Perennial

Deluge

Losses from securities linked to subprime mortgages may exceed $265 billion as regional U.S. banks, credit unions and overseas financial institutions write down the value of their holdings, according to Standard & Poor's.

S&P cut or put on review yesterday the ratings on $534 billion of bonds and collateralized debt obligations tied to home loans made to people with poor credit, the most by the New York-based firm in response to rising mortgage delinquencies.

While banks and securities firms such as Citigroup Inc. and Merrill Lynch & Co. accounted for most of the $90 billion in writedowns to date, S&P said the next round will be borne mainly by smaller financial institutions in Europe, Asia, and the U.S. The ratings actions yesterday may create a ``ripple impact'' that further reduces prices of the securities, S&P said.

``There's a lack of confidence in the markets and this exacerbates that,'' said Anthony Davis, a banking analyst at Stifel Nicolaus & Co. in Florham Park, New Jersey. ``This will have a chilling effect on the markets.''

Almost half the subprime bonds rated by S&P in 2006 and early 2007 were cut or placed on review, potentially forcing credit unions and government-sponsored enterprises such as Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks to write down their holdings, the firm said. The securities represent $270.1 billion of subprime mortgage bonds and $263.9 billion of CDOs. About 35 percent of all CDOs comprised of asset-backed securities were put under review, S&P said.

Widespread `Implications'

``It is difficult to predict the magnitude of any such effect, but we believe it will have implications for trading revenues, general business activity, and liquidity for the banks,'' S&P said in a statement yesterday.

Some of the largest banks have already taken ``significant'' losses related to subprime mortgages and CDOs, and aren't likely to report more writedowns, S&P said. CDOs package assets into new securities with varying degrees of risk, from AAA to unrated classes.

Accounting rules have allowed smaller banks to avoid writing down their holdings until the credit ratings fell if they intended to keep them until maturity. S&P said it will review the ratings of smaller banks that are ``thinly capitalized.'' It didn't name any of the institutions.

The largest U.S. regional banks with the lowest Tier 1 capital ratios as of June 30 were Seattle-based Washington Mutual Inc.; Wachovia Corp. in Charlotte, North Carolina; National City Corp. of Cleveland; Atlanta-based SunTrust Banks Inc.; and Regions Financial Corp. in Birmingham, Alabama. Tier 1 capital measures a company's ability to cover losses.

Spokespeople for the banks either declined to comment or couldn't be reached for comment.

Credit Unions

The nation's biggest credit unions by assets include Navy Federal Credit Union in Vienna, Virginia; State Employees Credit Union in Raleigh, North Carolina; and Pentagon Federal Credit Union in Alexandria, Virginia, according to American Banker. Spokespeople for the credit unions didn't immediately return calls for comment.

Even before the S&P downgrades, analysts at Credit Suisse Group predicted that Washington-based Fannie Mae and Mclean, Virginia-based Freddie Mac, the two largest providers of mortgage financing, would write down their subprime holdings by $16 billion because they could no longer argue the declines would be reversed.

``We expect that the U.S. housing market, especially the subprime sector, will continue to decline before it improves, and we expect housing prices will continue to come under stress,'' S&P said in the report.

Foreclosures Increase

S&P's move came a day after RealtyTrac Inc. said the number of U.S. homeowners entering foreclosure climbed 75 percent in 2007 from a year earlier as mortgages became more difficult to refinance and falling property values made it tougher to sell.

More than 1 percent of U.S. households were in some stage of foreclosure during the year, up from 0.58 percent in 2006, according to RealtyTrac, an Irvine, California-based seller of real estate data. Home prices in 20 U.S. metropolitan areas fell 7.7 percent in November, the 11th consecutive decline, according to the S&P/Case-Shiller home-price index released this week.

The Federal Reserve yesterday cut its target interest rate for overnight loans between banks by half a percentage point to 3 percent, the lowest since June 2005. Lower borrowing costs may help borrowers of subprime loans by reducing the scheduled rate increases on their mortgages, according to reports by analysts at banks including Wachovia and JPMorgan Chase & Co. in New York.

Stretched

Trash Everywhere

MBIA Inc., the world's largest bond insurer, posted its biggest-ever quarterly loss and said it is considering new ways to raise capital after a slump in the value of subprime-mortgage securities the company guaranteed.

The fourth-quarter net loss was $2.3 billion, or $18.61 a share, raising concern the Armonk, New York-based company will lose its top credit ratings. The loss came a day after FGIC Corp.'s insurance unit became the third company to be stripped of its AAA grade.

MBIA is seeking to convince Moody's Investors Service to retain the highest ranking for its insurance unit as Chief Executive Officer Gary Dunton tries to shore up capital through stock and bond sales. Without the Aaa stamp, MBIA's business would be crippled and throw ratings on $652 billion of securities into doubt. The threat of losses prompted the New York State Insurance Department to call a meeting of banks last week to discuss a rescue.

``In the absence of a credible bailout plan, I think investors and issuers need to assume that MBIA, along with all of the other companies, will face continuing, worsening downgrade pressure all year,'' said Matt Fabian, a managing director at Concord, Massachusetts-based consulting firm Municipal Market Advisors.

Excluding writedowns and some other items, the operating loss was $407.8 million, or $3.30 a share, MBIA said today in a statement. The average analyst estimate from a Bloomberg survey was for a loss of $2.98.

``We are disappointed in our operating results,'' Dunton said in the statement.

CDO Expansion

Bond insurers guarantee $2.4 trillion of debt combined and are sitting on losses of as much as $41 billion, according to JPMorgan Chase & Co. analysts. Their downgrades could force banks to write down $70 billion, Oppenheimer & Co. analyst Meredith Whitney said yesterday in a report.

MBIA is reeling from an expansion out of municipal securities into guaranteeing collateralized debt obligations, which repackage assets such as mortgage bonds and buyout loans into new securities with varying risk. As the value of some CDOs plummet, ratings companies are pressing the insurers to add more capital.

Hedge fund manager William Ackman has also stepped up pressure on the companies. Ackman, a managing partner of Pershing Square Capital Management LP, released a letter to regulators yesterday estimating MBIA's CDO losses would reach $11.6 billion. Ackman has trades set up that would profit from a decline in the price of the shares and bonds of MBIA and Ambac Financial Group Inc., the second largest insurer.

Writedwowns

MBIA posted $3.4 billion of losses from marking down the value of residential and commercial mortgages as well as CDOs that it guarantees, according to the statement. MBIA also wrote off its $85.7 million investment in Channel Reinsurance Ltd., which reinsures securities guaranteed by MBIA. Moody's said Jan. 23 it may cut Channel Re's Aaa rating.

Adjusted direct premiums, a measure of new business written that doesn't adhere to generally accepted accounting principles, fell 38 percent to $262.4 million during the fourth quarter, MBIA said.

MBIA's loss compared with profit of $181 million, or $1.48 a share, reported a year earlier. MBIA, started as the Municipal Bond Insurance Association in 1974, has reported a profit every year since at least 1991, buoyed by the regular premiums from insuring municipal debt.

MBIA yesterday said New York-based private-equity firm Warburg Pincus LLC completed its purchase of $500 million of new shares, sticking to an agreement reached last month to buy the stock at $31 a share. MBIA sliced its dividend 62 percent and later sold $1 billion of notes.

Surpassing Requirements

Warburg Pincus' agreed to backstop a future share sale to help MBIA restore capital. MBIA said today it is considering this and other stock raising plans.

``We believe that these steps, along with reduced capital requirements resulting from slower business growth, will result in our capital position surpassing rating agency Triple-A requirements,'' the company said in the statement.

MBIA fell $2.02, or 13 percent, to $13.96 yesterday in New York Stock Exchange composite trading. The stock has lost more than 80 percent of its value in the past year.

Ambac reported a fourth-quarter net loss of $3.26 billion, or $31.85 a share, on Jan. 22, after writing down the value of credit-derivatives tied to subprime loans by $5.21 billion. Fitch cut the New York-based company's rating to AA from AAA this month and Ackman yesterday predicted Ambac may face $11.6 billion in losses.

Rescue Plan

As well as Ambac and FGIC's Financial Guaranty Insurance Co., Fitch earlier this month downgraded Hamilton, Bermuda-based Security Capital Assurance Ltd.'s XL Capital Assurance and XL Financial Assurance five steps to A.

New York's insurance regulator said this week it hired investment bank Perella Weinberg Partners for advice on the financial stability of bond insurers and how to protect their customers. Any rescue plan will ``take some time'' to complete, New York Insurance Superintendent Eric Dinallo has said.

Violet

Dwindling Quickly

Crude oil reserves in Mexico's huge but waning Cantarell oil field will continue to decline this year at around the same pace as in 2007, Pemex Director General Jesus Reyes Heroles said on Tuesday.

Reyes Heroles told Reuters average daily production at Cantarell, in the Gulf of Mexico, would drop by 200,000 barrels over 2008, increasing pressure on the state-owned oil monopoly to ramp up output at smaller oil fields.

The decrease would be a drop of 16 percent from Cantarell's December 2007 output of 1.26 million barrels per day (bpd), its lowest level of the year. Yields at Cantarell declined 16 percent during 2007, slightly more than forecast.

Reyes Heroles told an engineering event Pemex aimed to keep its total crude output at around 3.1 million bpd by increasing production at other fields. But to maintain that level beyond 2012 would require higher investment over the next few years.

The Mexican government is raising Pemex's investment budget for 2008 by around a third to roughly $20 billion, after a $2.8 billion tax cut agreed last year. Pemex will spend nearly $2 billion on exploration and around $13 billion on production.

Within that, Pemex will pump some $2 billion into Cantarell to seek small pockets of oil, and will spend more than $1 billion to increase production at the nearby Ku Maloob Zaap complex, said Vinicio Suro, head of investment projects at Pemex Exploration and Production.

"It's an important project, we are going upwards, everything's going well," Suro told reporters. He said the goal was to raise output at KMZ to 780,000 bpd within the next two or three years from roughly 600,000 bpd today.

Pemex is also working to expand output at Chicontepec, a technically tricky sprawl of onshore fields.

Mexico is one of the four top oil suppliers to the United States, which relies on it as a politically stable source.

While it grapples with a decline in total output since a 2004 peak, Pemex also is under pressure to shore up declining crude reserves. It lags behind foreign oil companies of its size in getting exploration projects going in deep water.

President Felipe Calderon is keen to attract more private capital to the oil sector and has lawmakers discussing changing the law to let Pemex form private partnerships in specific areas, such as cross-border oil fields in the Gulf of Mexico.

Senators from two main parties say they could agree an energy reform during the Feb. 1 to April 30 congressional session, but they face opposition from leftists who stand against loosening barriers to private investment in oil.

Cantarell, the former jewel of Mexico's oil industry, accounted for two-thirds of the country's crude output for years, but now makes up just 43 percent of the total.

Celebrate

Big Junk

Subprime-related problems at UBS AG deepened on Wednesday as the Swiss bank unveiled $4 billion in new writedowns in a surprise statement, dragging the embattled bank deep into the red for the year.

UBS posted a 12.5 billion Swiss franc ($11.45 billion) loss for the last three months of 2007 and a full-year loss of 4.4 billion francs. The bank had previously left open the possibility of a full-year loss, depending on its performance in the final quarter.

UBS is one of the hardest-hit banks worldwide from the credit crisis that has caused over $100 billion in losses, gashed balance sheets and forced some of the proudest institutions like UBS, Citigroup and Merrill Lynch into emergency capital-raising measures.

The surprise announcement adds to the sense of chaos in Western banking after Societe Generale last week shocked with a $7 billion loss it blamed on a lone trader -- the worst trading loss in history by far.

The new writedowns bring the total writedowns from the sub-prime debacle to $18.4 billion at UBS and will likely increase pressure on chairman Marcel Ospel, who presided at the group during its push into risky U.S. investments, to resign.

UBS shares were seen sharply lower in pre-market indications.

"This is certainly not good," said analyst Georg Kanders at bank WestLB. "I had expected less."

The group last month announced a 13 billion Swiss franc capital injection from Singapore and an unidentified Middle East investor and hopes to convince shareholders to approve the plan at an extraordinary meeting on February 27.

The Swiss bank's huge losses, which have prompted calls for it to spin off its investment banking business and concentrate on its highly successful wealth management activities, stem from a disastrous hedge fund venture into subprime mortgages.

Priority

Shutdown

China deployed half a million soldiers to help restore transport links, power supplies and clear debris as the nation's worst snowstorms in 50 years stranded migrant workers before the Lunar New Year holidays.

The government allocated 126 million yuan ($17.5 million) for emergency relief in the worst-affected areas and boosted food supplies to prevent hoarding, state-run Xinhua News Agency said. The death toll from the snowstorm climbed to 53 people. An estimated 77.8 million people in 14 provinces are directly affected.

``We haven't passed the most difficult time,'' Zhu Hongren, spokesman for the National Development and Reform Commission, the state planning agency, said today. ``We're facing challenges that are unprecedented in 50 years.''

The army and paramilitary forces deployed to help the relief efforts are the biggest since about 300,000 soldiers were sent to battle flooding at the Yangtze River in 1998. Snow has been falling in eastern, central and southern China for more than two weeks, causing an estimated 22.1 billion yuan in economic losses.

Southern cities including Guangzhou haven't experienced snow fall since China's revolution in 1949. About 600,000 people have been left in the city as rail services connecting it with other provinces were disrupted by snow.

``I'm very sorry that you are stranded and not able to go home earlier'' for the Lunar New Year, Premier Wen Jiabao, using a bullhorn to address a crowd at the Changsha railway station in southern China, said yesterday in remarks broadcast on China Central Television. ``We are doing our best to fix things so that you will all be home'' for the holidays.

More Blizzards

More blizzards are forecast in southwestern China until Feb. 6, according to the Chinese Weather Information Service. It warned state agencies and the population to prepare for severe cold and potential problems from heavy snow in the next 10 days.

China's yuan climbed to the highest since the end of a link to the U.S. currency in 2005 on speculation the snowstorms will exacerbate inflation, paving the way for faster currency gains.

The yuan rose for a sixth day as snow fall destroyed 4.2 million hectares of farmland and strained supplies of food and coal. China is willing to use the exchange rate to help slow inflation, which is double the central bank's annual target.

Production Suspended

Disruptions to traffic and power supplies forced some carmakers to suspend production at plants.

Toyota Motor Corp. will halt production of its Crown sedan and Reiz compact cars in northeastern China's Tianjin city because of the snowstorms, spokeswoman Hiromi Hirooka said by telephone. Honda will halt output at a factory in southern China's Guangdong province, spokeswoman Akemi Ando said.

Ford Motor Co. and its partner Mazda Motor Corp. said they're suspending production in Nanjing in eastern China, where more than a foot of snow has fallen in the most severe storm since 1954.

``We'll try to use future weekend holidays to make up the loss,'' said Kenneth Hsu, spokesman of Ford in China.

Absence

Hollow Shell

Royal Dutch Shell is to delay publication of key data about its oil reserves that it would normally have released alongside profits figures being published on Thursday.

The decision has disappointed some analysts, who have been told that the subject will not even be "up for discussion" and which has sparked concern the reserves numbers could be poor.

The amount of reserves booked by Shell is always a sensitive issue for the company as it was the revelation in 2004 that Europe's largest oil firm had overstated the amount of oil in its wells that led to the resignation of chairman Sir Philip Watts and investigations by regulators in London and New York.

Analysts at Kleinwort Benson said the decision to now publish the data in May was "regrettable". Another analyst said: "Since [the reserves scandal] Shell has been hot on releasing information to the market at its annual results. Putting it back doesn't mean there's a problem. But it doesn't inspire confidence."

Reserve replacement ratios are a measure of an oil company's health, as they compare the amount of new oil booked as recoverable with the amount of crude being pumped from wells. The lower the ratio, the lower the future returns. Shell's ratio in 2006 was 150pc, up from 78pc in 2005. Although oil firms are not required to publish data with profits figures, many do, or at least give the market a steer on the numbers.

"Our problem with this is not the delay per se, but the fact that we will not even get an indication," said an oil analyst. "It seems unnecessarily coy." Kleinwort analyst Colin Smith said: "We understand Shell will not comment on reserves and will not provide any details until publication of the 20F [an SEC filing in May] essentially because the reserve replacement has been weak and made more complex by the impact of the Sakhalin II transaction." It is thought that problems in Nigeria are another reason why the reserve replacement could be disappointing.

Shell said: "We think the right place to update on reserves is in the 20F." The firm did not expand on why.

Parched

Basix

Soccer crowds in England like to abuse match referees by chanting: “You don’t know what you’re doing.” If protesters had been able to get near the World Economic Forum in Davos last week, they could justifiably have aimed the same chant at the world leaders who assembled in the Alps.

These people are meant to be the “masters of the universe”: presidents, prime ministers, bankers, billionaires. If anybody can make sense of world events, it should be them. But the air of confusion in Davos was both palpable and alarming.

The meeting took place against a background of crashing stock markets, panicky interest-rate cuts and a massive bank fraud. The global financial system is now so complicated that nobody really knows how deep its problems run. This central “known unknown” means that all the subsequent big questions are much harder to answer. Will America face a serious recession? It all depends. How bad will the knock-on effects be for the rest of world? Search me. How should politicians and regulators react? Difficult to say.

At Davos a year ago, the business and finance crowd were still full of the joys of globalisation, while it was the people dealing with international politics who were spreading alarm and despondency. This year the roles were reversed. While the financiers are frightened, the politicians and diplomats are going through a relatively calm period.

Without a big short-term crisis to distract them, the international politics crowd were able to look at longer-term trends. They too are trying to understand the consequences of globalisation. But while the bankers grapple with the top end of the process – the movement of billions of dollars around the world financial system – the political analysts are increasingly preoccupied by the way globalisation is affecting people at the bottom of the pile.

The costs of food and energy are rising fast. The availability of water is also becoming an issue, from Australia to Africa. The struggle for these three basic commodities – food, energy and water – came up repeatedly in Davos.

Globalisation – in particular the rise of China and India – is driving a lot of these changes. The world oil price has risen by 80 per cent over the past 12 months and – since 2001 – China alone has accounted for about 40 per cent of the increase in oil demand. Global food prices have gone up by about 50 per cent this year. There are short-term reasons for this, such as a drought in Australia and pig disease in China. But the biggest long-term driver of increased prices is growing wealth in China and India.

Urbanisation and industrialisation are both increasing demand for water, at a time when climate change is disrupting supply. The rains in China are moving north and becoming more intense. The level of the Yangtse river is falling. Other important rivers around the world are suffering in the same way: the Murray in Australia, the Colorado in the US, the Tagus in Spain and Portugal. Businessmen can see the problem growing. Andrew Liveris, chairman of Dow Chemical told the Davos meeting that: “Water is ... the oil of the 21st century.”

The food, energy and water problems all touch on each other. America’s pursuit of alternatives to oil has led to massive investment in biofuels made from maize. That in turn has cut the amount of maize being used for food production and so contributed to rising food prices. The production of biofuels is also very water-intensive. Meanwhile, increased demand for agricultural land to grow more food is leading to the clearing of forest in Brazil – which could worsen global warming – leading to further stress on the world’s water supplies.

The potential for political conflicts increases along with the rise in food, energy and water prices. Ban Ki-Moon, the United Nations secretary-general, told the Davos meeting that water shortages had helped to cause the conflict in Darfur.

Jami Miscik, head of global sovereign risk at Lehman Brothers, points to a series of less dramatic events, which highlight the political strains caused by rising food and energy prices: riots in Mexico last summer, after sharp increases in the price of maize flour; mass protests in Indonesia this month, provoked by the rising price of soyabeans; a deadly stampede in western China last November, caused by a rush for subsidised cooking oil; a food-price freeze in Russia, introduced just ahead of the parliamentary elections in December; gas and petrol rationing in Iran; blackouts in Argentina and South Africa.

This month Hugo Chávez, the president of Venezuela, raised milk prices by 37 per cent and threatened military intervention and nationalisation if food producers did not sell more to the government.

All of these examples are confined within national boundaries. But competition for food, water and energy could also provoke conflict between countries. One session at Davos was devoted to the prospect of drilling for oil and gas in the Arctic. It heard that military activity in the area is increasing, as eight rival countries – including Russia, the US, Canada and Norway – gear up to assert their claims over the fossil fuels that lie beneath the melting Arctic ice.

The theme of this year’s World Economic Forum was meant to be “collaborative innovation”. It is difficult to think of anything less collaborative or innovative than a new era of resource wars.

New World Order

Inflation

The Chinese yuan may rise more than 10 percent this year against the dollar, allowing Japanese policy makers to accept further gains in the yen, said Eisuke Sakakibara, Japan's former top currency official.

China's currency has strengthened 1.4 percent this year, on course for the biggest monthly advance since the end of a dollar peg in July 2005, as the government seeks to curb inflation. The Group of Seven industrialized nations have called on China, Japan's biggest trading partner, to stop keeping the yuan artificially weak to support exports.

``Chinese authorities now recognize that they need to appreciate their currency quite significantly for their own sake,'' Sakakibara, 66, currently a professor at Tokyo's Waseda University, said in an interview with Bloomberg Television.

A rising yuan would make Chinese goods more expensive in global markets, bolstering the competitiveness of Japanese exporters. The yen may advance as much as 12 percent to 95 per dollar by summer as the U.S. economy slows and the Bank of Japan refrains from intervention to slow the rally, he said.

Sakakibara was dubbed ``Mr. Yen'' because of his ability to influence the foreign-exchange market during his 1997-1999 tenure at the finance ministry. He correctly forecast in an interview in October that the dollar would plunge against the yen because of the risk of a U.S. slump.

The yen rose to 106.73 per dollar from 106.90 in New York yesterday. The yuan, which climbed 7 percent last year, traded at 7.1948 as of 6:30 a.m. in London, compared with 7.1970 at yesterday's close, according to China Foreign Exchange Trade System. The yuan had a correlation of 0.86 with the yen over the past six months, according to data compiled by Bloomberg. A reading of 1 would mean the two currencies move in lockstep.

Too Bullish?

Sakakibara's forecast suggests the yuan will rise beyond 6.57 per dollar by the end of the year. That is more bullish than the 6.80 median estimate of 32 analysts surveyed by Bloomberg News. Forward contracts show traders are betting on an 8.4 percent advance to 6.6390 in the next 12 months.

Sakakibara said today that Japan's central bank is unlikely to intervene to slow the yen's advance because the U.S. government is opposed to interfering with currency markets.

``Mr. Sakakibara is too bullish on the yuan,'' said Xinyi Lu, chief strategist at the international treasury division at Mizuho Corporate Bank Ltd. in Tokyo, a unit of Japan's second- largest publicly trader lender. ``China is aiming for a soft landing on a plateau of slower growth without excessive appreciation of the yuan.''

The currency may end the year at 6.8, Lu said.

Rate Increase Debate

China has amassed record foreign-exchange reserves of $1.5 trillion as the central bank tempers strength in the yuan to prevent exporters' earnings from being eroded by currency gains.

``With that kind of very heavy intervention in the foreign- exchange market, the tightening of monetary policy is extremely difficult,'' said Sakakibara. ``China would start to tighten and appreciate the currency quite significantly'' once the Cabinet is changed around March, he said.

China raised interest rates six times last year to help slow inflation from the highest in 11 years. China's consumer prices rose 4.8 percent last year, exceeding the government's target of 3 percent.

China's government yesterday said snowstorms have caused ``very serious'' power shortages and may aggravate food price inflation.

The ``Chinese now recognize that they can live with a rapidly appreciating yuan and, as a result, they're letting the yuan appreciate more each day,'' Harvard University economist Martin Feldstein, head of the National Bureau of Economic Research in Cambridge, Massachusetts, said in an interview with Bloomberg Radio.

Urban Flower

CDC

Even in France, many people haven't heard of Caisse des Depots & Consignations. Yet they regularly cross paths with the 192-year-old state-owned institution, whose assets reach into every part of the economy.

Parisians can munch on pigs' feet at Au Pied de Cochon, a CDC-owned brasserie that draws celebrity diners such as Henry Kissinger and actor Jean-Paul Belmondo. Vacationers can play baccarat at the seaside casino in Deauville, which is 10 percent owned by the Paris-based bank; take their children to the Gaul- themed Parc Asterix, 20 miles from Paris; or ski on the slopes of Chamonix, Meribel or Val d'Isere in the Alps. All are owned by the bank. Millions of low-income workers live in state- subsidized housing that CDC finances in the suburbs of large cities.

With assets of 405.5 billion euros ($599.2 billion), CDC is also France's largest institutional investor. It has stakes in half of the companies in the benchmark CAC 40 Index. The stakes include 2.0 percent of Societe Generale SA, which said yesterday that bets on stock-index futures by a 31-year-old employee caused it 4.9 billion euros in trading losses, the largest in banking history.

``The Caisse des Depots is a bizarre but typically French monster that mixes public and private sector activities,'' says Philippe Francois, a researcher at Ifrap, the French Research Institute on Public Services, a Paris-based study group advocating free market economics. ``It's a caricature of how the French government operates.''

President Nicolas Sarkozy, elected last year on promises to shake up the economy, indicated he may tighten his grip on the bank. Though the National Assembly oversees CDC, its chief executive officer is named by the president.

Defending the Nation

Sarkozy says he plans to use CDC to help protect French enterprises from speculative investors and foreign sovereign funds. ``The Caisse des Depots is an instrument of this policy of defending and promoting the nation's primordial economic interests,'' Sarkozy said at a news conference on Jan. 8, during which many questions dealt with his romance with former model Carla Bruni.

Those interests include helping to fund the country's troubled university system and build more public housing, according to plans unveiled in December by CEO Augustin de Romanet and endorsed by Christine Lagarde, France's finance minister. In the past, governments have used CDC to help bail out state companies.

CDC may find it tougher to carry out the government's orders in the future. Until now, CDC has used proceeds from its management of the country's 205.1 billion euros of tax-exempt savings accounts to finance public housing.

Funds May Shrink

Now that the European Union has told France it must allow all banks to sell the accounts starting this year, those funds may dwindle because the banks may steer savers toward their own investment products, de Romanet says. Sarkozy supported the EU order, overruling de Romanet's objections.

De Romanet, who took over the bank in March 2007, inherited other challenges. CDC has lost about 295 million euros by buying shares in European Aeronautic, Defence & Space Co., Europe's largest defense firm.

The EADS investment has also entangled CDC in an insider trading investigation. A plan to create an investment bank hatched by de Romanet's predecessor, Francis Mayer, who died of cancer in 2006, also foundered.

A former civil servant and investment banker who was appointed to a five-year term by former French President Jacques Chirac, de Romanet, 47, is making sure he has this government's backing for any new projects. Sarkozy can fire de Romanet at the end of the CDC chief's term, or he can renew it.

Meetings With Sarkozy

De Romanet says he meets frequently with Prime Minister Francois Fillon, Lagarde and Sarkozy. By law, the bank pays a third of its annual profit into the government's general budget. In 2006, that contribution amounted to 1.5 billion euros.

Lagarde attended a meeting of 400 of CDC's top executives in Deauville in December at which de Romanet presented the bank's goals for the next decade. They include: increasing loans for subsidized housing; financing universities; boosting investment in small and medium-sized companies; and supporting carbon trading and the development of environmentally friendly technologies.

``We must show we are worthy of the expectations the country has of us,'' de Romanet told the managers.

Lagarde outlined some of the expectations in her address at the meeting. She urged CDC to abandon Mayer's policy of making the bank an activist investor.

Saving Club Med

In 2004, Mayer brokered a deal to bail out money-losing Paris-based resort company Club Mediterranee SA. Accor SA, the French hotel group then 4.5 percent owned by CDC, bought 29 percent of Club Med -- including CDC's 7.7 percent stake -- for $303 million. ``While it may occasionally be necessary and even profitable for the bank to influence a company's management, this shouldn't be the norm,'' Lagarde said.

Lagarde also criticized the bank's corporate governance in light of Mayer's purchase of EADS shares. Currently, her ministry appoints only one of the 12 members of the bank's supervisory board, which includes four members of Parliament and representatives of government agencies and the Bank of France.

Lagarde, who was representing Sarkozy at the meeting, backed de Romanet's plan to set up an investment committee to advise on future large equity stakes -- something de Romanet says he'll do soon. Lagarde also said the board and Parliament should consider creating an additional, external body to monitor the bank.

That plan represents little change from CDC's past role, Ifrap's Francois says.

`Plum Jobs'

``No matter who is in power, and no matter what their views, politicians find it useful to have a large financial institution that can make investments left and right, and where civil servants can find plum jobs,'' he says.

De Romanet says CDC is protected by checks and balances since Parliament has responsibility for overseeing the bank and its CEO is appointed by the president for a fixed term.

There is a lot to manage at CDC, whose holdings sprawl across France and abroad. CDC owns 40 percent of Paris-based CNP Assurances SA, France's largest life insurance company, with 32 billion euros of premium income in 2006. CDC also has an international transport company; an engineering subsidiary that builds ports and highways; and 40 percent of publicly traded Cie. des Alpes, which owns ski slopes and amusement parks.

In addition, the bank owns stakes in large French companies equal to 2-3 percent of the CAC 40 Index's market value. The bank says it got a 12.5 percent return on its investments in equities and bonds in 2006. It also has two private equity divisions, including one that owns the Freres Blanc restaurant group and the jewelry retailer Marc Orian SA. Overall, the bank's 2006 profit totaled 4.47 billion euros.

Public Housing

Not everything CDC does aims at making a profit for the bank. The 205.1 billion euros in tax-exempt savings, which are held separately from the rest of CDC's assets, earned 678 million euros in 2006. Those funds are used to help finance CDC's long-term loans for subsidized public housing.

For instance, CDC is helping to finance Les Carreaux, a 154 million euro housing renovation project in the north Paris suburb of Villiers-le-Bel. The suburb is where gun-wielding youths rioted last November after two teenagers died when their motorcycle collided with a police car.

Last year, the bank provided 80 percent of all funds for French public housing, much of it in poor urban neighborhoods such as Villiers-le-Bel. De Romanet and Lagarde want the bank to finance the construction of 90,000 housing units in 2010 compared with 64,000 in '07.

Carbon Trading

The government is also using CDC to invest in green projects. CDC teamed up with NYSE Euronext, owners of the New York Stock Exchange, in December to buy the carbon-trading unit of Paris-based Powernext SA, an energy-trading exchange. BlueNext, the new name for the unit, will start trading emission permits this year, the companies say.

The World Bank estimates that in 2007 worldwide carbon trading tripled in value to $30 billion -- and de Romanet, and Lagarde, want CDC to have a share of this market.

Starting this year, CDC will also invest up to 150 million euros annually to help universities improve research facilities. CDC also plans to increase its support for startup companies in France. From 2008 to '11, CDC aims to invest 1 billion euros in small and medium-sized companies with more than 50 employees, one third more than its current expenditure.

``The Caisse des Depots is the French government's private bank,'' says David Lascelles, senior fellow at the London-based Centre for the Study of Financial Innovation, which researches Europe's banking industry. ``The government can use the Caisse to do whatever it likes.''

Paying for War

CDC has been used for generations as a way for the government to invest in French companies. The bank was created by King Louis XVIII in 1816 to help restore confidence in France's public finances after Napoleon's costly wars by managing and paying out civil servants' pensions.

CDC still manages 52 pension funds for French public sector employees. In 2006, these funds paid 16.2 billion euros in benefits to about 3 million pensioners, a fifth of France's retirees. CDC is also the national custody bank for legal fees, with 30.4 billion euros on deposit at the end of 2006. Every weekday, lawyers' clerks from around Paris deliver fees to a special CDC counter in the atrium of the bank's head office.

``The government has been tempted to take control of the Caisse des Depots ever since the bank was established, simply because the French state is always short of money,'' says Alain Lambert, a senator from Sarkozy's UMP party.

Bailing Out Alstom

In the past decade, CDC has stood at the government's flank in some high-profile bailouts. Mayer in 2003 joined the government's rescue of Alstom SA, the Paris-based maker of power stations, high-speed trains and cruise ships. CDC contributed about 1.2 billion euros in financing to a 4.2 billion euro rescue package.

Sarkozy, who became France's finance minister in April 2004, persuaded Mario Monti, then EU competition commissioner, to approve the bailout in July 2004. ``I remember being criticized for rescuing the company, but today it's one of France's greatest industrial success stories,'' Sarkozy said at the news conference in January.

CDC had a direct interest in Alstom's survival. It owned 3.3 percent of the company in 2003; it now owns about 1.5 percent. Alstom's shares closed at 135.5 euros on Thursday, more than double their value when the rescue was announced.

`Good Investment'

``Alstom turned out to be a very good investment for the bank, and you can't really criticize them for making money,'' says Colette Neuville, founder and president of ADAM, the association for the defense of minority shareholders, a lobbying group based in Chartres, France. ``That's their mission.''

CDC can influence French companies even with a small stake, says Fabrice Remon, who manages the French office of Deminor International SCRL, a Brussels-based consulting firm for minority shareholders. ``In France, the quorum for a shareholders meeting is often very low, at about 25 or 30 percent,'' Remon says. ``Even if you only own 3 or 4 percent of a company, you are a really important player.''

To be sure, CDC hasn't always done the government's bidding. ``The relationship can be rather uncertain, depending on the chief executive's personality and his ability to resist the government,'' says Philippe Marini, a French senator who's a member of CDC's supervisory board.

Rejecting Adidas Deal

Former CEOs say that they were pressured by government ministers to make certain investments during their tenures at CDC --and refused.

Robert Lion, CDC's CEO from 1982 to '92, recalls that in 1990 Finance Minister Pierre Beregovoy asked him to invest in Adidas AG, the German sportswear company, which was then 80 percent owned by Bernard Tapie, the French investor. Lion says he refused because he thought Adidas in poor shape.

Beregovoy summoned Lion to his office. ``Beregovoy had already told Tapie I would invest, and he didn't dare tell him I would not,'' Lion says. ``So I did. It was fun.''

Beregovoy was prime minister from 1992 to '93, when Tapie was briefly his urban affairs minister. Beregovoy committed suicide in 1993 after France's ruling Socialist Party lost a parliamentary election. Tapie didn't respond to calls to his lawyer's office seeking comment.

Daniel Lebegue, CDC's chief executive officer from 1998 to 2002, says he refused the government's request in January 2002 that he help rescue Paris-based Air Lib, France's second-largest airline, which was close to bankruptcy. ``I said no, because I didn't consider that it conformed with my mandate, which was to protect the assets of the Caisse des Depots,'' he says.

The government made a $27.3 million loan to privately held Air Lib, which continued to lose money and was liquidated in February 2003.

Natixis Formed

In July 2004, Sarkozy -- then finance minister -- supported Mayer's attempt to form a jointly owned investment bank with Groupe Caisse d'Epargne. Mayer agreed to transfer CDC's investment banking units to Caisse d'Epargne, in return for a 35 percent stake in the bank, with a market value at the time of 3.4 billion euros. Two years later, Caisse d'Epargne instead opted to create a new investment bank, Natixis SA, with Groupe Banque Populaire.

Mayer protested to the Finance Ministry, then led by Thierry Breton, in vain.

Both Lion and Lebegue are critical of the incident, which Lebegue calls a brutal defeat. ``When you're a loser, you shouldn't scream out you're a superloser,'' Lion says.

De Romanet responds that the episode is finished. Groupe Caisse d'Epargne bought back CDC's 35 percent stake in a deal completed last year for 7 billion euros.

Natixis is now France's fourth-largest bank by market value after selling 26 percent of its shares on the Paris Bourse in December 2006. Natixis shares closed at 11.66 euros on Jan. 24, down 40 percent since the sale.

Went to ENA

De Romanet is well qualified to juggle the pressures involved in managing CDC, says Lambert, a former deputy budget minister who employed de Romanet as his chief of staff from 2002 to '04. ``He's familiar with how the French state works, but also understands what it takes to be a private-sector banker,'' Lambert says.

A graduate of the Ecole Nationale d'Administration, France's elite training college for civil servants, de Romanet worked from 1986 to '99 in the Finance Ministry and at the EU in Brussels. He joined Oddo & Cie., a Paris-based investment bank, as a partner in 1999. He returned to the civil service in 2002, and in 2005 became Chirac's deputy chief of staff.

In October 2006, near the end of Chirac's presidency, de Romanet joined Paris-based Groupe Credit Agricole SA, France's No. 2 bank by assets, as deputy director of finance and strategy.

Two months later, Mayer, 56, died of cancer. Finance Minister Breton called de Romanet on Chirac's behalf to offer him Mayer's job.

EADS Scandal

One of the first things that de Romanet had to navigate was an insider trading scandal that involved CDC even though the bank hasn't been accused of any wrongdoing.

In April 2006, Mayer bought 2.25 percent of EADS for 600 million euros from Lagardere SCA, the Paris-based industrial and media company. CDC already owned 0.58 percent of the company. Two months later, EADS's Airbus unit disclosed production delays on its A380 superjumbo plane, sending EADS shares down 26 percent in a single day. As of Jan. 24, CDC had lost about 295 million euros on the stock it bought from Lagardere.

Arnaud Lagardere, the company's CEO, said on Dec. 9 that he wasn't aware of production delays at Airbus when his company sold CDC the stock.

Investigation

Investigating Magistrate Xaviere Simeoni is looking into allegations of criminal insider trading by EADS shareholders who haven't been identified. She's expected to report her results in the first half of 2008.

Lebegue and Lion say Mayer must have had prior government approval to make such a big investment in a defense company. ``They should have known when they bought the stake that the company was in poor condition,'' Lion says. ``I do not believe that the Caisse made this investment without some kind of coordination with the state,'' Lebegue says.

De Romanet disagrees. ``Nobody in April 2006 could have imagined that EADS's share price would tumble 30 percent because of a wiring problem,'' he says. Mayer made a mistake by not telling CDC's board he'd bought the shares until after they had plunged, he says.

Breton testified to a parliamentary commission in October that the government didn't know in advance about CDC's purchase of EADS shares.

De Romanet says his next task is to figure out which areas the bank should focus on in the future. In January, he began reviewing CDC's activities to see what could be trimmed. ``We can't be everywhere,'' he says. ``We must focus our resources.'' Whatever de Romanet decides, Sarkozy's government may have other ideas.

Observers

Preview

China, the world's biggest energy user after the U.S., said the heaviest snowstorms in decades have disrupted coal shipments, causing ``very serious'' power shortages in half of the country and delaying flights.

China, which generates 78 percent of electricity with coal, shut 5 percent of the country's coal-fired power plants after snowstorms delayed fuel deliveries, making it ``difficult'' to stabilize energy supplies, the National Development and Reform Commission said today. The problem may persist in some regions throughout the year, the country's top planning agency said.

China's fifth year of power shortages may add pressure on Premier Wen Jiabao to lift caps on coal, gasoline and electricity prices, undermining efforts to curb the worst inflation in 11 years. Snowstorms, which grounded flights in Shanghai and closed eastern Chinese highways, may disrupt travel plans during next week's Lunar New Year, when more than 2 billion trips are made.

``Energy shortages and transportation bottlenecks are likely to aggravate inflation pressures in China in the short term,'' Goldman Sachs Group Inc's senior economist Liang Hong said today. ``These latest developments will likely push up near-term CPI inflation to levels that will be very uncomfortable for policy makers and China's investors.''

`Enormous' Shortage

Inflation was near an 11-year high last month at 6.5 percent, forcing the Chinese central bank to raise interest rates six times last year to curb spending. The government also capped the prices of food, public transport and ordered banks to reduce their lending.

China's 2007 electricity demand jumped 14 percent, as the fastest economic growth in 13 years spurred new factories, shopping malls and offices. Power shortages have affected 17 Chinese provinces, or half of the country, the Chinese planning commission's spokesman Zhu Hongren said today. Closures of coal- fired power plants forced 13 provinces to ration power, figures from State Grid Corp. of China showed on Jan. 23.

``The shortage is close to 39.9 million kilowatt hours, an enormous number,'' Zhu said today in Beijing. ``The main cause is the shortage of coal. Power plants are all working against the clock to get more coal delivered.''

To ease the shortage, coal shipments were increased by 2,000 to 36,000 train carriages a day on Jan. 26, Railway Minister Liu Zhijun said at a conference yesterday, according to minutes released by the government. That's 30 percent more than the increase at about the same time last year, he said.

Dwindling Stockpiles

Coal stockpiles at 90 power plants in central and northern China have dropped below the ``caution line'' of three days' requirements, State Grid said. The shortage may ease after the Lunar New Year holidays, which start on Feb. 7, when weather conditions may improve according to forecasts, Li Xiaochao, spokesman for the National Bureau of Statistics, said on Jan. 24.

``Other factors also contributed to the shortage, namely the various government controls of energy prices and transport bottlenecks,'' said Goldman's Liang. ``Bringing down inflation appears to be top of the macro policy agenda this year. Bad weather and bad policy choices have made this goal even more difficult to attain.''

China's coal production rose 9.4 percent last year to 2.3 billion tons, the statistics bureau said on Jan. 25. Exports of the fuel dropped 16 percent and imports jumped 33 percent in 2007, leaving the nation with 2 million tons of net exports, according to customs data.

Effects of Snowstorms

Snowstorms in central China's Hunan, Guizhou, Anhui and Jiangxi provinces were the worst in decades, affecting industrial production, the China Meteorological Administration said.

Electricity shortage may force smelters to cut their aluminum production by up to 200,000 tons, Beijing Antaike Information Development Co.'s chief analyst Wang Feihong said.

``About 800,000 metric tons of annual aluminum production capacity might be affected,'' Wang said in a phone interview today in Beijing. ``Assuming that the power shortages last three months, aluminum output this year will be 200,000 tons less than our earlier forecast.''

Zhuzhou Smelter Group Co., China's largest zinc smelter, had cut production since mid-January because of power shortages, said the company's trading managing director Wang Jianjun.

Snow delayed up to 35 percent of flights from two airports in Shanghai, China's financial hub, the airfields' operator said. At the railway station in Guangzhou, southern China's largest city near Hong Kong, 170,000 passengers were stranded for 24 hours yesterday after snowstorms in northern China threw the train schedule into chaos, Xinhua News Agency reported.

Jiangsu Expressway Co., the biggest operator of toll highways in eastern China, said it's allowing only trucks to get on to roads to reduce the potential for accidents and fatalities, according to a statement on its Web site.

Damaged Power Lines

Power lines linking the Three Gorges hydroelectric dam in central China's Hubei province to Shanghai were damaged in snowstorms, Xinhua said today, without saying when the lines were expected to be repaired.

``The difficulty in ensuring stable supplies of coal, electricity, oil and transportation is increasing,'' the planning commission's Zhu said.

Castrated

Amazon

The rate of Amazon deforestation rose sharply during the final five months of 2007 as land was cleared for soy and cattle, prompting a top-level emergency meeting Thursday by government officials to deal with the problem.

Environment Minister Marina Silva and other ministers were heading to the presidential palace Thursday to meet with President Luiz Inacio Lula da Silva about the report on deforestation issued late Wednesday.

Silva's ministry estimates as much as 2,700 square miles of rain forest was cleared from August through December, meaning that Brazil could lose 5,790 square miles of jungle by August of this year if the rate continues.

That would be a sharp increase from the 4,334 square miles that was cut down and burned from August 2006 through July of last year.

Although preliminary calculations can only prove that 1,287 square miles of rain forest were cleared from August through December, ministry executive secretary Joao Paulo Capobianco said officials are analyzing satellite imagery and working under the assumption that the higher count of jungle was cleared.

"We're working with the worst hypothesis," he said, according to Brazil's official Agencia Brasil news service.

The Environment Ministry could not immediately provide data to precisely compare the five-month destruction rate for last year to the same period in 2006.

Most of last year's destruction happened in November and December and was concentrated in the three Amazon region states of Mato Grosso, Para and Rondonia.

Mato Grosso is the center of Brazil's important soy production industry, and Latin America's largest nation is second only to the United States for production.

Jungle is typically cleared in the Amazon to provide pasture for cattle, then soy farmers move in later and cultivate their crops. Brazil also has a booming beef export industry, and cattle ranchers have been expanding operations in the Amazon.

Brazil last year trumpeted a drop in Amazon deforestation, but the new numbers appear to indicate that the situation has been reversed. Brazilian media reported that the president and the ministers would discuss emergency measures to reduce the deforestation.

Whispers

World Bank/IMF/WTO - An Exchange

GP: It’s quiet now, but all police leave in the capital has been cancelled. They’re taking no chances after last week’s anti-globalisation protests in Quebec and the street wars on this spot during the same meeting last year of the IMF and World Bank. So what’s their complaint? The protesters say that what we have here is a conspiracy - the World Bank, IMF and World Trade Organisation don’t help the poor of the world, they crush them. Well, the bosses are here today, let’s ask them. JW, the protesters say you are the chief of a secretive, undemocratic world government which has made poverty worse worldwide. How do you respond?

JW: (PRESIDENT, WORLD BANK) Well, I think it’s nonsense. I’ve been accused of many things but I didn’t know that was one of the accusations. I’m not sure where this government exists, but if I can answer the question more seriously, what I think is behind it, is that I’m very proud of the record of the bank.

GP: But that’s not what the insider says.

JS: You shouldn’t take advantage of someone who is down and out and squeeze the last blood out of them.

GP: JS was chief economist of the World Bank - he should know. He was in the meetings when the World Bank and IMF met to decide the fate of nations.

JS: They were making the countries worse off.

GP:And he charges the IMF actually encouraged corruption.

JS: They’ll take a strong position on petty larceny and petty theft, but on grand larceny, they’ll look the other way.

GP: The insider says there’s a “one-size-fits-all” plan. Every nation gets the same exact four-step programme to the free market paradise.

Step 1 - freedom for hot money.
Step 2 - freedom to increase prices.
Step 3 - free trade for all.
Step 4 - [where it all begins] freedom to privatise everything.

Insiders saw how it worked in Russia.

JS: That was the extreme case. You turned over these assets to these oligarchs at a time when the government didn’t have enough money to pay pensions to old people. It turned over billions of dollars to a few oligarchs for a fraction of the value of those assets.

GP: How could the IMF let this happen in their privatisation programme?

JS: When it comes to corruption in Russia, they were willing to turn the other way. The IMF and the US Treasury actually encouraged it. There was a real commitment to a particular set of leadership - to Yeltsin. There was a fear that if he didn’t get re-elected, who knows what would happen. So, the belief was the means justified the ends.

GP: JS charges the US government used the IMF to fix the Russian elections. JS isn’t guessing. At the time he was in Clinton’s cabinet as the president’s chief economist.

JS: The US Treasury’s view was that this was great because they wanted Yeltsin re-elected. “We don’t care if it is a corrupt election, we want the money to go to Yeltsin to be re-elected because he’s our friend.”

GP: Step 2 is what the World Bank calls a poverty reduction strategy. In Tanzania, the bank’s idea of a poverty reduction strategy was to require the government to raise the price of medicine during an AIDS epidemic. In Bolivia, the bank’s poverty reduction strategy was to demand increases in the price of water. That strategy produced riots. In Ecuador, the poverty reduction strategy included increasing the price of cooking gas by 60%. The nation exploded. The riots in Ecuador came as no surprise to the World Bank. We’ve obtained some confidential documents from inside. This one’s the master strategy for Ecuador. It says the bank knew that their plans pushed down real wages and shoved 51% of the population below the poverty line. They even scripted in riots. They said their plans would lead to social unrest. The insider heard the same story about Indonesia.

JS: They’d been warned if the policies of austerity were continued, the economy would go down. The probability of social and political turmoil was very high. They’ve been warned and the unfortunate thing is those predictions came out to be true. Finally, the whole cauldron blew up and did enormous damage, from which the country has still not recovered.

GP: What got Indonesia was Step 3 of the IMF assistance programme - ending all controls on capital. This left Indonesia’s fate to the mood of speculators and what JS calls “hot money”. In Asia, it was the nations that refused the IMF medicine that escaped the financial flames.

JS: Both of them weathered the global financial crisis very well. India’s been having growth rate over the past decade of over 5%. China’s growth rate has been faster. Neither of them followed the dictum of having capital market liberalisation.

GP: Step 4 - free trade. According to the insider, the World Trade Organisation just makes the rich richer.

JS: So much so, that after the last round of trade negotiations - the Uruguay round in 1994 - calculations of the World Bank showed that sub-Saharan Africa - the poorest region of the world - was actually worse off by more than 2%. While the USA was bragging about how many billions and billions of dollars better off it was.

GP: JS says the WTO operates like the British Empire in the Opium Wars, when Britain forced China at gunpoint to “open its markets” to British narcotics. The new drug wars are over the WTO’s intellectual property treaty. Until this month, British and American drug companies used WTO rules to prevent AIDS victims in South Africa getting cheap medicine.

JS: South Africa said, “We want to produce that drug and sell it at a cost the people can afford.” The drug companies said, “If you do that, you are violating intellectual property rights.” We don’t care if people die, intellectual property rights are really supreme.” People heard about this and they were outraged. And the protesters put such pressure that today, the drug companies have backed down.

GP: One lost skirmish for the drug companies, but the deadly WTO rule still survives. And back at the IMF and World Bank spring meeting today, World Bank chief, JW, is still musing about world domination.

JW: We’ve done a lot of things well. We’ve made a lot of mistakes, but no more or no less than any other well-meaning group of people in a most difficult area. In some cases, I wish I was president of a world government, because then I could make sure everything worked - knowing, as you all do, of my great skill as an administrator!

New Standard

GATA Advert

The gold reserves of the United States have not been independently audited for half a century. Now there is proof that those gold reserves and those of other Western nations are being used for the surreptitious manipulation of the international currency, commodity, equity, and bond markets.

The Federal Reserve’s general counsel, J. Virgil Mattingly, acknowledged as much when he told the Federal Open Market Committee on January 31, 1995, that the Treasury Department’s Exchange Stabilization Fund had undertaken gold swaps. Federal Reserve Chairman Alan Greenspan acknowledged as much in testimony to Congress on July 24, 1998, when he said that “central banks stand ready to lend gold in increasing quantities should the price rise.”

Barrick Gold Corp. acknowledged as much in a fi ling in U.S. District Court in New Orleans on February 28, 2003, disclosing that the mining company was the agent of the central banks in shorting the gold market.

The Bank for International Settlements acknowledged as much on June 27, 2005, when the head of its monetary and economic department, William S. White, declared at a convention of central bankers in Basel, Switzerland, that a major purpose of international central bank cooperation is “the provision of international credits and joint efforts to influence asset prices — especially gold and foreign exchange.” Since last May the U.S. Treasury Department’s weekly report of the government’s international reserve position has cited loans and swaps from the U.S. gold reserves.

Since 2004 four major international investment houses — Sprott Asset Management, Cheuvreux, Citigroup, and Redburn Partners — have issued reports stating that Western central banks have been manipulating the gold market. The objective of this manipulation is to conceal the mismanagement of the U.S. dollar so that it might retain its function as the world’s reserve currency. But to suppress the price of gold is to disable the barometer of the international fi nancial system so that all markets may be more easily manipulated. This manipulation has been a primary cause of the catastrophic excesses in the markets that now threaten the whole world.

Gold’s recent rise toward $900 per ounce shows that the price suppression scheme is faltering. When it is widely understood how central banks have been suppressing gold, its price may rise to $3,000 or $5,000 or more. Surreptitious market manipulation by government is leading the world to disaster. We want to expose it and stop it.

Who are we?

We’re the Gold Anti-Trust Action Committee Inc., a non-profi t, federally tax-exempt civil rights and educational organization formed by people who recognize the necessity of free markets in the monetary metals. In May 2001 we gathered representatives of five gold-producing African countries in Durban, South Africa, at the GATA African Gold Summit. In August 2005 we brought gold market experts and investors from around the world to the Gold Rush 21 conference in Dawson City, Yukon Territory, Canada, excerpts of which you can watch on the Internet here:

www.GoldRush21.com

Now GATA is marching on the Treasury Department to demand, via the Freedom of Information Act, that the U.S. government come clean about its gold reserves — to disclose how much gold is left and how much has been compromised by leases, swaps, and other encumbrances undertaken for surreptitious market intervention. So that we may explain how the unfolding world financial disaster can be mitigated and why free markets in the monetary metals are essential to free markets everywhere, we invite you to join us at our next conference — “GATA Goes to Washington: Anybody Seen
Our Gold?” — to be held Thursday through Saturday, April 17-19.

For information about that conference and GATA, visit www.GATA.org.

CM

America Loses It's Dearest Friend

Former dictator Suharto, an army general who crushed Indonesia's communist movement and pushed aside the country's founding father to usher in 32 years of tough rule that saw up to a million political opponents killed, died Sunday.

He was 86.

"He has died," Dr Christian Johannes told The Associated Press, adding that he died at 1.10 p.m. Suharto's death was later confirmed in a statement from chief presidential physician Dr. Marjo Subiandono.

Finally toppled by mass street protests in 1998, the US Cold War ally's departure opened the way for democracy in this predominantly Muslim nation of 235 million people and he withdrew from public life, rarely venturing from his comfortable villa on a leafy lane in the capital.

Suharto had ruled with a totalitarian dominance that saw soldiers stationed in every village, instilling a deep fear of authority across this Southeast Asian nation of some 6,000 inhabited islands that stretch across more than (4,825 kilometers) 3,000 miles.

Since being forced from power, he had been in and out of hospitals after strokes caused brain damage and impaired his speech. Blood transfusions and a pacemaker prolonged his life, but he suffered from lung, kidney, liver and heart problems.

Suharto was vilified as one of the world's most brutal rulers and was accused of overseeing a graft-ridden reign. But poor health - and continuing corruption, critics charge - kept him from court after he was chased from office by widespread unrest at the peak of the Asian financial crisis.

The bulk of political killings blamed on Suharto occurred in the 1960s, soon after he seized power. In later years, some 300,000 people were slain, disappeared or jailed in the independence-minded regions of East Timor, Aceh and Papua, human rights groups and the United Nations say.

Suharto's successors as head of state - B.J. Habibie, Abdurrahman Wahid, Megawati Sukarnoputri and Susilo Bambang Yudhoyono - vowed to end corruption that took root under Suharto, yet it remains endemic at all levels of Indonesian society.

With the court system paralyzed by corruption, the country has not confronted its bloody past. Rather than put on trial those accused of mass murder and multi-billion-dollar (euro) theft, some members of the political elite consistently called for charges against Suharto to be dropped on humanitarian grounds.

Some noted Suharto also oversaw decades of economic expansion that made Indonesia the envy of the developing world. Today, nearly a quarter of Indonesians live in poverty, and many long for the Suharto era's stability, when fuel and rice were affordable.

But critics say Suharto squandered Indonesia's vast natural resources of oil, timber and gold, siphoning the nation's wealth to benefit his cronies and family like a mafia don.

Jeffrey Winters, associate professor of political economy at Northwestern University, said the graft effectively robbed "Indonesia of some of the most golden decades, and its best opportunity to move from a poor to a middle class country."

"When Indonesia does finally go back and redo history, (its people) will realize that Suharto is responsible for some of the worst crimes against humanity in the 20th century," Winters added.

Those who profited from Suharto's rule made sure he was never portrayed in a harsh light at home, Winters said, so even though he was an "iron-fisted, brutal, cold-blooded dictator," he was able to stay in his native country.

Like many Indonesians, Suharto used only one name. He was born Mohammad Suharto on June 8, 1921, to a family of rice farmers in the village of Godean, in the dominant Indonesian province of Central Java.

When Indonesia gained independence from the Dutch in 1949, Suharto quickly rose through the ranks of the military to become a staff officer. His career nearly foundered in the late 1950s, when the army's then-commander, Gen. Abdul Haris Nasution, accused him of corruption in awarding army contracts.

Absolute power came in September 1965 when the army's six top generals were murdered under mysterious circumstances, and their bodies dumped in an abandoned well in an apparent coup attempt. Suharto, next in line for command, quickly asserted authority over the armed forces and promoted himself to four-star general.

Suharto then oversaw a nationwide purge of suspected communists and trade unionists, a campaign that stood as the region's bloodiest event since World War II until the Khmer Rouge established its gruesome regime in Cambodia a decade later. Experts put the number of deaths during the purge at between 500,000 and 1 million.

Over the next year, Suharto eased out of office Indonesia's first post-independence president, Sukarno, who died under house arrest in 1970.

The legislature rubber-stamped Suharto's presidency and he was re-elected unopposed six times.

During the Cold War, Suharto was considered a reliable friend of Washington, which didn't oppose his violent occupation of Papua in 1969 and the bloody 1974 invasion of East Timor. The latter, a former Portuguese colony, became Asia's youngest country with a UN-sponsored plebiscite in 1999.

Even Suharto's critics agree his hard-line policies kept a lid on Indonesia's extremists. He locked up hundreds of suspected Islamic militants without trial, some of whom later carried out deadly suicide bombings with the al-Qaida-linked terror network Jemaah Islamiyah after the Sept. 11 attack on the US. Meanwhile, the ruling clique that formed around Suharto - nicknamed the "Berkeley mafia" after their American university, the University of California, Berkeley - transformed Indonesia's economy and attracted billions of dollars in foreign investment.

By the late 1980s, Suharto was describing himself as Indonesia's "father of development," taking credit for slowly reducing the number of abjectly poor and modernizing parts of the nation.

But the government also became notorious for unfettered nepotism, and Indonesia was regularly ranked as one of the world's most corrupt nations as Suharto's inner circle amassed fabulous wealth. The World Bank estimates 20 percent to 30 percent of Indonesia's development budget was embezzled during his rule.

Even today, Suharto's children and aging associates have considerable sway over the country's business, politics and courts. Efforts to recover the money have been fruitless.

Suharto's youngest son, Hutomo "Tommy" Mandala Putra, was released from prison in 2006 after serving a third of a 15-year sentence for ordering the assassination of a Supreme Court judge. Another son, Bambang Trihatmodjo, joined the Forbes list of wealthiest Indonesians in 2007, with $200 million from his stake in the conglomerate Mediacom.

Suharto's economic policies, based on unsecured borrowing by his cronies, dramatically unraveled shortly before he was toppled in May 1998. Indonesia is still recovering from what economists called the worst economic meltdown anywhere in 50 years.

State prosecutors accused Suharto of embezzling about $600 million via a complex web of foundations under his control, but he never saw the inside of a courtroom. In September 2000, judges ruled he was too ill to stand trial, though many people believed the decision really stemmed from the lingering influence of the former dictator and his family.

In 2007, Suharto won a $106 million defamation lawsuit against Time magazine for accusing the family of acquiring $15 billion in stolen state funds.

The former dictator told the news magazine Gatra in a rare interview in November 2007 that he would donate the bulk of any legal windfall to the needy, while he dismissed corruption accusations as "empty talk."

Suharto's wife of 49 years, Indonesian royal Siti Hartinah, died in 1996. The couple had three sons and three daughters.

Sorting Out

Creepy Crawlies

The men who manage the so-called sovereign wealth funds of the Persian Gulf for their governments are quickly becoming some of the world's most powerful money managers. They are using billions from Persian Gulf oil revenues to change the face of global finance by buying big chunks of blue chip companies, partnering with private equity firms to do buyouts, and increasingly snapping up companies on their own. As the credit crisis deepens, investment banks and buyout firms are stepping back from dealmaking to nurse their wounds. Gulf funds, which already have more assets than the entire $1 trillion buyout industry, are filling the void. Move over, Steve Schwarzman at the Blackstone Group (BX), and meet the new kings of Wall Street:

1. Bader M. Al Sa'ad
Kuwait Investment Authority

Assets: $213 billion (est.)

Fifteen percent of the fund is invested in emerging markets, buyout funds and hedge funds. That's about $32 billion.

2. Sameer Al Ansari
Dubai International Capital

Assets: $12 billion (est.)

Al Ansari has engineered six solo buyouts, including museum operator Tussauds Group, which he bought from Charterhouse Capital Partners for $1.6 billion in 2005. Last year, he bought a big stake in Sony (SNE) and hedge fund behemoth Och-Ziff Capital Management.

3. Soud Ba'alawy
Dubai Group

Assets: $7 billion (est.)

Ba'alawy is assisting Dubai's ruler to build a Wall Street of the Middle East. In September, he agreed to take a 19.9% stake in Nasdaq as part of a play for a stake in Sweden's OMX Group. The terms for the deal were approved in December.

4. David Jackson
Istithmar

Assets: $8 billion (est.)

Jackson, an American, has invested in more than 50 companies for the investment arm of government-owned Dubai World. In September, he bought luxury retailer Barney's for $942 million. Before that, he bought a 3% stake in the $20 billion European hedge fund GLG Partners.

5. Sheikh Hamad bin Jassim bin Jabir Al-Thani
Qatar's prime minister and head of the Qatar Investment Authority

Assets: $50 billion (est.)

He is working with hedge fund activist Nelson Peltz to shake up British beverage company Cadbury Schweppes (CSG). Last year, Qatar's fund launched a bid for the British grocery chain Sainsbury.

6. Khaldoun Al Mubarak
Mubadala Development Company

Al Mubarak runs a fund of an undisclosed amount, but large enough to buy stakes in the Carlyle Group and Advanced Micro Devices (AMD) last year. Another initiative: a multibillion-dollar green energy project called Masdar.

Anchor

Walk Away & Win

A homeowner who can't sell his house tells the L.A.Times, "Foreclose me. ... I'll live in the house for free for 12 months, and I'll save my money and I'll move on."

Banks and lenders fear this kind of thinking -- that walking away from a house could be the smart economic move -- appears to be on the rise. Wachovia, in a conference call yesterday, warned investors that increasing numbers of homeowners are walking away from their homes by choice: "... people that have otherwise had the capacity to pay, but have basically just decided not to because they feel like they've lost equity, value in their properties..."

Calculated Risk notes this is "one of the greatest fears for lenders ... that it will become socially acceptable for upside down middle class Americans to walk away from their homes."

A commenter on L.A. Land this morning writes, "I am one of these people. My condo has dropped in value from $520K in 5/06 when I bought it to $350K now. My ARM payment will probably go up $900 per month in June.

"Despite all this, I would be willing to stay if the bank would refi the loans to a 30 year fixed, but since I'm not a 'hardship' case they'd apparently rather foreclose. I guess the only way I could qualify for loan mitigation is to get my boss to fire me, stop making payments, and wreck my credit. In fact, my bank won't even talk to me until I miss a couple of payments.

"I have purchased a cheaper place in a nearby area now, while my credit is good, and will stop making payments on house #1 after house #2 closes. I know the foreclosure will be on my credit for 7 years, but I will have saved a lot of money.

"I realize I agreed to the deal when I signed the mortgage papers, but I am within my rights to walk away from a bad deal and suffer the consequences, just as many corporations write down billions of dollars of debt, lose money for their shareholders, and lay off people as a result of their bad decisions.

"I don't really understand why people view a business decision by a homeowner as a terrible moral lapse. However, when large lending institutions, with access to more sophisticated information than any consumer could imagine, make mistakes affecting thousands of people worldwide, they are not excoriated and vilified with the same righteous zeal."

Breather

Drilling Down

We see the first signs of bail-out proposals for the US bond insurers (monoliners), and that of course is inevitable. If only because at face value, it seems to make sense.

After all, it was only last week that some of the ratings agencies indicated that they would be satisfied with capital injections of some $1 billion, in order for Ambac (and consequently all the bonds it insures) to keep the coveted AAA status. Obviously, other parties did the math too, and reckoned that this was a cheap bargain for restoring law and order in the sector, which tries hard to hold together $2.4 trillion in insurance for bonds, plus who knows how much for other paper.

A closer look, however, will show whoever tries this trick that what makes it seem like such a good deal, is exactly what kills it. Ambac is leveraged 143 times, and MBIA 147 times. This means that even if far less than 1 percent of their outstanding commitments go south and sour, they will, in theory, have emptied their covering coffers, which for Ambac hold less than $7 billion (which is why the $1 billion injection looks so appetizing!!), if memory serves. Ponzi works great on the way up, but not so after. This deal looks cheap, but looks deceive.

It will still be tried though, even if it’s a bad deal: the money needed on the table will come from the public purse, and that’s mighty easy to spend, always. Just to be on the safe side, they’ll raise $15 billion this time, by throwing in some private capital. Don’t forget that for the banks this is an excellent investment: they stand to lose more, by an order of magnitude, if the monoliners’ ratings fall below AAA for real and for good. The value of the bonds will drop off a cliff if that happens. Some people now start blaming the shifting (as in: more severe) focus of the ratings agencies for the monoline mayhem, but that's like saying the cart is supposed to push the horse.

Still, the biggest problem for the monoliners may well not even be in their core business. In the past few years, they, like few others, were "lifted up" by the party spirit, and started insuring and covering all sorts of securities as well. What enabled them to do this was partly the counterparty cover of banks such as CIBC and Barclay’s (and many -so far more or less hidden- others).

The most astonishing model here: bank buys or sells commercial paper, which is insured (either by same bank, or by another issuer) through the bond insurer. The next step is that same bank becomes the counterparty (in this case guarantor, or you could say insurer) for the paper, so the bank is the (end-) insurer for the paper that it just bought insurance for. That's a hard one to beat, brought to you by the 1998 repeal of Glass-Steagall by the US Congress.

Lastly, the main victims of the downfall of the bond insurers will be municipalities, counties and states. I’ve said it several times: they face a triple whammy slamdunk, which will drive many to the brink of the abyss. First, their tax revenue plummets when property taxes decrease through lower housing values. Second, the vast majority of them have reserves invested, often through third parties, in shaky shoddy not-so-securities. Now, number three comes a-calling: issuing bonds will become much more expensive (or less lucrative, if you will), if not downright impossible for many, if insurance at AAA level cannot be acquired.

These lower levels of government depend, for a very large part of their day-to day-finance dealings, on issuing and rolling over bonds. If that becomes a dead end, there will be no more capital to maintain infrastructure, let alone build new. Not only does that mean potholes and school closings, it will lead to a lot of unemployment in communities as well.

So yes, the stakes are high, and the temptations obvious. But if you’d ask the decision makers, off the record, if they feel confident in reviving the industry, the ones in the know would all shake their heads and wander off, possibly babbling incoherently, a condition sustained shock is known to inflict on human beings.

Fog

Slump

Facing a collapse in the subprime mortgage market that has pockmarked their cities with vacant houses and crippled their budgets, the nation’s mayors pleaded Wednesday for a huge infusion of federal aid.

As more than 250 mayors gathered in Washington for the winter meeting of the United States Conference of Mayors, many agreed that the collapse of the subprime market had left a growing problem of vacant houses, depressed property values, tighter credit, and a need to cut services to close municipal budget gaps.

“It’s an economic tsunami that is hitting our cities,” said Mayor Douglas H. Palmer of Trenton, the president of the conference. “We need federal action not six months from now, but within the next 30 days.”

The conference called on Congress to raise the limits on loans bought by Fannie Mae and Freddie Mac to stimulate the mortgage market, and increase Community Development Block Grants to help stabilize neighborhoods.

In December, the conference released a study that said that home values would drop by $1.2 trillion in 2008, hitting city budgets the hardest. States are also beginning to suffer; on Wednesday, the Center for Budget and Policy Priorities in Washington reported that at least 16 states had predicted budget shortfalls for 2009 totaling over $30.1 billion.

“We’re the ones left boarding up these places, cutting their grass, doing demolition on the abandoned structures, picking up the trash, making sure no one breaks in,” said Mayor Frank Jackson of Cleveland.

Cuyahoga County, Ohio, which includes Cleveland, has more than 16,800 homes that have been abandoned because of foreclosures.

“Anything from the federal government short of a massive infusion of resources into urban centers to rebuild infrastructure and pay for services is too little, too late,” Mr. Jackson said.

Speaking to the group, Robert E. Rubin, a former Treasury secretary, urged the mayors to be more aggressive in pressuring Washington for strong federal action, particularly in reviving the housing market.

Mr. Rubin said the government needed to provide more aid to homeowners struggling with mortgage payments.

The subprime mortgage problem has left many cities scrambling to cut services to try to close budget gaps.

City officials in Sacramento have responded to a $55 million projected budget shortfall for next year city by ordering an immediate hiring freeze and an end to some discretionary spending.

In Virginia, Fairfax County is facing a $220 million deficit for the coming fiscal year and is considering cuts to school districts.

This month, Baltimore’s mayor and City Council announced plans to sue Wells Fargo Bank, contending that the bank’s lending practices discriminated against black borrowers and led to a wave of foreclosures that has reduced city tax revenues and increased its costs.

Cleveland has sought monetary damages from 21 lenders.

“By driving down the value of nearby homes, foreclosures also drive down city revenues and place additional financial burdens on the city and its residents,” said Mayor Sheila Dixon of Baltimore. “It is our responsibility to do what we can to stop it.”

Mr. Palmer said the conference had not taken an official stance on the issue of cities suing lenders. He said that Trenton had had a 14 percent increase in foreclosures in the past year but that suing did not seem prudent because litigation would take at least two years.

He said cities should require lenders to pick up the cost of upkeep for abandoned properties after foreclosures occur.

The Otter

Croissant?

Societe Generale SA reported a 4.9 billion-euro ($7.1 billion) trading loss, the largest in European history, and accused an unidentified trader of fraud after wrong-way bets on stock index futures.

France's second-largest bank by market value plans to raise 5.5 billion euros from investors after the trading loss and subprime-related writedowns depleted capital, the Paris-based company said today. The Bank of France, the country's banking regulator, said it's investigating the situation.

The trading shortfall rivals the $6.6 billion Amaranth Advisors LLC lost in 2006, and is more than three times the $1.8 billion of losses by Nick Leeson that brought down Barings Plc in 1995. An offer by Chairman Daniel Bouton to resign after the trades were discovered this past weekend was refused by Societe Generale's board, the bank said.

``At first this seemed like a joke,'' said Nicolas Rutsaert, an analyst covering European banks at Dexia SA in Brussels. Societe Generale ``was a leader in derivatives and was considered one of the best risk managers in the world.''

Societe Generale shares were suspended before the start of trading in Paris today. The stock fell 20 percent since the beginning of the year on concern about more writedowns related to the U.S. subprime mortgage crash.

Credit-default swaps based on the debt of Societe Generale rose as much as 10 basis points to 95 basis points today, and traded at 85 basis points at 7:46 a.m. in London. The contracts, which increase as default risk rises, were at 50 basis points a week ago.

Derivatives Leader

Societe Generale has ranked first or second during the past five years in client surveys of equity derivative firms, according to Risk Magazine. In 2007, it received the award for ``Equity Derivatives House of the Year'' from The Banker, a London-based monthly magazine.

The trading loss wipes out almost two years of pretax profit at Societe Generale's investment-banking unit. The company has started disciplinary proceedings against the trader and fired his managers, Bouton said.

``The transactions that were built on the fraud were simple, positions linked to rising stock markets, but they were hidden through extremely sophisticated and varied techniques,'' Bouton said in a letter posted on the bank's Web site.

The bank said it will post a profit of between 600 million euros and 800 million euros for 2007 and pay a dividend equal to 45 percent of its earnings. ``Most of the sectors, in France and abroad, continue to produce good, and sometimes excellent results,'' Bouton said.

The company said it plans to raise the capital by selling shares in a rights offer underwritten by JPMorgan Chase & Co. and Morgan Stanley.

Calyon Losses

Societe Generale's report of fraud comes four months after French competitor Credit Agricole SA said an unauthorized proprietary trade at its investment-banking unit in New York cost it 250 million euros.

Societe Generale said that it has already closed all the positions set up by the trader, who had used his experience working in the back office to hide his trades through fictitious transactions.

Societe Generale said it's taking 1.1 billion euros of writedowns linked to the U.S. residential real estate market, 550 million euros related to U.S. bond insurers, and 400 million euros on other unspecified risks.

In the third quarter, the bank reported 375 million euros of writedowns and trading losses linked to turmoil in financial markets. The world's biggest financial companies have announced more than $120 billion in writedowns and credit losses as the U.S. housing slump rattles debt markets.

Societe Generale's exposure to bonds backed by home loans is now down to 35 million euros, the bank said.