Treasury Secretary Henry Paulson's plan for streamlining financial regulations is already meeting resistance. The plan basically calls for reducing the the seven current federal regulators into three agencies: the US Federal Reserve, a newly created financial regulator, and a third agency for consumer protection and business practices. He also recommends closing down the Office of Thrift Supervision and transferring its duties to the Office of the Comptroller of the Currency, which oversees national banks.In an effort to regulate the activities of mortgage brokers it is proposed to establish a ' mortgage origination commission' made up of regulatory agency representatives that would be able to set licensing standards for mortgage brokers.
However legislation is expected to be complex and is unlikely to be completed in an election year.Influential lawmakers have indicated that they need more time to study the proposals in detail. Consumer groups on their part are not sure whether the proposals are far reaching enough to be able to give them the protection they need. At the same time industry is already shouting that they go a bit too far.
The most scathing criticism of the plan came from Democratic Senator Christopher J Dodd of Connecticut who heads the Senate Banking Committee. He emphasized that the Paulson plan had nothing to help homeowners facing higher mortgage rates and foreclosures. It was helping such people which should be a priority at the moment, he said. The Democrats among other measures want local governments to be given $4 billion to purchase foreclosed properties, setting in effect a floor price for homes. Senator Dodd was also critical of the proposal to give more powers to the Fed , which he blames for the present crisis in the first place.
Paulson, an experienced Wall Street hand, on his part has clarified:' I am suggesting that we should and can have a structure that is.........more flexible, one that can better adapt to change, one that will allow us to more effectively deal with inevitable market disruptions, one that will better protect investors and consumers, and one that will enable US capital markets to remain the most competitive in the world.'
Russian Billionaire To Build America, Russia Undersea Tunnel.
Forty-one year old Roman Abramovich figures on the Forbes 2007 list as the sixteenth richest man in the world with a net worth of $18.7 billion. A college dropout he made his fortune in the Russian oil industry. He has a knack of making newspaper headlines, be it because of his controversial business deals, or for his buyout of English soccer club Chelsea, which he turned around into one of the most successful soccer teams in the world.
He is once again in the news for placing an order for the world's largest drill for almost $160 million. According to news reports, Abramovich, who heads Russian firm Infrastruktura, is planning to build an undersea tunnel, linking Russia and America, under the 58 mile wide Bering Strait. The projecct is estimated to take ten years to complete.
The 62.3 foot wide drill will be built in two years by the German engineering firm Herrenknecht. Apart from this tunnel it will also be used to build infrastructure in Russia. This drill is much wider than the 49 fot drill used by the Chinese to build a tunnel under the Yangtze river.
The tunnel will connect Russia's Chukotka region where Abramovich is also governor, with Alaska in the US. It will have the capacity of allowing transport of some 100 million tons of freight annually, as well as oil, gas and electricity from Siberia to North America. If the project goes through it will be the longest undersea tunnel in the world. Presently the distinction is held by the 30 mile long Channel Tunnel that links Britain and France. This tunnel had cost $9.5 billion to build and is yet to make a profit!
He is once again in the news for placing an order for the world's largest drill for almost $160 million. According to news reports, Abramovich, who heads Russian firm Infrastruktura, is planning to build an undersea tunnel, linking Russia and America, under the 58 mile wide Bering Strait. The projecct is estimated to take ten years to complete.
The 62.3 foot wide drill will be built in two years by the German engineering firm Herrenknecht. Apart from this tunnel it will also be used to build infrastructure in Russia. This drill is much wider than the 49 fot drill used by the Chinese to build a tunnel under the Yangtze river.
The tunnel will connect Russia's Chukotka region where Abramovich is also governor, with Alaska in the US. It will have the capacity of allowing transport of some 100 million tons of freight annually, as well as oil, gas and electricity from Siberia to North America. If the project goes through it will be the longest undersea tunnel in the world. Presently the distinction is held by the 30 mile long Channel Tunnel that links Britain and France. This tunnel had cost $9.5 billion to build and is yet to make a profit!
Lehman Brothers Swindled Out Of $355 Million.
Lehman has been conned out of more than $355 million in a sophisticated scam operation. The scam seems to have been masterminded by two employees at the Japanese trading house Marubeni Corporation. Marubeni is Japan's fifth biggest trading company.
Lehman had advanced a loan through Marubeni to a medical company called Asclepius Ltd., a now bankrupt unit of LTT Bio-Pharma Co. The money was to be used to finance medical leases and was supposedly guaranteed by Marubeni. Marubeni claims that the documents with Lehman are forged.Before advancing the money, Lehman asked to meet the Marubeni general manager involved. The man they met now appears to have been an impostor.Marubeni has fired two employees who it says might have been manipulated by the former president of Asclepius. 'We are confident in our legal claim, which we will pursue until we receive re-payment from Marubeni,' said Matthew Russell, a spokesman for Lehman.
This disclosure could not have come at a worse time for Lehman. There have been rumors for several weeks that Lehman may have problems similar to Bear Stearns.Customers may get worried about Lehman's financial health, and if they withdraw large sums of money, Lehman could face liquidity problems.
Meanwhile Marubeni in a statement said:' We have nothing to do with the fraudulent acts, and we have no obligation to cover any re-payment requests.'
Lehman had advanced a loan through Marubeni to a medical company called Asclepius Ltd., a now bankrupt unit of LTT Bio-Pharma Co. The money was to be used to finance medical leases and was supposedly guaranteed by Marubeni. Marubeni claims that the documents with Lehman are forged.Before advancing the money, Lehman asked to meet the Marubeni general manager involved. The man they met now appears to have been an impostor.Marubeni has fired two employees who it says might have been manipulated by the former president of Asclepius. 'We are confident in our legal claim, which we will pursue until we receive re-payment from Marubeni,' said Matthew Russell, a spokesman for Lehman.
This disclosure could not have come at a worse time for Lehman. There have been rumors for several weeks that Lehman may have problems similar to Bear Stearns.Customers may get worried about Lehman's financial health, and if they withdraw large sums of money, Lehman could face liquidity problems.
Meanwhile Marubeni in a statement said:' We have nothing to do with the fraudulent acts, and we have no obligation to cover any re-payment requests.'
McCain,Obama and Clinton:Managing the Mortgage Crisis.
Predictions are that the mortgage crisis will cost the financial system at least $ 1 trillion. The calculation is fairly simple. Home prices are predicted to fall cumulatively about 20%. Given such a fall about 16 million households will have negative equity, which means the value of their homes is below the value of thir mortgages. And since the mortgages are no-recourse loans, the borrowers if they choose, can simply walk away. If only half of such borrowers were to walk away, the financial system will lose $ 1 trillion.
With the security situation in Iraq improving perceptibly, it is possible that economic problems, particularly the mortgage crisis, will take center stage in the upcoming Presidential elections.
Of the three Presidential hopefuls McCain seems to be closest to Bush's policies. In Santa Ana Tuesday, he said that he was open to ideas on handling the crisis, but that the government should not reward banks or small borrowers that had acted irresponsibly.
Obama was quick to criticize McCain, saying that the Republican would' just sit back and watch,' as millions of Americans lost their homes.He personally advocates a conservative response to the crisis. His suggestions appear to be somewhat vague, although he does talk about creating a $10 billion fund for protecting homeowners, and has emphasized the need for regulating the industry.
Clinton, to be fair to her, has been most specific and consistent in her proposals. She has proposed the creation of a $ 30 billion fund to assist homeowners in crisis. She has also proposed a 90 day moratorium on foreclosures and would freeze the interest rate on adjustable rate subprime loans for a number of years. In fact she has gone so far as to recommend that the Federal Housing Administration be given enhanced powers to oversee and perhaps to guarantee or purchase defaulted loans. 'If the Fed can extend $30 billion to help Bear Stearns adress their financial crisis, the federal government should provide at least that much emergsency help to families and communities to address theirs,' argues Clinton.
With the security situation in Iraq improving perceptibly, it is possible that economic problems, particularly the mortgage crisis, will take center stage in the upcoming Presidential elections.
Of the three Presidential hopefuls McCain seems to be closest to Bush's policies. In Santa Ana Tuesday, he said that he was open to ideas on handling the crisis, but that the government should not reward banks or small borrowers that had acted irresponsibly.
Obama was quick to criticize McCain, saying that the Republican would' just sit back and watch,' as millions of Americans lost their homes.He personally advocates a conservative response to the crisis. His suggestions appear to be somewhat vague, although he does talk about creating a $10 billion fund for protecting homeowners, and has emphasized the need for regulating the industry.
Clinton, to be fair to her, has been most specific and consistent in her proposals. She has proposed the creation of a $ 30 billion fund to assist homeowners in crisis. She has also proposed a 90 day moratorium on foreclosures and would freeze the interest rate on adjustable rate subprime loans for a number of years. In fact she has gone so far as to recommend that the Federal Housing Administration be given enhanced powers to oversee and perhaps to guarantee or purchase defaulted loans. 'If the Fed can extend $30 billion to help Bear Stearns adress their financial crisis, the federal government should provide at least that much emergsency help to families and communities to address theirs,' argues Clinton.
Social Security And Medicare Programs Face Bankruptcy.
Trustees for the government's Social Security and Medicare programs have warned that the two programs faced the prospect of financial collapse. Resources in the Social Security trust fund are expected to be exhausted by 2041 and those in the Medicare trust fund even earlier, by 2019. The financial crunch will start when the two programs start paying out more in benefits, than they collect in payroll taxes.For Medicare the tipping point will be reached this year, and for Social Security in 2017. However despite long term financial dificulties, both programs will be able to pay all promised benefits for at least 10 more years without additional funding.
The annual report of the two programs was released Tuesday by the trustees. 'This report confirms the need for acton,' said Treasury Secretary Henry Paulson. 'The sooner we take action to strengthen Social Security's financial footing, the less drastic the needed reforms will be to future generations.'
The Medicare program is in worse shape than Social Security mainly because health care costs are rising quickly. Proposals regarding the two programs have caused intense bickering in Congress between the Republicans and the Democrats. Republicans have urged quick action while the Democrats accuse them of using the report as an excuse to make cuts in benefits. Any immediate change is unlikely in an election year, and it will only be the next President who will have to find a solution. There is no easy fix to the problem. Social Security's funding over 75 years would take an inrease in the payrolls tax from 12.1% to 14%, or a 12% decrease in benefits, or a combination of both. Fixing Medicare's funding over the next 75 years would require an increase in the Medicare payroll tax from 2.9% to 6.4% or a 51% reduction in outlays to hospitals, nursing homes and home health care, or again a combination of the two.
The annual report of the two programs was released Tuesday by the trustees. 'This report confirms the need for acton,' said Treasury Secretary Henry Paulson. 'The sooner we take action to strengthen Social Security's financial footing, the less drastic the needed reforms will be to future generations.'
The Medicare program is in worse shape than Social Security mainly because health care costs are rising quickly. Proposals regarding the two programs have caused intense bickering in Congress between the Republicans and the Democrats. Republicans have urged quick action while the Democrats accuse them of using the report as an excuse to make cuts in benefits. Any immediate change is unlikely in an election year, and it will only be the next President who will have to find a solution. There is no easy fix to the problem. Social Security's funding over 75 years would take an inrease in the payrolls tax from 12.1% to 14%, or a 12% decrease in benefits, or a combination of both. Fixing Medicare's funding over the next 75 years would require an increase in the Medicare payroll tax from 2.9% to 6.4% or a 51% reduction in outlays to hospitals, nursing homes and home health care, or again a combination of the two.
Microsoft May Raise Yahoo Offer.
Although Microsoft and Yahoo have been talking off and on for the past few years, it was only early this year that Microsoft made a formal $44.6 billion bid for Yahoo. The offer appears generous as it was at about a 62% premium to Yahoo's prevailing share price.It was however turned down by Yahoo.
Reaction from arch rival Google was immediate.It said that the deal raised troubling questions......about preserving the underlying principles of the Internet: openness and innovation.Rumors are circulating that Schmidt, Google's CEO has offered his help to Jerry Yang of Yahoo to ward off Microsoft. Google currently commands 75% of search-ad revenues worldwide. It carried out almost 65% of all the Internet searches done in the US this year. Even if Yahoo and Microsoft were to combine their corresponding figure for searches would only be 28%. Microsoft is eager to seal a deal with troubled Yahoo to avoid being left out of the lucrative online ad business. It is not concerned about the possibility of Google making a counter offer as it would almost certainly be prevented by regulators, given Google's dominance in the area.
Around the middle of this month, Yahoo on its part, made a forecast that its revenues-minus advertising commissions-will climb more than 70% in the next 3 years to reach $8.8 billion in 2010. Analysts interpreted this disclosure as a sign that Yahoo was unable to find an alternative deal to Microsoft's offer and that it may be willing to negotiate with Microsoft. In fact a meeting between the top executives of the two companies has been held in Silicon valley, prompting analysts to remark that the deal appeared to be turning 'friendly.'
The latest assessment comes from Citigroup which says that Microsoft is likely to raise its $31 per share offer for Yahoo. Although other possibilities were being discussed it considers a Microsoft-Yahoo deal to be the most likely outcome.
Reaction from arch rival Google was immediate.It said that the deal raised troubling questions......about preserving the underlying principles of the Internet: openness and innovation.Rumors are circulating that Schmidt, Google's CEO has offered his help to Jerry Yang of Yahoo to ward off Microsoft. Google currently commands 75% of search-ad revenues worldwide. It carried out almost 65% of all the Internet searches done in the US this year. Even if Yahoo and Microsoft were to combine their corresponding figure for searches would only be 28%. Microsoft is eager to seal a deal with troubled Yahoo to avoid being left out of the lucrative online ad business. It is not concerned about the possibility of Google making a counter offer as it would almost certainly be prevented by regulators, given Google's dominance in the area.
Around the middle of this month, Yahoo on its part, made a forecast that its revenues-minus advertising commissions-will climb more than 70% in the next 3 years to reach $8.8 billion in 2010. Analysts interpreted this disclosure as a sign that Yahoo was unable to find an alternative deal to Microsoft's offer and that it may be willing to negotiate with Microsoft. In fact a meeting between the top executives of the two companies has been held in Silicon valley, prompting analysts to remark that the deal appeared to be turning 'friendly.'
The latest assessment comes from Citigroup which says that Microsoft is likely to raise its $31 per share offer for Yahoo. Although other possibilities were being discussed it considers a Microsoft-Yahoo deal to be the most likely outcome.
New Deal For Bear Stearns Shareholders.
After secret discussions Sunday, it was announced early today that JP Morgan would pay $10 for every share of Bear, instead of the initial offer of only $2 per share.The reason given for the new deal is that it is fairer to the shareholders and the employees of Bear.The Fed was reportedly hesitant about backing the deal as it would invite renewed criticism that taxpayers money was being used to bail out greedy financial institutions. But at the same time the Fed did not want to appear to be opposing a fair deal for Bear investors and employees.
Rumors of a fresh deal had been doing the rounds of the market last weekend, and the Bear stock had closed the week at $5.96 on expectations of a better bargain. It was also rumored that Joe Lewis, the largest shareholder in Bears was in talks with other financiers to make a rival bid. Many shareholders felt that if they blocked the deal and sent the firm into bankruptcy protection they may get much more than $2 a share from creditors.Now with the new deal having been approved by the respective boards of both Bear and JP Morgan it remains to be seen what Mr. Lewis will do next.
Another rumor doing the rounds is that JP Morgan stands to make a killing on the deal, as the real value of Bear is much more than the price offered.Why would JP Morgan pay an extra $750 million, they argue?
Such rumors will continue till the real reasons for the take over of Bears by JP Morgan become known. Of particular interest will be the role of credit default swaps in the buyout. Credit default swaps are basically insurance purchased by lenders to institutions such as Bears, to guard against loss of capital.The system, developed in the 1990's was working fine in periods of stability.But things have changed in the last two years, since the sub prime issue surfaced. This market has grown from about $10 trillion to more than $45 trillion in this short period. The total value of the bonds insured against default is only about $5.7 trillion. There is a huge private market out there where buyers and sellers of insurance are betting on the survival or failure of companies. The big commercial banks are major players in the market. Interestingly, JP Morgan Chase is the biggest player with$7.8 trillion and Citibank is next with $3 trillion.It would be interesting to find out about JP Morgan's exposure to Bear Stearns debt, and whether it stood to lose or gain in the event of Bear's collapse
Rumors of a fresh deal had been doing the rounds of the market last weekend, and the Bear stock had closed the week at $5.96 on expectations of a better bargain. It was also rumored that Joe Lewis, the largest shareholder in Bears was in talks with other financiers to make a rival bid. Many shareholders felt that if they blocked the deal and sent the firm into bankruptcy protection they may get much more than $2 a share from creditors.Now with the new deal having been approved by the respective boards of both Bear and JP Morgan it remains to be seen what Mr. Lewis will do next.
Another rumor doing the rounds is that JP Morgan stands to make a killing on the deal, as the real value of Bear is much more than the price offered.Why would JP Morgan pay an extra $750 million, they argue?
Such rumors will continue till the real reasons for the take over of Bears by JP Morgan become known. Of particular interest will be the role of credit default swaps in the buyout. Credit default swaps are basically insurance purchased by lenders to institutions such as Bears, to guard against loss of capital.The system, developed in the 1990's was working fine in periods of stability.But things have changed in the last two years, since the sub prime issue surfaced. This market has grown from about $10 trillion to more than $45 trillion in this short period. The total value of the bonds insured against default is only about $5.7 trillion. There is a huge private market out there where buyers and sellers of insurance are betting on the survival or failure of companies. The big commercial banks are major players in the market. Interestingly, JP Morgan Chase is the biggest player with$7.8 trillion and Citibank is next with $3 trillion.It would be interesting to find out about JP Morgan's exposure to Bear Stearns debt, and whether it stood to lose or gain in the event of Bear's collapse
Cheney Discusses Oil Prices With The Saudis.
'Mr. vice-president, we've been friends a long time,' said Saudi Arabia's King Abdullah, while welcoming Mr. Cheney to his kingdom. Mr. Cheney's visit is a follow up on President Bush's January visit to try and persuade OPEC nations to do more to stabilize world oil markets. Saudi Arabia is the oil cartel's largest producer and most influential member.The meetings were also attended by Saudi oil minister Ali al-Naimi. The outcome of the meetings has not been made public so far.
This is in sharp contrast to the January talks when Mr. Naimi had been quick to insist that the kingdom would boost production only if the market justified it. Meanwhile back home President Bush observed that high oil prices would also harm oil exporting countries in the long run.
There is every indication that US concerns are finally being taken seriously. The US economy has slowed very sharply.The GDP growth rate slumped to only 0.6% for the quarter ending December 2007 as against a healthy 3.8% for the September quarter, and indications are that the economy has slipped into recession. Commodity prices have soared as the dollar has slumped in value against all major currencies.It is this loss in dollar value that Bush was referring to in his interview.The major oil exporting countries have seen a sharp decline in the value of their surpluses , which have been invested in the US, as a result of dollar depreciation. Another country in a similar situation is China, because of its huge trade surplus with the US.The Chinese now appear to be sharing US concerns.The Chinese Central Bank announced a 50 basis point increase in the cash reserve ratio only hours before the Fed announced a rate cut.The move is expected to slow down the Chinese economy, reduce pressure on commodity prices, and help the dollar.
Faced with the prospect of a US recession, the Saudis also do not have any choice but to adopt a flexible attitude in the matter.
This is in sharp contrast to the January talks when Mr. Naimi had been quick to insist that the kingdom would boost production only if the market justified it. Meanwhile back home President Bush observed that high oil prices would also harm oil exporting countries in the long run.
There is every indication that US concerns are finally being taken seriously. The US economy has slowed very sharply.The GDP growth rate slumped to only 0.6% for the quarter ending December 2007 as against a healthy 3.8% for the September quarter, and indications are that the economy has slipped into recession. Commodity prices have soared as the dollar has slumped in value against all major currencies.It is this loss in dollar value that Bush was referring to in his interview.The major oil exporting countries have seen a sharp decline in the value of their surpluses , which have been invested in the US, as a result of dollar depreciation. Another country in a similar situation is China, because of its huge trade surplus with the US.The Chinese now appear to be sharing US concerns.The Chinese Central Bank announced a 50 basis point increase in the cash reserve ratio only hours before the Fed announced a rate cut.The move is expected to slow down the Chinese economy, reduce pressure on commodity prices, and help the dollar.
Faced with the prospect of a US recession, the Saudis also do not have any choice but to adopt a flexible attitude in the matter.
Can The Housing Market Be Revived?
The Asian crisis of the late 1990's eventually spread to America. The Dow cracked and threatened to fall below 7000! Greenspan cut interest rates aggressively and US companies announced share buyback programs which led to a remarkably quick turnaround.
The present crisis has its origins in the housing market. As home prices fell, the loans advanced against them started turning bad. The investors in these mortgage backed securities started pulling out their money, and fresh credit to this sector also dried up.Analysts keep predicting further downsides to home values which is scaring away potential buyers. All this has led to a vicious downward spiral which shows no signs of stopping, although Bernanke is now cutting rates aggressively.
The housing market is not recovering because the second part of the 1990's bailout is missing so far.Just as companies announced share buybacks then, setting in effect a floor price for them, what is needed now is some kind of mechanism to set a floor price on home prices.
President Bush earlier rejected a plan to let mortgage judges alter the terms of mortgages and also refused to allow states to buy surplus homes.Such a policy is clearly shortsighted. We must remember that an average American household has most of his savings invested in his home rather than the stock market.It is essential to prevent further deflation in this sector. If we have gone to such extraordinary lengths in the past to defend the stock markets, then it is time that a similar approach is adopted regarding the housing market. A proposal presently under consideration is to allow home owners in default on their mortgage payments to continue to live in those homes.The title of the property would pass to the lender and they would be required only to pay rent for the property, rents typically being much lower than mortgage installments.These agreements would be for a fixed period, after which the home owner would have an option to repurchase his property at the prevailing market price.It is a time of crisis and requires bold and imaginative decisions.A recovery in home prices will cause a quick turnaround in economic activity.
The present crisis has its origins in the housing market. As home prices fell, the loans advanced against them started turning bad. The investors in these mortgage backed securities started pulling out their money, and fresh credit to this sector also dried up.Analysts keep predicting further downsides to home values which is scaring away potential buyers. All this has led to a vicious downward spiral which shows no signs of stopping, although Bernanke is now cutting rates aggressively.
The housing market is not recovering because the second part of the 1990's bailout is missing so far.Just as companies announced share buybacks then, setting in effect a floor price for them, what is needed now is some kind of mechanism to set a floor price on home prices.
President Bush earlier rejected a plan to let mortgage judges alter the terms of mortgages and also refused to allow states to buy surplus homes.Such a policy is clearly shortsighted. We must remember that an average American household has most of his savings invested in his home rather than the stock market.It is essential to prevent further deflation in this sector. If we have gone to such extraordinary lengths in the past to defend the stock markets, then it is time that a similar approach is adopted regarding the housing market. A proposal presently under consideration is to allow home owners in default on their mortgage payments to continue to live in those homes.The title of the property would pass to the lender and they would be required only to pay rent for the property, rents typically being much lower than mortgage installments.These agreements would be for a fixed period, after which the home owner would have an option to repurchase his property at the prevailing market price.It is a time of crisis and requires bold and imaginative decisions.A recovery in home prices will cause a quick turnaround in economic activity.
Wall Street Recovers After Bear Stearns Bailout.
Global markets collapsed as news spread about the Bear Stearns collapse.The Fed acted swiftly. First it engineered a buyout of Bear Stearns by JP Morgan Chase, and then it went ahead and cut interest rates by 75 basis points.It also took some unprecedented steps to pump liquidity into the system.It allowed financial institutions other than commercial banks to approach it directly for loans.Further, more importantly it will be advancing loans against those very illiquid securities which have triggered the present crisis. In the latest such move, the Office of Federal Housing Enterprise Oversight , or OFHEO has reduced the amount of capital it requires Fannie Mae and Freddie Mac to maintain on their balance sheets. By reducing the capital surplus level from 30% to 20% an additional $200 billion will be released in the mortgage backed securities market.
These measures led to the dollar rebounding from record lows, and commodities from oil to wheat falling from record highs. Stocks rallied, dipped and then climbed again.Most analysts expect the rally to continue. Meanwhile rates on fixed mortgages also dropped sharply. The rate on a 30 year loan dropped to an average of 5.87% from 6.13% a week ago, and a 15 year mortgage to 5.27% from 5.60%, reflecting renewed confidence in the mortgage market.
The reason is simple. With most people having accepted that we are already in a recession, any bit of decent news leads to short covering in a heavily oversold market. The sectoral bad news regarding housing and financial firms has already been factored in. The only thing spooking the markets is the possibility of another Bear Stearns lurking out there. There is also the feeling that financial firms may be reluctant to approach the Fed for fear that doing so will be taken as a sign that they are in trouble.All this will lead to nervousness in the markets for the next 2 or 3 months, and then things will surely improve.
These measures led to the dollar rebounding from record lows, and commodities from oil to wheat falling from record highs. Stocks rallied, dipped and then climbed again.Most analysts expect the rally to continue. Meanwhile rates on fixed mortgages also dropped sharply. The rate on a 30 year loan dropped to an average of 5.87% from 6.13% a week ago, and a 15 year mortgage to 5.27% from 5.60%, reflecting renewed confidence in the mortgage market.
The reason is simple. With most people having accepted that we are already in a recession, any bit of decent news leads to short covering in a heavily oversold market. The sectoral bad news regarding housing and financial firms has already been factored in. The only thing spooking the markets is the possibility of another Bear Stearns lurking out there. There is also the feeling that financial firms may be reluctant to approach the Fed for fear that doing so will be taken as a sign that they are in trouble.All this will lead to nervousness in the markets for the next 2 or 3 months, and then things will surely improve.
Maryland Teachers Promote Gambling To Raise Funds.
The Maryland State Teachers Association voted Friday night to support passage of a November referendum on legalizing slot machines. The Association President Clara Foyd said: 'The referendum establishes an Education Trust Fund and dedicates half of future proceeds to our public schools. It provides Maryland with an additional source of funding beginning with license fees in early 2009.' State lawmakers are hoping to generate about $650 million annually from 15,000 slot machines installed at five locations across the state. Cynical lawmakers have tied legalized slots to future education funding.State President Thomas V. Miller warned that failure of the Bill would inevitably lead to budget cuts on education spending, and would affect salaries and particularly pensions, as alternative sources of funding will have to be found for it.
Many state leaders and some other teacher associations had urged this group to remain neutral or seek more input before making their choice.
The state Comptroller Peter Franchot is a bitter opponent of the move. He feels that the state could develop alternative sources of revenue by investing in biotechnology and other emerging scientific industries and by stepping up tax collections.
Although the slots opponents are saddened by the vote they are in no mood to give up without a fight. Maryland residents vote in November on whether to amend the state constitution to authorize the new slot machines.
Many state leaders and some other teacher associations had urged this group to remain neutral or seek more input before making their choice.
The state Comptroller Peter Franchot is a bitter opponent of the move. He feels that the state could develop alternative sources of revenue by investing in biotechnology and other emerging scientific industries and by stepping up tax collections.
Although the slots opponents are saddened by the vote they are in no mood to give up without a fight. Maryland residents vote in November on whether to amend the state constitution to authorize the new slot machines.
Dow To Rally 1000 Points: Barton Biggs!
One of Wall Street's living legends, Barton Biggs says that this is the time to be buying stocks around the world and not to be selling them. He is not to be dismissed lightly. For more than 25 years he was in charge of global investing at Morgan Stanley and is credited with a knack of spotting global trends early, which helped investors make big money.
He told Bloomberg Television, ' We're setting up for a really big rally. I don't mean three or four hundred points on the Dow, I mean 1000 points on the Dow. I don't know if we're going to get it next week or the week after. But this thing is getting crazy and is overdone.'
Could he be right again? Consider what's in his favor. Consumer prices remained unchanged in February as against an expected increase of 0.3%. Core inflation, excluding food and energy prices, was also unchanged, the first time it did not increase since November 2006. The University of Michigan consumer sentiment reading fell to 70.5, the lowest since February 1992, but better than the forecast of 69.3. Fed fund futures indicate a 60% chance of a full 1% rate cut at the next Fed meeting on March 18th. That it will be cut by at least 0.75% seems to be a foregone conclusion.S&P has predicted that sub prime mortgage write downs are nearing the end. The facility of raising loans upto $200 billion against illiquid assets will be operational from the 27th of March.The $150 billion economic stimulus plan as well as the effects of earlier interest rate cuts will be visible in the next couple of months. History tells us that similar monetary policy moves have always succeeded in the past in reviving economic activity. Barton Biggs may be correct as usual.
He told Bloomberg Television, ' We're setting up for a really big rally. I don't mean three or four hundred points on the Dow, I mean 1000 points on the Dow. I don't know if we're going to get it next week or the week after. But this thing is getting crazy and is overdone.'
Could he be right again? Consider what's in his favor. Consumer prices remained unchanged in February as against an expected increase of 0.3%. Core inflation, excluding food and energy prices, was also unchanged, the first time it did not increase since November 2006. The University of Michigan consumer sentiment reading fell to 70.5, the lowest since February 1992, but better than the forecast of 69.3. Fed fund futures indicate a 60% chance of a full 1% rate cut at the next Fed meeting on March 18th. That it will be cut by at least 0.75% seems to be a foregone conclusion.S&P has predicted that sub prime mortgage write downs are nearing the end. The facility of raising loans upto $200 billion against illiquid assets will be operational from the 27th of March.The $150 billion economic stimulus plan as well as the effects of earlier interest rate cuts will be visible in the next couple of months. History tells us that similar monetary policy moves have always succeeded in the past in reviving economic activity. Barton Biggs may be correct as usual.
Bear Stearns Appears To Be Doomed.
Bear Stearns has reached out to rival JP Morgan Chase and the Federal Reserve Bank of New York for emergency funding to reassure investors concerned about the struggling investment bank's deteriorating liquidity. JP Morgan and the Fed agreed to provide short term secured funding for up to 28 days, with JP Morgan Chase saying it was working to find permanent or other alternative funding.
Bear Stearns finds itself in this mess simply because lenders and investors want their cash back, and without this financing deal it cannot make the payments.There are already rumors in the market that it is up for sale.
Bear Stearns was one of the biggest buyers and packagers of mortgage backed securities.Since business was booming they did not bother to diversify.As a result the credit crunch has hit the company particularly hard.Recently Moody downgraded the mortgage debt held by Bear Stearns which led to speculation that it was facing liquidity problems.This is what is behind the belief that with its restricted business model and high exposure to mortgage related instruments, it is in serious trouble.
Tuesday's Fed move to make available$200 billion to financial institutions against illiquid assets, such as mortgage backed securities, as collateral should have helped Bear Stearns, but it doesn't seem so. It's shares lost 50% of their value today, shortly after trading started.It's CEO Alan Schwartz however insists 'There is absolutely no truth to the rumors of liquidity problems.' He added that Bear's 'balance sheet, liquidity, and capital remain strong,' and that the company's first quarter earnings, to be announced March 20th, will fall within analyst's range of forecasts. The CEO may paint a rosy picture but the market is clearly saying that Bear Stearns is doomed.
Bear Stearns finds itself in this mess simply because lenders and investors want their cash back, and without this financing deal it cannot make the payments.There are already rumors in the market that it is up for sale.
Bear Stearns was one of the biggest buyers and packagers of mortgage backed securities.Since business was booming they did not bother to diversify.As a result the credit crunch has hit the company particularly hard.Recently Moody downgraded the mortgage debt held by Bear Stearns which led to speculation that it was facing liquidity problems.This is what is behind the belief that with its restricted business model and high exposure to mortgage related instruments, it is in serious trouble.
Tuesday's Fed move to make available$200 billion to financial institutions against illiquid assets, such as mortgage backed securities, as collateral should have helped Bear Stearns, but it doesn't seem so. It's shares lost 50% of their value today, shortly after trading started.It's CEO Alan Schwartz however insists 'There is absolutely no truth to the rumors of liquidity problems.' He added that Bear's 'balance sheet, liquidity, and capital remain strong,' and that the company's first quarter earnings, to be announced March 20th, will fall within analyst's range of forecasts. The CEO may paint a rosy picture but the market is clearly saying that Bear Stearns is doomed.
Farmers Will Prosper Even In Recession.
The cost of food has risen sharply not just in the US but all over the world. Governments are worried that the increases will last longer than expected. Unprecedented global growth has boosted demand for food, which has driven up prices of farm produce from milk to wheat and meat.As world food stocks decline American exports are expected to cross $100 billion, an increase of almost 23%.
The increase in prices of farm based products means that agricultural incomes across America are rising. They are expected to rise by 50% this year over the average of the last ten years. This is increasing rural prosperity not just because of rising incomes, but also because of rising land values.
Besides demand other factors are also at play leading to rising agricultural commodity prices. The Australian wheat crop has been hit by a drought and 18% of feed corn in America is being distilled into ethanol.As the price of corn rises farmers are switching over to growing corn, which reduces production of other crops leading to an increase in their prices. Ethanol production in the US is expected to double in the next five to six years.
The American farmer is better positioned than his counterparts in most other countries as he owns more equipment and storage facilities.This increases his productivity and also enables him to get a better price for his produce.
The only bit of bad news for the moment is that costs have also risen sharply because of the increase in oil prices and the cost of agricultural labor.In fact it is the latter which is causing greater concern. Several areas in the US are heavily dependent on immigrant farm labor, a large part of which is illegal.With politicians talking tough on this issue, these costs may increase sharply in future. For the moment however the US farmer has never had it so good.He doesn't have to try and figure out what he should plant this year. He can plant anything and he won't go wrong.
The increase in prices of farm based products means that agricultural incomes across America are rising. They are expected to rise by 50% this year over the average of the last ten years. This is increasing rural prosperity not just because of rising incomes, but also because of rising land values.
Besides demand other factors are also at play leading to rising agricultural commodity prices. The Australian wheat crop has been hit by a drought and 18% of feed corn in America is being distilled into ethanol.As the price of corn rises farmers are switching over to growing corn, which reduces production of other crops leading to an increase in their prices. Ethanol production in the US is expected to double in the next five to six years.
The American farmer is better positioned than his counterparts in most other countries as he owns more equipment and storage facilities.This increases his productivity and also enables him to get a better price for his produce.
The only bit of bad news for the moment is that costs have also risen sharply because of the increase in oil prices and the cost of agricultural labor.In fact it is the latter which is causing greater concern. Several areas in the US are heavily dependent on immigrant farm labor, a large part of which is illegal.With politicians talking tough on this issue, these costs may increase sharply in future. For the moment however the US farmer has never had it so good.He doesn't have to try and figure out what he should plant this year. He can plant anything and he won't go wrong.
Bernanke Under Pressure To Cut Rates Aggressively.
'The economic situation has become distinctly less favorable since the summer,' Bernanke told lawmakers a few days back. He added that the Fed will act in a timely manner as needed to support growth and to provide adequate resources against downside risks. This was taken as an indication that Bernanke would cut rates again if needed.Yesterday President Bush admitted that the economy is not doing well,but he insisted that the US is not in recession. This week various influential people from the financial world, including Warren Buffet, have argued that the US is already in recession.
Bad news continues to pour in from all sides. The economy unexpectedly lost 63,ooo jobs in February, the biggest drop since March 2003. If one accounts for the 38,000 new jobs created in the government sector, then the private sector lost 101,000 jobs in February.These figures point to an impending recession. Little wonder then that Bush felt compelled to speak about it.US Treasuries have risen pushing down yields on growing speculation that the Fed will lower interest rates by 0.75% at its March 18th meeting. Fed funds futures contracts on the Chicago Board of Trade show that the odds of the Fed lowering interest rates to 2.25% at its March 18th meeting have increased to 74 percent.
Rising unemployment and increasing credit market losses have led many to believe that the Fed may go ahead and cut interest rates by as much as 100 basis points. Interest rate futures on CBOT indicate a 32 percent chance of this possibility.
Since increases in commodity prices have made it almost impossible for central bankers to predict how much inflation will be rising, the Fed is no longer talking of controlling inflation.The core inflation rate excluding food and fuel prices is still at comfortable levels.The task on hand is to avoid recession at any cost. Inflation can be handled later. People are losing their sense of economic security.The markets cannot be allowed to run their course.The government has to step in and defend the markets.If the stock markets decline further, mutual funds and pension funds will start taking a hit, with disastrous consequences.The Fed must, and will most certainly intervene aggressively by its next policy meeting.
Bad news continues to pour in from all sides. The economy unexpectedly lost 63,ooo jobs in February, the biggest drop since March 2003. If one accounts for the 38,000 new jobs created in the government sector, then the private sector lost 101,000 jobs in February.These figures point to an impending recession. Little wonder then that Bush felt compelled to speak about it.US Treasuries have risen pushing down yields on growing speculation that the Fed will lower interest rates by 0.75% at its March 18th meeting. Fed funds futures contracts on the Chicago Board of Trade show that the odds of the Fed lowering interest rates to 2.25% at its March 18th meeting have increased to 74 percent.
Rising unemployment and increasing credit market losses have led many to believe that the Fed may go ahead and cut interest rates by as much as 100 basis points. Interest rate futures on CBOT indicate a 32 percent chance of this possibility.
Since increases in commodity prices have made it almost impossible for central bankers to predict how much inflation will be rising, the Fed is no longer talking of controlling inflation.The core inflation rate excluding food and fuel prices is still at comfortable levels.The task on hand is to avoid recession at any cost. Inflation can be handled later. People are losing their sense of economic security.The markets cannot be allowed to run their course.The government has to step in and defend the markets.If the stock markets decline further, mutual funds and pension funds will start taking a hit, with disastrous consequences.The Fed must, and will most certainly intervene aggressively by its next policy meeting.
US Oil Demand Falls But Prices Rise-Why?
First the good news. US oil consumption is lower by 1.1% over the last six weeks than it was a year ago. The bad news is that oil prices have still hit a record high of $105 per barrel. That is because presently 85% of the increase in consumption has come from countries in Asia and the Middle East.When the US outsourced manufacturing to Asia it perhaps did not realize that it was shifting production to countries which were inefficient consumers of oil,a factor responsible for both higher oil prices and increased environmental pollution.
In addition these countries sell fuel at home at prices which are lower than the market price.In theory such subsidies have a crucial market impact.Although countries like China ,India and other Asian nations are reluctantly taking some action, cash rich oil producing countries of the Middle East continue to provide cheap fuel to their people.Oil subsidies are a drain on all economies of the Middle East region, but are politically difficult to abandon. In fact rising oil revenues are delaying plans to reform the subsidy system in several countries.Windfall profits for these oil exporting countries allow their governments to sell fuel at cost price and any increase would risk popular unrest in an already unsettled region. In fact in the Gulf region the local population sees cheap energy as a right of citizenship. Just imagine, in Venezuela gasoline sells at 13 cents a gallon!
But low prices encourage consumption, and more importantly inefficient consumption. China now seems to be conscious of the need to tackle growth in energy demand so as to curb pollution and also to take care of its energy security worries.However the fear of popular discontent and of inflation which is already at a record high is holding it back.Attempts to hike prices elsewhere in Asia such as in Indonesia and Myanmar have triggered violent protests.Ordinary citizens must realize that cash spent on fuel subsidies eats into other and maybe more important areas of the national budget.Efficient and sensible consumption of oil is the only way to deal with high oil prices.
In addition these countries sell fuel at home at prices which are lower than the market price.In theory such subsidies have a crucial market impact.Although countries like China ,India and other Asian nations are reluctantly taking some action, cash rich oil producing countries of the Middle East continue to provide cheap fuel to their people.Oil subsidies are a drain on all economies of the Middle East region, but are politically difficult to abandon. In fact rising oil revenues are delaying plans to reform the subsidy system in several countries.Windfall profits for these oil exporting countries allow their governments to sell fuel at cost price and any increase would risk popular unrest in an already unsettled region. In fact in the Gulf region the local population sees cheap energy as a right of citizenship. Just imagine, in Venezuela gasoline sells at 13 cents a gallon!
But low prices encourage consumption, and more importantly inefficient consumption. China now seems to be conscious of the need to tackle growth in energy demand so as to curb pollution and also to take care of its energy security worries.However the fear of popular discontent and of inflation which is already at a record high is holding it back.Attempts to hike prices elsewhere in Asia such as in Indonesia and Myanmar have triggered violent protests.Ordinary citizens must realize that cash spent on fuel subsidies eats into other and maybe more important areas of the national budget.Efficient and sensible consumption of oil is the only way to deal with high oil prices.
Too Much Talk Of Recession Is Unjustified.
Only two issues grab headlines these days. One is whether the Democratic candidate will be Clinton or Obama, and the other is whether the US economy is already in recession or about to slide into one. That the US economy will be in recession this year seems to be taken for granted by most financial analysts.Warren Buffet remarked the other day:'I would say, by any commonsense definition, we are in a recession.'
The signs are ominous.Property prices are declining by the month, oil and food prices are going up reducing the purchasing power of the people, and those who want to spend are unable to get credit for it.Banks and other lending institutions are busy writing off billions in bad loans and reporting record losses. Top banks and brokerages are compelled to sell equity to foreign investors to fund these losses.
However the Fed on its part is confident of avoiding a recession.It has cut interest rates from 5.25% in September to 3% today, and more cuts are on the way.The fiscal stimulus will kick in shortly. People should remember that although the housing and auto sectors declined by 12% last year, they make up only about 7% of GDP.The balance 93% of the economy grew by a healthy3.8%. It seems that bad news has been exaggerated and the good news has been underplayed.We should note that the agricultural sector and exports are doing particularly well.Thanks to the lessons learnt in the 1970's and the 'just in time' practices adopted in supply chain management, inventories are under control.A brief period of readjustment after several years of uninterrupted growth may in fact not be all that bad in the long run.Once the excesses of the past are out of the system growth should return to normal, latest by the second half of the year.
The signs are ominous.Property prices are declining by the month, oil and food prices are going up reducing the purchasing power of the people, and those who want to spend are unable to get credit for it.Banks and other lending institutions are busy writing off billions in bad loans and reporting record losses. Top banks and brokerages are compelled to sell equity to foreign investors to fund these losses.
However the Fed on its part is confident of avoiding a recession.It has cut interest rates from 5.25% in September to 3% today, and more cuts are on the way.The fiscal stimulus will kick in shortly. People should remember that although the housing and auto sectors declined by 12% last year, they make up only about 7% of GDP.The balance 93% of the economy grew by a healthy3.8%. It seems that bad news has been exaggerated and the good news has been underplayed.We should note that the agricultural sector and exports are doing particularly well.Thanks to the lessons learnt in the 1970's and the 'just in time' practices adopted in supply chain management, inventories are under control.A brief period of readjustment after several years of uninterrupted growth may in fact not be all that bad in the long run.Once the excesses of the past are out of the system growth should return to normal, latest by the second half of the year.
Bernanke Prepares Aggressive Response To Financial Crisis.
The US consumer has been hit by a triple whammy:falling home prices, rising food and energy costs which reduce real income and a credit squeeze which has reduced spending.It has all added up to a vicious downward spiral which threatens to put the US into recession.
Greenspan kept interest rates too low for too long which fueled a runaway boom in real estate and commodity prices.Bernanke, bent upon keeping inflation low, kept interest rates too high for too long, which is the main reason behind the present crisis.
Now, in an election year, all talk of containing inflation has been thrown out of the window as the Fed battles to prevent a recession.Warren Buffet said yesterday that he feels the US is already in recession.The Fed however remains confident that it will avoid one. This assessment is backed by the International Monetary Fund. These authorities have forecast a very low growth rate in the first half of the year, with growth rebounding in the second half.
Bernanke is now urging banks and other lenders to help people avoid foreclosure even at the cost of writing down some of the principal. He argues that it may be cheaper for the banks to do so, given the high cost of enforcing foreclosure and of selling a repossessed property.
At the root of all these problems is undoubtedly the policy of reckless outsourcing promoted by the government over the last decade.Millions of steady long term jobs have been shifted overseas.In theory this loss should have been made good by an increased demand for high value goods from the US. This has not increased as much as anticipated, partly because of restrictions on export of hi-tech goods to many countries, including China. All this has put a cap on US exports unless the dollar falls further.
All eyes are now on the next Fed meet on March 18th, when another rate cut is expected. Bernanke has already signaled as much.Outsourcing is already an election issue, with the Democrats promising strong action. Hopefully better days lie ahead.
Greenspan kept interest rates too low for too long which fueled a runaway boom in real estate and commodity prices.Bernanke, bent upon keeping inflation low, kept interest rates too high for too long, which is the main reason behind the present crisis.
Now, in an election year, all talk of containing inflation has been thrown out of the window as the Fed battles to prevent a recession.Warren Buffet said yesterday that he feels the US is already in recession.The Fed however remains confident that it will avoid one. This assessment is backed by the International Monetary Fund. These authorities have forecast a very low growth rate in the first half of the year, with growth rebounding in the second half.
Bernanke is now urging banks and other lenders to help people avoid foreclosure even at the cost of writing down some of the principal. He argues that it may be cheaper for the banks to do so, given the high cost of enforcing foreclosure and of selling a repossessed property.
At the root of all these problems is undoubtedly the policy of reckless outsourcing promoted by the government over the last decade.Millions of steady long term jobs have been shifted overseas.In theory this loss should have been made good by an increased demand for high value goods from the US. This has not increased as much as anticipated, partly because of restrictions on export of hi-tech goods to many countries, including China. All this has put a cap on US exports unless the dollar falls further.
All eyes are now on the next Fed meet on March 18th, when another rate cut is expected. Bernanke has already signaled as much.Outsourcing is already an election issue, with the Democrats promising strong action. Hopefully better days lie ahead.
Sovereign Wealth Funds-The Road Ahead.
Sovereign Wealth Funds have dominated headlines recently.Although investments by China's CIC and by GCC funds have been welcomed by high profile companies such as Citigroup etc.,their growing influence has made policy makers distinctly uneasy.With assets under management predicted to increase to $12 trillion by 2015 the issue of regulating their activities has become extremely important.
SWF's have become extremely influential because most of them are state backed and have access to the huge surpluses of energy exporters, or other Asian countries which have run up large trade surpluses as a result of conscious policies adopted to prevent a recurrence of the crisis of the late 1990's.Rather than being content with investing in US bonds these funds are now seeking higher returns in equity markets.This trend may accelerate if interest rates fall further.
As SWF's become more active there is bound to be increasing friction with countries in which they invest,primarily because of a lack of transparency in their activities.As dedicated investment departments and state backed companies from Russia,China and the Gulf go on an investment spree, alarm bells are starting to ring.Successful IPO's, especially by Chinese companies have further increased their investible resources.
By their very nature, being long term investors, SWF's in fact may contribute to greater stability in the world financial markets.But it is the fear of their acquiring managing control in vital sectors,which makes countries wary of their activities.SWF's on their part have sought to play down these fears by often investing in non voting stock.
Various responses have been suggested to regulate the activities of SWF's, but since each country will have a different response, it is difficult to adopt a common approach.In the end bilateral agreements between the investing country and the host country to regulate their activities may be the only solution. On the other hand the SWF's may themselves decide to be more transparent in their activities so as to prevent obstacles being placed in their path.
SWF's have become extremely influential because most of them are state backed and have access to the huge surpluses of energy exporters, or other Asian countries which have run up large trade surpluses as a result of conscious policies adopted to prevent a recurrence of the crisis of the late 1990's.Rather than being content with investing in US bonds these funds are now seeking higher returns in equity markets.This trend may accelerate if interest rates fall further.
As SWF's become more active there is bound to be increasing friction with countries in which they invest,primarily because of a lack of transparency in their activities.As dedicated investment departments and state backed companies from Russia,China and the Gulf go on an investment spree, alarm bells are starting to ring.Successful IPO's, especially by Chinese companies have further increased their investible resources.
By their very nature, being long term investors, SWF's in fact may contribute to greater stability in the world financial markets.But it is the fear of their acquiring managing control in vital sectors,which makes countries wary of their activities.SWF's on their part have sought to play down these fears by often investing in non voting stock.
Various responses have been suggested to regulate the activities of SWF's, but since each country will have a different response, it is difficult to adopt a common approach.In the end bilateral agreements between the investing country and the host country to regulate their activities may be the only solution. On the other hand the SWF's may themselves decide to be more transparent in their activities so as to prevent obstacles being placed in their path.
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