Sunday, November 30, 2008


How Long Will The Dollar Last

The Federal Reserve boosted its lending to commercial banks and investment firms over the past week, indicating that a severe credit crisis was still squeezing the financial system.

The Fed released a report Friday saying commercial banks averaged $93.6 billion in daily borrowing for the week ending Wednesday. That was up from an average of $91.6 billion for the week ending Nov. 19.

The report also said investment firms borrowed an average of $52.4 billion from the Fed's emergency loan program over the week ending Wednesday, up from an average of $50.2 billion the previous week.

The Fed said its net holdings of business loans known as commercial paper over the week ending Wednesday averaged $282.2 billion, an increase of $16.5 billion from the previous week.

Financial firms are borrowing from the Fed because they are having trouble raising money through normal channels as the financial system endures its worst crisis since the Great Depression.

Banks are hoarding cash rather than making loans out of fear that they won't be repaid. The Fed and the Treasury have been flooding the financial system with money in hopes that banks can return lending operations to more normal levels.

The central bank on Oct. 27 began buying commercial paper, the short-term debt that companies use to pay everyday expenses. It was one of a series of moves the Fed has made to try to unfreeze credit markets.

The Fed's goal is to raise demand in this area as a way to boost the availability of commercial paper, which has been seriously constrained since the financial crisis hit with force in September.

The report said insurance giant American International Group's loan from the Fed averaged $79.6 billion for the week ending Wednesday. That was down by $5.6 billion from the average the previous week.

The reduction reflected a modification of the government's support program for AIG earlier this month. Under that change, Treasury stepped in with a $40 billion purchase of stock in AIG, using money from the government's $700 billion financial system rescue package. The increased support from Treasury allowed the Fed to reduce slightly the size of its total loans to AIG.

The Fed unveiled two new programs Tuesday in a further effort to get consumer credit flowing again.

It said it would begin buying mortgage-backed securities from mortgage giants such as Fannie Mae and Freddie Mac. And it announced a program to lend to financial firms that buy securities backed by various types of consumer debt, from credit cards to auto and student loans.

Source - Associated Press

Thursday, November 27, 2008


Panic In China

The move came just one day after the World Bank predicted that China would grow by 7.5pc next year. The level of growth may appear robust by Western standards, but it would represent the slowest economic expansion in China for the last two decades.

It is also perilously close to the 7pc minimum level of growth that Chinese economists believe is necessary in order to create enough jobs for the 6m university graduates who will enter the jobs market next year.

It is the fourth interest rate cut from the Chinese central bank in the last ten weeks as the government desperately battles an evident economic collapse. "China is out to save itself here," said Patrick Bennett, an analyst with Societe Generale in Hong Kong.

The PBOC reduced its main borrowing rate by 1.08pc points to 5.58pc, the biggest one-off cut since the Asian Financial Crisis in 1997.

In recent weeks, a series of riots across central and southern China have flowered as disgruntled employees aired their grievances at the downturn.

Today, around 500 protesters rioted at the Kai Da toy factory in Dongguan in the Pearl River delta, flipping over a police car and trashing computers in a dispute over payoffs to 80 fired workers. Tens of thousands of factories across the region have already shut their gates.

Yin Weimin, China's Social Security minister, has revealed that employment is the Communist Party's number one concern in the downturn and said the "situation is critical". Unemployment is expected to rise from 4pc to 4.5pc by the end of the year and anecdotal reports have suggested that 3m people have already been fired in the industrial province of Zhejiang alone.

Two major provinces, Shandong and Hubei, have already responded by banning companies from firing staff without permission from the government.

The Chinese government has also announced a £373bn bailout to stimulate domestic growth by investing in infrastructure. However, only a fifth of the money is likely to come from central government coffers, with the rest coming from a mix of private enterprise and local government funds.

"We're seeing a government that steps in, that is trying to do everything it can to keep growth at a decent rate, and has the financial means and the administrative capacity to make that happen," said Louis Kuijs, the head of the World Bank's China economics analysis.

"All my colleagues were shocked by such a big easing. It signals the government may believe the economic situation is really serious for it to call for such a drastic move," said Liu Dongliang, a currency analyst at China Merchants Bank in Shenzhen.

The reserve requirements of Chinese banks were also cut by 1pc point, and 2pc points for smaller banks, freeing up around 360 billion rmb (£34bn) for lending.

Source - Telegraph

Tartaric Acid Landscape

Hope In Common

We seem to have reached an impasse. Capitalism as we know it appears to be coming apart. But as financial institutions stagger and crumble, there is no obvious alternative. Organized resistance appears scattered and incoherent; the global justice movement a shadow of its former self. There is good reason to believe that, in a generation or so, capitalism will no longer exist: for the simple reason that it’s impossible to maintain an engine of perpetual growth forever on a finite planet. Faced with the prospect, the knee-jerk reaction—even of “progressives”—is, often, fear, to cling to capitalism because they simply can’t imagine an alternative that wouldn’t be even worse.

The first question we should be asking is: How did this happen? Is it normal for human beings to be unable to imagine what a better world would even be like?

Hopelessness isn’t natural. It needs to be produced. If we really want to understand this situation, we have to begin by understanding that the last thirty years have seen the construction of a vast bureaucratic apparatus for the creation and maintenance of hopelessness, a kind of giant machine that is designed, first and foremost, to destroy any sense of possible alternative futures. At root is a veritable obsession on the part of the rulers of the world with ensuring that social movements cannot be seen to grow, to flourish, to propose alternatives; that those who challenge existing power arrangements can never, under any circumstances, be perceived to win. To do so requires creating a vast apparatus of armies, prisons, police, various forms of private security firms and police and military intelligence apparatus, propaganda engines of every conceivable variety, most of which do not attack alternatives directly so much as they create a pervasive climate of fear, jingoistic conformity, and simple despair that renders any thought of changing the world seem an idle fantasy. Maintaining this apparatus seems even more important, to exponents of the “free market,” even than maintaining any sort of viable market economy. How else can one explain, for instance, what happened in the former Soviet Union, where one would have imagined the end of the Cold War would have led to the dismantling of the army and KGB and rebuilding the factories, but in fact what happened was precisely the other way around? This is just one extreme example of what has been happening everywhere. Economically, this apparatus is pure dead weight; all the guns, surveillance cameras, and propaganda engines are extraordinarily expensive and really produce nothing, and as a result, it’s dragging the entire capitalist system down with it, and possibly, the earth itself.

The spirals of financialization and endless string of economic bubbles we’ve been experience are a direct result of this apparatus. It’s no coincidence that the United States has become both the world’s major military (”security”) power and the major promoter of bogus securities. This apparatus exists to shred and pulverize the human imagination, to destroy any possibility of envisioning alternative futures. As a result, the only thing left to imagine is more and more money, and debt spirals entirely out of control. What is debt, after all, but imaginary money whose value can only be realized in the future: future profits, the proceeds of the exploitation of workers not yet born. Finance capital in turn is the buying and selling of these imaginary future profits; and once one assumes that capitalism itself will be around for all eternity, the only kind of economic democracy left to imagine is one everyone is equally free to invest in the market—to grab their own piece in the game of buying and selling imaginary future profits, even if these profits are to be extracted from themselves. Freedom has become the right to share in the proceeds of one’s own permanent enslavement.

And since the bubble had built on the destruction of futures, once it collapsed there appeared to be—at least for the moment—simply nothing left.

The effect however is clearly temporary. If the story of the global justice movement tells us anything it’s that the moment there appears to be any sense of an opening, the imagination will immediately spring forth. This is what effectively happened in the late ‘90s when it looked, for a moment, like we might be moving toward a world at peace. In the US, for the last fifty years, whenever there seems to be any possibility of peace breaking out, the same thing happens: the emergence of a radical social movement dedicated to principles of direct action and participatory democracy, aiming to revolutionize the very meaning of political life. In the late ‘50s it was the civil rights movement; in the late ‘70s, the anti-nuclear movement. This time it happened on a planetary scale, and challenged capitalism head-on. These movements tend to be extraordinarily effective. Certainly the global justice movement was. Few realize that one of the main reasons it seemed to flicker in and out of existence so rapidly was that it achieved its principle goals so quickly. None of us dreamed, when we were organizing the protests in Seattle in 1999 or at the IMF meetings in DC in 2000, that within a mere three or four years, the WTO process would have collapsed, that “free trade” ideologies would be considered almost entirely discredited, that every new trade pact they threw at us—from the MIA to Free Trade Areas of the Americas act—would have been defeated, the World Bank hobbled, the power of the IMF over most of the world’s population, effectively destroyed. But this is precisely what happened. The fate of the IMF is particularly startling. Once the terror of the Global South, it is, by now, a shattered remnant of its former self, reviled and discredited, reduced to selling off its gold reserves and desperately searching for a new global mission.

Meanwhile, most of the “third world debt” has simply vanished. All of this was a direct result of a movement that managed to mobilize global resistance so effectively that the reigning institutions were first discredited, and ultimately, that those running governments in Asia and especially Latin America were forced by their own populations to call the bluff of the international financial system. Much of the reason the movement was thrown into confusion was because none of us had really considered we might win.

But of course there’s another reason. Nothing terrifies the rulers of the world, and particularly of the United States, as much as the danger of grassroots democracy. Whenever a genuinely democratic movement begins to emerge—particularly, one based on principles of civil disobedience and direct action—the reaction is the same; the government makes immediate concessions (fine, you can have voting rights; no nukes), then starts ratcheting up military tensions abroad. The movement is then forced to transform itself into an anti-war movement; which, pretty much invariably, is far less democratically organized. So the civil rights movement was followed by Vietnam, the anti-nuclear movement by proxy wars in El Salvador and Nicaragua, the global justice movement, by the “War on Terror.”

But at this point, we can see that “war” for what it was: as the flailing and obviously doomed effort of a declining power to make its peculiar combination of bureaucratic war machines and speculative financial capitalism into a permanent global condition. If the rotten architecture collapsed abruptly at the end of 2008, it was at least in part because so much of the work had already been accomplished by a movement that had, in the face of the surge of repression after 911, combined with confusion over how to follow up its startling initial success, had seemed to have largely disappeared from the scene.

Of course it hasn’t really.

We are clearly at the verge of another mass resurgence of the popular imagination. It shouldn’t be that difficult. Most of the elements are already there. The problem is that, our perceptions having been twisted into knots by decades of relentless propaganda, we are no longer able to see them. Consider here the term “communism.” Rarely has a term come to be so utterly reviled. The standard line, which we accept more or less unthinkingly, is that communism means state control of the economy, and this is an impossible utopian dream because history has shown it simply “doesn’t work.” Capitalism, however unpleasant, is thus the only remaining option. But in fact communism really just means any situation where people act according to the principle of “from each according to their abilities, to each according to their needs”—which is the way pretty much everyone always act if they are working together to get something done. If two people are fixing a pipe and one says “hand me the wrench,” the other doesn’t say, “and what do I get for it?”(That is, if they actually want it to be fixed.) This is true even if they happen to be employed by Bechtel or Citigroup. They apply principles of communism because it’s the only thing that really works. This is also the reason whole cities or countries revert to some form of rough-and-ready communism in the wake of natural disasters, or economic collapse (one might say, in those circumstances, markets and hierarchical chains of command are luxuries they can’t afford.) The more creativity is required, the more people have to improvise at a given task, the more egalitarian the resulting form of communism is likely to be: that’s why even Republican computer engineers, when trying to innovate new software ideas, tend to form small democratic collectives. It’s only when work becomes standardized and boring—as on production lines—that it becomes possible to impose more authoritarian, even fascistic forms of communism. But the fact is that even private companies are, internally, organized communistically.

Communism then is already here. The question is how to further democratize it. Capitalism, in turn, is just one possible way of managing communism—and, it has become increasingly clear, rather a disastrous one. Clearly we need to be thinking about a better one: preferably, one that does not quite so systematically set us all at each others’ throats.

All this makes it much easier to understand why capitalists are willing to pour such extraordinary resources into the machinery of hopelessness. Capitalism is not just a poor system for managing communism: it has a notorious tendency to periodically come spinning apart. Each time it does, those who profit from it have to convince everyone—and most of all the technical people, the doctors and teachers and surveyors and insurance claims adjustors—that there is really no choice but to dutifully paste it all back together again, in something like the original form. This despite the fact that most of those who will end up doing the work of rebuilding the system don’t even like it very much, and all have at least the vague suspicion, rooted in their own innumerable experiences of everyday communism, that it really ought to be possible to create a system at least a little less stupid and unfair.

This is why, as the Great Depression showed, the existence of any plausible-seeming alternative—even one so dubious as the Soviet Union in the 1930s—can turn a downswing into an apparently insoluble political crisis.

Those wishing to subvert the system have learned by now, from bitter experience, that we cannot place our faith in states. The last decade has instead seen the development of thousands of forms of mutual aid association, most of which have not even made it onto the radar of the global media. They range from tiny cooperatives and associations to vast anti-capitalist experiments, archipelagos of occupied factories in Paraguay or Argentina or of self-organized tea plantations and fisheries in India, autonomous institutes in Korea, whole insurgent communities in Chiapas or Bolivia, associations of landless peasants, urban squatters, neighborhood alliances, that spring up pretty much anywhere that where state power and global capital seem to temporarily looking the other way. They might have almost no ideological unity and many are not even aware of the other’s existence, but all are marked by a common desire to break with the logic of capital. And in many places, they are beginning to combine. “Economies of solidarity” exist on every continent, in at least eighty different countries. We are at the point where we can begin to perceive the outlines of how these can knit together on a global level, creating new forms of planetary commons to create a genuine insurgent civilization.

Visible alternatives shatter the sense of inevitability, that the system must, necessarily, be patched together in the same form—this is why it became such an imperative of global governance to stamp them out, or, when that’s not possible, to ensure that no one knows about them. To become aware of it allows us to see everything we are already doing in a new light. To realize we’re all already communists when working on a common projects, all already anarchists when we solve problems without recourse to lawyers or police, all revolutionaries when we make something genuinely new.

One might object: a revolution cannot confine itself to this. That’s true. In this respect, the great strategic debates are really just beginning. I’ll offer one suggestion though. For at least five thousand years, popular movements have tended to center on struggles over debt—this was true long before capitalism even existed. There is a reason for this. Debt is the most efficient means ever created to take relations that are fundamentally based on violence and violent inequality and to make them seem right and moral to everyone concerned. When the trick no longer works, everything explodes. As it is now. Clearly, debt has shown itself to be the point of greatest weakness of the system, the point where it spirals out of anyone’s control. It also allows endless opportunities for organizing. Some speak of a debtor’s strike, or debtor’s cartel.

Perhaps so—but at the very least we can start with a pledge against evictions: to pledge, neighborhood by neighborhood, to support each other if any of us are to be driven from our homes. The power is not just that to challenge regimes of debt is to challenge the very fiber of capitalism—its moral foundation—now revealed to be a collection of broken promises—but in doing so, to create a new one. A debt after all is only that: a promise, and the present world abounds with promises that have not been kept. One might speak here of the promise made us by the state; that if we abandon any right to collectively manage our own affairs, we would at least be provided with basic life security. Or of the promise offered by capitalism—that we could live like kings if we were willing to buy stock in our own collective subordination. All of this has come crashing down. What remains is what we are able to promise one another. Directly. Without the mediation of economic and political bureaucracies. The revolution begins by asking: what sort of promises do free men and women make to one another, and how, by making them, do we begin to make another world?

Source - InterActivist

Wednesday, November 26, 2008


A Russian Perspective On The US

A leading Russian political analyst has said the economic turmoil in the United States has confirmed his long-held view that the country is heading for collapse, and will divide into separate parts.

Professor Igor Panarin said in an interview with the respected daily Izvestia published on Monday: "The dollar is not secured by anything. The country's foreign debt has grown like an avalanche, even though in the early 1980s there was no debt. By 1998, when I first made my prediction, it had exceeded $2 trillion. Now it is more than 11 trillion. This is a pyramid that can only collapse."

The paper said Panarin's dire predictions for the U.S. economy, initially made at an international conference in Australia 10 years ago at a time when the economy appeared strong, have been given more credence by this year's events.

When asked when the U.S. economy would collapse, Panarin said: "It is already collapsing. Due to the financial crisis, three of the largest and oldest five banks on Wall Street have already ceased to exist, and two are barely surviving. Their losses are the biggest in history. Now what we will see is a change in the regulatory system on a global financial scale: America will no longer be the world's financial regulator."

When asked who would replace the U.S. in regulating world markets, he said: "Two countries could assume this role: China, with its vast reserves, and Russia, which could play the role of a regulator in Eurasia."

Asked why he expected the U.S. to break up into separate parts, he said: "A whole range of reasons. Firstly, the financial problems in the U.S. will get worse. Millions of citizens there have lost their savings. Prices and unemployment are on the rise. General Motors and Ford are on the verge of collapse, and this means that whole cities will be left without work. Governors are already insistently demanding money from the federal center. Dissatisfaction is growing, and at the moment it is only being held back by the elections and the hope that Obama can work miracles. But by spring, it will be clear that there are no miracles."

He also cited the "vulnerable political setup", "lack of unified national laws", and "divisions among the elite, which have become clear in these crisis conditions."

He predicted that the U.S. will break up into six parts - the Pacific coast, with its growing Chinese population; the South, with its Hispanics; Texas, where independence movements are on the rise; the Atlantic coast, with its distinct and separate mentality; five of the poorer central states with their large Native American populations; and the northern states, where the influence from Canada is strong.

He even suggested that "we could claim Alaska - it was only granted on lease, after all."

On the fate of the U.S. dollar, he said: "In 2006 a secret agreement was reached between Canada, Mexico and the U.S. on a common Amero currency as a new monetary unit. This could signal preparations to replace the dollar. The one-hundred dollar bills that have flooded the world could be simply frozen. Under the pretext, let's say, that terrorists are forging them and they need to be checked."

When asked how Russia should react to his vision of the future, Panarin said: "Develop the ruble as a regional currency. Create a fully functioning oil exchange, trading in rubles... We must break the strings tying us to the financial Titanic, which in my view will soon sink."

Panarin, 60, is a professor at the Diplomatic Academy of the Russian Ministry of Foreign Affairs, and has authored several books on information warfare.

Source - RIA Novosti


Dubai - Boom To Gloom

The seaside emirate of Dubai shifted into crisis mode this week as its breakneck building boom stalled, its lending bonanza evaporated and the government pondered wider steps to rescue banks.

Dubai -- self-styled bling capital of the Middle East, nightclub hotspot for the teetotalling Gulf and home to the world's tallest building and biggest mall -- has gone pear-shaped.

"It's gotten pretty ugly out there," analysts at Nomura Investment Banking wrote in a note this week, describing Dubai's property market as "a full-scale frenzy in which speculation went largely unchecked until it was very late."

The result may be a new business model for the emirate, one based less on debt and speculation.

Dubai's response is now being hammered out by a committee of business and government leaders charged with steering the emirate through the crisis and perhaps throwing its high-debt business model out the window.

Big developers have started firing staff and paring projects, banks like Emirates NBD ENBD.DU have blocked consumer credit to employees of companies at risk, and at least one major mortgage company has stopped lending altogether.

"Lenders blinded by rising oil prices and borrowers spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance," Nomura said.

Now, investors fear that individuals and corporations alike will have trouble paying back Dubai's non-bank foreign currency debt estimated at just under $70 billion, according to estimates by ratings agency Fitch.

Shares in the region have lost around $1 trillion since the beginning of the year as investors fled. The UAE finance ministry said last month it would inject 70 billion dirhams ($19 billion) into the banking system, and is already looking at doing more to keep interbank liquidity flowing.

Many had hoped that the six countries of the Gulf Cooperation Council (GCC) would escape the crisis due to their massive current account surpluses from energy exports.

"Dubai is the most vulnerable, as it has little oil and has been booming on the oil surpluses from the GCC, Iran and Russia," said analysts at Citibank this week.


Dubai Inc. -- the name applied to the emirate because it is run more as a business than a state -- now faces a major overhaul and has taken on teams of consultants to advise on how it might reshape itself in an era of weaker credit, rising competition, falling speculation and narrower profit margins.

With barely any oil to call its own within the loose UAE confederation, Dubai made its bid for fame by housing banks, retail, media, shipping and logistics enterprises and by billing itself as a safe haven in a volatile region for investors.

Post-crisis, banks and property firms are likely to merge, developers retrench, and the wild culture of speculation grow tame.

"The solution is a comprehensive effort to consolidate the myriad of companies that make up Dubai Inc.," Citibank said.

In addition, some suggest that the monetary regimes in the Gulf -- all, except Kuwait, which peg their currencies to the dollar -- may need to restructure as floating regimes instead, a move likely to spur decades-old goals of monetary union.

Few anticipate default given the widespread view that Dubai is too big to fail and the implicit support provided by its neighbor Abu Dhabi -- home to the largest sovereign wealth fund in the world, ADIA.

"We believe Dubai will pull through with some help," Citibank said.

But with the cost of credit for the Gulf's top 22 financial firms rising from 30 basis points over LIBOR in early 2007 to around 200 now, many expect Dubai's spree to halt, plans to be swept from the drawing board, and existing projects to struggle.

The result, in the end, may be the sustainable growth model that Dubai has sought all along.

Source - Reuters


Bank Of America Next

A government rescue plan has eased investors' concerns about Citigroup Inc, but mines lurking in the balance sheets of rivals including
Bank of America Corp could still tempt short-sellers.

Bank of America, the No 3 US bank by assets, has loaded up on mortgages as the world's largest economy wrestles with the worst housing market since the Great Depression.

The Charlotte, North Carolina-based bank further heightened its exposure to home loans by acquiring Countrywide Financial Corp, the largest US independent mortgage lender and agreeing to buy Merrill Lynch & Co, which owns the world's largest retail brokerage.

If losses on mortgages and other debt securities mount significantly, the bank may see the ratio of equity to risk-weighted assets, known as Tier-1 capital, dwindle to alarmingly low levels.

"I would expect there are more banks who are in dire straits and more who can expect to be helped," said Michael Farr, president of investment management company Farr, Miller & Washington in Washington, D.C. "The share price makes it look like Bank of America might be next in line," he said.

Before Monday's stock market rally, Bank of America shares had lost 52 per cent in November alone, making them the second biggest decliner for the month in the KBW Banks index after Citigroup.

Source - Reuters

Tuesday, November 25, 2008


Funny Money For All - $ 7.76 Trillion On Bailouts

The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

“Whether it’s lending or spending, it’s tax dollars that are going out the window and we end up holding collateral we don’t know anything about,” said Congressman Scott Garrett, a New Jersey Republican who serves on the House Financial Services Committee. “The time has come that we consider what sort of limitations we should be placing on the Fed so that authority returns to elected officials as opposed to appointed ones.”

Too Big to Fail

Bloomberg News tabulated data from the Fed, Treasury and Federal Deposit Insurance Corp. and interviewed regulatory officials, economists and academic researchers to gauge the full extent of the government’s rescue effort.

The bailout includes a Fed program to buy as much as $2.4 trillion in short-term notes, called commercial paper, that companies use to pay bills, begun Oct. 27, and $1.4 trillion from the FDIC to guarantee bank-to-bank loans, started Oct. 14.

William Poole, former president of the Federal Reserve Bank of St. Louis, said the two programs are unlikely to lose money. The bigger risk comes from rescuing companies perceived as “too big to fail,” he said.

‘Credit Risk’

The government committed $29 billion to help engineer the takeover in March of Bear Stearns Cos. by New York-based JPMorgan Chase & Co. and $122.8 billion in addition to TARP allocations to bail out New York-based American International Group Inc., once the world’s largest insurer.

Citigroup received $306 billion of government guarantees for troubled mortgages and toxic assets. The Treasury Department also will inject $20 billion into the bank after its stock fell 60 percent last week.

“No question there is some credit risk there,” Poole said.

Congressman Darrell Issa, a California Republican on the Oversight and Government Reform Committee, said risk is lurking in the programs that Poole thinks are safe.

“The thing that people don’t understand is it’s not how likely that the exposure becomes a reality, but what if it does?” Issa said. “There’s no transparency to it so who’s to say they’re right?”

The worst financial crisis in two generations has erased $23 trillion, or 38 percent, of the value of the world’s companies and brought down three of the biggest Wall Street firms.

Markets Down

The Dow Jones Industrial Average through Friday is down 38 percent since the beginning of the year and 43 percent from its peak on Oct. 9, 2007. The S&P 500 fell 45 percent from the beginning of the year through Friday and 49 percent from its peak on Oct. 9, 2007. The Nikkei 225 Index has fallen 46 percent from the beginning of the year through Friday and 57 percent from its most recent peak of 18,261.98 on July 9, 2007. Goldman Sachs Group Inc. is down 78 percent, to $53.31, on Friday from its peak of $247.92 on Oct. 31, 2007, and 75 percent this year.

Regulators hope the rescue will contain the damage and keep banks providing the credit that is the lifeblood of the U.S. economy.

Most of the spending programs are run out of the New York Fed, whose president, Timothy Geithner, is said to be President- elect Barack Obama’s choice to be Treasury Secretary.

‘They Got Snookered’

The money that’s been pledged is equivalent to $24,000 for every man, woman and child in the country. It’s nine times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office figures. It could pay off more than half the country’s mortgages.

“It’s unprecedented,” said Bob Eisenbeis, chief monetary economist at Vineland, New Jersey-based Cumberland Advisors Inc. and an economist for the Atlanta Fed for 10 years until January. “The backlash has begun already. Congress is taking a lot of hits from their constituents because they got snookered on the TARP big time. There’s a lot of supposedly smart people who look to be totally incompetent and it’s all going to fall on the taxpayer.”

President Franklin D. Roosevelt’s New Deal of the 1930s, when almost 10,000 banks failed and there was no mechanism to bolster them with cash, is the only rival to the government’s current response. The savings and loan bailout of the 1990s cost $209.5 billion in inflation-adjusted numbers, of which $173 billion came from taxpayers, according to a July 1996 report by the U.S. General Accounting Office, now called the Government Accountability Office.

‘Worst Crisis’

The 1979 U.S. government bailout of Chrysler consisted of bond guarantees, adjusted for inflation, of $4.2 billion, according to a Heritage Foundation report.

The commitment of public money is appropriate to the peril, said Ethan Harris, co-head of U.S. economic research at Barclays Capital Inc. and a former economist at the New York Fed. U.S. financial firms have taken writedowns and losses of $666.1 billion since the beginning of 2007, according to Bloomberg data.

“This is the worst capital markets crisis in modern history,” Harris said. “So you have the biggest intervention in modern history.”

Bloomberg has requested details of Fed lending under the U.S. Freedom of Information Act and filed a federal lawsuit against the central bank Nov. 7 seeking to force disclosure of borrower banks and their collateral.

Collateral is an asset pledged to a lender in the event a loan payment isn’t made.

‘That’s Counterproductive’

“Some have asked us to reveal the names of the banks that are borrowing, how much they are borrowing, what collateral they are posting,” Bernanke said Nov. 18 to the House Financial Services Committee. “We think that’s counterproductive.”

The Fed should account for the collateral it takes in exchange for loans to banks, said Paul Kasriel, chief economist at Chicago-based Northern Trust Corp. and a former research economist at the Federal Reserve Bank of Chicago.

“There is a lack of transparency here and, given that the Fed is taking on a huge amount of credit risk now, it would seem to me as a taxpayer there should be more transparency,” Kasriel said.

Bernanke’s Fed is responsible for $4.74 trillion of pledges, or 61 percent of the total commitment of $7.76 trillion, based on data compiled by Bloomberg concerning U.S. bailout steps started a year ago.

“Too often the public is focused on the wrong piece of that number, the $700 billion that Congress approved,” said J.D. Foster, a former staff member of the Council of Economic Advisers who is now a senior fellow at the Heritage Foundation in Washington. “The other areas are quite a bit larger.”

Fed Rescue Efforts

The Fed’s rescue attempts began last December with the creation of the Term Auction Facility to allow lending to dealers for collateral. After Bear Stearns’s collapse in March, the central bank started making direct loans to securities firms at the same discount rate it charges commercial banks, which take customer deposits.

In the three years before the crisis, such average weekly borrowing by banks was $48 million, according to the central bank. Last week it was $91.5 billion.

The failure of a second securities firm, Lehman Brothers Holdings Inc., in September, led to the creation of the Commercial Paper Funding Facility and the Money Market Investor Funding Facility, or MMIFF. The two programs, which have pledged $2.3 trillion, are designed to restore calm in the money markets, which deal in certificates of deposit, commercial paper and Treasury bills.

Lehman Failure

“Money markets seized up after Lehman failed,” said Neal Soss, chief economist at Credit Suisse Group in New York and a former aide to Fed chief Paul Volcker. “Lehman failing made a lot of subsequent actions necessary.”

The FDIC, chaired by Sheila Bair, is contributing 20 percent of total rescue commitments. The FDIC’s $1.4 trillion in guarantees will amount to a bank subsidy of as much as $54 billion over three years, or $18 billion a year, because borrowers will pay a lower interest rate than they would on the open market, according to Raghu Sundurum and Viral Acharya of New York University and the London Business School.

Congress and the Treasury have ponied up $892 billion in TARP and other funding, or 11.5 percent.

The Federal Housing Administration, overseen by Department of Housing and Urban Development Secretary Steven Preston, was given the authority to guarantee $300 billion of mortgages, or about 4 percent of the total commitment, with its Hope for Homeowners program, designed to keep distressed borrowers from foreclosure.

Federal Guarantees

Most of the federal guarantees reduce interest rates on loans to banks and securities firms, which would create a subsidy of at least $6.6 billion annually for the financial industry, according to data compiled by Bloomberg comparing rates charged by the Fed against market interest currently paid by banks.

Not included in the calculation of pledged funds is an FDIC proposal to prevent foreclosures by guaranteeing modifications on $444 billion in mortgages at an expected cost of $24.4 billion to be paid from the TARP, according to FDIC spokesman David Barr. The Treasury Department hasn’t approved the program.

Bernanke and Paulson, former chief executive officer of Goldman Sachs, have also promised as much as $200 billion to shore up nationalized mortgage finance companies Fannie Mae and Freddie Mac, a pledge that hasn’t been allocated to any agency. The FDIC arranged for $139 billion in loan guarantees for General Electric Co.’s finance unit.

Automakers Struggle

The tally doesn’t include money to General Motors Corp., Ford Motor Co. and Chrysler LLC. Obama has said he favors financial assistance to keep them from collapse.

Paulson told the House Financial Services Committee Nov. 18 that the $250 billion already allocated to banks through the TARP is an investment, not an expenditure.

“I think it would be extraordinarily unusual if the government did not get that money back and more,” Paulson said.

In his Nov. 18 testimony, Bernanke told the House Financial Services Committee that the central bank wouldn’t lose money.

“We take collateral, we haircut it, it is a short-term loan, it is very safe, we have never lost a penny in these various lending programs,” he said.

A haircut refers to the practice of lending less money than the collateral’s current market value.

Requiring the Fed to disclose loan recipients might set off panic, said David Tobin, principal of New York-based loan-sale consultants and investment bank Mission Capital Advisors LLC.

‘Mark to Market’

“If you mark to market today, the banking system is bankrupt,” Tobin said. “So what do you do? You try to keep it going as best you can.”

“Mark to market” means adjusting the value of an asset, such as a mortgage-backed security, to reflect current prices.

Some of the bailout assistance could come from tax breaks in the future. The Treasury Department changed the tax code on Sept. 30 to allow banks to expand the deductions on the losses banks they were buying, according to Robert Willens, a former Lehman Brothers tax and accounting analyst who teaches at Columbia University Business School in New York.

Wells Fargo & Co., which is buying Charlotte, North Carolina-based Wachovia Corp., will be able to deduct $22 billion, Willens said. Adding in other banks, the code change will cost $29 billion, he said.

“The rule is now popularly known among tax lawyers as the ‘Wells Fargo Notice,’” Willens said.

The regulation was changed to make it easier for healthy banks to buy troubled ones, said Treasury Department spokesman Andrew DeSouza.

House Financial Services Committee Chairman Barney Frank said he was angry that banks used the money for acquisitions.

“The only purpose for this money is to lend,” said Frank, a Massachusetts Democrat. “It’s not for dividends, it’s not for purchases of new banks, it’s not for bonuses. There better be a showing of increased lending roughly in the amount of the capital infusions” or Congress may not approve the second half of the TARP money.

Source - Bloomberg

Friday, November 21, 2008


Hat In Hand

The United States has asked four oil-rich Gulf states for close to 300 billion dollars to help it curb the global financial meltdown, Kuwait's daily Al-Seyassah reported Thursday.

Quoting "highly informed" sources, the daily said Washington has asked Saudi Arabia for 120 billion dollars, the United Arab Emirates for 70 billion dollars, Qatar for 60 billion dollars and was seeking 40 billion dollars from Kuwait.

Al-Seyassah said Washington sought the amount as "financial aid" to face the fallout of the financial crisis and help prevent its economy from sliding into a painful recession.

The daily said the United States plans to use the funds to help the ailing automobile industry, banks and other companies suffering from the global financial turmoil.

The four nations, all members of OPEC, produce together 14 million barrels of oil per day, around half of the cartel's production and about 17 percent of world supplies.

The four states are estimated to have amassed close to 1.5 trillion dollars in surplus in the past six years due to high oil prices that rocketed above 147 dollars in July before sliding to just above 50 dollars.

The daily also said that the United States has asked Kuwait to forgive its Iraqi debt estimated at around 16 billion dollars.

Source - Yahoo

Thursday, November 20, 2008


Citigroup Is Dying

Citigroup Inc faced a crisis of confidence on Wednesday as investors questioned the survival prospects of the U.S. banking giant, and its shares tumbled 23 percent to a 13-year low.

The second-largest U.S. bank by assets has been reeling on concerns that mounting losses from credit cards, mortgages and toxic debt could overwhelm its efforts to slash costs and add deposits. Last month, Wells Fargo & Co dealt a blow by derailing Citigroup's bid to buy Wachovia Corp.

Citigroup shares closed down $1.96 at $6.40 on the New York Stock Exchange and have fallen 33 percent this week as some investors concluded that Chief Executive Vikram Pandit's plan to shed 52,000 jobs and cut expenses by one-fifth won't restore the bank to health.

"People are looking at their business model and wondering how on earth they're going to be able to survive," said William Larkin, a fixed-income manager at Cabot Money management in Salem, Massachusetts.

Citigroup said in a statement it has a strong capital and liquidity position, and is focused on executing its strategy, which it believes will pay off over time.

Earlier Wednesday, Citigroup agreed to buy $17.4 billion in assets remaining in some funds known as structured investment vehicles. The SIVs were among the earlier investments to implode when the global credit crunch began last year.

While shares of the New York-based bank are down 78 percent this year, trading Wednesday brought new urgency as investors viewed the bank's prospects in terms of other companies that either failed or went to the brink.

Worries about Citigroup were a key factor in U.S. stocks falling broadly Wednesday to a 5-1/2-year low.

"The whole thing echoes quite frankly of Bear Stearns," said David Dietze, chief investment officer of Point View Financial Services in Summit, New Jersey.

Bear Stearns narrowly avoided failure this year when JPMorgan Chase & Co bought the investment bank in a government-backed sale. "(The Bear problems) all started with them liquidating hedge funds," Dietze said. "It's quite an eerie echo."

William Smith, a portfolio manager at Smith Asset Management, referred to insurer American International Group Inc, which got a $152 billion government bailout. "It's simple. Break it up before it turns into another AIG," he said about Citigroup, which operates in more than 100 countries.

The U.S. Treasury Department declined to comment, citing its policy of not discussing individual companies.

Regulators have shown a willingness this year to intervene when banks appeared to struggle. They pushed Wachovia Corp into finding a buyer and arranged for JPMorgan to buy Washington Mutual Inc's banking assets after worried customers began to yank deposits.

"If the government stepped in, they would rescue the senior bondholders and probably the subordinated holders too, but equity is far less likely to be saved," said Sean Egan, principal of Egan-Jones Ratings Co in Haverford, Pennsylvania.


Wednesday's decline drove Citigroup's market value down to about $34.9 billion, allowing U.S. Bancorp to surpass it as the nation's fourth-largest bank by market value. U.S. Bancorp's asset base is about one-eighth as large.

Citigroup's market value is down from more than $270 billion just two years ago. It is also less than one-half the $75 billion of new capital that Citigroup has raised since the credit crisis began, including $25 billion through Treasury Secretary Henry Paulson's financial industry rescue package.

Other bank shares also declined, including 11.4 percent at JPMorgan, 10.3 percent at Wells Fargo and 14 percent at Bank of America Corp, the largest banks by market value.

US Bancorp fell 8.2 percent. Wachovia fell 13.1 percent, and Merrill Lynch & Co Inc, which Bank of America plans to buy, fell 15.8 percent.

Investor worries about the banking sector swirled after Credit Suisse analysts said two big, new commercial loans were near default. That fanned fears that credit deterioration that has already saturated the residential mortgage market and worsened in credit cards was heading to a major new sector -- commercial real estate.

New government data showed that consumer prices dropped in October at the fastest pace ever, while housing starts that month were the fewest on record. And minutes released Wednesday of the Federal Reserve's October 28-29 meeting show that the central bank believes the economy could contract next year.


"The financial industry is under assault," said Tom Sowanick, chief investment officer for Clearbrook Financial LLC in Princeton, New Jersey. "It looks like the short-sellers are squeezing the hell out of Citi shares.

"The way the stock is trading today," he continued, "it is clear that investors have lost confidence in what chief executive Vikram Pandit has to say and confidence in how he picks stocks including his own. Last week Pandit bought 750,000 common shares in Citi, days before he announced problems at a Citi hedge fund and 52,000 layoffs. Good going Vikram."

Fixed-income investors grew less confident that Citigroup can pay its debts.

The cost to insure $10 million of Citigroup debt against default for five years rose to $360,000 annually from $240,000 on Tuesday, according to Phoenix Partners Group.

Citigroup's 6.5 percent notes maturing in 2013 yielded 5.86 percentage points more than U.S. Treasuries, up from 5.19 percentage points, according to MarketAxess.

Citigroup, JPMorgan and Bank of America are in the Dow Jones industrial average. They have lost close to $500 billion of market value from their recent highs -- Bank of America in November 2006, Citigroup the next month, and JPMorgan in May 2007.

Source - Reuters


G-20 Statement - In English

Here's a “translation” of the official statement:

1. Now that the growth of debt and derivatives bubbles has stalled, we are committed to using governmental-central bank mechanisms to cover the positions of any of the large private financial institutions whose profits are at risk due to their management of these bubbles and who can use this opportunity to squeeze and acquire smaller rivals at low cost.

2. Our commitment to use derivatives and market interventions to shift investment from the real economy and commodities into a paper economy is firm. We will continue to use centralized governmental mechanisms to subsidize and manage this process.

3. All of the organizations and players who reaped a fortune engineering the debt and derivatives bubbles will be allowed to keep their winnings.

4. We will use this period of consolidation to further centralize the global financial system by enforcing greater centralization of the standards, practices and control of enforcement and regulatory bureaucracies. This increased governmental centralization will be presented as the “fix” for our “problems.”

5. We will continue the move toward one world government and one world currency.

6. We are prepared to use coordinated inflation of global money supplies and fiscal stimulus to protect our control and positions.

7. We are committed to the Slow Burn (see below).

8. This process will continue to be managed to protect large insurance and risk positions.

9. The net result will be to continue to exercise growing control over the real economy by a handful of private families and institutions designed to protect and grow intergenerational wealth.

G-20 are silent on the military and covert action that will be required to make this stick. They are also silent on how they are going to manage this much inflation. For example, the most recent figures from the St. Louis Fed indicate that the aggregate monetary base is growing at an annualized rate of almost 800%.

Watch for a new focus on “green investing” as the trick in all of this will be how to create new productivity when the absence of real prices mean there is no market to provide the necessary signals and financial incentives.


The Slow Burn

People often ask whether I am concerned about inflation, deflation, peak oil, or a global financial meltdown. My answer is as follows.

The future is something to be created, rather than feared. Allocating our time, networks, and resources to deal with a variety of high-risk scenarios frees us to become proactive and to build positive futures instead of negative ones. I like to understand what these scenarios mean in terms of managing risk and to know how we can succeed within all possible futures.

But my business is investment, not prophecy.

The risk scenario I weight most heavily is not listed above. I call it the Slow Burn.

The “slow burn” is a political culture and economy managed through principles of economic warfare in which insiders systematically protect themselves and centralize control and ownership of resources by using:

* Central banks
* Currency and lending systems
* Taxation
* Regulatory and enforcement policies
* Controlled media and entertainment

Insiders use these means to drain the time, resources, and life of people on the outside. Although insider cartels compete and jockey for power, they are able to settle their squabbles by increasing control and draining everyone and everything else. This is why the bubble economy continues to deplete the real economy. It is likely the reason why Dick Cheney said, “Deficits don’t matter.”

In a slow burn scenario, it is possible to prop up trillions of dollars in financial asset values by systematically arranging subsidies that ultimately liquidate life. This is what “managing” markets really means: de-populating people and places to maintain phony values created and necessitated by derivative bets.

The reason why it is difficult for sophisticated financial people to discern that a slow burn is taking place is because we have not yet collectively mastered the operational detail of how it is implemented. This is an extremely important subject.

Source -


GE Sinking

General Electric (GE), the legendary American institution, founded in 1878 by Thomas Edison, is in deep trouble. Its PR machine has been in constant spin mode as the company sinks deeper into despair. It is one of the few companies in the U.S. that still retains a AAA rating. Considering Moody’s and S&P’s track record, rating companies and financial instruments, that AAA rating is not worth the paper it is written on. One look at GE’s balance sheet will convince you they do not deserve a AAA rating. AAA companies do not need to take the desperate actions that GE has taken in the last few months.

The virtual crash in its stock price indicates that there is something seriously wrong with GE. The stock reached $53 at its peak in 2000. It closed below $17 this past week, the lowest level since the mid-1990s. CEO Jeffrey Immelt, who took over from icon Jack Welch in 2001, has made his mark by managing the company to a 68% decline in its stock price. You will not see anyone on CNBC take a hard look at GE’s financial statements or ask the CEO tough questions, because Mr. Immelt signs their paychecks. While shareholders have taken a bath, Mr. Immelt, a Harvard MBA, raked in $72.2 million of compensation between 2002 and 2007. A company that is known for its pay for performance mantra evidently does not hold its CEO to the same standards.

The first signs of cracks in this global institution appeared in April 2008. GE has met their earnings projections consistently for decades. It is widely known that they are masters of “legal” earnings manipulation. Accounting rules allow for wide discretion in reserves and estimates. GE Capital has always been a black box within the larger company. GE does not provide detailed financial information about this division. This lack of detail has allowed GE to use this division as its backstop for meeting earnings estimates. During a better than expected quarter, they take extra reserves and have the quarter meet estimates or beat by one cent. During a down quarter, they use those excess reserves to meet estimates. The GE Capital division would also sell liquid assets at the end of a quarter to guarantee smooth sailing. This earnings management had lulled analysts and stockholders into being complacent regarding GE’s business.

In mid-March Mr. Immelt confirmed publicly that GE would meet earnings expectations of $.50 to $.53 per share for the quarter ending March 31. With 2 weeks left in a 12 week quarter, Mr. Immelt was confident in their results. When GE reported earnings of $.44 per share in early April, the world was shocked. The stock, which had reached a yearly high of $37, dropped 16% to $31. Knowing that GE always has excess reserves to manage their earnings, with only two weeks left in the quarter, made the magnitude of the earnings miss beyond belief. Former CEO Jack Welch went on CNBC and said, “I’d be shocked beyond belief, and I’d get a gun out and shoot him if he doesn’t make what he promised now. Here’s the screw-up: you made a promise that you’d deliver this, and you missed three weeks later. Jeff has a credibility issue.” Mr. Welch is absolutely right. Jeffrey Immelt has no credibility left. His excuse was, "We had planned for an environment that was going to be challenging...[but] after the Bear Stearns event, we experienced an extraordinary disruption in our ability to complete asset sales and incurred marks of impairments and this was something that we clearly didn't see until the end of the quarter." A top CEO should have a better handle on his business.

The next daggers into Mr. Immelt’s credibility occurred in late September and early October. On September 25, with the stock trading at $25.50, Jeff Immelt lowered GE’s earnings guidance, suspended its $15 billion stock buyback plan and declared they needed no outside capital. He reaffirmed their commitment to maintaining a AAA rating with these actions. One week later he convinced Warren Buffett to invest $3 billion in the company by paying him an annual dividend of 10% while granting him warrants to purchase $3 billion of common stock at $22.25. It then sold $12 billion of additional shares at $22.25 to the public. These were not the actions of a company or CEO that is in control. AAA rated companies do not have to pay 10% interest rates. Credit default swaps protecting against GE Capital default traded as if GE is a junk bond credit.

The issuing of $12 billion in common stock at $22.25 per share is an act of extreme desperation and brings into question whether GE has a lucid strategy. How can investors have confidence in a company that bought back 97 million shares for $3.1 billion at an average price of $31.69 in the first nine months of 2008, and then issued $12 billion worth of stock at $22.25 in October? Not only did they buyback $3.1 billion of stock in 2008, but they also bought back $27 billion of stock in the prior three years at an average price of $36.46. This is a twist on the old saying, buy high and sell low. If Mr. Immelt was not so focused on trying to beat short term earnings goals by wasting $30 billion of cash on share buybacks, he wouldn’t have had to beg Warren Buffett for $3 billion last month at very poor terms from GE’s perspective. A CEO is responsible for preparing their company for a worst case scenario and should never risk the company in an attempt to meet short term goals. Mr. Buffett may have made one of the few mistakes of his glorious investing career. He has lost $762 million on his investment in 1 ½ months, a return of -25%.

Most people know GE as an industrial conglomerate that makes light bulbs, appliances, and jet engines. Their advertising agency has positioned GE as a “green” company with an advertising campaign called “Ecomagination”, stressing wind power, hybrid locomotives, and environmentally friendly products. The truth is that GE should have an ad campaign called “Bankomagination”. GE is a bank disguised as an industrial conglomerate. GE Capital is a division of GE, which truly dominates the results of this company. GE Capital has three subdivisions (GE Commercial Finance, GE Money, and GE Consumer Finance). In 2003, GE Capital generated $5.9 billion of GE’s $17 billion of profits, or 35%. By 2007, GE Capital was generating $12.2 billion of their $29 billion of profits, or 42%. Being a bank during the boom years of 2004 to 2007 did wonders for GE’s bottom line. Being a bank now is a rocky path to destruction.

GE Capital is enormously leveraged to consumers throughout the world. It issues credit cards for Wal-Mart, Lowe’s, IKEA, and hundreds of other retailers throughout the world. GE Capital provides private label credit card programs, installment lending, bankcards and financial services for customers, retailers, manufacturers and health-care providers. It also owns 1,800 commercial airplanes and leases them to 225 airlines worldwide. GE Capital provides credit services to more than 130 million customers — like retailers, consumers, auto dealers and mortgage lenders. Their financial products and services include a suite of offerings, from credit cards to debt consolidation to home equity loans. GE Capital has also been a huge benefit to the industrial side of the business. GE Capital provides financing for customers that buy GE power turbines, jet engines, windmills, locomotives and other big ticket items. The crucial question is whether the people and companies who received loans from GE Capital can pay them back. GE’s future is highly dependent on the answer to this question.

The AAA rating of GE allows GE Capital to borrow funds at lower rates than all banks in the United States. Their cost of capital has been 7.3%. Losing that rating would be disastrous to GE Capital. Between 2002 and 2006, GE Capital did what most other banks did and levered up. Their ratio of debt to equity rose from 6.6 to 8.1, while profits quadrupled. GE Capital jumped into the subprime mortgage market in 2004, buying WMC Mortgage. It sold it in 2007, after racking up losses of $1 billion in 2007. It also unloaded a Japanese consumer lending company at a $1.2 billion loss in 2007. It is clear that risk management has taken a back seat to profits at GE Capital. GE Capital’s profits plunged 38% in the 3rd quarter, the main reason for GE’s earnings miss. Analyst Nicholas Heymann of Sterne Agee wrote: "Investors now understand that GE uses the last couple weeks in the quarter to 'fine-tune' its financial service portfolios to ensure its earnings objectives are achieved. It turns out it really wasn't miracle management systems or risk-control systems or even innovative brilliance. It was the green curtain that allowed the magic to be consistently performed undetected."

Egan-Jones, an independent rating agency, calculates that GE is levered ten-to-one, a more conservative and higher number than the company's eight-to-one figure. Cofounder Sean Egan believes that, depending on the off-balance-sheet holdings, actual leverage could be still higher. His firm rates the company single-A. Looking at GE’s Balance Sheet between 2003 and today, clearly shows a deteriorating situation. Long-term debt grew from $172 billion in 2003 to $381 billion by the 1st quarter of 2008, a 121% increase. Their long term debt to equity ratio grew from 68% to 77%. Short-term debt grew from $157.4 billion in 2003 to $218.7 billion in the latest quarter, a 40% increase. The 70% increase in profits between 2003 and 2007 were undoubtedly juiced by the use of prodigious amounts of debt. Stockholder’s equity is at the same level as 2004. With cash of only $59.7 billion and short-term debt of $218.7 billion, the freezing up of the credit markets has put GE at major risk when trying to rollover their debt.

All indications point to a company in trouble. Mike Shedlock, a brilliant financial analyst, recently quoted an insider at GE Capital. "Sales personnel are not allowed to make any more loans this year, and are being told to try to get their customers to pay off their loans. All prepayment penalties are waved for closing loans and GE Capital is about to launch a new incentive scheme for the salespeople that makes it worth their while to get their customers to agree to participate." This sounds like the actions of a company desperately trying to pay down debt. The risks and unknowns for this company are many:

* GE announced plans during the summer to sell its lighting and appliance business. It expected to get $5 to $8 billion for these divisions. It has found no buyers.

* GE announced that it wanted to sell its private label credit card business, with $30 billion of outstanding receivables. It is not surprising that no buyers have appeared, knowing that many of these receivables are owed by subprime borrowers. GE does not provide bad debt figures for these portfolios.

* Paying Warren Buffett 10% on preferred shares when their cost of capital has been 7.3% is a sign of intense stress.

* GE has $74 billion of commercial paper outstanding that rolls over every few days. GE was rumored to not being able to rollover this paper. They are now utilizing the Fed’s short-term funding facility. This is a sign of weakness.

* GE holds $53 billion of off-balance-sheet assets that are pieces of securitized debt, some of which are hooked to interest rate swaps with counterparties that are now troubled. The value of these assets is a complete unknown, but is likely to worth far less than $53 billion.

* GE’s recent 10Q had the following disclosure: “GE Capital has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks and other institutional clients. Many of these transactions expose GE Capital to credit risk in the event of default of its counterparty or client. In addition, GE Capital’s credit risk may be exacerbated when the collateral held by it cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the loan or derivative exposure due to it.”

* Much of GE’s debt is covered by credit insurance. This insurance is virtually worthless, as the credit insurers have collapsed.

* GE has $43 billion of long-term debt maturing by June 30, 2009, with another $38 billion due by December 31, 2009. The terms for refinancing this debt will be much worse than the previous terms.

* GE convinced the U.S. government to insure $139 billion in debt for GE Capital using the new FDIC program. Why does a AAA company need a government guarantee?

* Rumors of a dividend cut have been swirling in the business press. GE spokesmen have guaranteed the dividend only through 2009. Many other banks have promised no dividend cuts in the last year, only to cut dividends a month later.

* The most hazardous unknown for GE is the global recession that will likely ravage the company in 2009. Their five main businesses (Technology Infrastructure, Energy Infrastructure, Capital Finance, NBC Universal and Consumer & Industrial) will all be under severe stress in 2009.

o Technology Infrastructure is dependent on airline and military spending. Airlines are struggling just to survive and conserve cash. The Obama administration is likely to reduce military spending dramatically.

o Energy Infrastructure is dependent on wind, oil and gas companies. With the spectacular decrease in oil prices, these companies are massively cutting capital budgets. Financing for large projects has dried up.

o Capital Finance is dependent on consumer credit, commercial lending & leasing, and real estate. This division will be overwhelmed by a tsunami of deleveraging in 2009. Consumers will be defaulting in record numbers and commercial real estate has just begun to implode.

o NBC Universal is reliant on advertising revenues from companies and consumer spending on entertainment. Every company in America will be reducing their advertising budgets in 2009 and consumer discretionary spending is collapsing.

o Consumer & Industrial is dependent on consumer’s spending money on appliances. A housing collapse has led to collapse in appliance sales, which will continue in 2009

The future does not look bright for GE. A perfect global storm will hit GE in 2009. GE is like a giant supertanker loaded with debt that is in danger of being swamped by this perfect storm. A GE collapse would not bring good things to life. It would bring about the mother of all bailouts.

Source - Seeking Alpha

Tuesday, November 18, 2008


Fight Water Privatization

Water is the new oil for global financial powerhouses and water is being commoditized and traded in global stock exchanges.

Today in addition to being able to buy water rights and purchase lakes on private land, an individual or a corporation can invest in water-targeted hedge funds, index funds and exchange-traded funds (EFTs), water certificates, shares of water engineering and technology companies, shares of multinational private water utilities, shares of multinational banks and investment banks that own water companies, and a host of other newfangled water investments in this U.S.$425 billion industry which is expected to become a U.S.$1 trillion industry within five years. And if one happens to be a tycoon, one can also create his or her own private water districts and water utilities.

The recent media coverage on water has centered on individual corporations and super-investors seeking to control water by buying up water rights and water utilities. But paradoxically the hidden story is a far more complicated one. The real story of the global water sector is a convoluted one involving "interlocking globalized capital": Wall Street and global investment firms, banks, and other elite private-equity firms -- often transcending national boundaries to partner with each other, with banks and hedge funds, with technology corporations and insurance giants, with regional public-sector pension funds, and with sovereign wealth funds -- are moving rapidly into the water sector to buy up not only water rights and water-treatment technologies, but also to privatize public water utilities and infrastructure.

"Water" and "water sector" are used broadly to refer to water rights (i.e., the right to tap groundwater, aquifers, and rivers), land with bodies of water on it or under it (i.e., lakes, ponds, and natural springs on the surface, or groundwater underneath), water-purification and treatment technologies (e.g., desalination, treatment chemicals and equipment), irrigation and well-drilling technologies, water and sanitation services and utilities, water infrastructure maintenance and construction (from pipes and distribution to all scales of treatment plants for residential, commercial, industrial, and municipal uses), water engineering services (e.g., those involved in the design and construction of water-related facilities), and retail water sector (such as those involved in the production, operation, and sales of bottled water, water vending machines, bottled water subscription and delivery services, water trucks, and water tankers).

The story is multifaceted: In the midst of a recessionary economy with a blistering financial and economic crisis, declining employment, and a shrinking tax base, many financially strapped and debt-ridden local governments are beginning to relinquish public infrastructure (including water) and municipal services (including water and sewage utilities) to privatization by Wall Street and other global investors.

At the same time, Wall Street and multinational banks are seeing water, food, energy, and public infrastructure as safe investment havens with stable returns and financially liquid assets. Simultaneously, they are waking up to the golden opportunity presented by the current reality of a thirstier, water-scarcer world caused by global climate change (and its extreme weather), rapidly depleting groundwater and aquifers, increasing water pollution, soaring water demand exerted by population increases, fast-rising agricultural and industrial uses, and crumbling water infrastructure worldwide requiring billions of dollars annually in maintenance and upgrade.

Often, the picture painted by mainstream media and water-rights activists is too simple -- that of a single corporation (such as Coca-Cola in India or Bechtel in Bolivia) "corporatizing water;" the real story is not just of flamboyant tycoons (such as U.S.'s billionaire and former oil tycoon T. Boone Pickens, or more recently, Hong Kong's real-estate billionaire Li Kai-shing, or Britain's magnate Vincent Tchenguiz) single-handedly grabbing water rights or individual corporations (e.g., Coca-Cola and Nestlé) sucking dry springs and groundwater to the detriment of poor subsistence farmers or slum-dwellers, but vastly complex global networks and partnerships of investment banks and private-equity firms linking together with other institutions (such as public-sector pension funds in Australia, Canada, and Europe; and sovereign wealth funds in the Middle East and Asia) and multinational corporations elsewhere to buy up and control water worldwide.

Not only are individual corporations buying up water but a deluge of globalized capital are also rapidly buying up water and consolidating their foothold in the water sector; these capital entities are investment powerhouses such as Goldman Sachs, JPMorgan Chase, Merrill Lynch (before it was sold to Bank of America), Citigroup, Morgan Stanley, Deutsche Bank, Credit Suisse, Macquarie Bank, Allianz SE, UBS AG, HSBC Bank, Alinda Capital, The Carlyle Group, Barclays Bank, Nomura Holdings, and many others. In fact, Wall Street and their global banking and corporate partners are aggressively buying up water all over the world.

Given this recent liquid-gold rush by private (also several public pension-funds) capital, it will be extremely difficult for environmental activists and human rights advocates who called water a basic human right and a public good which should be under public control to reverse this privatization trend. Naturally, when governments are financially strained by revenue shortfalls and tightening municipal-bond markets, calls for privatization of existing public infrastructure and utilities will be louder and harder to resist.

These banks and investment funds are aggressively entering the water sector, and they have raised billions of dollars for their water and infrastructure specialty investment funds (i.e., index funds, hedge funds) -- and they can recruit more money (in euro, pound sterling, dollar, RMB/yuan, yen, Australian or Canadian dollar, and whatever currency needed) within a short period of time from anywhere in the world, transcending all boundaries (whether national, ideological, political, linguistic, religious).

All this water-market reshaping is occurring in the midst of a global frenzy over privatization of public infrastructure -- considered to be low-risk investments -- such as roads, bridges, tunnels, ports, airports, gas, and water and sewage treatment. Water is one of the critical infrastructures, and Wall Street knows it. For Wall Street and global capital, water is also so much more -- it is the new petroleum of this century, an essential commodity to be invested, owned, controlled, and speculated upon to maximize profit.

Unfortunately, for water users everywhere, a likely consequence of Wall Street and multinational corporations' ownership and control of water in the midst of a global financial and economic crisis is that they will attempt to recapture their massive losses in their risky investments in the financial and housing/real estate sectors and elsewhere at the expense of water users.

For example, U.K. water customers are being squeezed by their private water utilities, to the tune of 17.5 percent to 62.2 percent increases in water rates, and could be paying as much as £1,000 in annual water bill per household within five years. Predictably, when Merrill Lynch boasts that its ML China Water Index yields a 102.2 percent returns, outperforming the benchmark by 70.7 percent during a 12-month period from 2006 to 2007, other multinational banks will also rush to invest in the water sector because they see it as a haven with rich rewards and expect these stratospheric returns. One possible outcome is the squeezing of water end-users.

Private water utilities are monopolies and they are able to set prices at will (or exert monopolistic pricing) due to a lack of competition and governmental regulations. Additionally, water itself is an essential good without a substitute; demand for water is also inelastic relative to price: regardless of its cost, one must have minimal amount of freshwater for maintaining daily life -- for drinking, washing and hygiene, crop production, and food preparation. (Goldman Sachs sees water consumption doubling every 20 years.)

If the history of U.K.'s water privatization is a guide, then water users all over the world -- not just households, but also businesses, industries, and agriculture -- are in serious trouble because they will be held hostage to high prices exerted by the monopolistic private water corporations and water utilities, many of which are owned by multinational banks and investment banks, and in turn these banking institutions have their shareholders, private investors, and even public pension funds demanding and expecting high returns on their water investments.

Water is more important than oil: it takes some 1,800 gallons to produce a barrel of crude oil, some 4,000 liters of water to produce a liter of ethanol, and 900 liters of water to make a liter of biodiesel. Several people have already made the statement about water being the new oil of the 21st century; recognizing its importance, Wall Street has rushed into global water markets to cash in on this liquid gold. The former heads of state, United Nations chiefs, CIA and Pentagon analysts, CEOs, tycoons, analysts with the world's largest investment banks and private-equity firms, and oil companies' executives have agreed on this.

Multinational and Wall Street banks and investment banks often disguise their investment in the water sector as a part of the so-called green, sustainable, environmentally friendly, socially responsible, clean-technology, climate friendly or global warming-reducing investments. They see "rich rewards" in water and infrastructure: Indeed, the European Union requires an investment of between U.S.$150 billion to U.S.$215 billion in sanitation infrastructure; more than U.S.$700 billion (incidentally, this is also the amount just given to bail out Wall Street) is needed to maintain and upgrade its water and sanitation infrastructure in the next 20 years. In Australia, an estimated AUD$5 billion is needed just to replace aging water assets in cities over the next five years and that AUD$30 billion is required to build new water infrastructure in the next decade.

Emerging economies such as China and India also have such serious water shortages and pollution problems that they both require at least a trillion dollars of investment to solve their respective water problems. Water-sector investment opportunities are also immense in Mexico, Egypt, the Middle East, Brazil, several African countries, and many other water-stressed nations.

Why Water Is the "Petroleum for the 21st Century"

Only 2.5 percent of the earth's water is freshwater -- and of that 2.5 percent, 70 percent is locked in the glaciers, ice caps, and aquifers, so less than 1 percent of world's freshwater (or 0.007 percent of world's water) is accessible and potable for humanity, to be shared by the world's 6.7 billion people, the myriads of wildlife and ecosystems, and humans' agriculture and industries.

Back in 2001, the CIA had already estimated that by 2015, almost half of the world's population will live in water-stressed countries. Worldwide, 1.1 billion people lack adequate water and 2.6 billion people don't have adequate sanitation. By 2025, the United Nations forecast that 3 billion people will lack clean water. The Organization for Economic Corporation & Development (OECD) predicts that nearly 50 percent of the world's population will face severe water shortages by 2030. In China, some 360 out of 600 cities are facing water shortages, with 100 facing severe shortages, according to China Institute for Geo-Environment Monitoring. The first person to serve as China's Minister of State Environmental Protection Agency, Qu Geping, said, "The ideal population for China's limited water resources is no more than 650 million people." China's population is 1.3 million in 2008.

Water is often dubbed "the new oil" because of its similarity to oil: diminishing supplies and rapidly growing demand worldwide. The world has already seen many oil wars in the 20th century over supposed dwindling supplies of natural commodities and resources. This century, the world has already witnessed the genocide in Darfur, which was initially brought about by climate-induced droughts and desertification lasting more than 20 years (since the 1980s), which led to tribal competition over water and grazing land between Arab nomads and black African farmers; these small-scale resource conflicts eventually exploded into a full-blown genocide backed by a racist, genocidal ideology.

Indeed, lobbying group Justice Africa told BBC in July 2007 that "the root cause of the conflict is resources -- drought and desertification in North Darfur." In June 2007, UN Environmental Programme (UNEP) said that peace in Darfur is nearly impossible unless the issues of environmental destruction were addressed.

Water is the basis of agriculture -- not just in growing food, but also in processing food. Water is the foundation of modern cities and urban sanitation systems -- from our indoor plumbing to centralized wastewater-treatment plants. Water is the basis of industries and manufacturing. Water is also used to generate electricity. Water sustains nature and wildlife. In essence, humanity can live without oil -- albeit more primitively -- but humanity cannot survive without water.

Simply put, without water, there's no agriculture and food production, no industries, no viable ecosystems, and no life. Major multinational banks and corporations around the world are waking up to the reality of water's emerging scarcity, which can disrupt national economies and lead to social and political chaos. In the midst of global climate change which brings extreme droughts and in the midst of a chaotic global financial and economic environment, water is a commodity likened to gold: it is liquid gold that sustains life. Hence, in the recent few years we have witnessed a mad rush by Wall Street and multinational banks and super-investors elsewhere to buy up and control this commodity.

In the past few years, multinational and Wall Street investment firms and banks have launched water-targeted investment funds. Several well-known specialized water funds include Pictet Water Fund, SAM Sustainable Water Fund, Sarasin Sustainable Water Fund, Swisscanto Equity Fund Water, and Tareno Waterfund. Several structured water products offered by major investment banks include ABN Amro Water Stocks Index Certificate, BKB Water Basket, ZKB Sustainable Basket Water, Wagelin Water Shares Certificate, UBS Water Strategy Certificate, and Certificate on Vontobel Water Index. There are also several water indexes and index funds, as follows:

One often-heard reason for the investment banks' rush to control of water is that, "Utilities are viewed as relatively safe assets in an economic downturn so [they] are more isolated than most from the global credit crunch, initially sparked by concerns over U.S. subprime mortgages," according to a 2007 Reuters article. A London-based analyst at HSBC Securities told Bloomberg News that water is a good investment because, "You're buying something that's inflation proof and there's no threat to earnings really. It's very stable and you can sell it any time you want.''

The Coming Tidal Wave of Privatization of Public Infrastructure and Municipal Services

Privatization of public infrastructure -- including water utilities -- has been gaining more mainstream media scrutiny recently. For example, the New York Times recently reported on cities debating the issue of privatization of public infrastructure: Wall Street investment banks and investors -- such as Goldman Sachs, Morgan Stanley, Credit Suisse, Kohlberg Kravis Roberts, and the Carlyle Group -- are amassing an estimated U.S.$250 billion "war chest -- much of it raised in the last two year -- to finance a tidal wave of infrastructure projects in the United States and overseas," the New York Times reported.

As the New York Times pointed out correctly, U.S. federal, state, and local governments are financially strained with "mounting deficits that have curbed their ability to improve crumbling roads, bridges and even airports with taxpayer money," hence both the voting public and the governments are increasingly open to the idea of privatizing public infrastructure; the crumbling infrastructure is estimated to require at least U.S.$1.6 trillion investment in the next five years to maintain and upgrade according to the American Society of Civil Engineers.

Currently, approximately 8 percent of water utilities worldwide are in private hands; this figure is expected to double by 2015, according to several investment-banking analysts. As for water corporations (e.g., those in technology and engineering, materials and equipment, vending and private distribution via water trucks), all are in private hands. According to data compiled by Bloomberg, the rate of infrastructure privatization for all types of infrastructure almost doubled to U.S.$340 billion between 2005 and 2007.

The New York Times also reported that many cities suffering severe financial strains after having been shut out of the municipal bond markets are cutting back infrastructure upgrade and maintenance projects. Cities are also facing revenue shortfalls attributable to unprecedented housing foreclosures (shrinking property-tax base), decreased employment base, dwindling sales taxes, and reduced funding from state and federal governments. For example, Athens-Clarke County in Georgia delayed a U.S.$221 million bond issue for upgrading its three sewage-treatment plants after Lehman Brothers filed for bankruptcy.

Given the current state of economy in the United States and elsewhere in the world, we can expect more municipal infrastructure and services privatization. Goldman Sachs, Citigroup, the Carlyle Group, AIG Highstar Capital, Credit Suisse (also partnering with GE), UBS AG, JPMorgan Chase, Deutsche Bank, and other multinational banks are amassing "war chests" of several billions of dollars in anticipation of this "tidal wave" of infrastructure (including water) privatization around the world.

Source - Alternet


Monday, November 17, 2008

Dark Days For Europe

Lenny Brecher was in a foul mood yesterday as he wheeled his bicycle out of the Volkswagen factory in Wolfsburg. Germany, the powerhouse of Europe, is in recession and the bad news had just caught up with the 24-year-old welder.

“Recession, what does that mean?” he asked, trying to push his way through a knot of colleagues leaving the early shift. “It's just another excuse to get rid of us.”

He was grumpy because VW's first reflex in the swirling economic crisis has been to shed 750 workers before Christmas. Thousands more temporary workers like Lenny are expected to be laid off early in the new year. This at a time when VW results are looking rather good: deliveries and production will be better than the boom year of 2007 and the company is on course to generate pretax profits of €6.15 billion (£5 billion).

German workers had just been getting used to the good times, were starting to spend more and borrow more, when the recession hit. It was made official yesterday: the country's economy contracted 0.5 per cent in the third quarter, after a shrinkage of 0.4 per cent in the second.

Industrial output fell 3.6 per cent in September compared with August. And exports, the engine of the German economy, are flagging.

The car industry, which employs one German in seven, provides a good illustration of the country's economic malaise. In August sales were 10.4 per cent down on the corresponding month last year, and they are still in a steep decline - down 8.2 per cent in October. Lenny's boss, Martin Winterkorn, chief executive of VW, says that 2009 will be a hard year.

His counterpart at Audi, Peter Schwarzenbauer, says: “I have never experienced such a wildfire running through the economy.” Daimler is sending 150,000 workers home early for Christmas; BMW is considering deep cutbacks.

It was only a matter of time before the global financial crisis, which tops the agenda at this weekend's G20 summit, hit the real German economy. Wolfsburg, a one-company town, is particularly sensitive. As Lenny and I head down Porsche Street, the town's main pedestrian precinct, he gives a running commentary on the creeping recession.

“See that?” he says, pointing to a club offering “Happy Hour, 50 per cent reduction on cocktails between 17 and 20 hours”. “The place shuts at 8. We have the longest happy hours in the world.”

Bookshops are offering their 2009 calendars at a 20 per cent discount, sensing that ready cash is already running out. A jeweller announces in a big sign: “We buy dental gold and accept teeth with gold”. The only activity is in mobile phone shops - worried teenagers trying to change their contracts - and in two shops offering “Everything for One Euro”.

Orazio Nardi set up his ice cream parlour, the Eiscafe Roma, 20 years ago. Porsche Street - named after Ferdinand Porsche, the founding father of VW - is full of Turkish and Italian snack bars set up by foreign VW workers who saved up enough to go into business before they were laid off. “There have been ups and downs but this is as bad as I've seen,” Mr Nardi says. “I've been open seven hours and you're my second serious customer.” Serious signifies a waffle with chocolate spread.

Yet there is a sense that German boardrooms are talking up the crisis. Carmakers in particular have been lobbying for state assistance, arguing that if they go down, so will the whole economy. And if the Government is ready to prop up the banking system to the tune of €500 billion, it can spare a few billions to keep manufacturing alive.

After a fierce argument in the coalition Government, the Chancellor, Angela Merkel, has agreed to suspend the vehicle tax on new car purchases for the next six months. Critics say that this is grandstanding - next year is election year - rather than sound policy.

The US Administration has offered American car manufacturers access to $25 billion (£16 billion) worth of cheap credit. The European Commissioner for Industry, the German Günter Verheugen, has been considering a €40 billion rescue package for the European car industry.

It is suppliers rather than the main production hubs that are suffering. To make the windscreens and mirrors of the VW Golf, parts are needed from 16 specialist companies; the electronics demand the services of another 15 niche firms. They are being hit by the sudden drop in demand for cars and by the lack of credit lines.

That is what German recession figures conceal: the drop in exports largely reflects the problems of small businesses, the so-called Mittelstand, in keeping hold of their markets.

Friedhelm Sträter, the head of the car parts supplier ESU - it makes car seat levers and the bit of metal that connects the seat with the headrest - complains: “Every morning the car manufacturers send through their plans, and every morning the figures shrink.”

Contracts with suppliers are usually weighted heavily in favour of the manufacturer. “We work in cycles, of course. That's the business, but it has never been like this.” In August he received €3.2 million worth of orders. In October it was down to €350,000.

The suddenness of the downturn has left people in shock. But there is an argument that the recession will be fast and shallow, with a bounce-back in the second half of next year. That is certainly the hope of Mrs Merkel, who needs to enter the September 2009 general election with a solid reputation as an economic crisis manager.

The key question for Germans about this recession, though, may be not so much “How long will it last?” as “How can we best use it?”. The local Wolfsburg historian Ingo Sielaff argues that it was the recession in the mid-1970s - when VW cut more than 10,000 jobs - that spurred the transition from the outdated VW Beetle to the compact Golf.

Mr Sträter is using the downturn in a similar way, diversifying from car components. His company is making parts for espresso machines, aluminium cat-feeding bowls, surgical tools and, just in case the climate-change crisis is not supplanted by the financial crisis, rotor blades for wind-power generators.

Source - Times Online