungary and Ukraine is something over $100bn each - which is not trivial but does not put them near the top of the rankings in terms of the size of their GDP.  However, the output of Argentina is well over $200bn and that of South Korea is around $900bn. In fact, South Korea is the 13th biggest economy in the world.  If you add together the GDPs of all the economies currently diagnosed with toxic BO by international investors you arrive at a sum that's not far off the economic output of the UK.

And the sums of debt involved are also fairly substantial. Hungary has external debt of more than $100bn, Ukraine has foreign borrowings of $50bn, while Pakistan's dependence on overseas funding is nudging $40bn.

As for South Korea, which hasn't requested formal help from the IMF, its foreign debt is nearer $200bn.  Now you may think this is all about remote countries, with no relevance to you. Well, that would be wrong. We're all connected.  It's been very fashionable for pension funds to invest in developing economies in recent years. If you're saving for a pension, you may own a chunk of South Korea or Argentina.

If you're very unlucky, your pension fund may have belatedly put some of your cash into one of the many hedge funds being royally mullered by the way they borrowed vast sums to invest in some of these emerging economies.

And of course the woes of these economies reduce their ability to purchase from abroad, which acts as a further serious drag on global economic growth.  Also the UK is being buffeted directly by international investors' re-awakened distaste for economies perceived to be too dependent on foreign capital or credit from institutions and companies.  What's happening to South Korea - where its currency, the won, has fallen 29% in the past three months, and shares have fallen well over 20% in a week - is particularly worrying for us.

South Korea is a great manufacturing and exporting nation. Its balance of trade is vastly healthier than the UK's.

But like the UK, South Korea's banks are dependent on wholesale funds that are being withdrawn because of fears that those banks face losses on imprudent deals (not lending to homeowners, as is the case in the UK, but currency hedges with local companies - see my note "Crisis is business as normal").

Of course, our banks - and South Korea's - are being shored up by massive financial support from taxpayers.  But if investors no longer think the UK's banks are at risk of collapse, they then look at our other vulnerabilities - such as public sector borrowing which is rising very sharply because of the costs of the bank rescues, dwindling tax revenues and the need to spend our way through the economic downturn.

They also look at our structural trade deficit and our huge reliance on financial flows generated by a City of London and a financial services industry that's shrinking fast.  As I've pointed out in a tediously repetitive way, the sum of all we've borrowed - the aggregate of corporate, personal and public sector debt - is equivalent to three times our annual economic output.  That's a vast amount of debt to repay - and it's all the harder to do so at a time when our most successful industry, financial services, is in some difficulty and the global economy is slowing down.

If international investors fear our credit isn't what it was and are selling pounds, we should hardly be surprised.

Global creditors end U.S. spending spree
Wasington Times
Patrice Hill
Sunday, October 12, 2008

The crash unfolding on Wall Street is not just the fall of once-mighty banks and corporations that took on too much debt, but the collapse of an American economy and lifestyle that for decades has been purchased with credit cards.

The nation's creditors - many of them foreign countries such as China and Brazil with ample economic needs of their own - reached a point this summer at which they were no longer willing to extend new loans in light of burgeoning default rates.

One of every 10 American homeowners has stopped making mortgage payments, and high-flying investment banks such as Lehman Brothers and Bear Stearns that peddled American debt around the world found themselves in bankruptcy and default.

The boycott by foreign lenders is forcing U.S. businesses and consumers to live more within their means, while political leaders frantically try to find ways to keep the financial sector alive without the free flow of an estimated $3 billion a day from abroad, analysts say. The spigot of foreign money in the heyday of the credit boom earlier this decade enabled everyone from Wall Street's best and brightest to college students with no income to easily obtain cheap loans.

"The party is over," said Peter Schiff, president of Euro Pacific Capital. "The current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow-and-spend culture that has all but defined us for a generation. ... The sooner we come to grips with this, the better."

The nation's increasing reliance on debt to grow and prosper is manifested in the current account deficits that have increased dramatically this decade. Those deficits show how much the U.S. collectively spends more than it produces and how much money is owed to the rest of the world. The federal deficit hit an unprecedented $812 billion in 2006, at the peak of the housing bubble, before declining to $738 billion last year as the housing market crumbled.

The huge external debt was financed for years with a flow of credit from abroad, but that suddenly shut down in July, when foreigners pulled $25.6 billion out of U.S. stock and bond markets, according to the Treasury's most recent figures on international capital flows. About the same time, Fannie Mae and Freddie Mac, former favorites of Asian investors in particular, started having trouble raising funds. The government later took over the mortgage giants as they became insolvent.

"We can no longer entice foreigners into lending us their available savings," said Mr. Schiff. "Given that we are already too loaded up on existing debt that we cannot realistically repay, who can blame them for not wanting to lend us more?"

With the abrupt shutdown of the credit spigot this summer, the housing and credit markets faced an outright crisis and easy loans all but disappeared. Consumer spending reached its biggest decline in years as banks - having difficulty raising funds - severely limited access to mortgages, home-equity loans and other kinds of credit.

"The day of reckoning appears to have arrived," said Stephen Stanley, chief economist at RBS Greenwich Capital, noting that scarcer credit is forcing Americans to save more of their income and spend less. One result is that the trade deficit is now dropping at a 25 percent annual rate, he said. "As Americans retrench, the structural imbalances that the world bludgeoned us about will shrink in size all too quickly."

Political and financial leaders always knew that the inevitable end of the great debt binge would be painful, forcing Americans to dramatically cut back spending and bringing on a long, deep recession that Mr. Stanley and other economists are predicting.

"We have warned for years to be careful what you wish for on this count," he said.

Laura Nishikawa, an analyst with Innovest, a credit-research group that is predicting a major rise in credit-card defaults, said consumers took on increased debt in recent years to finance middle-income and affluent lifestyles even as their wages were stagnating and savings were dwindling.

"The mortgage problem is, in fact, a symptom of a deeper crisis of deteriorated consumer financial health," she said.

Now, big banks like Bank of America, Citibank, JPMorgan Chase, Capital One and American Express - themselves hard-pressed to get loans in bank-funding markets - are reducing consumers' credit-card limits and home-equity lines and limiting credit-card-balance transfers, putting already pinched consumers into serious binds, she said.

"When they reduce credit availability, consumers won't have the ability to roll their debt over, and the issuers will essentially force customers into default," she said.

Consumers sank deeper into debt during the housing boom, when easy initial mortgage terms allowed them to buy bigger, more expensive homes and rapid appreciation opened the door to cash-out refinancings and home-equity loans that financed other spending.

"Millions of households have been operating just like hedge funds for a long time," said Brent Wilson, analyst with, a Web site tracking foreclosed homes, describing how ever-increasing debt financed the doubling or tripling of house prices in many areas that have now deflated.

"They borrowed ever-increasing amounts of money to finance an asset whose price depends on borrowing ever-increasing amounts of money. The financial profile of hedge funds and millions of households is almost identical," he said. Now, "the financial sector is on its knees, since they financed the speculation."

But the problem was not confined to real estate, he said. "The fact is that the whole economy to some extent has been operating like a hedge fund for a long time - households, corporations, state governments, Wall Street, cities" - all leveraging assets like real estate to finance a spending binge, he said.

"It looks like a long period of consolidation has set in," he said. "Many weaker companies will go bankrupt, many more banks will go under - with or without help from the federal government, stocks will probably be weak for some time."

Many analysts find it disconcerting and ironic that the solutions offered by the Treasury, Federal Reserve and Congress rely on massive issues of debt from the Treasury to try to save cash-strapped banks, homeowners and corporations.

The Treasury is about the only American entity that still has easy access to cheap loans as investors seeking safe havens pile money into Treasury bills paying close to 0 percent interest. The Treasury, already the world's biggest debtor, has been adding to its red ink at a prodigious rate to finance rescue programs that could drive the U.S. budget deficit to an unprecedented $1 trillion next year.

"The intention of all these daily federal interventions is to keep the credit spigots open, so Americans can go even deeper into debt to buy more stuff they can't actually afford," Mr. Schiff said.

"The sad reality is that we borrowed and spent our way into this crisis, and we are not going to borrow and spend our way out of it," he said. "Savings can't be magically concocted into existence by a printing press, but can only be created by consumers who spend less than they earn."

Armageddon avoided
Robert Peston 8 Oct 08, 04:42 PM

The symbolism couldn't be worse.

Gordon Brown commits £400bn of taxpayers' money - equivalent to about a third of our entire economic output - to rescuing the banking system.  And central banks from Asia to Europe to North America slash interest rates.  In other words, there's been a co-ordinated global attempt to prop up the financial system and save individual economies from a deep dark recession.

Yet the FTSE 100 plumbs new depths.

What on earth's going on?  Are we all doomed?  Well, the symbolism is a bit misleading, because the FTSE 100 is massively unrepresentative of the British economy.  The main reason it's fallen is because of sharp falls in the prices of giant mining companies that are listed on the London exchange.  So does that mean the FTSE 100 drop doesn't matter?

No, for two reasons.

First, one of the untold horror stories of the credit crunch is that it's wreaking havoc with the investments that underpin the value of millions of people's pensions.  Also, the reason for the fall in those mining companies is that there's been a further sharp drop in the price of commodity and energy prices.  Good news in a way, if it leads to lower household bills.

But the cause of those drops is a slowdown in economic activity throughout the world and the onset of recessions in several developed economies.

So what Gordon Brown and central banks have done today should stave off economic Armageddon - but it's probably too late to save us from months, or even years, of sluggish growth.

Wall Street Pulls Back Amid Credit Concerns
Published: October 8, 2008
Filed at 9:23 a.m. ET

NEW YORK (AP) -- Wall Street headed for another volatile session Wednesday as investors doubted that an emergency interest rate cut would revive credit markets that have been stagnant for weeks.

Investors were initially encouraged after central banks including the Federal Reserve cut interest rates in a coordinated effort aimed at restoring confidence in the market and help end the global financial crisis. But their enthusiasm faded as they realized a rate cut doesn't guarantee that businesses and consumers will have an easier time obtaining credit anytime soon, and that the economy is still in jeopardy because of a lack of lending.

''With all of this occurring as a coordinated effort is showing that everybody out there is trying to fight this thing, and that should bring some confidence back to the market,'' said Scott Fullman, director of derivatives investment strategy for WJB Capital Group. ''But, the big question now is can the credit market open for business.''

The Fed noted in a statement that the market turmoil posed a further threat to an already shaky economy; it was joined in the rate cut by banks including the European Central Bank, Bank of England, The Bank of Canada, the Swedish Riksbank and the Swiss National Bank.

Dow Jones industrial average futures fell 290, or 3.04 percent, to 9,248. Standard & Poor's 500 index futures fell 36.80, or 3.66 percent, to 969.00, while Nasdaq 100 futures dropped 50.75, or 3.76 percent, to 1,286.25.

European indexes, which were down about 5 percent before the rate cut, pared some of their losses. In Britain, the FTSE-100 fell 1.43 percent, Germany's DAX dropped 2.55 percent, and France's CAC-40 dropped 1.95 percent.

In Asia, the Nikkei 225 closed 9.38 percent lower and Hang Seng tumbled 8.17 percent hours before the rate cuts were announced; their declines showed the extent of the worldwide gloom.

''The credit market is still tight, there's no money out there,'' said Todd Leone, managing director of equity trading at Cowen & Co. ''Everything the Fed is doing will eventually help, but people have to realize that it will take some time and that the economy is going to get worse during the next few months.''

Investors had been extremely anxious in recent days for a rate cut, and while the Fed had taken other steps this week to try to ease the stagnant credit markets, including buying commercial paper, the short-term debt used by companies, its moves weren't enough to stanch losses that have taken the Dow Jones industrials down 875 points in just two days this week.

It is very likely that stocks won't begin to recover for good until investors are certain the credit markets are functioning in a more normal fashion. But there are also severe economic problems including heavy job losses and high unemployment that will also need to show improvement.

Credit has all but dried up in the weeks after the failure of Lehman Brothers Holdings Inc. Banks have been reluctant to lend for fear they won't be paid back. That in turn has been stifling the economy, and led to the huge plunges on Wall Street in recent weeks.

Demand for short-term Treasurys remained high because of their safety; investors are willing to take extremely low returns just to have their money in a secure place. The yield on the three-month Treasury bill, which moves opposite its price, dropped to 0.53 percent from 0.81 percent late Tuesday.

Investors also bought up longer-term Treasury bonds, which don't draw as much demand in times of fear. The yield on the 10-year note fell to 3.48 percent from 3.51 percent late Tuesday.

The first third-quarter earnings reports are showing signs of strain on companies, and that is adding more uncertainty to the stock market. After the close Tuesday, Alcoa Inc. said it would conserve cash by suspending its stock buyback program and all non-critical capital projects. The aluminum company's earnings fell 52 percent.

Googling can find interesting things...

Obama puts out details of his derivatives-regulation plan;  Small nonfinancial firms would be exempt from posting margin when hedging
By Ronald D. Orol, MarketWatch
Aug 11, 2009, 5:48 p.m. EST

WASHINGTON(MarketWatch) -- The White House on Tuesday released the final piece of its reform plan for derivatives trading, including a provision that would require all of the complex financial instruments that are standardized to be traded on exchanges or on electronic-trading platforms regulated by the Securities and Exchange Commission or the Commodity Futures Trading Commission.

"We believe this proposal would help oversee the derivatives world and reduce their ability to hurt investors and investing public," said Michael Barr, assistant secretary of the Treasury for financial institutions.

The proposal, which is the final piece of the Obama administration's regulatory-reform plan, also sets up incentives to encourage traders and dealers of opaque over-the-counter derivatives to use clearinghouses, which are intermediaries between buyers and sellers, and exchanges for tailored derivatives that otherwise would have continued to trade in the opaque OTC market.

Those incentives include greater capital and leverage limits for traders and dealers that continue to trade specialized derivatives in the over-the-counter market.

Seeking to alleviate concerns by nonfinancial corporations that use derivatives to hedge operating risk, the Treasury proposal would exempt small firms involved in hedging activities. A number of these firms had raised concerns about the leverage costs.

AP Sources: 2 Boston Hedge Funds Closing Down
Filed at 9:14 p.m. ET
June 2, 2009

BOSTON (AP) -- A pair of unrelated Boston-based hedge funds managing a total of more than $1.3 billion separately told investors Tuesday they're shutting down and returning investor cash because of recent disappointing performance.  Letters from Raptor Capital Management and Noble Partners LP that were obtained by The Associated Press say both firms plan to revamp their investment strategies and eventually offer new funds.

Noble Partners' George Noble told investors in his $550 billion Gyrfalcon QP and Offshore Funds that ''my performance over the past several months of 2009 has been the most professionally disappointing and personally frustrating'' of his nearly 30-year career.

''Whatever the reasons for our poor performance, the numbers speak for themselves and are simply unacceptable,'' Noble said in a letter to investors about the funds' 30 percent loss this year.

The closures were also confirmed to the AP by two people familiar with the situations. The persons spoke on condition of anonymity because they were not authorized to speak publicly on the matters. The Wall Street Journal first reported the closures online Tuesday afternoon.  James Pallotta, who heads the $800 billion Raptor Funds, told investors in a letter that his firm has returned an average of nearly 13.9 percent per year since the funds' inception in October 1993 through the end of last month. That compares with a 6.5 percent return over that period for the Standard & Poor's 500 index.

But the funds' performance this year has been ''roughly flat,'' he said.  Pallotta became a minority owner of the Boston Celtics professional basketball team, and split several months ago with longtime hedge fund partner Paul Tudor Jones of Tudor Investment Corp.  Pallotta said his Raptor Capital Management is suspending investor withdrawals and will begin returning investor cash in early July, starting with a cash payment of about 75 percent, followed by a process to eventually return the remainder.

Noble told his investors to expect 95 percent of their remaining capital returned by July 1. Meanwhile, an audit will be conducted so that the remaining cash can be returned ''as soon as expeditiously as possible thereafter.''

In his letter, Pallotta didn't offer details of the shortcomings that recent market volatility has exposed in his fund's investment strategy. But he wrote that in recent years he's become skeptical ''regarding the sustainability of certain aspects of the industry's structure and short-term focus.''

Noble said that ''the dynamics of the past year dictated a far shorter-term, more tactical approach.

''Although we managed to preserve capital in 2008, as the new year unfolded we became increasingly aware of the unsustainable nature of our overall investment process.''

The new strategy that his company hopes to devise ''will seek greater return consistency by reducing downside volatility, without eroding our core investment approach.''

The process will ''take at least several months,'' Noble wrote, adding that ''it is not appropriate or consistent with our fiduciary duties to retain outside capital during this time.''

The moves follow the closures of a record 1,471 hedge funds -- or nearly 15 percent of the industry -- in 2008, with half of them vanishing in the fourth quarter alone, according to Hedge Fund Research. The average hedge fund lost 18 percent last year, although not all hedge funds fared poorly.  Hedge funds, which are coming under increasing scrutiny because they are largely unregulated, are vast pools of capital that operate secretively and traditionally cater to institutional investors and very wealthy individuals. Hedge funds have grown explosively in recent years, luring an increasing number of ordinary investors, pension funds and university endowments.

Hedge funds can invest in nearly anything: commodities, real estate, complex derivative securities as well as ordinary stocks, assets of companies. Unlike government-regulated mutual funds -- the primary vehicle for retirement savings for tens of millions of Americans -- hedge funds can use techniques such as short-selling, or betting on falling stocks or markets to make a profit from downturns.

Pequot to close amid investigation: Once world's biggest hedge fund, Wilton company to shut its doors
The Advocate Staff
Posted: 05/27/2009 09:05:42 PM EDT

Wilton-based Pequot Capital Management, once the world's largest hedge fund company, will be liquidated by founder Arthur Samberg because a federal insider-trading investigation has cast a cloud over the firm.

"With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business as an investment adviser," Samberg wrote Wednesday in a letter to clients.

The Securities and Exchange Commission in January reopened a probe into whether Samberg's funds illegally profited by trading on inside information about Microsoft Corp.  Investigators learned of documents that show former Microsoft employee David Zilkha may have obtained confidential information in 2001 about the software maker. Zilkha left the Redmond, Wash.-based company that year to join Pequot.

"Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction," Samberg wrote in the letter, a copy of which was obtained by Bloomberg News.

Samberg, 68, plans to liquidate his main hedge funds and spin off others. The firm manages about $3 billion in assets, according to a person familiar with matter, down from about $15 billion in 2001 when the then-Westport-based company split into two parts. Andor Capital Management of Greenwich, the spun-off company run by former Pequot technology fund manager Dan Benton, shut down last year when Benton retired.

Pequot's assets had surged from $4 billion at the beginning of 1999 to $15 billion in mid-2001 when the break-up occurred. The firm caught the rise in technology shares and later rise in technology shares and later anticipated their decline, selling many short in a bet they'd fall. Pequot clients said growth stoked tensions between Samberg and Benton. Samberg wanted to limit the firm's size. Benton favored increased expansion and wanted greater control.

From 1991 to 2001, Samberg's funds returned 27 percent a year after fees, on average. Samberg started his flagship Pequot Partners fund in 1986. He was then part of Dawson-Samberg Capital Management Inc., a Southport-based money management firm founded in 1981.

Samberg added other hedge funds over the next dozen years and he spun off Pequot Capital in January 1999.

Pequot at its peak had 23 funds for domestic and offshore investors and more than 200 employees, including more than 60 analysts and 18 traders.

The number of employees affected by the shutdown was unavailable Wednesday evening. Marketwatch reported that Pequot would spin off its Matawin fund, run by Mike Corasaniti, and its Special Opportunities fund, overseen by Rob Webster and Paul Mellinger.

Jonathan Gasthalter, a spokesman for Pequot, declined to comment on the letter.

Hedge Fund Pequot Closing as Probe Back In Spotlight
May 27, 2009Filed at 9:08 p.m. ET

NEW YORK (Reuters) - Prominent hedge fund firm Pequot Capital told investors on Wednesday it will shut down because of a reopened government probe into possible insider trading.

"Public disclosures about the continuing investigation have cast a cloud over the firm and have become a source of personal distraction," the firm's founder Arthur Samberg, long one of the hedge fund industry's best-known managers, wrote in a letter obtained by Reuters.

"With the situation increasingly untenable for the firm and for me, I have concluded that Pequot can no longer stay in business as an investment adviser."

In the past, Samberg and Pequot have denied allegations of insider trading.

The fund's closure is likely to reignite controversy over the firing of an SEC lawyer whose earlier probe into Pequot led him to request an interview with John Mack, who is now the powerful head of Wall Street investment bank Morgan Stanley.

The lawyer, Gary Aguirre, said he was fired because of his persistent requests for the interview.

Mack, a friend of Samberg, had worked at the Westport, Connecticut-based hedge fund firm from 2004 to 2005 before taking the Morgan Stanley position in the summer of 2005.

A Morgan Stanley spokeswoman declined to comment.

The SEC's Inspector General last year said there was a connection between Aguirre's firing and his efforts to interview the influential Wall Street executive in connection with the probe.

Pequot, which once invested $15 billion and most recently managed $3 billion, became the target of a Securities and Exchange Commission and U.S. Attorney's office investigation several years ago when investigators reviewed trades made by Samberg in Microsoft <MSFT.O> stock in 2001 by the Core Funds.

Although regulators and prosecutors brought no charges and closed the probe in 2006, the government reopened the matter in 2008.

Samberg told investors that the firm will spin off two portfolios and liquidate its Core Funds. Fund manager Mike Corasaniti will run the Matawin fund while Rob Webster and Paul Mellinger will lead the Special Opportunities fund as separate entities before the end of the year, Samberg said. Other investors will begin to get their money back by the end of next month.

Samberg's illustrious career has included growing Pequot into one of the world's most powerful hedge funds and being counted among industry leaders whose opinions could move markets.

The 68-year-old trader, who famously once had a basketball court built in his offices for his employees, started his career by focusing on stocks. He later moved into other areas.

Now he joins the growing ranks of shuttered hedge funds, a list that also includes his former partner, Dan Benton, who shocked investors by his decision to close down last year.

For years, Samberg's fund beat the broader stock market, and its recent performance would not appear to make a shutdown necessary. Since it was launched in 22 years ago, Samberg's fund earned a net annualized 16.8 percent while the Standard & Poor's 500 index returned 8.5 percent.

Last year hedge funds delivered their worst-ever losses of 19 percent last year.

Skittish investors including pension funds are especially nervous about problems like SEC probes right now and some industry analysts speculated that some investors were ready to pull money out.

Hedge Funds, Unhinged
January 18, 2009


LAST summer, Kenneth C. Griffin and his wife, Anne, hedge fund managers both, were so rich that they did something most wealthy couples don’t do until much later in life.  Still in their 30s, they hired a Ph.D. student in economics to help dole out their money to charities.  Fast-forward six months, and Mr. Griffin, who built the Citadel Investment Group into one of the largest hedge funds in the world, has seen the value of his funds plunge by roughly $10 billion — one of the biggest amounts lost in the hedge fund carnage last year.

He was down 55 percent while the average fund was down 18 percent. For Mr. Griffin, it is a failing as personal as they come. Sitting back in his chair, gazing uneasily at the skyline here, he points to a new patch of gray hair when asked about the toll of his losses.

“Last year was a dramatic year for the world’s largest financial institutions,” he says. “We were not immune.”

Mr. Griffin has basked in praise — whiz kid, wunderkind, the next Warren Buffett — ever since he began trading from his Harvard dorm room 20 years ago and then moved to Chicago to start his hedge fund. In recent years, his firm handily took in more than $1 billion annually.  But now, the whiz kid has lost so much money that it is unclear whether he can make it all back. That reality is playing out among thousands of troubled hedge funds drowning in losses.

Two out of three hedge funds lost money last year, and according to agreements with investors, their managers are supposed to recoup all losses before they start skimming fees from their profits again. That could take years.  And it’s unclear whether these traders, so accustomed to flush times, will stick it out long enough to make investors whole again.  Their decisions will reverberate beyond Greenwich, Conn., the New York suburb that is a haven for hedge fund honchos. Pension funds, endowments and charities — not just wealthy individuals — all invest in hedge funds.

Assets held by hedge funds surged to nearly $2 trillion as of the start of last year, from $375 billion in 1998, according to estimates from Hedge Fund Research, a Chicago firm. Along the way, hedge funds — once so few in number that they represented a boutique industry populated by a rarefied group of specialists — sprang up like kudzu.

Today, there are around 10,000 hedge funds, compared with around 3,000 a decade ago and just a few hundred two decades ago.  Little other than money unites hedge funds, which invest in areas as varied as bonds, aircraft and small-business loans. They even make bets on the weather.  What they have in common are lucrative fees: managers typically charge 20 percent of profits and 2 percent of total funds under management — the latter of which they earn regardless of performance.

The wealth and power of hedge funds, and those handsome fees, were predicated on what now sounds like a hollow promise: to make money year in and year out.  But the years of easy money are over.  Banks, pinioned by their own enormous mistakes and the economic slump, have cut back on hedge fund lending — essentially turning off a financial spigot that the funds relied upon to goose their returns.  Economic uncertainty makes it harder to predict market movements. And investors, burned by big losses in 2008, are either questioning hedge fund fees or simply avoiding putting more money into the funds.

The regulatory vise, meanwhile, is tightening around an industry that long enjoyed the freedom to trade and operate without the constraints imposed on more traditional firms.  On Thursday, Mary L. Schapiro, Barack Obama’s nominee to head the Securities and Exchange Commission, said during a confirmation hearing that she plans to more tightly regulate hedge funds as part of an effort to “bring transparency and accountability to all corners of the marketplace.”

Lawmakers are already considering new taxes and regulations that would require hedge funds to disclose more information about their secretive trading strategies.  Add it all up, and managing a hedge fund looks much less attractive than it used to.

“The magnitude of this current crisis and its effect on their business was a real shock for hedge fund managers,” said William N. Goetzmann, a professor who studies hedge funds at the Yale School of Management. “It will be a long-lasting effect because it’s caused customers to question the basic model.”

Mr. Griffin, fiercely competitive, says he is firmly in the camp of those trying to stay open. But he acknowledges that for several years, he will be working mostly for “psychic income.”

NOT everyone is rooting for Citadel. Call up nearly any hedge fund manager, and you will hear the stories about Mr. Griffin, now 40, poaching workers, landing a trade on the cheap and stalking wounded peers for deals. Mr. Griffin declined to comment on such stories.  His aggression has earned him admirers but has also created enemies. In the low-profile hedge fund industry, people shuddered at his brash claims that Citadel would become as powerful as investment banks like Morgan Stanley and Goldman Sachs.

His firm has become the fortress that many would love to see broken. Mr. Griffin knows that, but he chalks it up to his success. “Over the last 10 years we have been innovative and bold,” he says.

But in July, his magic touch deserted him. After reviewing the trading books at Kensington and Wellington, the two largest funds that Citadel manages, he decided to trim some holdings while bolstering an asset class he had traded since his early days: convertible bonds.  But the value of convertibles plummeted as banks, large issuers of such shares, went into a tailspin after the collapse of Lehman Brothers, the venerable investment bank.

Citadel made another large bet that the gap between corporate bonds and insurance bought on those bonds, known as credit-default swaps, would narrow. In essence, Mr. Griffin was betting that the economy would strengthen and that the price of insurance on debt would cheapen.  Others in the industry backed away from that particular gambit. Paul Touradji, who runs a fund associated with the veteran trader Julian Robertson, said his own digging indicated that more people would need to sell their bond positions than the number that were likely to buy in.

Still, Mr. Griffin stuck to his guns, even as his funds fell 16 percent in September. The loss put Citadel in the spotlight and generated speculation about its survival.

One day, the rumor was that Federal Reserve officials were trolling his Chicago headquarters; the next, that his funds were selling off troubled assets, or that banks were pulling credit. (Federal Reserve officials did in fact check up on Citadel. But since last spring, such inquiries have become routine at all large financial institutions. The other rumors were unfounded.)

Mr. Griffin says Citadel came under attack because it was a large and easy target — not because it was about to collapse.  By late October, Citadel was fighting for its life. At the end of the month, its funds were down an additional 20 percent and nearing 40 percent losses for the year. Mr. Griffin met with all of his employees and held a public conference call to reassure the world about Citadel’s financial footing.

Mr. Griffin calls that period “surreal” but says he never went to bed worried that Lehman’s fate would become his own. The difference with Citadel, Mr. Griffin says, is financing. He says he has arranged for credit lines at dozens of banks with durations as long as a year, buying him time. “Any firm that is a lasting, permanent institution goes through rough times,” he says. “In three years, they’ll write the story about how we came back, much like Goldman Sachs came back after 1929.”

Citadel, in fact, is different from many hedge funds that specialize only in trading. Mr. Griffin reinvested profits over the years into new service-based businesses. The management company, which is controlled solely by Mr. Griffin, also owns a firm that provides administrative services to other hedge funds, as well as the Citadel Derivatives Group, a major player in the options and stock markets. And Citadel recently hired a former Merrill Lynch executive to build a capital markets business, a mainstay of investment banking.

“Citadel is a diverse platform,” says Matt Andresen, who runs the Derivatives Group. “Our clients do not interact with the asset management side of the firm, and they’ve come to know us in an entirely different capacity.”

Mr. Griffin has full discretion over how much money he uses to subsidize his struggling funds. Last year, Citadel shouldered some of the funds’ operating costs, which are known to be among the largest in the industry.  At the same time, though, Citadel blocked investors in its two troubled hedge funds from withdrawing money at the end of last year. The company has told investors that they might be allowed to withdraw money at the end of March.

Mr. Griffin explains these decisions by saying that “it was the right thing to do,” because withdrawals by some investors might have disadvantaged other investors who remained in the funds. Citadel also canceled its holiday gathering because it was not “right,” he says, to celebrate last year.  But right and wrong in hedge fund land is a matter of debate. Industry veterans have been loudly criticizing fund managers who blocked investors from retrieving money. Leon Cooperman, for instance, who runs Omega Advisors, is suing another hedge fund, contending that it didn’t allow him to make withdrawals; he said his own fund would never block redemptions.

“You’d have to lower me into the ground before I’d put up a gate,” Mr. Cooperman says. “Clients deserve to be able to withdraw their money.”

Orin Kramer, another hedge fund manager, who also helps oversee the New Jersey pension fund, says that what bothers him most is that managers who are freezing their funds are still charging 2 percent management fees on money they have trapped.

“It’s like telling someone at a hotel that they can’t check out and then charging them for the privilege of staying,” Mr. Kramer says.

IN November, five of the country’s richest hedge fund managers filed solemnly into a Congressional hearing room to be grilled by lawmakers.  They made up a Who’s Who of their industry. In addition to Mr. Griffin, the group included James Simons, of Renaissance Technologies; Philip A. Falcone, an activist investor who has bought a large stake in The New York Times; John Paulson, who earned billions of dollars betting against mortgages before the crisis; and George Soros, the Hungarian trader who rode to fame on prescient currency trades in the early 1990s.

Unlike banks or brokerages, hedge funds do not have to reveal information on their financial condition to the government. That means the government has no way to know the value of funds’ assets, how much money they borrow, or even how many funds there are.  For years, the industry has argued that hedge funds should be allowed to operate under the radar because they serve sophisticated investors.  But by November, it had become apparent that too many hedge funds, crammed into too many of the same trades, had been forced to sell — and that they did not operate in some distant universe. Like mutual funds, they can roil the markets.

At the hearing, four of the managers surprised lawmakers and their peers by saying that more regulation of their business was needed.

Mr. Griffin was the lone holdout. He argued for private market solutions, but as the hearing proceeded, he conceded that he would “not be averse” to greater disclosure to the government, provided that it was not made public. He says now that he is working on providing more transparency to his investors.  Lawmakers proclaimed the day a victory.

“I believe there’s been a near-consensus that hedge funds can cause systemic risk,” said Representative Carolyn B. Maloney, a Democrat from New York and a member of the House Financial Services Committee.

Even without government intervention, the days of working behind a curtain may be ending. Investors are already demanding more information about hedge funds’ operations.  Eiichiro Kuwana, president of Cook Pine Capital, a firm in Greenwich, Conn., that helps wealthy people invest in hedge funds, says that investors once had so much money to invest that they became less circumspect — with many of them investing in hedge funds that refused to provide much information.

No longer.

“Why would I trust a fund with my money if they won’t trust me with information?” Mr. Kuwana says.

HEDGE FUNDS tend to close by choice; outright collapses are less common. Sometimes banks pull funds’ credit lines and managers are forced to shut down. But by and large, the end comes when a manager no longer sees a financial upside for himself or herself.  Few funds have actually shut their doors. The number of funds peaked early last year at 10,233, according to Hedge Fund Research, and fell just 4 percent during the year. And they still manage $1.6 trillion.

Of the funds that lost money last year, the average loss was 29 percent, according to estimates from, a research firm. It will take a few years of fairly robust gains — no easy feat in these markets — for funds to simply recoup those losses.  Until then, managers would earn only their 2 percent fee, chump change to most hedge funds. Some managers are already paying talented employees out of their own pockets to persuade them to stay, but it’s apparent that surviving this turbulence isn’t in the cards for scores of funds.

Mr. Touradji of Touradji Capital was one of the few managers to make money last year, up 13 percent. He says that most firms that call themselves hedge funds never really deserved the title.

“There’s any number of good violinists, but how many people are good enough to be considered to conduct the Philharmonic?” he says. “The whole concept of hedge funds was always and still is this very high bar, that you were never allowed to say it was a tough market. Come rain or shine, you were supposed to do well — even in tough markets.”

But he predicts a slow death for the poseurs. Hedge fund managers, he says, may behave like restaurateurs who keep the doors open long after losses mount, largely because they don’t want to work in someone else’s kitchen.  For his part, Mr. Griffin is not likely to be job-hunting any time soon.  While there is no way to calculate his net worth, it is thought to be at least hundreds of millions of dollars. In May, a monument to his riches will be unveiled at the Art Institute of Chicago. He and his wife donated $19 million for Griffin Court, part of a new modern wing that connects the museum to Millennium Park. And they are hoping they will have plenty of money for their Ph.D. graduate to give out by 2010.

As for Mr. Griffin’s troubled hedge funds, their survival will pivot on successful trading — they are up 6 percent this year — and on his willingness to use Citadel’s other units as a safety net.  Whatever happens, Mr. Griffin says he can handle the shakeout in the hedge fund industry. “It’s going to be fairly significant, “ he says, then pauses and grins. “It’s part of capitalism.”

What Crisis? Some Hedge Funds Are Gaining
November 10, 2008

Bernard V. Drury is a rarity on Wall Street: a hedge fund manager who is making money rather than losing it.

While most hedge funds are sinking into red this year and unsettling the markets in the process, a handful of them are posting spectacular gains. Mr. Drury’s fund, for instance, is up 60 percent since Jan. 1.

How did he do it? Mr. Drury, a former grain trader, is not giving away his secrets. He relies on proprietary computer models to chart tides in the markets and to ride the prevailing currents.

But however smart or lucky the moneymakers have been, a few bad trades can end any hot streak. Despite Wall Street’s reputation as a place of big money and bigger egos, many of the winners are reluctant to boast, particularly given the gaping losses threatening some rivals.

“There’s going to be, naturally, a lot of forms of disillusionment with hedge funds,” said Mr. Drury, who opened his fund, Drury Capital, in 1992.

Indeed, gloomy talk of an industry shakeout is getting louder as returns at most funds sink lower. Over the last few months, some funds have been forced to dump stocks and bonds because their investors want their money back. Wall Street traders worry that another big wave of withdrawals in mid-November could further unsettle the markets.

All of which makes the big winners stand out even more. Hedge fund returns, on average, are down 20 percent. But one in every 50 funds is up more than 30 percent — an astonishing performance, considering the broad stock market is down even more than that.

Winners include trend-followers like Mr. Drury; market-spanning macro funds, which dart in and out of an array of markets and bet on everything from Apple Inc. to zinc; and niche players that are buying insurance policies or making loans to small companies.

Some of this year’s stars are familiar names on Wall Street. For instance, a fund managed by John Paulson, who reportedly was paid $3.7 billion in 2007 after betting against the subprime mortgage market, has gained nearly 30 percent this year in his largest fund, investors say.

But some of the other moneymakers are not well known, and could benefit as competitors close and investors look for new places to park their money. Hedge-fund traders who make a killing are often lionized within the industry. One good year can vault a small player to the big leagues.

But with so many funds down — only one in three has made any money this year — the price of admission to the winner’s circle has fallen. A showing that would have been considered dismal only a year ago is now viewed as a standout success. Traders even joke that down 10 percent is the new break-even. Actually making money is all the more rare.

“This year, anything north of 10 percent is spectacular,” said Pierre Villeneuve, managing director of the Mapleridge Capital Corporation, a $750 million hedge fund in Canada that is up 18 percent.

Other funds with big winnings include R. G. Niederhoffer Capital Management; Conquest Capital Group; MKP Capital Management; the Tulip Trend Fund, run by Progressive Capital; and funds run by John W. Henry & Company.

Never before have so many funds been down. In 5 of the last 10 years, fewer than 15 percent of hedge funds lost money. Even in the worst year, 2002, 31 percent finished down, according to estimates from, a unit of Channel Capital Group. This year, some 70 percent of hedge funds had lost money from Jan. 1 through the end of September.

To a degree, hedge funds are hostage to their stated investment strategies, and investors judge them accordingly. Funds that specialize in convertible bonds and stocks, for example, are among the worst performers this year because those markets have been hard hit in the financial crisis.

Losers include well-known traders like Kenneth C. Griffin, who runs the Citadel Investment Group; Lee S. Ainslie, head of Maverick Capital; and David Einhorn, the head of Greenlight Capital, who called attention to the troubles at Lehman Brothers before many others.

Still, funds that specialize in investment strategies that have suffered could come out looking good if they manage to post even modest gains. For instance, Exis Capital, a $150 million fund that trades stocks, is up 9 percent this year, even after the fund’s manager took their 50 percent fee, according to investors. The average stock fund, by comparison, is down 22 percent, according to estimates from Hedge Fund Research. In commodities trading, Touradji Capital Management is up 11 percent even as its competitor, Ospraie Management, was forced to liquidate a large fund.

At some hedge fund companies, this year’s performance is mixed. Trafalgar, a hedge fund in London, manages 10 funds. Three are down, but two — a volatility fund, and “special situations” fund — are up more than 20 percent, according to an investor.

Trafalgar declined to say what special situations it had pounced on. Volatility funds, a category that is broadly doing well, focus on trading options and try to profit when the markets swing wildly as they have lately.

Lee Robinson, co-founder of Trafalgar Asset Managers, said his firm’s success set it apart from competitors.

“Every investor is going to say, ‘What did you do in September ’08, what did you do in October ’08?’ and if you were down significantly, you’re going to have trouble raising money,” Mr. Robinson said. “The most important question is not, ‘How much money am I getting back?’ it’s ‘Do I get my money back?’ ”

Several managers who are doing well did not want to brag at a time when so many of their industry colleagues were struggling.

“You don’t do victory laps,” said Adam Stern, a partner at AM Investment Partners, whose volatility fund is up 6.75 percent this year. “It’s a very sad time for a lot of people. People worked very hard, and they’re losing a lot of money and net worth.”

Marek Fludzinski, one of this year’s winners, remembers what it was like to be a loser. Mr. Fludzinski, the chief executive of Thales Fund Management, was among the computer-loving quantitative fund managers who suffered in 2007, when his fund lost 8 percent. Investors immediately began asking for their money back, so Mr. Fludzinski shut the $1.6 billion fund and started anew.

Now his computer-driven fund, created in May, has grown to $350 million from $80 million in assets and is up 14 percent.

Mr. Fludzinski said the important factor in running a hedge fund these days was simply surviving.

“Don’t do something that will kill you,” said Mr. Fludzinski, who uses a database with 14 years of prices on thousands of stocks to try to spot patterns like the forced selling of stocks.

Marc H. Malek, a former UBS trader who manages $611 million, is up 44 percent in his macro fund. But even as new investors approach his company, Conquest Capital, the firm is also receiving redemption requests from investors who want their money back, Mr. Malek said. Investors are pulling cash from wherever they can.

A growing number of troubled hedge funds are temporarily refusing to give investors their money back by freezing their funds, in industry parlance. But others are profiting from the waves of panic that have convulsed the markets this year.

Roy Niederhoffer, founder of R. G. Niederhoffer Capital Management, whose more famous brother, Victor, made and then lost a fortune trading, is up more than 50 percent. To predict how investors will behave, Roy Niederhoffer, who majored in neuroscience at Harvard, delves into psychological research.

But Mr. Niederhoffer does not need much research to tell him that some investors chase winners. With his fund soaring, investors are piling on. His assets under management have climbed to $2 billion, from $700 million earlier this year.

Still, Mr. Niederhoffer is not planning any celebrations.

“The greatest danger at a time like this is hubris,” he said. He has banned fist-pumping victory poses on his trading floor.

Hedge Fund Results Seen Going From Bad to Worse
By Joseph A. Giannone and Svea Herbst
Published: November 7, 2008
Filed at 8:13 a.m. ET

NEW YORK (Reuters) - As brutal as September was for hedge funds, October was even worse.

Hedge fund industry trackers Barclay Hedge, Hedge Fund Research Inc and Hennessee Group LLC will report over the next few days just how poorly the $1.9 trillion industry performed last month. It was a period of plunging stock prices, frozen debt markets and fire-sales by banks scrambling to boost cash.

"You had one of the worst months in the equity markets that you had in decades. You add to that the ban on short selling, which destroyed convertible arbitrage, and the equity strategies were hurt badly," said Sol Waksman, founder of industry tracking service Barclay Hedge.

Some of the most successful names in the industry were hammered last month, as funds lost more money than they did in a September that featured the Lehman Brothers bankruptcy, the near collapse of American International Group <AIG.N>, and one of the steepest stock market drops ever.

David Einhorn's Greenlight Capital, lauded for predicting Lehman's financial woes, suffered heavy losses from a short position on Volkswagen <VOWG.DE> after the German carmaker's shares spiked. Greenlight, down 16 percent in the first nine months this year, is seen posting bigger declines for October.

Ken Griffin's Citadel Investment Group, down 15 percent in September, is seen dropping further in October. Lee Ainslie's Maverick Fund is expected to be down again after falling more than 19 percent in September.

Also stumbling is Goldman Sachs <GS.N>, which told clients the $7 billion Goldman Sachs Investment Partners fund has lost nearly $1 billion since its launch in January thanks to wayward bets on commodities, metals, energy and agriculture.

Earlier Thursday, shares of London-based hedge fund managers Man Group <EMG.L> tumbled 31 percent partly on fears the firm's Man Global Strategies fund would see more outflows. Man's total assets under management have fallen to $61 billion from $68 billion at the end of September.

The HFRX Global Hedge Fund Index, compiled by Hedge Fund Research Inc, had a negative 9.3 percent rate of return in October and through Tuesday was down 19 percent this year.

By comparison, the Standard & Poor's 500 Index fell 17 percent in October -- its ninth-worst decline ever-- and 32 percent for the year.

Still, the poor performance of hedge funds -- which charge high management and incentive fees -- shook up confidence in an investment vehicle that was supposed to protect clients by serving as a "hedge" against market swings.

Charles Gradante, co-founder of Hennessee Group, said hedge funds were down 7 percent in October, about 3 percentage points lower than they "should be." Usually, hedge funds fall about one-third as much as the overall market, he explained.

"They were down so much largely because of the volatility, and markets not acting on fundamentals but fear," Gradante said. Some of the hardest hit were those focused on emerging markets, Europe and convertible arbitrage, he said.

Not all funds suffered. Short-seller funds were up about 10 percent for the month.

Even so, fund managers were forced to deal with plunging markets, anxious clients pulling out their money, and wide-scale de-leveraging that put more pressure on asset values. All that plus a ban on short-selling.

"I would expect that redemptions by historical standards are quite high. Not a day goes by where we don't see that such and such a fund is putting up gates," said Barclay's Waksman.

Michelle Celarier, editor of Absolute Return, a magazine focused on the hedge fund industry, said it's too early to predict if the industry's October results lagged September.

Based on preliminary data, at least half of the funds that submit data to the magazine lost money in October. But with three of the five worst months in a decade recorded in March, July and September this year, it is clear hedge funds are suffering.

"I think we can predict September and October together will be worst back-to-back months that we've ever seen," Celarier said. And with redemption demands draining cash, "I don't see it getting any better anytime soon."

Investors Flee as Hedge Fund Woes Deepen
Published: October 22, 2008

The gilded age of hedge funds is losing its luster. The funds, pools of fast money that defined the era of Wall Street hyper-wealth, are in the throes of an unprecedented shakeout. Even some industry stars are falling back to earth.

This unregulated, at times volatile corner of finance — which is supposed to make money in bull and bear markets — lost $180 billion during the last three months. Investors, particularly wealthy individuals, are heading for the exits.

As the stock market plunged again on Wednesday, with the Dow Jones industrial average sinking 514 points, or 5.7 percent, the travails of the $1.7 trillion hedge fund industry loomed large. Some funds dumped stocks in September as their investors fled, and other funds could follow suit, contributing to the market plummet.

No one knows how much more hedge funds might have to sell to meet a rush of redemptions. But as the industry’s woes deepen, money managers fear hundreds or even thousands of funds could be driven out of business.

The implications stretch far beyond Manhattan and Greenwich, Conn., those moneyed redoubts of hedge-fund lords. That is because hedge funds are not just for the rich anymore. In recent years, public pension funds, foundations and endowments poured billions of dollars into these private partnerships. Now, in the midst of one of the deepest bear markets in generations, many of those investments are souring.

Granted, hedge funds are not going to disappear. In fact, some are still thriving. Even many of the ones that have stumbled this year are doing better than the mutual fund industry, which has also been hit with withdrawals that have forced their managers to sell.

But the reversal for the hedge fund industry represents a sea change for Wall Street and its money culture. Since hedge funds burst onto the scene in the 1990s, they have recast not only the rules of finance but also notions of wealth and status. Hedge-fund riches helped inflate the price of everything from modern art to Manhattan real estate. Top managers raked in billions of dollars a year, and managing a fund became the running dream on Wall Street.

Now, for lesser lights, at least, that dream is fading.

“For the past five or six years, it seemed anybody could go to their computer and print up a business card and say they were in the hedge fund business, and raise a pot of money,” said Richard H. Moore, the treasurer of North Carolina, which invests workers’ pension money in hedge funds. “That’s going to be gone forever.”

As are some hedge funds. For the first time, the industry is shrinking. Worldwide, the number of these funds dropped by 217 during the last three months, to 10,016, according to Hedge Fund Research.

Even some of the industry’s most well-regarded managers are starting to retrench. Richard Perry, who until now had not had a down year for his flagship fund in more than a decade, has laid off some employees. Mr. Perry, who began his career at Goldman Sachs, is moving away from stock-picking to focus on the troubled credit markets.

Three other hedge fund highfliers — Kenneth C. Griffin, Daniel S. Loeb and Philip Falcone — have suffered double-digit losses through the end of September.

Steven A. Cohen, the secretive chief of a fund called SAC Capital, has put much of the money in his funds into cash, reducing trading by some of his workers.

Many hedge fund investors, particularly the wealthy individuals, are flabbergasted by their losses this year. The average fund was down 17.6 percent through Tuesday, according to Hedge Fund Research.

“You’re seeing a lot of shock, a lot of inaction, a lot of reassessment of where their allocations are and what to do going forward,” said Patrick Welton, chief executive of the Welton Investment Corporation, whose fund is up double-digits this year.

Many investors, Mr. Welton said, had hoped hedge funds would protect them from a steep decline in the broader market. But in many cases, that has not happened.

Now Wall Street is buzzing about how much money could be pulled out of hedge funds — and which funds might bear the brunt of the redemptions.

Funds have set aside billions of dollars in cash to prepare for withdrawals, and many prominent funds require their investors to leave their money in the funds for years. That could help relieve some of the pressure.

But because hedge funds are largely unregulated, they do not publicly disclose the identity of their investors or whether they have received requests for withdrawals. While it might make sense to pull money out of poorly performing funds, investors might also exit funds that are doing well to offset losses elsewhere.

Institutions — pension funds, endowments and the like — pushed into hedge funds after the Nasdaq stock market bust at the turn of the century. Many hedge funds had prospered as technology stocks crashed, leading these investors to believe they would in the future.

In Massachusetts, for instance, Norfolk County broached the issue with the state’s pension oversight commission, said Robert A. Dennis, the investment director of the commission. Mr. Dennis was impressed that hedge funds had fared so much better than the broader stock market.

Though Mr. Dennis says he recognizes the risks that come with selecting hedge funds, he thinks they remain a good investment. Next week, the state commission will vote on whether to allow some towns with pension funds below $250 million to invest in hedge funds, a move Mr. Dennis supports.

“Hedge funds are having a bad year, absolutely, but they’re still holding up better than stocks,” Mr. Dennis said. “Losing less money than another investment is, while not great, it’s still something to be at least satisfied with.”

But now that the days of easy money are over, some fund managers are throwing in the towel.

One manager, Andrew Lahde, was blunt about his decision.

“I was in this game for the money,” Mr. Lahde wrote to his investors recently. He made a fortune betting against the mortgage markets, calling those on the other side of his trades “idiots.”

“I have enough of my own wealth to manage,” Mr. Lahde wrote. He did not return telephone calls seeking comment.

And what wealth there has been. More than anything else, hedge funds are vehicles for their managers to take a big cut of profits. The lucrative economics of the industry is known as “two and 20.” Managers typically collect annual management fees equal to 2 percent of the assets in their funds, and, on top of that, take a 20 percent cut of any profits. Last year, one manager, John Paulson, reportedly took home $3 billion.

But with the industry under pressure, those fat fees are being questioned. Mr. Moore and other investors are starting to ask whether hedge funds deserve all that money. Mr. Griffin, who runs Citadel Investment Group in Chicago, plans to offer funds with lower fees.

More changes could be coming, including increased regulation. The House Committee on Oversight and Government Reform is scheduled to hold a hearing about regulation next month with five hedge fund managers who reportedly made more than $1 billion last year: Mr. Griffin, Mr. Falcone and Mr. Paulson, as well as George Soros and James Simons.

Will hedge fund investors cash in today?
Greenwich TIME
By Michael C. Juliano, Staff Writer
Article Launched: 09/30/2008 08:00:45 AM EDT

There's tension in the hedge fund industry as investment analysts said they expect many investors to cash in their holdings today after Monday's House rejection of a $700 billion bailout for the nation's financial system.

Many hedge funds consider Sept. 30 a quarterly redemption period when investors may cash in investments.

K. Daniel Libby, a senior portfolio manager for Select Access Funds of the Greenwich investment firm Sands Brothers, said he expects many investors to notify hedge fund operators that they are pulling their investments today so they can get out by year's end.

"For any hedge fund investor who has not reduced his risk to exposure up until now, they're definitely going to take the last opportunity now," Libby said.

Many investors will give their 90-day notifications, as required by many hedge fund operators, to sell their assets so they can make them liquid them by the end of the year instead of six months from now, Libby said.

"I think, on the margin, people are more likely to be redeeming," he said.

But other observers of the hedge fund industry, such as Steve McMenamin, executive director of the Greenwich Roundtable, an investment research firm, don't expect investors to back out today.

"I think some hedge fund investors would like to move to increase their cash positions to protect their capital and buy at the bottom," McMenamin said.

Joel Schwab, managing director of in New York, said sophisticated investors probably will stay in hedge funds, which number about 300 in Greenwich.

"If anything, hedge funds are likely one of the better parts of their investment portfolios," Schwab said. "While going through their worst period ever, hedge funds are still doing a lot better than other investments."

The bailout failure may cause less experienced investors to panic and leave hedge funds, but the industry will do fine, Schwab said.

"Will that cause people to back out of hedge funds?" he said. "Absolutely, but it's hard to tell how many."

Despite the market uncertainty, Shariah Capital in New Canaan will invest $150 million in three hedge funds with the Dubai government.

Shariah-compliant strategies are designed for Islamic investors. The Quran doesn't allow a person to sell something he doesn't own, which rules out short-selling - a widely used strategy that enables hedge funds to post high returns even in bear markets.

Together, Shariah and Dubai have put $50 million in Toqueville Asset Management, which specializes in precious metals, coal and steel investors Zweig-DiMenna International, and Lucas Capital Management, investors in natural gas.

"We want to make it clear that we're investing in capital markets," said Eric Meyer, president and chief executive officer of Shariah Capital. "We're tying to look a bit longer term."

A Squeeze on Leading Fund Chiefs
Published: September 30, 2008

Lee S. Ainslie, Louis M. Bacon and Daniel Loeb are some of the most successful hedge fund managers around. But even they lost big lately as the markets turned chaotic.

While their showing was better than that of the broad stock market, it nonetheless underscored how difficult this year had been for hedge funds — and how much pain might yet lie ahead. The average fund is down 10 percent for the year, as of last Friday, according to Hedge Fund Research, and much of those losses hit in September.

The news could not come at a worse time for the $2 trillion industry, which manages money for some of the largest pension funds, endowments and foundations. Many hedge funds ask investors to provide three months’ notice if they would like to take their money back. And for year-end withdrawals, the deadline was this week — meaning that investors were evaluating their hedge fund holdings just as lightning struck the markets.

“Some of the selling you saw in the stock market Monday was clearly hedge fund managers selling to be ready for redemptions,” said David Salem, chief investment officer for the Investment Fund for Foundations, which invests $8 billion for charity endowments.

Mr. Salem said he did not redeem a penny this week, but he believed funds would continue to suffer as others cashed out.

On Tuesday, RAB Capital, a British fund manager reportedly froze redemptions on its fund for three years, meaning that investors could not take money out until 2011. RAB, once a high-flying fund, has lost more than 54 percent of the value in one of its funds this year and double digits in others, according to HSBC.

The credit squeeze has affected hedge funds in some of the same ways that it hit banks. And now they face new rules from the Securities and Exchange Commission about short-selling, a trading tactic that many funds use to bet against stocks.

Maverick Capital, a hedge fund in Texas run by Mr. Ainslie, lost 11.4 percent in September. That put Mr. Ainslie, a disciple of the noted investor Julian Robertson, down 13 percent for the year, according to a report from HSBC that includes data through last Friday. Mr. Ainslie did not return phone calls seeking comment.

At least three funds run by Moore Capital, which is headed by Mr. Bacon, stumbled in the last couple of weeks. A spokesman for Moore Capital declined to comment.

Third Point Offshore, led by the activist investor Mr. Loeb, was down only 1.2 percent as of Sept. 12. But over the next two weeks, it fell to a 6.6 percent loss for the month. That leaves Mr. Loeb down 13.8 percent this year.

“Look, they’ve had their hands tied behind their back,” said Dick Del Bello, senior partner of Conifer Securities, a company that provides administrative support to hedge funds. “Look at what has happened to the market in the last two weeks. And they can’t play the downside?”

Many funds took their money out of the markets to try to avoid trouble. The cash-outs signal that some managers chose to lock in gains from the year, instead of taking additional risks. It also signals that some expect they will need cash on hand to pay for redemptions.

It is not only the troubled funds that could face withdrawals. Some investors may take money from funds that are performing well, simply because those funds have looser redemption policies.

“The investors who are rushing for the exits will do so where they can, not where they want to,” said Andrew Barber, a director at Research Edge, an investment research firm in New Haven, Conn.

Hedge funds employ a wide range of investing strategies, but it was those who invest in public companies that took the toll over the last few weeks. The value fund of Fir Tree Partners lost 10 percent last month, even though it was up 2 percent in mid-September. The last two weeks left the equity hedge fund down 17.7 percent for the year as of last Friday, according to HSBC.

Paul Tudor Jones’s Raptor Fund fell nearly 2 percent in September, putting its losses at nearly 12 percent for the year. It will be months before the impact is known from hedge fund redemptions on the markets. As investors take back their money, hedge funds sometimes must sell their positions, although they typically have months to do so.

While many investors will flee, some investors said they were willing to stick with veteran hedge fund managers.

“It would be very unwise to conclude that someone who has been demonstrably good at managing money for years has suddenly lost their compass,” Mr. Salem said. “The compass may just be malfunctioning in the current environment.”


Read full draft text (as of Monday A.M., September 29, 2008) here, courtesy of the New York Post.

True cost of the rescue
Robert Peston
20 Sep 08, 02:27 PM

The US Government has just admitted that the financial system was on the verge of total meltdown. And it's right. On Thursday, even blue chip companies were having difficulty rolling over their short-term borrowings.

Armageddon was minutes away - averted by Hank Paulson's plan to insure money-market funds and cut the gangrene out of the banking system.

The US Treasury Secretary is working over the weekend to nationalise around £450bn of banks' balance sheets - equivalent to a third of the British economy.

So, if anything, he was guilty of understatement when he conceded that the "financial regulatory structure is sub-optimal, duplicative and outdated".

However, on Friday - in reaction to all of that - stock markets were partying as though its 1999 again.


That doesn't feel like quite the right reaction to me.

Investors are probably right to conclude that one great source of stress will be lifted from the banking system, as and when Paulson sucks their toxic subprime loans, unsellable asset-backed securities, and radioactive collateralised debt obligations into a vast, lead-lined box financed by US taxpayers.

In the country that brought us Ghostbusters, he is styling himself as the Debtbuster.

And it's not all front: the risk of a calamitous, domino-effect, collapse of banks all over the world - and especially throughout the US - has receded somewhat.

That said, the devil will be in the detail of the mechanics of the rescue. What we don't yet know, for example, is whether Paulson's First Toxic Bank - as I shall christen his vehicle for buying the stinky housing loans - will pay the written-down price for the debt, the market price (which after Lehmans collapse is lower than the written-down price) or a discount to the market price.

This matters.

There is an argument that Paulson should pay a discount to the market price, to protect US taxpayers and soundly spank the banks and their owners.

However if he did that, banks' capital resources would be further depleted, which would further undermine their ability to lend to the rest of us. And it wouldn't do a great deal to reinforce the foundations of the creaking banking system.

But if he bails banks out at the price of this stuff in their books or above, well that would be an acknowledgement that an entire generation of banking executives had behaved wholly irresponsibly in their lending practices for years.

Arguably, they should all be sacked and thrown on to the mercy of a jobs market made all the less kind by their own recklessness.

Let's assume for now that Paulson finds a mechanism to extract the poison from the banks, without enfeebling them in the process. Can we all then breathe a sigh of relief and assume our economic prospects will improve markedly?

Sadly, I don't think so.

Banks, money managers, controllers of trillions of dollars on behalf of the cash-rich states of Asia and the Middle East have all had a painful lesson in the meaning of risk over the past fortnight.

They will for an extended period - possibly years - be less willing to fund our banks without demanding a significant increment in what the banks pay them. That'll increase the cost of money for all of us, which will make most of us feel quite a lot poorer for some time.

Also, you can kiss goodbye to the kind of financial creativity, innovation and competition that accelerated the growth of the UK and US economies over the past few years.

Our retail banks, commercial banks and investment banks will all be subject to much tighter regulation. Which will dampen their growth and their profitability.

Just the elimination of HBOS as an independent bank has removed from the scene a competitive thorn in the side of the other big banks which a few years ago shook them out of their torpor to the benefit of consumers and small businesses - for all that it's patently true that HBOS didn't properly appreciate the risks it was running in the way it financed itself.

The UK's unsustainable economic dependence on the City and financial services is coming home to roost.

The shrinkage of that sector may - just on its own - reduce economic growth by well over one percentage point over the coming year.

But, perhaps more significantly, the cutting down of finance into a smaller more regulated industry, and a semi-permanent rise in the perception of the risks of lending, will reduce the potential growth of the economy, probably for many years to come.

Even after the lean years are passed, and there may be a couple of them to come, subsequent recovery may be lacklustre. After the boom years, we may be entering the dismal grey years.

Painful Path To More Realistic Growth:
Growing home prices, and credit deri
ved from the resulting equity, provided the illusion that increasing purchase power without increasing wage growth was sustainable. Income and buying became disengaged. 
By The Day    
Published on 9/16/2008 

At some point the federal government had to say no. It could not continue saving every major investment corporation from its own bad decisions. That's not how a free market system works.

When it came to underwriting a plan to save Lehman Brothers, the government finally drew the line. Whether that line comes too late or too soon is impossible to judge until the current crisis plays out. And crisis is the right word.

After failing to engineer a government bailout or get help from fellow bankers, Lehman Brothers filed for bankruptcy Monday. At the same time Merrill Lynch, also on the point of collapse, agreed to sell itself to Bank of America for roughly $50 billion.

Combined with the demise of Bear Stearns earlier in the year, three of the five giants of Wall Street, the major independent brokers, will soon be gone, leaving only Morgan Stanley and Goldman Sachs. The carnage is unprecedented, the economic fallout incalculable.

Despite dramatic and controversial steps by the Treasury and Federal Reserve to address the crisis, it continues to escalate. The Fed took on billions of dollars in risky investments to make the sale of Bear Stearns possible before it collapsed. It has opened its discount window ever wider to provide liquidity to financial institutions, and lowered standards for the collateral it would accept. More recently the Treasury Department effectively nationalized the troubled mortgage finance companies Fannie Mae and Freddie Mac, leaving U.S. taxpayers essentially owning the bulk of the nation's mortgage market, and not a healthy market at that.

But the waves of institutional failures continued to crash on shore.

The government has done all it can, and arguably too much, to try and stop the current downward spiral. It appears the time has come to let the situation play out and find the true bottom.

Over the past decade the real wages of the middle class, when measured against the cost of living, have declined, yet consumer spending showed steady growth. Credit, combined with diminished savings, made that mathematical equation work. Growing home prices, and the credit derived from the resulting equity, provided the illusion that increasing purchase power without increasing wage growth was sustainable. Income and buying became disengaged.

Long-accepted standards for responsible lending and borrowing became passé. No longer did borrowers have to have sufficient income and a healthy down payment to obtain a home mortgage. This easy credit fueled housing sales, which drove up prices, which fed more reckless borrowing. But then the bubble burst. Housing sales plummeted, as did prices. Equity evaporated and foreclosures soared. And now the debt that backed all those derivatives, hedge funds and leveraged arrangements is not getting paid back and seeming untouchables, such as Lehman Brothers, are pushing daises.

The reaction of the stock market Monday was predictable - the Dow Jones industrial average sinking 504 points, the biggest single-day loss since markets reopened after the 9/11 attacks in 2001. With each prior bailout announcement the markets had risen, as if the need for government intervention was good news. On Monday it was as if a day of reckoning had arrived.

The resulting convulsions will likely lead to even tighter credit as commercial banks and securities firms seek to preserve capital and limit risk going forward. Tighter credit will likely slow the economy and deepen the recession.

Painful as that may be, the result will be a more reality-based economy, with purchasing and borrowing habits again tied to income.

Both Wall Street and Main Street are getting a tough, but inevitable, reality check.  

There Will Be Blood

By Stephen Davidoff
September 15, 2008, 12:45 pm
Call it the Weekend That Changed Wall Street.

The upheaval of the past few days offers some lessons about the markets and how a financial crisis turns fatal. Here are a few that I’ve been thinking about.

Lesson 1: Perception Is Everything

In financial crises, your actual capital adequacy and liquidity does not matter. Both Lehman Brothers and Bear Stearns — and Lehman particularly — were felt to be adequately capitalized only days before their fall. But once people thought that the end was near, the trading stopped, liquidity dried up, and the capital fled.

Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the legal aspects of mergers, private equity and corporate governance. A former corporate attorney at Shearman & Sterling, he is a professor at the University of Connecticut School of Law. His columns are available at The Deal Professor blog.

Lesson 2: Uncertainty Is Death

Lehman’s unfortunate problem was that we have already gone through one round of capital market infusions. The infusions have left the investors, mostly sovereign wealth funds, deep under water. Now, with continuing uncertainty over the price of Lehman’s assets, no one wanted to get hit again and potentially be forced to invest even more months from now — or worse yet, lose more money. Had Lehman faced this problem earlier or later in the cycle, it might have avoided bankruptcy (though probably still lost its independence).

It is the old adage all over again: If you can’t price assets, you can’t buy them.

Lesson 3: Know When to Fold ‘Em

John Thain, the chief executive of Merrill Lynch, made the right move in selling his firm to Bank of America. He took a deal when it was on the table. A month from now, it might have been better, but the whispers were that Merrill would be next. And in a down market, whispers can kill.

Lesson 4: Sometimes, You Can Only Raise Capital When You Don’t Need It

Lehman issued $4 billion in preferred stock in April — the share offering was oversubscribed. Even then, though, people whispered that the capital raise was a sign of weakness, reflecting Lehman’s anemic balance sheet. This paradox helped bring about the death of both Bear and Lehman: They needed capital, but raising it only made people more concerned about their state.

It is a Catch-22 for which we have yet to find a solution. And that is why, even to the bitter end, Lehman didn’t access the Federal Reserve’s emergency loan facility. If it had, everyone would have assumed it was in trouble.

The whole conundrum supports raising the capital reserve levels for investment banks. Ultimately, Lehman, Bear, Merrill and their balance sheets couldn’t stand the predicament.

esson 5: But Be Careful When You Do Raise Capital

The clauses and terms you agree to can further inhibit financing. For example, Washington Mutual raised $7 billion from a consortium led by TPG. But there is an antidilution clause in that financing that resets the share price paid by TPG to any subsequent, lower share price paid in any further equity raised until October 2009.

This protects TPG from getting diluted out on its investment, but is now preventing WaMu from raising more equity unless TPG is included.

Lesson 6: Bankruptcy Is Not the End of The World (For Some)

In the end, Lehman only filed for Chapter 11 protection at the holding company level. The remaining companies below the holding company remain functioning. Some will be sold, some will be run off and Lehman may even try to emerge from bankruptcy. There’s only a slim chance of that, but substantial parts of Lehman will live on.

Lesson 7: The Sky Is Not Falling

Things are tough, but the economy is still in reasonable shape. All of these troubles at Lehman, Bear, A.I.G. and WaMu are attributable to the housing crisis. If we solve that, we will begin to emerge from the woods. While parts of the country are stabilizing, others appear caught in a declining feedback loop. It would help most if we found a floor on the housing decline. To the extent the government is the answer here, then this is where it should focus.

Lesson 8: Shorts Kill

Shorting is a necessary mechanic in our capital markets. But in financial crises, shorting, and the whispers it generates, can be deadly for financial stocks that exist on trust (see Lesson 1). In these times, we need limits on shorting of financial institutions.

I know the shorts will scream that this is a lynch mob, but it’s not. It is merely a confined and short-term limit on their activities over the next few months. In the interim, there will still be thousands of other shorting opportunities that the short-sellers of the world can use to feed their families.

Lesson 9: Moral Hazard Is an Overused Term

Don’t talk to me about moral hazard. The shareholders of Lehman had no more say in the operation of their company than in the case of Bear or Fannie Mae. If we are really going to stop moral hazard, we will meaningfully punish the people who took these positions and approved them (i.e., management). The step that the FHFA just, to block the exit packages of the chief executive officers of Fannie and Freddie Mac, was a good start.

Lesson 10: In Every Sad Moment, There Are Winners

Congratulations to Jon Marzulli at Shearman & Sterling for representing Merrill Lynch, as well as Robert D. Joffe at Cravath Swaine & Moore and Ed Herlihy at Wachtell Lipton Rosen & Katz who represented Bank of America. Weil Gotshal & Manges is representing Lehman.

These are nice, and well-deserved, assignments for them and the rest of the lawyers I missed giving a shout-out to. Get some sleep.

Lesson 11: Henry Paulson Runs the U.S. Economy

Not President George W. Bush, not Federal Reserve Chairman Ben Bernanke…

A note: For those who watch the Fed, it announced Sunday that it would take as collateral much riskier assets — including equities, junk bonds, subprime mortgage-backed securities and even whole mortgages — in exchange for emergency loans through the Primary Dealer Credit Facility.

In a day of big news, this is equally as big as the other events. Before, the Fed justified the facility by saying it would only take on safe assets. But now, the taxpayers are really going to be guaranteeing the balance sheets (and investments) of the financials.

In the end, I’m a bit sad today. Both Merrill and Lehman were great institutions and will be missed. I wish my friends there the best…


About Steven Davidoff
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions. A former corporate attorney at Shearman & Sterling, he is a professor at the University of Connecticut School of Law and, during the academic year 2008-09, a visiting professor at the Michael E. Moritz College of Law at Ohio State University. His research focus is on corporate governance, regulation of hedge funds, mergers and acquisitions, and securities regulation. His prior scholarship is available on the Social Science Research Network

Professor Davidoff graduated from the Columbia University School of Law, where he was a Harlan Fiske Stone Scholar, and received a B.A. from the University of Pennsylvania, cum laude with honors. He has a masters in finance from the London Business School.

Multi-handed economist speak
Mounting sadness behind the happy headlines

Financial Times of London
By Tony Jackson
Published: May 24 2009 16:34 | Last updated: May 24 2009 17:04

One of the driving forces in economics, according to Robert Shiller of Yale, is the story we tell ourselves. We create happy versions of life in the boom times and sad ones in the bust.  It might be said the story is the product of events. But the process is circular. Events drive the story, the story drives our behaviour and our behaviour drives events.  Franklin Roosevelt grasped the point when he told the American people in 1933 that the only thing they had to fear was fear itself. So what is the story today?

On the face of it, a happy one. Equity markets are flying – most of the time, anyway. Investors are hurling billions of new money at the banks, including the most moribund ones.

The world’s fund managers, according to the latest Merrill Lynch survey, are positively bubbling. Their expectations for global growth and corporate earnings are at a five-year high, having been in the pits at Christmas. That mood is shared by the general public, in the US at any rate. Consider the University of Michigan’s survey of consumer sentiment, which asks people how they see things going over the next five years.  The reading hit a low last summer – though not as low as in the two oil shocks of 1973 and 1979, or even the recession of 1990. Since then it has rebounded very nearly to its long-run average.

That is striking on two counts. First, at the risk of seeming cynical, there is no reason to suppose the general public’s instincts are less trustworthy here than those of investment professionals. Second, it is the mood and therefore the behaviour of the general public that matters above all.  As Prof Shiller put it in a lecture at the London School of Economics last week, the central question now is whether we just got our confidence back. If so, logic suggests our problems should disappear.

Prof Shiller is not sure about that, nor am I. It strikes me the feel-good story could be modified by events, in the usual circular way. Equally important, there are other less cheerful stories running alongside it.

On the first point, it is instructive that the US popular mood should have started to revive as long ago as July. For it was not until September that most of the really big stuff happened: the collapse of Lehman Brothers, AIG and Washington Mutual.

On the other hand, it was already clear by July that the US government was going to bail out Fannie Mae and Freddie Mac. So it seems the public had already judged – correctly, on the showing so far – that the government would go to any lengths to shore up the system.  But there are other things which, though foreseeable in principle, could turn out unexpectedly grievous in practice. It seems clear that unemployment will worsen from here, the only question being by how much.

As to house prices, further evidence produced by Prof Shiller – an expert on the subject – reminds us of how far we are in unknown territory. The fall to date is without precedent. But so was the previous rise. In 1990, US house prices were in real terms roughly where they had been a century earlier. Then they almost doubled to the peak.

The picture in the UK is uncannily similar. Prof Shiller shows a chart comparing house prices in London and Los Angeles in the boom and bust. They are almost identical, with the grim proviso that UK prices have yet to fall nearly as far.

Fairness and corruption

That said, let us turn to some of the other stories around. A central part of Prof Shiller’s thesis, as set out in his recent book Animal Spirits, is that people’s mood and behaviour is affected by certain constants, of which we may focus on two: fairness and corruption.

The issue of fairness, particularly in respect of chief executive pay, is scarcely new. But it is when things go wrong that perceived unfairness makes people angry, and thus has consequences.

Two examples. First, in the US, the Securities and Exchange Commission has finally proposed that investors should be allowed to nominate directors. The chief investment officer of Calpers, a leading US institution, commented: “The credit debacle represents a massive failure of oversight.”

Second, Shell has had its directors’ pay package voted down. The oil company had missed targets that would have triggered bonuses, but proposed to pay them anyway.

Add to this the furore over abuse of the expenses system by UK Members of Parliament, and we get the impression of a much angrier and unhappier story than the headlines might suggest. Conceivably, we are past the worst. But it does not quite feel like it.

Copyright The Financial Times Limited 2009

So sorry...
British economists send apology to queen

The Associated Press
Updated: 07/26/2009 09:33:19 AM EDT

LONDON—Sorry Ma'am—we just didn't see it coming.

A British newspaper reported Sunday that a group of eminent economists have apologized to Queen Elizabeth II for failing to predict the financial crisis.

The Observer newspaper reported that a letter has been sent to the Queen after she demanded, during a visit to the London School of Economics last November, to know why nobody had anticipated the credit crunch.

According to the newspaper, the letter says that says "financial wizards" who believed that their plans to manage risky debts and protect the financial system were infallible were guilty of "wishful thinking combined with hubris."

Signatories to the three-page letter include Tim Besley, a member of the Bank of England's monetary policy committee and historian Peter Hennessy.

The newspaper said the content was discussed during a seminar with a group of leading economists in June, including Nick MacPherson, a permanent secretary at Britain's Treasury, and Goldman Sachs chief economist Jim O'Neill.

"In summary, your majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole," the newspaper quoted the letter as saying.

Buckingham Palace declined to comment on the correspondence, but said the Queen often discusses current issues with experts. In March, Mervyn King became the first Bank of England governor to be invited for private talks at the palace.

"The Queen always displays an interest in current issues and is kept abreast of current issues. Obviously the recession is very topical," Buckingham Palace said in a statement.

Luis Garicano, a professor at the London School of Economics, said he had discussed the origins of the crisis with the Queen during her visit. He said she had asked: "Why did nobody notice it?"

The London School of Economics was not immediately available for comment, or to provide a copy of the letter

As Financial Empires Shake, City Feels No. 2 on Its Heels
Published: September 12, 2008

Early last year, Mayor Michael R. Bloomberg and Senator Charles E. Schumer sounded the alarm that New York City was in danger of losing its status as the world’s pre-eminent financial hub to London. And that was before one of the biggest investment banks on Wall Street, Bear Stearns, collapsed and a second, Lehman Brothers, teetered on the brink of failure.

Now New York City officials and economists are worrying even more about the future of the city’s financial sector. New York City will surely remain a leading center of global finance when the current crisis is over, they say, but its days as the clear leader may be ending.

“This is the worst financial-services crisis of our lifetime,” and Wall Street is its epicenter, said Robert N. Sloan, who heads the financial-services executive recruiting practice at Egon Zehnder International in Manhattan. “You have major firms that have imploded or are at risk of imploding. It is a deconstruction — and a reconstruction to follow — of the financial-services industry as we know it.”

Many analysts point out that the resources of big financial companies were migrating toward London well before the current crisis. The banks reoriented themselves to capitalize on the rapid growth in Asia, “which left London as really the springboard to conducting business looking east,” Mr. Sloan said.

London’s ascendance threatens more than egos and bragging rights. Wall Street is widely regarded as the most important sector of New York’s economy. While it is not the biggest employer, it has provided about one-fourth of all the personal income earned in the city in recent years and about 10 percent of the city’s tax revenue.

Lehman Brothers alone could be the source of as much as $100 million in annual income tax in the city, estimated Marcia Van Wagner, a deputy city comptroller.

The rivalry became more heated after 2005, when companies making their first sale of stock raised more money in London than in New York. Although that shift may have been only temporary, it spurred American officials to call for regulatory changes to make Wall Street more attractive to foreign companies seeking to raise money.

Mayor Bloomberg and Senator Schumer used a study conducted at their direction by McKinsey & Company, a consulting firm, to argue that “if we do nothing within 10 years, while we will remain a leading regional financial center, we will no longer be the financial capital of the world.”

In a report issued this week, the World Economic Forum also ranked the United States just barely ahead of Britain in an assessment of global financial development. The report ranked the United States first for the size and efficiency of its banks but second to Britain when it came to investment banks, brokerage firms and other financial companies.

Nouriel Roubini, a professor of economics at New York University who was one of the study’s authors, said the two countries were quite similar in their strengths and weaknesses. Both, he said, are suffering in the current crisis and may deserve even lower marks for financial stability when it is over.

“This is a very severe economic and financial crisis where hundreds of banks are going to go bust,” Mr. Roubini said, adding that the damage would not be confined to the United States. “Swiss banks like UBS have lost as much as Citigroup,” he said.

Facing its biggest quarterly loss ever, Lehman, one of the six largest firms on Wall Street, said on Wednesday that it would unload many of its assets and shrink significantly. The firm, which employed more than 28,000 people at the start of this year, has lost about 95 percent of its stock-market value in less than two years.

Lehman’s throes, coming just half a year after Bear Stearns collapsed suddenly, rattled city officials who already were concerned about the depth and breadth of the damage on Wall Street. This year, banks and brokerage firms have announced 83,000 job cuts worldwide, and most of those were in New York.

“There’s going to be a lot of realignment of the financial sector, and this is just the beginning of it,” Ms. Van Wagner said. “We certainly seem to be going in the direction of fewer firms. It could be a smaller industry.”

But how much of New York’s loss will be London’s gain — or Hong Kong’s or Dubai’s — is a sensitive topic with the city’s officials and business leaders these days.

Foreign investors may shy away from investing in American companies and American markets, said Kathryn S. Wylde, the chief executive of the Partnership for New York City, an association of large employers. She was quick to add that global financial markets were linked and that the big Wall Street firms were also some of the biggest in other countries.

“It’s important to remember that Lehman is a London firm as well,” Ms. Wylde said. “This stuff hurts London just like it hurts New York.”

It is true that like the United States, Britain is suffering through a housing slump that has hurt its market for mortgages and other forms of debt, but New York firms pioneered and dominated the sales and trading of bundles of risky mortgages. The report Mayor Bloomberg and Senator Schumer released last year cited Wall Street’s dominance of the market for subprime loans as one that European banks could cut into by adopting “U.S.-style” lending practices.

Now, that subprime market is often called the sickest segment of the American financial market, and is a major cause of the current crisis.

London, on the other hand, has become a much bigger magnet for the sales and trading of various types of derivatives, securities that companies buy or sell to hedge against certain risks, such as fluctuations of interest rates or currencies. Some of those lines of business have remained profitable through the recent bond-market crisis.

And that has potentially strengthened London’s hand in its rivalry with New York: Indeed, the biggest Wall Street firms have moved entire derivatives-trading operations to London in the last several years.

Still, some city officials were loath to accept that Wall Street’s influence might be diminished by the disappearance or drastic downsizing of some of its most prominent firms, like Lehman.

Seth W. Pinsky, the president of the city’s Economic Development Corporation, said that city officials would do what they could to help Lehman but that the firm was grappling with some issues that were “outside of the scope and authority of the city government.”

He said he was unaware of any discussions between Lehman executives and city or state officials about what might be done to prevent a complete collapse of the firm. (On Friday, Lehman was courting buyers as its stock continued to fall.)

Mr. Pinsky said he would not speculate about Lehman’s prospects but added that after past periods of upheaval on Wall Street, new firms had emerged to replace those that did not survive. “New York remains the world’s financial capital, and we think the financial institutions in the city are sufficiently broad and deep that once we emerge from the current environment that New York will still be in the same position,” he said.

Freddie Mac official found dead in apparent suicide 

By MATT SMALL, Associated Press Writer    
Posted on Apr 22, 2009 8:38 AM EDT

WASHINGTON (AP) -- David Kellermann, the acting chief financial officer of mortgage giant Freddie Mac, was found dead at his home Wednesday morning in what police said was an apparent suicide.

Mary Ann Jennings, director of public information for the Fairfax County, Va., Police Department, said Kellermann was found dead in his Reston, Va., home. The 41-year-old Kellermann has been Freddie Mac's chief financial officer since September.

Jennings said that a crime scene crew and homicide detectives were investigating the death, but that there didn't appear to be any sign of foul play.

McLean-based Freddie Mac has been criticized heavily for reckless business practices that some argue contributed to the housing and financial crisis. Freddic Mac is a government-controlled company that owns or guarantees about 13 million home loans. CEO David Moffett resigned last month.

Freddie Mac and sibling company Fannie Mae, which together own or back more than half of the home mortgages in the country, have been hobbled by skyrocketing loan defaults and have received about $60 billion in combined federal aid.

Kellermann was named acting chief financial officer in September 2008, after the resignation of Anthony "Buddy" Piszel, who stepped down after the September 2008 government takeover. The chief financial officer is responsible for the company's financial controls, financial reporting and oversight of the company's budget and financial planning.

Before taking that job, Kellerman served as senior vice president, corporate controller and principal accounting officer. He was with Freddie Mac for more than 16 years.

S.E.C. Concedes Oversight Flaws Fueled Collapse
Published: September 26, 2008

WASHINGTON — The chairman of the Securities and Exchange Commission, a longtime proponent of deregulation, acknowledged on Friday that failures in a voluntary supervision program for Wall Street’s largest investment banks had contributed to the global financial crisis, and he abruptly shut the program down.

The S.E.C.’s oversight responsibilities will largely shift to the Federal Reserve, though the commission will continue to oversee the brokerage units of investment banks.

Also Friday, the S.E.C.’s inspector general released a report strongly criticizing the agency’s performance in monitoring Bear Stearns before it collapsed in March. Christopher Cox, the commission chairman, said he agreed that the oversight program was “fundamentally flawed from the beginning.”

“The last six months have made it abundantly clear that voluntary regulation does not work,” he said in a statement. The program “was fundamentally flawed from the beginning, because investment banks could opt in or out of supervision voluntarily. The fact that investment bank holding companies could withdraw from this voluntary supervision at their discretion diminished the perceived mandate” of the program, and “weakened its effectiveness,” he added.

Mr. Cox and other regulators, including Ben S. Bernanke, the Federal Reserve chairman, and Henry M. Paulson Jr., the Treasury secretary, have acknowledged general regulatory failures over the last year. Mr. Cox’s statement on Friday, however, went beyond that by blaming a specific program for the financial crisis — and then ending it.

On one level, the commission’s decision to end the regulatory program was somewhat academic, because the five biggest independent Wall Street firms have all disappeared.

The Fed and Treasury Department forced Bear Stearns into a merger with JPMorgan Chase in March. And in the last month, Lehman Brothers went into bankruptcy, Merrill Lynch was acquired by Bank of America, and Morgan Stanley and Goldman Sachs changed their corporate structures to become bank holding companies, which the Federal Reserve regulates.

But the retreat on investment bank supervision is a heavy blow to a once-proud agency whose influence over Wall Street has steadily eroded as the financial crisis has exploded over the last year.

Because it is a relatively small agency, the S.E.C. tries to extend its reach over the vast financial services industry by relying heavily on self-regulation by stock exchanges, mutual funds, brokerage firms and publicly traded corporations.

The program Mr. Cox abolished was unanimously approved in 2004 by the commission under his predecessor, William H. Donaldson. Known by the clumsy title of “consolidated supervised entities,” the program allowed the S.E.C. to monitor the parent companies of major Wall Street firms, even though technically the agency had authority over only the firms’ brokerage firm components.

The commission created the program after heavy lobbying for the plan from all five big investment banks. At the time, Mr. Paulson was the head of Goldman Sachs. He left two years later to become the Treasury secretary and has been the architect of the administration’s bailout plan.

The investment banks favored the S.E.C. as their umbrella regulator because that let them avoid regulation of their fast-growing European operations by the European Union.

Facing the worst financial crisis since the Great Depression, Mr. Cox has begun in recent weeks to call for greater government involvement in the markets. He has imposed restraints on short-sellers, market speculators who borrow stock and then sell it in the hope that it will decline. On Tuesday, he asked Congress for the first time to regulate the market for credit-default swaps, financial instruments that insure the holder against losses from declines in bonds and other types of securities.

The commission will continue to be the primary regulator of the companies’ broker-dealer units, and it will work with the Fed to supervise holding companies even though the Fed is expected to take the lead role.

The Fed had already begun regulating Wall Street firms that borrowed money under a new Fed lending program, and the S.E.C. had entered into an agreement under which its examiners worked jointly with Fed examiners, an arrangement that is expected to continue.

The S.E.C. will still have primary responsibility for regulating securities brokers and dealers.

The announcement was the latest illustration of how the market turmoil was rapidly changing the regulatory landscape. In the coming months, Congress will consider overhauls to the regulatory structure, but the markets and the regulators are already transforming it in response to events.

Still, the inspector general’s report made a series of recommendations for the commission and the Federal Reserve that could ultimately reshape how the nation’s largest financial institutions are regulated. The report recommended, for instance, that the commission and the Fed consider tighter limits on borrowing by the companies to reduce their heavy debt loads and risky investing practices.

The report found that the S.E.C. division that oversees trading and markets had failed to update the rules of the program and was “not fulfilling its obligations.” It said that nearly one-third of the firms under supervision had failed to file the required documents. And it found that the division had not adequately reviewed many of the filings made by other firms.

The division’s “failure to carry out the purpose and goals of the broker-dealer risk assessment program hinders the commission’s ability to foresee or respond to weaknesses in the financial markets,” the report said.

The S.E.C. approved the consolidated supervised entities program in 2004 after several important developments in Congress and in Europe.

In 1999, the lawmakers adopted the Gramm-Leach-Bliley Act, which broke down the Depression-era restrictions between investment banks and commercial banks. As part of a political compromise, the law gave the commission the authority to regulate the securities and brokerage operations of the investment banks, but not their holding companies.

In 2002, the European Union threatened to impose its own rules on the foreign subsidiaries of the American investment banks. But there was a loophole: if the American companies were subject to the same kind of oversight as their European counterparts, then they would not be subject to the European rules. The loophole would require the commission to figure out a way to supervise the holding companies of the investment banks.

In 2004, at the urging of the investment banks, the commission adopted a voluntary program. In exchange for the relaxation of capital requirements by the commission, the banks agreed to submit to supervision of their holding companies by the agency.

U.S. Announces Takeover of Fannie Mae and Freddie Mac
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Published: September 7, 2008

Filed at 11:34 a.m. ET

WASHINGTON (AP) -- The Bush administration, acting to avert the potential for major financial turmoil, announced Sunday that the federal government was taking control of mortgage giants Fannie Mae (NYSE:FNM) and Freddie Mac. (NYSE:FRE)

Officials announced that the executives of both institutions had been replaced. Herb Allison, a former vice chairman of Merrill Lynch (NYSE:MER) (OOTC:MERIZ) , was selected to head Fannie Mae, and David Moffett, a former vice chairman of US Bancorp (NYSE:USB) , was picked to head Freddie Mac.

Treasury Secretary Henry Paulson says the actions were being taken because "Fannie Mae and Freddie Mac are so large and so interwoven in our financial system that a failure of either of them would cause great turmoil in our financial markets here at home and around the globe."

The huge potential liabilities facing each company, as a result of soaring mortgage defaults, could cost taxpayers tens of billions of dollars, but Paulson stressed that the financial impacts if the two companies had been allowed to fail would be far more serious.

"A failure would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," Paulson said.

Both companies were placed into a government conservatorship that will be run by the Federal Housing Finance Agency, the new agency created by Congress this summer to regulate Fannie and Freddie.

The Federal Reserve and other federal banking regulators said in a joint statement Sunday that "a limited number of smaller institutions" have significant holdings of common or preferred stock shares in Fannie and Freddie, and that regulators were "prepared to work with these institutions to develop capital-restoration plans."

The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.

Lenders Mulling New Offer In Alabama Debt Standoff
29 August 2008

BIRMINGHAM, Alabama (Reuters) - Alabama's Jefferson County and lenders pulled back from the brink of a threatened bankruptcy filing on Friday after the county proposed restructuring $3.2 billion of soured sewer debt.

Alabama Gov. Bob Riley, who this week entered the months-long talks, said in a news release that the county, which is home to the state's largest city, Birmingham, will be presented with a stand-still agreement against default through September 30 and that negotiations with lenders will restart next week.

A current stand-still agreement, which gives the county more time to negotiate, had been due to expire on Friday, and its expiration might have triggered what could have been the largest municipal bankruptcy filing in U.S. history.

"The county presented a proposal that provides for a restructure of the existing bond debt at lower, fixed interest rates over a longer term," Riley, a Republican, said. "Creditors received the proposal and agreed to respond next week."

The immediate issue among bond holders, insurers and the county turns on about $850 million of notes with interest rates that reset periodically and that defaulted earlier this year. The notes are held by banks, including Bank of America Corp <BAC.N> and JPMorgan Chase & Co <JPM.N>.

Bank of America had no immediate comment. JPMorgan Chase could not be immediately reached for comment. Several other lenders and insurers involved were either not available to comment or declined comment.

There is also about $2 billion of Jefferson County auction-rate sewer debt outstanding, with the rest of the $3.2 billion comprised of fixed-rate debt, according to Standard & Poor's.

"It's very positive if the county comes up with a solid plan and prevents bankruptcy," said Matt Fabian, a managing director at Municipal Market Advisors in Concord, Massachusetts. "All of the (debt) issuers in the state will suffer with higher yields if Jefferson County has to file for bankruptcy."

Jefferson County originally sold the debt to pay for upgrades to its sewer system, and its debt crisis began in early 2008 with credit ratings downgrades of municipal bonds insurers. Those ratings cuts throttled auction-rate markets and dramatically increased the interest costs for Jefferson County and many other issuers of auction-rate securities.

The interest on auction-rate debt resets through periodic auctions, typically held every seven, 28 or 35 days. That market seized up in February after Wall Street brokerages stopped supporting the debt, and investors demanded much higher interest rates from debt issuers.

A bankruptcy filing by Jefferson County over its sewer debt would be the biggest by a U.S. local government since Orange County, California, filed for protection in December 1994.

Such a filing, a rarity by a local government, would also make Jefferson County the latest casualty of the global credit crunch, hit by its exposure to the auction-rate securities market.

Jefferson County's sewer financing was also dogged by local scandal. The U.S. Securities and Exchange Commission sued three people, including Birmingham's mayor, for alleged fraud in connection with interest-rate swaps tied to the bonds.

The SEC alleged that Birmingham Mayor Larry Langford took more than $156,000 from bond dealer William Blount while Langford was president of the county commission after steering swap agreements in 2003 and 2004 to Blount's firm.

Riley, in his terse written statement, said: "The tone of the meeting was positive and constructive, and I remain willing to facilitate further progress towards a solution."

The talks occurred as Alabama officials braced for Hurricane Gustav, which is now in the Caribbean and next week may strike Alabama or elsewhere on the U.S. Gulf Coast as a powerful Category 3 storm. It has already killed at least 68 people.

 Page last updated at 23:13 GMT, Wednesday, 6 August 2008 00:13 UK  
Man studying share prices on screen
Not every country's economy has been affected by the credit crunch

Credit crunch: Around the world
One year after the start of the global credit crunch, the various regions of the world are experiencing a range of different market conditions.

Some countries are struggling to cope with economic slowdown and avoid recession, while others are virtually unscathed.

We asked BBC correspondents in key cities to tell us about the most important economic factors in their regions and to give us an idea of the local mood.


A strange thing is happening on Wall Street. As the first anniversary of the credit crunch approaches, investors have stopped battering financial stocks and started buying them again.

Merrill Lynch building
Merrill's last set of write-downs were on Thursday, 17 July

The share price of Bank of America has nearly doubled in a matter of days. And it's not as though the news coming out of the US banks is getting any better.

Last month, Merrill Lynch announced another write-down, this time of more than $4bn, and the sale of all its investments backed by toxic mortgages.

According to veteran Wall street trader Teddy Weisberg, of Seaport Securities, "Merrill Lynch is crying uncle," American slang for giving up or surrendering.

But by confessing to the full extent of their losses, Merrill and other US banks may, at long last, have succeeded in drawing a line under the sub-prime debacle and moving on.

Short-term credit markets freeze up after French bank BNP Paribas suspends three investment funds worth 2bn euros
The bank cited problems in the US sub-prime mortgage sector
During the following months, US and European banks report losses totalling hundreds of billions of dollars
The European Central Bank pumps 95bn euros into the eurozone banking system to ease the sub-prime credit crunch
The US Federal Reserve and the Bank of Japan take similar steps

Mr Weisberg says: "The banks are telling us: Yeah, we've got problems. But they're under control and we're not going out of business."

The revival of financial stocks has been mirrored by a sharp fall in the oil price. Oil is no longer regarded by investors as a one-way bet. Demand in the US has fallen.

The market is now on red alert for any signs that China's appetite for oil may be faltering too.

And, despite some dire predictions, the US economy has not fallen into recession. It grew at an annual rate of nearly 2% in the second quarter, as exports boomed on the back of a weak dollar.

Confidence remains extremely brittle. Another banking collapse or renewed tensions over Iran's nuclear programme could break it in an instant.

But the mood on Wall Street has undoubtedly changed. It's not one of optimism. More a sense that - one year on - the worst of the credit crunch is behind us.


It is becoming apparent that the effects of the credit crunch on Europe may be even more profound than on the US.

The financial sector has been worst hit. Many major European banks had exposure to the US mortgage market and according to the Institute of International Finance, the European banking sector lost more money last year than American banks.

In Denmark and the UK, governments have stepped in to stop Roskilde and Northern Rock banks going out of business.

The real fear is that is that if one major European bank goes under, others will follow.

Peter Spencer, an economist at Britain's Item Club, speaks of the "virus-like" effect of the credit crunch. "We do not know how long the contagion is going to run," he told the BBC.

One result of the financial crisis has been a reluctance by banks to lend money to each other and to their customers.

European Central Bank
The ECB has been applauded for its response to the credit crisis

To counter this lack of liquidity, the European Central Bank (ECB) has poured massive amounts of money into the markets to prevent them seizing up altogether.

Many European countries now face the threat of recession, particularly the Irish Republic and Spain. Denmark is already in recession.

That is not entirely down to the credit crunch. Rising food and oil prices and falling house prices have all had an impact.

However, national governments as well as institutions such as the European Commission and the European Central Bank are finding it hard to respond.

In fact, they are appealing to the financial and business communities to help.

But those sectors have profound problems of their own and are finding it difficult to find the funds or the motivation to come to the rescue of Europe's faltering economy.


When Mizuho Financial admitted it had lost more than $6bn on investments in the US mortgage market, the Japanese bank earned the title of Asia's biggest sub-prime loser.

But just compare that to the more than $40bn written off by Citigroup, and more than $30bn apiece lost by Merrill Lynch and UBS, and you'll see how unscathed - relatively speaking - Asia's cautious bankers have been by the crisis.

In fact, in the financial world, you could say the credit crunch has shaken up the old order in Asia's favour.

Mizuho is Japan's second largest bank

Plunging stock prices on Wall Street mean the world's top two banks by market value - and three out of the top six - are Chinese.

Singapore's investment funds Temasek and GIC have used the turmoil to make massive investments in the Western banking sector.

They're now the biggest shareholders of Merrill Lynch and UBS. They are both sitting on big paper losses as values continue to fall, but they will tell you this was a unique opportunity to gain that sort of foothold on Wall Street.

And while we are focused on this week's one-year anniversary of the credit crunch, it is easy to forget that other anniversary we were marking last year - 10 years since the Asian financial crisis.

The irony of Asian money bailing out Western banks has not been lost on many in this part of the world.

A much bigger worry for many Asians, though, is the economic fallout of the credit crunch.

The US consumer is still the most important buyer for much of what industrialised Asia produces.

Japanese export giants like Sony and Nissan are already feeling the impact as Americans tighten their belts. And the weakness of the US dollar is only making Japanese goods less affordable.

In the "factory of the world", the manufacturing heartland of Southern China, they are also feeling the effects of weakening global demand, with plant closures and layoffs.

Not all export businesses are in panic mode, though. South Korean exports have been growing at their fastest rate in four years.

The likes of Samsung and Hyundai have long been poor relations to their Japanese arch-rivals. But they've been able to win new customers in emerging markets like Latin America, the Middle East and China.

According to one estimate, retail sales in China are growing by 20% a year. Perhaps that's been the biggest effect of the credit crunch - to underline how the shape of the world economy is changing.


India started the year with experts talking about how the country was "decoupled" from the global markets. But now, three-quarters into the year, it’s clear that the problems are more complicated.

The country has been hit by three main worries this year - the impact of the global credit crunch, high oil prices and, more locally, rising inflation rates.

Inflation in India is running at a 13-year high, driven by the soaring cost of food and fuel. The country’s central bank has been aggressively increasing its key interest rate to try and control the rising inflation rates.

While some analysts have welcomed the move, some others feel higher interest rates could cause economic growth to slow further.

Indian labourer carries bag of rice in Delhi
The price of rice is a heavy burden for many Indians

The central bank has also repeatedly lifted the cash reserve ratio (CRR) - the level of minimum cash banks must keep in relation to customer deposits - in an attempt to discourage lending.

But manufacturers are already complaining that their profits have slumped as the price of raw materials is soaring, while consumers are simply not spending enough.

It has been a turbulent year for the markets as well. The Bombay Stock Exchange's benchmark Sensex has fallen more than 5,000 points and is now at last year’s levels.

But many global banks such as HSBC, GE Money and Standard Chartered are turning towards emerging markets like India and China to offset the global losses.

Many experts here feel the quality of credit is much better in India. But the global credit crunch has made institutions here more conservative, especially in consumer finance.

This is likely to hit Indian consumers, especially those looking to borrow to buy a new car or a new home.

Increasingly, there is rising public anger among the country's poor, who are the hardest hit by soaring prices.

In an effort to temper price rises, the Government has already cut import duties on edible oils and banned the export of pulses and most types of rice.

But with most of South Asia suffering from a food crisis, Sri Lanka and Bangladesh are looking to India for rice imports.

This is worrying the Congress-led government, as nearly a dozen states are going to the polls this year and general elections are due by next year.


Not for the first time when it comes to economic indicators around the world, Brazil as a developing country is bucking the trend for a gloomy outlook.

Here, the news is less about a credit crunch and more about unprecedented opportunities for people to buy their own home or to purchase consumer goods that were previously out of reach.

International investment agencies and magazines have been quick to notice that Brazil has largely escaped the pain of the credit crunch, and have been pointing investors towards Latin America's largest economy as a safe bet.

Sao Paulo city centre
Brazil's economy has remained stable as other countries feel the strain

It is "business as normal" in Brazil, as one headline screamed. Foreign investors have taken note and are flooding into the country.

Newly-available mortgage finance has undoubtedly opened the housing market to younger home buyers who were previously excluded.

"I wouldn't have stood a chance to buy this flat five years ago," says Renato Guidolin, a 30-year-old graphic designer, who is about to close a deal on a new apartment in Sao Paulo.

"It is easier to get a mortgage. The economy is a lot more established, which I believe is making buying a lot easier - not only houses, but all sort of goods."

There is visible evidence in many parts of Sao Paulo of a booming housing market, with construction work on residential buildings continuing at a furious pace.

Sales seem to be happening at much the same speed - it often appears most apartments are sold before the work is completed.

TV is awash with advertisements for companies selling electronic goods offering long-term credit deals. Despite the final cost, many Brazilians are choosing to buy more expensive items which, for many in the past, would have been out of their reach.

All this is happening against the background of a much more secure economic situation in a country that used to be troubled by crippling inflation.

Brazil remains a country marked by great inequality, but the steadily-improving economy has moved many of its poorer citizens onto the lower rungs of the middle class.

There is certainly concern about the impact of rising food prices and Brazil is becoming a more expensive country in which to live - but for the moment, the mood is buoyant.


While the credit crunch has hit the European and US banking sector hard, in Nigeria the situation is exactly the reverse.

Banks are falling over themselves to lend money to people in ways that they have never done before.

Millions of Nigerians don't have an account, as in the past they lacked confidence in banks. They used to go under regularly, taking everyone's money with them.

But confidence has grown in banks since the government forced them to consolidate three years ago. Now there are fewer, stronger banks and they're expanding rapidly.

Even in some of the most remote villages, there are now branches with cashpoint machines.

Part of the boom was fuelled by bank share issues which were massively oversubscribed. Banks offered marginal trading loans to people to buy shares in other banks, prompting fears the stock market boom could turn into a bubble.

The Central Bank tightened regulations and banks have aggressively marketed personal loans instead. For the first time, individuals have been able to get loans and mortgages - albeit at interest rates of about 24%.

The lending market boom was fed by the government selling off thousands of houses it owned at knock-down prices.

Unlike Europe and America, the housing market in the capital, Abuja, is booming, with some investors rumoured to have made 400% profits on houses they bought from the government and sold on.

But in an economy that doesn't produce much except oil, it remains to be seen if the central bank can prevent future banking bubbles from bursting.

Shipping Costs Start to Crimp Globalization

Published: August 3, 2008

When Tesla Motors, a pioneer in electric-powered cars, set out to make a luxury roadster for the American market, it had the global supply chain in mind. Tesla planned to manufacture 1,000-pound battery packs in Thailand, ship them to Britain for installation, then bring the mostly assembled cars back to the United States.

But when it began production this spring, the company decided to make the batteries and assemble the cars near its home base in California, cutting more than 5,000 miles from the shipping bill for each vehicle.

“It was kind of a no-brain decision for us,” said Darryl Siry, the company’s senior vice president of global sales, marketing and service. “A major reason was to avoid the transportation costs, which are terrible.”

The world economy has become so integrated that shoppers find relatively few T-shirts and sneakers in Wal-Mart and Target carrying a “Made in the U.S.A.” label. But globalization may be losing some of the inexorable economic power it had for much of the past quarter-century, even as it faces fresh challenges as a political ideology.

Cheap oil, the lubricant of quick, inexpensive transportation links across the world, may not return anytime soon, upsetting the logic of diffuse global supply chains that treat geography as a footnote in the pursuit of lower wages. Rising concern about global warming, the reaction against lost jobs in rich countries, worries about food safety and security, and the collapse of world trade talks in Geneva last week also signal that political and environmental concerns may make the calculus of globalization far more complex.

“If we think about the Wal-Mart model, it is incredibly fuel-intensive at every stage, and at every one of those stages we are now seeing an inflation of the costs for boats, trucks, cars,” said Naomi Klein, the author of “The Shock Doctrine: The Rise of Disaster Capitalism.”

“That is necessarily leading to a rethinking of this emissions-intensive model, whether the increased interest in growing foods locally, producing locally or shopping locally, and I think that’s great.”

Many economists argue that globalization will not shift into reverse even if oil prices continue their rising trend. But many see evidence that companies looking to keep prices low will have to move some production closer to consumers. Globe-spanning supply chains — Brazilian iron ore turned into Chinese steel used to make washing machines shipped to Long Beach, Calif., and then trucked to appliance stores in Chicago — make less sense today than they did a few years ago.

To avoid having to ship all its products from abroad, the Swedish furniture manufacturer Ikea opened its first factory in the United States in May. Some electronics companies that left Mexico in recent years for the lower wages in China are now returning to Mexico, because they can lower costs by trucking their output overland to American consumers.

Neighborhood Effect

Decisions like those suggest that what some economists call a neighborhood effect — putting factories closer to components suppliers and to consumers, to reduce transportation costs — could grow in importance if oil remains expensive. A barrel sold for $125 on Friday, compared with lows of $10 a decade ago.

“If prices stay at these levels, that could lead to some significant rearrangement of production, among sectors and countries,” said C. Fred Bergsten, author of “The United States and the World Economy” and director of the Peter G. Peterson Institute for International Economics, in Washington. “You could have a very significant shock to traditional consumption patterns and also some important growth effects.”

The cost of shipping a 40-foot container from Shanghai to the United States has risen to $8,000, compared with $3,000 early in the decade, according to a recent study of transportation costs. Big container ships, the pack mules of the 21st-century economy, have shaved their top speed by nearly 20 percent to save on fuel costs, substantially slowing shipping times.

The study, published in May by the Canadian investment bank CIBC World Markets, calculates that the recent surge in shipping costs is on average the equivalent of a 9 percent tariff on trade. “The cost of moving goods, not the cost of tariffs, is the largest barrier to global trade today,” the report concluded, and as a result “has effectively offset all the trade liberalization efforts of the last three decades.”

The spike in shipping costs comes at a moment when concern about the environmental impact of globalization is also growing. Many companies have in recent years shifted production from countries with greater energy efficiency and more rigorous standards on carbon emissions, especially in Europe, to those that are more lax, like China and India.

But if the international community fulfills its pledge to negotiate a successor to the Kyoto Protocol to combat climate change, even China and India would have to reduce the growth of their emissions, and the relative costs of production in countries that use energy inefficiently could grow.

The political landscape may also be changing. Dissatisfaction with globalization has led to the election of governments in Latin America hostile to the process. A somewhat similar reaction can be seen in the United States, where both Senators Barack Obama and Hillary Rodham Clinton promised during the Democratic primary season to “re-evaluate” the nation’s existing free trade agreements.

Last week, efforts to complete what is known as the Doha round of trade talks collapsed in acrimony, dealing a serious blow to tariff reduction. The negotiations, begun in 2001, failed after China and India battled the United States over agricultural tariffs, with the two developing countries insisting on broad rights to protect themselves against surges of food imports that could hurt their farmers.

Some critics of globalization are encouraged by those developments, which they see as a welcome check on the process. On environmentalist blogs, some are even gleefully promoting a “globalization death watch.”

Many leading economists say such predictions are probably overblown. “It would be a mistake, a misinterpretation, to think that a huge rollback or reversal of fundamental trends is under way,” said Jeffrey D. Sachs, director of the Earth Institute at Columbia University. “Distance and trade costs do matter, but we are still in a globalized era.”

As economists and business executives well know, shipping costs are only one factor in determining the flow of international trade. When companies decide where to invest in a new factory or from whom to buy a product, they also take into account exchange rates, consumer confidence, labor costs, government regulations and the availability of skilled managers.

‘People Were Profligate’

What may be coming to an end are price-driven oddities like chicken and fish crossing the ocean from the Western Hemisphere to be filleted and packaged in Asia not to be consumed there, but to be shipped back across the Pacific again. “Because of low costs, people were profligate,” said Nayan Chanda, author of “Bound Together,” a history of globalization.

The industries most likely to be affected by the sharp rise in transportation costs are those producing heavy or bulky goods that are particularly expensive to ship relative to their sale price. Steel is an example. China’s steel exports to the United States are now tumbling by more than 20 percent on a year-over-year basis, their worst performance in a decade, while American steel production has been rising after years of decline. Motors and machinery of all types, car parts, industrial presses, refrigerators, television sets and other home appliances could also be affected.

Plants in industries that require relatively less investment in infrastructure, like furniture, footwear and toys, are already showing signs of mobility as shipping costs rise.  Until recently, standard practice in the furniture industry was to ship American timber from ports like Norfolk, Baltimore and Charleston to China, where oak and cherry would be milled into sofas, beds, tables, cabinets and chairs, which were then shipped back to the United States.

But with transportation costs rising, more wood is now going to traditional domestic furniture-making centers in North Carolina and Virginia, where the industry had all but been wiped out. While the opening of the American Ikea plant, in Danville, Va., a traditional furniture-producing center hit hard by the outsourcing of production to Asia, is perhaps most emblematic of such changes, other manufacturers are also shifting some production back to the United States.

Among them is Craftmaster Furniture, a company founded in North Carolina but now Chinese-owned. And at an industry fair in April, La-Z-Boy announced a new line that will begin production in North Carolina this month.

“There’s just a handful of us left, but it has become easier for us domestic folks to compete,” said Steven Kincaid of Kincaid Furniture in Hudson, N.C., a division of La-Z-Boy.

Avocado Salad in January

Soaring transportation costs also have an impact on food, from bananas to salmon. Higher shipping rates could eventually transform some items now found in the typical middle-class pantry into luxuries and further promote the so-called local food movement popular in many American and European cities.

“This is not just about steel, but also maple syrup and avocados and blueberries at the grocery store,” shipped from places like Chile and South Africa, said Jeff Rubin, chief economist at CIBC World Markets and co-author of its recent study on transport costs and globalization. “Avocado salad in Minneapolis in January is just not going to work in this new world, because flying it in is going to make it cost as much as a rib eye.”

Global companies like General Electric, DuPont, Alcoa and Procter & Gamble are beginning to respond to the simultaneous increases in shipping and environmental costs with green policies meant to reduce both fuel consumption and carbon emissions. That pressure is likely to increase as both manufacturers and retailers seek ways to tighten the global supply chain.

“Being green is in their best interests not so much in making money as saving money,” said Gary Yohe, an environmental economist at Wesleyan University. “Green companies are likely to be a permanent trend, as these vulnerabilities continue, but it’s going to take a long time for all this to settle down.”

In addition, the sharp increase in transportation costs has implications for the “just-in-time” system pioneered in Japan and later adopted the world over. It is a highly profitable business strategy aimed at reducing warehousing and inventory costs by arranging for raw materials and other supplies to arrive only when needed, and not before.

Jeffrey E. Garten, the author of “World View: Global Strategies for the New Economy” and a former dean of the Yale School of Management, said that companies “cannot take a risk that the just-in-time system won’t function, because the whole global trading system is based on that notion.” As a result, he said, “they are going to have to have redundancies in the supply chain, like more warehousing and multiple sources of supply and even production.”

One likely outcome if transportation rates stay high, economists said, would be a strengthening of the neighborhood effect. Instead of seeking supplies wherever they can be bought most cheaply, regardless of location, and outsourcing the assembly of products all over the world, manufacturers would instead concentrate on performing those activities as close to home as possible.

In a more regionalized trading world, economists say, China would probably end up buying more of the iron ore it needs from Australia and less from Brazil, and farming out an even greater proportion of its manufacturing work to places like Vietnam and Thailand. Similarly, Mexico’s maquiladora sector, the assembly plants concentrated near its border with the United States, would become more attractive to manufacturers with an eye on the American market.

But a trend toward regionalization would not necessarily benefit the United States, economists caution. Not only has it lost some of its manufacturing base and skills over the past quarter-century, and experienced a decline in consumer confidence as part of the current slowdown, but it is also far from the economies that have become the most dynamic in the world, those of Asia.

“Despite everything, the American economy is still the biggest Rottweiler on the block,” said Jagdish N. Bhagwati, the author of “In Defense of Globalization” and a professor of economics at Columbia. “But if it’s expensive to get products from there to here, it’s also expensive to get them from here to there.”

Op-Ed Columnist
Texas to Tel Aviv         
Published: July 27, 2008

What would happen if you cross-bred J. R. Ewing of “Dallas” and Carl Pope, the head of the Sierra Club? You’d get T. Boone Pickens. What would happen if you cross-bred Henry Ford and Yitzhak Rabin? You’d get Shai Agassi. And what would happen if you put together T. Boone Pickens, the green billionaire Texas oilman now obsessed with wind power, and Shai Agassi, the Jewish Henry Ford now obsessed with making Israel the world’s leader in electric cars?

You’d have the start of an energy revolution.

The only good thing to come from soaring oil prices is that they have spurred innovator/investors, successful in other fields, to move into clean energy with a mad-as-hell, can-do ambition to replace oil with renewable power. Two of the most interesting of these new clean electron wildcatters are Boone and Shai.

Agassi, age 40, is an Israeli software whiz kid who rose to the senior ranks of the German software giant SAP. He gave it all up in 2007 to help make Israel a model of how an entire country can get off gasoline and onto electric cars. He figured no country has a bigger interest in diminishing the value of Middle Eastern oil than Israel. On a visit to Israel in May, I took a spin in a parking lot on the Tel Aviv beachfront in Agassi’s prototype electric car, while his sister watched out for the cops because it is not yet licensed for Israeli roads.

Agassi’s plan, backed by Israel’s government, is to create a complete electric car “system” that will work much like a mobile-phone service “system,” only customers sign up for so many monthly miles, instead of minutes. Every subscriber will get a car, a battery and access to a national network of recharging outlets all across Israel — as well as garages that will swap your dead battery for a fresh one whenever needed.

His company, Better Place, and its impressive team would run the smart grid that charges the cars and is also contracting for enough new solar energy from Israeli companies — 2 gigawatts over 10 years — to power the whole fleet. “Israel will have the world’s first virtual oilfield in the Negev Desert,” said Agassi. His first 500 electric cars, built by Renault, will hit Israel’s roads next year.

Agassi is a passionate salesman for his vision. He could sell camels to Saudi Arabia. “Today in Europe, you pay $600 a month for gasoline,” he explained to me. “We have an electric car that will cost you $600 a month” — with all the electric fuel you need and when you don’t want the car any longer, just give it back. No extra charges and no CO2 emissions.

His goal, said Agassi, is to make his electric car “so cheap, so trivial, that you won’t even think of buying a gasoline car.” Once that happens, he added, your oil addiction will be over forever. You’ll be “off heroin,” he says, and “addicted to milk.”

T. Boone Pickens is 80. He’s already made billions in oil. He was involved in some ugly mischief in funding the “Swift-boating” of John Kerry. But now he’s opting for a different legacy: breaking America’s oil habit by pushing for a massive buildup of wind power in the U.S. and converting our abundant natural gas supplies — now being used to make electricity — into transportation fuel to replace foreign oil in our cars, buses and trucks.

Pickens is motivated by American nationalism. Because of all the money we are shipping abroad to pay for our oil addiction, he says, “we are on the verge of losing our superpower status.” His vision is summed up on his Web site: “We import 70 percent of our oil at a cost of $700 billion a year ... I have been an oil man all my life, but this is one emergency we can’t drill our way out of. If we create a renewable energy network, we can break our addiction to foreign oil.”

Pickens made clear to me over breakfast last week that he was tired of waiting for Washington to produce a serious energy plan. So his company, Mesa Power, is now building the world’s largest wind farm in the Texas Panhandle, where he’s spent $2 billion buying land and 700 wind turbines from General Electric — the largest single turbine order ever. The U.S. could secure 20 percent of its electricity needs from wind alone.

But Pickens knows he’s unique. Unless, he says, “Congress adopts clear, predictable policies” — with long-term tax incentives and infrastructure — so thousands of investors can jump into clean power, we’ll never get the scale we need to break our addiction. For a year, Senate Republicans have been blocking such incentives for wind and solar energy. They vote again next week.

If only we had a Congress and president who, instead of chasing crazy schemes like offshore drilling and releasing oil from our strategic reserve, just sat down with Boone and Shai and asked one question: “What laws do we need to enact to foster 1,000 more like you?” Then just do it, and get out of the way.

Page last updated at
12:52 GMT, Friday, 18 July 2008 13:52 UK

Gas bills 'to top £1,000 a year'
Energy bills could rise by more than 60% within the next few years, a report for the UK's biggest domestic energy supplier Centrica has said.

It said annual average gas bills could rise from £600 to more than £1,000 early in the next decade.

Continuing high oil prices could lead to rises in the cost of both gas and electricity, it added.

The energy minister said predictions of huge rises were "mere speculation" and may not prove to be accurate.

But Malcolm Wicks told Channel 4 News: "Bills are likely to go up. Certainly that is the case. I agree with the person who said that the era of cheap energy is over."

'Two jumpers'

Centrica managing director Jake Ulrich warned that gas prices were likely to continue rising "for some time".

"I think it is going to hit people hard," he said.

"I do think we will see people change their behaviour, I think people will use less energy and I hate to go back to the Jimmy Carter days in the US, but maybe it's two jumpers instead of one.

"I think people will change the temperature they keep the house, they'll be more cognisant of energy waste, they'll buy better appliances."

Gas hob
The price of domestic gas is linked to the price of oil

Centrica Energy managing director Jake Ulrich warns that gas bills are set to rise

He added: "We're part of a world economy and I don't think we can rely on UK production or cheap gas, cheap energy of any sort any more.

"I think it's a reality not only in the UK but in Western Europe and North America. Energy is going to become relatively much more expensive in the future."

BBC News business reporter John Moylan says some people will wonder whether, by publishing the research, Centrica - which owns British Gas - is laying the groundwork for even steeper price rises in the years ahead.

The study - Under the Influence of Oil - was conducted for Centrica by Norwegian-based energy advisers Eclipse.

Eclipse managing partner John King said: "This report signals the significant change which the UK will go through over the next few years as the price of the UK gas market becomes influenced by factors across the globe."

Declining output

The report said that the link between crude oil prices and wholesale gas prices in the UK will get stronger over the next few years as dwindling output from North Sea makes the UK more dependent on imports.

"It looks like the era of cheap energy is over"
Duncan Sedgwick
Energy Retail Association

The UK must now compete with European countries for gas transported by pipeline or bid for tanker loads of liquefied natural gas in international markets where prices are correlated with oil.

"As recently as 2004 we were entirely self-sufficient, but by 2010, half our gas will come from somewhere else," Niall Trimble, managing director of industry consultants the Energy Contract Company, told the BBC.

Oil prices, which hit a record above $147 a barrel earlier this month, have fallen sharply this week to about $133 a barrel but are still twice as high as a year ago.

"The gas spot market has risen very, very sharply in the past year and the spot market is driven by oil," Mr Trimble added.

Price link

The prices of oil and gas have been linked historically because factories used to heat their premises using oil and gas together.

Half of the UK domestic gas supply will come from elsewhere by 2010

The contracts they signed for supply of fuel linked these two fuels to regulate price.

Suppliers say they are tied by the wholesale market, but consumer groups say the price link between oil and gas should no longer exist.

Energywatch described the link as "toxic" and said bills would fall significantly if they were decoupled.

"The government is right to say that the link to oil is a cause of the problems but wrong to say there is nothing that can be done," said Energywatch chief executive Allan Asher.

"The local impact is so catastrophic it should be leading the international drive to end the hugely damaging and entirely unjustifiable link between the prices of gas and oil.

"Rampaging oil prices are a serious and global contagion. That does not mean we should just take to our beds and hope that the fever will pass.

"Government can and should act in those areas where it can have an effect. Action to cut to the price link between gas and oil, action to improve the working of the domestic market, action to help those who can least afford to keep warm."

But the Energy Retail Association (ERA), which represents suppliers, said a reality check was needed, although it pointed out that assistance was available to customers who were struggling.

"Britain is no longer an energy island and we are much more exposed to the global energy markets than ever before," said ERA chief executive Duncan Sedgwick.

"It looks like the era of cheap energy is over."

Fuel poverty

The government estimates that 2.5 million households are in fuel poverty - defined as when more than 10% of household income is spent on fuel bills - but watchdog Energywatch says the figure is more than four million.

Npower: 17.2% rise in January
EDF: 12.9% rise in January
British Gas: 15% rise in January
Scottish Power: 15% rise in February
E.On: 15% rise in February
Scottish and Southern Energy: 15.8% rise in April

The consumer group says that 1,000 a day are being pushed onto more expensive pre-payment meters because they are getting into debt with utility bills.

If prices rise as much as this report predicts, that would make many more people fuel poor, campaigners say.

Rises of the scale suggested would put one in three pensioner households into this sector, according to Gordon Lishman, director general of Age Concern.

"It is totally unacceptable that because of price hikes, many older people may feel forced to cut back on their heating, which could put their health at risk," he said.

He said the government should introduce a fuel voucher scheme for the poorest pensioners and introduce mandatory social tariffs to ensure the poorest customers got the best deal.

Energy regulator Ofgem has been investigating the electricity and gas markets for households and small businesses since February.

It said it had no evidence of anti-competitive behaviour, but was responding to customer worries.

In 2009...
Retail Sales Drop Unexpectedly in April
Filed at 10:25 a.m. ET

May 13, 2009

WASHINGTON (AP) -- Retail sales fell for a second straight month in April, a disappointing performance that raised doubts about whether consumers were regaining their desire to shop. A rebound in consumer demand is a necessary ingredient for ending the recession.

The Commerce Department said Wednesday that retail sales fell 0.4 percent last month. Many economists had expected a flat reading, and the April weakness followed a 1.3 percent drop in March that was worse than first estimated.  Retail sales had posted gains in January and February after falling for six straight months, raising hopes that the all-important consumer sector of the economy might be stabilizing. But the setbacks in March and April could darken some forecasts because consumer spending accounts for about 70 percent of economic activity.

The hope had been that consumers were starting to feel better about spending, helped by the start of tax breaks included in the $787 billion stimulus bill. Households had spent the fall hunkered down in the face of thousands of job layoffs and the worst financial crisis since the 1930s.

The latest retail data ''are yet another illustration that, although the worst is now over, there is still no evidence of an actual recovery,'' Paul Dales, U.S. economist with Capital Economics in Toronto, wrote in a research note.

While anecdotal evidence suggests some improvement in sales in recent weeks, ''to offset the plunge in wealth, the household saving rate still needs to double from the current rate of 4 percent,'' Dales wrote. ''With falling employment hitting incomes, this can only be achieved by a further retrenchment in spending.''

The jobless rate rose to 8.9 percent in April when a net total of 539,000 jobs were lost and 13.7 million people were unemployed, the Labor Department said last week.  Wall Street tumbled after the weaker-than-expected retail sales report. The Dow Jones industrial average lost about 130 points in morning trading, and broader indices also fell.

In a separate report, the Commerce Department said business inventories fell 1 percent in March, a decline that matched economists' expectations. It marked the seventh straight decrease, the longest stretch since businesses cut inventories for 15 straight months in 2001 and 2002, a period that covered the last recession.

Businesses are continuing to cut their stockpiles in the face of declining sales, a development that has intensified the current economic downturn. Still, the reductions in stockpiles held on shelves and in backlots eventually should help businesses get their inventories more in line with reduced sales. If that is the case, any strengthening in consumer demand should lead to increased production.

The April retail sales dip came despite a 0.2 percent increase in auto sales, which fell 2 percent in March. Excluding autos, the drop in retail sales would have been 0.5 percent, much worse than the 0.2 percent gain economists expected.  Sales outside of autos showed widespread weakness last month. Demand at department stores and general merchandise stores fell 0.1 percent and sales at specialty clothing stores dropped 0.5 percent.

Department store operator Macy's Inc. on Wednesday reported a wider loss for the first quarter due partly to restructuring charges. Still, the company expects to see an improvement in sales from its localization efforts beginning in the fourth quarter of 2009, and in the spring of 2010.  Liz Claiborne Inc. reported a first-quarter loss that was worse than Wall Street expected. The apparel maker said its quarterly loss swelled on restructuring charges and a drop in same-store sales stemming from lower consumer spending and an extra week of sales in the year-ago period.

Sales also fell in April at furniture stores, electronic and appliance stores, food and beverage stores and gasoline stations, according to the Commerce Department.

The performance at department stores and specialty clothing stores came as a surprise since the nation's big chain stores had reported better-than-expected results for April. Same-store sales, rose 0.7 percent last month compared with April 2008. It was the first overall increase in six months, according to the tally by Goldman Sachs and the International Council of Shopping Centers.

For April, some mall-based clothing stores saw their declines level off and Wal-Mart Stores Inc., the world's largest retailer, had reported its same-store sales rose 5 percent, excluding fuel, which beat expectations. Same-store sales, or sales in stores open at least one year, is considered a key metric of a retailer's financial health.  The chain store sales report last week showed that Gap, American Eagle and Wet Seal posted smaller sales declines at their established locations than analysts had forecast.  The Children's Place, T.J. Maxx owner TJX Cos. Inc. and teen retailer The Buckle saw bigger gains than expected. But luxury stores again were hard hit as their higher-end wares find fewer takers.

Consumer spending grew 2.2 percent in the first quarter of the year, after posting back-to-back quarterly declines in the last half of 2008.

Economists believe the overall economy, as measured by the gross domestic product, will show a decline of around 2 percent in the current quarter. That would represent an improvement from the steep declines of 6.3 percent in the fourth quarter of last year and 6.1 percent in the first three months of this year, the worst six-month performance in a half-century.

In 2008...
Consumers finding more will buy less
Article Last Updated: 08/05/2008 12:24:36 AM EDT

Economists define inflation as too many dollars chasing too few goods.  To an individual consumer, this means the cost to buy a lot of the goods they need is growing at a faster rate than the cost-of-living increases to their paychecks.

"There's a disconnect, and there's a feeling that you're getting poorer," said Peter M. Gioia, an economist and vice president with the Connecticut Business & Industry Association.

Inflation is one side of the economy the Federal Open Market Committee will seek to balance when it meets today. The other is economic growth, and they pull in opposite directions.

"I think they've got a real conundrum," Gioia said Monday. At its last meeting, Gioia said, committee members were more concerned with keeping inflation in check, but there's been some rough economic sledding since then, including in employment news.

"My guess is, they'll stand pat [on interest rates]," Gioia said, but Chairman Ben Bernanke will have a more contentious meeting to deal with than usual, and there could be dissenting votes, which is unusual.

Edward Deak, an economics professor at Fairfield University, also expects no change to the federal funds rate, which is what the Federal Reserve charges banks on overnight loans. This drives the prime rate, which determines the interest rates for a number of consumer loans.

Deak said he thinks the committee will leave its target for the rate at 2 percent today, and would not be surprised if it kept rates down for the rest of the year, because energy prices are declining.  Monday, the per-barrel price for crude oil fell $3.69, to $121.41 on the New York Mercantile Exchange.

The Federal Reserve's moves to add liquidity to the financial system by providing bailouts and loans to banks and other institutions put more money in than the economy can absorb, Deak said. But, he said, inflation would be worse if the Fed hadn't done this.

The thought among economists, Deak said, is inflation will subside going into 2009, as the housing market troubles get further in the past. He agrees with this in part, but cautioned it is impossible to see the future, including, for example, what might happen to energy prices.  A drop in commodity costs can quickly translate into lower prices, said Gioia, who expects commodities will either continue to grow slowly or drop rapidly. But the question, he said, is when this will happen.

Also Monday, the Commerce Department reported consumer spending dipped by 0.2 percent in June, after removing the effects of higher prices, the poorest showing since a similar drop in February.

The higher prices reflected a big surge in gasoline costs and helped to drive an inflation gauge tied to consumer spending up by 0.8 percent in June, a monthly increase that has been exceeded only once since 1981. This price gauge jumped by 1 percent in September 2005 after Hurricane Katrina shut down oil production along the Gulf Coast.

The big rise in inflation ate up a part of the billions of dollars in stimulus payments delivered during the month. Personal incomes rose by a tiny 0.1 percent in June following a giant 1.8 percent increase in May.

The Dow Jones industrial average fell 42.17 to 11,284.15. The Standard & Poor's 500 index fell 11.30 to 1,249.01, and the Nasdaq composite index declined 25.40 to 2,285.56. The Russell 2000 index of smaller companies fell 12.02 to 704.14.

"It is a monetary event," Todd Martin, of Todd P. Martin Economic Services in Fairfield, said of inflation.

Demand-pull inflation happens when there's too much money and not enough goods and services, Martin said. It happens, for example, when the global demand for oil increases and the supply does not.  The supply-shock type of inflation, he said, happens when a supply interruption drives prices higher, such as when oil prices rose after Hurricane Katrina interrupted production and distribution in the Gulf of Mexico.

Today's situation, Martin said, has a little bit of both types of inflation.

The generally rising price of oil — used in making as well as transporting products — has driven the cost of everything higher, Martin said, while the open-market committee has been cutting rates to bolster economic growth by making it cheaper to borrow money. But this can also result in higher inflation. As money flows to where rates are higher, Martin said, the value of the dollar sinks, and prices rise for imported products, including oil.

Martin also believes the committee will hold rates steady today, given recent economic data. Gross domestic product, the value of goods and services produced in the country, rose only 1.9 percent in the most recent quarter, while the overall inflation rate is about 5 percent. The U.S. Labor Department measures price changes through its Consumer Price Index, which uses the cost of a market basket of goods, including breakfast cereal, milk, rent, women's dresses, prescription drugs, new cars, pet products and haircuts.

The government takes out the cost of food and fuel in figuring its core rate of inflation because those prices are volatile; that rate is about 2.5 percent, Martin said.  But most people, he added, would probably argue their personal inflation rates are much higher. "It's all the T's," he said, "including tuition, taxes, transportation, telecommunications and [my] tummy."

U.S. Report Shows Spike in Energy Costs for Households in New York Region   
Published: July 17, 2008

From May to June, the cost of residential energy use in the New York metropolitan region shot up by 10.8 percent, the biggest increase in any month on record, according to the latest report on inflation from the federal Bureau of Labor Statistics. The price of electricity, which rose more than 15 percent in that period, was the main driver of the overall cost of household energy.

Power bills have been rising fast in the region as utilities have passed on the surging cost of fuel. Locally, the price of fuel oil was more than 75 percent higher than in June 2007. Con Edison said last week that residential customers would be charged about 22 percent more this summer than last.

Over the past year, the cost of household energy has risen more than 18 percent, according to the report. The escalation of energy prices easily eclipsed the fast rise in the cost of food. Prices of groceries and other food consumed at home rose 6.4 percent in the past year, which was the largest change in any 12-month period since June 2004.

The overall rate of consumer price increases in the metropolitan area in the last 12 months was 4.5 percent. That was the highest annual rate of inflation in the region in almost two years but was lower than the national rate for the past year, 5 percent. From May to June, the local inflation rate was 1 percent.

In the metropolitan area, the only prices that have not been rising sharply have been for discretionary items, like clothing, household furnishings and entertainment, the report showed.

The price of clothing in the region dropped more than 5 percent last month and is down by more than 3 percent over the past year, a reflection of the weakening job market, said Michael L. Dolfman, the regional commissioner of labor statistics.

“When the job market is strong, people go out and buy some clothes, interview suits,” Mr. Dolfman said.

Rising rents also contributed to the surge in the cost of living. In the metropolitan area, rents rose 0.7 percent in June, about double the rate recorded in each of the previous seven months. Over the past year, rents have risen 4.8 percent, the report showed.

As I recall from the one college economics course that I took, when we didn't have enough gold to back the dollar, it would "float" - and my economics professor, a former advisor to Presidents, said "I don't want to be around when that happens."

Inflation coming - or is it here already? 

The buck doesn't stop here; it just keeps falling 
By TOM RAUM, Associated Press Writer 

Posted on Jul 6, 9:29 AM EDT

WASHINGTON (AP) -- Things in the U.S. sure are tough. Brother, can you spare a euro? Signs saying "We accept euros" are cropping up in the windows of some Manhattan retailers. A Belgium company is trying to gobble up St. Louis-based Anheuser-Busch, the nation's largest brewer and iconic Super Bowl advertiser.

The almighty dollar is mighty no more. It has been declining steadily for six years against other major currencies, undercutting its role as the leading international banking currency. The long slide is fanning inflation at home and playing a major role in the run-up of oil and gasoline prices everywhere.

Vacationing Europeans are finding bargains in the U.S., while Americans in Paris and other world capitals are being clobbered by sky-high tabs for hotels, travel and even sidewalk cafes. Northern border-city Americans who once flocked into Canada for shopping deals are staying home; it's the Canadians flocking here now.

Everything made in America - from goods to entire companies - is near dirt cheap to many foreigners. Meanwhile, American consumers, both those who travel and those who stay at home, are seeing big price increases in energy, food and imported goods. The dollar has lost roughly a quarter of its purchasing power against the currencies of major U.S. trading partners from its peak in 2002.

Since oil is bought and sold in dollars worldwide, the devalued dollar has made the recent surge in energy prices even worse for Americans, leading to $4 gasoline in the United States. Analysts suggest that of the $140 a barrel that oil fetches globally, some $25 may be due to the devalued dollar.

Further declines in the dollar will add to oil's appeal as a commodity to be traded.

Oil, suggests influential energy consultant Daniel Yergin, is "the new gold."

The limp greenback has had one big benefit to the U.S. economy: Since it makes American goods cheaper overseas, it has helped manufacturers who export and other U.S. based companies with international reach. Exports have been one of the few bright spots in an otherwise darkening U.S. economy.

Franklin Vargo, vice president of international economic affairs at the National Association of Manufacturers, welcomes the dollar slide, as do members of his organization.

"We can see that, when the dollar's not overpriced, that people around the world want American goods and our exports are going gangbusters now," he said.

He doesn't see the dollar as undervalued. He sees it as having being overpriced in the 1990s - and what's happened since as something along the lines of a correction.

Still, Vargo acknowledges the dollar's decline has brought a measure of pain to some consumers. "As the dollar has gone down in value, that has added to the dollar cost of oil. No question. So having the dollar decline is not unambiguously a plus. That's why we say there's got to be a balance there somewhere. What we want is a Goldilocks dollar. Not too strong, not too weak. But just right. And only the market can determine that," Vargo said.

Mark Zandi, chief economist at Moody's, said expanding exports due to a weak dollar are "an important source of growth, but it doesn't add a lot to jobs, it doesn't mean very much for the average American household. For the average American, for the average consumer, these are pretty tough times."

The loss of the dollar's purchasing power and international respect has some experts worrying that the euro might one day replace the dollar as the so-called primary reserve currency. And that could trigger a dollar rout as foreign governments and international investors flee from U.S. Treasury bonds and other dollar-denominated investments.

Making matters worse: The gaping U.S. current-account deficit - the amount by which the value of goods, services and investments bought in the U.S. from overseas exceeds the amount the U.S. sells abroad - and the low levels of domestic savings means that foreigners must purchase more than $3 billion every business day to fund the imbalance.

Since roughly half of the nation's nearly $10 trillion national debt is held by foreigners, mostly in Treasury bills and bonds, such a withdrawal could have enormous consequences.

Yet Washington finds its options limited.

President Bush asserts longtime support for a "strong" dollar, and made that point again Sunday in a news conference in Japan with Prime Minister Yasuo Fukuda. "In terms of the dollar, the United States strongly believes - believes in a strong dollar policy and believes that the strength of our economy will be reflected in the dollar."

But not once in his presidency has the U.S bought dollars on foreign exchange markets - called intervention - to help prop up the greenback. There's no telling where the buck will stop these days, although for the past few weeks it seems to be in a holding pattern. Even as three Bush Treasury secretaries in a row spouted the strong-dollar mantra, the dollar kept tumbling against the euro, the pound, the yen, the Canadian dollar and most other major currencies.

The Federal Reserve could prop up the dollar by increasing interest rates under its control. Increased yields would make dollar-denominated investments more attractive to foreigners. But that could undercut the already anemic economic growth in a frail U.S. economy rocked by soaring fuel costs, falling home prices and rising unemployment - and the lowest reading of consumer confidence in 16 years.

The Fed must do a balancing act between keeping the domestic economy from going into recession and keeping inflation at bay.

Furthermore, no Fed likes to raise rates aggressively in a presidential election year. It seems more inclined to hold interest rates low for now to give financial markets time to recover from the housing meltdown and credit crunch. It did just that in its meeting on June 25, leaving a key short-term rate at 2 percent. The rate reached that level in April after a series of aggressive cuts that brought it down 3.25 percentage points since September. Those cuts helped ease the housing and credit crises - but drove the dollar further down.

In early June, Bush declared before his trip to Europe: "A strong dollar is in our nation's interests. It is in the interests of the global economy." That, plus a warning by Fed Chairman Ben Bernanke that the dollar's weakness was contributing to U.S. inflation, seemed to temporarily break the dollar's tumble. Presidents and Fed chairmen don't usually talk directly about the dollar and exchange rates - leaving that up to the Treasury secretary - and international bankers and investors took note of the high-level attention.

Over the past few weeks, the dollar has remained relatively stable, although it took a dip after the Fed decided to leave rates unchanged. The long slide may not be over.

Still, if the Fed moves to lift rates later this year, as some traders and investors anticipate, it could buttress the dollar and spur an exodus of speculators from the oil market - helping to both prop up the dollar and drive down oil prices. But few economists are sanguine that the economy will improve any time soon.

The other main tool to move the dollar - intervention in currency markets by buying dollars and selling other currencies - is risky.

It would take great sums of money to make any difference. The foreign exchange market is the largest in the world, with over $1 trillion traded each day. Seeing the U.S. trying to prop up the greenback by buying dollars could be taken as a sign of desperation and possibly trigger a renewed round of selling.

Furthermore, there has been little encouragement for such a strategy from finance ministers from the Group of Eight wealthy democracies - Japan, Britain, Germany, France, Italy, Canada and Russia plus the U.S.

Leaders of the eight countries were to meet in Japan beginning Monday, but the falling dollar was not even on the formal agenda. It's too touchy an issue, and the dollar's relative stability over the past few weeks makes it easier for world leaders to steer clear. "People will be talking about it in the corridors," said Reginald Dale, a senior fellow with the Center for Strategic and International Studies.

Treasury Secretary Henry Paulson has suggested that nothing is "off the table" including intervention. But Bush has made statements suggesting he intends to let market forces set exchange rates.

The dollar has fallen so far, it will be difficult to halt or reverse its slide.

U.S. efforts to persuade Saudi Arabia and other major oil-producing nations to increase their production - and help ease pressure on both oil prices and the dollar - have brought scant results.

"There's no magic wand," said White House press secretary Dana Perino. "It's not going to be a problem that we solve overnight."

The impact of the falling dollar is not always visible to the average consumer. Not like the big numbers on gas pumps that give stark evidence of price levels.

But imported goods, from fuel to cars from Japanese automakers and toys from China - are getting more expensive just as U.S. wages are either stagnant or falling.

American companies suddenly look cheap to acquisition-minded foreigners, particularly those based in Europe.

Belgian-based InBev's hostile bid for Anheuser-Busch is a recent example. It has bid $46 billion to acquire the company - a 30 percent premium above where Anheuser's shares traded before the June 11 proposal.

A successful acquisition by InBev would put the last remaining mass-market American brewer in foreign hands. InBev is based in Belgium but run by Brazilians. Anheuser-Busch, which brews both Budweiser and Bud light, holds a 48.5 percent share of U.S. beer sales. Anheuser-Busch rejected InBev's bid, but the Belgian brewer forged ahead, seeking to unseat Anheuser's 13-member board and take its offer directly to shareholders.

If the takeover goes through, it might open the floodgates to other foreign takeovers of American companies.

Some of the dollar's decline depends on hard-to-measure factors, like the psychology of foreign investors.

When the U.S. economy is weakening, many investors stay away. The slide of the dollar has coincided with a long period of relatively low interest rates.

And some of the decline in the dollar's global role "is due to the foreign policy failures of the Bush administration, not just to recent economic developments and policies," suggests Adam S. Posen, deputy director of the Peterson Institute for International Economics and a former economist at the Federal Reserve Bank of New York. In other words, some international investors unhappy with Bush's policy on Iraq or toward other parts of the world might not wish to invest in American companies or buy U.S. bonds.

Still, he argues that the euro is unlikely to replace the dollar as the world's main reserve currency, and that the euro may be at "a temporary peak of influence."

David Wyss, chief economist at Standard & Poor's in New York, says he envisions a day when the dollar and the euro will share billing as the world's reserve currencies.

He predicts that the dollar will remain roughly at its present levels "for a couple years." Still, he says, "We might not be done with this down leg."

Another big problem for the dollar is that the European Central Bank is likely to hike rates while the Federal Reserve stands pat, giving euro-based investments a bigger yield advantage.

"I could see more downward pressure on the dollar, over the course of the summer, not dramatically, if the ECB does raise rates," said Robert Dye, an economist with PNC Financial Services Group. "If it is one and done, pressure will be minimal. But if it's an ongoing pattern of rate increases, there will be more substantial pressure."

A euro now buys as much as $1.55 in the United States.

The dollar has been the leading international currency for as long as most people can remember. But its dominant role can no longer be taken for granted.  Paul Volcker, who headed the Federal Reserve from 1979-87, warned in April that the nation was in a dollar crisis, and that what is happening now reminds him of the early 1970s, when serious inflation erupted as economic growth stagnated.

Then, as now, a weak economy limited the Fed's options. The result was a spiral of rising prices and wages - until the Fed, led by Volcker, suppressed double-digit inflation with huge interest rate increases that pushed the economy into a steep recession in 1982. He recently criticized the current Fed as defending the economy and the market, instead of defending the dollar. Volcker said that will make defending the greenback much harder later.

Energy consultant Yergin, chairman of Cambridge Energy Research Associates, recently told the House-Senate Joint Economic Committee that oil had become "the new gold."

"Oil has become a storehouse of value - reflecting broad global economic trends and imbalances. At the same time, oil is increasingly seen as an asset by financial investors, an uncorrelated alternative to equities, bonds, and real estate," he said.

When the credit crisis broke last summer, the result was a sharp reduction in interest rates by the Fed. That, in turn, accelerated the fall of the dollar.

"Instead of the traditional `flight to the dollar' during a time of instability, there has been a `flight to commodities' in search of stability during a time of currency instability and a falling dollar," Yergin said. "There's a painful irony here: The crisis that started in the subprime market in the United States has traveled around the world and, through the medium of a weaker dollar, has come back home to Americans in terms of higher prices at the pump." 

Oil speculation could wipe out pensions; Investments in crude oil are producing phenomenal results now, but an about-face holds the potential for disaster 
By Matthew Perrone    
Published on 6/28/2008 
Washington - All those speculators getting the blame for driving up the price of oil these days - just who are they? For part of the answer, look in the mirror.

The retirement savings of workers across the country, entrusted to pension fund managers, are being plowed into one of the few investments that has delivered phenomenal returns in recent years.  For decades, futures contracts were mostly traded by commodity producers and the people who used the actual products, such as crude oil, corn and soybeans. Agreeing to a price today for a commodity to be delivered in, say, two months is a way to smooth out price fluctuations for those supplies.

But large investors faced with the threat of inflation have increasingly used them as protection against the falling dollar. That includes pension funds, along with investment banks, mutual funds and private hedge funds.  Research firm Ennis Knupp and Associates says $139 billion had been funneled into energy commodites, primarily crude oil, by the end of March - and it estimates more than half of that is from retirement money.

The investments have paid off. The Standard & Poor's GSCI index, which tracks a basket of commodities, is up 19 percent in the past five years, compared with just 9 percent for the S&P 500 stock index.

The risk is that if the remarkable run in oil and other futures markets reverses course, billions of dollars of retirement benefits could be wiped out.

”A pension fund is supposed to be investing money in secure, stable investments for the benefit of the people whose money they are investing,” said Dan Lippe, an energy analyst at Houston-based Petral Consulting Inc. “When we hit that wall and things start falling, they will fall very fast, and the pension funds that invested in commodities will see a tremendous loss of value.”

The retirement system for public employees in California, the largest in the nation, has $1.3 billion invested in commodities. Most of it tracks the S&P commodity index.  That's still just one-half of 1 percent of the fund's total $240 billion in assets, said Michael Schlachter, who advises the California pension fund. He said a collapse in oil or other commodity prices would have little effect on retirees.

Still, a growing chorus of experts is convinced retirement investments are enough to distort prices.  Billionaire George Soros, the airline industry and the International Monetary Fund are all pressuring Congress to curb speculation by large investors. Democrats in Congress say they hope to vote on restrictions by August.

”Your pension fund manager may be using your retirement money to drive up the price of oil,” said Rep. Bart Stupak, D-Mich., at a hearing earlier this week on speculation in commodities. “What would happen if pension fund managers decided to increase their commodity investment by another 20-fold?”

Speculators put money into commodity markets simply to make money on their investments - unlike commercial investors, who are actually buying or selling orders for physical goods.  Energy analysts say it's unclear what effect speculators have had on oil prices, which climbed briefly to a new record above $142 on Friday before falling back.

But Stupak and other lawmakers have already dashed off more than a dozen proposals to rein in commodity trading, including limiting how many contracts speculators can hold and closing loopholes that allow them to skirt regulations.

Sen. Joe Lieberman, D-Conn., proposed banning pension funds and other large investors from commodities altogether. He dropped the idea after vigorous opposition by an association of public and private pension funds.

Schlachter, who is also managing director for investment consulting firm Wilshire Associates, called the idea “horrendously bad.” He said pension funds should not be compared to Wall Street speculators, who assume huge risks every day to maximize returns.

”The pension plans we work with are using commodities only as a long-term hedge against inflation,” he said.

Unlike the stock market, where there are a limited number of shares for each company, futures markets have no limits on contracts available. As long as a buyer can find a seller for each contract, investment opportunities are virtually unlimited.  Critics say retirement funds that accumulate contracts are artificially driving up commodity prices. In the case of oil, that means higher gas prices and more expensive food and other goods.

”If they're going to be in the futures market they need to trade rather than take this buy and hold strategy,” said Michael Masters, portfolio manager of hedge fund Masters Capital Management. “That is the worst possible thing for the futures market.”

Masters and other experts told members of Congress this week that eliminating excessive speculation could drive oil prices down to about $65 a barrel, less than half the current price.  Retirement funds have suffered at the hands of the market before. In 2002, when the stock market swooned after the dot-com crash and 9/11, retirement assets dropped $7 billion, losing 8 percent of their value. 

Oil Prices Raise the Cost of Making a Range of Goods
Published: June 8, 2008

Surging oil prices are beginning to cut into the profits of a wide range of American businesses, pushing many to raise prices and maneuver aggressively to offset the rising cost of merchandise made from petroleum.

Airlines, package shippers and car owners are no longer the only ones being squeezed by the ever-mounting price of oil, which shot up almost $11 a barrel on Friday alone, to $138.54, a record.

Companies that make hard goods using raw materials derived from oil, like tires, toiletries, plastic packaging and computer screens, are watching their costs skyrocket, and they find themselves forced into unpleasant choices: Should they raise prices, shift to less costly procedures, cut workers, or all three?

The Goodyear Tire and Rubber Company is trying to adapt. Its raw material of choice now is natural rubber rather than synthetic rubber, made from oil. To sustain profits, it is making more high-end tires for consumers willing to pay upwards of $100 to replace each tire on their cars.

These steps have not been enough, however, particularly now that the cost of natural rubber is also rising sharply, along with that of many other commodities. So Goodyear has raised the prices of its tires by 15 percent in just four months.

“Our strategy is to raise prices and improve the mix to offset the cost of raw materials,” said Keith Price, a Goodyear spokesman. “No one has predicted how long we can continue to do that.”

The sense that many companies may be hitting a wall is palpable. Corporate profits peaked last spring and have shrunk since then, Moody’s reports, drawing on Commerce Department data.

The housing crisis and the weakening economy are big reasons, but oil prices are adding greatly to the pressure on profits as retailers fail to pass along higher prices to consumers. That helps to explain why expensive oil has not yet pushed up the inflation rate.

So far this year, the nation’s employers have been cutting jobs at an accelerating pace, particularly last month, when the unemployment rate jumped to 5.5 percent from 5 percent. But with the vise on corporate profits tightening and the price of oil continuing to climb, more dire action, including job cuts and higher prices, may be in store, economists say, although there is still room to avoid such steps.

“Companies came into this period with extraordinarily high profit margins,” said Edward McKelvey, chief domestic economist at Goldman Sachs, “and some of the surge in raw material costs will be absorbed by lowering those profits.”

Still, the prevailing attitude that the economy could just keep absorbing higher oil prices is being tested — for the first time in nearly 30 years. Adjusted for inflation, a barrel of crude is now more expensive than it was in 1980, the previous peak.

“The conventional wisdom a couple of years ago was that oil did not have that much leverage over the economy,” said Daniel Yergin, chairman of Cambridge Energy Research Associates. “But now it plainly does. People are suddenly paying much more attention to their energy costs and trying to figure out how to manage them.”

Goodyear has kept its head above water in part by passing along some of the higher prices to dealers. The dealers, however, have not been able to pass along all of those increases to consumers and are absorbing the difference in lower profits.

Since last spring, the average profits of the nation’s corporations — from behemoths like Goodyear to small neighborhood retailers — have declined at an annual rate of nearly 6 percent, government data show.

Even companies that have been performing well in the economic downturn are sounding notes of caution. Take Costco, the discount retail chain, which offers a wide array of consumer goods, food, wine, furniture, appliances, beauty aids and much more.

Costco’s profit was up in the first quarter, but James D. Sinegal, the chief executive, says he is “starting to be confronted with unprecedented price increases” for the merchandise that Costco buys to stock its stores. His first response has been to buy in extra large quantities so that he has stock on hand to carry him through subsequent price increases.

“We just made a big purchase of Tumi luggage,” Mr. Sinegal said.

Procter & Gamble finds itself in a similar predicament. For its fiscal year beginning next month, it expects to spend an additional $2 billion on oil-based raw materials and commodities. That is double last year’s increase, and it is carved from total revenue of just under $80 billion.

Price increases have helped to offset this cost. They have averaged nearly 5 percent for paper towels, bath tissues and diapers, all made with chemicals derived from oil, said Paul Fox, a company spokesman.

Natural oils have been substituted for ingredients made from petroleum; for example, palm oil now goes into a variety of laundry soaps. But like rubber, the cost of palm oil and other natural commodities is rising.

Trying to hold down raw material costs, Procter & Gamble has resorted to “compacting” a few laundry products, Mr. Fox said, so that the same amount of detergent fits into smaller and less costly containers made of plastic, which is derived from oil.

Still, the company’s operating profit edged down to 20.1 percent of revenue in the first quarter, from 21.9 percent in each of the two previous quarters. “That 20.1 percent was down, but it was an improvement on the advance guidance we had given for that quarter,” Mr. Fox said.

No business in America produces more of the oil-based ingredients that go into the nation’s products than the Dow Chemical Company, based in Midland, Mich. From Dow’s petrochemical operations come the basic ingredients of a wide variety of plastic bottles and packaging, including numerous containers once made of glass or tin.

Indeed, paint, computer and television screens, mobile phones, light bulbs, cushions, paper, mattresses, car seats, carpets, steering wheels and polyesters are all made with ingredients that Dow and other chemical companies refine from oil and natural gas.

Dow normally raises prices piecemeal. Last month, though, the surge in the cost of oil and natural gas, the company’s principal raw materials, produced a rare across-the-board price increase of as much as 20 percent.

“We have taken out head count, automated, been very diligent on cost control,” said Andrew Liveris, Dow’s chairman and chief executive, “but these surges in energy prices are just one surge too many.”

Dow’s sweeping price increases will probably have a domino effect, resulting in higher prices or, more likely, shrinking profits, analysts say. Constrained by the weak economy and fewer wage earners among their customers, the nation’s retailers have so far not been able to pass on to consumers much of the rising cost of products that depend on oil. The Consumer Price Index, minus food and energy, is barely rising.

“One of the surprises,” said Patrick Jackman, a senior economist in the consumer price division of the Bureau of Labor Statistics, “is that the oil price surges of the 1970s passed through fairly quickly into consumer prices, and this time that is not happening.”

No more "big box" development?
Do Gas Prices Mean Business Bets Are Off? 
New London DAY editorial
By Paul Choiniere    
Published on 6/8/2008 

After the state legislature recently approved “An Act Concerning Energy Scarcity and Security,” its chief supporter, Rep. Terry Backer, warned that the United States is “standing at the doorstep of a sea change in energy and our consumption of it.”

”Everything changes from here on out and we must be prepared,” said the Stratford Democrat.

Backer is among a group of “peak oil” advocates that contend oil production has or soon will peak while demand globally continues to rise. The result is the high oil and gas prices we have all seen, with outright shortages likely to follow, according to the peak-oil crowd.

The Act Concerning Energy Scarcity and Security requires the Office of Policy and Management to do some future planning that takes into account rising costs and potential supply disruptions.

But if “everything changes from here on out,” they certainly did not get the message in Lisbon, population 4,200, where construction of a second major “big box” development has started off Exit 85 of Interstate 395.

The trees already stripped away, earthmoving equipment is now at work flattening a hill to make way for the “Crossing at Lisbon.” Expected to open next summer, it will be built directly across Route 12 from the Lisbon Landing shopping center.

The major Lisbon Landing anchor stores are a Wal-Mart and Home Depot. Brian Grassa, director of development for Cedarwood Development Inc., said Crossing at Lisbon has commitments from Target and Best Buy as well as a Chili's restaurant. A Lowe's Home Improvement store is also potentially in the mix.

It appears the Akron, Ohio development company is confident that nothing is changing from here on out. Despite $4-plus per gallon gasoline and home heating oil, the developer and big boxers planning to open more stores in Lisbon are confident that folks will drive from the small towns scattered around northern New London and southern Windham counties to yet a second Lisbon shopping center. And, after paying for gas, that they will have enough money left to shop when they get there.

The fact that sales have nosedived for both Home Depot and Lowes does not appear to overly concern the developer. Nor does the reality that two large stores at Lisbon Landing will soon sit vacant. The Old Navy store closed up shop about a year ago. Linen's 'n Things is now running a going-out-of-business sale. Grassa pointed to financial problems for both chains nationally, not locally, for the closings. While true, both chains did keep outlets open elsewhere, but chose to shutter the Lisbon stores.

The reality that many people refuse to accept is that high energy prices are changing everything, Backer said. Disposable incomes are disappearing, credit cards are getting maxed and people are worried about affording enough gas to get to work and enough heating oil to stay warm in the winter, “not shopping for stuff they don't need,” Backer said.

Time will tell who is right. If the oil grows scarcer and more expensive, and if the economy falters as a result, there will be a lot of empty big boxes. But many seasoned business people continue to invest money, confident that consumers will continue buying.

Yet it does seem strange to me that while men stand on one side of Route 12 with signs alerting passersby of a going out of business sale, bulldozers on the other side of the road are making way for yet more stores. How much further can people in the area continue stretching their pocketbooks?

I guess we'll find out.

Agency Calls for ‘Energy Revolution’
Published: June 7, 2008

BRUSSELS — The International Energy Agency, a group that advises industrialized countries, said Friday in a report that investments of at least $45 trillion might be needed over the next half-century to prevent energy shortages and greenhouse gas emissions from slowing economic growth.

Nobuo Tanaka, the agency’s executive director, called for “immediate policy action and technological transition on an unprecedented scale.”

Mr. Tanaka said the world would “essentially require a new global energy revolution which would completely transform the way we produce and use energy.”

The report sends a strong warning that the combination of growing demand for energy in countries like China and India, the dangers of climate change and the scarcity of resources are going to require huge shifts in the global economy. Countries will have to overcome objections to building nuclear power plants and to storing large amounts of carbon dioxide underground or beneath the ocean floor.

The report also described emissions-cutting pathways that broadly match the advice of some leading scientists who have recommended cutting emissions in half by 2050 as a way of avoiding devastating climate change. Environment ministers from the Group of 8 industrialized countries have backed a 50 percent target. The ministers said governments should endorse that target at a G-8 summit in July.

Among the International Energy Agency’s chief messages is that current policies are unsustainable with carbon dioxide emissions expected to rise 130 percent and demand for oil expected to rise 70 percent by 2050. Tanaka warned that oil demand could be five times the current production of Saudi Arabia by that time.

A crucial problem is that the rising cost of oil and gas is prompting a switch to coal, particularly in India and China. Coal is cheap and plentiful but its increasing use is contributing to the accelerating growth in emissions of carbon dioxide.

The International Energy Agency offers advice on energy policy to its 27 member nations, including the United States, Canada, Japan, Australia, New Zealand, South Korea and most of Europe. It recommended taking measures now that would ensure that carbon emissions are down to at least present-day levels by mid-century by, among other strategies, using energy efficiency measures and reducing emissions from power generation.

The agency also mapped out a second situation aimed at bringing emissions to half their current levels by mid-century by emphasizing technologies and strategies for “weaning the world off oil.” The agency estimated the cost of that process at $45 trillion, or 1.1 percent of annual global output, over the period to 2050. Investments of $100 billion to $200 billion would be needed each year over the next 10 years, rising to $1 trillion to $2 trillion each year in the coming decades.

To reach the goal of halving emissions, it said, among the most important measures would be equipping more than 50 gas and coal power plants each year with equipment to capture and sequester carbon dioxide. There would also be a need for 32 new nuclear plants each year, while the number of wind turbines would need to increase by 17,500 a year.

Other strategies included accelerating the development of solar electricity and so-called second-generation biofuels that do not compete with food for farmland.  The report acknowledged that numerous objections to these technologies would need to be overcome, in particular local opposition to building nuclear power plants and long-term nuclear waste repositories.

But the most difficult and costly step, it said, would be reducing carbon emissions from transportation at a time when the use of cars, airplanes and ships would still be growing rapidly but few technologies would exist to limit emissions from those sources.

Even so, Mr. Tanaka sounded an optimistic note, saying that although a global energy technology revolution “will be a tough challenge” it was “both necessary and achievable.”

Right near Benson Mines - and Star Lake! 
Revived Paper Mill Brings a Town Back With It
Published: June 5, 2008

NEWTON FALLS, N.Y. — Eight years ago, a paper mill closed in this remote corner of the western Adirondacks, taking with it more than 100 jobs. Most of the 75 houses in this speck of a hamlet a two-hour drive from Canada soon fell into disrepair, their frames thrashed by weather and hardship.

Some families moved wherever they could find work. Others were stuck with homes they could not sell and long commutes over desolate country roads. The nearest gas station closed, the local hospital struggled to fill its 20 beds, and the volume of mail at the one-person post office shriveled by half, as if the place had been given up for dead.

It is a familiar story: industry leaves, jobs disappear, hardscrabble town is left adrift. Not Newton Falls. As if in a fairy tale, the shuttered mill has come back to life, thanks to a healthy dose of luck, a longtime paper executive’s willingness to take a chance, and the unbending commitment of two men to the place where they had labored for two decades.

For eight months now, the mill has churned out an average of 200 tons of coated paper a day, or 2,000 feet per minute, 54 percent more than it did before it went dark. It runs 24 hours a day, every day, making paper that has been used in Jessica Seinfeld’s cookbook, Wal-Mart newspaper inserts, a work-wear manufacturer’s catalog and biology textbooks full of colorful diagrams.

The mill received close to 600 applications last summer for 77 jobs; 104 people work there now, up from 97 when it reopened. About half had toiled at the mill before it closed and left other jobs to come back.

Among them are Andy Leroux and Levi Durham Jr., longtime friends who have lived their whole lives in these parts. Many credit them with saving the mill — and, along with it, Newton Falls. While the mill was closed, Mr. Leroux and Mr. Durham lubricated machines, dusted crevices and corners, shoveled snow and occasionally called former co-workers to ask whether they would be willing to return were the mill to make paper again.

They also gave tours to prospective buyers. Those who seemed interested in reviving the plant — they were in the minority — found it heated in the winter. Those who wanted to tear it apart and sell the machines overseas did not.

“We had to do what we had to do to get our mill going again,” shrugged Mr. Leroux, 44, a third-generation mill worker.

Mr. Durham, 51, the first in his family to work there, added: “If you were there the day this place closed, you had people working their hearts out to make the best paper possible. We knew we had something special.”

The mill in Newton Falls was one of about 600 paper mills operating in the United States when it closed in the fall of 2000. Nearly 150 of them have closed since, according to Kenneth Patrick, an analyst with the Technical Association of the Pulp and Paper Industry, leaving holes in communities like Great Barrington, Mass.; Augusta, Ga.; and Lufkin, Tex. Many more, Mr. Patrick said, have merged in an effort to stave off competition from China, India and Latin America, where the cost of raw materials and labor is low and demand for paper is rising.

“It’s extremely unusual for a mill that had been shut down for a while to start up again,” he said.

The Newton Falls paper mill was profitable until its close, but its owner at the time, Appleton Coated of Kimberly, Wis., decided to consolidate its manufacturing operations closer to home.

The new owners, partners from Canada and the United States, said that the business was too young to turn a profit, but that it was expected to start making money before the year’s end.

Opened in 1894 by a family named Newton, the mill had several owners before Appleton, which spent tens of millions of dollars upgrading the plant before closing it on Oct. 23, 2000.

In the two years that followed, the mill’s blue-and-white concrete buildings remained dark and unheated. Pipes froze and cracked during ruthless northern New York winters. A roof caved in under several feet of snow.

When the mill closed, Mr. Leroux and Mr. Durham found jobs at another paper-making plant in the village of Deferiet, 44 miles west. Then that plant closed in 2001. For a while, Mr. Leroux did construction work on summer homes in the area, while Mr. Durham ran his father’s auto repair shop six miles from the mill, in the town of Fine.

Not a day would go by, they said, when they did not think about the Newton Falls mill.

One day, Mr. Leroux said, “we decided to stop thinking about our mill and actually do something to save it.” They approached the owner at the time and offered to maintain the mill, with the help of two other former employees, for $35,000 a year each.

That was in 2003.

For four years, Mr. Leroux, Mr. Durham and the two others worked 12-hour shifts tending to several interconnected buildings totaling 400,000 square feet on 4,000 acres. They would turn the machines on and off, oil them and replace defective parts, tracking maintenance work in log books.

When a light bulb burned out, they changed it. When too much dust gathered, they cleared it out with an industrial leaf blower. When snow accumulated on the roof, they removed it, sometimes in temperatures of 20 degrees below zero and winds gusting at 30 miles per hour.

“In our hearts, we never considered the mill closed,” Mr. Durham said. “To us, the mill was idle. There’s a difference between closed and idle.”

Meanwhile, a cadre of small-business owners, retirees, teachers and elected officials reached out to whoever they thought could help in a desperate bid to find a buyer.

“When we’d hear that someone was interested, we’d get their names and call them up and invite them over for a tour,” said Christopher L. Westbrook, director of a state forestry school nearby.

Mr. Leroux and Mr. Durham were in charge of the tours. They would look up potential buyers on the Internet in hope of determining their intentions, and listen carefully to the nature of their questions.

If a visitor seemed more attracted to the mill’s heavy equipment than to the operation as a whole, they turned off the heat or kept some of the lights off where machines were stored, forcing the visitor to inspect them with flashlights.

“We were doing cover-ups, yup,” recalled Mr. Leroux, who started in the mill’s boiler room and is now its vice president of operations.

“Whatever it took,” added Mr. Durham, who started as a machine operator and is now maintenance supervisor. “We didn’t want to see our mill sold piecemeal.”

In 2006, someone suggested that they reach out to Dennis L. Bunnell, who grew up in Buffalo and had once served as the mill’s president. After a series of meetings, studies and consultations, Mr. Bunnell and three partners joined with Scotia Investments, a family-owned holding company from Canada, to buy the mill for about $20 million.

They began making paper again on Sept. 7, 2007. The mill has a new name, Newton Falls Fine Paper, and a new mission statement: “Restore Newton Falls to its role as a dynamic force in the paper industry and the economy of the western Adirondacks.”

“All there is to a mill is machinery and people,” Mr. Bunnell said in an interview. “What makes a difference in this case is that the people who work here truly care about this mill.”

The paper made here comes from maple, birch and spruce trees. The fiber is bleached to keep the paper from yellowing when exposed to sunlight. It is then soaked, stretched, smoothed and steamed to remove the moisture in a 300-foot-long machine. The floor shudders and the machine whines, beeps and purrs as it spits out sheets hot to the touch. The air smells like candied popcorn.

Newton Falls lies in southern St. Lawrence County, within the town of Clifton, which has about 800 residents scattered over 150 square miles (the census does not keep track of the population of places as tiny as Newton Falls). It is 125 miles northeast of Syracuse, a solid seven-hour drive from New York City.

It is a picturesque place of rivers, lakes and a multitude of trees. Median family income hovers around $38,000, about $12,000 below the national median.

An iron-ore mill outside Newton Falls employed 1,200 people in its heyday, but it closed in 1978. Now the Newton Falls Fine Paper company is one of the largest private employers in the county.

Pay ranges from $15 an hour for jobs like packaging the paper for shipment to $22 an hour for maintenance crews, Mr. Bunnell said. Workers have medical and dental insurance and a 401(k) plan, many for the first time.

Raymond Fountain, director of the St. Lawrence County Office of Economic Development, said the mill “is a huge stabilizing factor in the community,” adding about $18 million a year to the economy, including a $4 million payroll.

Since the mill’s reopening, there have been modest improvements in and around Newton Falls, with the best news being that things have improved at all. The owner of a general store a mile from the mill expanded his business, and a motel that used to be open only during the summer is now open year-round.

On the quarter-mile stretch of County Road 60 linking Newton Falls to the mill, homeowners like Kimberly Provost are again investing in repairs: she recently bought an above-ground pool to replace the battered one that has sat for years in her backyard. A few doors down, Sylvia Bullock, whose late husband retired from the mill after 43 years, said the home she bought for $10,000 three years ago was recently assessed at $21,000.

“The mill and all the other positive changes you see here, I think they say something about the kind of people we are,” Ms. Bullock, 77, said from her newly built deck, the mill’s smokestack looming in the background. “We’re hard workers, we’re stubborn and even when it looks like the whole world is against us, we don’t give up.”

At Exxon’s Can’t-Miss Meeting  
Published: May 31, 2008

There were storms around New York on Tuesday evening, and we sat on the runway for hours. I was heading to Dallas for Exxon Mobil’s annual meeting, which had become this year’s “can’t-miss” meeting, especially if you are a reporter.

For the first time ever, several members of the Rockefeller family were going to use the annual meeting to publicly criticize the company founded by their patriarch, John D. Rockefeller. His great-granddaughter, Neva Rockefeller Goodwin, the co-director of the Global Development and Environmental Institute at Tufts University, was planning to offer several shareholder resolutions concerning global warming on behalf of a handful of family members. A larger group of Rockefellers was backing a nonbinding resolution, put forth by the shareholder activist Robert Monks, calling on the company to separate the roles of chairman and chief executive. Meanwhile, Rex W. Tillerson, Exxon Mobil’s imposing C.E.O. (and, lest we forget, board chairman) was going to give a rare press conference after it was over.

Waiting for my plane to go wheels up, I pulled out The New York Review of Books; an article by the great physicist Freeman Dyson had caught my eye. It was a review of two books about global warming. Mr. Dyson argued that while there is clear scientific evidence showing that the concentration of carbon dioxide in the atmosphere has risen steadily, it does not necessarily mean that the end is nigh. Mr. Dyson talked soberly about the economic trade-offs involved in various solutions to cut carbon emissions, and agreed with the Yale economist William Nordhaus, author of one of the books under review, that some of the most radical solutions (especially some from Al Gore) would be “disastrously expensive,” and would damage the global economy.

Even more striking was his view that the science surrounding the havoc global warming would one day wreak on the planet was far from settled. He posed the real possibility that a low-cost solution would eventually manage the problem. He concluded that environmentalism had become “a worldwide secular religion ... holding that we are stewards of the earth”— which for the most part was a good thing.

“Unfortunately,” Mr. Dyson added, “some members of the environmental movement have also adopted as an article of faith the belief that global warming is the greatest threat to the ecology of the planet. That is one reason why the arguments about global warming have become bitter and passionate. Much of the public has come to believe that anyone who is skeptical about the dangers of global warming is an enemy of the environment.”

So bitter and passionate, it turns out, that global warming can divide families. Even the Rockefellers.

Last year was another fabulous year for Exxon Mobil. It made a record $40.6 billion in profits. It replaced its reserves, no easy task with oil so hard to find and extract these days. Its safety record was stellar. Its return on capital was an astounding 32 percent, another record. It spent $21 billion in capital investments while also paying out $36 billion on a combination of dividends and stock buy backs. It share price rose 22 percent.

You can argue, as many do, that this performance is nothing more than a case of holding out the umbrella while it rains money — that it’s all due to the dramatic run-up in the price of oil. But it’s a lot more than that. Exxon Mobil’s competitors are operating in the same environment, and they can’t touch its performance.

As he laid out the company’s results during a 45-minute speech that opened the annual meeting, Mr. Tillerson kept using the word “discipline.” “By maintaining discipline and rigor in everything we do” the company would continue to outperform the competition, he said, for instance. Discipline and rigor are indeed at the heart of the company’s engineering culture, and have a lot to do with why Exxon Mobil is so successful. When you’re spending literally billions of dollars building a refinery in China, as Exxon Mobil is, you can’t afford to be sloppy. “I wish our government were run as efficiently as Exxon Mobil,” said Fadel Gheit, an oil analyst with Oppenheimer & Company.

That discipline is drummed into Exxon Mobil executives very early — which gets at another characteristic of the company: it is extremely insular. Like most Exxon Mobil executives, Mr. Tillerson signed on in his early 20s and never left. And that bugs its critics. Many of those who spoke out against the company at the annual meeting — including Ms. Goodwin — talked about the need to bring “fresh perspectives” to the board. That, she said, was why she and other Rockefellers supported the resolution to bring in an independent board chairman.

“Their strength is that they are an inward-looking company with discipline,” said Mr. Monks, who has sponsored his independent chairman resolution for a half-dozen years. “Their weakness is that they are an inward-looking company with discipline.” He’s got a point; the same qualities that make Exxon Mobil the world’s best producer of oil and gas also cause it to be a terrible articulator of its own message. Its executives really only feel comfortable when they’re speaking to each other.

But let’s be honest here: gaining fresh perspective is hardly the primary reason the dissident Rockefellers got behind Mr. Monks’s resolution. The Monks proposal was a stalking horse for the issue that matters most to them: global warming. Most of the members of the family who are critical of Exxon Mobil are staunch environmentalists, who feel that “their” company should be doing more — much, much more — to help the world move to alternative sources of energy. Here they are on far shakier ground.

During his presentation to shareholders, Mr. Tillerson laid out Exxon Mobil’s core belief: despite climate change concerns, and efforts to come up with alternatives to oil, “there would be enormous growth in energy demand,” he said. And, he added, oil and gas would still supply over 60 percent of that demand in the year 2030. When it was her turn to speak, Ms. Goodwin passionately objected to that forecast.

Exxon Mobil’s projections “depend on two critical but untested assumptions,” she said, reading from notes. “First, developing countries will enjoy strong economic growth. And second, global consumption of oil and gas will significantly increase. This second assumption is wrong.” In her view, there was a high likelihood that new technologies would reduce the world’s reliance on oil and gas — and Exxon Mobil would suffer because of its stubborn refusal to spearhead new technologies back when it still had a chance.

What’s more, she added, if Exxon Mobil turned out to be right, and demand for oil and gas continued to grow for the next quarter century and beyond, that would bring about its own set of disastrous results — namely the environmental consequences of global warming. “It will cause weather disasters,” she predicted. “It will have a huge and harmful effect on the global economy upon which Exxon Mobil depends.”

What she and the other family members seem to really want is for Exxon Mobil to begin taking steps to transition away from the thing it does better than any entity in the world: find and produce oil. But where is it written that oil companies should be the ones to lead us into the promised land of alternative energy? The world doesn’t work that way. Transforming technologies will most likely come from innovators who have never set foot in an oil company, and don’t have an oil company’s baggage. Expecting Exxon Mobil to move the world to an oil-free future is a little like expecting buggy-whip manufacturers to invent the automobile.

What the Rockefellers were trying to do at the annual meeting is push Exxon Mobil toward their belief system — their global warming religion — and that is a place the company is unwilling to go. Its hard-headed view is that it is doing the most good for the most people by finding the oil and gas the world is going to need for the foreseeable future — and that global warming is not likely to lessen that need. Realistically, I find that notion difficult to disagree with.

As for Ms. Goodwin’s prediction of weather catastrophe, it could certainly happen. But it might not. We just don’t know enough yet. It would be lovely if we had new technologies that made the world much less reliant on oil but that’s not likely. India and China, just for starters, desperately need more energy to fuel their ambitions, and it is hardly fair to ask them to halt their economic progress — nor are they likely to do so. The best we can hope to do is dampen our need for oil — with such things as hybrid cars — by making, continual, small, practical breakthroughs. Believe it or not, Exxon Mobil has scientists working on precisely those kinds of practical breakthroughs.

In the end, most shareholders agreed with Exxon Mobil. And why not? If a company’s stock price is its report card, then Exxon Mobil is getting straight A. Ms. Goodwin’s primary resolution, calling for the company to produce a climate change report, got only 10.4 percent of the vote. Mr. Monks’s resolution got 39.5 percent — about the same as last year. The Rockefeller support made zero difference.

At his press conference afterward, Mr. Tillerson was asked about global warming. “My view is that climate change policy is so important to the world that to not have a debate on it is irresponsible. We don’t know everything about it. Nobody has this figured out. Anybody who tells you they have this all figured out is not telling you the truth. We have to understand that climate change policy, whatever it turns out to be, is going to hurt some people. But let’s at least have an open debate about it, so everybody knows what the facts are.”

Would that the Rockefellers had said something as sensible — and as disciplined — as that. Maybe next year.

Rockefellers Seek Change at Exxon
Published: May 27, 2008

HOUSTON — The Rockefeller family built one of the great American fortunes by supplying the nation with oil. Now history has come full circle: some family members say it is time to start moving beyond the oil age.

The family members have thrown their support behind a shareholder rebellion that is ruffling feathers at Exxon Mobil, the giant oil company descended from John D. Rockefeller’s Standard Oil Trust.

Three of the resolutions, to be voted on at the company’s shareholder meeting on Wednesday, are considered unlikely to pass, even with Rockefeller family support.  The resolutions ask Exxon to take the threat of global warming more seriously and look for alternatives to spewing greenhouse gases into the air.

One resolution would urge the company to study the impact of global warming on poor countries, another would encourage Exxon to reduce its emissions and a third would encourage it to do more research on renewable energy sources like solar panels and wind turbines.

A fourth resolution, which the Rockefellers are most united in supporting, is considered more likely to pass. It would strip Rex W. Tillerson of his position as chairman of Exxon’s board, forcing the company to separate that job from the chief executive’s job.  A shareholder vote in favor of that idea would be a rebuke of Mr. Tillerson, who is widely perceived as more resistant than other oil chieftains to investing in alternative energy.

The Rockefellers say they are not trying to embarrass Mr. Tillerson, also Exxon’s chief executive, but think it is time for the company to spend more of its funds helping the nation chart a new energy future.

“Exxon Mobil needs to reconnect with the forward-looking and entrepreneurial vision of my great-grandfather,” Neva Rockefeller Goodwin, a Tufts University economist, said in a statement to reporters.

“The truth is that Exxon Mobil is profiting in the short term from investments and decisions made many years ago, and by focusing on a narrow path that ignores the rapidly shifting energy landscape around the world,” she added.

The resolution on Exxon’s chairmanship was offered for several years before the Rockefellers became publicly involved and last year was supported by 40 percent of shareholders who voted. Royal Dutch Shell and BP already separate the positions of chairman and chief executive, as do many other companies.

“You need a board asking the tough questions,” Peter O’Neill, a private equity investor and great-great-grandson of John D. Rockefeller, said in an interview. “We expect the company to figure out how in this changing world to adjust.”

Kenneth P. Cohen, vice president for public affairs at Exxon, said the shareholders pushing the resolutions were “starting from a false premise.” He added that the company was already concerned about “how to provide the world the energy it needs while at the same time reducing fossil fuel use and greenhouse gas emissions.”

Fifteen members of the family are sponsoring or co-sponsoring the four resolutions, but it appears that some have much more solid support in the sprawling family than others.  Mr. O’Neill said that 73 out of 78 adult descendants of John D. Rockefeller were supporting the family effort to divide the chief executive and chairman positions. The goal of that resolution is to improve the management of the company, which could strengthen its environmental policies and improve more traditional pursuits like exploring more aggressively for new oil reserves.

David Rockefeller, retired chairman of Chase Manhattan Bank and patriarch of the family, issued a statement saying, “I support my family’s efforts to sharpen Exxon Mobil’s focus on the environmental crisis facing all of us.”

The Rockefeller family has always been identified with oil and the legacy of Standard Oil, but for several generations, it has also been active in environmental causes and acquiring land for preservation. John D. Rockefeller’s grandsons devoted themselves to conservation issues, and Rockefeller charitable organizations have long promoted efforts to fight pollution.

Ms. Goodwin, one of the most vocal Rockefellers on the environment today, is co-director of the Global Development and Environment Institute at Tufts.

In recent years, family members have quietly encouraged Exxon executives to take global warming seriously, but their private efforts did not go far. Until now, they have avoided publicity in their efforts, and the youngest Rockefeller generations have generally shunned attention.  Exxon executives said the company spent $2 billion over the last five years on programs to reduce emissions and improve efficiencies and had plans to spend $800 million on similar initiatives over the next three years. They said the company reduced the release of greenhouse gases from its operations last year by 3 percent, and it was working with Stanford to research biofuels and solar and hydrogen energy.

Since taking over the company two years ago, Mr. Tillerson has gradually shifted the company’s positions away from those of his predecessor, Lee R. Raymond, who was considered a skeptic on the science of global warming.

But with gasoline prices soaring and concern growing over global warming, Exxon, the biggest of the investor-owned oil companies, is a target for politicians and environmentalists. Chevron, BP and Shell, Exxon’s largest competitors, have given their investments in renewable fuels a much higher profile.  Similar or identical environmental proposals have not passed at previous Exxon shareholder meetings, but the public support of the Rockefeller family has given old efforts new energy.

The involvement of the Rockefellers, said Robert A. G. Monks, a shareholder who has been urging a separation of the chairman and chief executive jobs for years, shows that “this is not just a matter of the self-appointed good guys against the cavemen, but also a matter of the capitalists wanting to make money.”

Nineteen institutional investors with 91 million shares announced last week that they would support resolutions asking Exxon to separate the top executive positions and tackle global warming. They included the California Public Employees’ Retirement System, the California State Teachers’ Retirement System and the New York City Employees’ Retirement System.

California’s treasurer, Bill Lockyer, who serves on the boards of the two California funds, said the company’s “go-slow approach” on global warming “places long-term shareholder value at risk.”

Under Exxon’s rules, a shareholder proposal that passes is not binding without the support of the board. But Andrew Logan, director of the oil program at Ceres, a coalition of institutional investors and environmentalists, said, “boards tend to strongly consider proposals that get significant support.”

Paul Sankey, an oil analyst at Deutsche Bank, said that he thought a separation of the chief executive and chairman jobs might be a good management move and that “we might see a mild benefit to Exxon’s public image.” But he added, “On balance, we wouldn’t expect any change in strategy.”

The Fraternal Order of Police, which represents public safety officers, whose pensions are invested in Exxon, has publicly opposed the shareholder effort to change company policy.

“The Rockefeller resolution threatens to degrade the value of Exxon Mobil,” the organization wrote in a letter to Mr. Tillerson that criticized the splitting of the top executive jobs.

Gas prices bringing pain to drivers here, there and everywhere;  Cost is high in the U.S., but much higher in France, Turkey, Spain ... 
By Angela Charlton,  Associated Press   
Published on 5/31/2008 

Paris - Americans are shell-shocked at $4-a-gallon gas. But consider France, where a gallon of petrol runs nearly $10. Or Turkey, where it's more than $11.

Drivers around the world are being pummeled by the effects of record gas prices. And now some are hitting back, staging strikes and protests from Europe to Indonesia to demand that governments do more to ease the pain.  It's a growing problem in a world that's increasingly mobile and more vulnerable than ever to the cost of crude oil, which is racing higher by the day and showing no signs of stopping.

”I don't know why it is, but ... it hurts,” said Marie Penucci, a violinist who was filling up her Volkswagen to the tune of $9.66 a gallon at an Esso station on the bypass that rings Paris.

As she pumped, she looked wistfully at a commuter climbing onto one of the city's cheap rental bicycles, an option not open to her since she travels long distances to perform.  As oil soars, the effect on drivers can vary widely. Taxes and subsidies that differ from nation to nation are the main reasons, along with limits in oil-refining capacity and hard-to-reach places that drive up shipping costs.

In Europe and Japan, for example, high taxes have made drivers accustomed to staggering gas prices. As a result, plenty of European adults never even bother to learn to drive, preferring cheap mass transit to getting behind the wheel.  Those who do drive are still testing new pain thresholds. And it would be worse in Europe if the strong euro weren't cushioning the blow.

On the other hand, in emerging economies such as China and India, government subsidies shield consumers. But that still means governments themselves have to find a way to afford the soaring market prices for oil.  Increasingly, people around the world are reaching the boiling point - and it's not just drivers.

Fishermen in Spain and Portugal began nationwide strikes Friday, keeping their trawlers and commercial boats docked at ports. In Madrid, demonstrators handed out 20 tons of fish in a bid to win support from the public.  In Spain, the European Union's most important producer of fish, the fishing confederation estimates fuel prices have gone up 320 percent in the past five years - so high many fishermen can no longer afford to take their boats out.

French fishermen and farmers, who need fuel for trawlers and tractors, say their livelihoods are threatened by soaring prices and have blocked oil terminals around France and shipping traffic on the English Channel to demand government help.  British and Bulgarian truckers are staging fuel protests, too.

Indonesians are staging their own protests against shrinking gasoline subsidies in a nation where nearly half the population of 235 million lives on less than $2 a day.

The world is driving more than ever: There are 887 million vehicles in the world, up from 553 million just 15 years ago, according to London consultancy Global Insight. It estimates the figure will be 1 billion four years from now.  In Europe, the high tax burden means crude prices make up a smaller part of the retail cost of gas.

”The pain of a rise in prices is much less in Europe, because we may be paying a lot more here, but the rise in a percentage sense is a lot smaller,” said Julius Walker, oil analyst at the Paris-based International Energy Agency.

The United States, with its relatively low taxes, is considered to have retail prices closer to what energy data charts call the “real cost” of gasoline - closely linked to the price of oil.  So as oil prices have soared, U.S. gas prices have soared along with them.  Prices for regular unleaded gas have risen from $1.47 a gallon in May 2003 to more than $3.96 now, a jump of nearly 170 percent. In the same period, the most popular grade of gas in France rose by just over 90 percent - a relatively gentle climb.

Americans are driving less - about 11 billion fewer miles in March 2008 than March 2007, a drop of about 4 percent, according to the Schork Report newsletter. It was the first drop in March driving in almost three decades.

In the U.S., presidential candidates John McCain and Hillary Rodham Clinton have proposed suspending the federal gas tax for the summer to give drivers some help, although it is not clear whether drivers would actually see much relief.  French President Nicolas Sarkozy has urged the EU to cut its value-added tax on fuel.

Nations that produce huge amounts of oil aren't necessarily in better shape.  Russia is the world's second leading producer of oil, but gas there comes to about $3.68 a gallon - about the same as in the United States, where workers earn about six times as much money.  Much of the Russian cost comes from taxes, which run between 60 and 70 percent. Limited refining capacity and the costs of transporting gasoline across the country's vast expanse also push up prices.

Turkey faces similar problems. It costs $11.29 a gallon there, meaning filling up the tank of a midsize car can reach nearly $200 - enough to give up on driving and buy a domestic plane ticket.

But it's not that bad everywhere.  In China, government-mandated low retail gas prices have helped farmers and China's urban poor but, in a country struggling with pollution, also have hurt conservation. The Chinese used about 5 percent more gas in the first four months of this year than last.

And in Venezuela, long-held government subsidies and bountiful supplies have made the people think of cheap fuel as a birthright. It's a veritable wonderland for gas guzzlers - 12 cents a gallon. Consumers there are snapping up SUVs.  For solutions to the oil crisis, policymakers in less oil-rich nations are looking to Brazil, where ethanol made from sugar cane is widely available to the nation's 190 million people.

Eight out of every 10 new cars sold there are flex-fuel models that run on pure ethanol, gas or any combination of the two.

UN chief: food production must rise 50 percent by 2030 
By FRANCES D'EMILIO and ARIEL DAVID, Associated Press Writers 
Posted on Jun 3, 7:54 AM EDT

ROME (AP) -- World food production must rise by 50 percent by 2030 to meet increasing demand, U.N. chief Ban Ki-moon told world leaders Tuesday at a summit grappling with hunger and civil unrest caused by food price hikes.  The secretary-general told the Rome summit that nations must minimize export restrictions and import tariffs during the food price crisis and quickly resolve world trade talks.

"The world needs to produce more food," Ban said.

The Rome-based U.N. Food and Agriculture Organization is hosting the three-day summit to try to solve the short-term emergency of increased hunger caused by soaring prices and to help poor countries grow enough food to feed their own.

In a message read to the delegates, Pope Benedict XVI said "hunger and malnutrition are unacceptable in a world which, in reality, has sufficient production levels, the resources, and the know-how to put an end to these tragedies and their consequences."

The Pope told the world leaders that millions of people at threat in countries with security concerns were looking to them for solutions.  Ban said a U.N. task force he set up to deal with the crisis is recommending the nations "improve vulnerable people's access to food and take immediate steps to increase food availability in their communities."

That means increasing food aid, supplying small farmers with seed and fertilizer in time for this year's planting seasons, and reducing trade restrictions to help the free flow of agricultural goods.

"Some countries have taken action by limiting exports or by imposing price controls," Ban said. "They only distort markets and force prices even higher."

The increasing diversion of food and animal feed to produce biofuel, and sharply higher fuel costs have also helped to shoot prices upward, experts say.  The United Nations is encouraging summit participants to start undoing a decades-long legacy of agricultural and trade policies that many blame for the failure of small farmers in poor countries to feed their own people.

Wealthy nations' subsidizing their own farmers makes it harder for small farmers in poor countries to compete in global markets, critics of such subsidies say. Jim Butler, the FAO's deputy director-general, said in an interview ahead of the gathering that a draft document that could be the basis for a final summit declaration doesn't promise to overhaul subsidy policy.

Congress last month passed a five-year farm bill heavy on subsidies, bucking White House objections that such aid in the middle of a global food crisis wasn't warranted.  The head of the summit's U.S. delegation, Agriculture Secretary Ed Schafer, insisted on Monday that biofuels will contribute only 2 or 3 percent to a predicted 43 percent rise in prices this year.

Figures by other international organizations, including the International Monetary Fund, show that the increased demand for biofuels is contributing by 15-30 percent to food price increases, said Frederic Mousseau, a policy adviser at Oxfam, a British aid group.

"Food stocks are at their lowest in 25 years, so the market is very vulnerable to any policy changes" such as U.S. or European Union subsidizing biofuels or mandating greater use of this energy source, Mousseau said.

Brazil is another large exporter of biofuels, and President Luiz Ignacio Lula da Silva was expected to defend biofuels at the summit.  Several participants won't even be talking to each other at the summit. 

Australia's foreign minister decried as "obscene" Zimbabwean President Robert Mugabe's participation in the summit. The longtime African leader has presided over the virtual transformation of his country from former breadbasket to agricultural basket case.  Zimbabweans increasingly are unable to afford food and other essentials with agriculture paralyzed by land reform and the world's highest rate of inflation.

The Dutch ministry for overseas development pledged to "ignore" Mugabe during the summit.

EU sanctions against Mugabe because of Zimbabwe's poor human rights record forbid him from setting foot in the bloc's 27 nations, but those restrictions don't apply to U.N. forums.

Jewish leaders and some Italian politicians were among those denouncing Iranian President Mahmoud Ahmadinejad's attendance at the meeting. On Monday, Ahmadinejad repeated his call for the destruction of Israel, which is also participating in the summit.  Ahmadinejad was scheduled to give a summit news conference Tuesday afternoon.

Schafer, asked about the presence of the Zimbabwean and Iranian leaders, told reporters in Rome that the two were welcome to attend the summit, but that U.S. delegates would not be meeting with them.

As Prices Rise, Farmers Spurn Conservation
Published: April 9, 2008

Out on the farm, the ducks and pheasants are losing ground.

Thousands of farmers are taking their fields out of the government’s biggest conservation program, which pays them not to cultivate. They are spurning guaranteed annual payments for a chance to cash in on the boom in wheat, soybeans, corn and other crops. Last fall, they took back as many acres as are in Rhode Island and Delaware combined.

Environmental and hunting groups are warning that years of progress could soon be lost, particularly with the native prairie in the Upper Midwest. But a broad coalition of baking, poultry, snack food, ethanol and livestock groups say bigger harvests are a more important priority than habitats for waterfowl and other wildlife. They want the government to ease restrictions on the preserved land, which would encourage many more farmers to think beyond conservation.

Kerry Dockter, a rancher in Denhoff, N.D., has about 450 acres of grassland in the program. “When this program first came about, it was a pretty good thing,” he said. “But times have definitely changed.”

The government payments, Mr. Dockter said, “aren’t even comparable anymore” to what he could make by working the land. He plans to devote some of his conservation acres to growing feed for his cows and some to grazing. He might also lease some land to neighbors.

For years, the problem with cropland was that there was too much of it, which kept food prices low to the benefit of consumers and the detriment of farmers.

Now, because of a growing global middle class as well as federal mandates to turn large amounts of corn into ethanol-based fuel, food prices are beginning to jump. Cropland is suddenly in heavy demand, a situation that is fraying old alliances, inspiring new ones and putting pressure on the Agriculture Department, which is being lobbied directly by all sides without managing to satisfy any of them.

Born nearly 25 years ago in an era of abundance, the Conservation Reserve Program is having a rough transition to the age of scarcity. Its 35 million acres — about 8 percent of the cropland in the country — are the big prize in this brawl.

Groups like Ducks Unlimited and Pheasants Forever want the government to raise rental rates to keep the same amount of land in the program or even increase it. While offering more money to farmers might be a difficult sell in a year of record farm profits, Jim Ringelman of Ducks Unlimited said, “There are overriding environmental issues here.”

The bakers and their allies have a different set of overriding issues: high commodity prices. The rising cost of feed is hurting ranchers, the rising cost of corn is hurting ethanol producers and the rising cost of wheat is hurting bread makers.

“We’re in a crisis here. Do we want to eat, or do we want to worry about the birds?” asked JR Paterakis, a Baltimore baker who said he was so distressed at a meeting last month with Edward T. Schafer, the agriculture secretary, that he stood up and started speaking “vehemently.”

The Paterakis bakery, H&S, produces a million loaves of rye bread a week. The baker said he could not find the rye flour he needed at any price. That gives him two unwelcome options: close half of his operations starting in July, or experiment with a blended flour that will yield a different and possibly less-than-authentic rye bread.

Such problems were never contemplated when the Conservation Reserve was conceived as part of the 1985 Farm Bill. Participants bid to put their land in the program during special sign-ups, with the government selecting the acres most at risk environmentally. Average annual payments are $51 an acre. Contracts run for at least a decade and are nearly impossible to break — not that anyone wanted to until recently.

“Older farmers put their land in the program rather than renting to a younger farmer or selling,” said Dale Schuler, who grows wheat in Fort Benton, Mont. That made it difficult for farmers who wanted to expand as well as farm equipment dealers, supply co-ops and other services, which suffered declines in business.

“It’s certainly been a polarizing issue,” Mr. Schuler said. “Half the people love it and half the people hate it.”

While few urban dwellers ever heard of Conservation Reserve, it found support among two important constituents: hunters had more land to roam and more wildlife to seek out, with the Agriculture Department estimating that the duck population alone rose by two million; and environmentalists were pleased, too. No one disputes that there are real environmental benefits from the program, especially on land most prone to erosion.

The group doing the most to undermine this amiable coexistence is the farmers themselves. Last fall, when five million acres in Conservation Reserve came up for renewal, only half of them were re-entered. While the program has gained some high-priority land in the last few months, in part from an initiative to restore bobwhite quail habitats, the net loss is still more than two million acres.

That is just the beginning, warns Ducks Unlimited, a politically potent organization with more than half a million members in the United States. Ducks Unlimited is concerned about the three-quarters of a million acres of grassland that were removed from the program last year in the so-called duck factory in the Upper Midwest.

“We foresee a dramatic reduction,” said Mr. Ringelman, a conservation director for the association.

Ardell Magnusson, a farmer in Roseau, Minn., shows the changing mood. He said the program was “a godsend” when he put 300 of his 2,300 acres into it eight years ago. “I needed some guaranteed income or my banker was going to tell me to find another occupation,” Mr. Magnusson said. It is not exactly a bonanza: he gets about $12,000 a year.

He calculates he can make more than that by farming sunflowers or wheat or soybeans. When his contract expires in two years, he plans to withdraw about half his land. It would not be a shock if the Agriculture Department cut him loose sooner. “Another nine months of wheat at today’s prices and there will be political pressure on this program like you wouldn’t believe,” Mr. Magnusson said.

That pressure is exactly what the bakers and their allies are aiming for, saying the Conservation Reserve costs taxpayers and hurts consumers.

“This program is taking money out of your pocket twice a day,” said Jay Truitt, vice president for government affairs for the National Cattlemen’s Beef Association. “Do you think it’s right for you to pay so there’s more quail in Kansas?”

The cattlemen and bakers argue that farmers should immediately be allowed to take as much as nine million acres out of the Conservation Reserve without paying a penalty, something they say would not harm the environment.

“The pipeline for wheat is empty,” said Michael Kalupa, a bakery owner in Tampa, Fla., who is president of the Retail Bakers of America. Mr. Kalupa said the price he paid for flour had doubled since October. He cannot afford to absorb the cost and he cannot afford to pass it on. Sales have been falling 16 percent to 20 percent a month since October. He has laid off three employees.

Among farmers, the notion of early releases from conservation contracts is prompting sharp disagreement and even anger. The American Soybean Association is in favor. “We need more food,” said John Hoffman, the association’s president.

The National Association of Wheat Growers is against, saying it believes “in the sanctity of contracts.” It does not want more crops to be grown, because commodity prices might go down.

That is something many of its members say they cannot afford, even with wheat at a robust $9 a bushel. Their own costs have increased, with diesel fuel and fertilizer up sharply. “It would decrease my profit margin, which is slim,” said Jeff Krehbiel of Hydro, Okla. “Let’s hurt the farmer in order to shut the bakers up, is that what we’re saying?”

Mr. Krehbiel said his break-even last year was $4 a bushel. This summer it will be $6.20; the next crop, $7.75.

In the struggle between those who would shrink the program and those who would bolster it, the Agriculture Department is leaning toward the latter. When Mr. Schafer spoke recently before wildlife and hunting groups in Phoenix, he opened the door to significantly raising rents on new land.

Randy Schuring, a dairy farmer with 200 acres in the program, said there was no possible solution that would make everyone happy.

“If the government lets the land out and then crop prices fall, that’s going to hurt a lot of farmers,” said Mr. Schuring, whose farm is in Andover, S.D. “If it doesn’t let the land out and prices keep going up, that will hurt a lot of consumers. If only we had a crystal ball.”

So how does that affect Southwestern CT?
UBS to write off billions amid credit woes: reports
30 September, 2007

SINGAPORE (Reuters) - Swiss bank UBS (UBSN.VX) is expected to warn on Monday that it has written off billions of dollars on fixed-income assets, making it the biggest casualty so far of turmoil in world credit markets, the Financial Times and Wall Street Journal reported.

Citing people familiar with the matter, the FT said UBS was expected to say it has written down its fixed-income portfolio by more than 3 billion Swiss francs ($2.6 billion), triggering a third-quarter loss of at least 600 million Swiss francs ($516 million).

The Wall Street Journal reported UBS was projecting a third-quarter loss of 600 million to 700 million Swiss francs ($510 million to $600 million) based on a writedown of 3 billion to 4 billion Swiss francs.

The bank will report the fixed-income loss on Monday, ahead of its third-quarter results which are due October 30, according to the Journal. UBS told investors in August that the third quarter would be difficult if credit markets continued to struggle.

The bank's losses resulted from applying sharply lower market values to asset-backed bonds, after it took a conservative view, the Journal said, citing people close to the matter.

The losses, which far exceed those reported so far by other investment banks, are expected to trigger the departure of Huw Jenkins, who runs UBS's investment banking business, the FT said on its Web site.

The bank earlier this year ousted its chief executive, Peter Wuffli, amid dissatisfaction over his handling of the bank's in-house hedge fund, Dillon Read Capital Management. Investors have grown increasingly concerned that more banks might announce losses related to credit problems as they closed their books on a tumultuous third quarter. Persistent worries about the health of the banking system have weighed on financial markets around the world.

A meltdown in the U.S. subprime mortgage market, sparked by growing defaults on riskier loans, has created a squeeze in credit markets around the world. Despite signs in recent weeks that the credit tightness may be easing, some banks continue to report they are struggling to find cash on wholesale lending markets.

The FT report did not specify what type of fixed-income assets UBS was writing off. News of UBS's losses was first reported by the Wall Street Journal.

Economist: State weathering economic turndown
By ROBERT KOCH, Hour Staff Writer
Jan. 25, 2008

NORWALK — Connecticut will weather the building recession better than the rest of the nation. How much better will depend upon job growth and consumer confidence, according to a leading state economist.

"Connecticut is clearly going to be outperforming (the rest of the nation). Nevertheless, our ability to create jobs, our ability to sustain economic growth is really impacted by the severity of this national recession," said Don Klepper-Smith, chief economist and director of research with Data Core Partners, LLC, and chairman of Gov. M. Jodi Rell's Council of Economic Advisors. But "this is not 1989 where you had losses in banking, defense and housing, all creating a downside synergy."

"I think that 12,000 new jobs are within reach (in Connecticut in 2008)," Klepper-Smith said. "Consumer confidence will be key."

Klepper-Smith delivered his presentation, titled "New Perspectives on the U.S. and Connecticut Economies," to about 170 people gathered at The Continental Manor at 112 Main Ave. for the Greater Norwalk Chamber of Commerce's "2008 Economic Outlook Luncheon."
"I think it's safe to say (2008) is one of the most challenging economic environments that we've had," Klepper-Smith said. But "the national economy is not as good as the optimists would have you believe, nor is it as bad as the pessimists would leave you to believe — it's somewhere in between."

Although the national unemployment rate stands around 5 percent, Klepper-Smith noted that the statistics also show that 95 percent of Americans are employed. Also on the upside, worker productivity and the GDP continue to grow. The Federal Reserve Bank, he said, is addressing the economic woes. On the downside, inflation is heating up, crude oil has hit $100 a barrel and gasoline could hit $4-a-gallon, according to Klepper-Smith.

Klepper-Smith said the national economy already may be in recession, even if the National Bureau of Economic Research hasn't so declared. He told listeners not to expect the bureau to utter the word, given that 2008 is a presidential election year. Moreover, talk of recessions and recoveries typically lags behind events, he said.

Recessions, however, should not be viewed as entirely bad, according to Klepper-Smith. He predicted a turnaround in 2009 and urged listeners to prepare for it.

"Recessions are the cleansing mechanism that promote balance," Klepper-Smith said. "Now is the time to be planning for the next upturn."

Klepper-Smith said the health of the housing market, hit hard by the sub-prime lending crisis, varies from region to region. Florida and the West Coast have been most affected, whereas "the Connecticut market is holding up well," he said. Likewise, the credit market in Connecticut is better than elsewhere nationwide, he said.

Afterward, Klepper-Smith fielded questions, including one on the state budget from Tom Andrea, a consultant with Sullivan & LeShane, a legislative and administrative lobbying firm in Hartford. Referring to a recent state budget surplus, Andrea asked, "what's our secret?

Said Klepper-Smith: "We have to remember that's all rear-view mirror information. ... As we move through this period of economic uncertainty and national recession, it becomes very clear that this is a time for fiscal discipline. We need to make sure that the rainy day fund is preserved."

In a second presentation, Carol Latter, editor at CT Business Magazine, said businesses large and small increasingly are going "green." She said sales for Curtis Packaging of Sandy Hook climbed from $20 million to $40 million over the last four years, as the company turned to recyclable packaging materials.

"More and more, green business is big business and it's flourishing in a big way," Latter said.

In Norwalk, 100 percent of more than 2 million square feet of planned development will conform to green building standards established by the U.S. Green Building Design Council, according to the city.

A Shift Toward Service Jobs
By MICHAEL REGAN Courant Staff Writer
September 23, 2007

Homebound traffic is just beginning to fill downtown Hartford streets as a crowd of workers gathers on the sidewalk near the Old State House. Several dozen strong, bearing flags and placards, they form a line and begin the familiar union chants.

Most of the workers at this rally are in food service - cooks, cashiers, servers, dishwashers employed in the cafeterias of downtown businesses or at nearby colleges. They are a cross section of the city and surrounding towns: young and old, male and female, Hispanic, black and white.

And they are part of the fastest-growing employment group in the state, what the U.S. Census Bureau calls the service occupations. They account for nearly half the total growth in the state workforce from 2000 through 2006, according to new census figures.

The change in the nature of the workforce is nothing new. Across the country, employment in service occupations has grown rapidly for years as the proportion of workers in other areas, particularly manufacturing, stagnated or declined.

But the latest census data indicate the change is happening more rapidly here than in other parts of the country. Connecticut ranks in the upper third of states in workforce growth attributed to service occupations, the lowest-paying job category, and near the bottom in growth attributed to professional and managerial occupations, the highest-paying category.

Put another way, for every two workers added to the ranks of professional and managerial employees since 2000, three entered service occupations.

The pace of change has some economists concerned that Connecticut ultimately could lose its cherished position in the top ranks for per capita income.

"We have a disproportionate job creation in lower-income, lower-skill areas," said Fred Carstensen, professor of economics at the University of Connecticut and director of the Connecticut Center for Economic Analysis. "You have to have those jobs - that's part of economic development. You're going to have a range of incomes and skills. But we're getting this corrosive shift away from the higher-income positions. It's not good."

"We're going to see other states do better than we are," West Hartford economist Ron Van Winkle said. "We're going to see other states begin to catch us in median income."

The men and women marching in a long, thin loop on the Central Row sidewalk in Hartford have an answer for that concern.

"I know for a fact I should get paid a lot more money than I get paid right now," worker Jose Sanchez said.

Analogy To 1910s, '20s

Connecticut remains among the most white collar of states, with 39 percent of workers over 16 saying they are employed in management or professional jobs, according to the Census Bureau's 2006 American Community Survey, a large-scale national sampling operation. Another 15 percent said they held office jobs.

But while those categories accounted for more than half of all workers in 2000, they accounted for just 28 percent of the people added to the workforce since then.

Service workers represented just over 14 percent of all workers in 2000 but more than 47 percent of the growth in the workforce since then. They include nurses aides and home health aides; security guards; food service workers; building and grounds workers; day-care attendants; tourism and hospitality employees; and personal appearance workers.

The category also includes relatively well-paying police and firefighting jobs, most of which are unionized and provide benefits, but they account for no more than a tenth of the total. Overall, workers in the service occupations have lower median earnings than any other group.

The median earnings of all service-occupation workers in Connecticut rank among the highest in the country at $20,158, but that is less then 55 percent of the statewide median income, according to the census figures, and a little more than a third of the earnings of management and professional workers.

In addition to being the lowest-paid occupational group, service workers are more likely to be minorities, more likely to be women and far less likely to have year-round, full-time jobs, according to the survey.

Steve Matthews, the Connecticut director of Unite Here, a union that represents workers in food service and other service occupations, likens them to an earlier group of laborers.

"The analogy I draw is to the 1910s and '20s, when there was this upsurge in manufacturing," he said. "Those jobs were dirty, difficult jobs, long hours, poor pay and no benefits.

"Then, beginning in the 1930s, workers started to organize," he said. "We now look back at the late '40s, '50s and '60s as this golden era of working-class life. That was standing on the shoulders of serious organizing decades before that."

There's another similarity: Like the new factory workers of a century ago, many of today's service workers are immigrants. And now, as then, immigrants often draw suspicion and antipathy.

Although the American Community Survey figures don't break down the service occupation workers by place of birth, for years much of the growth in Connecticut's working age population has come from immigration. And, Matthews said, many of the newcomers end up in the kind of jobs his union targets.
"Our members are from all over the world. They're hardworking and come to the United States to have a better life," he said. "They face all kinds of challenges, and our union faces all kinds of challenges, in terms of the outright hostility that some sectors of our society have for immigrants."

Source Of Concern

For all they may lack in terms of pay and benefits, service jobs have one advantage over the manufacturing jobs they seem to be replacing: They aren't likely to be moved out of state or overseas.

"Health care, protective services, restaurants aren't affected much by this national competition, or world competition, to find the lowest price," Van Winkle said. "They compete against each other."

And in some ways, he said, the rapid growth of service employment can be seen as a sign that Connecticut remains economically healthy, at least for now: The higher your income, the more likely you are to go out to restaurants, for example, or hire gardeners or housekeepers.

But jobs in those areas tend to be cyclical, UConn's Carstensen noted, and can be hit hard if the economy falters. That's particularly true in areas such as tourism, which has spurred growth in service employment from the casinos in New London County to the new convention center in Hartford.

The expansion of low-paying jobs and stagnation in higher-paid occupations is a sign that the state needs work on bringing higher-paying jobs back to the state, Carstensen said.

"It's a source of real concern for the kind of state that we are," he said. "It just underlines how extraordinarily important it is to have a coherent economic development strategy and for the state to make strategic investments."

But Jacqueline Cotto and Jose Sanchez don't want jobs in different industries. They want the jobs they have, in food service, to pay better.

That's the point of the downtown demonstration: to push for organization of corporate cafeteria workers employed by Aramark, the 240,000-employee international food service giant. The downtown workers are joined by unionized employees of Aramark and other food-service companies at nearby colleges.

Earl Baskerville, president of Unite Here, Local 217, at the University of Hartford, said he's paid about $19 an hour plus benefits after 10 years with Aramark. Cotto, who works for Aramark at United Healthcare's cafeteria, said she makes $11.64 an hour, without benefits.

"I've been there eight years - that was my first food service job. Basically I do every job in that kitchen," she said. "We serve like 2,000 customers a day, so it's a busy place."

Cotto, who is 29, married and has three children, said she thinks about going back to school so she can get a different job, but she would rather stay where she is.

"I like the job. It's a good job. I'm a hands-on person, I like to multi-task," she said. "I like my hours. I'm home when my kids come home - that gives me all day with them."

That's only possible, though, because her husband has a good job, with benefits, at the Hartford Club.

"If I wasn't married and my husband didn't have such a good job, I would be working two jobs to make ends meet because after taxes what you bring home isn't a lot."

Sanchez, 47, already works two jobs: 40 hours a week for Aramark at Travelers and 30 hours in a union job for the food service company Chartwell's at Trinity College. He and his wife, who also works at Trinity, are raising seven children and depend on the benefits they get from Chartwell's.

"I like what I do," he said. But he'd like to do a bit less of it.

"It'd be nice for me to have one job making that kind of money" that he now gets from two, Sanchez said. "That's the way it should be, follow me? Now you can spend time with the kids. Me working back-to-back jobs, by the time I go home, the kids are asleep."

Authors urge women to 'go abroad' to achieve success
By JEREMY SOULLIERE, Hour Staff Writer
September 15, 2007

WESTON — For some women looking to break through that glass ceiling in their work fields, the answer lies overseas, says Stacie Berdan.

"You're given much more responsibility abroad, which translates to greater experience, which means more money," said the Weston resident, who, along with her former colleague and friend, C. Perry Yeatman, co-wrote the newly released book, "Get Ahead By Going Abroad: A Woman's Guide To Fast-track Career Success."

Landing a job overseas helps women maximize their potential for career advancement, Berdan said, because it gives them a global perspective and an understanding of international markets, a skill that American executives are seeking.

"People who can live and work abroad have a certain skill set that employers are looking for," said the 40-year-old marketing consultant, who specializes in giving multi-national corporations advice on feminine leadership and diversity issues. "You're seen as an internationalist first, which really differentiates you."

Berdan, whose new book came out on Sept. 4, has seen firsthand how taking a risk and working overseas can fast-track a woman's career, she said.

She spent three years working in Hong Kong with the global communication firm Burson-Marsteller, she said, and the international experience helped springboard her from a vice president position to global account managing director.

"I went over a mid-level manager and by the time I came back I tripled my salary and jumped two levels to senior management," Berdan said.

Yeatman, a former Westport resident who used to work with Berdan at Burson-Marsteller, also saw her career accelerate after she decided to work abroad, she said, jumping from an entry level position at Burson-Marsteller to later become a senior vice president at Kraft.

The two friends, seeing the results of international experience, first began to think about writing a book on the topic in 2004, Berdan said.

"We noticed that there is a trend," she said. "We had talked about it with our friends who worked abroad, and we noticed how we became much more successful than those women we left back home."

As part of their research, the duo surveyed 210 women who worked abroad or had international experience, she said. They also conducted in-depth interviews with 50 women about their employment overseas, and how it affected their careers, Berdan said.

Of those surveyed, 85 percent said working internationally accelerated their careers, she said, and 78 percent noted the move had a "significant" impact on their salaries.

The competition for senior level positions in America can be fierce at some companies, Berdan said, but many large businesses have satellite offices in smaller international markets where the candidate pools are much shallower.

Once landing a new position abroad, she said, the job responsibilities are likely to be increased because these satellite offices are less densely staffed. And, with a bigger share of the responsibility, women can begin to press the pedal on their careers, Berdan said.

"You simply know the process quicker," she said.

Unlike Yeatman and herself, readers of the duo's new book can hit the ground running with all the tools to hit the fast forward button their careers, Berdan said.

"None of us had a book like this — it's a how to guide on how to do this," she said. "How to determine if it's right for you. How to land the job. How to prepare for the move."

The book tells women the questions they need to ask themselves before they decide to pursue an international job, Berdan said, such as whether they can take charge under chaotic conditions or read between the lines when there's a language barrier.

One of the most critical attributes of an international working woman is she does not shut down when she's out of her comfort zone, she said.

"They not only have to like being out of their comfort zone, they have to thrive on it," she said.

One advantage women have over men in moving abroad is they transition easier to different cultures, Berdan added.

"Women actually do better than men because of the traits we have, such as adaptability, listening and communication skills," she said. "Women also tend to build teams as opposed to taking charge."

Despite that advantage, there are some challenges women face in other cultures that men don't have to, Berdan said.

"In some cultures we are not treated with respect, which makes it harder," she said.

Not all career paths can be accelerated overseas either, Berdan said. It's hard for professionals needing licenses specific to the country, such as doctors and lawyers, to make the transition, she said as an example.

The recipe certainly works for large multi-national corporations of all types, Berdan said. Also, the vast majority of those women who make the transition do it with companies they've already been employed with, she said.

The tides are beginning to turn a little, however, with more and more women landing new international jobs with companies they've never worked for, Berdan said.

Oftentimes these may be women willing to take a leap of faith, putting their future destination in the companies hands, she said.

"A lot of these companies need someone that will go anywhere," she said.

The new book is in stores everywhere, and Berdan will be discussing it at the Greenwich Library on Oct. 30 at 6:30 p.m. She also will be speaking about the book at a number of Connecticut universities and companies in the coming months.

For further information about the book visit

Staff writer Jeremy Soulliere can be reached at (203) 354-1049 or via e-mail at

26 June 2007 - I-BBC...
Two-tiered net could be coming

Net providers (ISPs) may start charging some websites for faster access to customers, a report has predicted

It could create a "two-tiered internet" which, while making money for providers would risk alienating consumers, Jupiter Research said. 
Charging both customers and websites for access could prove too tempting for ISPs to resist, said analyst Ian Fogg.

He warned it would add another layer of complexity to already confusing broadband services.

Traffic management

ISPs currently operate on incredibly tight margins in order to offer cheap broadband deals to the public.  One way of creating a new revenue stream would be to supply faster, prioritised access to a select group of websites willing to pay.

"ISPs are not getting much revenue from broadband but they can generate revenue from other services or by charging websites for better access. Charging at both ends could be very appealing to them," said Mr Fogg.

Such a system would be easy to set up with the traffic management tools that many ISPs already use to help control bandwidth, he added.

"ISPs say they are using these tools to deprioritise access to bandwidth-hungry peer-to-peer applications but they could equally be used to identify and either prioritise or deprioritise other services such as voice-over IP. The question is, will they be tempted?" asked Mr Fogg.

For ISPs that already offer their own value-added products such as IPTV or voice-over IP, there will also be an incentive to prioritise access to their own services.

"Whether they are doing deals with websites or hindering potentially competitive services, they have to be absolutely clear. Consumers need to know that they have access to everything or not so they can make a fair decision about which service to use," said Mr Fogg.

Pleasing early-adopters

He also called on UK broadband providers to be more transparent about existing services.  There has been controversy about ISPs marketing speeds for services that consumers are unlikely to actually achieve.

A survey conducted by broadband pressure group thinkbroadband earlier this year showed that a number of providers are marketing products as an 'up to 8Mbps' service, but have "a fair proportion of customers" still on fixed 512kbps, 1Mbps or 2Mbps services.

According to JupiterResearch, 16% of net users want a guarantee from their ISP not to restrict access to third party websites while 29% want flat-rate pricing with no usage limits.

It is important that ISPs continue to offer broadband packages that are free of usage caps in order to appeal to the small but influential group of early-adopters, who tend to be heavy users of net video, games or digital music, said Mr Fogg.

4 June 2007...I-BBC
Europe online '24 hours a month' Surfing the net

More than 122m Europeans aged 15 and above use the internet each day at home, school or in work, says a report.

The average European accesses the net 16.5 days in a month, and spends 24 hours viewing 2,662 web pages, according to tracking firm comScore.

The Netherlands has the highest net penetration, with 83% of the country online, the firm reported.

Russia, which was included as a European state, has the lowest, at 11% of the population.

More than 221m people across the 16 countries surveyed are online each month, comScore said.

Germany had the largest online population, with 32.5m net users aged 15 and above, the survey for net usage in May 2007 found.

Netherlands 83%
Norway 70%
Sweden 70%
Denmark 68%
Finland 65%
UK 62%
*The percentage of a population aged 15 and above online
Source: comScore

The UK had the most active online population, spending more than 34.4 hours online each month and a peak of more than 21.8m people online in any given day.

Google was the most popular online destination in 13 of the 16 countries, followed by Microsoft in second place and Yahoo in third.

Internet penetration across Europe was 40% of the population aged 15 and above, with only Spain (39%), Italy (36%) and Russia (11%) falling below this level.

Bob Ivins, managing director of comScore Europe, said: "Increased net usage is tied to broadband roll-out. The UK is an example of a country whose net usage has increased dramatically as broadband has reached more people."

He said: "While the study reflects average net usage and penetration, 20% of users account for 60% of usage, with some people spending hundreds of hours online each month."

He added: "As convergence takes place between TV and the internet, the nature of what is classed as online and offline will also have to change.

"Is someone online when watching TV over the net?"

According to comScore, the United States has 156m people online, with 121m online on average each day.

 Clean Tech Boom
Source: The Climate Group 
US leads search for climate solutions 
In the second of a series examining California's "green revolution", the BBC News website's Sam Wilson reports from San Jose on how the state is at the forefront of innovation in clean technology. 
Last Updated: Monday, 9 July 2007, 11:53 GMT 12:53 UK 

The most striking thing about the Miasole solar cell production plant in San Jose is how much of it is empty.   Probably less than a fifth of the huge production floor is occupied by machines.  But if Miasole's plan comes together, within a couple of years it will house a production line turning out vast rolls of photovoltaic cells, that some believe could help put solar power on a par with coal, gas or oil.

"It's an enormous growth opportunity," says chief executive officer David Pearce, matter-of-factly.  His company is just one of dozens in California at the cutting edge of innovation in renewable fuels.

For despite America's "addiction to oil", as President George W Bush put it, and reluctance to take on global warming at a federal level, the country is pushing the boundaries in the search for climate change solutions. California is where this frontier spirit is freest.

Search for breakthroughs

The state has a long record of taking action on the environment. Tough energy efficiency rules have meant consumption per capita remaining flat in California for 30 years, while it has risen by 50% elsewhere in the US.  The state also has a record of technological advancement, not least in the computing and information technology fields.

Both elements are being combined in the search for "clean tech" breakthroughs, and another California speciality, venture capitalism, is now pouring in hundreds of millions of dollars for good measure.  And the search for solutions to the climate crisis does not just involve energy.

California firm Planktos is investigating a controversial technique to absorb carbon dioxide by stimulating plankton growth in the oceans.  If the idea has as much potential as Planktos boss Russ George believes, it could go a significant way towards reversing global warming all on its own.  In doing so, it could earn the firm millions through the carbon market, by selling credits to firms emitting greenhouse gases.

Many environmentalists remain wary of the Planktos plan.

And while the promise of technological advances is "vitally important" in trying to beat climate change, a Greenpeace spokesman said, people and governments should take tough action now rather than pin their hopes on far-off solutions.  But Mr George says his type of project is exactly what was envisaged by those who drew up the Kyoto treaty.

"That was designed from the beginning to create an economic incentive to invent our way out of this problem," he says.

"We are one of those companies taking that incentive and trying to deliver a technology that we can earn money from, that will solve the problem."

Capital flow

Indeed it is the clean tech sector's soaring share prices, and the possibility of big returns, that is fuelling the investment boom.  The clean tech sector is "exploding, especially in the US", says Torsten Merkel, European director of Cleantech Group, which advises investors.

California attracted $307m of venture capital in the first quarter of 2007, compared with $172m in the whole of Europe, he says.

"Very clearly, California is leading. It is attracting most investment and most innovation is happening there."

Many credit California's politicians for providing the stimulus.

"I think it's fair to say the [solar] industry would not exist in a meaningful way, were it not for subsidies," says Miasole CEO David Pearce.

California is putting $3bn into a 10-year programme to put solar panels on a million roofs, while the federal government chips in 30% of the installation costs.  The state has mandated that 20% of its electricity must come from renewable sources by 2010. It has also written big cuts in greenhouse gases into law, and is laying the foundations for a carbon market that would reward firms for cutting emissions.

It means companies that find new ways to beat global warming are going to be very popular.

Solar future?

No wonder Miasole's thin-film solar technology is attracting so much interest, and money ($35m from venture capitalists in one funding round last October).  Rather than using conventional crystalline silicon - which has risen in price due to a shortage - Miasole uses an alloy of four metals: copper, indium, gallium and selenium (or Cigs).

"It's a challenging material to work with - that's one of the reasons it's been such a struggle to get Cigs into high-volume," says Mr Pearce.

Various firms are trying different techniques, but Mr Pearce believes Miasole's "sputtering" method - spraying the alloy onto a flexible steel foil - is the breakthrough that will open up thin-film solar to mass production.

The advantage Cigs has over other thin-film techniques is that it is more efficient in converting the sun's energy into electricity, says Mr Pearce.  It beats conventional rigid, heavy solar panels because it is so flexible it can be integrated into roofing felt and distributed in rolls, like carpet.  Mr Pearce believes that thin-film technology will compete on price with silicon as soon as 2010.

More dramatically, solar power will grow from less than 0.01% of global electrical generation today, to 10% or even 20% at some time in the future, he says.  And while production may turn out to be cheaper in countries like China, and the markets for solar power are currently bigger in Germany and Japan, it is its talent for innovation that will put the US in pole position to benefit.

"I believe it will happen, and California and Silicon Valley will lead that charge."   

California acts on climate - (terminates excessive emissions - our addition to the title of this list of actions)
California inspires US revolt on climate:  In the first of a series on California's "green revolution", the BBC News website's Sam Wilson reports from Sacramento on how state legislation to combat climate change may have a knock-on effect across the US.

After a week-long battle, firefighters have finally subdued the worst blaze to hit California's Lake Tahoe region in a century.  But to Linda Adams, who heads California's Environmental Protection Agency, it is only a sign of things to come.

"We can expect a lot more of this. More fires, more drought. This is global warming," says Ms Adams.

While the administration of President George W Bush has been accused of wilfully ignoring climate change, the state of California has already taken unilateral action. 
Governor Arnold Schwarzenegger has charged Ms Adams with implementing what she calls "the most comprehensive law in the world to reduce greenhouse gas emissions".

She is referring to Assembly Bill 32 (AB32), or the Global Warming Solutions Act, passed last year by California's Democratic-led assembly, with the backing of the governor, a Republican.

Trading emissions

The legislation obliges California to cut emissions back to 1990 levels by 2020. Work has begun on quantifying the level of emissions, after which a cap will be enforced, and industries will be able to buy and sell permits allowing a certain amount of pollution.  The system is likely to be similar to the emissions trading scheme, or "carbon market", in operation in the European Union.  But Ms Adams says it will be better, using a "unique" combination of incentives, regulation and market forces.

"We're using probably all the tools in the toolbox to address the problem," she says.

She recently visited Europe to examine its system. Many acknowledge it is far from perfect. The price of carbon credits dropped to virtually nothing, after the EU handed them out far too generously, critics say.

"Europe will admit that in their trial period the market collapsed - we went to find out why, to avoid the same mistakes," she says.

Applying pressure

While California's law has yet to be implemented fully, it is already being used as a template for nationwide action that American environmentalists hope will turn their country from a laggard on climate change, to a leader.  Fabian Nunez, the speaker of California's state parliament, says that was exactly the intention.

"If you look at Congress and the White House you would think that climate change is not a big issue with Americans, but that is false. The growing awareness about climate change across America has been incredible," he says.

"The intent for us when we passed AB32 was not only our commitment to California."

"There is a sense of state activism.

"When you look around and see that our president has essentially turned a blind eye to the issue of climate change, it raises a lot of concerns. So we wanted to help put the pressure on the federal government, and we think that's worked quite well thus far."

Indeed, the dominoes have started falling across the country.

Washington converts

Nine north-eastern states have committed to their own carbon trading scheme, and more than 400 mayors have pledged their cities to reduce emissions.  And the green tide is now rising in Washington too, where Mr Nunez's Democratic colleagues gained control of Congress in November.

The speaker of the House of Representatives, Nancy Pelosi, has pulled together a raft of different measures, being considered by 11 different congressional committees, under the banner of "energy independence".

Many of the measures - which include new energy efficiency standards for appliances, increased use of ethanol to power vehicles, and long-term financial incentives for renewable power - tie in with President Bush's call to reduce America's dependence on foreign oil.

But they are also explicitly presented as a way of combating climate change, in language - "requiring federal government operations to be carbon-neutral by 2050", for instance - that could not have emerged from the White House or the previous Republican-led Congress.

Senator Barbara Boxer has taken over the Environment and Public Works Committee from Republican James Inhofe, who memorably declared global warming to be "the greatest hoax ever perpetrated on the American people".

She has approved efforts by two senators to produce a bill, along the lines of California's AB32 law, that would introduce a greenhouse gas emissions cap and trade system nationwide.

It is expected within months.  President Bush has recently changed tack on climate change, saying in May that he wanted America to be part of a global deal, and inviting the world's heaviest emitters for talks.

The move was welcomed by some, including Britain's leader at the time, Tony Blair, as a significant change of attitude.  Environmentalists, however, said it was a "delaying tactic", and that the US would only make a real impact on climate change when there was a change at the top.

Election issue?

That is why next year's presidential election is being eyed keenly and apprehensively.

Although climate change has not been a dominant theme of the early presidential campaign, many of the candidates, whether Democrat or Republican, have indicated they will go further on climate change than the current president.

Speaker Nunez sees the 2008 election as a watershed not only for global warming but for America's reputation in the world.

"A lot of countries have resentment towards the US because we've turned a blind eye to global warming," he says.

"And for us to not act, for us to play a wait-and-see strategy, is not only an incorrect way but it sends a message of arrogance to the rest of the world.

"I believe that the next president of this country will indeed take a leadership role on this issue."

Greenspan not worried Chinese will dump Treasuries
By Pedro Nicolaci da Costa
June 12, 2007

NEW YORK (Reuters) - There is little reason to fear a wholesale pullout by China out of U.S. government bonds, former Federal Reserve Chairman Alan Greenspan said on Tuesday.

While expressing concerns about China's runaway growth rate and what he described as overvalued stocks, Greenspan played down the prospect that Chinese authorities would sell Treasuries in earnest, forcing a sharp spike in U.S. interest rates.

Asked at a commercial real estate conference if investors should be worried about this oft-cited concern, Greenspan said: "I wouldn't be, no."

Still, Greenspan said the reason such a withdrawal was unlikely was that China would not have anyone to sell the securities to, hardly the sort of comfort jittery bond investors were seeking.

U.S. government debt has been under severe pressure over the past week, with yields rising sharply on anxiety over the likelihood that global credit conditions would tighten as the year progresses. Bond prices move inversely to yields.

Greenspan reinforced the nervousness, saying that a global liquidity boom which he traced back to the end of the Cold War would not go on forever.

"Enjoy it while it lasts," he told the audience.

Now a private-sector consultant following more than 18 years at the U.S. central bank, Greenspan reiterated his prediction that China's latest growth spurt had come too far, too fast.

"We cannot continue this rate of growth in China and the Third World. This cannot continue indefinitely," Greenspan said in a speech. "Some of these price/earnings ratios are discounting nirvana."

Bill Clinton ties global warming, economics
Article Last Updated: 11/02/2007 10:47:42 PM EDT

SEATTLE (AP) — Former President Bill Clinton told more than 100 mayors that stopping global warming depends on them demonstrating that it makes economic sense.

"We will not get a global agreement on climate change unless you can prove this is not a burden," Clinton said Thursday at a climate summit organized by the U.S. Conference of Mayors. "This is the greatest opportunity we have had in our lifetimes."

The Clinton Climate Initiative is teaming up with Wal-Mart Stores Inc. to save cities money on environmentally friendly supplies by buying in bulk.

Two Connecticut-based companies that also are partners are UTC Power, a South Windsor, Conn.-based subsidiary of United Technologies Corp., and General Electric Co., based in Fairfield.

UTC Power has provided fuel cell power plants for bus fleet transportation since 1998. GE is a product supplier for lighting.

Clinton's project has previously worked with 40 of the world's largest cities to create a buying pool to bring down prices for green supplies such as hybrid vehicles and more efficient street lights.

It's the same approach the Clinton Foundation used to dramatically cut the price of AIDS drugs in Africa.

In addressing the climate summit, he announced that the 1,100 cities represented by that organization will become part of the purchasing group.

Wal-Mart, the nation's largest retailer, said it would work to bundle orders and product specifications for green technology. Wal-Mart estimates cities could save 50 percent on street lamp and parking lot energy consumption and 80 percent on maintenance costs if they switched over to energy-efficient, high-performance LED lights.

Friday, Clinton spoke to about 1,000 Microsoft workers; that company's giving campaign raised $72 million for charity.

Drive To Cut Emissions Creates Engine For Jobs 
By Barbara Whittaker , New York Times News Service
Published on 5/13/2007

The challenge of global warming is moving from rhetoric to the workplace, creating jobs as governments, businesses and environmental groups create markets aimed at reducing greenhouse gases.  Nowhere is that more obvious than in the trading of credits tied to emissions of carbon dioxide and other gases related to global warming.

“This is a very dynamic and fast-growing market,” said Wiley Barbour, executive director of Environmental Resources Trust, a Washington nonprofit group that is working to foster emission markets. “I can't even hire all the people I need. It's really hard right now to find climate change experts.”

His group has set up a voluntary registry for companies that want to buy or sell greenhouse gas reduction credits (also called offsets). Environmental Resources would verify the emission credits.  Emissions programs in the United States set a cap or limit on the amount of a pollutant that can be released. Companies that cannot stay under the limit buy credits from those that emit less than permitted.

The market for these types of jobs has evolved much more in Europe, which has agreed to curb greenhouse gases under the Kyoto Protocol, a U.N. treaty. But in the United States, which has not agreed to the treaty, the job market is blossoming as businesses realize that more legislation to cap emissions is inevitable. Already, California has passed laws to limit greenhouse gas emissions.

Voluntary efforts are growing as well amid heightened awareness of the dangers of global warming. For example, the Regional Greenhouse Gas Initiative, a group of Eastern states, is creating a program for trading emission credits.

Jobs tied to the carbon markets include company project developers, who find ways to reduce emissions; brokers and traders, who bring together companies that want to buy or sell emission credits; and verifiers, who go to a business to validate the credits being offered.

Barbour said that the people he hires as verifiers typically have science or engineering backgrounds and have a broad understanding of climate change policy. Verifiers with limited experience typically start at an annual salary of about $50,000, he said, with salaries more than $100,000 for experts.

In the corporate world, there is growing demand for “greenhouse gas coordinators” and “sustainability directors,” whose jobs include managing how much carbon dioxide their company is generating.

Environmental advocacy groups are looking for people to create programs that will ensure that the trading of carbon emissions credits meets standards and cuts emissions.

Environmental Defense, for example, has an opening for a carbon market specialist who would help businesses track and reduce greenhouse gas emissions — a job expected to pay $60,000 to $80,000. The group also has an opening for a carbon finance project team leader to work with the financial services industry to examine how a formal cap would affect current carbon credit markets. The salary is about $100,000.

“There probably aren't people out there with that direct title in prior jobs, but there are people who have the skill sets that are necessary,” said Marcia Aronoff, vice president for programs with Environmental Defense in New York.

Jonathan Stack, a broker with CantorCO2e — a subsidiary of Cantor Fitzgerald that trades in gases tied to global warming — said he knew in college that he wanted a job protecting the environment. But only after taking a class at Vermont Law School in environmental law did he realize he wanted a job in trading of emission credits.

The class examined how companies addressed climate change and studied emissions trading as a way to control the release of greenhouse gases. Stack read up on the subject and contacted Josh Margolis, a managing director with CantorCO2e, who subsequently hired him.

“I want to be involved in climate change and doing what I can to stop it,” said Stack, who works in the San Francisco office of CantorCO2e. “I believe businesses will react more to carrots than to sticks.”

Many of the jobs related to greenhouse gas emission are evolving out of ones that already existed.

Brian Anderson was recently named director of environmental management, regulatory affairs and sustainable development for the western division of the Vulcan Materials Co, a major producer of crushed stone, sand and gravel. In his previous job as manager of environmental affairs, he focused on carrying out environmental management systems.

His new job, which he assumed about two months ago, makes him responsible for how the company responds to climate change. He will help assess Vulcan's carbon emissions and develop ways to manage them.

Anderson trained as a geologist and began his career as an environmental consultant in 2002. To prepare for his new responsibilities, he said, he sought training through professional associations. He also works closely with experts and engineers to help the company meet goals like taking inventory of emissions levels for the California Climate Action Registry.

“Climate change is rapidly evolving and so new to most of us, really, I think time will dictate where the opportunities are in the job market,” Anderson said.

Global-Warming Consensus; Gambling on scientific disagreements is no longer a responsible option. 
DAY editorial
Published on 4/11/2007        
Governments from around the world have reached a consensus that global warming poses the threat of massive extinctions, droughts and floods within the current century and that the chances of such developments will grow if societies don't take steps to reduce the output of greenhouse gases.

That conclusion, a conservative one based on intense debate, is contained in the latest report by the United Nations' Intergovernmental Panel on Climate Change. The IPCC indicated that man-made global warming already is causing changes in the environment that are scientifically linked to greenhouse gas emissions from automobiles, power plants and factories.

The panel warns that if steps aren't taken to reduce man-made emissions, a third of the world's plant and animal species could become extinct by the end of the century. Ironically, the worst effects the international panel predicts will occur in some of the poorest regions on the earth, where the least greenhouse gases are produced.

As early as 2020, water shortages could affect more than 250 million people in Africa. Rising seas could threaten some of the world's busiest seaports, including Boston and New York.

This grim prognosis cannot be ignored by policymakers. Not only must governments prepare for these possible consequences, but they also must take steps to reduce carbon emissions. Gambling on lingering scientific disagreements over the issue is not a responsible option any longer.

Governments in industrialized nations like ours must pursue energy policies that don't rely on fossil fuels and provide models for developing nations to follow. The United States can no longer drag its feet in enforcing energy-efficiency standards in cars, power plants and other industrial activities that emit carbon gases.

The U.S. Supreme Court has taken a proactive stance in putting the federal government on notice that the Environmental Protection Agency has the responsibility and the obligation to regulate greenhouse gas emissions.

The government must follow through with an aggressive clean-energy campaign that engages the public. The American public has demonstrated in the past its willingness to make sacrifices for important causes, and with the right leadership, it can and must do so again.

Economist Sizes Up A Global Risk
By JOEL LANG, Courant Staff Writer
April 6, 2007
Gary Yohe, a professor at Wesleyan University, has been in Brussels this week, helping to draft the final wording of the latest global warming report from the U.N.'s Intergovernmental Panel on Climate Change.

Due today, the report will confirm with greater certainty than ever before that some of the most dire consequences of global warming - mass extinctions, wildfires, deadly heat waves and water shortages - are already occurring and will accelerate.

Yohe is not a biologist or climatologist, or someone easily labeled an alarmist. He is an economist, who began working on climate change long before it was recognized as a danger. His expertise in calculating risk puts him at the center of the serious, evolving discussion over global warming. Now that science has proved beyond a reasonable doubt that greenhouse gases are causing the planet to heat up, the question is what can or should be done to stop it.

The Supreme Court ruling this week that the gases can be classed as pollutants is expected to spur Congress to adapt national emission limits. Connecticut belongs to a New England compact that already has approved drastic cuts in emissions, as have some Western states, led by California.

But who can guarantee the reductions will be enough to blunt the most harmful effects of global warming? And who knows whether the cost of global warming damage, assuming it can be assigned a cost, will outweigh the cost of reducing emissions? Both have been estimated in trillions of dollars.

Yohe recognizes that science alone cannot provide the answers. Testifying before the Senate's Energy Committee last March, Yohe said climate "contrarians" should be told:

"You're right! We don't know exactly how much warming the planet will experience over the next century. We are not sure precisely how local climates will change. ... We cannot guarantee that our fears about potentially dangerous climate change are justified, but you cannot be sure that they are not!"

Among his many activities, Yohe co-edited a 2006 book, "Avoiding Dangerous Climate Change," that contains a paper on the likelihood of one of global warming's "doomsday" events - the collapse of the heat-carrying Atlantic waters that contain the Gulf Stream.

Yohe himself worked on the modeling exercise with four scientists. Their results showed a 50 percent chance of collapse by 2100 if the temperature rises another 2 degrees Celsius.

"The take-home message is this is not an experiment we want to try with the only planet we have," Yohe said. "There is a quantifiable risk it will happen, so we should take steps to assure it won't happen."

Yohe has advised thinking of global warming as an insurance risk: One pays to prepare for disaster, despite uncertainty the disaster will occur. The form of insurance he favors is a tax on carbon that begins small, but rises steadily to push long-term investment decisions toward cleaner power plants and greener buildings.

"You have to stop adding emissions at some point. There are expensive ways to do it and cheap ways to do it," Yohe said in one of a series of interviews.

"You start modestly, so you don't crash the economy. ... You need a $10- or $15-a-ton tax on carbon. The critical thing is that it increases like an interest rate, forever." He said a $10-a-ton carbon tax would add about a nickel to the price of a gallon of gas.

Yohe is one of five Americans among 60-odd experts in Brussels working on the report due today. It is a brief summary of a 1,500 page report on which Yohe served as a lead author.

"In our world he's a celebrity - as close as we come to one," said a graduate student who attended a lecture Yohe gave at the University of Connecticut the week before he left for Brussels. Yohe's main topic was the British government's so-called Stern Review published last fall that predicted economic catastrophe if greenhouse gases are not checked.

The science behind the Stern Review is sound, he said, but its cost calculations are so far off-base they provide a "slow-moving target" to climate change skeptics.

"Nobody's clairvoyant," Yohe said, referring again to risk policy. "The Senate can't subpoena Mother Nature to ask her what the climate sensitivity is going to be."

Burning Embers

On the wall of his office at Wesleyan, Yohe has a large poster he calls the "burning embers" chart. For him, it is at once a personal souvenir and a powerful message.

He worked on the team that constructed it for the last big U.N. report in 2001. They intended the chart to capture in a single image the risks of global warming - risks that are based on forecasts of climate sensitivity.

Sensitivity is the way scientists describe the link between rising temperatures and the buildup of greenhouse gases. But because the Earth's climate system is maddeningly complex, temperatures do not rise in lockstep with greenhouse gases. So scientists talk instead about the range of temperature increases most likely to result from any given concentration of greenhouse gases.

Then they must struggle to predict the damage the warming might ultimately do to the environment. In Yohe's "burning embers" chart, the potential damage is reflected in colored columns that bleed from safe white to fire alarm red across a scale of temperature increases.

With a single degree Celsius rise above the 0.7 degree warming that already has occurred, the poster's white indicates that the chance of a cataclysm, such as the rapid melting of polar ice sheets, is very low.

Yet for the same 1 degree rise, the poster's yellow shows plant and animal species already being harmed. At 2 degrees, the likely minimum warming now predicted by 2100, the poster turns mostly orange. At 4.5 degrees, the maximum, it is nearly all red for every kind of risk.

"Being in a room with 15 other smart people hammering out where the colors should change is pretty eye-opening," Yohe said.

He and his collaborators spent many hours over several days trying to decide what color hues to use for which risks, and whether the colors should melt into one another or change abruptly.

The embers chart now needs to be redrawn because of mounting evidence that global warming is changing the climate faster than expected in 2001.

"All those red lines are moving to the left," Yohe said, in the direction of greater risk.

Of C0{-2} and Butterflies

Yohe, at 58, looks youthful, even with gray hair that falls over his forehead. He first confronted global warming in the early 1980s, a few years after he joined the Wesleyan faculty, when one of his former professors at Yale, William Nordhaus, asked his help with a National Academy of Sciences study of what effect emissions of carbon dioxide, the main greenhouse gas, might have on temperature.

They didn't try to make disaster predictions. They projected how much more CO{-2} would pour into the atmosphere from future economic growth and how much the temperature might rise as a result.

"We were in the `Let's see if there's a problem stage,'" Yohe said. "How warm could it get? How high could the atmospheric concentrations get, and what difference would it make?"

Their work produced a 2-inch-thick report filled with some of the first "spaghetti graphs" - computer-generated tangles of lines that show the temperature rise under various scenarios.

Both professors are now internationally prominent. In a global warming issue published last fall, the Economist magazine described Nordhaus as "the father of climate-change economics." Nordhaus developed the first model to estimate the relative costs of containing global warming and the damage it might do.

Yohe, Nordhaus said, "is very simply one of the world's outstanding economists" in the area of global warming. Nordhaus, who also favors a carbon tax, said Yohe has done "landmark" work analyzing how rising sea levels might affect coastal property values.

He published one of his earliest papers, "The Cost of Not Holding Back the Sea," in 1991, the year after the U.N. panel issued its first global warming review.

His most noticed paper, however, grew out of a friendly fight with Camille Parmesan, a butterfly biologist at the University of Texas.

While working together on a section of the 2001 U.N. report, they were in opposing camps over how much global warming was already affecting various species. Some, like the Edith's checker spot butterfly Parmesan studied, were disappearing from the warmest end of their ranges, while birds and plants on many continents were mating or blooming earlier in the spring.

"Biologists wanted to say we're already seeing the impact of climate change," Parmesan recalled. "Economists thought that was too strong a statement. They believed in all the changes. But they had trouble accepting they were all due to climate change."

To resolve the conflict, she and Yohe analyzed data dating back decades for more than 1,700 species for a common "climate fingerprint." Yohe, Parmesan said, helped sift out confounding local factors such as pollution or development.

"I thought up a little probability model," Yohe said. He designed it to capture all possible weaknesses in their data, including the publication biases of scientific journals. They wanted their conclusions, Yohe said, to be "bulletproof."

Their study, published in the journal Nature in 2003, became one of the most frequently cited in global warming literature.

Of the nearly 500 species it identified as changing their seasonal behavior, almost 90 percent were breeding, nesting, migrating or blooming earlier. Of the 434 species that shifted their ranges, 80 percent were moving away from heat - toward the poles or up mountains.

The study did not consider whether the changes were harmful or beneficial. But Parmesan, in a survey published last November reported hundreds of species endangered, such as the polar bear. The harlequin frogs that lived in Central America's cloud forests had become extinct, killed by a fungus that climbed into their warmer, drier mountains.

Parmesan said her original argument with Yohe reflected the different way biologists and economists look at the future. Economists attach more importance to the immediate effect of a change on society. "To a biologist, it's just the opposite. A tiny change now will magnify over the next 20 or 50 years."

Yohe said economists have trouble capturing the full costs of climate change. They can estimate the net effect on agriculture or energy, but do less well with "non-market" effects.

"What's the value of a polar bear?" he said. "What's the value of the Great Barrier Reef?

"You could say it's the loss of tourism. But there's got to be more to it than that," he said.

Then there are the near imponderables of abrupt climate changes, such as the collapse of the Atlantic heat current.

"We can't describe the physical impact of that," he said.

"My job as an economist is not to tell people what to worry about. What I'd rather people do is look at that chart," he said pointing to his "burning embers" poster.

"I'd rather have people make their own judgments about what the dangers are, about what is tolerable interference with the climate.

"And I'm trusting that everyone will find something to worry about."

"...U.S. delegates rejected suggested wording that parts of North America may suffer 'severe economic damage' from warming."

Bleakest warning issued on climate
By Jeff Mason
Friday, April 6, 2007

BRUSSELS (Reuters) - Top climate experts issued their bleakest forecasts yet about global warming on Friday, ranging from hunger in Africa to a thaw of Himalayan glaciers in a study that may add pressure on governments to act.

More than 100 nations in the U.N. climate panel agreed a final text after all-night disputes during which some scientists accused governments of watering down forecasts about extinctions and other threats.

The report said change, widely blamed on human emissions of greenhouse gases, was already under way in nature and that desertification, droughts and rising seas would hit hard in the tropics, from sub-Saharan Africa to Pacific islands.

"It's the poorest of the poor in the world, and this includes poor people even in prosperous societies, who are going to be the worst hit," said Rajendra Pachauri, chairman of the Intergovernmental Panel on Climate Change (IPCC).

"This does become a global responsibility in my view," said Pachauri who added he was still wearing the same suit as on Thursday morning because of the marathon talks.

The IPCC groups 2,500 scientists and is the top world authority on climate change.

Its findings are approved unanimously by governments and will guide policy on issues such as extending the U.N.'s Kyoto Protocol, the main U.N. plan for capping greenhouse gas emissions mainly from burning fossil fuels, beyond 2012.

"This further underlines both how urgent it is to reach global agreement on reducing greenhouse gas emissions and how important it is for us all to adapt to the climate change that is already under way," said European Environment Commissioner Stavros Dimas.

"The urgency of this report, prepared by the world's top scientists, should be matched with an equally urgent response by governments," echoes Hans Verolme of the WWF conservation group.


Scientists said China, Russia and Saudi Arabia had raised most objections overnight seeking to tone down some findings. Other participants also said the United States, which pulled out of Kyoto in 2001 as too costly, had toned down some passages.

"Conflict is a hard word, tension is a better word," Gary Yohe, one of the lead authors, said of the mood at the talks.

China, the second largest source of greenhouse gases after the United States, sought to cut a reference to "very high confidence" that climate change was already affecting "many natural systems, on all continents and in some oceans."

But delegates sharpened other sections, including adding a warning that some African nations might have to spend 5 to 10 percent of gross domestic product on adapting to climate change.

Overall, the report was the strongest U.N. assessment yet of the threat of climate change, predicting water shortages that could affect billions of people and a rise in ocean levels that could go on for centuries.

It built on a previous IPCC report in February saying that human greenhouse gas emissions, mostly from burning fossil fuels, are very likely to be the main cause of recent warming.

That report also forecast that temperatures could rise by 1.8 to 4.0 Celsius (3.2 to 7.2 F) this century.

Friday's study also said climate change could cause hunger for millions with a sharp fall in crop yields in Africa. It could rapidly thaw Himalayan glaciers that feed rivers from India to China and bring heatwaves for Europe and North America.

U.S. delegates rejected suggested wording that parts of North America may suffer "severe economic damage" from warming.

Asia slowly recovers from telecom outage

By PETER ENAV, Associated Press Writer
Thu Dec 28, 10:23 AM ET
TAIPEI, Taiwan - Telecom companies quickly cobbled together new telephone and Internet networks on Thursday as Asia began recovering from a Taiwanese earthquake that snapped undersea cables, snarling service across the tech-savvy region.

Less than 48 hours after the powerful quake ruptured the two crucial cables off Taiwan's southern tip, companies from South Korea to Singapore said they managed to partially restore most of their service to millions of customers.  They did it by rerouting traffic through satellites and cables that weren't damaged by the 6.7-magnitude tremor that killed two people.

Four repair ships were sailing to the quake zone, but they weren't expected to arrive until Tuesday, said Lin Jen-hung, vice-general manager of Chunghwa Telecom Co., Taiwan's biggest phone company.  The crews would need to find the fault, survey the conditions and pull up the cables for repair — a job Chunghwa said could take two weeks.

Most international Internet data and voice calls travel as pulses of light through hundreds of undersea fiber optic cables crisscrossing the globe. The cables — clusters of glass fibers enclosed in protective material — are often owned by groups of telecom companies, who share costs and capacity.

"Cables break all over the place, from sharks nibbling, anchors dragged across," said Markus Buchhorn, an information technology expert at Australia National University.
But Buchhorn added the broken cables become a problem if — like in the Taiwanese case — several snap at the same time and there are not immediate backup lines to keep the traffic flowing.

Chunghwa estimated its revenue loss from the earthquake damage at about $3 million. Repairing the cables would cost about $1.53 million, the company said in a filing to the Taiwan Stock Exchange.  The outage reminded stock traders, travelers and online video gamers how addicted they've become to the Internet.

"Many lost the opportunity to make fast money," said Francis Lun, general manager at Fulbright Securities in Hong Kong.

"I haven't experienced anything like this before," Lun added. "We've become too dependent on these optic fibers — a few of them get damaged, and everything collapses."

Online gamer Daniel Lee, 28, said he was suffering in Hong Kong because he couldn't spend his usual eight to 10 hours a day playing games on the Internet.

"Most online games are routed through Taiwan, and now I can't play any of them. I can't contact a lot of people because my e-mail is down. It's a hassle and it's depressing, but I can't do anything about it," said Lee, who's unemployed.

Long lines formed at Hong Kong's airport because the computer system at the check-in counters for Taiwan's China Airlines weren't working.  A woman at the airline's hot line said the computer system had been down since Wednesday afternoon.

"We had to switch to manual services because the system in Taipei was affected by the quake," said the woman, who only gave her surname, Sze. "But all our computers are running normally now."

South Korea's biggest carrier, KT, said more than half of its 92 damaged lines should be fixed by the end of Thursday. One of the company's customers was the Foreign Ministry, which recovered its service.  In Japan, major carriers KDDI Corp. and NTT Communications said most fixed-line telephone services were up and running.

NTT spokeswoman Akiko Suzaki said that a full recovery would require a relaying of undersea cables and could take weeks.

Tim Dillon, senior research director with U.S.-based Current Analysis, which studies the telecom industry, said customers in Asia will have to get used to sluggish service in the next few weeks.

"We have a lot of traffic all going to alternate routings at the same time," Dillon said. "It's obviously going to result in slower speeds and congestion as everyone piles onto the same cable."

Earthquakes Off Taiwan Reveal Internet Vulnerability; Key Cables Cut, Slowing Telephone, Online Traffic
By Peter Enav, Peter Svensson, Associated Writers 
Published on 12/28/2006    
Taipei, Taiwan — With one blow, Mother Nature triggered the largest telecommunications outage in years, cutting off or slowing telephone and Internet traffic in Asia from Beijing to Bangkok.

A powerful earthquake off the southern tip of Taiwan late Tuesday damaged up to a dozen fiber-optic cables that cross the ocean floor south of Taiwan. They usually carry traffic between China, Japan, Korea, Southeast Asia, the U.S. and the island itself.

The magnitude-6.7 tremor, which struck near the town of Hengchun, killed two residents of Taiwan and injured more than 40 people.

It also showed the vulnerability of the global telecommunications network.

Chunghwa Telecom Co., Taiwan's largest phone company, said the quake damaged several of the undersea fiber lines, and repairs could take two to three weeks.

Taiwan lost almost all of its telephone capacity to Japan and mainland China. Service to the United States also was hard hit, with 60 percent of capacity lost.

Later, Chunghwa said connections to the U.S., China and Canada were mostly restored, but 70 percent of the capacity to Japan was still down, along with 90 percent of the capacity to Southeast Asia.

Stephan Beckert, an analyst with the Washington-based research firm TeleGeography, said it was the largest telecommunications failure in years.

“The magnitude of the break is surprising because Taiwan is otherwise a very well connected system,” Beckert said. He noted that cables get cut and disrupted all the time, but there's usually enough backup capacity on other lines to keep traffic flowing without customers noticing an interruption.

But with multiple cables broken at once, Internet traffic around the Pacific was disrupted. Hong Kong telephone company PCCW Ltd., which also provides Internet service, said the quake cut its data capacity in half. Internet access was cut or severely slowed in Beijing, said an official from China Netcom, China's No. 2 phone company.

The official, who would not give his name, said the cause was thought to be the earthquake, but he had no further details.

The Internet Traffic Report Web site, which monitors Internet connectivity in several countries, showed that packet loss, or the percentage of data that doesn't reach its destination, spiked sharply in Asia at the time of the earthquake, rising from about 10 percent to more than 40 percent.

On Wednesday afternoon U.S. time, the Web site showed limited connectivity to China, Singapore and Indonesia, while Japan and Taiwan were apparently back to normal.

KDDI Corp., Japan's major carrier for international calls, said its fixed-line telephone service was affected by the quake. Company spokesman Haruhiko Maeda said customers were having trouble calling India and the Middle East, which usually use the cables near Taiwan. Maeda said the company was rerouting calls through the U.S. and Europe.

South Korea's largest telecom company, KT, said that the lines it uses were damaged, affecting dozens of companies and institutions, including South Korea's Foreign Ministry.

In the U.S., Cisco Systems Inc.'s Linksys division warned that customer support call centers for its home networking gear were affected by the outage, but other companies with overseas call centers reported few problems.

Molly Faust, a spokeswoman for American Express Co., the global travel and payment card company headquartered in New York, said the company “wasn't experiencing any customer service issues in Asia.”

She said that there were “some interruptions” of the company's computer systems in Taiwan, but added: “It didn't impact customers because we could use backup systems and manual processes.”

Tyco International Ltd. said it has a Taiwan-based cable-laying ship heading to the area for repairs.

“Pretty much everything south of Taiwan has been reported at fault,” said Frank Cuccio, vice president of marine services at Morristown, N.J.-based Tyco Telecommunications.

Cuccio expects the ship to be in position in a few days. It then takes three to five days to repair each cable, but mudslides set off by the earthquake can complicate matters by covering the cables, making them harder to retrieve from the bottom.

Cuccio said the ruptures are more than 10,800 feet below sea level, too deep for the remote-controlled submersibles that otherwise would find the cables. Instead, the ship will drag grapnels along the bottom to find them.

The cables on the deep ocean floor are just two-thirds of an inch, a testament both to the immense data capacity of optical fiber and the fragility of the links that form the global telecommunications network.

Asia communications hit by quake 
Wednesday 27 Dec

Telecommunications across Asia have been severely disrupted because of damage to undersea cables caused by Tuesday's earthquake near Taiwan.
Banks and businesses in Taiwan, South Korea, China and Japan reported telephone and internet problems.  The earthquake, a magnitude 7.1 according to the US Geological Survey, struck off Taiwan's southern coast

Two people were killed and at least 42 injured in the temblor, which shook buildings across the island.  The earthquake took place at 2026 (1226 GMT) south-west of Hengchun. It was followed by a number of aftershocks.

Japan's Meteorological Agency had warned of a possible localised tsunami heading towards the Philippines, but nothing was later reported.

'Seriously affected'

Taiwan's largest telephone company, Chunghwa Telecom Co, said damage to an undersea cable had disrupted 98% of Taiwan's communications with Malaysia, Singapore, Thailand and Hong Kong.  Repairs could take three weeks, Vice-General Manager Lin Jen-hung said, but quality would improve daily.

Telecommunications companies in Hong Kong, Japan and China also reported problems.  China's biggest telecoms provider, China Telecommunications Group, said that communications cables to the US and to Europe had been damaged.

"Internet connections have been seriously affected, and phone links and dedicated business lines have also been affected to some degree," it said.  In South Korea, broadband provider KT Corp said six submarine cables had been affected, interrupting services to customers including banks.  Some foreign exchange trading was reportedly affected.

"Trading of the Korean won has mostly halted due to the communication problem," a dealer at one South Korean domestic bank told Reuters news agency.  Several companies have warned of slow internet access over the next few days.  In Taiwan, rescue workers were searching through rubble for people injured in the earthquake.

Two members of a family died in Hengchun when their house collapsed, Taiwanese officials said.  The earthquake came on the second anniversary of the Asian tsunami, which claimed almost 250,000 lives.  


Yale Shakes Up MBA Program;   Requires Study Abroad

Hartford Courant
Associated Press  NEW HAVEN, Conn.
12:53 PM EST, December 22, 2006

For a group of Yale business students, next month's lessons will take place on the pineapple, banana and coffee plantations in Costa Rica. Others are checking out investment prospects in Tanzania and what's sizzling in Singapore.

Yale this year became the first major MBA program to require students to study abroad. The Ivy League university also replaced finance and marketing courses that have been the mainstay of business education for 50 years with courses structured to mimic the way business managers operate.   The changes, implemented this fall, come after criticism in scholarly articles that master in business administration programs have failed to teach useful skills. Other business schools are implementing or considering similar plans.

"We are at the beginning of what over the next five years will be tremendous change in business education," said Joel M. Podolny, who was appointed dean of the Yale School of Management last year.

Business schools increasingly compete for students and faculty as the number of MBA programs has soared. Universities are trying to differentiate themselves with special programs, such as a growing emphasis on ethics courses in the wake of corporate scandals.

"There is a trend to being responsive to the needs of the marketplace," said Arthur Kraft, chairman of the Association to Advance Collegiate Schools of Business.  Next fall, a new Stanford University curriculum will emphasize the skills a business manager needs and requires students to have a global experience.

Yale's new curriculum aims to elevate a 30-year-old business program, its newest professional school, into the ranks of elite business schools such as Harvard, Wharton and others. Business Week ranked Yale 19th out of its top 30 MBA programs.

Mindful of the global economy, Yale and other business schools are placing more emphasis on studying abroad.

"I think it's something desired by the students and by the companies," said Douglas Viehland, executive director of the Association of Collegiate Business Schools and Programs, a business education accreditation organization in Overland Park, Kan.

During the first two weeks of January, Yale students will travel to one of eight destinations around the world for intensive study. They will meet business, government and nonprofit leaders.

The group heading to Africa will visit day care centers to see how the AIDS epidemic is affecting the work force.

Paul Ip is among the students traveling to Costa Rica to check out the plantations as well as niche markets such as ecotourism and how globalization affects small countries.

"You can read a lot in books," Ip said. "It's definitely more instructive to be there in person to see what's going on."

The new curriculum includes courses structured around the organizational roles a manager must deal with to solve problems or make progress. There are courses on the employee, the investor, the customer and the competitor.

"No executive wakes up in the morning and thinks, 'I'm going to do finance today,' so it doesn't make sense for students to sit in a finance class and learn to crunch numbers absent of any content," Sharon Oster, an economics professor, said in a statement.

Students still learn the traditional finance and marketing skills, but from the perspective of the employee and others.

The customer class, for instance, weaves in not only the traditional focus on marketing but also accounting to determine the value of the relationship, psychology to understand how customers make choices and operations to ensure good service.

"The approach is so much more practical," said Hannah Grannemann, an MBA and drama student who is heading to Japan next month. "Nobody makes decisions in isolation. I'm learning a huge amount."

Oster, who teaches the competitor course, says the new approach allows her to get more in-depth and help students connect the dots to what makes businesses run.

"I think we all feel we've gotten a little stale," Oster said. "We hope it will really attract adventurous, entrepreneurial students. These are courses intended to open your mind to doing great things over a long career." 


OIL:  Hedge against inflation?  Was/is Iranian election like Florida 2000?  Did someone say Global Warming?

Oil Rises to $72 as Investors Eye Inflation

Filed at 8:56 a.m. ET

June 19, 2009

Oil prices rose to $72 a barrel on Friday amid concerns that massive U.S. fiscal spending will spark inflation down the road, making oil and other commodities attractive investment alternatives.

Benchmark crude for July delivery rose 77 cents to $72.14 a barrel by mid-afternoon in Europe in electronic trading on the New York Mercantile Exchange. On Thursday, it rose 34 cents to settle at $71.37.

After hitting an eight-month high of $73.23 on June 11, oil has lingered above $70 a barrel this week on investor optimism that the global economy is stabilizing from a severe slowdown.

Traders are also buying crude and other commodities as protection against possible inflation and a weaker dollar.

On Friday, the euro rose to $1.3932 from $1.3903 late Thursday in New York, while the British pound also gained, trading at $1.6463 from $1.6350 in the previous session.

''As an inflation hedge, oil is very popular right now,'' said Christoffer Moltke-Leth, head of sales trading for Saxo Capital Markets in Singapore. ''The theme of the market is the inflation scare, and it's getting more pronounced. Crude is seen as a safe bet in this environment.''

So far, inflation rates have remained low, with some countries slipping into disinflation amid deep recessions. But analysts worry that government stimulus spending, especially in the U.S., and rising commodity prices could push prices higher by the end of the year.

Robert Prior-Wandesforde, senior Asia economist for HSBC in Singapore, said in a report that he expects the inflation rate in Asia excluding Japan and China to bottom at 3 percent in September and then rise to 5 percent by year-end and 6.5 percent by mid-2010.

''A strong rise in both food and energy price inflation will push the headline rate higher,'' he said. ''It is by no means clear that markets or policy makers are prepared for this kind of rapid reversal in inflation.''

Analysts also highlighted potential risk factors in Iran and Nigeria.

''The Iranian version of the Florida vote-recount is starting to be a bit too long for comfort,'' said Olivier Jakob of Petromatrix in Switzerland. ''The continuation of the protests in Teheran are a mounting embarrassment for the governing powers and increases the chance either a violent repression or the creation of a diversion by opening another front.''

In Nigeria, Africa's largest crude producer, the main militant group said it blew up a major pipeline run by Italian oil company Agip, although there was no immediate confirmation from the subsidiary of Italian energy giant Eni SpA.

Violence has been escalating in the oil-rich southern region as the military intensifies operations to flush out rebels battling for a larger share of the Nigeria's oil revenues.

In other Nymex trading, gasoline for July delivery was up 0.43 cent to $2.0338 a gallon and heating oil rose 1.9 cents to $1.8560. Natural gas for July delivery gained 6.1 cents to $4.154 per 1,000 cubic feet.

In London, Brent prices rose 72 cents to $71.78 a barrel on the ICE Futures exchange.

Iraq Throws Open Door to Foreign Oil Firms
Published: June 30, 2008
Filed at 9:22 a.m. ET

BAGHDAD (Reuters) - Iraq threw open the world's third largest oil reserves to foreign firms on Monday, putting British and U.S. companies in poll position five years after U.S.-led troops invaded the country to oust Saddam Hussein.

The move to invite bids for the development of Iraq's largest oilfields will mark the return of the oil majors, whose cash and technical expertise Iraq needs to restore its oil infrastructure that has been hard hit by sanctions and war.

But any awards to U.S. and British firms are likely to anger opponents of the invasion, who have said the 2003 war was designed to give Western oil companies control over Iraqi oil reserves. U.S. and British officials have denied the charges.

By allowing international firms to help raise output at its major oil fields, the Iraqi government is breaking with the policy of major oil-producing neighbors such as Saudi Arabia, Kuwait and the United Arab Emirates whose national firms keep tight control of foreign investment in their oil sectors.

"The six oilfields that have been announced today are the backbone of Iraq's oil production, and some of them are getting old and production is declining," Oil Minister Hussain al-Shahristani told a news conference.

He listed the areas as Rumaila, Kirkuk, Zubair, West Qurna Phase 1, Bai Hassan and Maysan -- which comprises three separate fields: Bazargan, Abu Gharab and Fakka.

The Oil Ministry said they were open for long-term development contracts. Iraqi has prequalified 41 foreign firms.

Shahristani said he hoped contracts could be signed in June 2009 to raise output by a combined 1.5 million barrels per day at those fields. He added that Iraq aimed to raise output to 4.5 million bpd by 2013 from the current 2.5 million bpd.

He also said the foreign bidders must take on a local partner with a minimum 25 percent stake in the deal; and that any firm that wanted to bid must open an office in Baghdad. Currently, few foreign companies have any presence in Iraq because of the security situation.


Iraq said last week it also hopes to sign six short-term oil service contracts during the next month.  Taken together, the short-term and long-term contracts will open the door to major international involvement in the OPEC member's oil sector for the first time in nearly four decades.  The majors have been positioning themselves for years in the hope of eventually gaining access to Iraq's oil reserves.

Its proven reserves, at 115 billion barrels, are the world's largest after Saudi Arabia and Iran, and Deputy Prime Minister Barham Salih said in April that as-yet unproven reserves could make the overall total as much as 350 billion barrels.

"We feel it is very important for Iraq to arrest any decline and increase production," Shahristani said.

The short-term service deals, each worth about $500 million, are aimed at quickly lifting output at Iraq's largest producing fields by a combined 500,000 barrels a day.

Five of the short-term deals that have been under discussion are with Royal Dutch Shell; Shell in partnership with BHP Billiton; BP; Exxon Mobil; and Chevron in partnership with Total.

Iraq has also been in talks with a consortium of Anadarko, Vitol and Dome for a sixth short-term contract.

Those talks on the short-term deals have given the majors concerned a head start in efforts to bid for future contracts.

In terms of the short-terms contracts, Shell negotiated for the Kirkuk oilfield in the north and was also in talks on the Maysan fields, Iraqi officials have said. BP has its eyes on the Rumaila field in the south, while Exxon wants the contract for the Zubair oilfield, in Basra province, also in the south.

And Chevron and Total were looking to work together to develop West Qurna, also in Basra.


But many Iraqis still bear a grudge after British, American and French oil companies controlled their oil industry for half a century through the Iraq Petroleum Co (IPC).

It was an era when Western majors working in the Middle East used oil output and prices as an economic and political tool, analysts said.

From the time it struck oil at the huge Kirkuk field in 1927 until nationalism forced it out in 1972, IPC -- made up of BP, Exxon, Mobil, Shell, CFP (Total) and Partex - ruled the roost.

That did not sit well with Baghdad, which resented IPC's control over its revenues.

Oil is Iraq's main source of income, and boosting output is key to earning the cash the country needs for reconstruction.

Iraq's cabinet agreed a draft oil law in February last year, but it has failed to get through parliament.

In the absence of the law, Baghdad has moved ahead with the contracts, saying this is in line with an old oil law in existence before the invasion that toppled Saddam.

Majors Say High Oil Prices Not Due to Speculators
Published: June 30, 2008
Filed at 9:25 a.m. ET

MADRID (Reuters) - The heads of some of the world's biggest oil companies countered on Monday OPEC claims that speculators were driving high oil prices, instead blaming a dearth of new supplies.

The chief executives of Royal Dutch Shell Plc <RDSa.L>, BP Plc <BP.L> and Spain's Repsol YPF <REP.MC> told the oil industry's biggest gathering in three years that restrictions on where they can invest and high taxes meant they could not help boost supplies as much as they might.

BP's CEO Tony Hayward said the argument that financial investors buying oil futures were behind a four-year rally that pushed oil prices to new records above $143/barrel on Monday was a "myth."

He said the problem was a failure of supply growth to match demand growth. "Supply is not responding adequately to rising demand," he told thousands of delegates at the World Petroleum Congress.

Repsol CEO Antonio Brufau agreed. "The fundamentals in the industry are the significant reasons for having these prices," he said.

Shell Chief Executive Jeroen van der Veer said there was enough supply to meet current demand but that the market was tight and that many users were justifiably worried that future supplies will not meet demand. 
Insofar as financial investors were involved in the market, they were only following such supply fears.

"We don't think that the financial markets are leading the speculation, probably they follow what other people fear as long term fundamentals," Van der Veer said. "I do not think that you can blame speculation for the oil price."

U.S. light crude was up $2.55 at $142.76 a barrel by 8:12 a.m. EDT, after a record high of $143.67 a barrel, propelled by heightened market fears of conflict between Israel and Iran over Tehran's nuclear program.


Hayward said politics rather than geology was the reason behind anemic supply growth. "The problems are above ground not below it," he said.

Brufau noted that the vast majority of the world's oil reserves were in countries, such as Saudi Arabia and Kuwait, which restricted investment by international oil companies.  Despite falling spare global oil production capacity, the OPEC oil cartel argues that supplies are ample and that they are investing enough to ensure consumers will have the oil they need in future.  However, analysts say that while the oil majors tend to boost their investments when oil prices rise, in the hope of lifting output and profits, state-run or national oil companies (NOCs) often do not respond to market signals.

NOCs' investments are driven by other priorities such as their government's short-term cash needs, maximizing long term returns and possibly management of the oil price.  High taxes have also limited investment, the executives said. As oil prices rose in recent years, producing countries from Russia to Venezuela have boosted oil taxes sharply.

Hayward said taxes were now "dangerously high."

Government discloses investigation of crude-oil market
Friday, May 30, 2008 3:33 AM EDT
WASHINGTON — Federal regulators are six months into a wide-ranging investigation of U.S. oil markets, with a focus on possible price manipulation.

The Commodity Futures Trading Commission on Thursday said it started the probe in December and took the unusual step of publicizing it "because of today's unprecedented market conditions." Crude prices have risen more than 42 percent since early December, even after a decline of more than $4 to $126.62 a barrel on the New York Mercantile Exchange. Gasoline prices are nearing a national average of $4 a gallon, up from about $3.20 a year ago.

The commission said it is investigating potential abuses in the way crude oil is purchased, shipped, stored and traded nationwide, but did not reveal details. Also on Thursday the agency announced a handful of other initiatives designed to increase transparency of U.S. and international energy futures markets.

For example, the CFTC said it will immediately require monthly reports from institutional investors who manage funds designed to mimic the price of crude oil and other energy futures. The goal, the agency said, is to identify the amount of such index trading and to "ensure that this type of trading activity is not adversely impacting the price discovery process." The CFTC also said it has reached an agreement with its British counterpart and InterContinental Exchange Inc.'s Futures Europe to expand surveillance of energy futures contracts with U.S. delivery points, including the benchmark West Texas Intermediate crude, which trades on the Nymex.

"The implementation of today's measures will improve oversight of the energy futures markets to ensure they reflect fundamental economic forces of supply and demand, free of manipulation and fraud," the CFTC said in a statement.

Analysts said the CFTC action would likely have a limited impact on oil prices, which have risen on a combination of factors, including growing demand in China and other developed nations, the falling value of the dollar, geopolitical tensions and low interest rates, which have fueled a futures buying binge by institutional investors seeking to ride oil's upward momentum.

It is the last factor, exacerbated by the Federal Reserve's efforts to prop up the ailing housing market, that is playing the biggest role in the recent runup, according to Howard Simons, a strategist at Bianco Research in Chicago.

"Eliminate that excess money and the problem (of soaring prices) disappears," he said.

Still, the CFTC action "will have a chilling effect" on speculative investors' enthusiasm for energy futures, Simons predicted. "What they're saying ... is, 'You either stop this or we're going to stop it for you."' At least one energy analyst sees trouble on the horizon for pension funds and other non-traditional investors looking to commodities indexes as just another type of security they need to have in their portfolios. If a major price drop occurs, this relatively new breed of investors will want out of energy futures at the same time and it will be "like entering a revolving door at the wrong time in the wrong direction," according to Cameron Hanover Inc. President Peter Beutel.

U.S. Sen. Jeff Bingaman, chairman of Senate Energy and Natural Resources Committee, earlier this week asked the CFTC to provide the committee with more information about its oversight of energy commodity markets.

The New Mexico Democrat said he was concerned about increasing trading activity in U.S. crude oil taking place overseas and in over-the-counter markets. He also questioned the CFTC practice of classifying large investment banks as "commercial" market participants alongside traditional buyers and sellers, and its "continued assertion that noncommercial participants, or speculators, follow rather than lead oil price movements." Bingaman on Thursday said he was pleased with the CFTC steps and that a future hearing will explore how they will address his concerns "that the commission lacks a robust understanding of the oil market." Congress earlier this month voted to give the CFTC greater oversight of unregulated electronic exchanges as a way to protect consumers and deter price distortion and manipulation.

A Senate subcommittee investigation last year found that hedge fund Amaranth Advisors LLC, which collapsed in 2006 after losing more than $6 billion in natural-gas trades, had shifted its activities to ICE from the regulated Nymex to avoid trading limits, and that the "excessive speculation" raised homeowners' heating bills.

Speculation has been cited as one on many factors contributing to surging petroleum prices, along with assumptions about new supplies, limited demand growth, possible supply disruptions overseas and the dollar's depressed value against other currencies.

Who knows why oil prices are so high?
Various reports have attributed the recent record breaking rise in oil prices to different reasons, but who is correct?
By Anthony Reuben, Business reporter, BBC News
22 May 2008

Some say it is because the Opec cartel is unwilling to boost its supply levels.  Others say it is because of fears about supplies from other countries such as Nigeria and Venezuela.

But the truth is, it could be something completely different.

The fundamentals

"Why did it happen on Tuesday? Nobody really knows for a fact what's happening or where it's going," says John Hall from the energy consultancy John Hall Associates.

So what is it that moves oil prices up and down?

"It's the fundamentals, stupid," says Mark Lewis from Energy Market Consultants.

The fundamentals are factors that influence the supply of, and demand for, oil.  Things such as the increasing demand from China and India, as well as fears that a stand-off between the US and Iran could interrupt supplies, have been raising oil prices.

Alternatively, financial factors may be at work, such as a hedge fund having to sell a particular oil contract so it does not end up receiving a tanker-load of oil - or a trader deciding it would be fun to be the first to trade oil above $100 a barrel.

The problem is, much fundamental information is not freely available.

No sense

"We really don't know what the fundamentals are doing at any point in time," Mr Lewis says.

"The markets are looking for signals from the fundamentals. Some of them are irrelevant, some of them are wrong, some of them are meaningless, but they affect prices nevertheless."

When the New York oil price broke through $100 a barrel for the first time at the start of 2008, one of the factors cited as being behind it was the assassination of Benazir Bhutto in Pakistan on 27 December 2007.

"That didn't strike us as making any sense at the time," says Sean Cronin, editor of Argus Global Markets.

He says that people are too keen to attribute market moves to geopolitical factors.  He attributes rising prices to over-optimistic expectations of oil production by non-Opec countries - and also to signs that Opec members appear to have a greater tendency to stick to their output limits.

'Can't sit around'

These long-term trends are all very well, but oil traders have to make quick decisions.

"You can't sit around a day or two and see what happens," says Mr Hall.

"So the rocket testing in North Korea [previously cited as a reason for rising prices] or the assassination of Benazir Bhutto turned out to have no real effect, but they might have done."

Some of the factors that are more likely to influence oil supply and demand, such as figures of oil demand from China, are not available.  That means that minor news of fundamentals, such as the output of a single refinery, may be given too much weight.

"Little changes in insignificant parts of the fundamental picture, if they're visible, can have a substantial impact on the oil price - substantial in the sense of several dollars," Mr Lewis says.

Dotcom boom

So there appears to be a distinction between the factors that raise the oil price because they affect sentiment and the ones that genuinely affect supply and demand for oil.  And it may be that rises due to the former are vulnerable.

"It's like the dotcom boom in the 1990s," says Mr Lewis. "It was overinflated, but as long as everyone kept believing in it, the price went up."

"When they stopped believing in it, the price went down. And that's a warning."

Big lesson Iran can teach U.S.

Norwalk HOUR
December 18, 2006

What do you call a world leader who faces a strategic threat stemming from his country's energy dependence and introduces a crash program for energy independence that taps into his country's domestic resources?


With 43 percent of Iran's gasoline imported, Iranian President Mahmoud Ahmadinejad knows that a comprehensive gasoline embargo could cause social unrest that could undermine his regime. In response, he recently announced a three-part crash program for energy independence.

One tenet of the plan is massive expansion of the country's refining capacity. While no refinery has been built in the United States in decades, Iran's refinery infrastructure is undergoing one of the world's fastest expansions, including the construction of two large new refineries.

A second pillar is to secure imports of refined products from Venezuela, one of Iran's staunchest allies against the West.

The third, and most innovative, part of the plan is to convert Iran's vehicles to run on natural gas rather than gasoline within five years. Iran has the world's second-largest natural-gas reserve after Russia — 16 percent of the world's total — which guarantees an uninterrupted supply of cheap transportation fuel for decades. The cost of conversion of both the cars and refueling stations is heavily subsidized by the government.

The conversion of cars is simple, particularly in a country where unemployment surpasses 10 percent and labor is cheap. All that is needed is a minor engine adaptation and the installation of a gas cylinder in the trunk of the car. More than 105 conversion centers have already been built.

A shift from petroleum to natural gas will save Iran between $3 billion and $8 billion per year on gasoline imports. It will also leave refineries free to produce a greater proportion of essential non-gasoline petroleum products like jet fuel, which will keep Iran's air force and commercial airlines intact, and diesel to power the army and navy.

Ahmadinejad's gas revolution is a clear sign that Iran is preparing itself for the possibility of war and is developing a comprehensive economic warfare strategy to supplement its military and diplomatic initiatives.

Yet, while Iran is taking meaningful steps to reduce its strategic vulnerability, the United States is doing the exact opposite when it comes to energy security. Despite President Bush's statement in January that "America is addicted to oil," neither Congress nor the administration has done much to address this vulnerability. We still impose a stiff, 54-cent punitive tariff on imported Brazilian ethanol; our fuel-efficiency standards have been stagnant; and severe limits on domestic exploration of oil and gas are still in place. This year, imports account for more than 60 percent of U.S. oil supply. With the sanctions option waning, we must begin to answer Iran's economic warfare strategy with one of our own. Therefore, the United States should:

Require that every new car sold here be a flex-fuel vehicle capable of running on any combination of gasoline and alcohol fuels, such as ethanol and methanol, that can be generated from vast domestic resources of biomass, wastes and coal. The extra cost to the automaker to make a car fuel flexible is less than $150, about a quarter the cost of converting an Iranian gasoline-powered car to run on natural gas. Requiring fuel flexibility will provide investors in alternative fuel plants the confidence that there will be a growing market for such fuels.

Tap into domestic resources by encouraging the use of electricity as a transportation fuel. Plug-in hybrid electric vehicles can shift our transportation sector from oil to made-in-America electricity generated from coal, nuclear power, and renewable sources.

Remove the ridiculous 54-cent-a-gallon tariff on imported ethanol, and encourage friendly Latin American countries to ramp up ethanol production from sugar cane. Nothing would improve America's posture in Latin America more than dollars invested in the region's farming communities.

Energy dependence presents a serious and urgent national security problem. This is something America's staunchest enemy clearly understands and is sparing no effort to address. Will we be smart enough to do the same?

Gal Luft is executive director of the Institute for the Analysis of Global Security ( in Washington; Anne Korin is chair of the Set America Free Coalition ( and co-director of IAGS. They wrote this for The Philadelphia Inquirer.

A businesslike approach to fixing transport?

By Robert Peston, BBC business editor 
1 December 2006

The Eddington Report on how to modernise the UK's transport network is palpably the work of a businessman rather than an economist or a policy wonk.

Rod Eddington's approach is pretty practical, treating the United Kingdom as if it was a giant business.  This former BA chief executive's methodology is basically to ask what kind of returns, what kind of profits, are generated by different kinds of transport investments.  Now he has absolutely no doubt that investing in transport brings significant returns.

He says, for example, that unless we tackle congestion, it will cost an extra £22bn in wasted time for all of us, especially business, by 2025.  Which is one of the reasons that he is such a powerful advocate of road pricing - or charging us each time we use a busy road.


Now, it is probably worth spelling out in more detail what he says about the financial benefits of a national scheme of pricing the use of busy roads.  
In his study, he assumes there would be a maximum charge of 80p per kilometre to travel at the busiest times.  He estimates that such a scheme would reduce congestion by 50% below what it would otherwise have be in 2025 and would therefore reduce the requirement of big new investment in road capacity by 80%.

And from there he deduces there would be benefits of £28bn every year in 2025. These are basically the benefits of being able to get from A to B quicker for those for whom it is most economically important.

And he says that these benefits are so big that they can't be ignored - although he also acknowledges the policy challenge of ensuring that poorer people are not discriminated against as and when it becomes more expensive to get around.


He also makes what I would call two very general and sweeping points about where money should be directed.

First he identifies three strategic priorities: 
BA's former chief executive is in favour of expanding Heathrow

Second, he says there are - on the whole - diminishing returns to investing in ever-larger projects. The best returns, he says, come from relatively small investments designed to make our existing transport network and system function better.

Things like increasing capacity on existing railway lines or bus routes.

Almost the biggest possible project in his report which he specifically endorses, for example, is so-called mixed mode at Heathrow - which would allow runways to be used for take off and landing.

Funny that a former BA chief executive should like that.

General principles

I think some people were expecting clearer recommendations from him about specific projects.

In fact, there aren't many of those.

Thus in the main 60-odd page report, I could find no reference to Cross Rail, the new line linking east and west London so favoured by business in general. As it happens, I think he's mildly in favour, but that's not explicit.
Britain's transport networks are "inefficient and disjointed"

And you have to deduce that he's in favour of Heathrow and Gatwick expansion from his saying that a) they are terribly important to the economic success of this country; and b) delays to flights at both of them are the worst in the European Union.

But nowhere is there a detailed grand plan for fixing Heathrow.

Going green

The other really important point about this report is that Eddington is very much a Stern acolyte.

He's totally bought into the Government-commissioned report on how to reverse climate change prepared by Sir Nicholas Stern - who gave him a bit of help with this report, as it happens.

So he says that the costs of damage to the environment, the costs of climate change, must be fully factored in to any assessment of specific transport schemes.

And he says that cars, planes, trains and so on must be charged for their relative emissions of carbon, their relative contributions to climate change.

As such, he's another influential voice endorsing more green taxation of transport or the rationing and trading of carbon emissions from the transport sector.

Which, if implemented of course, would make it more expensive for all of us to get around - the more so if it combined with congestion charging on the roads.  

U.N.: Lack of sanitation has human cost
By CLARE NULLIS, Associated Press Writer
Thu Nov 9, 11:40 PM ET
CAPE TOWN, South Africa - The humble flush toilet, taken for granted in most rich countries, could be a cheap but powerful tool to reduce childhood deaths and boost global development, a U.N. report said Thursday.   The annual report of the U.N. Development Program said that lack of access to clean water and basic sanitation killed nearly 2 million young children each year. This amounted to nearly 5,000 deaths per day, most of them preventable, and made diarrhea the second biggest childhood killer.

"No access to sanitation is a polite way of saying that people draw water for drinking, cooking and washing from rivers, lakes, ditches and drains fouled with human and animal excrement," said Kevin Watkins, the main author.

"The toilet may seem an unlikely catalyst for human development, but the report provides abundant and powerful evidence to show how it benefits people's well being," he said.

The report cited Peruvian studies that the installation of a flush toilet in the home increased by almost 60 percent the chances of a child surviving to the first birthday and in Egypt by 57 percent.  The report, "Beyond scarcity: Power, politics and the global water crisis" painted a grim picture of global imbalances and the low political priority accorded to safe drinking water and sanitation.

"Dripping taps in rich countries lose more water than is available each day to more than 1 billion people," it said.  The report called for a global campaign — similar to the Global Fund against AIDS, TB and malaria to try to coordinate all the fragmented efforts of different agencies working with water.  Watkins said rich countries needed to show more political leadership and follow through on promises to implement an action plan on water made at the G-8 summit in France three years ago.

"What we've seen since then is no action and no plan. It's not even on the radar screen of donor countries and we need to get it there."

But the report also criticized developing countries for spending too little on water and sanitation.

Most sub-Saharan African countries normally spend 0.2-0.4 percent of budget on water and sanitation. In Ethiopia the military budget was 10 times the water and sanitation budget and in Pakistan 47 times, it said.  The report said two out of three people in South Asia lack basic sanitation, numbers that put the region on a par with sub-Saharan Africa.

The report said the $10 billion price tag to achieve U.N. goals on increasing access to water and sanitation should be put in context. "It represents less than five days worth of global military spending and less than half what rich countries spend each year on mineral water."

Bernanke says globalization benefits face threats
By Tim Ahmann
2 hours, 49 minutes ago
JACKSON HOLE, Wyoming (Reuters) - The current "unprecedented" pace of global economic integration could raise living standards and cut poverty, but those benefits are at risk from geopolitical tensions and protectionism, Federal Reserve Chairman Ben Bernanke said on Friday.

"The scale and pace of the current episode (of globalization) is unprecedented," Bernanke said as he opened two days of discussions on globalization at the Kansas City Federal Reserve Bank's annual Jackson Hole retreat.

"Economic and technological changes are likely to shrink effective distances still further in coming years, creating the potential for continued improvements in productivity and living standards and for a reduction in global poverty," he said.

"Further progress in global integration should not be taken for granted," Bernanke warned, citing risks posed by international tensions and terrorism, as well as social and political opposition that can bubble up as some workers are displaced by shifting trade trends.

His remarks, which offered a wide overview of the history of economic integration from the Roman Empire on, did not touch on the current outlook for the U.S. economy or Fed policy.

The Fed chief said it was "natural" for workers hurt by globalization to push back.

"The challenge for policy-makers is to ensure that the benefits of global economic integration are sufficiently widely shared -- for example, by helping displaced workers get the necessary training to take advantage of new opportunities," he said.

Bernanke said the emergence of China, India and the former communist-bloc countries has brought "the greater part of the earth's population" into the global economy.

"The economic opening of China, which began in earnest less than three decades ago, is proceeding rapidly and, if anything, seems to be accelerating," he said.

Fresh features of the current globalization trend included the high level of integration between mature industrial economies and emerging market economies, and the direction of capital flows, Bernanke said.

The huge current account deficit run by the United States, substantially financed by capital from emerging market nations, contrasts with surpluses run by Great Britain when it was the center of the world economy in the 19th century, he noted.

Meanwhile, the geographical extension of production processes is more advanced and pervasive than ever, he said, a trend that can lead to "substantial productivity gains."

Bernanke also noted that gross capital flows are much larger than in the past and held in a much wider array of debt instruments, equities and derivatives.

Flows of foreign direct investment are much larger relative to output than they were fifty years ago, a trend helped by capital-market liberalization, he said.

Rubin quits Ford board over conflict
By TOM KRISHER, Associated Press Writer
August 25, 2006

DETROIT - Former U.S. Treasury Secretary Robert E. Rubin has resigned from the board of Ford Motor Co., citing a potential conflict of interest with his duties as a member of the chairman's office at the banking company Citigroup Inc.

Analysts said the move may be a sign that the Ford family will need financing for an alliance with another company or to take the struggling automaker private. Citigroup also may be a potential buyer of Ford's credit arm, they said.

In a letter dated Thursday to Ford Chairman and Chief Executive Bill Ford, Rubin said he needed to step down as the board begins a review of the automaker's strategic options.

"Citigroup's multifaceted relationship with Ford could raise a question whether my relationship with Ford and Citigroup creates an appearance of conflict. Although no conflict currently exists and while I would have liked to remain involved, I have with great regret concluded that I should resign from the board at this time," Rubin said in the letter.

Rubin, who was on the Ford board for six years and also serves on Citigroup's board, said in the letter that he was pleased Ford had hired banker and merger specialist Ken Leet to help plot the company's future.

Dearborn-based Ford lost $1.4 billion during the first half of the year, and its sales and market share have dropped. The company is in the midst of accelerating its "Way Forward" restructuring plan, and Bill Ford confirmed this week that Ford is exploring alliances with other companies.

The Wall Street Journal reported Wednesday that Bill Ford has approached Nissan-Renault CEO Carlos Ghosn about joining their global alliance, should a deal between General Motors Corp. and Nissan-Renault not work out. A Ford spokesman said the automaker wouldn't comment on such speculation, nor would he comment on reports that former Ford Chief Executive Jacques Nasser was leading a group interested in buying the Ford-owned Jaguar brand.

Analysts say Citigroup likely is discussing a big deal involving Ford, either as an adviser to the company, loaning it money or taking a financial interest in Ford Motor Credit Co.

Jim McTevia, a Michigan-based corporate turnaround specialist, said Ford, while losing money, is not in such poor financial condition that board members would start bailing out.

The price of buying back all of Ford's stock is far less at present than the value of the company's assets, McTevia said. Ford's market capitalization, or the value of its stock, is about $15 billion, and company officials said last month that it had about $23 billion in cash.

Ford shares rose 25 cents, or 3.2 percent, to $8.01 in afternoon trading Friday on the        New York Stock Exchange.

"It's entirely probable that Citigroup, being the size of an institution they are, would have the ability to finance the Ford family buying their stock back," McTevia said. The Ford family controls 40 percent of the voting shares of the company.

But Pete Hastings, an auto industry corporate bonds analyst with Morgan Keegan & Co. Inc. in Memphis, Tenn., said it's more likely that Citigroup is interested in buying part of Ford Motor Credit.

Nearly all banks including Citigroup have relationships with Ford or its credit arm, Hastings said, but that wouldn't necessarily trigger Rubin's resignation. Advising Ford on a bigger deal, or the possibility of a larger equity relationship, however, might create an appearance of a conflict and cause the resignation, Hastings said.

Rubin is doing the right thing by resigning because if a deal involving Citigroup takes place, he would face scrutiny from the Securities and Exchange Commission, McTevia said.

Gerald Meyers, former chairman of American Motors Corp. who now teaches leadership at the University of Michigan, said the Ford family could take the company private, fix its problems and then sell stock once again for a large profit.

"It's not a dead company. It's just been poorly managed," he said.

Rubin served as the Treasury Department secretary in the Clinton administration from 1995 to 1999.

Bill Ford said in a statement Friday that Rubin "brought strategic thinking to every situation and has been a wise and generous counselor to me and to the company. However, I understand and respect Bob's prudent decision to resign as we continue to explore future strategic options."

Goldman, Macquarie in bid battle for AB Ports
By Mark Potter and Michael Smith
June 15, 2006

LONDON (Reuters) - A Goldman Sachs-led group raised its bid for Associated British Ports to 2.58 billion pounds ($4.75 billion), prompting a proposal from a rival team led by Australia's Macquarie Bank to at least match the offer.

Admiral Acquisitions, the Goldman Sachs consortium, upped the stakes on Thursday in a bidding war for Britain's biggest ports group when it lifted its cash bid to 840 pence a share from the 810p a share it agreed a day earlier.

The Macquarie group followed with an informal bid approach, proposing to at least match the 840p offer, AB Ports said in a statement.

"The board is currently evaluating the Macquarie consortium's proposal in light of the revised cash offer from Admiral," AB Ports said in a statement, urging shareholders to take no action.

A source close to the matter said AB Ports was waiting to see if the Macquarie group had sufficient financing to fund a bid before opening its books.

Now that Macquarie has shown its hand, other infrastructure firms may consider rival bids although there had been no other approaches so far, the source said.

AB Ports' shares earlier leapt to a new high of 876-1/2p on hopes of a bidding war. The stock closed 5.4 percent firmer at 871-1/2 pence.

"840 (pence a share) will not succeed in my view," said Investec analyst John Lawson. "We believe that AB Ports is worth up to 860p a share, but in a contested situation could we get to 9 pounds?"


Goldman is under pressure to complete a deal after a string of failed bids, including for airports group BAA, broadcaster ITV and pub company Mitchells & Butlers

Port groups have become attractive targets due to their stable income streams and property assets and with shipping markets buoyant on the back of growth in world trade. In March, Dubai Ports World completed a $6.8 billion takeover of P&O after a bidding war with Singapore's PSA International.

Shares in the only remaining listed U.K. ports firm Forth Ports rose 4 percent to end the day at 1780 pence.

The Goldman group said its new bid, which compares with an initial proposal of 730p a share that was rejected by AB Ports, was worth 26.6 times AB Ports' 2005 underlying earnings.

Analysts said this was around the top of valuations for recent ports deals, but added comparisons were difficult.

Admiral said in a statement its interests had bought 15 million shares in AB Ports, or 5.1 percent of the company on Wednesday. The Macquarie group said it had 5.2 million shares, or 1.7 percent as of Wednesday.

AB Ports operates 21 UK ports which handle about a quarter of the country's seaborne trade.

The Admiral group is 33 percent owned by Canada's Borealis Infrastructure, the investment vehicle of Ontario pension fund OMERS; 33 percent by GIC Special Investments Pte Ltd., the private equity arm of the Government of Singapore Investment Corporation; 23 percent by Goldman Sachs; and, about 10 percent by the Prudential Group's Infracapital Partners.

Admiral said 1.19 billion pounds of funding for its bid would be provided by consortium members, with the rest from a loan arranged by Royal Bank of Scotland.

The Macquarie group includes two of the investment bank's spin-off infrastructure funds as well as UK private equity firm 3i Group Plc, Canada Pension Plan Investment Board, and Australia's Industry Funds Management.

The Admiral group is being advised by Goldman Sachs and Lexicon Partners. JP Morgan Cazenove and Morgan Stanley are brokers to AB Ports.

Goldman raises $6.5 billion infrastructure fund
December 28, 2006

NEW YORK (Reuters) - Goldman Sachs Group Inc. is stepping up its pursuit of ports, airports and regulated utilities around the world after the investment bank raised more than $6.5 billion for its first infrastructure investment fund.
The fund, GS Infrastructure Partners, is one of the largest investment pools dedicated to acquiring infrastructure assets. In September, Reuters reported the bank was raising money for an infrastructure fund and expected to complete the process this year.

Goldman's fund is two times the size expected earlier this year, demonstrating the demand for infrastructure investments.

"We have the capital to create and pursue large-scale investment opportunities while achieving portfolio diversification," said Steven Feldman and William Young, who co-head infrastructure investing in Goldman's merchant banking unit.

Fund-raising was completed on Wednesday,

Banks and investors in recent years have accelerated their purchases of infrastructure assets owned by governments as well as private-sector highway, airport, seaport and utility companies. Pioneer Macquarie Bank has generated strong returns from buying these low-risk cash-generating assets and inspired many firms to create their own funds.

At the same time, cash-strapped cities and states are considering sales of taxpayer-funded infrastructure to generate cash and plug budget gaps.

Morgan Stanley, Credit Suisse and Merrill Lynch, among others, have raised or set plans to create infrastructure funds. Bankers estimate that as much as $100 billion in capital is targeting investment in public assets.

Initially, Goldman said, the fund will focus on Europe and North America where developed markets have the necessary legal and regulatory rules in place.

Goldman Sachs committed $750 million of its own capital to the fund, which already participated in the leveraged buyouts of Associated British Ports and U.S. energy pipelines company Kinder Morgan Inc.

Thomson Reported To Bid On News Company Reuters; Analysts Say Deal Creates Competition For Bloomberg LP 
Published on 5/5/2007

Hartford (AP)— Information services conglomerate Thomson Corp.'s reported move to purchase Reuters Group LLC would bolster the company's efforts to offer information services directly to major corporations.

The Stamford-based company is seen as the most likely bidder to purchase Reuters, a British news and financial company that announced Friday it has been approached by a possible suitor. It would allow Thomson to compete directly with Bloomberg LP in the lucrative market of delivering real-time financial data and news to customers like investment banks.

Paul Bradley, an analyst for the Toronto investment firm Frasier Mackenzie, called Reuters is a logical target for Thomson.

“It's a strategic-thinking company,” Bradley said. “They don't rush right into things.”

A Thomson spokesman declined comment. Thomson, with 32,000 employees and 2006 revenue of $6.6 billion, traces its beginnings to the 1930s, when founder Roy Thomson acquired his first newspaper, The Timmins Press of Ontario, Canada. The company grew to be a major player in the North American newspaper industry, but also expanded into other fields such as travel, business financial services and book publishing.

In 2004, Thomson acquired CCBN, a provider of Web-based products for investment firms. The following year, Thomson Financial partnered with Merrill Lynch in a rollout of more than 23,000 workstations across more than 550 Merrill Lynch offices.

For several years, Thomson has divested itself of businesses that don't fit with its strategy of offering electronic business information and services. In 2000, Thomson sold many of its U.S. newspapers to Gannett Co. and Alabama-based Community Newspapers Holding Inc.

Last year, Thomson announced that it would sell its Thomson Learning business, which serves higher education and libraries, to focus on providing services to business and professional customers. The sale is expected to net $5 billion.

Today, Thomson's main business is selling specialized legal, professional and educational materials, about half of which is delivered electronically.

The company has a major legal and regulatory research arm, West Group, and a large business providing scientific and health care research to academics and other professionals.

Xerox, power plant operator join effort to limit greenhouse gases 
Posted on Jul 19, 7:06 AM EDT
HARTFORD, Conn. (AP) -- Xerox Corp. and one of the largest power plant operators in Connecticut have joined environmental groups and other companies that are seeking federal legislation to limit greenhouse gas emissions.

Xerox, which is based in Stamford, announced on Wednesday its membership in the United States Climate Action Partnership. In a statement, the office equipment manufacturer said it supports the partnership's approach to climate change and "its principles, which champion fairness and accountability, technology and innovation and environmental effectiveness."

NRG Energy, based in Princeton, N.J., also announced Wednesday that it has become a member of the group, which is seeking to reduce global warming gases with a mandatory limit on emissions and a system of trading credits that spell out pollution levels.

"The time is now for decisive action to address climate change and decisive action requires clear and unequivocal leadership," said David Crane, president and chief executive of NRG.

NRG operates power plants in Milford, Middletown, Montville and Norwalk. The plants are among six plants known as the "Sooty Six."

The General Assembly five years ago enacted tougher emission regulations, setting standards for pollutants such as sulfur dioxide.

The partnership includes Fairfield-based General Electric Co., several automakers and energy companies. The Natural Resources Defense Council and the Environmental Defense also are members.

Environmentalists say the focus has most recently turned to carbon dioxide emissions, with major companies moving away from disputes over the effects of global warming to backing regulations for carbon dioxide emissions.

"We have shifted from if we are going to tackle global warming to when and how," said Jon Coifman of the Natural Resources Defense Council in New York.

The alliance of big business and environmental groups told President Bush in January that mandatory emissions caps are needed to reduce the flow of carbon dioxide and other heat-trapping gases into the atmosphere.

The partnership also includes Dow Chemical Co., PepsiCo Inc., Royal Dutch Shell's U.S. arm, London-based oil company BP PLC and Houston-based ConocoPhillips.

House prices to drop much lower: Greenspan
Fri Sep 21, 3:25 AM ET

VIENNA (Reuters) - A big overhang of property will bring U.S. house prices down further, but it is too early to say if the economy will plunge into recession, former Federal Reserve chief Alan Greenspan was quoted as saying on Friday.
Greenspan said in an interview with Austrian magazine Format that low interest rates in the past 15 years were to blame for the house price bubble, but that central banks were powerless when they tried to bring it under control.

"It's a difficult situation, there is an enormous overhang on the real estate market," Greenspan was quoted as saying. "Many buildings which just have been finished can't be sold ..."

"So far, prices have dropped only slightly. But it was enough to cause alarm around the world," he said. "Prices are going to fall much lower yet."

"However, it is too early to answer the question about a recession. We simply don't know yet. It depends on how flexibly the economy can react," he said.

Greenspan said deregulation and the introduction of market economies in the former Communist bloc after the Berlin Wall fell in 1989 had caused a global boom and a worldwide reduction of interest rates, which both helped fuel the property bubble.

"There is no doubt about the fact that low interest rates for long-term government bonds have caused the real estate bubble in the United States," he said.

"The Federal Reserve began a series of interest rate increases in 2004. We were hoping to bring the speculative excesses in the real estate sector under control. We failed. We tried it again in 2005. Failure," he said.

"Nobody could do anything about it, neither us nor the European Central Bank. We were powerless," he said.

Does U.S. Still Make Anything?
By Stephen Manning
Published on 2/22/2009

It may seem like the country that used to make everything is on the brink of making nothing.

In January, 207,000 U.S. manufacturing jobs vanished in the largest one-month drop since October 1982. Factory activity is hovering at a 28-year low. Even before the recession, plants were hemorrhaging work to foreign competitors with cheap labor. And some companies were moving production overseas.

But manufacturing in the United States isn't dead or even dying. It's moving upscale, following the biggest profits, and becoming more efficient, just like Henry Ford did when he created the assembly line to make the Model T.  The U.S. by far remains the world's leading manufacturer by value of goods produced. It hit a record $1.6 trillion in 2007 - nearly double the $811 billion in 1987. For every $1 of value produced in China's factories, America generates $2.50.

So what's made in the USA these days?

The U.S. sold more than $200 billion worth of aircraft, missiles and space-related equipment in 2007. And $80 billion worth of autos and auto parts. Deere & Co., best known for its bright green and yellow tractors, sold $16.5 billion worth of farming equipment last year, much of it to the rest of the world. Then there's energy products like gas turbines for power plants made by General Electric, computer chips from Intel and fighter jets from Lockheed Martin. Household names like GE, General Motors, IBM, Boeing, Hewlett-Packard are among the largest manufacturers by revenue.

Several trends have emerged over the decades:

    * America makes things that other countries can't. Today, “Made in USA” is more likely to be stamped on heavy equipment or the circuits that go inside other products than the TVs, toys, clothes and other items found on store shelves.

    * U.S. companies have shifted toward high-end manufacturing as the production of low-value goods moves overseas. This has resulted in lower prices for shoppers and higher profits for companies.

    * When demand slumps, all types of manufacturing jobs are lost. Some higher-end jobs - but not all - return with good times. Workers who make goods more cheaply produced overseas suffer.

Once this recession runs its course, surviving manufacturers will emerge more efficient and profitable, economists say. More valuable products will be made using fewer people. Products will be made where labor and other costs are cheaper. And manufacturers will focus on the most lucrative products.  Aircraft maker Boeing announced last month it was cutting about 10,000 jobs. At the same time, workers are streamlining the wing assembly for the 737, the company's best-selling commercial plane, said Richard McCabe, a wing line mechanic for 10 years and former Machinists union shop steward.

He and his co-workers at the factory in suburban Renton, Wash., were asked about 3½ years ago to figure out how to switch from building wings in massive stationary jigs mounted vertically, “the way things have been done here forever,” to “one-piece flow,” assembling them horizontally on a moving line similar to automobiles. The new process is set to begin by the end of the year.

”I won't go to the wing. The wing will come to me,” McCabe said. “It's going to save them millions in scrap and rework.”

McCabe said there was a lot of initial resistance on the shop floor, but Boeing's increased outsourcing - including wing production for the new 787 to Japan - helped change workers' minds.

”I told the guys, it's development or die,” McCabe said. “If we can get this done, it assures us the future.”

About 12.7 million Americans, or 8 percent of the labor force, still held manufacturing jobs as of last month. Fifty years ago, 14.6 million people, or 28 percent of all workers, toiled in factories. The numbers - though painful to those who lost jobs - show how companies are making more with less.  Still, the perception of decline is likely to grow as factories and jobs vanish, and imports rise for most goods we buy at stores.

Thirty years ago, U.S. producers made 80 percent of what the country consumed, according to the Manufacturers Alliance/MAPI, an industry trade group. Now it's around 65 percent.

American factories still provide much of the processed food that Americans buy, everything from frozen fish sticks to cans of beer. And U.S. companies make a considerable share of the personal hygiene products like soap and shampoo, cleaning supplies, and prescription drugs that are sold in pharmacies. But many other consumer goods now come from overseas.

In the 1960s, America made 98 percent of its shoes. It now imports more than 90 percent of its footwear. The iconic red Radio Flyer wagons for kids are now made in China. Even Apple Inc.'s iPod comes in box that says it was made in China but “designed in California.”

”Some people lament the loss of manufacturing jobs we could have had making iPods. So what?” said Dan Ikenson, associate director of the Center for Trade Policy Studies at the libertarian-leaning Cato Institute. “The imports of iPods support U.S. jobs,” including engineers, marketers and advertisers.

Some U.S.-made products are hiding in plain sight.  Berner International Corp., based outside Pittsburgh, doesn't make the clothes, dishes or sponges sold at Wal-Mart, but its products hang above shoppers' heads as soon they come through the sliding doors.  The company's 60 employees make air curtains - rectangular blowers mounted to the ceiling that keep out hot or chilly air, insects and dust while keeping in A/C and heat. Also called air doors, they hang from ceilings at Wal-Marts, Whole Foods, and Starbucks, and above the big factory doors at Ford and Toyota car plants.

Chief Executive Georgia Berner keeps her company in the United States because she relies on her staff's deep knowledge of air blowers, which are custom made for clients using metal plates, fans, motors and electronic parts assembled at the company's 60,000-square-foot factory. Each box requires specific voltages and sizing, she says.

”I have a crew here (with) much of the product knowledge in (their) heads,” she said.

To deal with the recession, her production manager is making the factory more efficient by moving shelves of parts closer to workers.  She's also banking on a new line of air curtains for fast food drive-through windows, noting that fast food demand is on the rise while other restaurants decline.  Other companies saddled with high labor costs - sometimes called legacy costs that insured workers high wages, pensions and handsome benefits - can struggle to survive.

In the early 1980s, the U.S. steel industry faced such pressure. Today, it's the auto industry, which is pressuring its unions to agree to deep reductions in pay and generous benefits. In fact, it's a condition of the $17.4 billion in emergency loans from the government to keep the industry in business.

But other American manufacturers - and workers - have adapted.

Judy Horkman, 47, of Manitowoc, Wis., was devastated when she was laid off after 13 years of attaching handles to saute pans on the Mirro Cookware plant assembly line. But two years ago, Horkman took a job making industrial light fixtures for office buildings and warehouses at Orion Energy Systems Inc. She makes $12.50 per hour - not quite the $13.80 she earned at Mirro, but Horkman says she is fine with that.

Horkman said she takes tremendous pride in her work. When she assembled cookware she imagined that she would personally use the final product. When she switched to making lighting, she was driven by the same Golden Rule.

”Regardless of my product I'd put my heart into it. I put my hard work, my dedication, my quality into whatever I make,” she said. “I just imagine someone out there really needs this, and I think about how good I'd want it to be if it was for me.”

Associated Press Writers Tim Klass In Seattle, Dinesh Ramde In Milwaukee And David Brinkerhoff In New York Contributed To This Report.  

American trio wins 2007 Nobel for economics

By Adam Cox
15 October 2007

STOCKHOLM (Reuters) - American economists Leonid Hurwicz, Eric Maskin and Roger Myerson won the 2007 Nobel prize for economics on Monday for laying the foundations of an economic theory that determines when markets are working effectively.  Hurwicz, at 90 the oldest-ever recipient of a Nobel prize, said he had not expected to become a laureate.

"On the contrary, I thought that my time perhaps had passed already," the Russian-born American citizen said in a telephone interview.

The Royal Swedish Academy of Sciences said the three had established "mechanism design theory," which looks at how well different institutions fare in allocating resources and whether government intervention is needed.

Hurwicz, born in Moscow in the year of the Russian revolution, initiated the theory. Maskin of Princeton University and Myerson of the University of Chicago further developed it.

Maskin was born in 1950 and Myerson in 1951, the same year Hurwicz joined the University of Minnesota.

The midwestern university is rarely thought of as a home for pioneering research in the same way as "Ivy League" institutions such as Princeton or Harvard or other academic powerhouses such as the University of Chicago.

Maskin, who earned a doctorate in applied mathematics from Harvard, said he was relieved and thrilled to learn that all three of them had won.

"I guess my first thought when I heard Hurwicz was one of the winners was a sense of relief. Hurwicz has been a candidate for many years and he's now 90 years old and time was running out," Maskin said in a telephone conference with journalists.

"It was a tremendous thrill to hear that he won and to share the prize with him and with Myerson. Our friendship goes back to university time."


The academy said mechanism design theory now plays a central role in many areas of economics and parts of political science.

"Adam Smith's classical metaphor of the invisible hand refers to how the market, under ideal conditions, ensures an efficient allocation of scarce resources," the academy said.

"But in practice conditions are usually not ideal," it added. "For example, competition is not completely free, consumers are not perfectly informed and privately desirable production and consumption may generate social costs and benefits."

Hubert Fromlet, chief economist at Swedish banking giant Swedbank, said that the microeconomic theories these three had developed had become increasingly popular.

"Microeconomics has gained momentum in research," he said, adding that at economic conferences it was now common to hear about decision-making processes. "They are well-known economists within the academic field."

The economists will share a prize of 10 million Swedish crowns ($1.57 million).

Asked what he would do with his share of the award, Hurwicz said: "This I haven't decided yet. I want to make sure I'm really getting it."

Fellow winner Maskin said he knew what he would do with some of his share: Make a large donation to the Camphill Foundation, which works with disabled people.

"My wife and I have thought in the past about what would happen if we won the lottery," said Maskin, whose son is disabled.

Maskin said he was honored to be in such august company.

"But it hasn't really registered yet. I'm still so befuddled by the news," he told Reuters from his home in New Jersey.

Maskin received his doctorate in 1976. He is currently the Albert O. Hirschman Professor of Social Science, at the Institute for Advanced Study in Princeton, New Jersey. Roger Myerson was born in Boston in 1951. Like Maskin, he finished a PhD in applied mathematics at Harvard in 1976. He is currently the Glen A. Lloyd Distinguished Service Professor at the University of Chicago.  The economics prize is not part of the original crop of Nobel Prizes set out in Alfred Nobel's 1895 will.

The prize, established in 1968 and first awarded in 1969, is officially called The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel.

Metrics: Trade (spending, 2007

U.S. Trade Deficit Narrows as Imports Fall Sharply
April 10, 2009

Trade between the United States and the rest of the world contracted again in February, but an unexpected increase in exports fueled a debate about whether the economy was beginning to stabilize.

The Commerce Department reported on Thursday that imports fell sharply in February, dropping another 5 percent as American businesses reduced their spending on foreign-made machinery and consumer demand for imported televisions, toys and furniture remained low.

But in a reversal, American exports bounced back slightly after six months of declines. Exports grew by $2 billion as the country exported more automobiles, semiconductors, pharmaceuticals and chemicals.

As imports plunged and exports stabilized, the United States trade deficit narrowed to its lowest levels in nine years. The trade deficit, which measures the gap between imports and exports, fell to $26 billion in February, from a revised $36 billion in January.  Some economists said the rise in exports would have a positive effect on the country’s first-quarter gross domestic product, and represented another data point contributing to hopes that the economy was beginning to bottom out after more than a year of swift declines.

Recently, a flurry of small increases or stabilization in the housing market and niches like retail sales and factory orders have raised Wall Street’s hopes that the economic slump may be losing some momentum. A thin but growing sense of optimism has lifted stock indexes 20 percent over the last month.  Skeptics warn that the economy is not done falling, and they pointed out that exports had bounced off of extremely low levels. The monthly increase in exports could be a mere blip that would be erased as the government revises its trade data in the months ahead, they warned.

“I would take it as a possible positive sign, but with a great deal of skepticism,” the chief economist at Wachovia, John E. Silvia, said. “We’re still in a global recessionary environment. There’s still a lot of excess capacity in the world.”

The overall volume of trade between the United States and the rest of the world fell for another month in February as the global downturn continued to spread.  In all, the amount of goods and services brought into the United States or exported to other countries fell to $279.5 billion in February, down from $286 billion a month earlier. Demand for foreign-made products has withered as American consumers cut their spending, and plummeting oil prices have reduced the overall value of imported oil and petroleum products.

The United States imported $8.2 billion fewer goods and services in February. Imports fell to $152.7 billion, while exports climbed to $126.8 billion.

“Given what is happening in the rest of the world, it is highly unlikely that the February result represents the start of a turnaround in demand for U.S. goods abroad,” Joshua Shapiro, chief United States economist at MFR, wrote in a note. For the year, exports have declined 17 percent.

The country’s trade deficit with China shrank sharply from January to February as imports from China fell 23.7 percent. American exports to China rose slightly.  Experts said the sharp decline in imports reflected a troubling retrenchment by American businesses. Companies are importing fewer capital goods and industrial supplies as they reduce their investments and expectations for growth and try to cut a glut of inventories.

“Executives are depressed about the state of the economy, recognize that they’ve got too much capacity and try to shut it down,” said Brian Fabbri, chief North American economist at BNP Paribas. “They don’t want to bring in imports.”

Also on Thursday, the Labor Department reported that first-time unemployment claims fellby 20,000 last week to a seasonally adjusted 654,000. While the numbers offered some encouragement, the weekly jobless numbers can be volatile, and economists have warned that unemployment will probably continue rising into next year.  Continuing jobless claims rose to 5.8 million for the week ended March 28, from 5.7 million a week earlier. As the recession wears on and unemployment rates top 8.5 percent, people are having a harder time finding new work and are spending more time unemployed.

Guccis or Gadgets?
Published: September 6, 2008

When you have some extra cash padding your wallet, do you reach for the latest jeans or the sleekest new music player? Much of that decision, it seems, depends on where you live.

What Your Global Neighbors Are Buying If you live in Greece, Italy or Egypt, you'll probably choose textiles over technology. Greeks spend almost 13 times more money on clothing as they do on electronics.

"Italians and other Europeans love fashion; the greatest designs in the world come from those regions," said Todd D. Slater, a retail analyst for Lazard Capital Markets in New York.

If you live in Australia or Taiwan, you might be more tempted by a new laptop computer or flat-screen television. Australians spend only 1.4 times more cash on clothes than they do on consumer electronics.

"Some areas in the Pacific Basin are technologically savvy, and clothing is very casual," Mr. Slater said. "In Australia, what else do you need besides a bathing suit and a pair of Uggs?"

Off the Charts: Foreigners Wary of Long-Term U.S. Securities

February 21, 2009

Just when the United States really, really needs the money, overseas investors seem to be less willing to buy long-term American securities.

The government said this week that net purchases of those securities fell to $412.5 billion in 2008, less than half the 2007 level and the lowest annual total since 1999, when the federal government was running a budget surplus.

Money did come in, but it was diverted into the safest investment around, albeit one with almost no expectation of profit, Treasury bills. Overseas investors increased their holdings of those securities by $456 billion, an unprecedented flow.

A good part of that cash may have come from investors who would otherwise have invested in bonds issued by Fannie Mae and Freddie Mac, the government-sponsored mortgage lending enterprises.

For many years, those securities, which carried an implicit — that is, not certain — government guarantee, were popular overseas because they yielded more than Treasury bonds but seemed to have little additional risk.

But foreigners began selling them as the financial crisis accelerated last summer, and continued doing so even after the government rescued Fannie and Freddie and issued an explicit guarantee of their debts. Over all, foreigners sold $37.8 billion of agency securities. It was the first year since 1983, when the agency market was much smaller, that foreigners were net sellers.

The aversion to risk also showed up in the choice of long-term securities that were purchased. Foreigners bought a net $316 billion in Treasury notes and bonds, the highest amount in three years. But purchases of corporate bonds and stocks plunged.

It has long been a cliché that foreign investors in any market lack local knowledge and get the timing wrong. The data bears that out this year. The largest annual flow into American stocks ever was in 2007, when $195.5 billion came in. That broke the previous record of $174.9 billion, set in 2000. Stock prices fell sharply after each of those years.

The decline in funds for corporate bonds was not entirely attributable to a new hesitation to lend money to companies. The government counted other securities — like private mortgage-backed securities — as corporate bonds, and those markets have basically dried up. In any case, foreign purchases of corporate bonds fell to under $100 billion in 2008, less than a fifth of the level two years before.

Official institutions — foreign governments and central banks — have largely stopped investing in long-term American securities, a fact that may reflect their need for funds at home as the global recession deepens. Those institutions were net sellers in every month from July through December, an unprecedented stretch.

The fact that so much of the money came into Treasury bills — which mature within a year — means that the owners can get their money back whenever they wish, and will get it soon if they simply do nothing. It is thus readily available to move rapidly.

When the fear that drove money into Treasury bills fades, it may become clearer whether the rest of the world still sees the United States as a good place for long-term investments.

Something we just found!

United States Economy ("TIMES TOPICS")

The United States economy will produce roughly $15 trillion worth of goods and services in 2008, making it easily the largest in the world. China is next, at about $12 trillion, according to one widely used method. Per person, the American economy has the fourth largest output - more than $45,000 for every man, woman and child, on average - behind Luxembourg, Bermuda and Liechtenstein.

In 2007, the American economy began to slow significantly, mostly because of a real-estate slump and related financial problems. Many economists believe that the economy entered a recession at the end of 2007 or early in 2008. A committee of academic economists, overseen by the National Bureau of Economic Research, makes the most commonly cited determination about when recessions begin and end. Because the committee defines a recession as a broad-based and protracted downturn in economic activity, its members typically wait many months before announcing that the economy has entered a recession. They have made no such announcement lately.

The economy was last in recession in 2001. Contrary to widespread belief, the terrorist attacks of 2001 did not cause the downturn that year. The economy slowed as the dot-com bubble started leaking in early 2000 and began to shrink in early 2001. The recession ended in November 2001.

Over the last few decades, recessions have become less common than they once were. Ben S. Bernanke, the Federal Reserve chairman, and others have described this development as the "great moderation." While the economy used to swing between expansion and contraction every few years, there have been only two relatively brief recessions over the last 25 years. Perhaps the most important reason is the new flexibility of businesses. Executives can now track the ups and downs of their sales and inventories more closely than they used to, thanks in large part to computers. Better transportation, like FedEx, also helps companies to keep their warehouses lean. So a company is less likely to find itself suddenly stuck with too many workers and products - and then have to make sharp cutbacks.

Yet there are also now increasing worries that a boom in consumer spending, helped along by more consumer debt, played a large role in lifting economic growth over the last generation. If this is the case -- and if, as many analysts believe, the mortgage crisis marks the end of the debt boom -- economic growth may slow significantly in coming years.

Despite the healthy economic growth, many families have not received large pay increases. Starting in the mid-1970s, compensation - pay and benefits - for the typical worker began to grow more slowly than it had in the 1950s and '60s. Over the last 30 years, there has been only one period, from about 1996 to 2002, when hourly pay grew for most workers a lot faster than inflation. The most recent expansion, which began in late 2001, could end up being the first one on record in which median household income did not rise faster than inflation. -- David Leonhardt, Apr. 26, 2008

Triple-A Failure
Published: April 27, 2008

The Ratings Game

In 1996, Thomas Friedman, the New York Times columnist, remarked on “The NewsHour With Jim Lehrer” that there were two superpowers in the world — the United States and Moody’s bond-rating service — and it was sometimes unclear which was more powerful. Moody’s was then a private company that rated corporate bonds, but it was, already, spreading its wings into the exotic business of rating securities backed by pools of residential mortgages.

Obscure and dry-seeming as it was, this business offered a certain magic. The magic consisted of turning risky mortgages into investments that would be suitable for investors who would know nothing about the underlying loans. To get why this is impressive, you have to think about all that determines whether a mortgage is safe. Who owns the property? What is his or her income? Bundle hundreds of mortgages into a single security and the questions multiply; no investor could begin to answer them. But suppose the security had a rating. If it were rated triple-A by a firm like Moody’s, then the investor could forget about the underlying mortgages. He wouldn’t need to know what properties were in the pool, only that the pool was triple-A — it was just as safe, in theory, as other triple-A securities.

Over the last decade, Moody’s and its two principal competitors, Standard & Poor’s and Fitch, played this game to perfection — putting what amounted to gold seals on mortgage securities that investors swept up with increasing élan. For the rating agencies, this business was extremely lucrative. Their profits surged, Moody’s in particular: it went public, saw its stock increase sixfold and its earnings grow by 900 percent.

By providing the mortgage industry with an entree to Wall Street, the agencies also transformed what had been among the sleepiest corners of finance. No longer did mortgage banks have to wait 10 or 20 or 30 years to get their money back from homeowners. Now they sold their loans into securitized pools and — their capital thus replenished — wrote new loans at a much quicker pace.

Mortgage volume surged; in 2006, it topped $2.5 trillion. Also, many more mortgages were issued to risky subprime borrowers. Almost all of those subprime loans ended up in securitized pools; indeed, the reason banks were willing to issue so many risky loans is that they could fob them off on Wall Street.

But who was evaluating these securities? Who was passing judgment on the quality of the mortgages, on the equity behind them and on myriad other investment considerations? Certainly not the investors. They relied on a credit rating.

Thus the agencies became the de facto watchdog over the mortgage industry. In a practical sense, it was Moody’s and Standard & Poor’s that set the credit standards that determined which loans Wall Street could repackage and, ultimately, which borrowers would qualify. Effectively, they did the job that was expected of banks and government regulators. And today, they are a central culprit in the mortgage bust, in which the total loss has been projected at $250 billion and possibly much more.

In the wake of the housing collapse, Congress is exploring why the industry failed and whether it should be revamped (hearings in the Senate Banking Committee were expected to begin April 22). Two key questions are whether the credit agencies — which benefit from a unique series of government charters — enjoy too much official protection and whether their judgment was tainted. Presumably to forestall criticism and possible legislation, Moody’s and S.&P. have announced reforms. But they reject the notion that they should have been more vigilant. Instead, they lay the blame on the mortgage holders who turned out to be deadbeats, many of whom lied to obtain their loans.

Arthur Levitt, the former chairman of the Securities and Exchange Commission, charges that “the credit-rating agencies suffer from a conflict of interest — perceived and apparent — that may have distorted their judgment, especially when it came to complex structured financial products.” Frank Partnoy, a professor at the University of San Diego School of Law who has written extensively about the credit-rating industry, says that the conflict is a serious problem. Thanks to the industry’s close relationship with the banks whose securities it rates, Partnoy says, the agencies have behaved less like gatekeepers than gate openers. Last year, Moody’s had to downgrade more than 5,000 mortgage securities — a tacit acknowledgment that the mortgage bubble was abetted by its overly generous ratings. Mortgage securities rated by Standard & Poor’s and Fitch have suffered a similar wave of downgrades.

Presto! How 2,393 Subprime Loans Become a High-Grade Investment

The business of assigning a rating to a mortgage security is a complicated affair, and Moody’s recently was willing to walk me through an actual mortgage-backed security step by step. I was led down a carpeted hallway to a well-appointed conference room to meet with three specialists in mortgage-backed paper. Moody’s was fair-minded in choosing an example; the case they showed me, which they masked with the name “Subprime XYZ,” was a pool of 2,393 mortgages with a total face value of $430 million.

Subprime XYZ typified the exuberance of the age. All the mortgages in the pool were subprime — that is, they had been extended to borrowers with checkered credit histories. In an earlier era, such people would have been restricted from borrowing more than 75 percent or so of the value of their homes, but during the great bubble, no such limits applied.

Moody’s did not have access to the individual loan files, much less did it communicate with the borrowers or try to verify the information they provided in their loan applications. “We aren’t loan officers,” Claire Robinson, a 20-year veteran who is in charge of asset-backed finance for Moody’s, told me. “Our expertise is as statisticians on an aggregate basis. We want to know, of 1,000 individuals, based on historical performance, what percent will pay their loans?”

The loans in Subprime XYZ were issued in early spring 2006 — what would turn out to be the peak of the boom. They were originated by a West Coast company that Moody’s identified as a “nonbank lender.” Traditionally, people have gotten their mortgages from banks, but in recent years, new types of lenders peddling sexier products grabbed an increasing share of the market. This particular lender took the loans it made to a New York investment bank; the bank designed an investment vehicle and brought the package to Moody’s.

Moody’s assigned an analyst to evaluate the package, subject to review by a committee. The investment bank provided an enormous spreadsheet chock with data on the borrowers’ credit histories and much else that might, at very least, have given Moody’s pause. Three-quarters of the borrowers had adjustable-rate mortgages, or ARMs — “teaser” loans on which the interest rate could be raised in short order. Since subprime borrowers cannot afford higher rates, they would need to refinance soon. This is a classic sign of a bubble — lending on the belief, or the hope, that new money will bail out the old.

Moody’s learned that almost half of these borrowers — 43 percent — did not provide written verification of their incomes. The data also showed that 12 percent of the mortgages were for properties in Southern California, including a half-percent in a single ZIP code, in Riverside. That suggested a risky degree of concentration.

On the plus side, Moody’s noted, 94 percent of those borrowers with adjustable-rate loans said their mortgages were for primary residences. “That was a comfort feeling,” Robinson said. Historically, people have been slow to abandon their primary homes. When you get into a crunch, she added, “You’ll give up your ski chalet first.”

Another factor giving Moody’s comfort was that all of the ARM loans in the pool were first mortgages (as distinct from, say, home-equity loans). Nearly half of the borrowers, however, took out a simultaneous second loan. Most often, their two loans added up to all of their property’s presumed resale value, which meant the borrowers had not a cent of equity.

In the frenetic, deal-happy climate of 2006, the Moody’s analyst had only a single day to process the credit data from the bank. The analyst wasn’t evaluating the mortgages but, rather, the bonds issued by the investment vehicle created to house them. A so-called special-purpose vehicle — a ghost corporation with no people or furniture and no assets either until the deal was struck — would purchase the mortgages. Thereafter, monthly payments from the homeowners would go to the S.P.V. The S.P.V. would finance itself by selling bonds. The question for Moody’s was whether the inflow of mortgage checks would cover the outgoing payments to bondholders. From the investment bank’s point of view, the key to the deal was obtaining a triple-A rating — without which the deal wouldn’t be profitable. That a vehicle backed by subprime mortgages could borrow at triple-A rates seems like a trick of finance. “People say, ‘How can you create triple-A out of B-rated paper?’ ” notes Arturo Cifuentes, a former Moody’s credit analyst who now designs credit instruments. It may seem like a scam, but it’s not.

The secret sauce is that the S.P.V. would float 12 classes of bonds, from triple-A to a lowly Ba1. The highest-rated bonds would have first priority on the cash received from mortgage holders until they were fully paid, then the next tier of bonds, then the next and so on. The bonds at the bottom of the pile got the highest interest rate, but if homeowners defaulted, they would absorb the first losses.

It was this segregation of payments that protected the bonds at the top of the structure and enabled Moody’s to classify them as triple-A. Imagine a seaside condo beset by flooding: just as the penthouse will not get wet until the lower floors are thoroughly soaked, so the triple-A bonds would not lose a dime unless the lower credits were wiped out.

Structured finance, of which this deal is typical, is both clever and useful; in the housing industry it has greatly expanded the pool of credit. But in extreme conditions, it can fail. The old-fashioned corner banker used his instincts, as well as his pencil, to apportion credit; modern finance is formulaic. However elegant its models, forecasting the behavior of 2,393 mortgage holders is an uncertain business. “Everyone assumed the credit agencies knew what they were doing,” says Joseph Mason, a credit expert at Drexel University. “A structural engineer can predict what load a steel support will bear; in financial engineering we can’t predict as well.”

Mortgage-backed securities like those in Subprime XYZ were not the terminus of the great mortgage machine. They were, in fact, building blocks for even more esoteric vehicles known as collateralized debt obligations, or C.D.O.’s. C.D.O.’s were financed with similar ladders of bonds, from triple-A on down, and the credit-rating agencies’ role was just as central. The difference is that XYZ was a first-order derivative — its assets included real mortgages owned by actual homeowners. C.D.O.’s were a step removed — instead of buying mortgages, they bought bonds that were backed by mortgages, like the bonds issued by Subprime XYZ. (It is painful to consider, but there were also third-order instruments, known as C.D.O.’s squared, which bought bonds issued by other C.D.O.’s.)

Miscalculations that were damaging at the level of Subprime XYZ were devastating at the C.D.O. level. Just as bad weather will cause more serious delays to travelers with multiple flights, so, if the underlying mortgage bonds were misrated, the trouble was compounded in the case of the C.D.O.’s that purchased them.

Moody’s used statistical models to assess C.D.O.’s; it relied on historical patterns of default. This assumed that the past would remain relevant in an era in which the mortgage industry was morphing into a wildly speculative business. The complexity of C.D.O.’s undermined the process as well. Jamie Dimon, the chief executive of JPMorgan Chase, which recently scooped up the mortally wounded Bear Stearns, says, “There was a large failure of common sense” by rating agencies and also by banks like his. “Very complex securities shouldn’t have been rated as if they were easy-to-value bonds.”

The Accidental Watchdog

John Moody, a Wall Street analyst and former errand runner, hit on the idea of synthesizing all kinds of credit information into a single rating in 1909, when he published the manual “Moody’s Analyses of Railroad Investments.” The idea caught on with investors, who subscribed to his service, and by the mid-’20s, Moody’s faced three competitors: Standard Statistics and Poor’s Publishing (which later merged) and Fitch.

Then as now, Moody’s graded bonds on a scale with 21 steps, from Aaa to C. (There are small differences in the agencies’ nomenclatures, just as a grande latte at Starbucks becomes a “medium” at Peet’s. At Moody’s, ratings that start with the letter “A” carry minimal to low credit risk; those starting with “B” carry moderate to high risk; and “C” ratings denote bonds in poor standing or actual default.) The ratings are meant to be an estimate of probabilities, not a buy or sell recommendation. For instance, Ba bonds default far more often than triple-As. But Moody’s, as it is wont to remind people, is not in the business of advising investors whether to buy Ba’s; it merely publishes a rating.

Until the 1970s, its business grew slowly. But several trends coalesced to speed it up. The first was the collapse of Penn Central in 1970 — a shattering event that the credit agencies failed to foresee. It so unnerved investors that they began to pay more attention to credit risk.

Government responded. The Securities and Exchange Commission, faced with the question of how to measure the capital of broker-dealers, decided to penalize brokers for holding bonds that were less than investment-grade (the term applies to Moody’s 10 top grades). This prompted a question: investment grade according to whom? The S.E.C. opted to create a new category of officially designated rating agencies, and grandfathered the big three — S.&P., Moody’s and Fitch. In effect, the government outsourced its regulatory function to three for-profit companies.

Bank regulators issued similar rules for banks. Pension funds, mutual funds, insurance regulators followed. Over the ’80s and ’90s, a latticework of such rules redefined credit markets. Many classes of investors were now forbidden to buy noninvestment-grade bonds at all.

Issuers thus were forced to seek credit ratings (or else their bonds would not be marketable). The agencies — realizing they had a hot product and, what’s more, a captive market — started charging the very organizations whose bonds they were rating. This was an efficient way to do business, but it put the agencies in a conflicted position. As Partnoy says, rather than selling opinions to investors, the rating agencies were now selling “licenses” to borrowers. Indeed, whether their opinions were accurate no longer mattered so much. Just as a police officer stopping a motorist will want to see his license but not inquire how well he did on his road test, it was the rating — not its accuracy — that mattered to Wall Street.

The case of Enron is illustrative. Throughout the summer and fall of 2001, even though its credit was rapidly deteriorating, the rating agencies kept it at investment grade. This was not unusual; the agencies typically lag behind the news. On Nov. 28, 2001, S.&P. finally dropped Enron’s bonds to subinvestment grade. Although its action merely validated the market consensus, it caused the stock to collapse. To investors, S.&P.’s action was a signal that Enron was locked out of credit markets; it had lost its “license” to borrow. Four days later it filed for bankruptcy.

Another trend that spurred the agencies’ growth was that more companies began borrowing in bond markets instead of from banks. According to Chris Mahoney, a just-retired Moody’s veteran of 22 years, “The agencies went from being obscure and unimportant players to central ones.”

A Conflict of Interest?

Nothing sent the agencies into high gear as much as the development of structured finance. As Wall Street bankers designed ever more securitized products — using mortgages, credit-card debt, car loans, corporate debt, every type of paper imaginable — the agencies became truly powerful.

In structured-credit vehicles like Subprime XYZ, the agencies played a much more pivotal role than they had with (conventional) bonds. According to Lewis Ranieri, the Salomon Brothers banker who was a pioneer in mortgage bonds, “The whole creation of mortgage securities was involved with a rating.”

What the bankers in these deals are really doing is buying a bunch of I.O.U.’s and repackaging them in a different form. Something has to make the package worth — or seem to be worth — more that the sum of its parts, otherwise there would be no point in packaging such securities, nor would there be any profits from which to pay the bankers’ fees.

That something is the rating. Credit markets are not continuous; a bond that qualifies, though only by a hair, as investment grade is worth a lot more than one that just fails. As with a would-be immigrant traveling from Mexico, there is a huge incentive to get over the line.

The challenge to investment banks is to design securities that just meet the rating agencies’ tests. Risky mortgages serve their purpose; since the interest rate on them is higher, more money comes into the pool and is available for paying bond interest. But if the mortgages are too risky, Moody’s will object. Banks are adroit at working the system, and pools like Subprime XYZ are intentionally designed to include a layer of Baa bonds, or those just over the border. “Every agency has a model available to bankers that allows them to run the numbers until they get something they like and send it in for a rating,” a former Moody’s expert in securitization says. In other words, banks were gaming the system; according to Chris Flanagan, the subprime analyst at JPMorgan, “Gaming is the whole thing.”

When a bank proposes a rating structure on a pool of debt, the rating agency will insist on a cushion of extra capital, known as an “enhancement.” The bank inevitably lobbies for a thin cushion (the thinner the capitalization, the fatter the bank’s profits). It’s up to the agency to make sure that the cushion is big enough to safeguard the bonds. The process involves extended consultations between the agency and its client. In short, obtaining a rating is a collaborative process.

The evidence on whether rating agencies bend to the bankers’ will is mixed. The agencies do not deny that a conflict exists, but they assert that they are keen to the dangers and minimize them. For instance, they do not reward analysts on the basis of whether they approve deals. No smoking gun, no conspiratorial e-mail message, has surfaced to suggest that they are lying. But in structured finance, the agencies face pressures that did not exist when John Moody was rating railroads. On the traditional side of the business, Moody’s has thousands of clients (virtually every corporation and municipality that sells bonds). No one of them has much clout. But in structured finance, a handful of banks return again and again, paying much bigger fees. A deal the size of XYZ can bring Moody’s $200,000 and more for complicated deals. And the banks pay only if Moody’s delivers the desired rating. Tom McGuire, the Jesuit theologian who ran Moody’s through the mid-’90s, says this arrangement is unhealthy. If Moody’s and a client bank don’t see eye to eye, the bank can either tweak the numbers or try its luck with a competitor like S.&P., a process known as “ratings shopping.”

And it seems to have helped the banks get better ratings. Mason, of Drexel University, compared default rates for corporate bonds rated Baa with those of similarly rated collateralized debt obligations until 2005 (before the bubble burst). Mason found that the C.D.O.’s defaulted eight times as often. One interpretation of the data is that Moody’s was far less discerning when the client was a Wall Street securitizer.

After Enron blew up, Congress ordered the S.E.C. to look at the rating industry and possibly reform it. The S.E.C. ducked. Congress looked again in 2006 and enacted a law making it easier for competing agencies to gain official recognition, but didn’t change the industry’s business model. By then, the mortgage boom was in high gear. From 2002 to 2006, Moody’s profits nearly tripled, mostly thanks to the high margins the agencies charged in structured finance. In 2006, Moody’s reported net income of $750 million. Raymond W. McDaniel Jr., its chief executive, gloated in the annual report for that year, “I firmly believe that Moody’s business stands on the ‘right side of history’ in terms of the alignment of our role and function with advancements in global capital markets.”

Using Weather in Antarctica To Forecast Conditions in Hawaii

Even as McDaniel was crowing, it was clear in some corners of Wall Street that the mortgage market was headed for trouble. The housing industry was cooling off fast. James Kragenbring, a money manager with Advantus Capital Management, complained to the agencies as early as 2005 that their ratings were too generous. A report from the hedge fund of John Paulson proclaimed astonishment at “the mispricing of these securities.” He started betting that mortgage debt would crash.

Even Mark Zandi, the very visible economist at Moody’s forecasting division (which is separate from the ratings side), was worried about the chilling crosswinds blowing in credit markets. In a report published in May 2006, he noted that consumer borrowing had soared, household debt was at a record and a fifth of such debt was classified as subprime. At the same time, loan officers were loosening underwriting standards and easing rates to offer still more loans. Zandi fretted about the “razor-thin” level of homeowners’ equity, the avalanche of teaser mortgages and the $750 billion of mortgages he judged to be at risk. Zandi concluded, “The environment feels increasingly ripe for some type of financial event.”

A month after Zandi’s report, Moody’s rated Subprime XYZ. The analyst on the deal also had concerns. Moody’s was aware that mortgage standards had been deteriorating, and it had been demanding more of a cushion in such pools. Nonetheless, its credit-rating model continued to envision rising home values. Largely for that reason, the analyst forecast losses for XYZ at only 4.9 percent of the underlying mortgage pool. Since even the lowest-rated bonds in XYZ would be covered up to a loss level of 7.25 percent, the bonds seemed safe.

XYZ now became the responsibility of a Moody’s team that monitors securities and changes the ratings if need be (the analyst moved on to rate a new deal). Almost immediately, the team noticed a problem. Usually, people who finance a home stay current on their payments for at least a while. But a sliver of folks in XYZ fell behind within 90 days of signing their papers. After six months, an alarming 6 percent of the mortgages were seriously delinquent. (Historically, it is rare for more than 1 percent of mortgages at that stage to be delinquent.)

Moody’s monitors began to make inquiries with the lender and were shocked by what they heard. Some properties lacked sod or landscaping, and keys remained in the mailbox; the buyers had never moved in. The implication was that people had bought homes on spec: as the housing market turned, the buyers walked.

By the spring of 2007, 13 percent of Subprime XYZ was delinquent — and it was worsening by the month. XYZ was hardly atypical; the entire class of 2006 was performing terribly. (The class of 2007 would turn out to be even worse.)

In April 2007, Moody’s announced it was revising the model it used to evaluate subprime mortgages. It noted that the model “was first introduced in 2002. Since then, the mortgage market has evolved considerably.” This was a rather stunning admission; its model had been based on a world that no longer existed.

Poring over the data, Moody’s discovered that the size of people’s first mortgages was no longer a good predictor of whether they would default; rather, it was the size of their first and second loans — that is, their total debt — combined. This was rather intuitive; Moody’s simply hadn’t reckoned on it. Similarly, credit scores, long a mainstay of its analyses, had not proved to be a “strong predictor” of defaults this time. Translation: even people with good credit scores were defaulting. Amy Tobey, leader of the team that monitored XYZ, told me, “It seems there was a shift in mentality; people are treating homes as investment assets.” Indeed. And homeowners without equity were making what economists call a rational choice; they were abandoning properties rather than make payments on them. Homeowners’ equity had never been as high as believed because appraisals had been inflated.

Over the summer and fall of 2007, Moody’s and the other agencies repeatedly tightened their methodology for rating mortgage securities, but it was too late. They had to downgrade tens of billions of dollars of securities. By early this year, when I met with Moody’s, an astonishing 27 percent of the mortgage holders in Subprime XYZ were delinquent. Losses on the pool were now estimated at 14 percent to 16 percent — three times the original estimate. Seemingly high-quality bonds rated A3 by Moody’s had been downgraded five notches to Ba2, as had the other bonds in the pool aside from its triple-A’s.

The pain didn’t stop there. Many of the lower-rated bonds issued by XYZ, and by mortgage pools like it, were purchased by C.D.O.’s, the second-order mortgage vehicles, which were eager to buy lower-rated mortgage paper because it paid a higher yield. As the agencies endowed C.D.O. securities with triple-A ratings, demand for them was red hot. Much of it was from global investors who knew nothing about the U.S. mortgage market. In 2006 and 2007, the banks created more than $200 billion of C.D.O.’s backed by lower-rated mortgage paper. Moody’s assigned a different team to rate C.D.O.’s. This team knew far less about the underlying mortgages than did the committee that evaluated Subprime XYZ. In fact, Moody’s rated C.D.O.’s without knowing which bonds the pool would buy.

A C.D.O. operates like a mutual fund; it can buy or sell mortgage bonds and frequently does so. Thus, the agencies rate pools with assets that are perpetually shifting. They base their ratings on an extensive set of guidelines or covenants that limit the C.D.O. manager’s discretion.

Late in 2006, Moody’s rated a C.D.O. with $750 million worth of securities. The covenants, which act as a template, restricted the C.D.O. to, at most, an 80 percent exposure to subprime assets, and many other such conditions. “We’re structure experts,” Yuri Yoshizawa, the head of Moody’s’ derivative group, explained. “We’re not underlying-asset experts.” They were checking the math, not the mortgages. But no C.D.O. can be better than its collateral.

Moody’s rated three-quarters of this C.D.O.’s bonds triple-A. The ratings were derived using a mathematical construct known as a Monte Carlo simulation — as if each of the underlying bonds would perform like cards drawn at random from a deck of mortgage bonds in the past. There were two problems with this approach. First, the bonds weren’t like those in the past; the mortgage market had changed. As Mark Adelson, a former managing director in Moody’s structured-finance division, remarks, it was “like observing 100 years of weather in Antarctica to forecast the weather in Hawaii.” And second, the bonds weren’t random. Moody’s had underestimated the extent to which underwriting standards had weakened everywhere. When one mortgage bond failed, the odds were that others would, too.

Moody’s estimated that this C.D.O. could potentially incur losses of 2 percent. It has since revised its estimate to 27 percent. The bonds it rated have been decimated, their market value having plunged by half or more. A triple-A layer of bonds has been downgraded 16 notches, all the way to B. Hundreds of C.D.O.’s have suffered similar fates (most of Wall Street’s losses have been on C.D.O.’s). For Moody’s and the other rating agencies, it has been an extraordinary rout.

Whom Can We Rely On?

The agencies have blamed the large incidence of fraud, but then they could have demanded verification of the mortgage data or refused to rate securities where the data were not provided. That was, after all, their mandate. This is what they pledge for the future. Moody’s, S.&P. and Fitch say that they are tightening procedures — they will demand more data and more verification and will subject their analysts to more outside checks. None of this, however, will remove the conflict of interest in the issuer-pays model. Though some have proposed requiring that agencies with official recognition charge investors, rather than issuers, a more practical reform may be for the government to stop certifying agencies altogether.

Then, if the Fed or other regulators wanted to restrict what sorts of bonds could be owned by banks, or by pension funds or by anyone else in need of protection, they would have to do it themselves — not farm the job out to Moody’s. The ratings agencies would still exist, but stripped of their official imprimatur, their ratings would lose a little of their aura, and investors might trust in them a bit less. Moody’s itself favors doing away with the official designation, and it, like S.&P., embraces the idea that investors should not “rely” on ratings for buy-and-sell decisions.

This leaves an awkward question, with respect to insanely complex structured securities: What can they rely on? The agencies seem utterly too involved to serve as a neutral arbiter, and the banks are sure to invent new and equally hard-to-assess vehicles in the future. Vickie Tillman, the executive vice president of S.&P., told Congress last fall that in addition to the housing slump, “ahistorical behavorial modes” by homeowners were to blame for the wave of downgrades. She cited S.&P.’s data going back to the 1970s, as if consumers were at fault for not living up to the past. The real problem is that the agencies’ mathematical formulas look backward while life is lived forward. That is unlikely to change.

On Valentine's Day, a story about being in the red...sound like CT to us!
Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis

February 14, 2010

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.  As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November — three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.  It had worked before. In 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means.

Athens did not pursue the latest Goldman proposal, but with Greece groaning under the weight of its debts and with its richer neighbors vowing to come to its aid, the deals over the last decade are raising questions about Wall Street’s role in the world’s latest financial drama.

As in the American subprime crisis and the implosion of the American International Group, financial derivatives played a role in the run-up of Greek debt. Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.  In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books. Greece, for example, traded away the rights to airport fees and lottery proceeds in years to come.

Critics say that such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.  Some of the Greek deals were named after figures in Greek mythology. One of them, for instance, was called Aeolos, after the god of the winds.

The crisis in Greece poses the most significant challenge yet to Europe’s common currency, the euro, and the Continent’s goal of economic unity. The country is, in the argot of banking, too big to be allowed to fail. Greece owes the world $300 billion, and major banks are on the hook for much of that debt. A default would reverberate around the globe.  A spokeswoman for the Greek finance ministry said the government had met with many banks in recent months and had not committed to any bank’s offers. All debt financings “are conducted in an effort of transparency,” she said. Goldman and JPMorgan declined to comment.

While Wall Street’s handiwork in Europe has received little attention on this side of the Atlantic, it has been sharply criticized in Greece and in magazines like Der Spiegel in Germany.

“Politicians want to pass the ball forward, and if a banker can show them a way to pass a problem to the future, they will fall for it,” said Gikas A. Hardouvelis, an economist and former government official who helped write a recent report on Greece’s accounting policies.

Wall Street did not create Europe’s debt problem. But bankers enabled Greece and others to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.

“If a government wants to cheat, it can cheat,” said Garry Schinasi, a veteran of the International Monetary Fund’s capital markets surveillance unit, which monitors vulnerability in global capital markets.

Banks eagerly exploited what was, for them, a highly lucrative symbiosis with free-spending governments. While Greece did not take advantage of Goldman’s proposal in November 2009, it had paid the bank about $300 million in fees for arranging the 2001 transaction, according to several bankers familiar with the deal.  Such derivatives, which are not openly documented or disclosed, add to the uncertainty over how deep the troubles go in Greece and which other governments might have used similar off-balance sheet accounting.

The tide of fear is now washing over other economically troubled countries on the periphery of Europe, making it more expensive for Italy, Spain and Portugal to borrow.

For all the benefits of uniting Europe with one currency, the birth of the euro came with an original sin: countries like Italy and Greece entered the monetary union with bigger deficits than the ones permitted under the treaty that created the currency. Rather than raise taxes or reduce spending, however, these governments artificially reduced their deficits with derivatives.

Derivatives do not have to be sinister. The 2001 transaction involved a type of derivative known as a swap. One such instrument, called an interest-rate swap, can help companies and countries cope with swings in their borrowing costs by exchanging fixed-rate payments for floating-rate ones, or vice versa. Another kind, a currency swap, can minimize the impact of volatile foreign exchange rates.

But with the help of JPMorgan, Italy was able to do more than that. Despite persistently high deficits, a 1996 derivative helped bring Italy’s budget into line by swapping currency with JPMorgan at a favorable exchange rate, effectively putting more money in the government’s hands. In return, Italy committed to future payments that were not booked as liabilities.

“Derivatives are a very useful instrument,” said Gustavo Piga, an economics professor who wrote a report for the Council on Foreign Relations on the Italian transaction. “They just become bad if they’re used to window-dress accounts.”

In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.

Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.

These kinds of deals have been controversial within government circles for years. As far back as 2000, European finance ministers fiercely debated whether derivative deals used for creative accounting should be disclosed.  The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.

Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”

While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous.

George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.  Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.

In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.

In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued, according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.

Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations.

Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”

U.S. Inquiry Eyes S.&P. Ratings of Mortgages
August 17, 2011

The Justice Department is investigating whether the nation’s largest credit ratings agency, Standard & Poor’s, improperly rated dozens of mortgage securities in the years leading up to the financial crisis, according to two people interviewed by the government and another briefed on such interviews.

The investigation began before Standard & Poor’s cut the United States’ AAA credit rating this month, but it is likely to add fuel to the political firestorm that has surrounded that action. Lawmakers and some administration officials have since questioned the agency’s secretive process, its credibility and the competence of its analysts, claiming to have found an error in its debt calculations.

In the mortgage inquiry, the Justice Department has been asking about instances in which the company’s analysts wanted to award lower ratings on mortgage bonds but may have been overruled by other S.& P. business managers, according to the people with knowledge of the interviews. If the government finds enough evidence to support such a case, which is likely to be a civil case, it could undercut S.& P.’s longstanding claim that its analysts act independently from business concerns.

It is unclear if the Justice Department investigation involves the other two ratings agencies, Moody’s and Fitch, or only S.& P.

During the boom years, S.& P. and other ratings agencies reaped record profits as they bestowed their highest ratings on bundles of troubled mortgage loans, which made the mortgages appear less risky and thus more valuable. They failed to anticipate the deterioration that would come in the housing market and devastate the financial system.  Since the crisis, the agencies’ business practices and models have been criticized from many corners, including in Congressional hearings and reports that have raised questions about whether independent analysis was corrupted by the drive for profits.

The Securities and Exchange Commission has also been investigating possible wrongdoing at S.& P., according to a person interviewed on that matter, and may be looking at the other two major agencies, Moody’s and Fitch Ratings.

Ed Sweeney, a spokesman for S.& P., said in an e-mail: “S.& P. has received several requests from different government agencies over the last few years. We continue to cooperate with these requests. We do not prevent such agencies from speaking with current or former employees.” S.& P. is a unit of the McGraw-Hill Companies, which is under pressure from some investors and has been considering whether to spin off businesses or make other strategic changes this summer.

The people with knowledge of the investigation said it had picked up steam early this summer, well before the debt rating issue reached a high pitch in Washington. Now members of Congress are investigating why S.& P. removed the nation’s AAA rating, which is highly important to financial markets.  Representatives of the Justice Department and the S.E.C. declined to comment, as is customary for those departments, on whether they are investigating the ratings agencies.

Even though the Justice Department has the power to bring criminal charges, witnesses who have been interviewed have been told by investigators that they are pursuing a civil case.  The government has brought relatively few cases against large financial concerns for their roles in the housing blowup, and it has closed investigations into Washington Mutual and Countrywide, among others, without taking action.  The cases that have been brought are mainly civil matters. In the spring, the Justice Department filed a civil suit against Deutsche Bank and one of its units, which the government said had misrepresented the quality of mortgage loans to obtain government insurance on them. Another common thread — in that case and several others — is that no bank executives were named.

Despite the public scrutiny and outcry over the ratings agencies’ failures in the financial crisis, many investors still rely heavily on ratings from the three main agencies for their purchases of sovereign and corporate debt, as well as other complex financial products.

Companies and some countries — but not the United States — pay the agencies to receive a rating, the financial market’s version of a seal of approval. For decades, the government issued rules that banks, mutual funds and others could rely on a AAA stamp for investing decisions — which bolstered the agencies’ power.

A successful case or settlement against a giant like S.& P. could accelerate the shift away from the traditional ratings system. The financial reform overhaul known as Dodd-Frank sought to decrease the emphasis on ratings in the way banks and mutual funds invest their assets. But bank regulators have been slow to spell out how that would work. A government case that showed problems beyond ineptitude might spur greater reforms, financial historians said.

“I think it would have a major impact if there was a successful fraud case that would suggest there would be momentum for legislation that would force them to change their business model,” said Richard Sylla, a professor at New York University’s Stern School of Business who has studied the history of ratings firms.

In particular, Professor Sylla said that the ratings agencies could be forced to stop making their money off the entities they rate and instead charge investors who use the ratings. The current business model, critics say, is riddled with conflicts of interest, since ratings agencies might make their grades more positive to please their customers.  Before the financial crisis, banks shopped around to make sure rating agencies would award favorable ratings before agreeing to work with them. These banks paid upward of $100,000 for ratings on mortgage bond deals, according to the Financial Crisis Inquiry Commission, and several hundreds of thousands of dollars for the more complex structures known as collateralized debt obligations.

Ratings experts also said that a successful case could hamper the agencies’ ability to argue that they were not liable for ratings that turned out to be wrong.

“Their story is that they should be protected by full First Amendment protections, and that would be harder to make in the public arena, in Congress and in the courts,” said Lawrence J. White, another professor at New York University’s Stern School of Business, who has testified alongside ratings executives before Congress. “If they mixed business and the ratings, it would certainly make their story harder to tell.”

The ratings agencies lost a bit of ground on their First Amendment protections in the recent financial reform bill, which put the ratings firms on the same legal liability level as accounting firms, Professor White said. But that has yet to be tested in court.

People with knowledge of the Justice Department investigation of S.& P. said investigators had made references to several individuals, though it was unclear if anyone would be named in any potential case. Investigators have been asking about a remark supposedly made by David Tesher about mortgage security ratings, two people said. The investigators have asked witnesses if they heard Mr. Tesher say: “Don’t kill the golden goose,” in reference to mortgage securities.

S.& P. declined to provide a comment for Mr. Tesher.

Several of the people who oversaw S.& P.’s mortgage-related ratings went on to different jobs at McGraw-Hill, including Joanne Rose, the former head of structured finance; Vickie Tillman, the former head of ratings; and Susan Barnes, former head of residential mortgage bond ratings. Investigators have told witnesses that they are looking for former employees and that has proved difficult because so many crucial people still work at the company.

One former executive who has been mentioned in investigators’ interviews is Richard Gugliada, who helped oversee ratings of collateralized debt obligations. Calls to his home were not returned.

Taking Hard New Look at a Greenspan Legacy:  the full series
Published: October 8, 2008

“Not only have individual financial institutions become less vulnerable to shocks from underlying risk factors, but also the financial system as a whole has become more resilient.” — Alan Greenspan in 2004

George Soros, the prominent financier, avoids using the financial contracts known as derivatives “because we don’t really understand how they work.” Felix G. Rohatyn, the investment banker who saved New York from financial catastrophe in the 1970s, described derivatives as potential “hydrogen bombs.”

And Warren E. Buffett presciently observed five years ago that derivatives were “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”

One prominent financial figure, however, has long thought otherwise. And his views held the greatest sway in debates about the regulation and use of derivatives — exotic contracts that promised to protect investors from losses, thereby stimulating riskier practices that led to the financial crisis. For more than a decade, the former Federal Reserve Chairman Alan Greenspan has fiercely objected whenever derivatives have come under scrutiny in Congress or on Wall Street. “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so,” Mr. Greenspan told the Senate Banking Committee in 2003. “We think it would be a mistake” to more deeply regulate the contracts, he added.

Today, with the world caught in an economic tempest that Mr. Greenspan recently described as “the type of wrenching financial crisis that comes along only once in a century,” his faith in derivatives remains unshaken.

The problem is not that the contracts failed, he says. Rather, the people using them got greedy. A lack of integrity spawned the crisis, he argued in a speech a week ago at Georgetown University, intimating that those peddling derivatives were not as reliable as “the pharmacist who fills the prescription ordered by our physician.”

But others hold a starkly different view of how global markets unwound, and the role that Mr. Greenspan played in setting up this unrest.

“Clearly, derivatives are a centerpiece of the crisis, and he was the leading proponent of the deregulation of derivatives,” said Frank Partnoy, a law professor at the University of San Diego and an expert on financial regulation.

The derivatives market is $531 trillion, up from $106 trillion in 2002 and a relative pittance just two decades ago. Theoretically intended to limit risk and ward off financial problems, the contracts instead have stoked uncertainty and actually spread risk amid doubts about how companies value them.

If Mr. Greenspan had acted differently during his tenure as Federal Reserve chairman from 1987 to 2006, many economists say, the current crisis might have been averted or muted.

Over the years, Mr. Greenspan helped enable an ambitious American experiment in letting market forces run free. Now, the nation is confronting the consequences.

Derivatives were created to soften — or in the argot of Wall Street, “hedge” — investment losses. For example, some of the contracts protect debt holders against losses on mortgage securities. (Their name comes from the fact that their value “derives” from underlying assets like stocks, bonds and commodities.) Many individuals own a common derivative: the insurance contract on their homes.

On a grander scale, such contracts allow financial services firms and corporations to take more complex risks that they might otherwise avoid — for example, issuing more mortgages or corporate debt. And the contracts can be traded, further limiting risk but also increasing the number of parties exposed if problems occur.

Throughout the 1990s, some argued that derivatives had become so vast, intertwined and inscrutable that they required federal oversight to protect the financial system. In meetings with federal officials, celebrated appearances on Capitol Hill and heavily attended speeches, Mr. Greenspan banked on the good will of Wall Street to self-regulate as he fended off restrictions.

Ever since housing began to collapse, Mr. Greenspan’s record has been up for revision. Economists from across the ideological spectrum have criticized his decision to let the nation’s real estate market continue to boom with cheap credit, courtesy of low interest rates, rather than snuffing out price increases with higher rates. Others have criticized Mr. Greenspan for not disciplining institutions that lent indiscriminately.

But whatever history ends up saying about those decisions, Mr. Greenspan’s legacy may ultimately rest on a more deeply embedded and much less scrutinized phenomenon: the spectacular boom and calamitous bust in derivatives trading.

Some analysts say it is unfair to blame Mr. Greenspan because the crisis is so sprawling. “The notion that Greenspan could have generated a totally different outcome is naïve,” said Robert E. Hall, an economist at the conservative Hoover Institution, a research group at Stanford.

Mr. Greenspan declined requests for an interview. His spokeswoman referred questions about his record to his memoir, “The Age of Turbulence,” in which he outlines his beliefs.

“It seems superfluous to constrain trading in some of the newer derivatives and other innovative financial contracts of the past decade,” Mr. Greenspan writes. “The worst have failed; investors no longer fund them and are not likely to in the future.”

In his Georgetown speech, he entertained no talk of regulation, describing the financial turmoil as the failure of Wall Street to behave honorably.

“In a market system based on trust, reputation has a significant economic value,” Mr. Greenspan told the audience. “I am therefore distressed at how far we have let concerns for reputation slip in recent years.”

As the long-serving chairman of the Fed, the nation’s most powerful economic policy maker, Mr. Greenspan preached the transcendent, wealth-creating powers of the market.

A professed libertarian, he counted among his formative influences the novelist Ayn Rand, who portrayed collective power as an evil force set against the enlightened self-interest of individuals. In turn, he showed a resolute faith that those participating in financial markets would act responsibly.

An examination of more than two decades of Mr. Greenspan’s record on financial regulation and derivatives in particular reveals the degree to which he tethered the health of the nation’s economy to that faith.

As the nascent derivatives market took hold in the early 1990s, and in subsequent years, critics denounced an absence of rules forcing institutions to disclose their positions and set aside funds as a reserve against bad bets.

Time and again, Mr. Greenspan — a revered figure affectionately nicknamed the Oracle — proclaimed that risks could be handled by the markets themselves.

“Proposals to bring even minimalist regulation were basically rebuffed by Greenspan and various people in the Treasury,” recalled Alan S. Blinder, a former Federal Reserve board member and an economist at Princeton University. “I think of him as consistently cheerleading on derivatives.”

Arthur Levitt Jr., a former chairman of the Securities and Exchange Commission, says Mr. Greenspan opposes regulating derivatives because of a fundamental disdain for government.

Mr. Levitt said that Mr. Greenspan’s authority and grasp of global finance consistently persuaded less financially sophisticated lawmakers to follow his lead.

“I always felt that the titans of our legislature didn’t want to reveal their own inability to understand some of the concepts that Mr. Greenspan was setting forth,” Mr. Levitt said. “I don’t recall anyone ever saying, ‘What do you mean by that, Alan?’ ”

Still, over a long stretch of time, some did pose questions. In 1992, Edward J. Markey, a Democrat from Massachusetts who led the House subcommittee on telecommunications and finance, asked what was then the General Accounting Office to study derivatives risks.

Two years later, the office released its report, identifying “significant gaps and weaknesses” in the regulatory oversight of derivatives.

“The sudden failure or abrupt withdrawal from trading of any of these large U.S. dealers could cause liquidity problems in the markets and could also pose risks to others, including federally insured banks and the financial system as a whole,” Charles A. Bowsher, head of the accounting office, said when he testified before Mr. Markey’s committee in 1994. “In some cases intervention has and could result in a financial bailout paid for or guaranteed by taxpayers.”

In his testimony at the time, Mr. Greenspan was reassuring. “Risks in financial markets, including derivatives markets, are being regulated by private parties,” he said.

“There is nothing involved in federal regulation per se which makes it superior to market regulation.”

Mr. Greenspan warned that derivatives could amplify crises because they tied together the fortunes of many seemingly independent institutions. “The very efficiency that is involved here means that if a crisis were to occur, that that crisis is transmitted at a far faster pace and with some greater virulence,” he said.

But he called that possibility “extremely remote,” adding that “risk is part of life.”

Later that year, Mr. Markey introduced a bill requiring greater derivatives regulation. It never passed.

In 1997, the Commodity Futures Trading Commission, a federal agency that regulates options and futures trading, began exploring derivatives regulation. The commission, then led by a lawyer named Brooksley E. Born, invited comments about how best to oversee certain derivatives.

Ms. Born was concerned that unfettered, opaque trading could “threaten our regulated markets or, indeed, our economy without any federal agency knowing about it,” she said in Congressional testimony. She called for greater disclosure of trades and reserves to cushion against losses.

Ms. Born’s views incited fierce opposition from Mr. Greenspan and Robert E. Rubin, the Treasury secretary then. Treasury lawyers concluded that merely discussing new rules threatened the derivatives market. Mr. Greenspan warned that too many rules would damage Wall Street, prompting traders to take their business overseas.

“Greenspan told Brooksley that she essentially didn’t know what she was doing and she’d cause a financial crisis,” said Michael Greenberger, who was a senior director at the commission. “Brooksley was this woman who was not playing tennis with these guys and not having lunch with these guys. There was a little bit of the feeling that this woman was not of Wall Street.”

Ms. Born declined to comment. Mr. Rubin, now a senior executive at the banking giant Citigroup, says that he favored regulating derivatives — particularly increasing potential loss reserves — but that he saw no way of doing so while he was running the Treasury.

“All of the forces in the system were arrayed against it,” he said. “The industry certainly didn’t want any increase in these requirements. There was no potential for mobilizing public opinion.”

Mr. Greenberger asserts that the political climate would have been different had Mr. Rubin called for regulation.

In early 1998, Mr. Rubin’s deputy, Lawrence H. Summers, called Ms. Born and chastised her for taking steps he said would lead to a financial crisis, according to Mr. Greenberger. Mr. Summers said he could not recall the conversation but agreed with Mr. Greenspan and Mr. Rubin that Ms. Born’s proposal was “highly problematic.”

On April 21, 1998, senior federal financial regulators convened in a wood-paneled conference room at the Treasury to discuss Ms. Born’s proposal. Mr. Rubin and Mr. Greenspan implored her to reconsider, according to both Mr. Greenberger and Mr. Levitt.

Ms. Born pushed ahead. On June 5, 1998, Mr. Greenspan, Mr. Rubin and Mr. Levitt called on Congress to prevent Ms. Born from acting until more senior regulators developed their own recommendations. Mr. Levitt says he now regrets that decision. Mr. Greenspan and Mr. Rubin were “joined at the hip on this,” he said. “They were certainly very fiercely opposed to this and persuaded me that this would cause chaos.”

Ms. Born soon gained a potent example. In the fall of 1998, the hedge fund Long Term Capital Management nearly collapsed, dragged down by disastrous bets on, among other things, derivatives. More than a dozen banks pooled $3.6 billion for a private rescue to prevent the fund from slipping into bankruptcy and endangering other firms.

Despite that event, Congress froze the Commodity Futures Trading Commission’s regulatory authority for six months. The following year, Ms. Born departed.

In November 1999, senior regulators — including Mr. Greenspan and Mr. Rubin — recommended that Congress permanently strip the C.F.T.C. of regulatory authority over derivatives.

Mr. Greenspan, according to lawmakers, then used his prestige to make sure Congress followed through. “Alan was held in very high regard,” said Jim Leach, an Iowa Republican who led the House Banking and Financial Services Committee at the time. “You’ve got an area of judgment in which members of Congress have nonexistent expertise.”

As the stock market roared forward on the heels of a historic bull market, the dominant view was that the good times largely stemmed from Mr. Greenspan’s steady hand at the Fed.

“You will go down as the greatest chairman in the history of the Federal Reserve Bank,” declared Senator Phil Gramm, the Texas Republican who was chairman of the Senate Banking Committee when Mr. Greenspan appeared there in February 1999.

Mr. Greenspan’s credentials and confidence reinforced his reputation — helping him to persuade Congress to repeal Depression-era laws that separated commercial and investment banking in order to reduce overall risk in the financial system.

“He had a way of speaking that made you think he knew exactly what he was talking about at all times,” said Senator Tom Harkin, a Democrat from Iowa. “He was able to say things in a way that made people not want to question him on anything, like he knew it all. He was the Oracle, and who were you to question him?”

In 2000, Mr. Harkin asked what might happen if Congress weakened the C.F.T.C.’s authority.

“If you have this exclusion and something unforeseen happens, who does something about it?” he asked Mr. Greenspan in a hearing.

Mr. Greenspan said that Wall Street could be trusted. “There is a very fundamental trade-off of what type of economy you wish to have,” he said. “You can have huge amounts of regulation and I will guarantee nothing will go wrong, but nothing will go right either,” he said.

Later that year, at a Congressional hearing on the merger boom, he argued that Wall Street had tamed risk.

“Aren’t you concerned with such a growing concentration of wealth that if one of these huge institutions fails that it will have a horrendous impact on the national and global economy?” asked Representative Bernard Sanders, an independent from Vermont.

“No, I’m not,” Mr. Greenspan replied. “I believe that the general growth in large institutions have occurred in the context of an underlying structure of markets in which many of the larger risks are dramatically — I should say, fully — hedged.”

The House overwhelmingly passed the bill that kept derivatives clear of C.F.T.C. oversight. Senator Gramm attached a rider limiting the C.F.T.C.’s authority to an 11,000-page appropriations bill. The Senate passed it. President Clinton signed it into law.

Pressing Forward

Still, savvy investors like Mr. Buffett continued to raise alarms about derivatives, as he did in 2003, in his annual letter to shareholders of his company, Berkshire Hathaway.

“Large amounts of risk, particularly credit risk, have become concentrated in the hands of relatively few derivatives dealers,” he wrote. “The troubles of one could quickly infect the others.”

But business continued.

And when Mr. Greenspan began to hear of a housing bubble, he dismissed the threat. Wall Street was using derivatives, he said in a 2004 speech, to share risks with other firms.

Shared risk has since evolved from a source of comfort into a virus. As the housing crisis grew and mortgages went bad, derivatives actually magnified the downturn.

The Wall Street debacle that swallowed firms like Bear Stearns and Lehman Brothers, and imperiled the insurance giant American International Group, has been driven by the fact that they and their customers were linked to one another by derivatives.

In recent months, as the financial crisis has gathered momentum, Mr. Greenspan’s public appearances have become less frequent.

His memoir was released in the middle of 2007, as the disaster was unfolding, and his book tour suddenly became a referendum on his policies. When the paperback version came out this year, Mr. Greenspan wrote an epilogue that offers a rebuttal of sorts.

“Risk management can never achieve perfection,” he wrote. The villains, he wrote, were the bankers whose self-interest he had once bet upon.

“They gambled that they could keep adding to their risky positions and still sell them out before the deluge,” he wrote. “Most were wrong.”

No federal intervention was marshaled to try to stop them, but Mr. Greenspan has no regrets. 

“Governments and central banks,” he wrote, “could not have altered the course of the boom.”


Susan Walsh/Associated Press (Frank)
Representative Barney Frank of Massachusetts at the House hearing on A.I.G. Wednesday. "We are the effective owners of this company," he said.
Tower of toxicity, lead domino, perhaps? ("N'est ce pas?")  Photo (l.) used with permission, from the Internet - this webpage, "About Weston," is a not "for profit" site.  NOTE:  perhaps Representative Frank is holding this document in his hand?  Or the one, if it exists, of the 70+ staff collecting bonus for derivative trades? Or is it the new takeover bill?

Bank of America Settles S.E.C. Suit Over Merrill Deal
August 4, 2009

The Securities and Exchange Commission accused Bank of America on Monday of misleading investors about plans to pay billions of dollars in bonuses at Merrill Lynch, the troubled brokerage giant it bought last year.

The development once again turns an uncomfortable spotlight on a defining moment of the financial crisis — the ill-starred merger of Bank of America and Merrill — and on Bank of America’s embattled chief executive, Kenneth D. Lewis.

The $50 billion merger, completed at the behest of federal officials, has been the subject of heated hearings in Congress, as has the question of who knew what, and when, about the Merrill bonuses. Those bonuses were paid despite mounting losses that soon forced Bank of America to seek a second lifeline from Washington.

Bank of America said on Monday that it would pay $33 million to settle the S.E.C.’s claims, but the agreement is unlikely to put to rest questions swirling around the bank and its leadership. Indeed, news of the settlement came on the same day that Bank of America announced a significant management shake-up.

The S.E.C.’s lawsuit centers on statements Bank of America made in its proxy statement about the Merrill deal, which was announced on Sept. 15. The bank, one of the nation’s largest, told its investors in the proxy on Nov. 3 that Merrill had agreed not to pay year-end performance bonuses or other incentive pay without Bank of America’s consent before closing the deal.

But after that proxy was issued, Bank of America agreed that Merrill could pay up to $5.8 billion in year-end compensation to employees, the S.E.C. said in its complaint, which was filed in United States District Court in Manhattan. That agreement was memorialized in a separate bonus schedule that was omitted from the proxy statement, the S.E.C. said.

“Companies must give shareholders all material information about corporate transactions they are asked to approve,” said Robert Khuzami, director of the S.E.C.’s division of enforcement, in a statement. “Failing to disclose that a struggling company will pay out billions of dollars in performance bonuses obviously violates that duty and warrants the significant financial penalty imposed by today’s settlement.” Bank of America said in a statement that “the settlement, which it entered into without admitting or denying the S.E.C.’s allegations, represents a constructive conclusion to this issue. This is an important step forward for Bank of America and allows us to focus our energies on enhancing stockholder value by continuing to execute our strategies for the long-term success of our business.”

Even so, the questions for Bank of America, and for Mr. Lewis, are unlikely to stop. The Bank of America-Merrill deal, including the government’s role in it, has drawn sharp scrutiny on Wall Street and in Washington. Lawmakers armed with e-mail messages and internal documents have claimed at various hearings that Federal Reserve and Treasury officials had threatened to oust the bank’s top management if it pulled out of the deal.

Testifying on the issue, Ben S. Bernanke, the chairman of the Fed, denied that the Fed had maneuvered to postpone public disclosures about Merrill Lynch’s spiraling losses until after the merger was completed on Dec. 30, and he denied that Fed officials had kept other financial regulators in the dark about plans to bail out Bank of America in January. By shaking up senior management, Bank of America is putting in place several possible contenders to replace Mr. Lewis, who was stripped of the chairman’s title earlier this year.

Bank of America said Monday that it had hired Sallie Krawcheck, who was most recently the head of global wealth management at its archrival Citigroup, to lead its global wealth and investment management business. The bank also announced Monday that Brian Moynihan, currently the head of its global corporate and investment banking and global wealth management arms, would become the bank’s head of consumer banking, a division that will include Bank of America’s deposit, small-business and credit card businesses.

Tom Montag, who has been the bank’s head of global markets, will take on the additional role of running the bank’s global corporate and investment banking business.

Liam McGee, who currently runs the consumer and small-business banking unit, will be leaving the company after nearly 20 years. Mr. McGee said in Monday’s news release that he planned to “pursue my goal of running a company.”

Mr. Lewis suggested that the moves would help address the question of who might eventually lead the bank after him. The management changes “position a number of senior executives to compete to succeed me at the appropriate time,” he said in a statement Monday announcing the changes.

Beyond Outrage, Wall Street Payouts Fuel Connecticut's Economy, Tax Debate

The Hartford Courant
August 2, 2009

Five months after the national flap over AIG, outrage over Wall Street bonuses is back, and this time the stakes in Connecticut — for taxes and for economic health — are much higher.

Nearly 5,000 employees working for the nine large banks that accepted $175 billion in federal bailout money got million-dollar bonuses last year. In all, the banks handed out $32.6 billion in "performance-based" bonuses, New York Attorney General Andrew Cuomo disclosed Thursday in a report.

The payouts renewed angry calls for government controls on bonuses and prompted an immediate vote by the U.S. House for such controls — in a bill that would also give shareholders the right to nonbinding votes on executive pay.

In Connecticut, though, the debate takes on special meaning. It provides fodder for Democrats in the General Assembly as they try to push through a tax increase on the highest wage earners.

And even as the payments offend popular concepts of fairness, the billions in broader Wall Street bonuses are a financial boon to the state — much more than AIG's disputed $218 million paid to employees at a Wilton-based office of the failed insurance giant.

There is no public data showing how much of the nine big banks' bonus money went to Connecticut residents on the Fairfield County Gold Coast and elsewhere. But by all accounts the figure is large, and it boosts the state's coffers as well as its overall wealth.

"At minimum, we are talking $100 million for the state budget from direct income tax, let alone indirect spending by those receiving bonuses," said Peter Gioia, vice president for research at the Connecticut Business and Industry Association. "That may upset some people as taxpayers, but it should put a smile on people who own businesses."

The $100 million estimate assumes that the nine banks paid out about $2 billion of the $36 billion to Connecticut residents, based on the current state tax rate.

Whatever the right number, said Nicholas S. Perna, economic adviser for Webster Bank, "If Mr. Cuomo had been successful in banning all bonuses, the state budget would have been in even greater trouble."

Meanwhile, Democrats at the state Capitol have said for many months that the state should fill its two-year, $8.6 billion budget gap by increasing the tax on high-income residents.

"I think this makes it harder for Republicans to claim that raising taxes by just $20 a week on those making $600,000 a year is excessive," said Senate President Pro Tem Donald E. Williams Jr.

What Is Fair?

As Gioia and Perna point out, the so-called multiplier effect of the bonuses will help the state's economy as a whole, not just the few who got the money, since it will diffuse throughout the entire economy as it is spent.

But economic benefit is one thing and fairness is another.

"There ought to be some proportionality between executive bonuses and the health of the overall economy," said Jon Green, director of Connecticut Working Families. "Instead, Wall Street is content to continue to encourage risky gambling with other people's money. Have we learned nothing from the past year?"

Edward J. Deak, a professor of economics at Fairfield University, said he sees "a culture of 'me first'" at these banks, promoted by federal tax laws, that led to the large bonuses. Current law allows employers to deduct only the first $1 million in salaries for any one person for tax purposes, but leaves a loophole for performance-based pay, or bonuses.

"In this system, performance becomes a subjective standard," Deak said, "one that becomes looser and looser as more people want their share of the growing bonus pool."

The banks and insurance companies subject to federal oversight under the federal bailout program argue that they must be able to pay freely in order to attract and retain talent.  Pay expert Paul Hodgson, a senior research associate at The Corporate Library, a private group, takes aim at that notion.

"There has been a glut of bankers on the job market," he said, "and I find it hard to believe that there are top performers looking to leave their jobs if they don't get the same bonus as last year."

Spokesmen for three of the largest banks on the bailout list, Bank of America, JPMorgan Chase and Citigroup, declined to comment for this story.  The bonus amounts for 2008 were in line with the amounts paid in the past, said Jonathan Koppell, associate professor of politics and management Yale School of Management.

"I think it's surprising they were not lower considering the performance of the companies," Koppell said.

Fallout In Hartford

With seven-figure payouts to thousands of people, many, including key policymakers, doubt that all those bonuses could really have been earned.

"The government tried to help out the economy, by bailing these companies out, and it is disturbing that they took advantage of taxpayer generosity," said state House Speaker Christopher G. Donovan, D- Meriden. "We obviously need more regulation of the private sector."

Donovan, like Williams in the state Senate, believes Cuomo's report will advance the Democrats' argument for a tax hike on high earners — an increase opposed by most Republicans, including Gov. M. Jodi Rell.

"Gov. Rell believes this type of misuse of taxpayers' dollars is shameful. But this is a federal problem which requires a federal solution," said Rell spokesman Adam Liegeot. "Raising the state's income tax is not the answer. In fact, doing so would kill jobs in Connecticut. Gov. Rell will not allow that to happen."

State Attorney General Richard Blumenthal said his office is considering how it might obtain information about whether the bonuses actually compensate individuals for their performance and whether the recipients kept their jobs last year "by virtue of the government bailouts."

Nonetheless, he said, "We're dealing with the lifeblood of the American economy, so we're not going to simply start throwing grenades or making accusations."

Copyright © 2009, The Hartford Courant

After Rescue, New Weakness Seen at A.I.G.
July 31, 2009

The dozens of insurance companies that make up the American International Group show signs of considerable weakness even after their corporate parent got the biggest bailout in history, a review of state regulatory filings shows.

Over time, the weaknesses could mean trouble for A.I.G.’s policyholders, and they raise difficult questions for regulators, who normally step in when an insurer gets into trouble. State commissioners are supposed to keep insurers from writing new policies if there is any doubt that they can cover their claims. But in A.I.G.’s case, regulators are eager for the insurers to keep writing new business, because they see it as the best hope of paying back taxpayers.

In the months since A.I.G. received its $182 billion rescue from the Treasury and the Federal Reserve, state insurance regulators have said repeatedly that its core insurance operations were sound — that the financial disaster was caused primarily by a small unit that dealt in exotic derivatives.

But state regulatory filings offer a different picture. They show that A.I.G.’s individual insurance companies have been doing an unusual volume of business with each other for many years — investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect.

More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella.

Echoing state regulators’ statements, the company said the interdependency of its businesses posed no problem and strongly disputed that any units had obligations they could not pay.

“There is absolutely no concern about the capital in these companies,” said Rob Schimek, the chief financial officer of A.I.G.’s property and casualty insurance business. The company authorized him to speak about these issues.

Nothing is wrong with spreading risks to other companies, a practice known as reinsurance, when it is carried out with unrelated, solvent companies. It can also be acceptable in small amounts between related companies. But A.I.G.’s companies have reinsured each other to such a large extent, experts say, that now billions of dollars worth of risks may have ended up at related companies that lack the means to cover them.

“An organization like this one relies on constant, ever-growing premium volume, so it can cover and pay for the deficits,” said W. O. Myrick, a retired chief insurance examiner for Louisiana.

If A.I.G.’s incoming premiums shrink, he warned, “the whole thing’s going to collapse in on itself.”

Mr. Myrick has not fully examined all the A.I.G. subsidiaries but said his own recent review of many state filings raised serious concerns, particularly about the use of reinsurance to “bounce things around inside the holding company group.”

“That is a method used by holding companies to falsify the liabilities,” he said.

A.I.G.’s premiums have, in fact, been declining in important lines. Its ratings have fallen, and customers tend to steer clear of lower-rated insurers. To woo them back, A.I.G. has in some cases lowered its prices, competitors say. A.I.G. executives insist they would rather lose a customer than drive down prices dangerously.

A.I.G. has also pledged a share of its life insurance premiums to the Fed, to pay back about $8 billion. Details have not been provided, but consumer advocates say it is not clear how the life companies will pay future claims if their premiums are diverted.

“Eventually, there’s going to be a battle between the policyholders and the feds,” said Thomas D. Gober, a former insurance examiner who now has his own forensic accounting firm that specializes in insurance fraud. “The Fed is going to say, ‘We want our money back,’ but the law says, ‘Policyholders come first.’ It’s going to be ugly.”

Mr. Gober is a consultant for a lawsuit on behalf of A.I.G. policyholders, filed in California Superior Court in Los Angeles. The lawsuit seeks a court order requiring all A.I.G. subsidiaries doing business in California to put enough money to cover their obligations into a secure account controlled by the state treasurer.

The goal is to keep money from being moved out of California or used to finance A.I.G.’s other activities, said Maria C. Severson, a lawyer for the plaintiffs. The lawsuit also seeks to bar A.I.G. companies from soliciting new business without full disclosure of their financial condition.

The condition of A.I.G.’s individual companies is hard to see in the parent company’s filings with the Securities and Exchange Commission. Those filings simply tally all the individual subsidiaries’ financial information.

The companies’ weaknesses emerge in their filings with state insurance regulators — particularly when several are reviewed together. But that appears not to happen often, because there are so many. A.I.G. has more than 4,000 units in more than 100 countries.

Responsibility for A.I.G.’s 71 American insurance companies is spread among 19 state insurance commissions, which do not conduct examinations simultaneously.

As a result, Mr. Myrick said, a conglomerate like A.I.G. “can keep moving assets around to clean up one company” at a time, when examiners were looking. He said that it would take a coordinated, multistate examination of all the insurance companies to catch this.

Mr. Schimek, speaking for the insurance companies, said that in 2005, a team of examiners had at least considered A.I.G.’s property and casualty businesses as a group.

“It was a thorough examination,” he said. “I have absolutely no concern about the integrity of the financial information that’s been filed under my watch.”

State regulators confirmed that they believed the A.I.G. subsidiaries under their authority were solvent. Mike Moriarty, deputy insurance superintendent for New York State, said that while A.I.G. subsidiaries did not report all their reinsured obligations on their balances sheets, state regulators could “follow the trail of liabilities” and make sure they did not get lost in the holding company.

Obligations “can’t be hidden from state insurance regulators,” Mr. Moriarty said.

One A.I.G. subsidiary, the National Union Fire Insurance Company of Pittsburgh, shows what can happen by heavily relying on affiliates. Its most recent regulatory filing in Pennsylvania said it had more than enough money to pay its obligations.

But at the end of 2008, more than a third of National Union’s portfolio was invested in the stock of other A.I.G. companies, which are not publicly traded. National Union might not be able to sell all of these shares, and it is not clear what it could get for them. Many states bar insurers from investing that heavily in related companies.

Meanwhile, National Union has $42.1 billion in obligations looming off its balance sheet. These have been transferred to 56 other A.I.G. companies, through reinsurance. National Union will have to pay any of these claims and then collect from its relatives.

But it is not clear that the affiliates could pay promptly. National Union’s biggest reinsurance partner is American Home Assurance, an A.I.G. subsidiary that has taken $23.1 billion of obligations off National Union’s hands. In a New York filing, American Home reports total assets of $26.3 billion, but part of that consists of assets that cannot be used to pay claims, like furniture. It too includes a number of investments in other A.I.G. companies.

In addition, American Home has “unconditionally” guaranteed the obligations of 16 other A.I.G. subsidiaries, bringing the total it might have to pay to $140.6 billion.

Normally, when an insurance company weakens, regulators in its home state will first measure its capital. They may demand a weak company rebuild its capital, and if it fails, eventually bar it from selling new policies.

Like New York regulators, Pennsylvania regulators say they do not see a problem. “The insurance companies remain strong and are probably the most valuable assets within the A.I.G. structure,” said Joel Ario, Pennsylvania’s insurance commissioner. “To the best we know it, we think the companies are sound.”

But policyholder advocates said they feared state regulators were deferring to the wishes of the Fed and Treasury, to use the insurance operations to pay back the taxpayers.

“The insurance commissioners, for whatever reason, are letting them do this,” Mr. Myrick said. “I’d be jumping out of my shoes.”

A.I.G. Says It Needs 3 to 5 Years to Overhaul Itself
May 14, 2009

WASHINGTON — Edward M. Liddy, the chairman of American International Group, said on Wednesday that the company would probably need “three to five years” to carry out its restructuring plan and repay the taxpayer money used to bail it out.

A.I.G., once the nation’s biggest insurance conglomerate, has received more than $170 billion from the Federal Reserve and the Treasury since it collapsed in September.

The Treasury owns almost 80 percent of the voting shares. The Fed and Treasury have provided the company with about $83 billion in loans, and the Treasury has provided an additional $30 billion credit line. On top of that, the Federal Reserve Bank of New York has purchased tens of billions of dollars worth of its toxic assets and is holding them in two “special purpose vehicles.”

Testifying on Wednesday before the House Committee on Oversight and Government Reform, Mr. Liddy — whom Fed and Treasury officials recruited to run A.I.G. after it collapsed — outlined efforts so far to unwind its losses from exotic financial instruments and to spin off A.I.G.’s comparatively healthy insurance businesses. but he warned that the company would not sell businesses cheaply in order to raise cash more quickly.

“We must take the time and exercise the diligence to do this restructuring properly,” Mr. Liddy told lawmakers. “Let me be clear — our plan is explicitly designed to avoid having to divest A.I.G. assets at fire-sale prices.”

Asked by lawmakers to be more specific, Mr. Liddy estimated the entire plan would take “three to five years” to complete. But he warned that such estimates were fraught with uncertainty and could be too optimistic if the economy proves worse than expected or if market prices for its assets remains depressed.

Lawmakers at the oversight hearing questioned Mr. Liddy about his plans. Lawmakers were also set to question the three little-known trustees who were chosen by the government to vote its shares in A.I.G.

“The one thing that stands out most about the collapse and rescue of A.I.G. is the shroud of secrecy that has blanketed the entire sequence of events,” said Representative Edolphus Towns, Democrat of New York and chairman of the oversight committee.

In a recent memo to A.I.G. employees, Mr. Liddy said the company had developed a restructuring plan called “Project Destiny” that entails either spinning off many of the insurance subsidiaries, either by selling them to other companies or by turning them into independent companies and selling minority stakes through in public stock offerings.

The hearing marked the first time that the three trustees have spoken in public since they were appointed in January. The trustees, who were intended to be independent of both the company and the government, and are supposed to vote the government’s shares in A.I.G. — which account for 77.9 percent of its common stock — in a way most likely to “maximize” value for taxpayers.

The Fed and the Treasury have provided more than $170 billion in assistance to A.I.G. since its collapse. The company imploded primarily because of losses tied to credit-default swaps — essentially insurance contracts to protect investors against bond defaults — tied to mortgage-backed securities. The government is now trying to salvage the more traditional insurance and financing subsidiaries, most of which remain comparatively healthy.

Lawmakers in both parties have expressed confusion about the entire governance arrangement, and committee members are expected to grill the trustees about their unusual role.

“We recognize that we are in uncharted waters,” the trustees said in an unusual joint statement submitted in advance to the oversight committee. “With no history or precedent to which we can look for guidance, our anchor is the trust agreement itself.”

The three trustees are Jill Considine, a former chairwoman of the Depository Trust and Clearing Corporation in New York; Douglas Foshee, the chairman of El Paso Corporation in Houston; and Chester Feldberg, a retired top official with the Federal Reserve Bank of New York and former chairman of Barclays Americas.

The trustees are not supposed to get involved in any day-to-day management or even to act as “shadow” directors on A.I.G.’s board. They are also supposed to be independent of the Federal Reserve Bank of New York, which is the agency supervising the A.I.G. bailout.

In their prepared statement, the trustees acknowledged that they had been caught in the middle of a political firestorm over A.I.G.’s commitments to pay $165 million in “retention bonuses” to senior executives.

“We are well aware of the Congressional and public concern over bonuses paid to employees of recipients of federal funds in the current environment,” they said, adding that they were pushing Mr. Liddy and the A.I.G. board to come up with a “fair one effective compensation system.”

In a sign that the trustees might be taking a more active role in A.I.G. than officials had originally expected, they added that they were trying to reshape the company’s board.

“We are actively seeking new members of the board who could add important skills and perspectives,” they said in their statement.

“In all this, we have had extensive consultation with and cooperation with the F.R.B.N.Y. as well as with A.I.G. board members, senior managers and outside consultants,” they said, referring to the Federal Reserve Bank of New York.

UBS to Announce More Job Cuts Soon: Media
Filed at 8:40 a.m. ET
April 12, 2009

ZURICH (Reuters) - Swiss bank UBS will announce more job cuts soon, with staff in Switzerland and departments like marketing to be hit hard, newspapers reported on Sunday.

Citing several unnamed sources, the Sonntagszeitung newspaper said managers had already started telling their staff about job losses, with departments like marketing and support functions hardest hit.  NZZ am Sonntag said Switzerland would also be hit hard this time, with job cuts among the 26,400 due to be announced on April 22, unnamed sources said.  Swiss newspaper Sonntag said last month that the world's largest wealth manager in terms of assets would cut a further 8,000 jobs.

The bank, one of Europe's hardest hit in the financial crisis, has already announced plans to cut more than 10 percent of its workforce to bring the total staff down to about 75,000 this year.  Oswald Gruebel, a former Credit Suisse boss brought out of retirement by UBS in February as new chief executive, has already signaled that further cost cuts would be inevitable.

Gruebel will address his first UBS shareholders meeting on Wednesday.

The NZZ am Sonntag newspaper said up to a third of staff could go in departments like marketing, while the head of a team catering for institutional investors had been told to cut 15-25 percent of his team.  The head of U.S. wealth management informed his 19,000 staff about planned job cuts last week, although it was not clear how many positions were to go, both newspapers reported.

Sonntagszeitung said client advisors with few clients would go in both the United States and Switzerland.   Gruebel also told a UBS staff meeting in Frankfurt that business flights, lunch, training and taxi costs were banned, the NZZ am Sonntag newspaper said.

Denise Chervet, general secretary of the Swiss banking personnel association, told Sonntagzeitung UBS could make cuts in all departments, with the worst-case scenario more than 10,000 jobs to go, although Gruebel realized the population would not support that.

Earlier this month, Gruebel brought in a former Credit Suisse colleague, Ulrich Koerner, as new UBS chief operating officer and said he would centralize group-wide units to cut costs.

Swiss lawmakers reject deal with US in UBS tax row

8 June 2010

GENEVA – Switzerland's efforts to calm a banking furor hit a major setback Tuesday as nationalist and left-wing lawmakers blocked a treaty with the United States that would have allowed UBS to hand over thousands more files on its American clients to U.S. tax authorities.

The Swiss government and Washington had painstakingly crafted the treaty last August to resolve a long-standing dispute over the bank's alleged role in aiding tax evasion but 104 lawmakers in Switzerland's lower house voted against the deal Tuesday, compared to 76 in favor. Sixteen lawmakers abstained.

The government had urged lawmakers to approve the deal to avert harm to the Swiss economy, which is heavily dependent on the country's banking industry.

The deal is crucial to UBS — the country's largest bank — which has faced intense pressure from U.S. authorities since 2007.

Last year the bank agreed to turn over hundreds of client files and pay a $780 million penalty in return for a deferred prosecution agreement. But Washington has signaled that unless UBS reveals a further 4,450 American names demanded in the U.S.-Swiss agreement, it may face a crippling civil investigation just as the bank is recovering from the subprime crisis and seeking to rebuild its U.S. business.

The deal was blocked Tuesday by lawmakers from Switzerland's two biggest parties, the People's Party and the Social Democrats.

The Social Democrats had tied their consent to a binding government commitment to tax bankers' bonuses. The People's Party wanted parliament to vote against such a tax before dealing with the U.S. tax treaty. Both parties' demands were rejected by the government.

The bill will now be passed back to the upper house for further debate and could be voted on again by the lower house later this month. But lawmakers also voted to put any eventual compromise to a popular referendum, making a further delay likely.

Shares in UBS AG fell 2.1 percent after the vote to 14.41 Swiss francs ($12.41), as the bank now risks being drawn into costly civil litigation by U.S. authorities over the 4,450 suspected American tax cheats.

Switzerland has made many compromises in recent years to fend off demands by Germany, France, the United States and others for an end to its treasured banking secrecy rules, but the treaty that failed Tuesday would have gone far beyond those measures.

Last year, the government agreed to do away with the difference between tax evasion and tax fraud — a key legal distinction that has allowed foreigners with accounts in Switzerland to avoid having their details handed over to investigators back home.

Crunch vote looms for Swiss-US deal in UBS tax row
By FRANK JORDANS, Associated Press Writer
6 June 2010

GENEVA – The Swiss government is hoping to rid itself of a long-running headache over banking secrecy Tuesday when lawmakers are expected to approve a treaty to hand files on thousands of suspected tax cheats to U.S. authorities.

A standoff among lawmakers, courts and the government has held up ratification of the deal that Swiss and U.S. authorities signed in August to lift the threat of U.S. prosecution from Switzerland's largest bank, UBS AG.

The hoped-for resolution may yet be stalled as members of the nationalist Swiss People's Party and the left-of-center Social Democrats demand concessions in return for their consent.  The debate in Switzerland's lower house — or National Council — starts Monday.

If the option favored by government and centrist parties is passed it would spell the end of UBS's three-year battle with U.S. tax authorities that culminated in revelations the bank had for years helped American clients hide millions of dollars in offshore accounts.

Social Democrats have said they will only agree if the government makes a binding commitment to tax bankers' bonuses. Such a tax is opposed by the powerful People's Party, which instead wants the deal with Washington put before voters in a national referendum — a nod to Switzerland's unique system of grassroots democracy that could further delay passage of the agreement. Support of at least one of the two parties is necessary for a parliamentary majority.

The deal is crucial to UBS, which has faced intense pressure from U.S. authorities since 2007. Last year the bank agreed to turn over hundreds of client files and pay a $780 million penalty in return for a deferred prosecution agreement. But Washington has signaled that unless UBS reveals a further 4,450 American names demanded in the U.S.-Swiss agreement, it may face a crippling civil investigation just at a time when the bank is recovering from the subprime crisis and seeking to rebuild its U.S. business.

A parliamentary report published heavily criticized the cabinet for its handling of the UBS affair and suggested that at one point the bank was in such deep trouble a foreign buyout was being considered.

The deal goes far beyond other compromises Switzerland has made in recent years to fend off demands by Germany, France, the United States and others for an end to its treasured banking secrecy rules. Last year the government agreed to do away with the difference between tax evasion and tax fraud — a key legal distinction that has allowed foreigners with accounts in Switzerland to avoid having their details handed over to investigators back home.

Even if the vote passes in the government's favor, Swiss banking secrecy already faces a new threat.

Credit Suisse, Switzerland's second-largest bank, said in April that it believes client files were stolen from its computers and handed over to German authorities, who are now investigating possible tax evasion.

UBS won't sue former bosses on subprime, U.S. tax
By Emma Thomasson
Dec. 15, 2009

ZURICH (Reuters) – UBS AG (UBS.N) (UBSN.VX) will not sue its former bosses after risky bets on subprime mortgages and a strategy of helping U.S. clients hide money in secret accounts brought the Swiss bank to its knees.

Any action would only draw negative attention as UBS seeks a fresh start to win back client trust, the wealth management group said on Tuesday.

"The board has decided that years of uncertainty about these matters due to litigation ... and related negative attention from such action is not in the interest of UBS, its employees, clients and shareholders," the group said in a statement.

UBS said the board had decided not to take action after a thorough review, including consultation with external legal experts. It said its new management led by banking veteran Oswald Gruebel had taken "comprehensive and profound measures to ensure that nothing like this should ever happen again.

"The review concluded that there was no evidence of criminal conduct by former senior executives under Swiss law. Furthermore, there is no indication that they pursued personal interests to the detriment of UBS," it said.

Earlier this year, the world's No. 2 wealth manager, with $1.7 trillion in assets and the leader in the super-wealthy sector, appointed Gruebel as chief executive and Kaspar Villiger as new chairman to try to turn the page.

Public anger over UBS's problems has focused on former chairman Marcel Ospel, who quit in April 2008 after being blamed for the aggressive risk-taking strategy in the United States which brought the Swiss bank near to collapse.

Earlier this year, the Swiss Social Democrat party asked a judge to investigate whether Ospel and his successor as chairman Peter Kurer were aware of tax fraud on behalf of the banks' U.S. clients. Kurer, who was replaced by Villiger this April, dismissed the allegations as unfounded.

Ospel and other ex-board members agreed last year to return 33 million Swiss francs ($32 million) in payments from the bank after a media campaign against excessive bonuses, but UBS said the move should not be seen as an admission of guilt.

The other executives who returned payments were former Deputy Chairman Stephan Haeringer and former Chief Financial Officer Marco Suter.

Switzerland's flagship bank had to be rescued by the state last year after it made $52 billion writedowns in the subprime crisis and stood accused of helping rich Americans dodge taxes in a U.S. tax probe that has been settled.

UBS shares were up 0.8 percent at 15.92 Swiss francs at 5:15 a.m. EST, against a 1.1 percent weaker DJ Stoxx European banks index (.SX7P).

14,700 fess up to IRS on offshore accounts
Amnesty program nets hidden billions
Article published Nov 18, 2009

More than 14,700 U.S. taxpayers came forward to disclose billions in offshore bank accounts in 70 countries under a voluntary Internal Revenue Service program allowing most to avoid criminal prosecution as long as they pay what they owe, IRS officials said Tuesday.

A flood of people came forward in the last days before the amnesty program expired Oct. 15, IRS Commissioner Doug Shulman said. The final total far surpasses the number who disclose offshore accounts in a typical year - about 100 - and comes amid a broad U.S. crackdown on international tax evasion at Swiss bank UBS AG and other institutions.

"To put it simply, this is a historic milestone for the nation's hardworking taxpayers," Shulman said in a conference call from Washington.

The total in taxes, interest and penalties collected from those in the voluntary disclosure program will be in the "billions of dollars," Shulman said. The disclosures involved accounts on every continent but Antarctica.

Taxpayers flocked to the amnesty program after the U.S. reached an agreement in August with the Swiss government and UBS to obtain names of 4,450 U.S. taxpayers believed to be hiding assets in secret bank accounts. Earlier this year, UBS paid a $780 million penalty under a deferred prosecution agreement filed in a Florida federal court that included disclosure of an additional 150 names.

Seven of those people have been charged criminally, with at least two getting sentenced to prison time.

Shulman said the combination of the UBS disclosures and the amnesty program have fundamentally changed the offshore tax landscape, particularly in Switzerland where bank secrecy was the tradition for centuries.

"It shows we are serious about piercing the veil of bank secrecy," he said. "The whole game has changed."

Also Tuesday, the IRS and Swiss unveiled the criteria being used to determine which American UBS accounts will be disclosed under the August agreement.

Accounts being targeted include those that contained 1 million or more Swiss francs at any time between 2001 and 2008; instances in which there was clear fraudulent actions, such as false documents; and accounts that earned an average of 100,000 francs a year for at least three years.

The equivalent amounts in U.S. dollars vary widely depending on the year, as the dollar lost over a third of its value against the Swiss franc during that period. One million francs was worth about $600,000 in 2001, compared with about $900,000 seven years later.

U.S. Sen. Carl Levin, who chairs Senate Permanent Subcommittee on Investigations, called the criteria "disappointing" because it means some of Switzerland's bank secrecy will remain intact.

"It complicates and muddies what should have been a straightforward agreement by UBS and the Swiss government to disclose Swiss accounts hidden from the United States by U.S. account holders," said Levin, a Michigan Democrat.

The Swiss have until the end of August to hand over the names. Swiss officials said the first 400 names will be chosen by the end of this week, with another 100 expected to be ready by the end of the month. Those taxpayers who are picked for disclosure can appeal to Switzerland's top administrative court..

UBS registered mail warns U.S. clients on tax: report
October 18, 2009

GENEVA (Reuters) – Swiss bank UBS AG warned U.S. customers by registered mail their account details may be given to U.S. tax authorities, a method that could itself breach secrecy laws, a Swiss paper said on Sunday.

The use of registered mail and envelopes showing the sender was UBS could enable the U.S. authorities to trace customers wanted for tax evasion well before their details are handed over under a U.S.-Swiss double taxation agreement, Sonntag weekly paper said.

A spokesman for UBS declined to comment on the report.

Switzerland and the United States settled a row over evasion of U.S. taxes in August when Switzerland agreed to hand over details of 4,450 U.S. accounts at UBS.

But it could take into early 2010 before the first names are handed over under the agreed legal procedures.

Some 7,500 Americans voluntarily disclosed information about hidden overseas assets under a tax amnesty program that expired on October 15, according to the top U.S. tax collector.

UBS had agreed in February to pay $780 million to settle a criminal investigation accusing it of helping American clients evade taxes. At the same it agreed to release the names of about 250 clients in a first breach of Switzerland's banking secrecy.

Sonntag quoted lawyer Andreas Rued, who is representing some U.S. clients of the bank, as saying the use of registered mail and envelopes showing the name of the bank could constitute a contravention of Switzerland's banking secrecy laws. He said he was considering whether to seek a criminal investigation against the bank.

No one was immediately available at Rued's Zurich office.

Government steps up prosecution of U.S. tax evaders
By Kim Dixon
September 26, 2009

CHICAGO (Reuters) – The U.S. government is stepping up prosecutions of wealthy individuals dodging taxes through off-shore accounts, with new cases expected to be made public "every couple of weeks," a top government attorney said on Saturday.

U.S. officials have been sifting through about 250 client names obtained through a February settlement of a criminal probe against Swiss banking giant UBS AG, alleging the bank illegally helped U.S. taxpayers hide funds offshore.  That effort, along with an amnesty program encouraging tax evaders to turn themselves in, is speeding prosecutions, one of the top U.S. lawyers working on the cases at the U.S. Justice Department said.

"You can expect a few every couple of weeks," Kevin Downing, a senior attorney in the tax division of the Department of Justice told an American Bar Association tax conference.

On the sidelines of the conference, Downing also told Reuters that U.S. banks that helped U.S. clients hide money off-shore are a target.

"The folks in the United States that we get information on are obviously the easiest ones for us to pursue," he said.

"So anybody in the U.S. ... the U.S. banks helping U.S. clients set these offshore accounts up, we are doing the same thing," in going after them, he said.

In August, UBS AG agreed to disclose the names of 4,450 American holders of secret accounts at the bank, ending a related lawsuit that has begun to show cracks in Switzerland's prized banking secrecy.

"The UBS case has been a great success for the government," Downing said. "It is not an anomaly. It is the beginning of what is now a resource-intensive," process of going after other banks and countries.

The government has secured six guilty pleas so far in its effort, including one on Friday, where a New Jersey man pleaded guilty for failing to report about $6.1 million he had held in a UBS AG Swiss bank account. 
On a parallel track to the UBS case, the government last Monday extended a temporary amnesty program by three weeks to October 15, to encourage wealthy Americans with undeclared assets abroad to come forward.  Those taking part in the amnesty program pay reduced penalties and generally avoid criminal prosecution.

Downing also said the government has "made a lot of headway" in dealing with foreign banks, Downing said. "Let your clients know if they think it's just UBS they are mistaken," he told the group of tax lawyers.

Page last updated at 14:21 GMT, Wednesday, 19 August 2009 15:21 UK

UBS branch
The Swiss government negotiated with the US on behalf of its largest bank

US agrees Swiss tax deal over UBS

The US and Switzerland have signed an agreement designed to end a tax evasion dispute surrounding UBS's US customers.

The Swiss banking giant will now give the US tax authorities the details of 4,450 accounts, US officials said.

Internal Revenue Service Commissioner Doug Shulman said the accounts held $18bn in assets at one time, and many have since been closed.

The US Justice Department had been originally seeking the names of 52,000 US customers with Swiss accounts.

There was no alternative to this solution
Swiss Justice Minister Eveline Widmer-Schlumpf

The IRS said that the names being handed over were the ones most suspected of hiding undeclared assets in Switzerland.

"I believe this agreement gives us what we wanted - access to information about those UBS accountholders most likely to have been involved in offshore tax evasion," Mr Shulman said.

Washington said last week it would end its legal action in the US against UBS once the final deal was signed.


"The out-of-court agreement avoids a prolonged legal battle that would have had an uncertain outcome, and UBS can now continue with its consolidation process in an atmosphere free of this legal uncertainty," the Swiss Bankers Association said.

Switzerland is unusual is distinguishing between tax evasion and tax fraud
Tax evasion is the deliberate concealing of assets
Tax fraud, in addition, involves lying on official documents
Both are criminal offences in most countries, but tax evasion is only a civil matter in Switzerland

The deal looks set to end a stand-off that has lasted months.

In February, UBS admitted to tax fraud in the US and agreed to pay $780m (£467m) as part of a provisional deal to settle charges that it helped thousands of US clients use Swiss bank accounts to evade taxes.

UBS also handed over a limited number of account details, but US officials argued this was not enough and launched a fresh legal challenge to obtain the identities of all the bank's US account holders.

The US accused UBS of hiding nearly $15bn in assets of US customers.

Two legal regimes

UBS had been caught between two legal regimes, essentially violating US tax laws if it had not disclosed the names and violating Swiss secrecy laws if it did.

But US Justice Department attorney Stuart Gibson told a US court last week the two sides had now reached an out-of-court settlement.

Switzerland has long been famous for its status as a tax haven.

Swiss Justice Minister Eveline Widmer-Schlumpf told reporters in Bern that the deal ends the threat of criminal prosecution against UBS and "there was no alternative to this solution".

The UBS customers whose names are to be given to the US tax authorities will be able to challenge the hand-over of their identities before Switzerland's Federal Administrative Court, Mrs Widmer-Schlumpf said.

She said the agreement means that Swiss law "remains untouched".

Tax Dodgers Scramble to Come Clean Amid Crackdown
August 15, 2009Filed at 9:11 a.m. ET

WASHINGTON (AP) -- A deal with Switzerland settling U.S. demands for the names of suspected tax dodgers from a Swiss bank has a lot of wealthy Americans with offshore accounts nervously running to their tax advisers -- and the Internal Revenue Service.

''They are very frightened,'' said Richard Boggs, chief executive of Nationwide Tax Relief, a Los-Angeles-based tax firm that specializes in clients with tax debts exceeding $100,000. ''You have the super rich who are not used to being pushed around and they are finding themselves in unfamiliar territory.''

The U.S. and Swiss governments announced a court settlement last week in efforts by the IRS to force Zurich-based UBS AG to turn over the names of some 52,000 Americans believed to be hiding nearly $15 billion in assets in secret accounts.  Justice Department and UBS lawyers told a federal judge in Miami in a brief conference call Wednesday they had initialed a final deal. But they did not disclose any details, such as how many of the 52,000 names sought by the IRS will be revealed.

Even before the settlement, the high-profile case -- coupled with other U.S. efforts to go after Americans hiding undeclared assets -- has scared hundreds of tax dodgers to turn themselves in. Boggs said his firm has been taking on 100 new cases a month, a big increase over previous years.  Peter Zeidenberg, a litigation partner at the law firm DLA Piper in Washington, said he, too, is he seeing more people with undeclared assets seeking information about their legal options.

His advice: ''I don't think you have much of a choice but to come forward. ... I think the landscape is permanently changed.''

The IRS long has had a policy that certain tax evaders who come forward before they are contacted by the agency usually can avoid jail time as long as they agree to pay back taxes, interest and hefty penalties. Drug dealers and money launderers need not apply. But if the money was earned legally, tax evaders can usually avoid criminal prosecution.  In March, the IRS began a six-month amnesty program that sweetened the offer with reduced penalties for people with undeclared assets. IRS Commissioner Doug Shulman said the response has been unprecedented.

Shulman wouldn't say how many people have applied so far. But the IRS said 400 people applied to voluntarily disclose undeclared assets in a single week in July, compared with fewer than 100 applications all last year.  The amnesty program, which ends Sept. 23, is part of a larger effort by federal authorities to crack down on international tax evaders.

''Each time someone walks through the door with a disclosure, we get more information. We get more information about other people. We get more information about other financial institutions,'' Shulman said. ''If people have been hiding assets in the past, they should be nervous, and they should be a lot more suspect about doing it in the future.''

The U.S. recently reached agreements with several countries, including Luxembourg and Switzerland, to share more tax information in the future, just as the IRS is strengthening its enforcement ranks.  President Barack Obama, in his proposed 2010 budget, asked Congress to pay for 800 additional agents, examiners and lawyers to go after people who hide money overseas. Obama also wants Congress to require overseas financial institutions doing business in the U.S. to share more information with the IRS.

Earlier this year, UBS admitted assisting U.S. citizens in evading taxes as part of a deferred prosecution agreement with the Justice Department. UBS agreed to disclose the names of about 300 American clients and pay a $780 million penalty. The IRS subsequently filed its case seeking the names of 52,000 additional U.S. taxpayers believed to be hiding assets in UBS accounts.

So far, four UBS customers whose names were given to U.S. authorities under the prior agreement have made deals to plead guilty to tax charges in federal court.

''The UBS case, the agreements we are signing, the legislative proposals and the enforcement efforts are all meant to send one message, which is that if you owe tax to the U.S., we are going to use every tool we have available to get that,'' said Michael Mundaca, acting assistant treasury secretary.

Sen. Carl Levin, D-Mich., applauded the administration's efforts, but said more can be done to catch tax evaders. Levin has introduced a bill that would direct the treasury secretary to maintain a list of nations that ''impede U.S. tax enforcement'' and give him