US lawmakers rejected a $700 billion bailout plan for the financial industry in a shock vote that sent global markets sliding as European authorities scrambled to prop up a slew of banks.
The Dow Jones industrial average posted its largest point decline ever while the benchmark S&P 500 had its worst day since the 1987 crisis with an 8.8 percent drop. Latin American stocks tumbled 13 percent, their biggest decline in more than a decade.
Even before the vote, Asian and European markets had plummeted on fears the crisis was spreading, while U.S. regional lender Wachovia became the latest big bank to succumb to the crisis.
And global money markets were frozen even as central banks poured hundreds of billions of dollars into the financial system to persuade financial firms to stop hoarding cash.
"There's a monster amount of fear out there. This is global contagion. It's no longer just the United States," said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.
The House of Representatives voted 228-to-205 against a compromise bailout plan that would have allowed the Treasury Department to buy up toxic assets from struggling banks. House Republicans, in particular, balked at spending so much taxpayer money just before the November 4 U.S. elections.
"I can't believe they weren't able to come together and come up with a solution. Complete disaster was predicted if it didn't pass," said Stephen Berte, senior equity trader at Standard Life in Boston. "I can't see what the upside is right now."
U.S. President George W. Bush huddled with economic advisers, including Federal Reserve Chairman Ben Bernanke, to consider the administration's next move.
"We need a plan that works," said U.S. Treasury Secretary Henry Paulson, the Bush administration's point man on the bailout since the first plan was announced over a week ago. "We need it as soon as possible, and we're just committed to working with congressional leaders to get it done."
Investors rushed to assets considered a safe haven. Government bond prices and gold jumped, and oil fell below $99 per barrel on the view that world demand will contract as the financial crisis puts the brakes on economic activity.
"What should have been a day of hope turned into a day of desperation," said Marco Annunziato, chief economist for UniCredit in London. "We are facing a systemic crisis of confidence in the global financial system that is pushing us increasingly close to a complete meltdown."
World stocks, as measured by the MSCI's world index, lost about $1.7 trillion for the day.
Bailout prospects uncertain
In Washington, the failure of the bailout bill -- after more than a week of intensive closed-door negotiation intended to hammer out a compromise plan -- brought new uncertainty about the response of the U.S. government to the worst financial crisis since the Great Depression.
Republican House members voted against the rescue package by a more than 2-to-1 margin. A majority of Democrats voted in favor.
Both parties blamed each other for the failure of the closely watched bill after hours of closed-door negotiations intended to add provisions to protect taxpayers and head off criticism that Washington was riding to the rescue of bankers many Americans blame for triggering the housing crisis.
"What happened today cannot stand. We must move forward," House Speaker Nancy Pelosi told reporters. "We are here to protect the taxpayer as we work to stabilize the markets."
U.S. presidential candidates Barack Obama and John McCain had both offered qualified support for the bailout proposal, which now dominates the election with just over a month before the vote.
Obama, a Democrat, said he believed lawmakers would regroup to pass a financial rescue plan. "I'm confident we're going to get there," Obama said as he campaigned in Colorado. "It's going to be a little rocky.
McCain, a Republican who suspended his campaign last week in a failed attempt to broker a bailout deal, called on lawmakers to go back to work. "Now is the time for all members of Congress to go back to the drawing board," he said.
The Senate returns on Wednesday and the House on Thursday after a break for the Jewish New Year holiday of Rosh Hashanah. No laws can be passed in their absence but their staffs could work on a revised plan.
The high-stakes political showdown on the bailout proposal came after Wachovia Corp agreed to sell most of its assets to Citigroup Inc in a deal brokered by regulators. It was one of three U.S. financial deals struck as the crisis deepened.
Global contagion
Investors said there were ample signs that a financial crisis that started with risky lending to the overheated U.S. property market had gone rapidly global.
"The crisis is going to affect everybody. It's a very difficult situation and it's going to affect economies everywhere," Mexican billionaire Carlos Slim said.
Earlier, the governments of Belgium, the Netherlands and Luxembourg moved to partly nationalize Belgian-Dutch group Fortis NV, and German lender Hypo Real Estate Holding AG secured a credit line from the German government.
Earlier, European shares had dropped to a 3-1/2-year closing low, with bank shares weighing heavily.
The world's central banks, led by the U.S. Federal Reserve, announced a $330 billion expansion of currency swap arrangements, which allows them to increase the amount of money they can provide in their home markets, effectively throwing more money at the crisis.
The Wachovia deal was the latest in a series of events that has transformed the American financial landscape and wiped out hundreds of billions of dollars of shareholder wealth.
The changes include the government takeover of mortgage finance companies Fannie Mae and Freddie Mac, the bankruptcy of Lehman Brothers Holdings Inc, the failure of giant savings and loan Washington Mutual, and Bank of America Corp's purchase of Merrill Lynch & Co Inc.
Chronology of Fed Action
September 29
Fed increased swaps by $330 billion to $620 billion
Expands the size of 84 days TAF auctions to $75 billion per auction form $25 billon
September 26
Fed expands swaps with ECB by $10 billion to $120 billion
Total swaps now $290 billion, all swaps would expire on Jan 30, 2009
September 24
Fed established Swaps with Australia, Denmark, Norway, Sweden taking totalling $227 billion
September 21
Fed approves application of Goldman Sachs & Morgan Stanley to become bank holding cos.
September 18
Fed expands swaps to $247 billion, increasing line with ECB to $110 billion & line SNB to $27 billion
September 16
Fed agrees to lend up $85 billion to AIG
September 14
Fed expands collateral accepted for emergency loans
Tuesday, September 30, 2008
Monday, September 29, 2008
Payback provision in US bail-out plan
The US financial services sector could be forced to reimburse the US government for any losses on its $700bn rescue plan under a breakthrough agreement that paves the way for congressional approval as early as Monday.
But hours before a government bailout bill was due to move to the floor of the House of Representatives, Republican holdouts had yet to give an assurance they would help vote it into law.
After a weekend of frenzied talks, Hank Paulson, the Treasury secretary, and Nancy Pelosi, the Democratic House speaker, announced early on Sunday that a tentative deal had been reached authorising the government to buy up to $700bn of troubled assets from financial institutions.
The deal envisages historic restrictions on executive pay for banks involved in the programme and opens the door for the government to take equity warrants in those institutions.
More than half of Democrats in the Democratic-controlled House pledged to support the deal. But at a closed-door meeting of House Republicans late on Sunday, it was unclear whether enough would follow their party leaders to guarantee adoption of the package.
As the White House urged Republican opponents to come on board, John Boehner, House minority leader, appealed to Republicans “whose conscience will allow them” to support the bill. “The American people are angry and my colleagues are angry about the situation they find themselves in,” said Mr Boehner.
He acknowledged the bill was not exactly the one Republicans would have drafted but it contained elements they had helped to introduce.
Both Republicans and Democrats tried to claim credit for defending the interests of taxpayers amid public outrage at the prospect of spending $700bn to bail out Wall Street.
House Republicans, the most vocal opponents of the rescue plan, remained wary even after their leaders signed up to the agreement.
The two presidential candidates gave their qualified support on the basis of the outline of the deal. John McCain said: “Let’s get this deal done, signed by the president, and get moving.” The Republican came under fire from Democrats last week who claimed he slowed the outcome by intervening in the talks. Barack Obama, his Democratic rival, said if concerns on issues such as executive pay were addressed, “my inclination would be to vote for it, understanding that I’m not happy”.
Democratic legislators said they had earlier spoken by telephone to Warren Buffett, the billionaire investor, who warned them of “the biggest financial meltdown in American history” if they failed to act.
Although final details of the legislation were still being worked on throughout the morning, Capitol Hill aides said they expected the House and Senate would both approve the measures early in the week.
On Saturday night, negotiators found a way to address concerns that the bail-out plan insufficiently protected taxpayers. If, after five years, losses were incurred by the government on the sale of the troubled assets it purchases through the programme, the US president would have to present a plan to recover the money from those who benefited from it.
While imposing curbs on the compensation of executives at companies participating in the bail-out, Democrats dropped demands that shareholders be given a vote on pay. The $700bn would be authorised fully but released in three stages, beginning with an initial $250bn. Congress would review and could in principle block the final $350bn disbursement.
But hours before a government bailout bill was due to move to the floor of the House of Representatives, Republican holdouts had yet to give an assurance they would help vote it into law.
After a weekend of frenzied talks, Hank Paulson, the Treasury secretary, and Nancy Pelosi, the Democratic House speaker, announced early on Sunday that a tentative deal had been reached authorising the government to buy up to $700bn of troubled assets from financial institutions.
The deal envisages historic restrictions on executive pay for banks involved in the programme and opens the door for the government to take equity warrants in those institutions.
More than half of Democrats in the Democratic-controlled House pledged to support the deal. But at a closed-door meeting of House Republicans late on Sunday, it was unclear whether enough would follow their party leaders to guarantee adoption of the package.
As the White House urged Republican opponents to come on board, John Boehner, House minority leader, appealed to Republicans “whose conscience will allow them” to support the bill. “The American people are angry and my colleagues are angry about the situation they find themselves in,” said Mr Boehner.
He acknowledged the bill was not exactly the one Republicans would have drafted but it contained elements they had helped to introduce.
Both Republicans and Democrats tried to claim credit for defending the interests of taxpayers amid public outrage at the prospect of spending $700bn to bail out Wall Street.
House Republicans, the most vocal opponents of the rescue plan, remained wary even after their leaders signed up to the agreement.
The two presidential candidates gave their qualified support on the basis of the outline of the deal. John McCain said: “Let’s get this deal done, signed by the president, and get moving.” The Republican came under fire from Democrats last week who claimed he slowed the outcome by intervening in the talks. Barack Obama, his Democratic rival, said if concerns on issues such as executive pay were addressed, “my inclination would be to vote for it, understanding that I’m not happy”.
Democratic legislators said they had earlier spoken by telephone to Warren Buffett, the billionaire investor, who warned them of “the biggest financial meltdown in American history” if they failed to act.
Although final details of the legislation were still being worked on throughout the morning, Capitol Hill aides said they expected the House and Senate would both approve the measures early in the week.
On Saturday night, negotiators found a way to address concerns that the bail-out plan insufficiently protected taxpayers. If, after five years, losses were incurred by the government on the sale of the troubled assets it purchases through the programme, the US president would have to present a plan to recover the money from those who benefited from it.
While imposing curbs on the compensation of executives at companies participating in the bail-out, Democrats dropped demands that shareholders be given a vote on pay. The $700bn would be authorised fully but released in three stages, beginning with an initial $250bn. Congress would review and could in principle block the final $350bn disbursement.
Fortis Gets EU11.2 Billion Rescue From Governments
Fortis, the largest Belgian financial-services firm, received an 11.2 billion-euro ($16.3 billion) rescue from Belgium, the Netherlands and Luxembourg after investor confidence in the bank evaporated last week.
Belgium will buy 49 percent of Fortis's Belgian banking unit for 4.7 billion euros, while the Netherlands will pay 4 billion euros for a similar stake in the Dutch banking business, the governments said in a statement late yesterday. Luxembourg will provide a 2.5 billion-euro loan convertible into 49 percent of Fortis's banking division in that country.
Fortis is the largest European firm to be bailed out in the global financial crisis that drove Lehman Brothers Holdings Inc. into bankruptcy two weeks ago and prompted U.S. President George W. Bush to seek a $700 billion bank rescue package. Fortis dropped 35 percent last week in Brussels trading on concern the company would struggle to replenish capital depleted by the 24.2 billion-euro takeover of ABN Amro Holding NV units and credit writedowns.
``Confidence in Fortis needs to be restored,'' said Corne van Zeijl, a senior portfolio manager at SNS Asset Management in Den Bosch, the Netherlands, who oversees about $1.1 billion and owns Fortis shares.
Fortis plans to sell its stake in ABN Amro's consumer banking unit, though a buyer wasn't identified. Fortis joined with Royal Bank of Scotland Group Plc and Spain's Banco Santander SA last year to buy Amsterdam-based ABN Amro for 72 billion euros, just as the U.S. subprime mortgage market collapsed.
Lippens Resigns
Fortis Chairman Maurice Lippens stepped down and will be replaced by someone from outside the company, Fortis said. The firm picked company insider Filip Dierckx to succeed Herman Verwilst as chief executive officer on Sept. 26, just three months after former CEO Jean-Paul Votron was pushed out.
Fortis, formed in the 1990 merger of the Dutch insurance company NV Amev, Belgian insurer AG Group and the Dutch bank VSB, angered investors on June 26 by scrapping the interim dividend and announcing plans to sell shares to help strengthen its finances.
``We're buying power in the bank, getting more influence on the decisions that will be made, that's what savers need in these times,'' Dutch Finance Minister Wouter Bos told Dutch public television NOS. Bos said he couldn't comment on who'll buy the ABN Amro business.
The collapse of New York-based Lehman and the U.S. rescue of American International Group Inc. heightened concern about the global financial system and made it costlier for banks to raise funds. Seattle-based Washington Mutual Inc. was seized by regulators last week in the biggest U.S. bank failure in history.
Bradford & Bingley
Bradford & Bingley Plc, Britain's biggest lender to landlords, may be taken over by another bank or nationalized today under a U.K. government-backed plan to protect 21 billion pounds ($39 billion) of customer deposits.
Hypo Real Estate Holding AG, Germany's second-biggest commercial-property lender, said today it received a credit facility, following a report by the Financial Times Deutschland that the company may collapse.
In the U.S., Bush and congressional leaders said yesterday in Washington that they had reached agreement on the rescue package, which is designed to revive moribund credit markets.
Fortis tried three days ago to assuage investor concerns by stating that its financial position was ``solid,'' and that it had identified banking and insurance businesses to sell worth as much as 10 billion euros. Fortis said it wouldn't sell assets at fire-sale prices, and didn't have an urgent need for funds.
`Over-Leveraged'
The remarks, presented in an impromptu press conference by Verwilst and Dierckx, failed to stem the selling. The stock ended the day down 20 percent.
``Markets thought that they were over-leveraged,'' European Central Bank Governing Council member Nout Wellink said. ``What's happening in the U.S. is having an impact on the rest of the world. At the end of the day Fortis is a good bank,'' said Wellink, who also heads the Dutch central bank.
Fortis has fallen 71 percent this year in Brussels, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros.
The company has about 3 billion euros of bonds maturing this year and needs to refinance an additional 7 billion euros next year, said Ivan Lathouders, an analyst at Banque Degroof SA in Brussels, in a report last week.
Short-Selling Restricted
Fortis reported a 49 percent decline in second-quarter profit on credit-related writedowns on Aug. 4. The banking business's core Tier I capital ratio, an indicator of a bank's ability to absorb losses, was 7.4 percent at the end of June, compared with Fortis's own target of 6 percent.
The company's structured credit portfolio, which includes collateralized debt obligations and U.S. mortgage-backed securities, amounted to 41.7 billion euros at the end of June. Fortis said Aug. 4 the pretax impact of the credit market turmoil on its earnings was 918 million euros in the first half.
Belgian and Dutch regulators restricted short-selling in the shares and derivatives of financial companies for three months last week to curtail a market rout. The rules require investors betting on a decline in stock prices to arrange to borrow the shares before selling them. The Belgian and Dutch regulators also requested investors to refrain from lending the securities.
Belgium will buy 49 percent of Fortis's Belgian banking unit for 4.7 billion euros, while the Netherlands will pay 4 billion euros for a similar stake in the Dutch banking business, the governments said in a statement late yesterday. Luxembourg will provide a 2.5 billion-euro loan convertible into 49 percent of Fortis's banking division in that country.
Fortis is the largest European firm to be bailed out in the global financial crisis that drove Lehman Brothers Holdings Inc. into bankruptcy two weeks ago and prompted U.S. President George W. Bush to seek a $700 billion bank rescue package. Fortis dropped 35 percent last week in Brussels trading on concern the company would struggle to replenish capital depleted by the 24.2 billion-euro takeover of ABN Amro Holding NV units and credit writedowns.
``Confidence in Fortis needs to be restored,'' said Corne van Zeijl, a senior portfolio manager at SNS Asset Management in Den Bosch, the Netherlands, who oversees about $1.1 billion and owns Fortis shares.
Fortis plans to sell its stake in ABN Amro's consumer banking unit, though a buyer wasn't identified. Fortis joined with Royal Bank of Scotland Group Plc and Spain's Banco Santander SA last year to buy Amsterdam-based ABN Amro for 72 billion euros, just as the U.S. subprime mortgage market collapsed.
Lippens Resigns
Fortis Chairman Maurice Lippens stepped down and will be replaced by someone from outside the company, Fortis said. The firm picked company insider Filip Dierckx to succeed Herman Verwilst as chief executive officer on Sept. 26, just three months after former CEO Jean-Paul Votron was pushed out.
Fortis, formed in the 1990 merger of the Dutch insurance company NV Amev, Belgian insurer AG Group and the Dutch bank VSB, angered investors on June 26 by scrapping the interim dividend and announcing plans to sell shares to help strengthen its finances.
``We're buying power in the bank, getting more influence on the decisions that will be made, that's what savers need in these times,'' Dutch Finance Minister Wouter Bos told Dutch public television NOS. Bos said he couldn't comment on who'll buy the ABN Amro business.
The collapse of New York-based Lehman and the U.S. rescue of American International Group Inc. heightened concern about the global financial system and made it costlier for banks to raise funds. Seattle-based Washington Mutual Inc. was seized by regulators last week in the biggest U.S. bank failure in history.
Bradford & Bingley
Bradford & Bingley Plc, Britain's biggest lender to landlords, may be taken over by another bank or nationalized today under a U.K. government-backed plan to protect 21 billion pounds ($39 billion) of customer deposits.
Hypo Real Estate Holding AG, Germany's second-biggest commercial-property lender, said today it received a credit facility, following a report by the Financial Times Deutschland that the company may collapse.
In the U.S., Bush and congressional leaders said yesterday in Washington that they had reached agreement on the rescue package, which is designed to revive moribund credit markets.
Fortis tried three days ago to assuage investor concerns by stating that its financial position was ``solid,'' and that it had identified banking and insurance businesses to sell worth as much as 10 billion euros. Fortis said it wouldn't sell assets at fire-sale prices, and didn't have an urgent need for funds.
`Over-Leveraged'
The remarks, presented in an impromptu press conference by Verwilst and Dierckx, failed to stem the selling. The stock ended the day down 20 percent.
``Markets thought that they were over-leveraged,'' European Central Bank Governing Council member Nout Wellink said. ``What's happening in the U.S. is having an impact on the rest of the world. At the end of the day Fortis is a good bank,'' said Wellink, who also heads the Dutch central bank.
Fortis has fallen 71 percent this year in Brussels, the second-worst performance among the 69 companies on the Bloomberg Europe Banks and Financial Services Index, cutting the lender's market capitalization to 12.2 billion euros.
The company has about 3 billion euros of bonds maturing this year and needs to refinance an additional 7 billion euros next year, said Ivan Lathouders, an analyst at Banque Degroof SA in Brussels, in a report last week.
Short-Selling Restricted
Fortis reported a 49 percent decline in second-quarter profit on credit-related writedowns on Aug. 4. The banking business's core Tier I capital ratio, an indicator of a bank's ability to absorb losses, was 7.4 percent at the end of June, compared with Fortis's own target of 6 percent.
The company's structured credit portfolio, which includes collateralized debt obligations and U.S. mortgage-backed securities, amounted to 41.7 billion euros at the end of June. Fortis said Aug. 4 the pretax impact of the credit market turmoil on its earnings was 918 million euros in the first half.
Belgian and Dutch regulators restricted short-selling in the shares and derivatives of financial companies for three months last week to curtail a market rout. The rules require investors betting on a decline in stock prices to arrange to borrow the shares before selling them. The Belgian and Dutch regulators also requested investors to refrain from lending the securities.
AIG eyes sale of more than 15 businesses- report
American International Group, the insurer bailed out by the US Federal Reserve earlier this month, is looking to sell more than 15 businesses, to repay its $85 billion government loan, a newspaper report said on Sunday.
Citing people close to the situation, the newspaper said AIG was prepared to consider selling most of its operations besides its international life insurance unit and US pension businesses. The company's board was meeting in New York on Sunday night to discuss possible sales, the newspaper said.
AIG was not immediately available to comment. Assets AIG is considering selling include its aircraft leasing unit International Lease Finance Corp, its 59 per cent stake in reinsurer Transatlantic Holdings as well as its property portfolio and private equity investments, according to the article.
The paper said no final decisions had been made on what assets to sell. AIG, once the world's most valuable insurer, needs to raise cash quickly to repay the $85 billion loan that allowed it to avoid bankruptcy after taking massive losses on mortgage derivatives. If the loan is not repaid, the US government has the right to take an almost 80 per cent stake, heavily diluting investors' stock.
Citing people close to the situation, the newspaper said AIG was prepared to consider selling most of its operations besides its international life insurance unit and US pension businesses. The company's board was meeting in New York on Sunday night to discuss possible sales, the newspaper said.
AIG was not immediately available to comment. Assets AIG is considering selling include its aircraft leasing unit International Lease Finance Corp, its 59 per cent stake in reinsurer Transatlantic Holdings as well as its property portfolio and private equity investments, according to the article.
The paper said no final decisions had been made on what assets to sell. AIG, once the world's most valuable insurer, needs to raise cash quickly to repay the $85 billion loan that allowed it to avoid bankruptcy after taking massive losses on mortgage derivatives. If the loan is not repaid, the US government has the right to take an almost 80 per cent stake, heavily diluting investors' stock.
Infy may top HCL bid with 720p offer
Infosys is likely to make a one-time move to match or surpass HCL’s offer to acquire London-headquartered SAP consulting firm Axon, but would guard itself from entering into an expensive bidding war, sources said.
Axon board, which received HCL’s 650 pence counter offer amounting to $811 mn on Friday, is expected to formally discuss the development after providing Infosys the mandatory 60-hour window to react.
Infosys, which made 600 pence offer to buy Axon for $753 mn last month, is expected to disclose its plan on Monday.
Banking sources who have tracked Infosys believe the Bangalore-based tech giant could make a conditional offer—either matching or going up to 710-720 pence—after getting an assurance from Axon that it would consider another revised bid by HCL, or any other player, only if it comes at 750-755 pence or more.
However, it remains to be seen if HCL and Infosys opt for a bidding war. Some bankers argued that Infosys’ aversion for expensive acquisitions may take it out of fray beyond 700-720 pence. However, anticipating an escalation in the bidding war, LSE-listed Axon saw its stock price gallop on Friday to close at 682 pence.
Banking sources said HCL’s counter offer with a narrow 8.3% premium was a strategy banking on Infy’s lack of appetite for an aggressive bidding war. “Why pay 15% premium straight away if you can get Infy out with 8.3%,” said one banker.
But then, as a sectoral analyst warned, Infosys may turn the heat on HCL game plan as its legendary organic growth story looks increasingly uncertain in the midst of economic slowdown. Analysts said it was interesting why Indian companies were now aggressively chasing Axon, which has been an acquisition target for around two years.
Infy’s original offer—valued at 24 times Axon’s EBITDA—was already perceived to be rich. If it makes revised offer, Infosys will lace the unfolding discussions with softer arguments like the benefits of aligning with a stronger company that has an acclaimed work culture. There is also a likelihood that given the legal concurrence given by the Axon management to Infosys, the latter might leverage it to rein in other shareholders.
But if it’s hard numbers doing the talk, as it often happens with shareholders of UK-listed companies, Infy is widely expected to opt out. The report last month on Infosys’ announcement of its intention of acquire Axon said that a counter-bid was likely. It is understood that Infosys had factored in the possibility that it may have to hike its offer by 15-20%.
An eventual HCL offer could be $1 bn in payout forcing the company to raise significant debt from StanChart and HSBC that have offered a line of credit. HCL has over $500 mn sitting on books, but is unlikely to plough all of that into the acquisition play. Infy, on other hand, has a reserve of over $1.8 bn and has been traditionally wary of expensive inorganic growth strategies.
The Axon acquisition tale may take many more twists as there is speculation that besides the Indian players, there are also European and Japanese entities looking into company very keenly. It was reported earlier this month that Japanese major Fujitsu may also enter the fray.
Axon board, which received HCL’s 650 pence counter offer amounting to $811 mn on Friday, is expected to formally discuss the development after providing Infosys the mandatory 60-hour window to react.
Infosys, which made 600 pence offer to buy Axon for $753 mn last month, is expected to disclose its plan on Monday.
Banking sources who have tracked Infosys believe the Bangalore-based tech giant could make a conditional offer—either matching or going up to 710-720 pence—after getting an assurance from Axon that it would consider another revised bid by HCL, or any other player, only if it comes at 750-755 pence or more.
However, it remains to be seen if HCL and Infosys opt for a bidding war. Some bankers argued that Infosys’ aversion for expensive acquisitions may take it out of fray beyond 700-720 pence. However, anticipating an escalation in the bidding war, LSE-listed Axon saw its stock price gallop on Friday to close at 682 pence.
Banking sources said HCL’s counter offer with a narrow 8.3% premium was a strategy banking on Infy’s lack of appetite for an aggressive bidding war. “Why pay 15% premium straight away if you can get Infy out with 8.3%,” said one banker.
But then, as a sectoral analyst warned, Infosys may turn the heat on HCL game plan as its legendary organic growth story looks increasingly uncertain in the midst of economic slowdown. Analysts said it was interesting why Indian companies were now aggressively chasing Axon, which has been an acquisition target for around two years.
Infy’s original offer—valued at 24 times Axon’s EBITDA—was already perceived to be rich. If it makes revised offer, Infosys will lace the unfolding discussions with softer arguments like the benefits of aligning with a stronger company that has an acclaimed work culture. There is also a likelihood that given the legal concurrence given by the Axon management to Infosys, the latter might leverage it to rein in other shareholders.
But if it’s hard numbers doing the talk, as it often happens with shareholders of UK-listed companies, Infy is widely expected to opt out. The report last month on Infosys’ announcement of its intention of acquire Axon said that a counter-bid was likely. It is understood that Infosys had factored in the possibility that it may have to hike its offer by 15-20%.
An eventual HCL offer could be $1 bn in payout forcing the company to raise significant debt from StanChart and HSBC that have offered a line of credit. HCL has over $500 mn sitting on books, but is unlikely to plough all of that into the acquisition play. Infy, on other hand, has a reserve of over $1.8 bn and has been traditionally wary of expensive inorganic growth strategies.
The Axon acquisition tale may take many more twists as there is speculation that besides the Indian players, there are also European and Japanese entities looking into company very keenly. It was reported earlier this month that Japanese major Fujitsu may also enter the fray.
Wednesday, September 24, 2008
Goldman Gets Buffet's Aid in $7.5 Billion Fundraising
Goldman Sachs Group Inc. won the backing of Warren Buffett, the world's preeminent stock-picker, as the Wall Street firm seeks to raise cash from investors whose faith in the investment-banking business model has been shaken.
For Goldman, Buffett's endorsement came at a price. Berkshire Hathaway Inc., led by the 78-year-old billionaire, is buying $5 billion of perpetual preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years. The common stock closed yesterday at $125.05, providing Buffett with an instant paper profit of $437 million.
``It's a hell of a deal for Buffett,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. who rates Goldman stock ``market perform.'' ``The key thing for Goldman is making it through the credit cycle, and they're doing the right stuff.''
Goldman Chief Executive Officer Lloyd Blankfein is turning to Buffett, the second-richest American after Microsoft Corp. founder Bill Gates, to boost market confidence even though the investment bank hasn't reported a quarterly loss since it went public in 1999. The bankruptcy of Lehman Brothers Holdings Inc. and emergency sale of Merrill Lynch & Co. to Bank of America Corp. on Sept. 15 have fueled fears about firms that rely on bond markets for funding.
In addition to raising money from Buffett, Goldman said it plans to sell at least $2.5 billion of common stock to the public. It will be the firm's first common stock offering since 2000. No details of the planned offering were disclosed in a statement released by the New York-based company yesterday.
Lehman's Lesson
Sumitomo Mitsui Financial Group Inc., Japan's second-largest bank, will invest several hundred billion yen in Goldman, Kyodo news reported, without saying where it obtained the information. Chika Togawa, a spokeswoman for the Tokyo-based bank, said it hadn't decided to do so. Goldman spokeswoman Hiroko Matsumoto declined to comment.
Goldman surged in trading after the close of the New York Stock Exchange, following the announcement of the agreement with Buffett. The shares, which closed at $125.05 in composite trading, jumped as high as $138.88, an 11 percent increase, at 5:50 p.m. in New York.
``At this point you're better safe than sorry, I think that's the moral of Lehman,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``Everything's different because of the extraordinarily weak market conditions, as vividly described by our Treasury Secretary and Fed Chairman'' in congressional testimony yesterday, Hendler said.
Fickle Funding
Federal Reserve Chairman Ben S. Bernanke joined Treasury Secretary Henry Paulson in urging skeptical lawmakers yesterday to quickly pass a $700 billion rescue for financial institutions, saying the U.S. economy will shrink if markets don't begin functioning normally.
Wall Street's biggest firms lost investors' confidence this year as writedowns and losses on mortgage assets and other high- risk, high-yield loans swelled, wiping out profits and eroding shareholder equity at companies including Merrill and Lehman, both based in New York.
Bear Stearns Cos., the smallest of the five biggest U.S. securities firms, was forced into a government-assisted fire sale to JPMorgan Chase & Co. in March after losing access to short- term funds in the markets. JPMorgan, the third-largest U.S. bank by assets, is based in New York.
Lehman's collapse and Merrill's sudden sale this month reignited concern that Wall Street's depreciating assets and reliance on fickle bond-market funding mean the industry's ability to generate profit has diminished.
The Oracle
The decision to seek a cash infusion marks a reversal for Goldman, which this week transformed itself from the biggest U.S. securities firm to the nation's fourth-largest bank holding company. Less than a year ago, Goldman was posting record profits and awarding record bonuses: Blankfein and his two top deputies reaped payouts totaling more than $67 million apiece in 2007.
The company, while suffering from a decline in trading and investment banking revenue, has booked $4.9 billion of losses on devalued assets, a fraction of the writedowns taken by rivals such as Citigroup Inc., Merrill and Morgan Stanley.
``The investment will further bolster our strong capitalization and liquidity position,'' Blankfein, 54, said in the statement. Berkshire's commitment ``is a strong validation of our client franchise and future prospects,'' he said.
Known as the ``Oracle of Omaha,'' Buffett has become a cult figure among investors, drawing 31,000 people to an Omaha arena for his annual shareholders meeting this year.
`Affirmation'
Mutual funds and individuals mimic his stock picks in an effort to duplicate his success, and an academic study in 2007 found that using this strategy for 31 years would have delivered annualized returns of about 25 percent, double the return of the S&P 500.
Buffett transformed Berkshire over four decades from a failing textile manufacturer into a $200 billion holding company by buying out-of-favor stocks and companies whose business and management he deemed superior. In the process, he became the second-richest man in the U.S., according to Forbes magazine.
Buffett is ``getting very attractive terms, but Goldman is getting very attractive affirmation of their value from an investor with Warren's stature,'' said Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which manages more than $3 billion, including Berkshire shares.
The last time one of the biggest U.S. securities firms received an investment from Buffett was in 1987, when New York- based Salomon Inc. turned to him for a $700 million infusion to fend off an unwanted takeover.
Bank Conversion
The Goldman warrants Buffett is buying may themselves be worth $1.8 billion, according to Scott Roth, management partner at Severn River Capital Management, a $200 million hedge fund based in Greenwich, Connecticut. He said he calculated that Buffett is buying the preferred stock for about $3.2 billion, after accounting for the shares he's getting through warrants.
In contrast, Morgan Stanley agreed on Sept. 22 to sell as much as 20 percent of itself for about $8.4 billion to Mitsubishi UFJ Financial Group Inc., Japan's largest bank.
Both Goldman and Morgan Stanley said this week that they are converting to bank holding companies supervised by the Federal Reserve, a move that allows them permanent access to borrowing from the Fed and permits more flexible accounting for some assets.
``It's a good move for Goldman, but at a very expensive price,'' said Roth, referring to Buffett's investment. Roth said he's betting on an increase in shares of Goldman, where he worked more than a decade ago. Buffett's getting ``more value than when he bought Salomon.''
`Intellectual Capital'
Berkshire's preferred stock in Goldman can be repurchased by the investment bank at any time at a 10 percent premium, according to the terms of the agreement. The stock's 10 percent dividend offers a lower yield than securities issued by Merrill Lynch in April and by Citigroup Inc. in May, Bloomberg data show.
``Goldman Sachs is an exceptional institution,'' said Buffett in the statement. ``It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.''
Buffett and Goldman have long-standing ties. Buffett has a close relationship with Byron Trott, a Goldman banker based in Chicago, and has singled him out for praise in his annual reports to shareholders.
Goldman's stock has dropped 42 percent since the start of 2008 and 19 percent since the beginning of last week. The cost of credit default swaps used to insure against a default in the firm's debt jumped 0.9 percentage points to 3.8 percentage points yesterday before the Buffett announcement, according to broker Phoenix Partners Group in New York.
Leverage Ratio
At that price, it cost $380,000 a year to protect $10 million of Goldman debt for five years. Last week the price reached a record $685,000.
One concern for investors has been the firm's leverage, or the amount of assets held with every dollar of shareholder equity. Goldman owned $23.70 of assets for every dollar of shareholder equity at the end of August, making the firm dependent on raising debt in the markets to help finance its $1.08 trillion balance sheet.
With an additional $7.5 billion of equity, the leverage ratio will drop to 20.3 times. That's more consistent with the level regulators will likely allow for commercial banks, which are overseen by the Fed, Bernstein's Hintz said.
For Goldman, Buffett's endorsement came at a price. Berkshire Hathaway Inc., led by the 78-year-old billionaire, is buying $5 billion of perpetual preferred stock with a 10 percent dividend. Berkshire also gets warrants to buy $5 billion of common stock at $115 a share at any time in the next five years. The common stock closed yesterday at $125.05, providing Buffett with an instant paper profit of $437 million.
``It's a hell of a deal for Buffett,'' said Brad Hintz, an analyst at Sanford C. Bernstein & Co. who rates Goldman stock ``market perform.'' ``The key thing for Goldman is making it through the credit cycle, and they're doing the right stuff.''
Goldman Chief Executive Officer Lloyd Blankfein is turning to Buffett, the second-richest American after Microsoft Corp. founder Bill Gates, to boost market confidence even though the investment bank hasn't reported a quarterly loss since it went public in 1999. The bankruptcy of Lehman Brothers Holdings Inc. and emergency sale of Merrill Lynch & Co. to Bank of America Corp. on Sept. 15 have fueled fears about firms that rely on bond markets for funding.
In addition to raising money from Buffett, Goldman said it plans to sell at least $2.5 billion of common stock to the public. It will be the firm's first common stock offering since 2000. No details of the planned offering were disclosed in a statement released by the New York-based company yesterday.
Lehman's Lesson
Sumitomo Mitsui Financial Group Inc., Japan's second-largest bank, will invest several hundred billion yen in Goldman, Kyodo news reported, without saying where it obtained the information. Chika Togawa, a spokeswoman for the Tokyo-based bank, said it hadn't decided to do so. Goldman spokeswoman Hiroko Matsumoto declined to comment.
Goldman surged in trading after the close of the New York Stock Exchange, following the announcement of the agreement with Buffett. The shares, which closed at $125.05 in composite trading, jumped as high as $138.88, an 11 percent increase, at 5:50 p.m. in New York.
``At this point you're better safe than sorry, I think that's the moral of Lehman,'' said David Hendler, an analyst at CreditSights Inc. in New York. ``Everything's different because of the extraordinarily weak market conditions, as vividly described by our Treasury Secretary and Fed Chairman'' in congressional testimony yesterday, Hendler said.
Fickle Funding
Federal Reserve Chairman Ben S. Bernanke joined Treasury Secretary Henry Paulson in urging skeptical lawmakers yesterday to quickly pass a $700 billion rescue for financial institutions, saying the U.S. economy will shrink if markets don't begin functioning normally.
Wall Street's biggest firms lost investors' confidence this year as writedowns and losses on mortgage assets and other high- risk, high-yield loans swelled, wiping out profits and eroding shareholder equity at companies including Merrill and Lehman, both based in New York.
Bear Stearns Cos., the smallest of the five biggest U.S. securities firms, was forced into a government-assisted fire sale to JPMorgan Chase & Co. in March after losing access to short- term funds in the markets. JPMorgan, the third-largest U.S. bank by assets, is based in New York.
Lehman's collapse and Merrill's sudden sale this month reignited concern that Wall Street's depreciating assets and reliance on fickle bond-market funding mean the industry's ability to generate profit has diminished.
The Oracle
The decision to seek a cash infusion marks a reversal for Goldman, which this week transformed itself from the biggest U.S. securities firm to the nation's fourth-largest bank holding company. Less than a year ago, Goldman was posting record profits and awarding record bonuses: Blankfein and his two top deputies reaped payouts totaling more than $67 million apiece in 2007.
The company, while suffering from a decline in trading and investment banking revenue, has booked $4.9 billion of losses on devalued assets, a fraction of the writedowns taken by rivals such as Citigroup Inc., Merrill and Morgan Stanley.
``The investment will further bolster our strong capitalization and liquidity position,'' Blankfein, 54, said in the statement. Berkshire's commitment ``is a strong validation of our client franchise and future prospects,'' he said.
Known as the ``Oracle of Omaha,'' Buffett has become a cult figure among investors, drawing 31,000 people to an Omaha arena for his annual shareholders meeting this year.
`Affirmation'
Mutual funds and individuals mimic his stock picks in an effort to duplicate his success, and an academic study in 2007 found that using this strategy for 31 years would have delivered annualized returns of about 25 percent, double the return of the S&P 500.
Buffett transformed Berkshire over four decades from a failing textile manufacturer into a $200 billion holding company by buying out-of-favor stocks and companies whose business and management he deemed superior. In the process, he became the second-richest man in the U.S., according to Forbes magazine.
Buffett is ``getting very attractive terms, but Goldman is getting very attractive affirmation of their value from an investor with Warren's stature,'' said Tom Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, which manages more than $3 billion, including Berkshire shares.
The last time one of the biggest U.S. securities firms received an investment from Buffett was in 1987, when New York- based Salomon Inc. turned to him for a $700 million infusion to fend off an unwanted takeover.
Bank Conversion
The Goldman warrants Buffett is buying may themselves be worth $1.8 billion, according to Scott Roth, management partner at Severn River Capital Management, a $200 million hedge fund based in Greenwich, Connecticut. He said he calculated that Buffett is buying the preferred stock for about $3.2 billion, after accounting for the shares he's getting through warrants.
In contrast, Morgan Stanley agreed on Sept. 22 to sell as much as 20 percent of itself for about $8.4 billion to Mitsubishi UFJ Financial Group Inc., Japan's largest bank.
Both Goldman and Morgan Stanley said this week that they are converting to bank holding companies supervised by the Federal Reserve, a move that allows them permanent access to borrowing from the Fed and permits more flexible accounting for some assets.
``It's a good move for Goldman, but at a very expensive price,'' said Roth, referring to Buffett's investment. Roth said he's betting on an increase in shares of Goldman, where he worked more than a decade ago. Buffett's getting ``more value than when he bought Salomon.''
`Intellectual Capital'
Berkshire's preferred stock in Goldman can be repurchased by the investment bank at any time at a 10 percent premium, according to the terms of the agreement. The stock's 10 percent dividend offers a lower yield than securities issued by Merrill Lynch in April and by Citigroup Inc. in May, Bloomberg data show.
``Goldman Sachs is an exceptional institution,'' said Buffett in the statement. ``It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.''
Buffett and Goldman have long-standing ties. Buffett has a close relationship with Byron Trott, a Goldman banker based in Chicago, and has singled him out for praise in his annual reports to shareholders.
Goldman's stock has dropped 42 percent since the start of 2008 and 19 percent since the beginning of last week. The cost of credit default swaps used to insure against a default in the firm's debt jumped 0.9 percentage points to 3.8 percentage points yesterday before the Buffett announcement, according to broker Phoenix Partners Group in New York.
Leverage Ratio
At that price, it cost $380,000 a year to protect $10 million of Goldman debt for five years. Last week the price reached a record $685,000.
One concern for investors has been the firm's leverage, or the amount of assets held with every dollar of shareholder equity. Goldman owned $23.70 of assets for every dollar of shareholder equity at the end of August, making the firm dependent on raising debt in the markets to help finance its $1.08 trillion balance sheet.
With an additional $7.5 billion of equity, the leverage ratio will drop to 20.3 times. That's more consistent with the level regulators will likely allow for commercial banks, which are overseen by the Fed, Bernstein's Hintz said.
Tuesday, September 23, 2008
Starting a New Era at Goldman and Morgan
The transformation of Wall Street picked up pace on Monday as Goldman Sachs and Morgan Stanley, the last big independent investment banks, moved to restructure into larger, less risk-taking organizations that will be subject to far greater regulation by the Federal Reserve.
The changes came after Goldman and Morgan Stanley on Sunday night received permission from the Federal Reserve to become bank holding companies. The change means they will be able finance their activities with insured deposits but in return must reduce the amount they can borrow to make the kind of big trading bets that drove huge profits, and massive bonuses for executives, over the last several years of Wall Street’s latest Gilded Age.
Morgan Stanley moved quickly into the new era on Monday, announcing that it planned to sell up to a 20 percent stake in itself to Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, for about $8 billion. Mitsubishi has $1.1 trillion in bank deposits, which will help bolster Morgan’s stability of financing. Goldman Sachs is also expected to move to increase its deposit base and add more capital to its balance sheet.
The changes by Morgan Stanley and Goldman essentially bring to an end the era of the big, independent Wall Street investment bank and a return to the model that dominated before the Glass-Steagall Act of 1933 forbade commercial banks from also owning securities firms.
Both banks said they requested the change in their status. But the changes also closely follow comments from executives at both investment houses saying their business model was not broken and that transforming into deposit-funded commercial banks would not necessarily help them perform better. This raised the question of whether the change was really voluntary, which both banks insist it was, or was mandated by a Federal Reserve eager not to have to come to the rescue of another flailing financial institution.
The changes, which came as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms, amount to a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.
It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives.
Commercial banks tend to produce both more modest profits and payouts to top executives.
“The kind of bonuses you saw on Wall Street over the last five years are not something you are likely to ever see again, not in our lifetime,” said Charles Geisst, a Wall Street historian and professor at Manhattan College.
By becoming bank holding companies, Morgan Stanley and Goldman are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.
For decades, firms like Morgan Stanley and Goldman Sachs thrived by taking bold bets with their own money, often using enormous amounts of debt to increase their profits, with little outside oversight.
They were the envy of Wall Street, dominating the industry’s most lucrative businesses, landing headline-grabbing deals and advising companies and governments on mergers, stock offerings and restructurings.
But that brash model was torn apart over the last several weeks as investors lost confidence in the way they made those bets during the recent credit boom, when investment banks expanded with aplomb into esoteric securities, the risks of which were not easily understood.
Over several harrowing days, clients started pulling their money, share prices plunged and these banks’ entire enterprises were brought to the brink.
In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities.
It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies.
The decision by the banks to become a holding company also raises questions about whether the Federal Reserve will seek to regulate hedge funds, many of the largest of which closely resemble investment banks like Goldman.
Just a year ago investment banks, the titans of global finance, considered bank regulation a millstone to be avoided at all costs. Commercial banks have to subject themselves to restrictions on how much money they can borrow and what kinds of businesses they can be in. Lobbyists for firms like Goldman spent years fending off closer supervision of their business.
As bank holding companies, the two banks, whose shares have lost about half their value this year, will have to reduce the amount of money they can borrow relative to their capital.
That will make them more financially sound but will also significantly limit their profits. Today, both Goldman Sachs and Morgan Stanley have $1 of capital for every $22 of assets. By contrast, Bank of America’s has less than $11 for every $1 of capital.
JPMorgan Chase acquired Bear Stearns this spring in a fire sale brokered by the federal government, while Bank of America has agreed to buy Merrill Lynch for $50 billion.
As bank holding companies, Morgan and Goldman will have greater access to the discount window of the Federal Reserve, which banks can use to borrow money from the central bank. While they were allowed to draw on temporary Fed lending facilities in recent months, they could not borrow against the same wide array of collateral that commercial banks could. The discount window access for investment banks is expected to be phased out in January.
It will take time for Goldman and Morgan to transform into fully regulated banks because they cannot quickly reduce how much money they borrow relative to their assets. Both banks are likely to seek waivers from the Federal Reserve to give them time to comply with the capital requirements imposed on deposit-funded commercial banks.
The Fed and the Securities and Exchange Commission have had examiners at investment banks since March, giving regulators huge insight into their operations.
Both banks already have limited retail deposit-taking businesses, which they plan to expand over time. Morgan Stanley had $36 billion in retail deposits as of Aug. 31 and Goldman Sachs had $20 billion in deposits.
“We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,” Lloyd C.Blankfein, the chairman and chief executive of Goldman, said in a statement on Sunday night.
John J. Mack, the chairman and chief executive of Morgan Stanley, said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position — with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace.”
In recent days, Morgan Stanley had sought other ways to bolster its capital and had been in advanced talks with China’s sovereign wealth fund and others about raising billions of dollars, people briefed on the matter said Sunday night. It had also been talking about a merger with Wachovia, a large commercial bank based in Charlotte, N.C.
With their transition to operating as bank holding companies, those talks are likely to take a different form, because now Morgan Stanley can buy a commercial bank.
The changes came after Goldman and Morgan Stanley on Sunday night received permission from the Federal Reserve to become bank holding companies. The change means they will be able finance their activities with insured deposits but in return must reduce the amount they can borrow to make the kind of big trading bets that drove huge profits, and massive bonuses for executives, over the last several years of Wall Street’s latest Gilded Age.
Morgan Stanley moved quickly into the new era on Monday, announcing that it planned to sell up to a 20 percent stake in itself to Mitsubishi UFJ Financial Group, Japan’s largest commercial bank, for about $8 billion. Mitsubishi has $1.1 trillion in bank deposits, which will help bolster Morgan’s stability of financing. Goldman Sachs is also expected to move to increase its deposit base and add more capital to its balance sheet.
The changes by Morgan Stanley and Goldman essentially bring to an end the era of the big, independent Wall Street investment bank and a return to the model that dominated before the Glass-Steagall Act of 1933 forbade commercial banks from also owning securities firms.
Both banks said they requested the change in their status. But the changes also closely follow comments from executives at both investment houses saying their business model was not broken and that transforming into deposit-funded commercial banks would not necessarily help them perform better. This raised the question of whether the change was really voluntary, which both banks insist it was, or was mandated by a Federal Reserve eager not to have to come to the rescue of another flailing financial institution.
The changes, which came as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms, amount to a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.
It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives.
Commercial banks tend to produce both more modest profits and payouts to top executives.
“The kind of bonuses you saw on Wall Street over the last five years are not something you are likely to ever see again, not in our lifetime,” said Charles Geisst, a Wall Street historian and professor at Manhattan College.
By becoming bank holding companies, Morgan Stanley and Goldman are agreeing to significantly tighter regulations and much closer supervision by bank examiners from several government agencies rather than only the Securities and Exchange Commission. Now, the firms will look more like commercial banks, with more disclosure, higher capital reserves and less risk-taking.
For decades, firms like Morgan Stanley and Goldman Sachs thrived by taking bold bets with their own money, often using enormous amounts of debt to increase their profits, with little outside oversight.
They were the envy of Wall Street, dominating the industry’s most lucrative businesses, landing headline-grabbing deals and advising companies and governments on mergers, stock offerings and restructurings.
But that brash model was torn apart over the last several weeks as investors lost confidence in the way they made those bets during the recent credit boom, when investment banks expanded with aplomb into esoteric securities, the risks of which were not easily understood.
Over several harrowing days, clients started pulling their money, share prices plunged and these banks’ entire enterprises were brought to the brink.
In exchange for subjecting themselves to more regulation, the companies will have access to the full array of the Federal Reserve’s lending facilities.
It should help them avoid the fate of Lehman Brothers, which filed for bankruptcy last week, and Bear Stearns and Merrill Lynch — both of which agreed to be acquired by big bank holding companies.
The decision by the banks to become a holding company also raises questions about whether the Federal Reserve will seek to regulate hedge funds, many of the largest of which closely resemble investment banks like Goldman.
Just a year ago investment banks, the titans of global finance, considered bank regulation a millstone to be avoided at all costs. Commercial banks have to subject themselves to restrictions on how much money they can borrow and what kinds of businesses they can be in. Lobbyists for firms like Goldman spent years fending off closer supervision of their business.
As bank holding companies, the two banks, whose shares have lost about half their value this year, will have to reduce the amount of money they can borrow relative to their capital.
That will make them more financially sound but will also significantly limit their profits. Today, both Goldman Sachs and Morgan Stanley have $1 of capital for every $22 of assets. By contrast, Bank of America’s has less than $11 for every $1 of capital.
JPMorgan Chase acquired Bear Stearns this spring in a fire sale brokered by the federal government, while Bank of America has agreed to buy Merrill Lynch for $50 billion.
As bank holding companies, Morgan and Goldman will have greater access to the discount window of the Federal Reserve, which banks can use to borrow money from the central bank. While they were allowed to draw on temporary Fed lending facilities in recent months, they could not borrow against the same wide array of collateral that commercial banks could. The discount window access for investment banks is expected to be phased out in January.
It will take time for Goldman and Morgan to transform into fully regulated banks because they cannot quickly reduce how much money they borrow relative to their assets. Both banks are likely to seek waivers from the Federal Reserve to give them time to comply with the capital requirements imposed on deposit-funded commercial banks.
The Fed and the Securities and Exchange Commission have had examiners at investment banks since March, giving regulators huge insight into their operations.
Both banks already have limited retail deposit-taking businesses, which they plan to expand over time. Morgan Stanley had $36 billion in retail deposits as of Aug. 31 and Goldman Sachs had $20 billion in deposits.
“We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources,” Lloyd C.Blankfein, the chairman and chief executive of Goldman, said in a statement on Sunday night.
John J. Mack, the chairman and chief executive of Morgan Stanley, said: “This new bank holding structure will ensure that Morgan Stanley is in the strongest possible position — with the stability and flexibility to seize opportunities in the rapidly changing financial marketplace.”
In recent days, Morgan Stanley had sought other ways to bolster its capital and had been in advanced talks with China’s sovereign wealth fund and others about raising billions of dollars, people briefed on the matter said Sunday night. It had also been talking about a merger with Wachovia, a large commercial bank based in Charlotte, N.C.
With their transition to operating as bank holding companies, those talks are likely to take a different form, because now Morgan Stanley can buy a commercial bank.
Friday, September 19, 2008
Morgan Stanley, others may get gov't lifeline
America's battered financial services industry is close to getting the lifeline it was desperately seeking as government leaders sketched out a plan late Thursday to rescue banks from bad debts that threatened their survival.
Treasury Secretary Henry Paulson said after a meeting with congressional leaders that there was consensus on a plan to deal with illiquid real estate and other assets on the books of financial institutions.
That could require massive amounts of additional federal funding, but leaders from both parties in Congress said they are prepared to act quickly on legislation needed to save big Wall Street firms and Main Street banks alike from collapse amid the biggest realignment of the financial system since the Great Depression.
Though specific details have not been spelled out, the legislation could spare the weakest banking companies from failure. And it takes some of the immediate pressure off the two remaining major independent investment banks, Goldman Sachs and Morgan Stanley, to reach deals with deposit-taking institutions to ensure a steady flow of funds for their operations.
That was one of the reasons Merrill Lynch hastily agreed to be acquired by Bank of America Corp. earlier this week.
SEC Chairman Christopher Cox, who attended the closed-door meeting at the Capitol with Paulson and Federal Reserve Chairman Ben Bernanke, also had good news for financial companies struggling to fend off investors who sell their stock short _ a bet that they can buy it back later at a cheaper price and make a profit.
Cox told the lawmakers the SEC may order a temporary emergency ban on all short-selling _ not just the aggressive forms it already has targeted, according to a person familiar with the matter.
The ban might apply to stocks of selected financial companies, to all financial companies or even possibly to all public companies. Cox and the other four SEC commissioners were meeting Thursday night to consider the plan, according to the person, who spoke on condition of anonymity because the possible action hasn't been publicly announced.
These latest government moves come too late for Bear Stearns, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., the three Wall Street pillars that have lost independence or been toppled since the credit crisis began a year ago.
``This staves off judgment day,'' said Anthony Sabino, professor of law and business at St. John's University. ``This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them.''
Investors took comfort from the potential for some kind of government intervention. Shares of Goldman Sachs Group Inc. and Morgan Stanley shot up more than 10 percent in after-hours trading late Thursday.
Until a late reversal in the trading day Thursday, the dramatic slide in the shares of those two investment banks led many to think they had to act quickly to tie up with commercial banks or overseas investors with deep pockets.
The reason: Investment banks rely heavily on short-term borrowing to finance their proprietary trading and lending businesses, and the recent credit market disruptions have hammered home the point that they need to find more stable sources of funds to ride out market volatility.
``People are finally realizing that we are probably in the worst financial crisis since the Depression,'' said Alfred E. Goldman, chief market strategist for Wachovia Securities, a 49-year veteran of Wall Street. ``We're in a period of excessive fear.''
Economists including former Federal Reserve Chairman Alan Greenspan and investors like Wilbur Ross had been predicting more banks would fail in a shakeout reminiscent of the Great Depression. After the stock market's crash in 1929, 9,000 institutions failed and $140 billion of deposits were wiped out in the following decade.
The government adopted policies to protect bank depositors since then and government agencies have already closed nearly a dozen insolvent banks while making provisions to reopen them under new ownership in recent months.
Global banks and brokerages have written down more than $350 billion of distressed investments since the crisis began last year, and now bankers are looking to avoid becoming another statistic.
Morgan Stanley, the No. 2 U.S. investment bank, had been in talks with a number of potential suitors and investors to help it survive, according to people familiar with the situation who asked not to be identified by name because the discussions were still ongoing.
John J. Mack, chief executive of the 73-year-old securities firm, on Thursday told the company's 48,000 employees in a town hall meeting that he's doing everything possible to keep the embattled bank afloat. A day earlier, Mack complained in a memo to employees that their bank was ``in the midst of a market controlled by fear and rumors.''
He made a round of telephone calls late Wednesday to strike a deal or raise cash in a bid to calm investors and prevent more damage to Morgan Stanley's free-falling shares, these people said.
Morgan Stanley also opened up talks with China's sovereign wealth fund and state-owned bank Citic Group, and the Singapore Investment Fund about a possible cash infusion, people familiar with the discussions said.
There also were advanced negotiations with executives from retail bank Wachovia Corp., one person said. Other suitors could include big global banks such as Britain's HSBC Holdings PLC and Germany's Deutsche Bank.
Wachovia declined to comment about a potential deal. Spokesmen for GIC and Citic could not immediately be reached for comment.
Meanwhile, Seattle-based Washington Mutual, which has lost billions and seen its shares plummet due to subprime mortgage exposure, hired Goldman Sachs to contact potential bidders _ a list that so far includes Wells Fargo & Co., JP Morgan Chase & Co. and HSBC.
And in London, Britain's Lloyds TSB Lloyds TSB announced a $21.85-billion deal to take over struggling HBOS PLC, Britain's biggest mortgage lender.
``This isn't just a U.S. problem, it is a global problem,'' Stu Schweitzer, JPMorgan Chase & Co.'s global markets strategist told the bank's institutional clients on a conference call this week. ``The economy has its problems, the financial system has its problems, we can believe in Armageddon or believe that in the end, step by step and trial and error, the authorities will get it right.''
Treasury Secretary Henry Paulson said after a meeting with congressional leaders that there was consensus on a plan to deal with illiquid real estate and other assets on the books of financial institutions.
That could require massive amounts of additional federal funding, but leaders from both parties in Congress said they are prepared to act quickly on legislation needed to save big Wall Street firms and Main Street banks alike from collapse amid the biggest realignment of the financial system since the Great Depression.
Though specific details have not been spelled out, the legislation could spare the weakest banking companies from failure. And it takes some of the immediate pressure off the two remaining major independent investment banks, Goldman Sachs and Morgan Stanley, to reach deals with deposit-taking institutions to ensure a steady flow of funds for their operations.
That was one of the reasons Merrill Lynch hastily agreed to be acquired by Bank of America Corp. earlier this week.
SEC Chairman Christopher Cox, who attended the closed-door meeting at the Capitol with Paulson and Federal Reserve Chairman Ben Bernanke, also had good news for financial companies struggling to fend off investors who sell their stock short _ a bet that they can buy it back later at a cheaper price and make a profit.
Cox told the lawmakers the SEC may order a temporary emergency ban on all short-selling _ not just the aggressive forms it already has targeted, according to a person familiar with the matter.
The ban might apply to stocks of selected financial companies, to all financial companies or even possibly to all public companies. Cox and the other four SEC commissioners were meeting Thursday night to consider the plan, according to the person, who spoke on condition of anonymity because the possible action hasn't been publicly announced.
These latest government moves come too late for Bear Stearns, Merrill Lynch & Co. and Lehman Brothers Holdings Inc., the three Wall Street pillars that have lost independence or been toppled since the credit crisis began a year ago.
``This staves off judgment day,'' said Anthony Sabino, professor of law and business at St. John's University. ``This is a detox for banks, and will help cleanse themselves of the bad mortgage securities, loans and everything else that has hurt them.''
Investors took comfort from the potential for some kind of government intervention. Shares of Goldman Sachs Group Inc. and Morgan Stanley shot up more than 10 percent in after-hours trading late Thursday.
Until a late reversal in the trading day Thursday, the dramatic slide in the shares of those two investment banks led many to think they had to act quickly to tie up with commercial banks or overseas investors with deep pockets.
The reason: Investment banks rely heavily on short-term borrowing to finance their proprietary trading and lending businesses, and the recent credit market disruptions have hammered home the point that they need to find more stable sources of funds to ride out market volatility.
``People are finally realizing that we are probably in the worst financial crisis since the Depression,'' said Alfred E. Goldman, chief market strategist for Wachovia Securities, a 49-year veteran of Wall Street. ``We're in a period of excessive fear.''
Economists including former Federal Reserve Chairman Alan Greenspan and investors like Wilbur Ross had been predicting more banks would fail in a shakeout reminiscent of the Great Depression. After the stock market's crash in 1929, 9,000 institutions failed and $140 billion of deposits were wiped out in the following decade.
The government adopted policies to protect bank depositors since then and government agencies have already closed nearly a dozen insolvent banks while making provisions to reopen them under new ownership in recent months.
Global banks and brokerages have written down more than $350 billion of distressed investments since the crisis began last year, and now bankers are looking to avoid becoming another statistic.
Morgan Stanley, the No. 2 U.S. investment bank, had been in talks with a number of potential suitors and investors to help it survive, according to people familiar with the situation who asked not to be identified by name because the discussions were still ongoing.
John J. Mack, chief executive of the 73-year-old securities firm, on Thursday told the company's 48,000 employees in a town hall meeting that he's doing everything possible to keep the embattled bank afloat. A day earlier, Mack complained in a memo to employees that their bank was ``in the midst of a market controlled by fear and rumors.''
He made a round of telephone calls late Wednesday to strike a deal or raise cash in a bid to calm investors and prevent more damage to Morgan Stanley's free-falling shares, these people said.
Morgan Stanley also opened up talks with China's sovereign wealth fund and state-owned bank Citic Group, and the Singapore Investment Fund about a possible cash infusion, people familiar with the discussions said.
There also were advanced negotiations with executives from retail bank Wachovia Corp., one person said. Other suitors could include big global banks such as Britain's HSBC Holdings PLC and Germany's Deutsche Bank.
Wachovia declined to comment about a potential deal. Spokesmen for GIC and Citic could not immediately be reached for comment.
Meanwhile, Seattle-based Washington Mutual, which has lost billions and seen its shares plummet due to subprime mortgage exposure, hired Goldman Sachs to contact potential bidders _ a list that so far includes Wells Fargo & Co., JP Morgan Chase & Co. and HSBC.
And in London, Britain's Lloyds TSB Lloyds TSB announced a $21.85-billion deal to take over struggling HBOS PLC, Britain's biggest mortgage lender.
``This isn't just a U.S. problem, it is a global problem,'' Stu Schweitzer, JPMorgan Chase & Co.'s global markets strategist told the bank's institutional clients on a conference call this week. ``The economy has its problems, the financial system has its problems, we can believe in Armageddon or believe that in the end, step by step and trial and error, the authorities will get it right.''
Thursday, September 18, 2008
HISTORY OF A I G
American International Group Inc., founded in Shanghai, is rescued by the U.S. government to stave off a deepening global financial crisis. In China, people are more alarmed by poisoned milk powder.
``I have never heard of AIG,'' said Liu Gan, 87, who used to work for the Foreign Affairs Ministry, as he shopped for dumplings at a Beijing supermarket. ``I am more concerned with the milk scandal. I have a 9-year-old granddaughter.''
Chinese Premier Wen Jiabao yesterday ordered an overhaul of the nation's dairy industry after three children were killed and 1,300 others were sickened by milk powder contaminated with the industrial chemical melamine.
The U.S. Federal Reserve late Tuesday agreed to loan AIG $85 billion, roiling markets from New York to Shanghai, where the company was founded almost 90 years ago by a former ice-cream parlor owner. New York-based AIG has 3 million policyholders in China, giving it the biggest market share among foreign insurers.
The lifeline to AIG prevented the collapse of the U.S.'s biggest insurer. A meltdown would have rippled through the global economy because AIG provides insurance on more than $441 billion of fixed-income investments held by the world's biggest institutions.
AIG, whose Chinese units are known as AIG General Insurance Company China Ltd. and American International Assurance Co., was operating normally yesterday, the nation's Insurance Regulatory Commission said. The commission is assessing the impact of AIG's woes on the domestic insurance industry and will use relevant measures to prevent risks, the agency said without elaborating.
Stocks Fall
China's CSI 300 stock index fell 3.6 percent yesterday to the lowest in almost 21 months, led by financial companies, as investors reacted to the collapse of New York-based Lehman Brothers Holdings Inc. and the AIG bailout.
``Financial stocks have slumped over the past two days because of this U.S. credit crisis, but people will get over it once the situation is under control,'' said Zheng Jie, who manages 38 billion yuan ($5.6 billion) at Industrial Fund Management Co. in Shanghai.
The milk scandal is a more lasting issue.
``People are going to remember it for a long time and it will take brands named in this scandal at least several years to regain consumers' confidence,'' he said. ``This is a much bigger issue Chinese people and the Chinese government are facing now.''
`Fundamental Change'
The State Council, China's cabinet, yesterday vowed ``fundamental change'' and said the dairy industry ``must seriously learn from the mistakes.'' The government dispatched 5,000 inspectors to check milk producers.
Since Saturday, the milk story has led the official China Central Television's flagship evening news program. The state- owned Beijing Youth Daily splashed the baby formula story on the front page yesterday, with the financial stories inside.
At AIG's China headquarters on the Bund in Shanghai, an eight-story, neoclassical structure built for the company in the 1920s, about a dozen customers lined up at service windows Wednesday morning. None were aware of the company's struggles.
A man who identified himself only as Qin said he didn't know AIG was in trouble. He was there with his parents seeking help with the family's health and life insurance policies.
``The policies should be OK,'' said the man in his 30s. ``Our family bought their products more than 10 years ago, and we are happy with everything so far.''
AIG, then known as American Asiatic Underwriters, was founded in Shanghai in 1919 by Cornelius Vander Starr, a U.S. entrepreneur.
Post-Revolution Exile
It was exiled from China after Mao Zedong took power in 1949. Former Chairman and Chief Executive Officer Maurice Greenberg negotiated the company's return in 1992, four years before the next foreign insurer, Toronto-based Manulife Financial Corp., opened a branch in China.
Greenberg, who succeeded Starr, already had ties to China, making annual trips to the country starting in 1975 and developing a close relationship with former Premier Zhu Rongji.
AIG has about 30,000 agents in China, said company spokeswoman Shen Wei. It has more than 700,000 agents, brokers and sales representatives worldwide.
AIA's income from life insurance premiums was about 4.5 billion yuan in the first seven months of this year, giving it 19 percent of the market among foreign insurers, Insurance Commission data show. AIG General's income from property insurance premiums was 536 million yuan in the period, or about 31 percent of the market among foreign insurers.
Dwarfed by China Life
Those figures are dwarfed by China's domestic insurers.
China Life Insurance Co., the nation's biggest insurance company, reported gross premiums and policy fees of 79 billion yuan for the first half, 24 percent more than a year earlier.
AIG gets a third of its revenue from life insurance and retirement services outside the U.S. The company said in April that profit from overseas units would climb 88 percent to $12 billion by 2012.
The insurer's largest Asian markets are Japan and Taiwan, where the insurance bureau said AIG was operating normally yesterday. The bureau also said it was monitoring developments at AIG's local unit, Nan Shan Life Insurance Co., to protect client rights.
AIG's situation is ``scary,'' said Wu Jiangang, a Beijing- based analyst for Guosen Securities Co.
``If they have finance problems, the impacts on other insurers in China are material and policy holders will face large losses,'' Wu said. For now, though, ``the Chinese government is busy with domestic problems.''
``I have never heard of AIG,'' said Liu Gan, 87, who used to work for the Foreign Affairs Ministry, as he shopped for dumplings at a Beijing supermarket. ``I am more concerned with the milk scandal. I have a 9-year-old granddaughter.''
Chinese Premier Wen Jiabao yesterday ordered an overhaul of the nation's dairy industry after three children were killed and 1,300 others were sickened by milk powder contaminated with the industrial chemical melamine.
The U.S. Federal Reserve late Tuesday agreed to loan AIG $85 billion, roiling markets from New York to Shanghai, where the company was founded almost 90 years ago by a former ice-cream parlor owner. New York-based AIG has 3 million policyholders in China, giving it the biggest market share among foreign insurers.
The lifeline to AIG prevented the collapse of the U.S.'s biggest insurer. A meltdown would have rippled through the global economy because AIG provides insurance on more than $441 billion of fixed-income investments held by the world's biggest institutions.
AIG, whose Chinese units are known as AIG General Insurance Company China Ltd. and American International Assurance Co., was operating normally yesterday, the nation's Insurance Regulatory Commission said. The commission is assessing the impact of AIG's woes on the domestic insurance industry and will use relevant measures to prevent risks, the agency said without elaborating.
Stocks Fall
China's CSI 300 stock index fell 3.6 percent yesterday to the lowest in almost 21 months, led by financial companies, as investors reacted to the collapse of New York-based Lehman Brothers Holdings Inc. and the AIG bailout.
``Financial stocks have slumped over the past two days because of this U.S. credit crisis, but people will get over it once the situation is under control,'' said Zheng Jie, who manages 38 billion yuan ($5.6 billion) at Industrial Fund Management Co. in Shanghai.
The milk scandal is a more lasting issue.
``People are going to remember it for a long time and it will take brands named in this scandal at least several years to regain consumers' confidence,'' he said. ``This is a much bigger issue Chinese people and the Chinese government are facing now.''
`Fundamental Change'
The State Council, China's cabinet, yesterday vowed ``fundamental change'' and said the dairy industry ``must seriously learn from the mistakes.'' The government dispatched 5,000 inspectors to check milk producers.
Since Saturday, the milk story has led the official China Central Television's flagship evening news program. The state- owned Beijing Youth Daily splashed the baby formula story on the front page yesterday, with the financial stories inside.
At AIG's China headquarters on the Bund in Shanghai, an eight-story, neoclassical structure built for the company in the 1920s, about a dozen customers lined up at service windows Wednesday morning. None were aware of the company's struggles.
A man who identified himself only as Qin said he didn't know AIG was in trouble. He was there with his parents seeking help with the family's health and life insurance policies.
``The policies should be OK,'' said the man in his 30s. ``Our family bought their products more than 10 years ago, and we are happy with everything so far.''
AIG, then known as American Asiatic Underwriters, was founded in Shanghai in 1919 by Cornelius Vander Starr, a U.S. entrepreneur.
Post-Revolution Exile
It was exiled from China after Mao Zedong took power in 1949. Former Chairman and Chief Executive Officer Maurice Greenberg negotiated the company's return in 1992, four years before the next foreign insurer, Toronto-based Manulife Financial Corp., opened a branch in China.
Greenberg, who succeeded Starr, already had ties to China, making annual trips to the country starting in 1975 and developing a close relationship with former Premier Zhu Rongji.
AIG has about 30,000 agents in China, said company spokeswoman Shen Wei. It has more than 700,000 agents, brokers and sales representatives worldwide.
AIA's income from life insurance premiums was about 4.5 billion yuan in the first seven months of this year, giving it 19 percent of the market among foreign insurers, Insurance Commission data show. AIG General's income from property insurance premiums was 536 million yuan in the period, or about 31 percent of the market among foreign insurers.
Dwarfed by China Life
Those figures are dwarfed by China's domestic insurers.
China Life Insurance Co., the nation's biggest insurance company, reported gross premiums and policy fees of 79 billion yuan for the first half, 24 percent more than a year earlier.
AIG gets a third of its revenue from life insurance and retirement services outside the U.S. The company said in April that profit from overseas units would climb 88 percent to $12 billion by 2012.
The insurer's largest Asian markets are Japan and Taiwan, where the insurance bureau said AIG was operating normally yesterday. The bureau also said it was monitoring developments at AIG's local unit, Nan Shan Life Insurance Co., to protect client rights.
AIG's situation is ``scary,'' said Wu Jiangang, a Beijing- based analyst for Guosen Securities Co.
``If they have finance problems, the impacts on other insurers in China are material and policy holders will face large losses,'' Wu said. For now, though, ``the Chinese government is busy with domestic problems.''
Wednesday, September 17, 2008
US to take control of AIG
The US Federal Reserve announced that it will lend AIG up to $85bn in emergency funds in return for a government stake of 79.9 per cent and effective control of the company - an extraordinary step meant to stave off a collapse of the giant insurer that plays a crucial role in the global financial system.
Under the plan, the latest dramatic intervention by the US government to combat the global credit crisis, the existing management of the company will be replaced and new executives - as yet unnamed - will be appointed. It also gives the US government veto power over major decisions at the company.
The authorities will receive equity giving them a 79.9 per cent stake in AIG. In return, the insurer would receive a bridge loan of $85bn to keep it afloat until it could dispose of billions of dollars in assets. The Fed said the loan was expected to be repaid by the proceeds of selling AIG operating companies. A senior Fed staffer said the most likely outcome was an orderly liquidation of AIG, though it was possible that the firm could survive as an ongoing business.
The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIG’s assets, including those of its subsidiary companies.
The Fed said it was acting to prevent “a disorderly failure of AIG” which would “add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.
The issuance of the equity participation note to the government is designed to prevent existing shareholders from profiting from a rescue of the company, which has been hobbled by the losses on complex securities backed by mortgages and other assets.
President George W. Bush said the rescue was “to promote stability in the financial markets”.
The emergency moves came after earlier plans for a private sector bail-out were dashed by a further 21 per cent slump in AIG’s shares, reducing the market capitalisation of one of the biggest insurance companies in the world to just over $7.5bn (£4.2bn).
The AIG crisis fuelled another day of turmoil on global markets on Tuesday sparked by the weekend failure of Lehman Brothers and the rushed takeover of Merrill Lynch by Bank of America. Despite the turbulence, marked by brutal conditions in European money markets, the Federal Reserve kept interest rates unchanged at 2 per cent on Tuesday night.
“We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimise the disruption to our economy,” said Hank Paulson, Treasury secretary. “I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.”
But even as the plan was being being mapped out, there were already signs of political opposition. “I hope they don’t go down the road of a bailout, because where do you stop?’’ Richard Shelby, top Republican on the Senate Banking Committee, told Bloomberg Television.
Charles Schumer, the New York Democrat who chairs the congressional Joint Economic Committee, said: “The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times.
”You have to stop to catch your breath. But upon reflection, the alternatives are much worse.’’
During a day of emergency meetings at the New York Fed, the Treasury and Fed reversed initial reluctance to bail out another financial institution.
In March, the Fed helped JPMorgan Chase buy Bear Stearns by providing a $29bn credit line. Earlier This month, the Treasury seized control of troubled US mortgage giants Fannie Mae and Freddie Mac.
But at the weekend the authorities refused to back Lehman Brothers and encouraged Merrill Lynch to sell itself to a rival. Lehman filed for bankruptcy early Monday morning, rocking the financial system, while Merrill announced a $50bn takeover by Bank of America the same day.
AIG’s plans for a private sector capital infusion were dashed by a further slump in its shares on Tuesday after sharp cuts in the insurer’s credit ratings on Monday threatened to fuel a liquidity crisis and push it into bankruptcy.
Tim Geithner, president of the New York Fed, skipped the Fed’s interest-setting meeting to focus on AIG – a sign of the regulators’ heightened state of alert over the insurer’s plight.
Amid increasingly desperate lobbying for government help, David Paterson, New York governor, had said the beleaguered insurer which lost billions of dollars on derivatives and mortgage-backed securities, had “a day” to solve its problems.
AIG’s fight for survival came as Hank Greenberg, AIG’s former chief executive and the company’s biggest shareholder, announced said he was considering a bid to take over all or part of the company.
Mr Greenberg has sent a letter to AIG’s board and its chief executive, Robert Willumstad, complaining about their its refusal to take up his repeated offers to help the company group he ran for decades.
In a letter published in Wednesday’s Financial Times, Mr Greenberg urged urged the US government to step in to provide a loan if private lenders could not be found. He said said AIG needed a temporary bridge loan in order to prevent further ratings cuts “which would likely prove fatal” and “pose systemic risk to the US and international financial systems”.
Under the plan, the latest dramatic intervention by the US government to combat the global credit crisis, the existing management of the company will be replaced and new executives - as yet unnamed - will be appointed. It also gives the US government veto power over major decisions at the company.
The authorities will receive equity giving them a 79.9 per cent stake in AIG. In return, the insurer would receive a bridge loan of $85bn to keep it afloat until it could dispose of billions of dollars in assets. The Fed said the loan was expected to be repaid by the proceeds of selling AIG operating companies. A senior Fed staffer said the most likely outcome was an orderly liquidation of AIG, though it was possible that the firm could survive as an ongoing business.
The loan is at a punitive interest rate of three-month Libor plus 850 basis points, giving AIG a strong incentive to repay it as soon as possible. It will be secured on all AIG’s assets, including those of its subsidiary companies.
The Fed said it was acting to prevent “a disorderly failure of AIG” which would “add to already significant levels of financial market fragility and lead to substantially higher borrowing costs, reduced household wealth and materially weaker economic performance”.
The issuance of the equity participation note to the government is designed to prevent existing shareholders from profiting from a rescue of the company, which has been hobbled by the losses on complex securities backed by mortgages and other assets.
President George W. Bush said the rescue was “to promote stability in the financial markets”.
The emergency moves came after earlier plans for a private sector bail-out were dashed by a further 21 per cent slump in AIG’s shares, reducing the market capitalisation of one of the biggest insurance companies in the world to just over $7.5bn (£4.2bn).
The AIG crisis fuelled another day of turmoil on global markets on Tuesday sparked by the weekend failure of Lehman Brothers and the rushed takeover of Merrill Lynch by Bank of America. Despite the turbulence, marked by brutal conditions in European money markets, the Federal Reserve kept interest rates unchanged at 2 per cent on Tuesday night.
“We are working closely with the Federal Reserve, the SEC and other regulators to enhance the stability and orderliness of our financial markets and minimise the disruption to our economy,” said Hank Paulson, Treasury secretary. “I support the steps taken by the Federal Reserve tonight to assist AIG in continuing to meet its obligations, mitigate broader disruptions and at the same time protect the taxpayers.”
But even as the plan was being being mapped out, there were already signs of political opposition. “I hope they don’t go down the road of a bailout, because where do you stop?’’ Richard Shelby, top Republican on the Senate Banking Committee, told Bloomberg Television.
Charles Schumer, the New York Democrat who chairs the congressional Joint Economic Committee, said: “The administration is approaching an unprecedented step, but unfortunately we are living in unprecedented times.
”You have to stop to catch your breath. But upon reflection, the alternatives are much worse.’’
During a day of emergency meetings at the New York Fed, the Treasury and Fed reversed initial reluctance to bail out another financial institution.
In March, the Fed helped JPMorgan Chase buy Bear Stearns by providing a $29bn credit line. Earlier This month, the Treasury seized control of troubled US mortgage giants Fannie Mae and Freddie Mac.
But at the weekend the authorities refused to back Lehman Brothers and encouraged Merrill Lynch to sell itself to a rival. Lehman filed for bankruptcy early Monday morning, rocking the financial system, while Merrill announced a $50bn takeover by Bank of America the same day.
AIG’s plans for a private sector capital infusion were dashed by a further slump in its shares on Tuesday after sharp cuts in the insurer’s credit ratings on Monday threatened to fuel a liquidity crisis and push it into bankruptcy.
Tim Geithner, president of the New York Fed, skipped the Fed’s interest-setting meeting to focus on AIG – a sign of the regulators’ heightened state of alert over the insurer’s plight.
Amid increasingly desperate lobbying for government help, David Paterson, New York governor, had said the beleaguered insurer which lost billions of dollars on derivatives and mortgage-backed securities, had “a day” to solve its problems.
AIG’s fight for survival came as Hank Greenberg, AIG’s former chief executive and the company’s biggest shareholder, announced said he was considering a bid to take over all or part of the company.
Mr Greenberg has sent a letter to AIG’s board and its chief executive, Robert Willumstad, complaining about their its refusal to take up his repeated offers to help the company group he ran for decades.
In a letter published in Wednesday’s Financial Times, Mr Greenberg urged urged the US government to step in to provide a loan if private lenders could not be found. He said said AIG needed a temporary bridge loan in order to prevent further ratings cuts “which would likely prove fatal” and “pose systemic risk to the US and international financial systems”.
Tuesday, September 16, 2008
Asian stocks tumble as crisis grips more US financial firms
Markets across Asia tumbled on Monday on new fears over the state of the global financial system as Wall Street giant Lehman Brothers Holdings Inc. said it would file for bankruptcy.
Taiwan was the worst hit among the major markets, closing down 4.09%, while Singapore shed 3.27%. However, in Australia, dealers fought back slightly from earlier losses to end the day off 1.8%. But the worst hit of Asia’s bourses was Jakarta, which was 4.7% off, while Manila shed 4.2%. Tokyo, Hong Kong, Shanghai and Seoul were closed for public holidays.
The financial sector suffered most as investment bank Lehman Brothers, hit hard by the US subprime real estate meltdown, staged a last-ditch effort to find a buyer. When it failed, it announced that it would file for bankruptcy “in order to protect its assets and maximize value”.
The US Federal Reserve and major global banks opened up fresh credit as markets braced for its collapse, with many fearing a domino effect that would ravage the rest of the global financial system.
In the fallout, Bank of America Corp. took over Merrill Lynch and Co. in a $50 billion (Rs2.3 trillion) deal, insurance giant American International Group Inc. (AIG) was reported to have sought an emergency loan to head off its own crisis and a group of banks set up a $70 billion global emergency fund. “Obviously, with Lehman looking to file for bankruptcy protection, Bank of America buying Merrill Lynch and AIG under pressure to sell assets, you’ve probably seen more in one day of financial history than we’ve seen since the great crash of 1929,” Marcus Droga, associate director of Macquarie Private Wealth, a division of the Macquarie Group Ltd, told Dow Jones Newswires.
In other markets, Wellington shares slid 1.26%, Bangkok was off 1.83%, Kuala Lumpur lost 1.2% and Mumbai was 3.35% down after opening 5.19% off.
Australia’s benchmark SP/ASX200 index closed down 86.1 points at 4,817.7, led by heavy losses in the financial sector, while the broader All Ordinaries dropped 82.1 points to end the day at 4,875.
Singapore’s blue-chip Straits Times Index skidded 84.12 points to 2,486.55. “The market is terrible. The best is to stay away,” a local house dealer said.
Malaysian share prices ended 1.2% lower, dealers said. The Kuala Lumpur Composite Index shed 12.40 points, to close at 1,031.63.
Indonesian shares slumped 4.7% and the Jakarta Composite Index tumbled 84.81 points to its lowest closing level since March 2007 to 1,719.25. PT Bank Mandiri (Persero) Tbk fell 8.2%.
The Philippine composite index fell 109.96 points to 2,536.16, its lowest level in six weeks. In New Zealand, share prices fell by 1.26% and the country’s benchmark NZX-50 index fell 41.78 points to 3,319.90.
Taiwan was the worst hit among the major markets, closing down 4.09%, while Singapore shed 3.27%. However, in Australia, dealers fought back slightly from earlier losses to end the day off 1.8%. But the worst hit of Asia’s bourses was Jakarta, which was 4.7% off, while Manila shed 4.2%. Tokyo, Hong Kong, Shanghai and Seoul were closed for public holidays.
The financial sector suffered most as investment bank Lehman Brothers, hit hard by the US subprime real estate meltdown, staged a last-ditch effort to find a buyer. When it failed, it announced that it would file for bankruptcy “in order to protect its assets and maximize value”.
The US Federal Reserve and major global banks opened up fresh credit as markets braced for its collapse, with many fearing a domino effect that would ravage the rest of the global financial system.
In the fallout, Bank of America Corp. took over Merrill Lynch and Co. in a $50 billion (Rs2.3 trillion) deal, insurance giant American International Group Inc. (AIG) was reported to have sought an emergency loan to head off its own crisis and a group of banks set up a $70 billion global emergency fund. “Obviously, with Lehman looking to file for bankruptcy protection, Bank of America buying Merrill Lynch and AIG under pressure to sell assets, you’ve probably seen more in one day of financial history than we’ve seen since the great crash of 1929,” Marcus Droga, associate director of Macquarie Private Wealth, a division of the Macquarie Group Ltd, told Dow Jones Newswires.
In other markets, Wellington shares slid 1.26%, Bangkok was off 1.83%, Kuala Lumpur lost 1.2% and Mumbai was 3.35% down after opening 5.19% off.
Australia’s benchmark SP/ASX200 index closed down 86.1 points at 4,817.7, led by heavy losses in the financial sector, while the broader All Ordinaries dropped 82.1 points to end the day at 4,875.
Singapore’s blue-chip Straits Times Index skidded 84.12 points to 2,486.55. “The market is terrible. The best is to stay away,” a local house dealer said.
Malaysian share prices ended 1.2% lower, dealers said. The Kuala Lumpur Composite Index shed 12.40 points, to close at 1,031.63.
Indonesian shares slumped 4.7% and the Jakarta Composite Index tumbled 84.81 points to its lowest closing level since March 2007 to 1,719.25. PT Bank Mandiri (Persero) Tbk fell 8.2%.
The Philippine composite index fell 109.96 points to 2,536.16, its lowest level in six weeks. In New Zealand, share prices fell by 1.26% and the country’s benchmark NZX-50 index fell 41.78 points to 3,319.90.
Lehman fall may deepen Indian realtors' credit woes
Lehman Brothers’ bankruptcy is likely to cost Indian real estate dear. It may impact the financial major’s existing investments worth $500 million in realty firms, including DLF and Unitech, besides drying up another $500-million worth of potential investment which was expected to flow into Unitech’s Mumbai projects.
The news of Lehman’s collapse brought the BSE realty index down by 7.65% on Monday, while the benchmark Sensex declined 3.35%. Both DLF and Unitech fell 7.5%.
Lehman’s fall signals a deepening of credit crisis for Indian developers, who have lately been battling falling sales, rising cost of construction and tightening credit. It is expected that the US-based firm is likely to go for a fire sale of its assets.
The financial services major was very bullish on India and was among the active investors in Indian real estate. Early this year, it had leased out an office space in Mumbai paying Rs 1 crore per month as rental. This would divert a part of fresh funds seeking to invest in Indian realty.
This is because global fund houses have country-allocations. And as they buyout Lehman’s stake in some of the Indian assets, they will end up diverting some of the fresh funds-in-hand to existing assets rather than investing in new projects.
“Lehman’s departure will impact future cash flows of real estate companies. In a market situation like today’s, it will be all the more difficult for the firms to raise funds,” says Karvy Stock Broking vice-president Ambareesh Baliga.
Lehman invested $200 million in DLF promoter group company DLF Assets last year and bought 50% stake in Unitech’s Mumbai project for $175 million a few months ago. It had also invested $80 million in Bangalore-based SEZ Gandhi City and was likely to hike its share to $300 million.
Lehman’s other investments include a 40% stake in an IT park project of Peninsula Land in Hyderabad for an initial investment of Rs 50 crore. It had also teamed up with Mumbai-based developer HDIL to bid for the redevelopment of Asia’s largest slum Dharavi.
Wherever the developers had received fund, they are safe. But where the funds are yet to come, the developers could get stuck. Some analysts say a distress sale by Lehman will impact the valuation of existing projects.
DLF CFO Ramesh Sanka had earlier told ET that Lehman’s sale of investments in DAL would not impact DAL’s valuation. Unitech MD Sanjay Chandra said that his company had already received funds. So, the company won’t get impacted by Lehman’s bankruptcy.
Some industry executives say that FDI norms of a three-year lock-in period may prevent Lehman from making an immediate sale. But analysts argue that the lock-in period in case of bankruptcy may not hold.
The news of Lehman’s collapse brought the BSE realty index down by 7.65% on Monday, while the benchmark Sensex declined 3.35%. Both DLF and Unitech fell 7.5%.
Lehman’s fall signals a deepening of credit crisis for Indian developers, who have lately been battling falling sales, rising cost of construction and tightening credit. It is expected that the US-based firm is likely to go for a fire sale of its assets.
The financial services major was very bullish on India and was among the active investors in Indian real estate. Early this year, it had leased out an office space in Mumbai paying Rs 1 crore per month as rental. This would divert a part of fresh funds seeking to invest in Indian realty.
This is because global fund houses have country-allocations. And as they buyout Lehman’s stake in some of the Indian assets, they will end up diverting some of the fresh funds-in-hand to existing assets rather than investing in new projects.
“Lehman’s departure will impact future cash flows of real estate companies. In a market situation like today’s, it will be all the more difficult for the firms to raise funds,” says Karvy Stock Broking vice-president Ambareesh Baliga.
Lehman invested $200 million in DLF promoter group company DLF Assets last year and bought 50% stake in Unitech’s Mumbai project for $175 million a few months ago. It had also invested $80 million in Bangalore-based SEZ Gandhi City and was likely to hike its share to $300 million.
Lehman’s other investments include a 40% stake in an IT park project of Peninsula Land in Hyderabad for an initial investment of Rs 50 crore. It had also teamed up with Mumbai-based developer HDIL to bid for the redevelopment of Asia’s largest slum Dharavi.
Wherever the developers had received fund, they are safe. But where the funds are yet to come, the developers could get stuck. Some analysts say a distress sale by Lehman will impact the valuation of existing projects.
DLF CFO Ramesh Sanka had earlier told ET that Lehman’s sale of investments in DAL would not impact DAL’s valuation. Unitech MD Sanjay Chandra said that his company had already received funds. So, the company won’t get impacted by Lehman’s bankruptcy.
Some industry executives say that FDI norms of a three-year lock-in period may prevent Lehman from making an immediate sale. But analysts argue that the lock-in period in case of bankruptcy may not hold.
Saturday, September 13, 2008
To duck investor rage, GMDC bosses vanish
Perhaps for the first time since the formation of Gujarat state it has so happened that the chairperson, managing director and director (all IAS officers) were not present at the annual general meeting (AGM) of a listed public sector enterprise (PSE).
Fearing the wrath of minority shareholders, who have a 26% stake in Gujarat Mineral Development Corp (GMDC), chairperson Gauri Kumar, managing director Vijaylaxmi Joshi and director Tapan Ray did a vanishing act at the AGM on Thursday.
Many angry shareholders had come prepared to grill the management for their proposal to contribute 30% of profit before tax (PBT) to a state-owned agency Gujarat Socio Economic Development Society for social causes. Secretary from the state mining department, RK Shah, was nominated by GMDC’s management to conduct the AGM. But, after passing the ordinary resolutions regarding dividend and annual results for 2007-08, he could not take up the special resolutions and was forced to adjourn the AGM to September 24, due to strong protests from the shareholders present at the venue.
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Apart from this major contentious issue, the other special resolutions to increase the authorised share capital as well as issue of bonus shares could not be passed.
Gauri Kumar could not be contacted. GMDC’s managing director, VJ Joshi, arrogantly told DNA’s correspondent, “I will not speak to the press.” This entire episode has severely hit the investor-friendly image that Gujarat’s PSEs have developed over the past few decades. With 74% stake in GMDC, the state government can clear all the special resolutions legally. But, the company’s market valuations will take a big hit and it will go against the corporate governance norms which seek to protect the interest of retail shareholders.
“It has never happened in the history of Gujarat, that a company’s top officials were absent at an AGM,” said Parthiv Shah, senior research analyst at city-based broking firm Khandwala Integrated Financial Services.
“The AGM is the only platform where shareholders can question the company officials and know more about important business decisions that have an impact on their investments. The decision to transfer 30% of PBT for social causes is like moving away from a free-market place to a communist era,” he said.
Chandrakant Sandesara, a shareholder of GMDC who attended the AGM told DNA, “Why are the company’s top officials not willing to face us. If the government wants to spend more on social causes they should increase the dividend payouts.”
He said shareholders from Mumbai and other places outside the state had specially come down to Ahmedabad to voice their concern at the AGM.
Fearing the wrath of minority shareholders, who have a 26% stake in Gujarat Mineral Development Corp (GMDC), chairperson Gauri Kumar, managing director Vijaylaxmi Joshi and director Tapan Ray did a vanishing act at the AGM on Thursday.
Many angry shareholders had come prepared to grill the management for their proposal to contribute 30% of profit before tax (PBT) to a state-owned agency Gujarat Socio Economic Development Society for social causes. Secretary from the state mining department, RK Shah, was nominated by GMDC’s management to conduct the AGM. But, after passing the ordinary resolutions regarding dividend and annual results for 2007-08, he could not take up the special resolutions and was forced to adjourn the AGM to September 24, due to strong protests from the shareholders present at the venue.
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Apart from this major contentious issue, the other special resolutions to increase the authorised share capital as well as issue of bonus shares could not be passed.
Gauri Kumar could not be contacted. GMDC’s managing director, VJ Joshi, arrogantly told DNA’s correspondent, “I will not speak to the press.” This entire episode has severely hit the investor-friendly image that Gujarat’s PSEs have developed over the past few decades. With 74% stake in GMDC, the state government can clear all the special resolutions legally. But, the company’s market valuations will take a big hit and it will go against the corporate governance norms which seek to protect the interest of retail shareholders.
“It has never happened in the history of Gujarat, that a company’s top officials were absent at an AGM,” said Parthiv Shah, senior research analyst at city-based broking firm Khandwala Integrated Financial Services.
“The AGM is the only platform where shareholders can question the company officials and know more about important business decisions that have an impact on their investments. The decision to transfer 30% of PBT for social causes is like moving away from a free-market place to a communist era,” he said.
Chandrakant Sandesara, a shareholder of GMDC who attended the AGM told DNA, “Why are the company’s top officials not willing to face us. If the government wants to spend more on social causes they should increase the dividend payouts.”
He said shareholders from Mumbai and other places outside the state had specially come down to Ahmedabad to voice their concern at the AGM.
Thursday, September 11, 2008
Lehman shares drop as Wall Street questions survival
Lehman Brothers shares lost about 40 percent on Thursday as Wall Street questioned whether the investment bank will survive because of its failure to sell assets to cover losses from toxic real estate investments.
In early trade, the stock was recently down $2.92, or 40 percent, at $4.32 as analysts voiced doubts about the bank's survival plan, laid out on Wednesday by Chief Executive Dick Fuld.
The shares have lost about 76 percent since Monday and are down 94 percent from their 52-week high of $67.73.
Other financial stocks have fallen sharply in the past week and continued to struggle on Thursday morning. Investment firm Merrill Lynch shares fell 14 percent to $20.00, insurer AIG was down 9.5 percent at $15.84 and Washington Mutual fell 14 percent to $2.00.
But Lehman -- founded in 1850 by three German immigrants who traded cotton -- garnered the most attention on Thursday.
"As much as they try to calm people down or calm investors down, investors don't have yet the answers they need," said Rose Grant, managing director of Eastern Investment Advisors in Boston. "There's a complete lack of faith, lack of confidence, and lack of trust."
Lehman announced a record quarterly loss of $3.9 billion on Wednesday, and said it would spin off distressed assets and sell a stake in its asset management business.
On Thursday, a string of analysts from banks including JPMorgan, Wachovia, Goldman Sachs and Citigroup widened loss estimates and cut price targets for Lehman Brothers.
We thought getting news out of Lehman was going to clear the dark cloud but it really doesn't. It just leaves us with a company that's limping along, that may or may not make it," said Arthur Hogan, chief market analyst at Jefferies & Co in Boston.
The company has written down billions of dollars of assets during the last year, largely holdings of complex mortgage-backed securities. And over the last several months, the bank has been battling rumors of defecting clients and talk of a takeover at a fire sale price.
"It's unfortunate that we're in the kind of position now where events can take over. The stock is telling us that Dick Fuld is running out of options," said Michael Holland, founder, Holland & Co, which oversees more than $4 billion of investments. "Unfortunately for Fuld, who has been very adamant about keeping Lehman independent, he has to find a partner now, someone to acquire them."
Lehman's survival may hinge on the sale of a 55 percent stake in its asset management business, Neuberger Berman. But not everyone is confident a deal will be consummated.
"We are not even sure that the auction process for 55 percent of their asset management group is going to work because the people that win the auction need to find the money to buy it," Hogan said.
The Lehman worries were not just affecting the stock. Its credit protection costs soared to a record and some of its bonds traded near distressed levels.
Lehman bond prices fell, with bonds offering yields of 10 percent or more, an indication traders now view the debt as high-yield or even distressed.
Five-year credit default swaps traded at 768 basis points on Thursday, or $768,000 a year to protect $10 million of debt, widening 188 basis points from Wednesday's close, according to CMA DataVision.
In early trade, the stock was recently down $2.92, or 40 percent, at $4.32 as analysts voiced doubts about the bank's survival plan, laid out on Wednesday by Chief Executive Dick Fuld.
The shares have lost about 76 percent since Monday and are down 94 percent from their 52-week high of $67.73.
Other financial stocks have fallen sharply in the past week and continued to struggle on Thursday morning. Investment firm Merrill Lynch shares fell 14 percent to $20.00, insurer AIG was down 9.5 percent at $15.84 and Washington Mutual fell 14 percent to $2.00.
But Lehman -- founded in 1850 by three German immigrants who traded cotton -- garnered the most attention on Thursday.
"As much as they try to calm people down or calm investors down, investors don't have yet the answers they need," said Rose Grant, managing director of Eastern Investment Advisors in Boston. "There's a complete lack of faith, lack of confidence, and lack of trust."
Lehman announced a record quarterly loss of $3.9 billion on Wednesday, and said it would spin off distressed assets and sell a stake in its asset management business.
On Thursday, a string of analysts from banks including JPMorgan, Wachovia, Goldman Sachs and Citigroup widened loss estimates and cut price targets for Lehman Brothers.
We thought getting news out of Lehman was going to clear the dark cloud but it really doesn't. It just leaves us with a company that's limping along, that may or may not make it," said Arthur Hogan, chief market analyst at Jefferies & Co in Boston.
The company has written down billions of dollars of assets during the last year, largely holdings of complex mortgage-backed securities. And over the last several months, the bank has been battling rumors of defecting clients and talk of a takeover at a fire sale price.
"It's unfortunate that we're in the kind of position now where events can take over. The stock is telling us that Dick Fuld is running out of options," said Michael Holland, founder, Holland & Co, which oversees more than $4 billion of investments. "Unfortunately for Fuld, who has been very adamant about keeping Lehman independent, he has to find a partner now, someone to acquire them."
Lehman's survival may hinge on the sale of a 55 percent stake in its asset management business, Neuberger Berman. But not everyone is confident a deal will be consummated.
"We are not even sure that the auction process for 55 percent of their asset management group is going to work because the people that win the auction need to find the money to buy it," Hogan said.
The Lehman worries were not just affecting the stock. Its credit protection costs soared to a record and some of its bonds traded near distressed levels.
Lehman bond prices fell, with bonds offering yields of 10 percent or more, an indication traders now view the debt as high-yield or even distressed.
Five-year credit default swaps traded at 768 basis points on Thursday, or $768,000 a year to protect $10 million of debt, widening 188 basis points from Wednesday's close, according to CMA DataVision.
Fitch sees oil prices in the range of $50-$100 a barrel
Global rating agency Fitch on Monday said, it expects oil prices to remain in the range of $50 to $100 per barrel, despite a fall in prices in the past few weeks. Companies, whose margins are under threat from high crude oil and gas prices need to be prepared for oil prices to remain in the range of $50-100 per barrel, Fitch said in a report.
Crude oil contract for October closed at around $109 a barrel on Friday from its all-time high of $147 a barrel. On Monday, US light crude fell by $1 to $105.23 a barrel, reversing gains of nearly $4 a barrel, as the dollar rose to its highest level against the euro since October.
According to Fitch, oil prices would continue to decline, particularly as the global economy slows. However, it does not anticipate that price levels seen in 2004 and prior, are likely to recur.
The report also noted that the oil and gas price environment over the last 18 to 24 months have generally benefited the oil and gas firms. Also, unprecedented high real wholesale prices has mostly led to a significant increase in cash flows and margins.
However, some firms without significant upstream exploration and production assets have conversely faced a significant margin squeeze. The financial performance of companies like Indian Oil Corporation and Sinopec of China has suffered significantly over the last two years.
This is because governments wanting to control inflation and maintain economic growth momentum have not allowed the companies to fully pass through the higher costs of crude oil to customers. Goldman Sachs analyst Arjun N Murti predicted last month that crude prices were heading towards a level of $150-200 a barrel in the next six months to two years.
While reasserting his view that crude oil was likely to remain strong in the near future, Mr Murti said in an interview with the American stock market weekly Barron’s, Goldman Sachs’ long-term forecast for 20 years was that the price could fall back to $75 a barrel.
“We have always assumed that at some point you get a sustained drop in demand. Our long-term oil forecast looking out 20 years is to fall back to $75 a barrel or some lower number,” Barron’s quoted Mr Murti as saying.
In a Goldman Sachs research note last month, Mr Murti had written that the possibility of oil price rising to $150-
200 per barrel level was increasingly likely over the next 6 to 24 months
Crude oil contract for October closed at around $109 a barrel on Friday from its all-time high of $147 a barrel. On Monday, US light crude fell by $1 to $105.23 a barrel, reversing gains of nearly $4 a barrel, as the dollar rose to its highest level against the euro since October.
According to Fitch, oil prices would continue to decline, particularly as the global economy slows. However, it does not anticipate that price levels seen in 2004 and prior, are likely to recur.
The report also noted that the oil and gas price environment over the last 18 to 24 months have generally benefited the oil and gas firms. Also, unprecedented high real wholesale prices has mostly led to a significant increase in cash flows and margins.
However, some firms without significant upstream exploration and production assets have conversely faced a significant margin squeeze. The financial performance of companies like Indian Oil Corporation and Sinopec of China has suffered significantly over the last two years.
This is because governments wanting to control inflation and maintain economic growth momentum have not allowed the companies to fully pass through the higher costs of crude oil to customers. Goldman Sachs analyst Arjun N Murti predicted last month that crude prices were heading towards a level of $150-200 a barrel in the next six months to two years.
While reasserting his view that crude oil was likely to remain strong in the near future, Mr Murti said in an interview with the American stock market weekly Barron’s, Goldman Sachs’ long-term forecast for 20 years was that the price could fall back to $75 a barrel.
“We have always assumed that at some point you get a sustained drop in demand. Our long-term oil forecast looking out 20 years is to fall back to $75 a barrel or some lower number,” Barron’s quoted Mr Murti as saying.
In a Goldman Sachs research note last month, Mr Murti had written that the possibility of oil price rising to $150-
200 per barrel level was increasingly likely over the next 6 to 24 months
Gujarat PSEs lose Rs 1,100 cr in a day
Listed PSE companies from Gujarat took a huge beating on the bourses as investors sold heavily in these stocks, following the state government’s logic-defying ‘request’ to these entities to set aside 30 per cent of their profit before tax (PBT) for social causes.
On a single day, the market capitalisation of Gujarat Mineral Development Corp (GMDC), Gujarat Alkalies and Chemicals (GACL), Gujarat State Fertlizers and Chemicals (GSFC), Gujarat Narmada Valley Fertilizers Corp (GNFC), Gujarat Industrial Power Corp (GIPCL) and Gujarat State Petronet Limited (GSPL) fell by Rs 1,097 crores.
More importantly, the value of government’s holding in these companies was shaved off by Rs 590 crore on a single day. Shares of GMDC, which has already declared in its annual report it would contribute nearly Rs 123 crore for social causes, fell like a rock. Only GSPL could hold on to slender gains on a day the Sensex fell by around one per cent.
Analysts have already criticised government’s move saying it would erode the equity of these companies, as was evident to everyone on Thursday. Instead, they have suggested that these companies pay higher dividend to shareholders and the government, being the majority shareholder, use that amount for social causes.
TOI learnt that managing directors of all these six listed companies had together made a representation to the state government against the move, even as they prepared to call annual general meetings (AGM) to seek consent of shareholders to comply with the government’s wishes. At least three PSEs — GMDC, GSFC and GIPCL — have their AGMs scheduled within this month. The decision to transfer 30 per cent of profit before tax was taken earlier this year amid strong opposition from IAS officials heading these PSEs.
The most vocal among critics of the move was GNFC CMD Sudha Anchalia, who had clearly told the government that such a move, aimed at ensuring corporate social responsibility, would not only bring down the rating of the companies but also affect their expansion plans because of reduced liquidity.
On a single day, the market capitalisation of Gujarat Mineral Development Corp (GMDC), Gujarat Alkalies and Chemicals (GACL), Gujarat State Fertlizers and Chemicals (GSFC), Gujarat Narmada Valley Fertilizers Corp (GNFC), Gujarat Industrial Power Corp (GIPCL) and Gujarat State Petronet Limited (GSPL) fell by Rs 1,097 crores.
More importantly, the value of government’s holding in these companies was shaved off by Rs 590 crore on a single day. Shares of GMDC, which has already declared in its annual report it would contribute nearly Rs 123 crore for social causes, fell like a rock. Only GSPL could hold on to slender gains on a day the Sensex fell by around one per cent.
Analysts have already criticised government’s move saying it would erode the equity of these companies, as was evident to everyone on Thursday. Instead, they have suggested that these companies pay higher dividend to shareholders and the government, being the majority shareholder, use that amount for social causes.
TOI learnt that managing directors of all these six listed companies had together made a representation to the state government against the move, even as they prepared to call annual general meetings (AGM) to seek consent of shareholders to comply with the government’s wishes. At least three PSEs — GMDC, GSFC and GIPCL — have their AGMs scheduled within this month. The decision to transfer 30 per cent of profit before tax was taken earlier this year amid strong opposition from IAS officials heading these PSEs.
The most vocal among critics of the move was GNFC CMD Sudha Anchalia, who had clearly told the government that such a move, aimed at ensuring corporate social responsibility, would not only bring down the rating of the companies but also affect their expansion plans because of reduced liquidity.
Wednesday, September 10, 2008
Sugar mills: govt extends date for filing financial bids
The state government has extended the date for filing of financial bids by private investors till 2 pm on September 16 in connection with the divestment of 31 sugar mills of the public sector UP State Sugar Corporation.
In July, five companies — Gammon India, Dalmia, Era, Chaddha and Noida-based Uflex — had submitted expressions of interests (EoIs) in accordance with the modified terms and conditions. On Monday, among the five companies, only Gammon India filed the financial bid.
Gammon India has emerged as the frontrunner to acquire the public sector unit. According to a senior government official: “If the other four companies fail to file
financial bids by September 16, the government will consider the price quoted by Gammon India.”
The official added that on September 6, Gammon India had sought permission to allow one of its 100 per cent-owned subsidiary to take part in the bidding process, which the government had accepted. He, however, claimed that the price quoted by Gammon India should not be lower than the reserve price worked out by the valuation experts hired by the government.
“Even if the price quoted by Gammon India is lower than the reserve price, the government may offer to the company if it was willing to quote the price higher than the reserve price,” the official said. “If the single bidder, Gammon India, is willing to quote a higher price than the reserve price, then the government may consider its bids,” he added.
In July, five companies — Gammon India, Dalmia, Era, Chaddha and Noida-based Uflex — had submitted expressions of interests (EoIs) in accordance with the modified terms and conditions. On Monday, among the five companies, only Gammon India filed the financial bid.
Gammon India has emerged as the frontrunner to acquire the public sector unit. According to a senior government official: “If the other four companies fail to file
financial bids by September 16, the government will consider the price quoted by Gammon India.”
The official added that on September 6, Gammon India had sought permission to allow one of its 100 per cent-owned subsidiary to take part in the bidding process, which the government had accepted. He, however, claimed that the price quoted by Gammon India should not be lower than the reserve price worked out by the valuation experts hired by the government.
“Even if the price quoted by Gammon India is lower than the reserve price, the government may offer to the company if it was willing to quote the price higher than the reserve price,” the official said. “If the single bidder, Gammon India, is willing to quote a higher price than the reserve price, then the government may consider its bids,” he added.
Monday, September 08, 2008
Expert terms Indo-US nuke deal 'foolish and risky'
The Indo-US civil nuclear agreement approved by the 45 nation Nuclear Suppliers Group (NSG) is a "foolish and risky deal" that will make every country free to sell nuclear technology to India while "asking virtually nothing from India in return", said an US based expert.
Mira Kamdar, a fellow at Asia Society, New York, writes in the Washington Post that the deal in the process will undermining the very international system that India so ardently seeks to join.
Kamdar said that while India needs energy, "this foolish, risky deal is not the way to get any of these things. India's democracy has already paid a crippling price, and now the planet may too."
The Indo-US nuclear co-operation agreement was approved by the NSG at its meeting in Vienna this weekend. However, it still has to find US congressional approval.
The deal, Kamdar argues, risks triggering a new arms race in Asia.
If it passes, a "miffed and unstable Pakistan will seek nuclear parity with India, and China will fume at a transparent US ploy to balance Beijing's rise by building up India as a counterweight next door," the Daily Times quoted Kamdar, as saying.
The pact will gut global efforts to contain the spread of nuclear materials and encourage other countries to flout the Nuclear Non-Proliferation Treaty (NPT) that India is now being rewarded for failing to sign.
Kamdar believes that the deal will divert billions of dollars away from India's real development needs in sustainable agriculture, education, health care, housing, sanitation and roads.
It will also distract India from developing clean energy sources, such as wind and solar power, and from reducing emissions from its many coal plants, she added.
Instead, the pact will focus the nation's efforts on an energy source that will, under the rosiest of projections, contribute a mere 8 percent of India's total energy needs - and that will not happened until 2030, Kamdar said.
The deal will generate billions of dollars in lucrative contracts for major Indian and US companies as well as help resuscitate the moribund American nuclear power industry.
France and Russia, both of which support the deal, will reap huge profits in India. According to one estimate, the deal will generate more than 100 billion dollars in business over the next 20 years, as well as a large number of jobs in India and the United States. (ANI)
Mira Kamdar, a fellow at Asia Society, New York, writes in the Washington Post that the deal in the process will undermining the very international system that India so ardently seeks to join.
Kamdar said that while India needs energy, "this foolish, risky deal is not the way to get any of these things. India's democracy has already paid a crippling price, and now the planet may too."
The Indo-US nuclear co-operation agreement was approved by the NSG at its meeting in Vienna this weekend. However, it still has to find US congressional approval.
The deal, Kamdar argues, risks triggering a new arms race in Asia.
If it passes, a "miffed and unstable Pakistan will seek nuclear parity with India, and China will fume at a transparent US ploy to balance Beijing's rise by building up India as a counterweight next door," the Daily Times quoted Kamdar, as saying.
The pact will gut global efforts to contain the spread of nuclear materials and encourage other countries to flout the Nuclear Non-Proliferation Treaty (NPT) that India is now being rewarded for failing to sign.
Kamdar believes that the deal will divert billions of dollars away from India's real development needs in sustainable agriculture, education, health care, housing, sanitation and roads.
It will also distract India from developing clean energy sources, such as wind and solar power, and from reducing emissions from its many coal plants, she added.
Instead, the pact will focus the nation's efforts on an energy source that will, under the rosiest of projections, contribute a mere 8 percent of India's total energy needs - and that will not happened until 2030, Kamdar said.
The deal will generate billions of dollars in lucrative contracts for major Indian and US companies as well as help resuscitate the moribund American nuclear power industry.
France and Russia, both of which support the deal, will reap huge profits in India. According to one estimate, the deal will generate more than 100 billion dollars in business over the next 20 years, as well as a large number of jobs in India and the United States. (ANI)
Australia baulks at selling uranium to India
Australia will not sell uranium to India despite voting with other members of the Nuclear Suppliers Group (NSG) to end a 34-year embargo on nuclear trade with Delhi, officials said Monday.
Prime Minister Kevin Rudd took office in November pledged to withhold uranium sales so long as India remains outside the Nuclear Non-Proliferation Treaty (NPT).
John Howard, his conservative predecessor, held that India's refusal to sign the NPT should not debar it from importing uranium from Australia, custodian of 40 percent of the world's known reserves.
'Labor is committed to supplying uranium to only those countries party to the NPT,' Trade Minister Simon Crean told The Australian newspaper.
'Australia will therefore not be supplying uranium to India while it is not a member of the NPT.'
In a NSG meeting in Vienna at the weekend Australia supported a waiver allowing India to engage in nuclear trade so long as its nuclear programme came under an inspection regime.
The opposition Liberal Party said the Rudd government, which has no objections to selling uranium to China, is being hypocritical by at once supporting technology transfer but banning the export of the feedstock for the nuclear power stations that India wants to build.
The Liberals argue that nuclear power is green energy and Australia ought to be supporting India's efforts to reduce its emissions.
Prime Minister Kevin Rudd took office in November pledged to withhold uranium sales so long as India remains outside the Nuclear Non-Proliferation Treaty (NPT).
John Howard, his conservative predecessor, held that India's refusal to sign the NPT should not debar it from importing uranium from Australia, custodian of 40 percent of the world's known reserves.
'Labor is committed to supplying uranium to only those countries party to the NPT,' Trade Minister Simon Crean told The Australian newspaper.
'Australia will therefore not be supplying uranium to India while it is not a member of the NPT.'
In a NSG meeting in Vienna at the weekend Australia supported a waiver allowing India to engage in nuclear trade so long as its nuclear programme came under an inspection regime.
The opposition Liberal Party said the Rudd government, which has no objections to selling uranium to China, is being hypocritical by at once supporting technology transfer but banning the export of the feedstock for the nuclear power stations that India wants to build.
The Liberals argue that nuclear power is green energy and Australia ought to be supporting India's efforts to reduce its emissions.
How low can the oil price go?
If we assume we’re going to have a global recession similar to the one we had after the bursting of the technology bubble, then it’s worth our while checking what happened to oil prices at that time
Now that international crude oil prices have retreated to around $106 (about Rs4,706) a barrel from a high of $147, the question everybody is asking is how much further can they ease. If we assume we’re going to have a global recession similar to the one we had after the bursting of the technology bubble, then it’s worth our while checking what happened to oil prices at that time.
A global recession is technically defined as growth below 2.5%. By that criterion, the last recession the world had was in 2001, when gross domestic product (GDP) growth fell to 2.22%, from 4.67% in 2000. Nymex crude oil prices, which had gone above $35 a barrel in September and October 2000, fell briefly below $20 a barrel in late 2001 before recovering in April 2002 to above $26 a barrel. According to the graphic shown below (which shows the month-end prices) oil prices fell from $33.12 a barrel at the end of August 2000 to $19.44 a barrel by the end of October 2001. To cut a long story short, the fall in oil prices from the peak to the lowest point was about 44%. This time, at around $106 a barrel, oil prices are already about 28% off their highs.
The world recession before the 2001 one occurred during 1991-93—global GDP growth was 1.45% in 1991, 2.02% in 1992 and 2% in 1993. At that time, taking the month-end price figures, crude oil prices went down from $39.5 per barrel at the end of September 1990 to $14.17 per barrel by the end of December 1993, a fall of 64%. Admittedly, the peak oil price at that time was the result of the first gulf war, so the situation then was very different from the present. At the same time, the recession of the early 1990s had some features common to the current downturn—they both had a housing crunch in the US at its core.
If the current slowdown mimics the recession of 2001 and oil prices drop by around 44% or so, then the lower level for crude could well be within the $80-$90 a barrel level. If, however, this recession is going to be longer and deeper, closer to that of the early 1990s, then the drop in oil prices would be much more.
Which is the more likely scenario? Those who argue that oil prices are not likely to fall much say that the world of 2008 is very different, with emerging market growth well above the levels they were at in 2001 on the one hand and with supply constraints on the other. For example, in its August short-term energy outlook, the US government’s Energy Information Administration said it expects crude prices to average $124 a barrel in 2009.
Also, there are those who argue that oil has been a massive bubble and we’re going to see a major correction in oil prices. A research note from broking firm First Global, for instance, says, “Over the next 12-18 months, we expect oil prices to reach around $50 a barrel, which is roughly the same level from where the current oil bubble began. And who knows, we could see oil back at $30 over the next couple of years.”
In 2001, only one large sector—technology—was hurt badly. This time the cause of the downturn is the US housing sector and research has shown that it takes much longer for an economy to climb out of a housing bust. Add to that the impact of the bust on big banks and the currently ongoing process of de-leveraging, the current slowdown is likely to be worse than in 2001. That calls for lower global growth and bigger declines in commodity and oil prices.
India’s premium rises against other emerging markets
The Indian market has been one of the chief beneficiaries of the fall in international crude oil prices. According to the S&P/Citigroup Global Equity Indices, the one-year forward price-earnings (P-E) multiple for Indian market estimates (based on earnings forecasts from IBES, or the Institutional Brokers’ Estimate System) was 14.98 at the end of August, a 38.5% premium to the P-E multiple for emerging markets and a 20.6% premium to Asia-Pacific emerging markets.
Despite being at the centre of the economic storm, the US has done well
At the end of July, the Indian market traded at a forward P-E multiple of 14.4, a 26% premium to emerging markets and a 15.4% premium to Asia-Pacific emerging markets.
At the end of June, India’s premium over emerging markets was even lower, at 12.4%, while that over Asia-Pacific emerging markets was 11.4%.
The premium over other emerging markets has come down quite a bit from 64.2% at the beginning of the year, but it has increased once again in recent months as oil prices waned.
That’s not very surprising. But what is unexpected is that the Indian market is now cheaper than the US, where the one-year forward P-E multiple at the end of August was 15.23. The US market was at a 19% premium to the global market P-E at end-August. At the beginning of the year, that premium was just 7.6%. Despite being at the centre of the storm that has battered global markets, the US has done very well indeed.
Now that international crude oil prices have retreated to around $106 (about Rs4,706) a barrel from a high of $147, the question everybody is asking is how much further can they ease. If we assume we’re going to have a global recession similar to the one we had after the bursting of the technology bubble, then it’s worth our while checking what happened to oil prices at that time.
A global recession is technically defined as growth below 2.5%. By that criterion, the last recession the world had was in 2001, when gross domestic product (GDP) growth fell to 2.22%, from 4.67% in 2000. Nymex crude oil prices, which had gone above $35 a barrel in September and October 2000, fell briefly below $20 a barrel in late 2001 before recovering in April 2002 to above $26 a barrel. According to the graphic shown below (which shows the month-end prices) oil prices fell from $33.12 a barrel at the end of August 2000 to $19.44 a barrel by the end of October 2001. To cut a long story short, the fall in oil prices from the peak to the lowest point was about 44%. This time, at around $106 a barrel, oil prices are already about 28% off their highs.
The world recession before the 2001 one occurred during 1991-93—global GDP growth was 1.45% in 1991, 2.02% in 1992 and 2% in 1993. At that time, taking the month-end price figures, crude oil prices went down from $39.5 per barrel at the end of September 1990 to $14.17 per barrel by the end of December 1993, a fall of 64%. Admittedly, the peak oil price at that time was the result of the first gulf war, so the situation then was very different from the present. At the same time, the recession of the early 1990s had some features common to the current downturn—they both had a housing crunch in the US at its core.
If the current slowdown mimics the recession of 2001 and oil prices drop by around 44% or so, then the lower level for crude could well be within the $80-$90 a barrel level. If, however, this recession is going to be longer and deeper, closer to that of the early 1990s, then the drop in oil prices would be much more.
Which is the more likely scenario? Those who argue that oil prices are not likely to fall much say that the world of 2008 is very different, with emerging market growth well above the levels they were at in 2001 on the one hand and with supply constraints on the other. For example, in its August short-term energy outlook, the US government’s Energy Information Administration said it expects crude prices to average $124 a barrel in 2009.
Also, there are those who argue that oil has been a massive bubble and we’re going to see a major correction in oil prices. A research note from broking firm First Global, for instance, says, “Over the next 12-18 months, we expect oil prices to reach around $50 a barrel, which is roughly the same level from where the current oil bubble began. And who knows, we could see oil back at $30 over the next couple of years.”
In 2001, only one large sector—technology—was hurt badly. This time the cause of the downturn is the US housing sector and research has shown that it takes much longer for an economy to climb out of a housing bust. Add to that the impact of the bust on big banks and the currently ongoing process of de-leveraging, the current slowdown is likely to be worse than in 2001. That calls for lower global growth and bigger declines in commodity and oil prices.
India’s premium rises against other emerging markets
The Indian market has been one of the chief beneficiaries of the fall in international crude oil prices. According to the S&P/Citigroup Global Equity Indices, the one-year forward price-earnings (P-E) multiple for Indian market estimates (based on earnings forecasts from IBES, or the Institutional Brokers’ Estimate System) was 14.98 at the end of August, a 38.5% premium to the P-E multiple for emerging markets and a 20.6% premium to Asia-Pacific emerging markets.
Despite being at the centre of the economic storm, the US has done well
At the end of July, the Indian market traded at a forward P-E multiple of 14.4, a 26% premium to emerging markets and a 15.4% premium to Asia-Pacific emerging markets.
At the end of June, India’s premium over emerging markets was even lower, at 12.4%, while that over Asia-Pacific emerging markets was 11.4%.
The premium over other emerging markets has come down quite a bit from 64.2% at the beginning of the year, but it has increased once again in recent months as oil prices waned.
That’s not very surprising. But what is unexpected is that the Indian market is now cheaper than the US, where the one-year forward P-E multiple at the end of August was 15.23. The US market was at a 19% premium to the global market P-E at end-August. At the beginning of the year, that premium was just 7.6%. Despite being at the centre of the storm that has battered global markets, the US has done very well indeed.
Indian economy may perform better in Q2: Barclays
The global investment banker projected a growth rate of 7.5%for 2008-09 with risks tilted to the upside
The Indian economy is expected to perform better in the second quarter (July-September 2008) and is likely to record a growth rate of 8.5%, up from 7.9% witnessed in the first quarter, says an international investment banker.
“In Q2 of the current fiscal, GDP growth is likely to be about 8.5%,” Barclays said in its recent Emerging Markets Research report.
According to the global investment banker, the country’s annual growth is running well above 8% and the first quarter growth rate of 7.9% is likely to be revised upwards by 0.3-0.5 percentage points.
However, Barclays projected 7.5% growth rate for 2008-09 with “risks tilted to the upside.” India recorded 9 per cent Gross Domestic Product growth rate during 2007-08.
RBI forecasts a GDP growth rate of 8% in the current fiscal, while the Prime Minister’s Economic Advisory Council expects the economy to rise by 7.6%.
Inflationary spiral
Referring to the inflationary spiral, the investment bank has said demand-side pressures on inflation would persist for the next one-two quarters and the apex bank would continue to keep the liquidity conditions tight over the next 3-6 months.
The banking regulator meanwhile, in its Currency and Finance 2006-08 report, has indicated that it is important in the present scenario to show continuously “a determination to act decisively, effectively and swiftly to curb any signs of adverse developments in regard to inflation expectations.”
Inflation which is reining over 12% is still way above the RBI’s projection of 7% by the end of the current fiscal and the regulator has in phases raised the Cash Reserve Ratio (CRR) and reserve repo rate to 9% to tame rising inflation.
The Indian economy is expected to perform better in the second quarter (July-September 2008) and is likely to record a growth rate of 8.5%, up from 7.9% witnessed in the first quarter, says an international investment banker.
“In Q2 of the current fiscal, GDP growth is likely to be about 8.5%,” Barclays said in its recent Emerging Markets Research report.
According to the global investment banker, the country’s annual growth is running well above 8% and the first quarter growth rate of 7.9% is likely to be revised upwards by 0.3-0.5 percentage points.
However, Barclays projected 7.5% growth rate for 2008-09 with “risks tilted to the upside.” India recorded 9 per cent Gross Domestic Product growth rate during 2007-08.
RBI forecasts a GDP growth rate of 8% in the current fiscal, while the Prime Minister’s Economic Advisory Council expects the economy to rise by 7.6%.
Inflationary spiral
Referring to the inflationary spiral, the investment bank has said demand-side pressures on inflation would persist for the next one-two quarters and the apex bank would continue to keep the liquidity conditions tight over the next 3-6 months.
The banking regulator meanwhile, in its Currency and Finance 2006-08 report, has indicated that it is important in the present scenario to show continuously “a determination to act decisively, effectively and swiftly to curb any signs of adverse developments in regard to inflation expectations.”
Inflation which is reining over 12% is still way above the RBI’s projection of 7% by the end of the current fiscal and the regulator has in phases raised the Cash Reserve Ratio (CRR) and reserve repo rate to 9% to tame rising inflation.
Indian industry see Rs1.2 trillion investment in nuclear power
Industry bodies Ficci and CII hope to see the country usher into a robust force in global nuclear trade
Indian industry bodies expect 18-20 new nuclear power plants to be set up in next 15 years costing Rs1.2 trillion after a ban on nuclear trade with India was lifted by the Nuclear Suppliers Group.
On Saturday, the 45-nation approved a US proposal to lift a global ban on nuclear trade with India in a breakthrough towards sealing a controversial US-Indian atomic energy deal.
“The NSG clearance has now instilled confidence of business opportunities worth Rs1.2 trillion in the next 15 years, which would add about 18-20 nuclear reactors at the cost of Rs5,000 to 6,000 crores each,” the Confederation of Indian Industry said in a statement.
“The nuclear deal will also enable addition of new capacity and help fulfill the target of adding 63,000 MW by 2030,” it said.
The Federation of Indian Chambers of Commerce and Industry said the lifting of the ban would enable India to get nuclear fuel for all its nuclear reactors, which have been running at almost half the capacity.
“It will open the doors for foreign investments in the nuclear power generation and usher India into the world’s top Nuclear Club,” it said.
Indian industry bodies expect 18-20 new nuclear power plants to be set up in next 15 years costing Rs1.2 trillion after a ban on nuclear trade with India was lifted by the Nuclear Suppliers Group.
On Saturday, the 45-nation approved a US proposal to lift a global ban on nuclear trade with India in a breakthrough towards sealing a controversial US-Indian atomic energy deal.
“The NSG clearance has now instilled confidence of business opportunities worth Rs1.2 trillion in the next 15 years, which would add about 18-20 nuclear reactors at the cost of Rs5,000 to 6,000 crores each,” the Confederation of Indian Industry said in a statement.
“The nuclear deal will also enable addition of new capacity and help fulfill the target of adding 63,000 MW by 2030,” it said.
The Federation of Indian Chambers of Commerce and Industry said the lifting of the ban would enable India to get nuclear fuel for all its nuclear reactors, which have been running at almost half the capacity.
“It will open the doors for foreign investments in the nuclear power generation and usher India into the world’s top Nuclear Club,” it said.
Sunday, September 07, 2008
PSEs shed Rs 1,300 cr on Modi's welfare call
In a controversial order, the Gujarat government has asked all profit-making public sector enterprises (PSEs) in the state to contribute up to 30% of their annual profit before tax to Gujarat Socio-Economic Development Society (GSEDS), set up to support weaker sections of society.
The request has had a cascading effect on several PSEs that have lost Rs 1,336 crore in terms of market cap since the Wednesday directive.
Confirming the Gujarat government’s decision, state commissioner of Bureau of Public Sector Enterprises, Arvind Agarwal, told TOI , ‘‘Because these companies earn good profits, their contribution to Gujarat’s socio-economic development will help the state achieve its social objectives.’’
But in the last two trading sessions alone, the market capitalisation of Gujarat Mineral Development Corp (GMDC), Gujarat Alkalies and Chemicals (GACL), Gujarat State Fertlizers and Chemicals (GSFC), Gujarat Narmada Valley Fertilisers Corp (GNFC), Gujarat Industrial Power Corp (GIPCL) and Gujarat State Petronet Limited (GSPL) has fallen by Rs 1,336 crore.
And the value of government’s holding in these companies got shaved off by Rs 721 crore.
GMDC, which has declared in its annual report that it would contribute nearly Rs 123 crore for social causes, continued to fall sharply, down by 17% in two days since the decision. While the managing directors of the six listed PSEs have made a strong representation to the state government that the move would erode the rating of PSEs, the government has remained undeterred in its pursuit to milk the profit-making PSEs for its social goals.
While bureaucrats manning these PSEs are disturbed by the slide in the stocks, a government spokesperson told TOI that ‘‘there’s no question of going back on this.’’
‘‘It’s a retrograde step from the capital market point of view. A better way to implement CSR is to ask PSEs to increase the dividend payouts so that the Gujarat government receives higher sum to donate to any society of its choice,’’ said V K Sharma, the head of Anagram Securities.
The request has had a cascading effect on several PSEs that have lost Rs 1,336 crore in terms of market cap since the Wednesday directive.
Confirming the Gujarat government’s decision, state commissioner of Bureau of Public Sector Enterprises, Arvind Agarwal, told TOI , ‘‘Because these companies earn good profits, their contribution to Gujarat’s socio-economic development will help the state achieve its social objectives.’’
But in the last two trading sessions alone, the market capitalisation of Gujarat Mineral Development Corp (GMDC), Gujarat Alkalies and Chemicals (GACL), Gujarat State Fertlizers and Chemicals (GSFC), Gujarat Narmada Valley Fertilisers Corp (GNFC), Gujarat Industrial Power Corp (GIPCL) and Gujarat State Petronet Limited (GSPL) has fallen by Rs 1,336 crore.
And the value of government’s holding in these companies got shaved off by Rs 721 crore.
GMDC, which has declared in its annual report that it would contribute nearly Rs 123 crore for social causes, continued to fall sharply, down by 17% in two days since the decision. While the managing directors of the six listed PSEs have made a strong representation to the state government that the move would erode the rating of PSEs, the government has remained undeterred in its pursuit to milk the profit-making PSEs for its social goals.
While bureaucrats manning these PSEs are disturbed by the slide in the stocks, a government spokesperson told TOI that ‘‘there’s no question of going back on this.’’
‘‘It’s a retrograde step from the capital market point of view. A better way to implement CSR is to ask PSEs to increase the dividend payouts so that the Gujarat government receives higher sum to donate to any society of its choice,’’ said V K Sharma, the head of Anagram Securities.
Friday, September 05, 2008
India's external debt up by over $50 bn
India’s external debt went up sharply by over $50 billion for the financial year ended March 2008 — the highest year-on-year increase ever in last 18 years.
A fall in the value of the dollar against the Indian rupee and other international currencies, along with increased overseas borrowings by companies are being cited as reasons for the increase.
External debt, both government and non-government, stood at $221.2 billion as on March 2008, representing an increase of over 30 per cent in one year, said a Finance Ministry report.
The external debt of India, Asia’s third largest economy, rose by $83 billion in less than three years (between March 2005 and March 2008), while it took fifteen years for the external debt to increase by $54.3 billion to touch $138.1 billion.
External commercial borrowings (ECB), used by corporates to borrow money from abroad at a cheaper interest rate, rose 40 per cent to touch $70.6 billion in 2007-08, as compared to $48.52 billion a year-ago.
The last two years saw the sharpest increase in ECB at $38.29 billion. The share of such overseas borrowings in the total debt has risen to nearly 32 per cent now from under 24 per cent two years back.
In order to curb inflows via the ECB route, the finance ministry withdrew exemption given to ‘development of integrated township’, which was the only part of real estate sector where ECB proceeds were permitted.
The government also revised downwards the cost ceilings for ECB borrowings.
Further, it has set a limit of $20 million per borrower in a financial year, and any borrowing above $20 million have to used only for foreign currency expenditures.
Two concerns dominate the views of foreign inflows through ECBs. First, the influx of borrowings from abroad will increase the domestic money supply that has potential to accelerate the inflation rate.
Second, flow of money to sectors like real estate — which is classified as ‘sensitive’ by the government — was feared to cause price inflation.
Despite the huge increase in external debt, union finance minister P Chidambaram, in his foreword to the report, said: “Though India’s external debt stock increased during 2007-08, all the major solvency and liquidity indicators of external debt remained in the comfort zone”.
The weakening of the US dollar against other currencies accounted for 20 per cent of the increment in India’s external debt, said the report titled “India’s External Debt- A status report 2007-08”.
As nearly 57 per cent of India’s debt is denominated in US dollar, any decrease in the value of the US dollar against the Indian rupee and other international currencies means that stock of external debt increases.
In 2007-08, Indian rupee appreciated against US dollar by as much as 13 per cent, as per data available with Reserve Bank of India.
Despite the increase, the ratio of government debt to total debt has declined by 2.8 percentage points to 25.6 per cent as on March 2008, reflecting higher share of private borrowings.
Key external debt indictors like ratio of total external debt to GDP, ratio of short-term debt to foreign exchange reserves and ratio of short-term debt to total debt have shown an increase in the financial year 2007-08.
For example, ratio of external debt to GDP is now at 18.8, an increase of 1 percentage point and ratio of short-term debt to total debt stood at 20 per cent — an increase of 6 percentage points in one-year.
“India’s external debt has remained within manageable limits owing to cautious external debt policy pursued by the government”, said Chidambaram.
Compared to other developing countries, India’s debt service ratio was the second best after that of China’s and in terms of credit ratings, India was four places behind China.
A fall in the value of the dollar against the Indian rupee and other international currencies, along with increased overseas borrowings by companies are being cited as reasons for the increase.
External debt, both government and non-government, stood at $221.2 billion as on March 2008, representing an increase of over 30 per cent in one year, said a Finance Ministry report.
The external debt of India, Asia’s third largest economy, rose by $83 billion in less than three years (between March 2005 and March 2008), while it took fifteen years for the external debt to increase by $54.3 billion to touch $138.1 billion.
External commercial borrowings (ECB), used by corporates to borrow money from abroad at a cheaper interest rate, rose 40 per cent to touch $70.6 billion in 2007-08, as compared to $48.52 billion a year-ago.
The last two years saw the sharpest increase in ECB at $38.29 billion. The share of such overseas borrowings in the total debt has risen to nearly 32 per cent now from under 24 per cent two years back.
In order to curb inflows via the ECB route, the finance ministry withdrew exemption given to ‘development of integrated township’, which was the only part of real estate sector where ECB proceeds were permitted.
The government also revised downwards the cost ceilings for ECB borrowings.
Further, it has set a limit of $20 million per borrower in a financial year, and any borrowing above $20 million have to used only for foreign currency expenditures.
Two concerns dominate the views of foreign inflows through ECBs. First, the influx of borrowings from abroad will increase the domestic money supply that has potential to accelerate the inflation rate.
Second, flow of money to sectors like real estate — which is classified as ‘sensitive’ by the government — was feared to cause price inflation.
Despite the huge increase in external debt, union finance minister P Chidambaram, in his foreword to the report, said: “Though India’s external debt stock increased during 2007-08, all the major solvency and liquidity indicators of external debt remained in the comfort zone”.
The weakening of the US dollar against other currencies accounted for 20 per cent of the increment in India’s external debt, said the report titled “India’s External Debt- A status report 2007-08”.
As nearly 57 per cent of India’s debt is denominated in US dollar, any decrease in the value of the US dollar against the Indian rupee and other international currencies means that stock of external debt increases.
In 2007-08, Indian rupee appreciated against US dollar by as much as 13 per cent, as per data available with Reserve Bank of India.
Despite the increase, the ratio of government debt to total debt has declined by 2.8 percentage points to 25.6 per cent as on March 2008, reflecting higher share of private borrowings.
Key external debt indictors like ratio of total external debt to GDP, ratio of short-term debt to foreign exchange reserves and ratio of short-term debt to total debt have shown an increase in the financial year 2007-08.
For example, ratio of external debt to GDP is now at 18.8, an increase of 1 percentage point and ratio of short-term debt to total debt stood at 20 per cent — an increase of 6 percentage points in one-year.
“India’s external debt has remained within manageable limits owing to cautious external debt policy pursued by the government”, said Chidambaram.
Compared to other developing countries, India’s debt service ratio was the second best after that of China’s and in terms of credit ratings, India was four places behind China.
US denies cover up for key documents on N-deal
Rejecting that it had covered up documents on stoppage of fuel supplies if India conducts a nuclear test, the US has said New Delhi's obligations are very clear as it had agreed to a moratorium on nuclear testing.
"Certainly, India's obligations under the 123 agreement are very clear and the Indians have agreed to a moratorium on testing. And we expect they will adhere to that commitment," State Department spokesman Robert Wood said.
A 26-page document released by Howard Berman, Chairman of the House Foreign Affairs Committee, contains an assertion by the Bush Administration that its assurances of nuclear supplies to India are not meant to "insulate" it against the consequences of a nuclear test.
"The Indians understand what our views are with regard to nuclear testing. We've made them clear. And they understand those. There was no attempt to cover up anything," Wood said brushing off suggestion that Washington kept the document under wraps to protect the government in India.
"... people have that interpretation, but that certainly was not the position of the US government. We weren't trying to keep anything under wraps. We've had discussions with various members of Congress about this agreement. We'll continue to do so.
"We've stressed over and over again the importance of this agreement, not only to the United States and India, but to our overall non-proliferation efforts around the world," the official said.
The 'disclosures' set off a flurry of political activity in India with the BJP and the Left demanding resignation of Prime Minister Manmohan Singh even as the UPA government rejected charges that New Delhi will lose the sovereign right to conduct an atomic test.
"Certainly, India's obligations under the 123 agreement are very clear and the Indians have agreed to a moratorium on testing. And we expect they will adhere to that commitment," State Department spokesman Robert Wood said.
A 26-page document released by Howard Berman, Chairman of the House Foreign Affairs Committee, contains an assertion by the Bush Administration that its assurances of nuclear supplies to India are not meant to "insulate" it against the consequences of a nuclear test.
"The Indians understand what our views are with regard to nuclear testing. We've made them clear. And they understand those. There was no attempt to cover up anything," Wood said brushing off suggestion that Washington kept the document under wraps to protect the government in India.
"... people have that interpretation, but that certainly was not the position of the US government. We weren't trying to keep anything under wraps. We've had discussions with various members of Congress about this agreement. We'll continue to do so.
"We've stressed over and over again the importance of this agreement, not only to the United States and India, but to our overall non-proliferation efforts around the world," the official said.
The 'disclosures' set off a flurry of political activity in India with the BJP and the Left demanding resignation of Prime Minister Manmohan Singh even as the UPA government rejected charges that New Delhi will lose the sovereign right to conduct an atomic test.
Will India clinch NSG waiver for N-deal today?
India's nuclear waiver is close to being clinched, and indications are the deal may be completed by Friday. After the first day’s talks in the Nuclear Suppliers Group, the objections are much fewer and many more countries have come around to having India inside the nuclear tent. Diplomats were tightlipped, but sources said it may be possible to channel the objections into a tough chairman’s statement that could be attached to the actual waiver document.
More countries are coming out with understanding of India’s energy needs. Part of the whittling down of the objections has been due to the huge effort mounted by the US and other supplier countries on the naysayers in the NSG. Part of it is due to the very real threat that India may walk out from a less-than-complete waiver. The pressure has been relentless on the smaller countries, many of whom have been quietly supported by biggies like China.
According to sources, some of the conditions that even Japan was asking for have disappeared, in the larger interest of the relationship with India, a reason that is said to be working powerfully on many other countries as well. The pressure is intense to complete the process by Friday, something many countries favour. Certainly some of the countries said, "we think it should be done this time". This, however, was offset by others who predicted this would go on until another round for a decision.
It was significant, some said, that the NSG broke for lunch and did not return until 5pm — many here felt there was a definite reason, like agreeing on some particular language. Since India is insistent that its ‘‘ moratorium on testing’ ’ suffice, this could be included in the final document.
According to sources, William Burns and John Rood, the two heads of the US delegation, have parked themselves in Vienna for two days now, working on these countries, with some success, they say. As during the IAEA safeguards vote, the holdout group may be splintering again. Certainly, New Zealand is wavering , as is Netherlands and some said, even the Irish and Switzerland. Austria remains a committed nonnuclear party.
About an hour into the meeting on Thursday morning, US undersecretary William Burns walked out with a statement detailing the kind of work the US was doing to push the deal. "We have before us a historic opportunity to end India’s three-decades of isolation from the nuclear regime. That opportunity warrants extraordinary efforts we’re making. The US is determined to continue to do all we can by working with NSG partners and India to realize that opportunity," it said.
BJP, CPM up ante; ask govt to quit
The disclosure of the gap between the stated positions of India and the US over the nuclear deal has revived hostilities between the government and Opposition.
On Thursday, both BJP and Left attacked Prime Minister Manmohan Singh for misleading Parliament, demanded an urgent session and the government's dismissal.
Pouncing upon the US state department's replies to some Congressmen, bringing out a disconnect between government's assurance on nuclear testing and the Bush administration's clarification that all sanctions would kick in should India conduct nuclear tests, the Opposition held Prime Minister Manmohan Singh guilty of breaching the privilege of Parliament.
BJP leaders Yashwant Sinha and Arun Shourie demanded that Parliament's session be convened within a week to allow for a privilege motion against the PM. CPM general secretary Prakash Karat also demanded an early monsoon session.
More countries are coming out with understanding of India’s energy needs. Part of the whittling down of the objections has been due to the huge effort mounted by the US and other supplier countries on the naysayers in the NSG. Part of it is due to the very real threat that India may walk out from a less-than-complete waiver. The pressure has been relentless on the smaller countries, many of whom have been quietly supported by biggies like China.
According to sources, some of the conditions that even Japan was asking for have disappeared, in the larger interest of the relationship with India, a reason that is said to be working powerfully on many other countries as well. The pressure is intense to complete the process by Friday, something many countries favour. Certainly some of the countries said, "we think it should be done this time". This, however, was offset by others who predicted this would go on until another round for a decision.
It was significant, some said, that the NSG broke for lunch and did not return until 5pm — many here felt there was a definite reason, like agreeing on some particular language. Since India is insistent that its ‘‘ moratorium on testing’ ’ suffice, this could be included in the final document.
According to sources, William Burns and John Rood, the two heads of the US delegation, have parked themselves in Vienna for two days now, working on these countries, with some success, they say. As during the IAEA safeguards vote, the holdout group may be splintering again. Certainly, New Zealand is wavering , as is Netherlands and some said, even the Irish and Switzerland. Austria remains a committed nonnuclear party.
About an hour into the meeting on Thursday morning, US undersecretary William Burns walked out with a statement detailing the kind of work the US was doing to push the deal. "We have before us a historic opportunity to end India’s three-decades of isolation from the nuclear regime. That opportunity warrants extraordinary efforts we’re making. The US is determined to continue to do all we can by working with NSG partners and India to realize that opportunity," it said.
BJP, CPM up ante; ask govt to quit
The disclosure of the gap between the stated positions of India and the US over the nuclear deal has revived hostilities between the government and Opposition.
On Thursday, both BJP and Left attacked Prime Minister Manmohan Singh for misleading Parliament, demanded an urgent session and the government's dismissal.
Pouncing upon the US state department's replies to some Congressmen, bringing out a disconnect between government's assurance on nuclear testing and the Bush administration's clarification that all sanctions would kick in should India conduct nuclear tests, the Opposition held Prime Minister Manmohan Singh guilty of breaching the privilege of Parliament.
BJP leaders Yashwant Sinha and Arun Shourie demanded that Parliament's session be convened within a week to allow for a privilege motion against the PM. CPM general secretary Prakash Karat also demanded an early monsoon session.
Euro Slides to 11-Month Low Versus Dollar on Recession Risks
The euro slumped to an 11-month low against the dollar on speculation a credit-market slump will push European economies into recession.
The currency headed for its biggest weekly decline versus the yen in more than a year after European Central Bank President Jean-Claude Trichet said the economy is ``weak'' and Luxembourg Finance Minister Jean-Claude Juncker said the euro is ``overvalued.'' The yen jumped to two-year highs against the Australian and New Zealand dollars as declines in stocks and commodities prompted investors to reduce holdings of higher- yielding assets funded in the Japanese currency.
``This is a global recession story,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third-biggest lender. ``We're seeing a reversal of what's been happening over the past two years. Now the dollar and the yen are benefiting as risk appetite is on the decline.''
The euro fell to $1.4269 at 12 p.m. in Tokyo, from $1.4325 yesterday. It earlier touched $1.4214, the weakest since Oct. 24. The euro slid to 150.60 yen, the lowest since Aug. 17, 2007, before trading at 152.52 yen from 153.40 yen. It fell 4.2 percent this week. The yen reached 105.69 per dollar, the highest since July 17, and traded at 106.84. The euro may decline to $1.40 in six months, Umemoto said.
Carry Trades
The Australian dollar dropped 3 percent to 87.65 yen from late Asian trading yesterday. It touched 85.88 yen, the lowest since July 2006. New Zealand's dollar slumped 3.7 percent to 71.39 yen, reaching 69.96, the lowest since July 2006. The UBS Bloomberg Constant Maturity Commodity Index reached a seven- month low and the Standard & Poor's 500 Index tumbled the most in three months.
In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand. The risk to is that currency moves may erase profits.
Volatility implied by dollar-yen options expiring in one- month rose to 12.59 percent, the highest in a more than a month.
``These currency moves are huge,'' said Toru Tokoyoda, head of foreign exchange sales in Tokyo at Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm. ``Volatility is likely to squeeze higher on further gains in the yen as that would spur demand to hedge against that move.''
One-month volatility may rise to 15 percent provided that the yen rises to 105 per dollar today, he said.
Korean Won
South Korea's won rose 0.2 percent to 1,126.70, reversing an earlier drop of as much as 1.2 percent, on speculation the central bank is buying the currency after it two days ago breached 1,150 for the first time in four years. The nation's foreign-exchange reserves fell by $21 billion in the five months through August to $243 billion as the Bank of Korea bought won to try to halt the currency's slide.
A 10 percent drop in the won in the past month sparked concern South Korea may be headed for a repeat of 1997, when the currency lost half its value versus the dollar and the country turned to the International Monetary Fund for a $57 billion bailout to help companies repay overseas debt. Central bank Governor Lee Seong Tae yesterday told lawmakers there is no need to worry that the country is facing a financial crisis.
The euro dropped for a seventh day against the dollar, its longest decline since October 2006. The ECB yesterday kept its main refinancing rate at a seven-year high of 4.25 percent and Trichet told a press conference growth risks are on the ``downside.''
`Effectively Overvalued'
Europe's currency extended its decline after Luxembourg Juncker told reporters the currency is ``effectively overvalued.'' The euro has dropped more than 10 percent against the dollar from the record high of $1.6038 set on July 15.
``Juncker's comments pushed the euro lower,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``It's a bit of an overshoot. It reflected a market that really wants to buy dollars.''
The ICE future exchange's Dollar Index, which gauges the greenback against the currencies of six major U.S. trading partners, rose 0.3 percent to 78.822 after yesterday touching 79.077, the highest in almost a year.
U.S. nonfarm payrolls probably shrank by 75,000 last month, following a drop of 51,000 in July, according to the median forecast of 76 economists surveyed by Bloomberg News. The Labor Department's report is due at 8:30 a.m. in Washington.
``The dollar faces downside risks against the yen,'' said Tohru Sasaki, chief strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. ``A worse-than-expected payrolls number would stoke fears about a global recession.''
The dollar may fall to 103.70 yen in the next few days, he said.
`Financial Tsunami'
The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' said Bill Gross, co-chief investment officer of Newport California-based Pacific Investment Management Co., manager of the world's biggest bond fund, on the firm's Web site yesterday.
The ECB lowered its 2008 economic growth forecast yesterday to about 1.4 percent from 1.8 percent and its 2009 prediction to 1.2 percent from 1.5 percent. The central bank raised its inflation forecast for this year to 3.5 percent from 3.4 percent and 2.6 percent from 2.4 percent for 2009.
Sterling fell for a ninth day, reaching a two-year low of $1.7538 after the Bank of England yesterday kept its target lending rate at 5 percent. Policy makers judged the fastest inflation in more than a decade outweighed the risk that the British economy is sinking into a recession.
European Haircut
Banks in the U.K., Spain and Ireland that have relied on the ECB for low-cost funding will have to pay more as it tightens lending rules to prevent abuses.
The ECB will increase the so-called `haircut' on most asset-based securities from Feb. 1 to 12 percent from as little as 2 percent, the central bank said yesterday. That means it will lend just 88 percent of the value of the paper.
``The liquidity situation continues to be severe and this could be one reason for the euro to weaken,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``This also focuses attention on the divergence in banks and economies in the euro region.''
The euro may fall to $1.40 this month after breaking below a cloud on its weekly ichimoku chart used to show support levels, he said.
The currency headed for its biggest weekly decline versus the yen in more than a year after European Central Bank President Jean-Claude Trichet said the economy is ``weak'' and Luxembourg Finance Minister Jean-Claude Juncker said the euro is ``overvalued.'' The yen jumped to two-year highs against the Australian and New Zealand dollars as declines in stocks and commodities prompted investors to reduce holdings of higher- yielding assets funded in the Japanese currency.
``This is a global recession story,'' said Toru Umemoto, chief currency analyst in Tokyo at Barclays Capital, Britain's third-biggest lender. ``We're seeing a reversal of what's been happening over the past two years. Now the dollar and the yen are benefiting as risk appetite is on the decline.''
The euro fell to $1.4269 at 12 p.m. in Tokyo, from $1.4325 yesterday. It earlier touched $1.4214, the weakest since Oct. 24. The euro slid to 150.60 yen, the lowest since Aug. 17, 2007, before trading at 152.52 yen from 153.40 yen. It fell 4.2 percent this week. The yen reached 105.69 per dollar, the highest since July 17, and traded at 106.84. The euro may decline to $1.40 in six months, Umemoto said.
Carry Trades
The Australian dollar dropped 3 percent to 87.65 yen from late Asian trading yesterday. It touched 85.88 yen, the lowest since July 2006. New Zealand's dollar slumped 3.7 percent to 71.39 yen, reaching 69.96, the lowest since July 2006. The UBS Bloomberg Constant Maturity Commodity Index reached a seven- month low and the Standard & Poor's 500 Index tumbled the most in three months.
In carry trades, investors get funds in a country with low borrowing costs and buy assets where returns are higher. Japan's 0.5 percent benchmark interest rate compares with 4.25 percent in Europe, 7 percent in Australia and 8 percent in New Zealand. The risk to is that currency moves may erase profits.
Volatility implied by dollar-yen options expiring in one- month rose to 12.59 percent, the highest in a more than a month.
``These currency moves are huge,'' said Toru Tokoyoda, head of foreign exchange sales in Tokyo at Lehman Brothers Holdings Inc., the fourth-largest U.S. securities firm. ``Volatility is likely to squeeze higher on further gains in the yen as that would spur demand to hedge against that move.''
One-month volatility may rise to 15 percent provided that the yen rises to 105 per dollar today, he said.
Korean Won
South Korea's won rose 0.2 percent to 1,126.70, reversing an earlier drop of as much as 1.2 percent, on speculation the central bank is buying the currency after it two days ago breached 1,150 for the first time in four years. The nation's foreign-exchange reserves fell by $21 billion in the five months through August to $243 billion as the Bank of Korea bought won to try to halt the currency's slide.
A 10 percent drop in the won in the past month sparked concern South Korea may be headed for a repeat of 1997, when the currency lost half its value versus the dollar and the country turned to the International Monetary Fund for a $57 billion bailout to help companies repay overseas debt. Central bank Governor Lee Seong Tae yesterday told lawmakers there is no need to worry that the country is facing a financial crisis.
The euro dropped for a seventh day against the dollar, its longest decline since October 2006. The ECB yesterday kept its main refinancing rate at a seven-year high of 4.25 percent and Trichet told a press conference growth risks are on the ``downside.''
`Effectively Overvalued'
Europe's currency extended its decline after Luxembourg Juncker told reporters the currency is ``effectively overvalued.'' The euro has dropped more than 10 percent against the dollar from the record high of $1.6038 set on July 15.
``Juncker's comments pushed the euro lower,'' said Richard Franulovich, a senior currency strategist at Westpac Banking Corp. in New York. ``It's a bit of an overshoot. It reflected a market that really wants to buy dollars.''
The ICE future exchange's Dollar Index, which gauges the greenback against the currencies of six major U.S. trading partners, rose 0.3 percent to 78.822 after yesterday touching 79.077, the highest in almost a year.
U.S. nonfarm payrolls probably shrank by 75,000 last month, following a drop of 51,000 in July, according to the median forecast of 76 economists surveyed by Bloomberg News. The Labor Department's report is due at 8:30 a.m. in Washington.
``The dollar faces downside risks against the yen,'' said Tohru Sasaki, chief strategist in Tokyo at JPMorgan Chase & Co. and a former chief currency trader at the Bank of Japan. ``A worse-than-expected payrolls number would stoke fears about a global recession.''
The dollar may fall to 103.70 yen in the next few days, he said.
`Financial Tsunami'
The U.S. government needs to start using more of its money to support markets to stem a burgeoning ``financial tsunami,'' said Bill Gross, co-chief investment officer of Newport California-based Pacific Investment Management Co., manager of the world's biggest bond fund, on the firm's Web site yesterday.
The ECB lowered its 2008 economic growth forecast yesterday to about 1.4 percent from 1.8 percent and its 2009 prediction to 1.2 percent from 1.5 percent. The central bank raised its inflation forecast for this year to 3.5 percent from 3.4 percent and 2.6 percent from 2.4 percent for 2009.
Sterling fell for a ninth day, reaching a two-year low of $1.7538 after the Bank of England yesterday kept its target lending rate at 5 percent. Policy makers judged the fastest inflation in more than a decade outweighed the risk that the British economy is sinking into a recession.
European Haircut
Banks in the U.K., Spain and Ireland that have relied on the ECB for low-cost funding will have to pay more as it tightens lending rules to prevent abuses.
The ECB will increase the so-called `haircut' on most asset-based securities from Feb. 1 to 12 percent from as little as 2 percent, the central bank said yesterday. That means it will lend just 88 percent of the value of the paper.
``The liquidity situation continues to be severe and this could be one reason for the euro to weaken,'' said Masafumi Yamamoto, head of foreign exchange strategy for Japan at Royal Bank of Scotland in Tokyo and a former Bank of Japan currency trader. ``This also focuses attention on the divergence in banks and economies in the euro region.''
The euro may fall to $1.40 this month after breaking below a cloud on its weekly ichimoku chart used to show support levels, he said.
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