Global Inveztor

Happy Halloween

noreply@blogger.com (none) — Sun, 01 Nov 2009 01:11:00 +0000

Dubai Bonds May Yield Same as Companies One Level Above Junk

noreply@blogger.com (none) — Tue, 27 Oct 2009 11:47:00 +0000

Oct. 27 (Bloomberg) -- Dubai, in its first international bond sale in 18 months, is being treated by investors the same as Russian companies with the lowest investment-grade ratings.

The sheikhdom’s planned dollar-denominated securities, which aren’t rated, will be sold to yield 350 basis points to 400 basis points over the benchmark midswap rate, said three investors approached for the sale. That equates to a premium of 50 basis points, or 0.50 percentage point, more than debt sold by Russian issuers such as OAO Sberbank, which is rated BBB, two levels above high-yield, high-risk debt, Commerzbank AG says.

“It’s pretty fair to consider Dubai an investment grade credit at the BBB- or even a BBB level,” Luis Costa, an emerging-market debt strategist in London, said in a telephone interview. “Although the credit-quality may be aligned to its other BBB-area peers, you still have to input some premium given the leverage in Dubai.”

Dubai, which until August 2007 amassed $80 billion of debt transforming itself into the financial services and tourist hub of the Persian Gulf, is selling bonds for the first time since April 2008 before oil and real-estate prices slumped. Home prices in Dubai tumbled about 50 percent from their peak in 2008’s second quarter and may drop another 20 percent this year after a construction boom created thousands of houses just as demand began to evaporate, Deutsche Bank AG said in June.

Debt Payments

The second-largest sheikhdom in the United Arab Emirates and its government-linked companies have to meet $6.8 billion in debt obligations in the fourth quarter, Frankfurt-based Deutsche Bank said in a report last month. Property developer Nakheel PJSC needs to repay Islamic bonds, or sukuk, of $3.52 billion in December, while Dubai Civil Aviation Authority has to pay a $1 billion security next month, data compiled by Bloomberg show. Sukuk are securities that are governed by Shariah laws barring investors from profiting from the exchange of money, as happens with interest payments on other bonds.

As Dubai prepares to return to international credit markets, contracts protecting against losses on bonds sold by the emirate are pricing the government lower than investment grade. Bonds rated below BBB- by Standard & Poor’s and less than Baa3 by Moody’s Investors Service, are considered high yield, or junk.

Dubai’s credit-default swaps, which get cheaper as perceptions of credit quality improve, trade more like Egypt, whose debt carries a junk rating of BB+ from S&P.

The contracts linked to Dubai debt cost about 294 basis points, higher than the 211 basis points for Egypt’s credit default swaps. Dubai’s swaps remain the sixth-costliest of 39 emerging markets, according to Bloomberg data.

‘Leverage’

“People realize there is quite a bit of leverage at the sovereign level,” said David Lewis, an emerging-market credit analyst in global research at Bank of America Merrill Lynch in London. “This is not a transparent issuer where the market knows exactly where the spread level should be.”

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point is equivalent to $1,000 a year on a contract protecting $10 million of debt.

Dubai officials are meeting with investors in London this week after marketing to funds in Asia and the Middle East. The emirate plans to sell five-year dollar- and dirham-denominated bonds as part of a $6.5 billion medium-term fund-raising plan, according to the investors. The pricing of the medium-term note, which are unsecured, continuously offered debt obligations typically ranging from nine months to three years, compares with a 50 basis-point yield premium that the Dubai government paid in April last year.

The dirham bonds may be priced in the “high” 300 basis points above the three-month emirates interbank offered rate, which was 1.955 percent yesterday, the investors said.

Support Fund

The offering is separate from a $20 billion support fund that the government set up for state-related companies. Dubai borrowed $10 billion by selling bonds to the country’s central bank in February and will probably raise another $10 billion in November, said Mohammed Alabbar, who heads the government committee evaluating the impact of the credit crisis on Dubai.

At a yield of 350-plus basis points over the midswap rate, Dubai’s dollar bonds would be priced in line with the premium investors demand to own the debt of DP World Ltd., the government-owned port operator which is rated three levels above junk at BBB+ by S&P and three levels higher at A1 by Moody’s Investors Service. DP World’s 6.85 percent, 2017 bonds are trading around 350 basis points over the benchmark U.S. midswap rate, according to Lewis. The rate was 2.866 percent yesterday.

‘Lower Risk’

“If you are looking at DP World then you are looking at a corporate proxy for Dubai,” said Philipp Lotter, a Middle East corporate analyst at Moody’s in Dubai. “Sovereigns would generally be a lower risk than its corporates.”

Commerzbank’s Costa says Moscow-based Sberbank’s debt is a fair proxy. Dollar-denominated bonds sold by Russia’s state- controlled lender that are due February 2015 yielded 6.19 percent yesterday, representing a spread of 357 basis points over Treasuries.

Dubai’s planned pricing makes the offer “genuinely attractive,” said Norval Loftus, the head of convertible bonds and sukuk in London at Matrix Corporate Capital Ltd., which oversees $2.5 billion, after attending investor meetings with the emirate yesterday. “There is no desperation implied at this spread.”

To contact the reporter on this story: Laura Cochrane in London at lcochrane3@bloomberg.net

The Quiet Coup

noreply@blogger.com (none) — Sat, 17 Oct 2009 16:28:00 +0000

The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises. If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.

One thing you learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

But inevitably, emerging-market oligarchs get carried away; they waste money and build massive business empires on a mountain of debt. Local banks, sometimes pressured by the government, become too willing to extend credit to the elite and to those who depend on them. Overborrowing always ends badly, whether for an individual, a company, or a country. Sooner or later, credit conditions become tighter and no one will lend you money on anything close to affordable terms.

The downward spiral that follows is remarkably steep. Enormous companies teeter on the brink of default, and the local banks that have lent to them collapse. Yesterday’s “public-private partnerships” are relabeled “crony capitalism.” With credit unavailable, economic paralysis ensues, and conditions just get worse and worse. The government is forced to draw down its foreign-currency reserves to pay for imports, service debt, and cover private losses. But these reserves will eventually run out. If the country cannot right itself before that happens, it will default on its sovereign debt and become an economic pariah. The government, in its race to stop the bleeding, will typically need to wipe out some of the national champions—now hemorrhaging cash—and usually restructure a banking system that’s gone badly out of balance. It will, in other words, need to squeeze at least some of its oligarchs.

Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

Becoming a Banana Republic
In its depth and suddenness, the U.S. economic and financial crisis is shockingly reminiscent of moments we have recently seen in emerging markets (and only in emerging markets): South Korea (1997), Malaysia (1998), Russia and Argentina (time and again). In each of those cases, global investors, afraid that the country or its financial sector wouldn’t be able to pay off mountainous debt, suddenly stopped lending. And in each case, that fear became self-fulfilling, as banks that couldn’t roll over their debt did, in fact, become unable to pay. This is precisely what drove Lehman Brothers into bankruptcy on September 15, causing all sources of funding to the U.S. financial sector to dry up overnight. Just as in emerging-market crises, the weakness in the banking system has quickly rippled out into the rest of the economy, causing a severe economic contraction and hardship for millions of people.

But there’s a deeper and more disturbing similarity: elite business interests—financiers, in the case of the U.S.—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them.

Top investment bankers and government officials like to lay the blame for the current crisis on the lowering of U.S. interest rates after the dotcom bust or, even better—in a “buck stops somewhere else” sort of way—on the flow of savings out of China. Some on the right like to complain about Fannie Mae or Freddie Mac, or even about longer-standing efforts to promote broader homeownership. And, of course, it is axiomatic to everyone that the regulators responsible for “safety and soundness” were fast asleep at the wheel.

But these various policies—lightweight regulation, cheap money, the unwritten Chinese-American economic alliance, the promotion of homeownership—had something in common. Even though some are traditionally associated with Democrats and some with Republicans, they all benefited the financial sector. Policy changes that might have forestalled the crisis but would have limited the financial sector’s profits—such as Brooksley Born’s now-famous attempts to regulate credit-default swaps at the Commodity Futures Trading Commission, in 1998—were ignored or swept aside.

The financial industry has not always enjoyed such favored treatment. But for the past 25 years or so, finance has boomed, becoming ever more powerful. The boom began with the Reagan years, and it only gained strength with the deregulatory policies of the Clinton and George W. Bush administrations. Several other factors helped fuel the financial industry’s ascent. Paul Volcker’s monetary policy in the 1980s, and the increased volatility in interest rates that accompanied it, made bond trading much more lucrative. The invention of securitization, interest-rate swaps, and credit-default swaps greatly increased the volume of transactions that bankers could make money on. And an aging and increasingly wealthy population invested more and more money in securities, helped by the invention of the IRA and the 401(k) plan. Together, these developments vastly increased the profit opportunities in financial services.

Not surprisingly, Wall Street ran with these opportunities. From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007.

The great wealth that the financial sector created and concentrated gave bankers enormous political weight—a weight not seen in the U.S. since the era of J.P. Morgan (the man). In that period, the banking panic of 1907 could be stopped only by coordination among private-sector bankers: no government entity was able to offer an effective response. But that first age of banking oligarchs came to an end with the passage of significant banking regulation in response to the Great Depression; the reemergence of an American financial oligarchy is quite recent.

The Wall Street–Washington Corridor
Of course, the U.S. is unique. And just as we have the world’s most advanced economy, military, and technology, we also have its most advanced oligarchy.

In a primitive political system, power is transmitted through violence, or the threat of violence: military coups, private militias, and so on. In a less primitive system more typical of emerging markets, power is transmitted via money: bribes, kickbacks, and offshore bank accounts. Although lobbying and campaign contributions certainly play major roles in the American political system, old-fashioned corruption—envelopes stuffed with $100 bills—is probably a sideshow today, Jack Abramoff notwithstanding.

Instead, the American financial industry gained political power by amassing a kind of cultural capital—a belief system. Once, perhaps, what was good for General Motors was good for the country. Over the past decade, the attitude took hold that what was good for Wall Street was good for the country. The banking-and-securities industry has become one of the top contributors to political campaigns, but at the peak of its influence, it did not have to buy favors the way, for example, the tobacco companies or military contractors might have to. Instead, it benefited from the fact that Washington insiders already believed that large financial institutions and free-flowing capital markets were crucial to America’s position in the world.

One channel of influence was, of course, the flow of individuals between Wall Street and Washington. Robert Rubin, once the co-chairman of Goldman Sachs, served in Washington as Treasury secretary under Clinton, and later became chairman of Citigroup’s executive committee. Henry Paulson, CEO of Goldman Sachs during the long boom, became Treasury secretary under George W.Bush. John Snow, Paulson’s predecessor, left to become chairman of Cerberus Capital Management, a large private-equity firm that also counts Dan Quayle among its executives. Alan Greenspan, after leaving the Federal Reserve, became a consultant to Pimco, perhaps the biggest player in international bond markets.

These personal connections were multiplied many times over at the lower levels of the past three presidential administrations, strengthening the ties between Washington and Wall Street. It has become something of a tradition for Goldman Sachs employees to go into public service after they leave the firm. The flow of Goldman alumni—including Jon Corzine, now the governor of New Jersey, along with Rubin and Paulson—not only placed people with Wall Street’s worldview in the halls of power; it also helped create an image of Goldman (inside the Beltway, at least) as an institution that was itself almost a form of public service.

Wall Street is a very seductive place, imbued with an air of power. Its executives truly believe that they control the levers that make the world go round. A civil servant from Washington invited into their conference rooms, even if just for a meeting, could be forgiven for falling under their sway. Throughout my time at the IMF, I was struck by the easy access of leading financiers to the highest U.S. government officials, and the interweaving of the two career tracks. I vividly remember a meeting in early 2008—attended by top policy makers from a handful of rich countries—at which the chair casually proclaimed, to the room’s general approval, that the best preparation for becoming a central-bank governor was to work first as an investment banker.

A whole generation of policy makers has been mesmerized by Wall Street, always and utterly convinced that whatever the banks said was true. Alan Greenspan’s pronouncements in favor of unregulated financial markets are well known. Yet Greenspan was hardly alone. This is what Ben Bernanke, the man who succeeded him, said in 2006: “The management of market risk and credit risk has become increasingly sophisticated. … Banking organizations of all sizes have made substantial strides over the past two decades in their ability to measure and manage risks.”

Of course, this was mostly an illusion. Regulators, legislators, and academics almost all assumed that the managers of these banks knew what they were doing. In retrospect, they didn’t. AIG’s Financial Products division, for instance, made $2.5 billion in pretax profits in 2005, largely by selling underpriced insurance on complex, poorly understood securities. Often described as “picking up nickels in front of a steamroller,” this strategy is profitable in ordinary years, and catastrophic in bad ones. As of last fall, AIG had outstanding insurance on more than $400 billion in securities. To date, the U.S. government, in an effort to rescue the company, has committed about $180 billion in investments and loans to cover losses that AIG’s sophisticated risk modeling had said were virtually impossible.

Wall Street’s seductive power extended even (or especially) to finance and economics professors, historically confined to the cramped offices of universities and the pursuit of Nobel Prizes. As mathematical finance became more and more essential to practical finance, professors increasingly took positions as consultants or partners at financial institutions. Myron Scholes and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the end of the decade. But many others beat similar paths. This migration gave the stamp of academic legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.

As more and more of the rich made their money in finance, the cult of finance seeped into the culture at large. Works like Barbarians at the Gate, Wall Street, and Bonfire of the Vanities—all intended as cautionary tales—served only to increase Wall Street’s mystique. Michael Lewis noted in Portfolio last year that when he wrote Liar’s Poker, an insider’s account of the financial industry, in 1989, he had hoped the book might provoke outrage at Wall Street’s hubris and excess. Instead, he found himself “knee-deep in letters from students at Ohio State who wanted to know if I had any other secrets to share. … They’d read my book as a how-to manual.” Even Wall Street’s criminals, like Michael Milken and Ivan Boesky, became larger than life. In a society that celebrates the idea of making money, it was easy to infer that the interests of the financial sector were the same as the interests of the country—and that the winners in the financial sector knew better what was good for America than did the career civil servants in Washington. Faith in free financial markets grew into conventional wisdom—trumpeted on the editorial pages of The Wall Street Journal and on the floor of Congress.

From this confluence of campaign finance, personal connections, and ideology there flowed, in just the past decade, a river of deregulatory policies that is, in hindsight, astonishing:

• insistence on free movement of capital across borders;

• the repeal of Depression-era regulations separating commercial and investment banking;

• a congressional ban on the regulation of credit-default swaps;

• major increases in the amount of leverage allowed to investment banks;

• a light (dare I say invisible?) hand at the Securities and Exchange Commission in its regulatory enforcement;

• an international agreement to allow banks to measure their own riskiness;

• and an intentional failure to update regulations so as to keep up with the tremendous pace of financial innovation.

The mood that accompanied these measures in Washington seemed to swing between nonchalance and outright celebration: finance unleashed, it was thought, would continue to propel the economy to greater heights.

America’s Oligarchs and the Financial Crisis
The oligarchy and the government policies that aided it did not alone cause the financial crisis that exploded last year. Many other factors contributed, including excessive borrowing by households and lax lending standards out on the fringes of the financial world. But major commercial and investment banks—and the hedge funds that ran alongside them—were the big beneficiaries of the twin housing and equity-market bubbles of this decade, their profits fed by an ever-increasing volume of transactions founded on a relatively small base of actual physical assets. Each time a loan was sold, packaged, securitized, and resold, banks took their transaction fees, and the hedge funds buying those securities reaped ever-larger fees as their holdings grew.

Because everyone was getting richer, and the health of the national economy depended so heavily on growth in real estate and finance, no one in Washington had any incentive to question what was going on. Instead, Fed Chairman Greenspan and President Bush insisted metronomically that the economy was fundamentally sound and that the tremendous growth in complex securities and credit-default swaps was evidence of a healthy economy where risk was distributed safely.

In the summer of 2007, signs of strain started appearing. The boom had produced so much debt that even a small economic stumble could cause major problems, and rising delinquencies in subprime mortgages proved the stumbling block. Ever since, the financial sector and the federal government have been behaving exactly the way one would expect them to, in light of past emerging-market crises.

By now, the princes of the financial world have of course been stripped naked as leaders and strategists—at least in the eyes of most Americans. But as the months have rolled by, financial elites have continued to assume that their position as the economy’s favored children is safe, despite the wreckage they have caused.

Stanley O’Neal, the CEO of Merrill Lynch, pushed his firm heavily into the mortgage-backed-securities market at its peak in 2005 and 2006; in October 2007, he acknowledged, “The bottom line is, we—I—got it wrong by being overexposed to subprime, and we suffered as a result of impaired liquidity in that market. No one is more disappointed than I am in that result.” O’Neal took home a $14 million bonus in 2006; in 2007, he walked away from Merrill with a severance package worth $162 million, although it is presumably worth much less today.

In October, John Thain, Merrill Lynch’s final CEO, reportedly lobbied his board of directors for a bonus of $30 million or more, eventually reducing his demand to $10 million in December; he withdrew the request, under a firestorm of protest, only after it was leaked to The Wall Street Journal. Merrill Lynch as a whole was no better: it moved its bonus payments, $4 billion in total, forward to December, presumably to avoid the possibility that they would be reduced by Bank of America, which would own Merrill beginning on January 1. Wall Street paid out $18 billion in year-end bonuses last year to its New York City employees, after the government disbursed $243 billion in emergency assistance to the financial sector.

In a financial panic, the government must respond with both speed and overwhelming force. The root problem is uncertainty—in our case, uncertainty about whether the major banks have sufficient assets to cover their liabilities. Half measures combined with wishful thinking and a wait-and-see attitude cannot overcome this uncertainty. And the longer the response takes, the longer the uncertainty will stymie the flow of credit, sap consumer confidence, and cripple the economy—ultimately making the problem much harder to solve. Yet the principal characteristics of the government’s response to the financial crisis have been delay, lack of transparency, and an unwillingness to upset the financial sector.

The response so far is perhaps best described as “policy by deal”: when a major financial institution gets into trouble, the Treasury Department and the Federal Reserve engineer a bailout over the weekend and announce on Monday that everything is fine. In March 2008, Bear Stearns was sold to JP Morgan Chase in what looked to many like a gift to JP Morgan. (Jamie Dimon, JP Morgan’s CEO, sits on the board of directors of the Federal Reserve Bank of New York, which, along with the Treasury Department, brokered the deal.) In September, we saw the sale of Merrill Lynch to Bank of America, the first bailout of AIG, and the takeover and immediate sale of Washington Mutual to JP Morgan—all of which were brokered by the government. In October, nine large banks were recapitalized on the same day behind closed doors in Washington. This, in turn, was followed by additional bailouts for Citigroup, AIG, Bank of America, Citigroup (again), and AIG (again).

Some of these deals may have been reasonable responses to the immediate situation. But it was never clear (and still isn’t) what combination of interests was being served, and how. Treasury and the Fed did not act according to any publicly articulated principles, but just worked out a transaction and claimed it was the best that could be done under the circumstances. This was late-night, backroom dealing, pure and simple.

Throughout the crisis, the government has taken extreme care not to upset the interests of the financial institutions, or to question the basic outlines of the system that got us here. In September 2008, Henry Paulson asked Congress for $700 billion to buy toxic assets from banks, with no strings attached and no judicial review of his purchase decisions. Many observers suspected that the purpose was to overpay for those assets and thereby take the problem off the banks’ hands—indeed, that is the only way that buying toxic assets would have helped anything. Perhaps because there was no way to make such a blatant subsidy politically acceptable, that plan was shelved.

Instead, the money was used to recapitalize banks, buying shares in them on terms that were grossly favorable to the banks themselves. As the crisis has deepened and financial institutions have needed more help, the government has gotten more and more creative in figuring out ways to provide banks with subsidies that are too complex for the general public to understand. The first AIG bailout, which was on relatively good terms for the taxpayer, was supplemented by three further bailouts whose terms were more AIG-friendly. The second Citigroup bailout and the Bank of America bailout included complex asset guarantees that provided the banks with insurance at below-market rates. The third Citigroup bailout, in late February, converted government-owned preferred stock to common stock at a price significantly higher than the market price—a subsidy that probably even most Wall Street Journal readers would miss on first reading. And the convertible preferred shares that the Treasury will buy under the new Financial Stability Plan give the conversion option (and thus the upside) to the banks, not the government.

This latest plan—which is likely to provide cheap loans to hedge funds and others so that they can buy distressed bank assets at relatively high prices—has been heavily influenced by the financial sector, and Treasury has made no secret of that. As Neel Kashkari, a senior Treasury official under both Henry Paulson and Tim Geithner (and a Goldman alum) told Congress in March, “We had received inbound unsolicited proposals from people in the private sector saying, ‘We have capital on the sidelines; we want to go after [distressed bank] assets.’” And the plan lets them do just that: “By marrying government capital—taxpayer capital—with private-sector capital and providing financing, you can enable those investors to then go after those assets at a price that makes sense for the investors and at a price that makes sense for the banks.” Kashkari didn’t mention anything about what makes sense for the third group involved: the taxpayers.

Even leaving aside fairness to taxpayers, the government’s velvet-glove approach with the banks is deeply troubling, for one simple reason: it is inadequate to change the behavior of a financial sector accustomed to doing business on its own terms, at a time when that behavior must change. As an unnamed senior bank official said to The New York Times last fall, “It doesn’t matter how much Hank Paulson gives us, no one is going to lend a nickel until the economy turns.” But there’s the rub: the economy can’t recover until the banks are healthy and willing to lend.

The Way Out
Looking just at the financial crisis (and leaving aside some problems of the larger economy), we face at least two major, interrelated problems. The first is a desperately ill banking sector that threatens to choke off any incipient recovery that the fiscal stimulus might generate. The second is a political balance of power that gives the financial sector a veto over public policy, even as that sector loses popular support.

Big banks, it seems, have only gained political strength since the crisis began. And this is not surprising. With the financial system so fragile, the damage that a major bank failure could cause—Lehman was small relative to Citigroup or Bank of America—is much greater than it would be during ordinary times. The banks have been exploiting this fear as they wring favorable deals out of Washington. Bank of America obtained its second bailout package (in January) after warning the government that it might not be able to go through with the acquisition of Merrill Lynch, a prospect that Treasury did not want to consider.

The challenges the United States faces are familiar territory to the people at the IMF. If you hid the name of the country and just showed them the numbers, there is no doubt what old IMF hands would say: nationalize troubled banks and break them up as necessary.

In some ways, of course, the government has already taken control of the banking system. It has essentially guaranteed the liabilities of the biggest banks, and it is their only plausible source of capital today. Meanwhile, the Federal Reserve has taken on a major role in providing credit to the economy—the function that the private banking sector is supposed to be performing, but isn’t. Yet there are limits to what the Fed can do on its own; consumers and businesses are still dependent on banks that lack the balance sheets and the incentives to make the loans the economy needs, and the government has no real control over who runs the banks, or over what they do.

At the root of the banks’ problems are the large losses they have undoubtedly taken on their securities and loan portfolios. But they don’t want to recognize the full extent of their losses, because that would likely expose them as insolvent. So they talk down the problem, and ask for handouts that aren’t enough to make them healthy (again, they can’t reveal the size of the handouts that would be necessary for that), but are enough to keep them upright a little longer. This behavior is corrosive: unhealthy banks either don’t lend (hoarding money to shore up reserves) or they make desperate gambles on high-risk loans and investments that could pay off big, but probably won’t pay off at all. In either case, the economy suffers further, and as it does, bank assets themselves continue to deteriorate—creating a highly destructive vicious cycle.

To break this cycle, the government must force the banks to acknowledge the scale of their problems. As the IMF understands (and as the U.S. government itself has insisted to multiple emerging-market countries in the past), the most direct way to do this is nationalization. Instead, Treasury is trying to negotiate bailouts bank by bank, and behaving as if the banks hold all the cards—contorting the terms of each deal to minimize government ownership while forswearing government influence over bank strategy or operations. Under these conditions, cleaning up bank balance sheets is impossible.

Nationalization would not imply permanent state ownership. The IMF’s advice would be, essentially: scale up the standard Federal Deposit Insurance Corporation process. An FDIC “intervention” is basically a government-managed bankruptcy procedure for banks. It would allow the government to wipe out bank shareholders, replace failed management, clean up the balance sheets, and then sell the banks back to the private sector. The main advantage is immediate recognition of the problem so that it can be solved before it grows worse.

The government needs to inspect the balance sheets and identify the banks that cannot survive a severe recession. These banks should face a choice: write down your assets to their true value and raise private capital within 30 days, or be taken over by the government. The government would write down the toxic assets of banks taken into receivership—recognizing reality—and transfer those assets to a separate government entity, which would attempt to salvage whatever value is possible for the taxpayer (as the Resolution Trust Corporation did after the savings-and-loan debacle of the 1980s). The rump banks—cleansed and able to lend safely, and hence trusted again by other lenders and investors—could then be sold off.

Cleaning up the megabanks will be complex. And it will be expensive for the taxpayer; according to the latest IMF numbers, the cleanup of the banking system would probably cost close to $1.5 trillion (or 10 percent of our GDP) in the long term. But only decisive government action—exposing the full extent of the financial rot and restoring some set of banks to publicly verifiable health—can cure the financial sector as a whole.

This may seem like strong medicine. But in fact, while necessary, it is insufficient. The second problem the U.S. faces—the power of the oligarchy—is just as important as the immediate crisis of lending. And the advice from the IMF on this front would again be simple: break the oligarchy.

Oversize institutions disproportionately influence public policy; the major banks we have today draw much of their power from being too big to fail. Nationalization and re-privatization would not change that; while the replacement of the bank executives who got us into this crisis would be just and sensible, ultimately, the swapping-out of one set of powerful managers for another would change only the names of the oligarchs.

Ideally, big banks should be sold in medium-size pieces, divided regionally or by type of business. Where this proves impractical—since we’ll want to sell the banks quickly—they could be sold whole, but with the requirement of being broken up within a short time. Banks that remain in private hands should also be subject to size limitations.

This may seem like a crude and arbitrary step, but it is the best way to limit the power of individual institutions in a sector that is essential to the economy as a whole. Of course, some people will complain about the “efficiency costs” of a more fragmented banking system, and these costs are real. But so are the costs when a bank that is too big to fail—a financial weapon of mass self-destruction—explodes. Anything that is too big to fail is too big to exist.

To ensure systematic bank breakup, and to prevent the eventual reemergence of dangerous behemoths, we also need to overhaul our antitrust legislation. Laws put in place more than 100 years ago to combat industrial monopolies were not designed to address the problem we now face. The problem in the financial sector today is not that a given firm might have enough market share to influence prices; it is that one firm or a small set of interconnected firms, by failing, can bring down the economy. The Obama administration’s fiscal stimulus evokes FDR, but what we need to imitate here is Teddy Roosevelt’s trust-busting.

Caps on executive compensation, while redolent of populism, might help restore the political balance of power and deter the emergence of a new oligarchy. Wall Street’s main attraction—to the people who work there and to the government officials who were only too happy to bask in its reflected glory—has been the astounding amount of money that could be made. Limiting that money would reduce the allure of the financial sector and make it more like any other industry.

Still, outright pay caps are clumsy, especially in the long run. And most money is now made in largely unregulated private hedge funds and private-equity firms, so lowering pay would be complicated. Regulation and taxation should be part of the solution. Over time, though, the largest part may involve more transparency and competition, which would bring financial-industry fees down. To those who say this would drive financial activities to other countries, we can now safely say: fine.

Two Paths
To paraphrase Joseph Schumpeter, the early-20th-century economist, everyone has elites; the important thing is to change them from time to time. If the U.S. were just another country, coming to the IMF with hat in hand, I might be fairly optimistic about its future. Most of the emerging-market crises that I’ve mentioned ended relatively quickly, and gave way, for the most part, to relatively strong recoveries. But this, alas, brings us to the limit of the analogy between the U.S. and emerging markets.

Emerging-market countries have only a precarious hold on wealth, and are weaklings globally. When they get into trouble, they quite literally run out of money—or at least out of foreign currency, without which they cannot survive. They must make difficult decisions; ultimately, aggressive action is baked into the cake. But the U.S., of course, is the world’s most powerful nation, rich beyond measure, and blessed with the exorbitant privilege of paying its foreign debts in its own currency, which it can print. As a result, it could very well stumble along for years—as Japan did during its lost decade—never summoning the courage to do what it needs to do, and never really recovering. A clean break with the past—involving the takeover and cleanup of major banks—hardly looks like a sure thing right now. Certainly no one at the IMF can force it.

In my view, the U.S. faces two plausible scenarios. The first involves complicated bank-by-bank deals and a continual drumbeat of (repeated) bailouts, like the ones we saw in February with Citigroup and AIG. The administration will try to muddle through, and confusion will reign.

Boris Fyodorov, the late finance minister of Russia, struggled for much of the past 20 years against oligarchs, corruption, and abuse of authority in all its forms. He liked to say that confusion and chaos were very much in the interests of the powerful—letting them take things, legally and illegally, with impunity. When inflation is high, who can say what a piece of property is really worth? When the credit system is supported by byzantine government arrangements and backroom deals, how do you know that you aren’t being fleeced?

Our future could be one in which continued tumult feeds the looting of the financial system, and we talk more and more about exactly how our oligarchs became bandits and how the economy just can’t seem to get into gear.

The second scenario begins more bleakly, and might end that way too. But it does provide at least some hope that we’ll be shaken out of our torpor. It goes like this: the global economy continues to deteriorate, the banking system in east-central Europe collapses, and—because eastern Europe’s banks are mostly owned by western European banks—justifiable fears of government insolvency spread throughout the Continent. Creditors take further hits and confidence falls further. The Asian economies that export manufactured goods are devastated, and the commodity producers in Latin America and Africa are not much better off. A dramatic worsening of the global environment forces the U.S. economy, already staggering, down onto both knees. The baseline growth rates used in the administration’s current budget are increasingly seen as unrealistic, and the rosy “stress scenario” that the U.S. Treasury is currently using to evaluate banks’ balance sheets becomes a source of great embarrassment.

Under this kind of pressure, and faced with the prospect of a national and global collapse, minds may become more concentrated.

The conventional wisdom among the elite is still that the current slump “cannot be as bad as the Great Depression.” This view is wrong. What we face now could, in fact, be worse than the Great Depression—because the world is now so much more interconnected and because the banking sector is now so big. We face a synchronized downturn in almost all countries, a weakening of confidence among individuals and firms, and major problems for government finances. If our leadership wakes up to the potential consequences, we may yet see dramatic action on the banking system and a breaking of the old elite. Let us hope it is not then too late.

Simon Johnson, a professor at MIT’s Sloan School of Management, was the chief economist at the International Monetary Fund during 2007 and 2008. He blogs about the financial crisis at baselinescenario.com, along with James Kwak, who also contributed to this essay.

Russia ready to abandon dollar in oil, gas trade with China

noreply@blogger.com (none) — Fri, 16 Oct 2009 13:55:00 +0000

BEIJING, October 14 (RIA Novosti) - Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday.

The premier, currently on a visit to Beijing, said a final decision on the issue can only be made after a thorough expert analysis.

"Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans," Putin said.

He stressed that "there should be a balance here."

On Tuesday, Russia and China agreed terms for Russian gas deliveries at a level of up to 70 billion cubic meters a year. China also imports oil from Russia.

The Russian prime minister said the issue would be addressed among others at a meeting of Shanghai Cooperation Organization (SCO) finance ministers, who are to convene before the end of the year in Kazakhstan.

Britain's Independent newspaper reported last Tuesday that Russian officials had held "secret meetings" with Arab states, China and France on ending the use of the U.S. dollar in international oil trade.

The countries are reportedly seeking to switch from the dollar to a basket of currencies including the euro, Japanese yen, Chinese yuan, gold, and a new unified currency of leading Arab oil producing countries.

The Independent said the meetings have been confirmed by Chinese and Arab banking sources.

Deficits and the Chinese Challenge

noreply@blogger.com (none) — Wed, 14 Oct 2009 22:28:00 +0000

Debt can become a true liability for a superpower. Recall what happened with postwar Britain.

The dollar's sharp drop over the past few weeks has led to considerable anxiety about the status of the United States as the dominant force in the global economy. Closely related to this fear is constant worry about the rise of China and the evermore complicated relationship between Beijing and Washington.

Most people are now aware that China is the largest creditor to a heavily indebted U.S. government. It holds close to a trillion dollars of U.S. Treasurys and has invested hundreds of billions more in private enterprises in America. Even though these facts are plainly acknowledged, policy makers and experts continue to underestimate the full ramifications of this relationship.

David Gothard

Consider what happened in 1946, when a cash-strapped Great Britain turned to the U.S. for a loan. For 30 years or more, the British had been consumed by the threat of a rising Germany. Two wars had been fought, millions of lives had been lost, and the British treasury was dramatically depleted in the process. Britain survived, but the costs were substantial.

In spite of its global empire, a powerful military, and an enviable position at the center of world-wide commerce, in early 1946 the British government faced a serious risk of defaulting on its financial obligations. So it did what it had done at various points over the previous decade and turned to its closest ally for assistance. It asked the U.S. for a loan of $5 billion at zero-interest repayable over 50 years. As generous as those terms seem today, such financing had been almost routine in years prior. To the surprise and shock of the British, Washington refused.

Unable to take no for answer, Britain explained that unless it received funds the government would be insolvent. The Americans came back with a series of conditions. They would lend Britain $3.7 billion at 2% interest, and the British government would have to abide by the 1944 Bretton Woods plan, which made the dollar rather than the pound sterling the reference point for global exchange rates and required Britain to make the pound freely convertible. Even more significantly, Britain had to end its system of imperial preferences, which meant no more tariffs and duties on goods to and from colonies such as India. These were not mere financial penalties: Taken together, they meant the end of the British Empire.

Within two years, Britain had left India and was on its way to decolonizing throughout Asia and Africa. Unable to compete with the United States economically and no longer able to reap the benefits of colonial trade, Britain's military shrank and its commerce contracted. It quickly receded from its dominant global position and entered several decades of economic malaise. In the 1980s, Britain finally emerged as a prosperous country, but it was a shadow of what it had been in its heyday.

The U.S. replaced Britain as the guardian of the West. As one British official, Evelyn Shuckburgh, remarked in the late 1940s, "it was impossible not to be conscious that we were playing second fiddle." And that was precisely what the U.S. desired. Having supported the British for decades and become its banker and manufacturer during two wars, at the end of World War II the U.S. fully intended to supplant the British Empire. The loan request provided the pretext, but by then the balance had already shifted and Britain could have done little to reverse the tide.

By 2030—if not sooner—China is likely to surpass the U.S. in the size of its economy, though it will remain on a per capita basis a much poorer society for many years after that. Trajectories can change, but the recent implosion of the American financial system has only accelerated China's rise.

Given the lesson of the British Empire's demise, it would be foolish to base current policy on the assumption that China will hit a fatal speed-bump before it is able to supplant the U.S. And while the level of current indebtedness is manageable for the U.S.—and in fact tethers the Chinese closely to the U.S. economy in ways that are arguably beneficial for both countries—the fact that these economies are currently bound together does not mean that their interests will always be in sync.

Here, too, the British analogy is sobering. For decades, the relationship between Britain and the U.S. was mutually beneficial, though the Americans resented being treated as junior partners. As tension festered, the British were consumed with the more immediate threat of Germany. But in the end it was the U.S. that delivered the knockout blow.

The Americans have not had to deal with a true economic rival since the British more than half a century ago. America today is as unaccustomed to global economic competition as the British were at their apex. The U.S. often seems lumbering and ill-suited to the demands of economic rivalry.

The only way to avoid Britain's fate and meet the challenge of China is to reinvigorate economic life. This is a multiyear endeavor that must be done primarily through innovation, not legislation. America needs to retool its domestic economy to build on the global success of many U.S. companies. It must focus on inventing new products and generating new ideas, rather than defending the rusty industries of yesterday. Fights over health care and climate change are the cultural equivalent of fiddling while Rome burns.

China thrives because it is hungry, dynamic, scared of failure and convinced that it should be a leading force in the world. That is why America thrived a century ago. Today, such hunger and dynamism seem less evident in American life than petulance that the world is not cooperating.

The U.S. is in danger of assuming that because it has been a dominant nation on the world stage, it must continue to be so. That is a recipe for becoming Britain.

By ZACHARY KARABELL

Mr. Karabell is the author of "Superfusion: How China and America Became One Economy and Why the World's Prosperity Depends on It," just published by Simon & Schuster.

The Day the Dollar Falls...Comes Closer

noreply@blogger.com (none) — Mon, 12 Oct 2009 10:08:00 +0000

In 2005 a program named Backlight (on Dutch TV) aired a documentary about the growing risk on the dollar currency: The day the dollar falls. Recent articles in the media are giving me the creeps that the end of the dollar era and the US empire might be close to an endgame scenario.

Although the dire situation surrounding the fundamentals of the US economy was hardly visible in the real economy during the boom years 2003 - 2007, a few bright minds like e.g. Ron Paul (Rep. Congressman Texas) as early as late 1970's and Peter Schiff (EuroPacific Capital) saw that the deficit path was unsustainable and should be reverted as soon as possible before it to be irreversible. Many believed (Asia, Europe) that the newly elected President Obama (D) would change the destructive Bush (R) fiscal policies to a more sustainable path. This graph clearly indicates that Democratic presidents are more fiscally prudent than their Republican counterparts.

This time, that notion turned out the be an illusion as US gross national debt was 9.5 trillion dollars when Bush left office and increased to 11.9 trillion dollars over the first 6 months of the Obama presidency, supposedly necessary to again stave off a (more severe) recession, to create 1.4 million jobs (better: cushion the depression-like job losses) and to get the 70% consumer driven economy spending again (again better: keeping GDP at level in an obvious secular deflationary private sector).

A year after the collapse of Lehman Brothers in September 2008 followed by a period of 6 months of uncertainty in global markets resulting in a new low for the markets in March 2009, we are currently experiencing a (sentiment) recovery in the global stock markets following a near propaganda campaign from the US government and media as if the US economy is recovering in full swing. The policymakers hopes are based upon a Keynesian debt-induced V-recovery but are anxious the rally may be short-lived.

The enormous amounts of money being borrowed daily from creditor nations like China, Japan and oil rich Gulf States, aswell as the monetization of debt (quantitative easing) by the Federal Reserve Bank is spurring a new boom/bust cycle of malinvestments and phony gains aswell as a growing uncertainty in debt markets. With the dollar recently dropping a percent in a week, the growing concern is a major loss of confidence in the dollar being able to serve as a worlds reserve currency. Rumors and talks are indicating that holders of dollar reserves are accelerating their efforts for diversification out of the dollar. The past weeks are showing alarming reports, so lets summarize the smoke abit:

1. Article from the Independant by Robert Fisk: The demise of the dollar, one of recent alarming articles talking about secret meetings of finance ministers from China, Russia, France, Japan and several Gulf States about abandoning the dollar in oil trading. Reports of this happening were broadly denied by parties, which would seem obvious, as noone is aiming at panic, but rather a slow diversification to protect their assets and investments without too much market interference.

2. Today Bloomberg comes up with an article: The dollar Reaches Breaking Point as Central Banks Shift Reserves, reporting - nations reporting currency breakdowns put 63 percent of the new cash into euro's and yen in April, May and June, the latest Barclays Capital data show. That's the highest percentage in any quarter with more than an $80 billion increase. -

“Global central banks are getting more serious about diversification, whereas in the past they used to just talk about it,” said Steven Englander, a former Federal Reserve researcher who is now the chief U.S. currency strategist at Barclays in New York. “It looks like they are really backing away from the dollar.”

3. Stockhouse.com published an article today from Sy Harding, President of Asset Management Research Corp.: What The Heck Are Central Banks Up To?, questioning why Central Banks policymakers are appearing to be spreading uncertainty in the markets, following an article in the Economist talking about Fed governors not singing the same tune in public comments.

One of the reasons I think this uncertainty is being spread, is to convince (uncertainty equals fear) markets that there might be a shift in US monetary policy ahead, indicating that the economy might be on a turn around to growth and inflation (in nominal terms perhaps, definitely not in real terms). This uncertainty is fueled to induce a continued interest in US bonds and treasuries to support the dollar currency and stave off its possible accelerated selloff, which might be close to breaking point in my opinion.

Bill Gross, who runs the $186 billion Pimco Total Return Fund, the world’s largest bond fund, said in June that dollar investors should diversify before central banks do the same on concern that the U.S.’s budget deficit will deepen. Clearly there is a growing conviction that this path of US fiscal imprudency is the wrong way to go. The dollar value will suffer immensely if even Central Banks are diversifying away from the dollar currency.

Gold stands at an alltime high today at $1055 (2009 dollars). Obviously, this whole dynamic that I see happening is coming close to a point where some big players are nerving to pull their money out of dollar denominated assets. When that moment happens, possible at the end of a Friday afternoon in a certain week not very far away (a hunch? perhaps instinct? I can't tell)...the markets will tumble, liquidity will dry up once again and a cascade of investor actions in the week ahead fleeing out of dollar denominated assets will finalize the collapse of the worlds first reserve currency, the US dollar.

As history shows us time and time again, fiscal prudence is key to a viable economy and its currency. Since the creation of the Federal Reserve in 1913, the dollar has lost 95 percent of its value. So far for a stable currency, the main task of the FED.

Lets take a short look at what the Fed has accomplished in 96 years of civil (private) service. In 1913, total broad money supply M3 was $20 billion on a total of 97 million American citizens. Fast forward to 2009, M3 money supply (US gov. stopped reporting it for dodgy reasons) is approx. $15 trillion on a population of 305 million people. Thats an average inflation of 7.8 percent a year! The money supply doubles every (T,2 = 100ln2 / growth rate per year) 9 years!

The keynesian theory justifies an increase in the money supply equal to the growth in population (zero growth), which is around 1.2% since 1913. Conclusion, instead of real organic growth the FED has been taxing the American an additional 6.5 percent a year by inflation, halving the purchasing power every decade...now consider the gain in nominal terms of the S&P 500 and you basically had a lost decade just like Japan did...

One arithmatic lesson I would recommend to Ben Bernanke and his policymakers (albeit somewhat late) is based on the greatest shortcoming of the human race: That is our inability to understand the exponential function.

Learn and listen to Professor Emeritus Dr. Albert A. Bartlett, Department of Physics at the University of Colorado at Boulder:

To end this dire expectation with a core line from a well-known social philosopher H.L. Mencken; "It is the nature of the human species to reject what is true but unpleasant and to embrace what is obviously false but comforting"...

I say 'be smart and think for yourself before another one thinks for you'. RdG.

S&P: Dubai Is Nearly Out Of Cash

noreply@blogger.com (none) — Sun, 11 Oct 2009 20:44:00 +0000

DUBAI, United Arab Emirates (AP) — An analyst at credit rating firm Standard & Poor's says Dubai has "insufficient" funds to pay back billions of dollars worth of debt coming due, putting added pressure on the city-state to raise additional cash.

Farouk Soussa, S&P's head of Middle East government ratings, said Sunday that the sheikdom has about $4 billion left from a February bond issue, but must find a way to cover as much as $50 billion over the next three years.

He says "the notion that the government will be able and/or willing to stand 100 percent by all that debt on an equal basis is wrong."

Soussa's comments come two days after a top Dubai official told CNN the government could seek to raise another $10 billion through government bonds as early as this month.

by Joe Weisenthal

Central Banking: A Blight On Humanity

noreply@blogger.com (none) — Sat, 10 Oct 2009 19:47:00 +0000

Impeccably reliable sources have informed me that as recently as Sept. 30, 2009 – the last possible day of trade in the Sept. 09 gold futures – a number of well-heeled market participants “bought” substantial tonnage worth of gold futures on the London Bullion Market [LBMA] and immediately told their counterparties they wanted to take instantaneous delivery of the underlying physical bullion.

The unexpected immediate demand for substantial tonnage of gold bullion created utter panic in at least two banks who were counterparties to this trade – J.P. Morgan Chase and Deutsche Bank – because they simply did not posses the gold bullion which they had sold short [an illegal act which in trading parlance is referred to as a “naked short”].

Because these banks did not have the bullion to honor their contracted commitments, one or both of them approached the counterparties and asked if there was any way they could settle this embarrassing matter quietly on a “cash basis” to absolve the banks from fulfilling their physical bullion delivery obligations. The purchasers were not interested in a ‘cash settlement’ and demanded delivery of physical bullion giving these banks 5 business days to resolve the situation. A premium of as much as spot plus 25 % [that would be 1,250 – 1,300 per ounce of gold] was offered to settle this matter in fiat money instead of the embarrassment of a very public “failure to deliver” on the part of the London Bullion Market Association.

Earlier this week, no less than two Central Banks became involved in effecting the physical settlement of this situation. One of these Central Banks was British [that would be the Bank of England] – and reportedly, even they were only capable of providing less than pure, non-compliant gold bars that did not meet good delivery standards stipulated by the LBMA. Like it or not, this is a testament to lack of physical gold available, folks.

To summarize: Banks like J.P. Morgan Chase and Deutsche Bk. - who sold endless amounts of gold futures at prices of 950 – 1025 and then tried to make “side deals” with the folks they sold the futures to – offering them spot + 25 % [let’s say 1,275 per ounce] to settle in fiat – only after their counter parties demanded substantial tonnage of physical gold bullion.

Stunningly, if accurate [and there is absolutely no doubt in my mind that this is not accurate], this means that gold is already in SEVERE backwardation and this fact is being hidden from the public.

Then, to protect the “integrity” of the futures market as a ‘price discovery mechanism’ – Central Banks – aiding and abetting - plunder the sovereign assets of their respective countries to bail out their agents / friends in an attempt to ‘sweep the whole bloody mess under the carpet’.

To think that anyone wonders why our financial system and fiat money will soon to be TOAST?

What a disgraceful insult to humanity.

By Rob Kirby
www.Goldseek.com

The Demise of The Dollar

noreply@blogger.com (none) — Tue, 06 Oct 2009 01:32:00 +0000

In a graphic illustration of the new world order, Arab states have launched secret moves with China, Russia and France to stop using the US currency for oil trading.

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar.

Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars.

The plans, confirmed to The Independent by both Gulf Arab and Chinese banking sources in Hong Kong, may help to explain the sudden rise in gold prices, but it also augurs an extraordinary transition from dollar markets within nine years.

The Americans, who are aware the meetings have taken place – although they have not discovered the details – are sure to fight this international cabal which will include hitherto loyal allies Japan and the Gulf Arabs. Against the background to these currency meetings, Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East. "Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region's conflicts into a battle for great power supremacy. China uses more oil incrementally than the US because its growth is less energy efficient. The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

The decline of American economic power linked to the current global recession was implicitly acknowledged by the World Bank president Robert Zoellick. "One of the legacies of this crisis may be a recognition of changed economic power relations," he said in Istanbul ahead of meetings this week of the IMF and World Bank. But it is China's extraordinary new financial power – along with past anger among oil-producing and oil-consuming nations at America's power to interfere in the international financial system – which has prompted the latest discussions involving the Gulf states.

Brazil has shown interest in collaborating in non-dollar oil payments, along with India. Indeed, China appears to be the most enthusiastic of all the financial powers involved, not least because of its enormous trade with the Middle East.

China imports 60 per cent of its oil, much of it from the Middle East and Russia. The Chinese have oil production concessions in Iraq – blocked by the US until this year – and since 2008 have held an $8bn agreement with Iran to develop refining capacity and gas resources. China has oil deals in Sudan (where it has substituted for US interests) and has been negotiating for oil concessions with Libya, where all such contracts are joint ventures.

Furthermore, Chinese exports to the region now account for no fewer than 10 per cent of the imports of every country in the Middle East, including a huge range of products from cars to weapon systems, food, clothes, even dolls. In a clear sign of China's growing financial muscle, the president of the European Central Bank, Jean-Claude Trichet, yesterday pleaded with Beijing to let the yuan appreciate against a sliding dollar and, by extension, loosen China's reliance on US monetary policy, to help rebalance the world economy and ease upward pressure on the euro.

Ever since the Bretton Woods agreements – the accords after the Second World War which bequeathed the architecture for the modern international financial system – America's trading partners have been left to cope with the impact of Washington's control and, in more recent years, the hegemony of the dollar as the dominant global reserve currency.

The Chinese believe, for example, that the Americans persuaded Britain to stay out of the euro in order to prevent an earlier move away from the dollar. But Chinese banking sources say their discussions have gone too far to be blocked now. "The Russians will eventually bring in the rouble to the basket of currencies," a prominent Hong Kong broker told The Independent. "The Brits are stuck in the middle and will come into the euro. They have no choice because they won't be able to use the US dollar."

Chinese financial sources believe President Barack Obama is too busy fixing the US economy to concentrate on the extraordinary implications of the transition from the dollar in nine years' time. The current deadline for the currency transition is 2018.

The US discussed the trend briefly at the G20 summit in Pittsburgh; the Chinese Central Bank governor and other officials have been worrying aloud about the dollar for years. Their problem is that much of their national wealth is tied up in dollar assets.

"These plans will change the face of international financial transactions," one Chinese banker said. "America and Britain must be very worried. You will know how worried by the thunder of denials this news will generate."

Iran announced late last month that its foreign currency reserves would henceforth be held in euros rather than dollars. Bankers remember, of course, what happened to the last Middle East oil producer to sell its oil in euros rather than dollars. A few months after Saddam Hussein trumpeted his decision, the Americans and British invaded Iraq.

By Robert Fisk

National Obligation in China - Consumer Spending

noreply@blogger.com (none) — Fri, 28 Aug 2009 17:06:00 +0000

China has initiated a program of obligatory nationalistic spending. Its domestic reform is in full swing after the export sector was under severe pressure following the (logical) inability of the US consumer to immediately accept the restart of the Chinese-American symbiotic relation a.k.a. the US debt-dream now spurred by the Obama leadership.
China however is wide awake when it comes to GDP growth targets and loss of public face when not fulfilling them. Logically the Chinese growth engine must be spurred one way or the other and commi-capitalism has found a way: State-run consumer spending.

As a result of a declining foreign tourist spending binge, the Chinese consumers are now letting off spending themselves and have increased their savings for a better day as jobs are in decline. Chinese leadership now encourages its people to spend more with different incentives from state-run hotels and national parks in the area's that are hitten hardest by the economic decline. Chinese consumers are given vouchers and other free tickets to visit tourist places within China in an effort to stimulate spending.

At least China can say that they are experienced in running a planned economy.

Declining Confidence in US Fiscal and Monetary Policies

noreply@blogger.com (none) — Mon, 24 Aug 2009 11:49:00 +0000

A lot has happened in the last two years. When I look back onto 2008 and the first half of 2009, I see that the world is entering a paradigm shift. Structural changes have to be made to restore (my) confidence in the US market. America's leadership in the world is faltering and it still doesn't seem to understand what the underlying problems of its policies are. It is obvious that the political agenda's are too short-term and therefore a major threat to US national security and prosperity.

Following the collapse of Lehman Bros. the financial world shook on its remaining pillars. Never in modern times was systemic risk so obvious, liquidity severely constrained, banks tightening credit and loan facilities while hoarding for cash to fill up gaps in their (highly leveraged, 20-50:1) balance sheets and governments worldwide bailing out private (mostly financial) institutions to make sure the average Joe on the street received his monthly paycheck on time. When credit stops flowing, businesses can't make payments for goods and services and paychecks can't be fulfilled. In order to limit the damage that started with securitization (a treat of financial innovation) on Wall Street, banks were bailed out to avoid imminent bankruptcy, which would restrict the remaining credit facilities even further.

Under the current Obama administration the fallacy of consumer borrowing and spending is destined to continue, even considering the US national total debt per citizen is currently $38,000 and rising. When we include unfunded US liabilities the picture shows to be even more dire at $191,000 for every man, woman and child. See US National Debt Clock for real time details.

During the 2002 - 2007 timeframe, investors were overwhelmed with easy credit. Speculation and malinvestment were abundant, especially in the housing market. The policies were aligned through Washington for all American's to own a home. After 9-11 the Fed's discount window interest rate was lowered to 1%. Wall Street made use of that easy credit and some of the regulatory key figures let it happen on their watch. In short, low FED rates where the cause of excess liquidity spurring unregulated home ownership in America following 9-11 where George W. Bush told his nation to go out and spend America to prosperity in order to avoid the (much needed) recession after the NASDAQ tech-bubble collapsed.

Alan Greenspan always was a great believer in market forces. He believed that the market would always regulate itself, as he opined that employees always would deal in the interest of the company and not mainly for personal gains. Greenspan believed that bubbles are not an issue for government regulation. In May 2005 he said in a speech: "Private regulation generally has proved far better at constraining excessive risk-taking than has government regulation". Recently Greenspan came back from that statement and told the world that he made a mistake by thinking the market would regulate itself. Clearly greed is of a larger factor for long-term corporate survival.

Even more so disturbing is the fact that Greenspan reassured (first-time) homebuyers in 2004 about taking on ARM mortgages (Adjustable Rate Mortgages) when the first signs of overheating were already present in some local markets. How wrong could he be in hindsight. For me, the ordinary man on the street its hindsight but I doubt if Greenspan didn't had enough information in his circles that showed him that his economic model was early flawed. One of the indications should be the huge bonusses that drove performance. A man of his numeric intelligence should have seen the equation of low FED discount rates, high leverage, monetary expansion (M3) and the urge for high corporate earnings (PE ratios) to get investors interested in buying more of their stocks.

People now have to get their head straight and educate themselves about cause and effects of misguided monetary and fiscal policies for their own benefit and vote accordingly in the next decades to come. It is of upmost importance that American's see that their elected officials are playing partizan games in the House and Congress, putting high-ranking people in places like the FED and US Treasury that are aligned in their political will. In fact, I think that the Federal Reserve is way to aligned with the US government agenda, which currently says: expand government to save jobs and increase fiscal spending to please (better: to save) our constituencies. The FED as a private entity should do the exact opposite of what government wants in order to restore balance in the economy. To limit government and lower the deficit by raising interest rates as soon as possible. Yet they lack the courage or the right type of people to do so.

One thing is for sure though, irresponsible corporate exhuberance is (temporarily) done for and so is the American dream 1.0. The people's confidence is lost although American morale and optimism appears undented. Reality clearly indicates the need for structural sacrifice and financial regulation reform in the short term. The current spending binge from the Obama administration doesn't really help that idea come into reality. As a result, record high debt levels are frightening to look at with US national debt to GDP ratio currently at 100%. Include unfunded national liabilities like Medicare/Medicaid plus Social Security and the total US national debt to GDP reaches 400%. Thats a true debt spiral only serviceable by printing fiat dollars and thus rigorously debasing the dollar value, or simply by default.

Printing money is the only solution to fake growth and increase nominal asset prices when investors slowly increase their awareness of the coming debt spiral and retract their money out of dollar denominated assets in the coming years. In my view, its bound to happen unless government spending is cut, personal savings are increased and a renewed manufacturing base is in place.

Some people talk about avoiding the lost decades of Japan by means of loosening credit as part of the Keynesian ultimate dream (fallacy). Ironically America is walking into the same two decade trap at the very least caused by their own political ignorance and irrational spending. Time will tell.

Hyperinflation Nation

noreply@blogger.com (none) — Fri, 17 Jul 2009 16:55:00 +0000

To all my friends in the once mighty US of A, I would like to say: hold on guys, cause there some serious sh@t coming your way under the current Obama policy proposals.

Below I've added some interesting view of one of the first video's of National Inflation Association that shows us what is truly happening among the elites of America. Its time you all got sick. Sick of politicians and pork spending. Its time you take a stand an follow up on your pride and freedom where America stands for. Be patriotic and support congressman Ron Paul to fight this ignorant bunch of politicians that have other agenda's then the voter needs.

Take the political right in your own hands. Strife for a full audit of the Federal Reserve as this private entity is inflating your valued dollar away from you, unaudited. The FED uses the world and your nations wealth to perform their own glorious manipulative agendas to the benefit of their own. Its a scam.

Educate yourselves people. America is going down on a lack of principles and common logic. Follow the constitution and keep it simple but effective. The free market will always prevail. Government is there for economic stability and law and order. Not for free market manipulation. End it all. Right now. Vote Ron Paul, listen to Freedom Watch with Judge Andrew Napolitano. Read yourself into Peter Schiff and others that rely on the Austrian School of Economics.

Keynesianism is like Communism, Marxism and Socialism. Eventually it will all fail due to the nature of mankind. We are greedy. Only Capitalism has worked for us. The ones that work hard should get the rewards. A minimal social buffer is a good thing, if regulated (the framework that is) by government, but executed by the private sector, like healthcare for instance...

Its up to you, my American friends. I'm just a single European watching the demise of a glorious nation and its dollar currency...

David Rosenberg On The 40% Dead Cat Bounce

noreply@blogger.com (none) — Tue, 07 Jul 2009 15:08:00 +0000

McEwen Capital launches junior gold index

noreply@blogger.com (none) — Sun, 21 Jun 2009 14:15:00 +0000

It always bothered Rob McEwen that there was no benchmark to measure how his junior gold investments were doing. So in his usual fashion, the gold entrepreneur decided to do something about it.

Mr. McEwen and his team at McEwen Capital have launched a junior gold index, which investors can view on his Web site, www.mcewen capital.com. It is believed to be the first true proxy for how the junior gold sector is doing, and the former head of Goldcorp Inc. hopes to eventually do much more with it.

Initially, the McEwen team did not plan to take the index public - they considered it an internal tool to keep tabs on the sector. But during an investor presentation for Mr. McEwen's current company, US Gold Corp. (UXG/TSX), they showed people the index and found that they were getting many more questions about that than about US Gold. Eventually, they decided to make it available for everyone.

Ian Ball, a senior executive at US Gold and McEwen Capital, said in an interview that there are already two indexes for large-cap gold stocks (the HUI and the XAU), but there was clearly demand for something specific to the juniors that could be used to benchmark their performance against the seniors and against the gold price.

"The TSX Venture Exchange should create a subindex for the juniors. And they don't. We don't know why, but we decided to create our own and persuade them that there is an audience for this," he said.

Twenty-one companies were put into the index. They read like a who's who of Canada's junior mining sector: Osisko Mining Corp. (OSK/TSX), Rubicon Minerals Corp. (RMX/TSX), Detour Gold Corp. (DGC/TSX), Fronteer Development Group Inc. (FRG/TSX), and of course US Gold.

In selecting the cream of the crop, Mr. Ball said there was a realization that many junior golds with weak balance sheets are trapped in penny-stock territory and will not go up, no matter what the gold price does. "Most of the juniors are still dead," he said.

So for the index, the focus is on companies with good cash balances, trading liquidity, and an actual discovery of some note. For the most part, this small group has defied the rest of the junior sector and rallied strongly this year alongside the gold price.

"There's a brat pack of junior companies like ours that seem to be getting most of the attention. They've got strong management and strong cash positions," said David Adamson, Rubicon's chief executive.

The index has been publicly available for a couple of weeks, but McEwen Capital has much broader hopes for it. The plan is to build up a following, get listed on the Kitco bullion Web site alongside the HUI and the XAU, and possibly launch an exchange-traded fund that tracks it.

In the shorter term, the company hopes to make background data to the index available so that investors can build their own models, and offer more charting material.

"We just haven't spent the money to have the real-time charts created, because we have to buy the data from the exchanges and it does get a little expensive," Mr. Ball said. "But we're slowly getting there. This started for our own amusement, but we do think there is a need out there for it."

Peter Koven, Financial Post Published: Wednesday, June 17, 2009

Suitcase With $134 Billion Puts Dollar on Edge: William Pesek

noreply@blogger.com (none) — Wed, 17 Jun 2009 16:25:00 +0000

June 17 (Bloomberg) -- It’s a plot better suited for a John Le Carre novel.

Two Japanese men are detained in Italy after allegedly attempting to take $134 billion worth of U.S. bonds over the border into Switzerland. Details are maddeningly sketchy, so naturally the global rumor mill is kicking into high gear.

Are these would-be smugglers agents of Kim Jong Il stashing North Korea’s cash in a Swiss vault? Bagmen for Nigerian Internet scammers? Was the money meant for terrorists looking to buy nuclear warheads? Is Japan dumping its dollars secretly? Are the bonds real or counterfeit?

The implications of the securities being legitimate would be bigger than investors may realize. At a minimum, it would suggest that the U.S. risks losing control over its monetary supply on a massive scale.

The trillions of dollars of debt the U.S. will issue in the next couple of years needs buyers. Attracting them will require making sure that existing ones aren’t losing faith in the U.S.’s ability to control the dollar.

The dollar is, for better or worse, the core of our world economy and it’s best to keep it stable. News that’s more fitting for international spy novels than the financial pages won’t help that effort. It is incumbent upon the U.S. Treasury to get to the bottom of this tale and keep markets informed.

GDP Carriers
Think about it: These two guys were carrying the gross domestic product of New Zealand or enough for three Beijing Olympics. If economies were for sale, the men could buy Slovakia and Croatia and have plenty left over for Mongolia or Cambodia. Yes, they could have built vacation homes amidst Genghis Khan’s Gobi Desert or the famed Temples of Angkor. Bernard Madoff who?

These men carrying bonds concealed in the bottom of their luggage also would be the fourth-largest U.S. creditors. It makes you wonder if some of the time Treasury Secretary Timothy Geithner spends keeping the Chinese and Japanese invested in dollars should be devoted to well-financed men crossing the Italian-Swiss border.

This tale has gotten little attention in markets, perhaps because of the absurdity of our times. The last year has been a decidedly disorienting one for capitalists who once knew up from down, red from black and risk from reward. It almost fits with the surreal nature of today that a couple of travelers have more U.S. debt than Brazil in a suitcase and, well, that’s life.

Clancy Bestseller
You can almost picture Tom Clancy sitting in his study thinking: “Damn! Why didn’t I think of this yarn and novelize it years ago?” He could have sprinkled in a Chinese angle, a pinch of Russian intrigue, a dose of Pyongyang and a bit of Taiwan-Strait tension into the mix. Presto, a sure bestseller.

Daniel Craig may be thinking this is a great story on which to base the next James Bond flick. Perhaps Don Johnson could buy the rights to this tale. In 2002, the “Miami Vice” star was stopped by German customs officers as he was traveling in a car carrying credit notes and other securities worth as much as $8 billion. Now he could claim it was all, uh, research.

When I first heard of the $134 billion story, I was tempted to glance at my calendar to make sure it didn’t read April 1.

Let’s assume for a moment that these U.S. bonds are real. That would make a mockery of Japanese Finance Minister Kaoru Yosano’s “absolutely unshakable” confidence in the credibility of the U.S. dollar. Yosano would have some explaining to do about Japan’s $686 billion of U.S. debt if more of these suitcase capers come to light.

‘Kennedy Bonds’
Counterfeit $100 bills are one thing; two guys with undeclared bonds including 249 certificates worth $500 million and 10 “Kennedy bonds” of $1 billion each is quite another.

The bust could be a boon for Italy. If the securities are found to be genuine, the smugglers could be fined 40 percent of the total value for attempting to take them out of the country. Not a bad payday for a government grappling with a widening budget deficit and rebuilding the town of L’Aquila, which was destroyed by an earthquake in April.

It would be terrible news for the White House. Other than the U.S., China or Japan, no other nation could theoretically move those amounts. In the absence of clear explanations coming from the Treasury, conspiracy theories are filling the void.

On his blog, the Market Ticker, Karl Denninger wonders if the Treasury “has been surreptitiously issuing bonds to, say, Japan, as a means of financing deficits that someone didn’t want reported over the last, oh, say 10 or 20 years.” Adds Denninger: “Let’s hope we get those answers, and this isn’t one of those ‘funny things’ that just disappears into the night.”

This is still a story with far more questions than answers. It’s odd, though, that it’s not garnering more media attention. Interest is likely to grow. The last thing Geithner and Federal Reserve Chairman Ben Bernanke need right now is tens of billions more of U.S. bonds -- or even high-quality fake ones -- suddenly popping up around the globe.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: William Pesek in Tokyo atwpesek@bloomberg.net

Gold in the IMF

noreply@blogger.com (none) — Sun, 17 May 2009 13:01:00 +0000

Gold played a central role in the international monetary system until the collapse of the BrettonWoods system of fixed exchange rates in 1973. Since then, the role of gold has been gradually reduced. However, it is still an important asset in the reserve holdings of a number of countries, and the IMF remains one of the largest official holders of gold in the world.

The IMF's gold holdings

The IMF holds 103.4 million ounces (3,217 metric tons) of gold at designated depositories. The IMF’s total gold holdings are valued on its balance sheet at SDR 5.9 billion (about $8.7 billion) on the basis of historical cost. As of March 31, 2009, the IMF's holdings amounted to $94.8 billion (at then current market prices). A portion of these holdings were acquired since the Second Amendment of the IMF’s Articles of Agreement in April 1978, amounting to 12.97 million ounces (403.3 metric tons), with a market value of $11.9 billion as of March 31, 2009. As noted below, this part of the Fund’s gold holdings is not subject to restitution to members.

The IMF acquired the majority of its gold holdings prior to the Second Amendment through four main types of transactions. First, it was then prescribed that 25 percent of initial quota subscriptions and subsequent quota increases were to be paid in gold. This represented the largest source of the IMF's gold. Second, all payments of charges (i.e., interest on members' use of IMF credit) were normally made in gold. Third, a member wishing to purchase the currency of another member could acquire it by selling gold to the IMF. The major use of this provision was sales of gold to the IMF by South Africa in 1970-71. And finally, members could use gold to repay the IMF for credit previously extended.

The IMF's policy on gold today

The Second Amendment to the Articles of Agreement in April 1978 eliminated the use of gold as the common denominator of the post-World War II exchange rate system and as the basis of the value of the Special Drawing Right (SDR). It also abolished the official price of gold and brought to an end the obligatory use of gold in transactions between the IMF and its members. It furthermore required that the IMF, when dealing in gold, avoid managing its price or establishing a fixed price.

The Articles of Agreement now limit the use of gold in the IMF's operations and transactions. The IMF may sell gold outright on the basis of prevailing market prices, and may accept gold in the discharge of a member's obligations at an agreed price, based on market prices at the time of acceptance. These transactions in gold require an 85 percent majority of total voting power. The IMF does not have the authority to engage in any other gold transactions—such as loans, leases, swaps, or use of gold as collateral—nor does it have the authority to buy gold.

The Articles also provide for the restitution of the gold the Fund held on the date of the Second Amendment to members of the Fund as of August 31, 1975. Restitution would involve the sale of gold to this group of members at the former official price of SDR 35 per ounce, with such sales made to those members who agree to buy it in proportion to their quotas on the date of the Second Amendment. A decision to restitute gold requires support from an 85 percent majority of the total voting power. The Articles do not provide for the restitution of gold the Fund has acquired after the date of the Second Amendment.

The IMF's policy on gold is governed by the following principles:

• As an undervalued asset held by the IMF, gold provides fundamental strength to its balance sheet. Any mobilization of IMF gold should avoid weakening its overall financial position.

• The IMF should continue to hold a relatively large amount of gold among its assets, not only for prudential reasons, but also to meet unforeseen contingencies.

• The IMF has a systemic responsibility to avoid causing disruptions to the functioning of the gold market.

• Profits from any gold sales should be used whenever feasible to create an investment fund, of which only the income should be used.

How and when the IMF used gold

Outflows of gold from the IMF's holdings occurred under the original Articles of Agreement through sales of gold for currency, and via payments of remuneration and interest. As noted, since the Second Amendment of the Articles of Agreement, outflows of gold can only occur through outright sales. Key gold transactions included:

• Sales for replenishment (1957-70). The IMF sold gold on several occasions to replenish its holdings of currencies.

• South African gold (1970-71). The IMF sold gold to members in amounts roughly corresponding to those purchased from South Africa during this period.

• Investment in U.S. government securities (1956-72). In order to generate income to offset operational deficits, some IMF gold was sold to the United States and the proceeds invested in U.S. government securities. Subsequently, a significant buildup of IMF reserves prompted the IMF to reacquire this gold from the U.S. government.

• Auctions and "restitution" sales (1976-80). The IMF sold approximately one third (50 million ounces) of its then-existing gold holdings following an agreement by its members to reduce the role of gold in the international monetary system. Half of this amount was sold in restitution to members at the then-official price of SDR 35 per ounce; the other half was auctioned to the market to finance the Trust Fund, which supported concessional lending by the IMF to low-income countries.

• Off-market transactions in gold (1999-2000). In December 1999, the Executive Board authorized off-market transactions in gold of up to 14 million ounces to help finance the IMF's participation in the Heavily Indebted Poor Countries (HIPC) Initiative. Between December 1999 and April 2000, separate but closely linked transactions involving a total of 12.9 million ounces of gold were carried out between the IMF and two members (Brazil and Mexico) that had financial obligations falling due to the IMF. In the first step, the IMF sold gold to the member at the prevailing market price and the profits were placed in a special account invested for the benefit of the HIPC Initiative. In the second step, the IMF immediately accepted back, at the same market price, the same amount of gold from the member in settlement of that member's financial obligations. In the end, these transactions left balance of the IMF's holdings of physical gold unchanged.

A Factsheet - April 2009

IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs		Media Relations
Phone:	202-623-7300	Phone:	202-623-7100
Fax:	202-623-6278	Fax:	202-623-6772

InterOil Increases Condensate Recovery at 2nd Sidetrack of Antelope-1

noreply@blogger.com (none) — Mon, 11 May 2009 17:32:00 +0000

InterOil reports increased condensate recovery in the second side track of the Antelope-1 well. Drill Stem Test (DST) #11, performed over an interval from 7,529 feet to 7,700 feet (2,295 to 2,347 meters) in the Antelope-1ST2, recovered surges of between 25 to 100 barrels of condensate per million cubic feet of natural gas. Antelope-1ST2 kicked out from the Antelope-1 wellbore at 6,726 feet (2,050 meters) on May 1st and reached the current total depth of 7,700 feet (2,347 meters) on May 5th. The increased gas-to-condensate ratio indicated from this test, which was conducted deep in the hydrocarbon column confirms our original assumptions, which were based on observations from worldwide gas and condensate fields, and support our decision to case the well for further testing.

The formation in which the DST packer was set did not completely seal allowing gas from above to channel into the test interval, resulting in limited testing capability with these DST tools within the large open hole interval. Given the encouraging results of the DST, the company has elected to case the well and isolate the 1,968 feet (600 meters) of gas pay behind pipe. Forward plans are to drill out underbalanced to further test this zone and additional zones of interest in the lower portion of the Antelope reservoir with the improved isolation of a cased wellbore and without further contamination by drilling fluids during managed pressure drilling.

Analysis of the test pressure data and condensate by third parties is in progress. The Company is in the early stages of evaluation and has not yet determined the final volume, and in particular whether condensate volumes would be sufficient to be commercially exploitable.

InterOil's Antelope-1 Well Flows at Record Gas Rate

noreply@blogger.com (none) — Mon, 11 May 2009 17:26:00 +0000

InterOil Corporation says that its Antelope-1 well flowed at 382 million cubic feet of natural gas per day (MMcfd) with 5,000 barrels of condensate per day (BCPD) for a total 68,700 barrels of oil equivalent per day (BOEPD), setting a new record rate for the country of Papua New Guinea.

The flow test recorded a maximum calculated rate at 545 MMcfd for a dry gas reading through a 6 inch capacity choke that was only opened to 3 ½ inches or about 30% of capacity. Conservatively adjusting the dry gas flow rate of 545 MMcfd to compensate for 13 Bbls of condensate per MMcf results in the 382 MMcf effective gas flow rate. The company says that as far as we are aware, the world record breaking gas flow rate from a vertical well confirms other records recently established by the well, such as the largest vertical hydrocarbon column height in a single onshore carbonate reef structure and the largest calculated absolute open flow (CAOF) at 17.7 Billion cubic feet of natural gas per day. The well results establish the country of Papua New Guinea as a world class gas resource base in close proximity to the largest and most well developed LNG market in the world.

InterOil believes the Antelope-1 well clearly confirms the gas resource potential sufficient to proceed with plans to build a liquefied natural gas (LNG) plant on company land next to the InterOil refinery. Antelope-1 and previous wells, have confirmed over 120% of full capacity, estimated at 500 MMcfd, for the first proposed LNG train.

Third party resource estimates are underway and will be released when completed in the next few weeks. Recent settlement agreement with Merrill Lynch uniquely positions InterOil to enter direct negotiations with industry partners on an ownership stake in the Elk/Antelope structure, an ownership stake in the proposed LNG plant and long-term LNG offtake contracts.

Chavez Moves to Take Over Oil Service Companies in Venezuela

noreply@blogger.com (none) — Fri, 08 May 2009 13:21:00 +0000

May 8 (Bloomberg) -- Venezuelan President Hugo Chavez signed a law to allow the government to seize assets from oilfield services companies and said he’ll start taking over boats and docks on Lake Maracaibo today.

The National Assembly approved the law earlier yesterday, allowing for the nationalization of services including water injection at wells, gas compression and dock control.

“I’m going to enact this law immediately,” Chavez said last night. “We’re going to start to recover these assets, which will become property of the state. Now they’re liberated.”

Petroleos de Venezuela SA, the state oil company, is pressing foreign services companies to lower rates as growing debts hamper oil output. Production in Venezuela, the biggest oil exporter in the Americas, was down 8.4 percent last month from a year ago, according to Bloomberg estimates, and services firms have idled rigs this year because of past-due payments.

Venezuela depends on oil exports to finance half the government’s budget.

Chavez didn’t provide names of companies that would be targeted today.Schlumberger Ltd. and Halliburton Co., the world’s biggest and second-biggest oilfield services companies, both operate in Venezuela. The two companies declined to comment when asked about the new law on May 6.

Boats, Docks
Oil and Energy Minister Rafael Ramirez said the state oil company today will seize 300 boats, 61 diving boats and 39 terminals and docks and other assets used by the oil industry on Lake Maracaibo in Venezuela’s western Zulia state. PDVSA, as the oil company is known, will absorb 8,000 employees from subcontractors.

“These intermediary companies speculated, and took a large part of our oil earnings,” Ramirez said yesterday on state television. “With this, we’ll continue reducing costs in our oil industry.”
Venezuela’s output may fall below 2 million barrels per day for the first time in 20 years, said Patrick Esteruelas, a Latin America analyst at Eurasia Group in New York, in a research note yesterday.

Venezuela has already started expropriating assets this year from services companies that have idled equipment.

Yesterday, John Wood Group Plc, a services company based in Aberdeen, Scotland, said that PDVSA took over one of its contracts, and Houston-basedBoots & Coots International Well Control Inc. said it suspended operations in the first quarter because of past-due payments.

Williams Cos. said on April 29 that it wrote off $241 million for uncollectible Venezuela payments, while Helmerich & Payne Inc. said it may not be able to collect $116 million.
Helmerich has idled seven rigs, while Dallas-based Ensco International Inc. idled one, which was later seized by PDVSA.

Investment Plan
PDVSA cut its investment plan for this year to $14 billion from a previously planned $24 billion on April 28, and in February Ramirez said the company asked service providers to cut their fees by 40 percent after the price of oil plunged.

Chavez has pledged to maintain spending on social programs that provide subsidized food, health care and housing to the poor, even after crude oil prices plunged 61 percent since July.

Crude oil for June delivery rose 37 cents, or 0.66 percent, to $56.71 a barrel on the New York Mercantile Exchange yesterday.

Ramirez said May 6 that Venezuela, a member of the Organization of Petroleum Exporting Countries, supports efforts to raise the price of oil to $70 a barrel.

Angel Rodriguez, a lawmaker and president of the Energy and Mines Commission in the National Assembly, said in an interview May 6 the government won’t expropriate foreign-owned oil and gas drilling rigs.

To contact the reporter on this story: Matthew Walter in Caracas at mwalter4@bloomberg.net
Last Updated: May 7, 2009 23:54 EDT

Insight: Kazakh bank falls foul of CDS

noreply@blogger.com (none) — Sun, 03 May 2009 16:32:00 +0000

Mention the word “Kazakhstan” to a trader in New York or London, and the image of Borat is likely to spring to mind.

Right now, though, bankers have a second – more serious – reason to ponder the Central Asian country, aside from the putative mankini-wearing Kazakh traveller who featured in a comedy film.

As the financial crisis virus has swept around the globe in recent months, Kazakhstan’s banking sector has been engulfed in turmoil. This is not just creating a headache for the Kazakh government and Western creditors, but also highlighting issues about the credit derivatives market that extend well beyond those far-flung steppes.

Take the case of Morgan Stanley’s dealings with BTA, Kazakhstan’s largest bank. A few years ago, BTA – like many of its Eastern brethren – was an up-and-coming darling of the capital markets world, with investment bankers furiously competing to float its bonds, provide loans, and much else.

But earlier this year, when funding dried up for Kazakh banks, BTA fell under the control of the government. Initially BTA wanted to keep servicing its loans, and its creditors, such as Morgan Stanley, appeared happy to play along.

But last week Morgan Stanley and another bank suddenly demanded repayment. BTA was unable to comply, and thus tipped into partial default. That sparked fury among some other creditors, and shocked some Kazakhs, who wondered why Morgan Stanley would have taken an action that seemed likely to create losses.

One clue to the US bank’s motives, though, can be seen on the official website of the International Swaps and Derivatives Association. One page reveals that just after calling in the loan, Morgan Stanley also asked ISDA to start formal proceedings to settle credit default swaps contracts written on BTA.

For it transpires that while the US bank has a loan to BTA it also has a big CDS position on BTA, that pays out if – and only if – the Kazakh bank goes into default. Indeed, some of Morgan Stanley’s rivals suspect that notwithstanding its loan, Morgan Stanley is actually net short the Kazakh bank.

As a result speculation is rife that Morgan might have deliberately provoked the default of BTA to profit on its CDS, since a default makes the US bank a net winner, not a loser as logic might suggest.

Morgan Stanley, for its part, refuses to comment on this speculation (although its officials note that the bank does not generally take active “short” positions in its clients.) And I personally have no way of knowing whether Morgan is short or long, since Morgan refuses to disclose details of its CDS holding.

What is crystal clear is that somebody has been placing big bets on whether or not the banking equivalent of Borat will blow up. Right now more than $700m BTA CDS contracts are registered with the Depositary Trust & Clearing Corp in New York. Last year the BTA CDS contract was so liquid that banks and hedge funds were trading it as a proxy for Kazakh governent debt.

Therein lies the crucial reason why the world outside Kazakhstan should note what has happened to BTA. In some respects, the fact that BTA has spawned so much CDS activity has been rather good for Kazakhstan. After all, if banks such as Morgan Stanley had not been able to hedge their positions in recent years, they might never have provided finance on such a scale to BTA - or any other emerging market banks.

Or, to put it another way, if CDS contracts did not exist, Western banks such as Morgan Stanley would now be nursing big losses at BTA, rather than ending up flat (or even making a profit.)
But the rub for regulators and investors is that BTA credit risk has not entirely disappeared: somebody right now is holding the other side of Morgan Stanley’s contracts and unfortunately there is little way for outsiders to know exactly who.

Worse, the presence of those CDS contracts makes it fiendishly hard to work out what the true incentives of any creditors are. In theory, lenders should have an interest in avoiding default. In practice, CDS players do not. The credit world has become a hall of mirrors, where nothing is necessarily as it seems.

At best, this makes it very difficult to tell how corporate defaults will affect banks; at worst, it creates the risk of needless value destruction as creditors tip companies into default. Either way, the key point to grasp is that this is not just a Kazakh tale.

After all, investment banks and hedge funds have written vast volumes of CDS contracts on western names too. And while the corporate default rate has been low in recent years, it is rising fast.

What is playing out at BTA, in other words, is merely a foretaste of what awaits part of the Western corporate scene too. Call it, if you like, the new face of financial globalisation, albeit one that is unlikely to look quite as funny as those Borat jokes, as companies and investors finally wake up to the implications of this deceptive new credit world.

By Gillian Tett
Published: April 30 2009 18:11
Last updated: April 30 2009 18:11
The Financial Times Limited 2009

I.M.F. Planning to Sell Bonds to Finance New Loans

noreply@blogger.com (none) — Sun, 26 Apr 2009 17:02:00 +0000

WASHINGTON — Hoping to raise money quickly for a new $500 billion emergency loan program, the International Monetary Fund is in the advanced stages of a plan to sell bonds for the first time in its history, officials for the group said Saturday.

The bonds’ buyers are expected to be the governments of fast-growing emerging economic powers like China, Russia, Brazil and India.

Though the fund has been authorized for decades to raise cash by selling bonds, officials have never done so because they wanted to avoid what amounts to short-term borrowing.

But the new plan is a response to the growing political clout of countries like China and Brazil, which have become important economic powers and potentially major contributors to the fund, but which are frustrated by their small share of voting power.

As the United States and the European Union have pushed to raise money for the $500 billion lending program to help countries weather the global financial crisis, the big emerging-market countries have demanded that they obtain a bigger voting stake in the fund in exchange for big new financial contributions.

The United States has generally supported an overhaul of the organization’s voting structure, but many European countries oppose a dramatic shift, because it would dilute their own voting power.

To get around the roadblock, fund officials said they are close to agreeing on a plan to sell bonds to countries including China, Russia, Brazil and India. The bonds would have to be repaid after one or two years, so they would not increase the fund’s permanent resources.

But they would provide the fund with a way to raise the entire $500 billion quickly enough to help countries trapped in cash squeezes because of the frozen credit markets.

“There was a lot of discussion that the fund would use the possibility to issue notes that could be bought by central banks, which could be a vehicle for some countries to provide resources to the fund,” said Dominique Strauss-Kahn, the I.M.F.’s managing director, after a meeting with officials from member countries here on Saturday.

Other officials said the plans were serious and in an advanced stage, though they stopped short of saying that a bond offering was ready to be started.

“What this signifies is that the emerging markets are drawing a line in the sand,” said Eswar Prasad, a professor of economics at Cornell University and a former senior economist for the I.M.F. “From the perspective of the key emerging countries, they are being asked to contribute a very substantial amount of resources in exchange for a very uncertain promise of reform.”

China, for example, has only 3.78 percent of the voting power at the I.M.F. But the United States and other wealthy nations are hoping that it contributes $40 billion, or 8 percent, of the new emergency fund.

American officials said they supported the proposed bond issue, adding that the most important priority was to raise the necessary money as quickly as possible. The United States, Europe and Japan have each pledged to contribute $100 billion to the new lending facility.

Though finance ministers attending the I.M.F.’s annual meeting here have expressed increased optimism that the global financial crisis is easing, American officials and fund officials have also warned that a recovery is still months away and that it will be even longer before unemployment stops climbing and begins to recede.

The idea for the new lending program is to provide flexible credit lines to poorer countries that found themselves blindsided by the sudden inability to borrow in global capital markets.

Poland, Mexico and Colombia have signed up to borrow from the program, and more countries are expected to do so as well.

By EDMUND L. ANDREWS
Published: April 25, 2009

The Tide is Turning

noreply@blogger.com (none) — Fri, 17 Apr 2009 18:58:00 +0000

Slowly but surely, the flow of funds out of assets and into cash that defined the vicious bear market of 2008 seems to be reversing. Certainly some investors who never dreamed that the Dow could fall below 10,000 in the first place are convinced that a bottom in stocks has been reached. But that's not the whole story.

Wiser investors, seeing a tidal wave of new money rolling off printing presses around the world, have lost enthusiasm for all the paper they had previously stuffed into their piggy banks. It is beginning to dawn on those fleeing to safety that they are heading in the wrong direction. After all, how much safety can there be in an asset where supply is exploding and demand is based solely on the false perception of safety? When perception catches up with reality, supply will overwhelm demand, and the price will collapse. In this case, price refers to the exchange rate of the dollar verses other currencies, or its value in terms of gold.

In addition, it is slowly becoming more evident that the global economy can function without American consumption. In March, auto sales in China surged another 10% to over 1 million units for the first time ever. In contrast, sales in the U.S. slid to just over 850,000 in March, 37% below last year's level. This marks the third consecutive month that Chinese car sales exceeded those in the U.S. As I have long forecast, the world is still producing cars, it's just that fewer of them are being purchased by overly indebted Americans, while more are being bought by an emerging class of Chinese car buyers.

Meanwhile, the February U.S. trade deficit narrowed to "only" $26 billion, a nine year low. Significantly, the improvement is not due to a surge in exports, but a collapse in imports. At first blush, one might conclude that a smaller trade deficit is bullish for the dollar, but the move is hardly sufficient to create any additional buoyancy for the greenback. A reduced trade deficit is welcome, but our account balance must actually move strongly into surplus if we have any chance of actually resolving the imbalances that brought our economy into crisis.

While a $26 billion trade deficit may seem small when compared to the $60 billion level that had become routine during the height of the bubble, the number is still large in absolute terms. A trade deficit of any size means that we are still injecting dollars into a global economy that is already saturated with an excess supply. Once our foreign creditors come to their senses, not only will they be unwilling to finance our somewhat smaller monthly deficits, but they will be unwilling to continue warehousing the trillions of dollars already in their possession as a result of funding our past deficits.

Ironically, just as the United States government ramps up its issuance of debt, smaller U.S. trade deficits mean that our trading partners now have fewer dollars to recycle into our bond markets. As the budget deficit explodes to nearly $2 trillion annually, slackening demand for Treasuries from abroad could be devastating. With smaller trade surpluses to recycle, nations like China will have diminished need to buy our debt. The argument supporting the "vendor financing" system that had developed between the United States and China always rested on their need to lend us money so we can keep buying their products. But if we are now using their money to finance government stimulus programs (including spending on education, health care, green energy, and corporate bailouts), this dog no longer hunts.

With these negatives building for the dollar, alternatives are emerging. Now that stock and commodity prices have stabilized investors are looking to other assets that offer higher yields and better long-term prospects. While most of the attention has been focused on the recent rally in U.S. stocks, few have noticed that foreign stocks are doing even better. The 20% rise in the S&P from its March low merely returns the index to its Oct 2008 low. In contrast, Hong Kong's Hang Seng index is now 40% above its October 2008 lows. In short, while U.S. stocks have merely treaded water, Hong Kong shares have surged 40%. Far from being dead, de-coupling is clearly alive and well. My advice is to take your seat on this train before most investors realize that it's left the station.

By Peter Schiff, President and Chief Global Strategist of Euro Pacific Capital

Dubai Emerges as Big Export Market for Indian Gold

noreply@blogger.com (none) — Sun, 12 Apr 2009 17:14:00 +0000

DUBAI: There is a new-found golden love between India, the world’s largest gold consuming country and Dubai, a top global gold trading city. Dubai which generally exports gold to India is these days importing the yellow metal from India.

In the last three months-January, February and March-of 2009, India exported nearly 10 tons of gold coins to Dubai, the City of Gold, which has several large India-based gold jewellery show rooms.

According to figures from the Bombay Bullion Association, while gold imports by India, one of the top importers of the yellow metals in the world, dipped to virtually zero levels in February and March, gold exports from India have gone up. And, thus, Dubai has emerged as the largest export market for Indian gold coins and jewellery items.

”High prices of gold has forced several gold business houses in India to export scrap gold to Dubai. In fact, turning old gold into gold coins and then selling to the Dubai market is a big business with several large gold dealers in India,” bullion analyst Mark Robinson told Commodity Online.

He says Dubai has emerged as a large export market for gold coins and gold jewellery from India. "It is a reversal of the export-import market. All these months, Dubai used to export gold to India. Now India exports gold to Dubai," Robinson added.

Global gold consultancy GFMS says rising gold prices in the last six months has turned India from a large importer of gold to an exporter.

According to Gargi Shah, metals analyst at GFMS, the significance of India’s changed role as a major importer to exporter of gold is very interesting.

Check Shah’s description of gold usage patterns here: “For instance, my recent trip to Ahmedabad revealed that the buy:sell ratio of jewellery at the retail level has dramatically switched. In 2008, for example, a retailer would typically sell 10 kilogrammes and repurchase around one kilogramme of old jewellery over say a week (i.e. he would need to buy additional metal in the open market).”

”By contrast, in 2009, the same retailer is now purchasing 8 kilogrammes of old gold jewellery per day whilst only selling around 200 grammes of new jewellery. This has led to a significant amount of metal surplus from scrap vis-à-vis the demand in the market. Usually the capacity of the trade to hold the metal (whether a retailer, bullion dealer or any other entity) is at best one week. But the flow of scrap has remained very strong, forcing the market into a substantial discount and making the export of metal profitable.”

”My colleagues who look after the Middle Eastern markets have confirmed the fact that the flow of the metal has changed between the two markets – Dubai and Switzerland, both of which are major exporters of bullion to India, are now receiving considerable quantities of Indian origin scrap.”

Analysts like Robison and Shah point out that the trade partnership between India and Dubai is increasingly being written in gold.

In fact, India was the top gold trading partner of Dubai for 2008. While gold trade through Dubai rose 53 per cent to $29 billion in 2008 against $19bn in the previous year, the country that carried out the largest gold trade with the Emirates city was India.

Traders say gold trading between India and Dubai has boomed thanks to the fact that there are a large number of jewellery shops owned by Indian businessmen in Dubai, and across other Gulf countries.

Joy Alukkas, Managing Director of Joyalukkas Group, one of the largest gold business houses in India and the Middle East says India is the largest gold trading partner with Dubai because Indians are the largest expatriates working in Dubai and other Middle East countries.

Dubai has several major Indian jewellery chains like Joy Alukkas, Atlas Jewellery, Sky Jewellery and Malabar Gold.

According to statistics released by Dubai Multi Commodities Centre (DMCC). gold exports from Dubai reached 371 tonnes in 2008, an increase of 29 per cent compared to 287 tonnes in the previous year.

For the 12 months ending December 31, 2008, about 674 tonnes of gold was imported into Dubai, up 21 per cent compared to 559 tonnes in 2007. More than 100 countries served as gold import partners to Dubai in 2008, led by the UK and India. During the same period, Dubai exported gold to a record 64 nations, with India and Switzerland topping the list of export partners.

Here are some interesting facts on the gold trade in Dubai:

**The total value of the gold traded through Dubai in the second half of 2008 reached $15.99bn, up 57 per cent compared to $10.16bn during the corresponding period in 2007 and up 22 per cent compared to $13.07bn in the first six months of 2008.

**Gold imports in Dubai rose 21 per cent to reach 674 tonnes in 2008 compared to 559 tonnes in 2007 while exports rose 29 per cent to 371 tonnes compared to 287 tonnes in the previous year.

**Gold jewellery demand in the UAE dropped from 99.8 tonnes in 2007 to 93.3 tones last year although there had been a 32 per cent increase in investment demand of gold —from 7.5 tonnes in 2007 to 9.9 tonnes.

**Dubai imported gold from more than 100 countries in 2008 and exported to 64 nations.

Roundabout Bailout: Fed To Pump Foreign Currency Into U.S. Banks

noreply@blogger.com (none) — Sun, 12 Apr 2009 00:50:00 +0000

The Fed is already printing trillions of U.S. dollars and pumping them into the global economy in an effort to stave off a financial collapse. Now it plans to start injecting foreign currency, too, according to minutes recently released from its March meeting.

How the hell can the U.S. Fed do that? Glad you asked.

The Federal Reserve engages in so-called swaps with foreign countries, which we first reported here. It uses these swaps to pump hundreds of billions of dollars into foreign central banks while taking foreign currency in exchange.

The foreign central banks pass their new U.S. dollars to their foreign financial institutions, while the Fed has kept the foreign currency on its balance sheet and not injected it into the money supply.

Now, however, the Fed will be able to take the foreign currency it acquires in these swaps, and rather than hold it on its balance sheet, pass it on to U.S. banks, according to minutes from the Federal Open Market Committee's March meeting. These U.S. banks can then use that foreign currency to cover their foreign debts.

The Fed governors said, according to the meeting notes, that the measure was only precautionary: "There was no evidence that these institutions were encountering difficulty in meeting foreign currency obligations at this time, but these facilities would be available should pressures develop in the future."

The expanded effort is part of a Fed project that has been injecting hundreds of billions of dollars into foreign central banks over the last several months.

The committee notes say that the new program will "augment the existing network of central bank liquidity swap lines."

The Fed also announced in its minutes that it was approving "additional temporary reciprocal currency arrangements (swap lines) with the Bank of England, the European Central Bank (ECB), the Bank of Japan, and the Swiss National Bank." Extending additional swaps to these central banks raises the question of whether those banks are facing difficulties repaying previous swaps. The European and Japanese economies have been collapsing at a faster rate than the United States' has.

"It is basically either an extension or increase of the existing lines, and raises suspicion that massive losses have been incurred in the previous round of supposedly 'temporary' swaps, as the return to dollar-supply-normalcy that these geniuses pretended to expect would have happened by now, did not," ventures economist James Galbraith.

Rep. Alan Grayson (D-Fla.), after reading the minutes, describes the Fed plan as "a massive transfer of wealth from the American people to who knows where," calling it a "round-about bailout."

Beyond that, he notes, it's hard to know what to make of the Fed action because of the obscurity of the institution. "The Fed is out of control. If the president tried to do this, Republicans would be calling for his impeachment. But because it's done by the man behind the curtain they call the Chairman of the Federal Reserve, it's supposedly okay," he says, arguing that the founding fathers never intended one man to have so much unchecked power. The obscurity has led economists to wonder about the Fed's true motives.

The expansion of Fed power comes amid increasing calls for transparency into the workings of the organization. If the Fed does send foreign currency to U.S. banks, it will be under no requirement to disclose which banks or how much.

On Wednesday, Financial Services Committee Chairman Barney Frank (D-Mass.) called for the GAO to have more authority to investigate the Fed. Grayson says Frank has told him on numerous occasions that Congress needs a better idea of what it is that the Fed is doing.

On Wednesday night, House Speaker Nancy Pelosi (D-Calif.) called on the Fed to post its financial transactions online during a conversation with the Daily Show's John Stewart. She plans to address "Fed authority" when Congress returns.

From the minutes:
The Committee also took up a proposal to augment the existing network of central bank liquidity swap lines by adding several temporary swap lines that could provide foreign currency liquidity to U.S. institutions, analogous to the arrangements that currently provide U.S. dollar liquidity abroad. There was no evidence that these institutions were encountering difficulty in meeting foreign currency obligations at this time, but these facilities would be available should pressures develop in the future. The Committee unanimously approved the following resolution:

"The Federal Open Market Committee authorizes the Federal Reserve Bank of New York to enter into additional temporary reciprocal currency arrangements (swap lines) with the Bank of England, the European Central Bank (ECB), the Bank of Japan, and the Swiss National Bank to support the provision of liquidity in British pounds, euros, Japanese yen, and Swiss francs. The swap arrangements with each foreign central bank shall be subject to the following limits: an aggregate amount of up to £30 billion with the Bank of England; an aggregate amount of up to €80 billion with the ECB; an aggregate amount of up to ¥10 trillion with the Bank of Japan; and an aggregate amount of up to SwF 40 billion with the Swiss National Bank. These arrangements shall terminate no later than October 30, 2009, unless extended by mutual agreement of the Committee and the respective foreign central banks. The Committee also authorizes the Federal Reserve Bank of New York to provide the foreign currencies obtained under the arrangements to U.S. financial institutions by means of swap transactions to assist such institutions in meeting short-term liquidity needs in their foreign operations. Requests for drawings on the central bank swap lines and distribution of the foreign currency proceeds to U.S. financial institutions shall be initiated by the appropriate Reserve Bank and approved by the Foreign Currency Subcommittee."

A Simple Decision

noreply@blogger.com (none) — Thu, 09 Apr 2009 11:12:00 +0000

One thing you can say about the recent sharp sell-off in silver, at the very least, is that it forces you to think. In fact, my friend and mentor, Izzy Friedman, wrote an article with that title a couple of years ago. http://www.investmentrarities.com/07-03-07.html Nothing focuses an investor’s attention more than a sudden decline in price, especially in an item one thought was undervalued to begin with. This is as it should be.

I’m not going to completely rehash the premise of the original article, but instead try to simplify the lesson of this most recent sell-off in silver. Why did it occur? And what should you learn from it?

Was there any obvious real world developments in actual silver supply and demand fundamentals that caused the price to decline? Not from anything I‘ve observed. Investor demand for real metal remained strong for every measurable category from strong ETF flows and record coin production and sales, to dramatic COMEX warehouse withdrawals, to continued disruptions in silver production and refining. Industrial consumption, admittedly weak, didn’t suddenly plunge anew in the last few weeks.

The explanation for the sell-off was the same as it ever was - price rigging on the COMEX. The big commercial shorts engineered the market lower to force leveraged longs on margin to sell, in order for the big shorts to buy back futures and other derivatives. Once again, the derivatives market tail wagged the real world price of silver dog. The good news is that the concentrated short position, while still large and manipulative, appears to be just about as low as it’s going to get, after this recent sell-off and the engineered decline over the past 8 months.

OK, if that’s the answer to why silver sold off, what’s the lesson? The lesson is that you must approach silver in such a way that you are not a victim of the manipulators. Buy for cash, don’t borrow or go on margin. You can’t prevent silver from dropping due to these rigged sell-offs, but you can prevent your silver from being taken away from you by forced margin call selling.

There’s a simple decision that every silver investor must make. You must decide whether you believe that the price of silver is manipulated or if it is functioning as a free market. This may sound weird at first, but if you decide that silver is not manipulated in price, but is trading free from control, you shouldn’t buy it or continue to hold it as an investment, in my opinion.

That’s because if you believe that the price of silver is free from an active downward manipulation, you must believe it is priced in accordance with everything you see around you. You must believe that consistent record demand for an item should result in sharply lower prices. You must be comfortable with delays and rising premiums being compatible with lower prices. You must be able to disregard documented proof of an unprecedented concentrated short position as unconvincing, and regulator stalling and double-talk as reassuring. You must see something I don’t see.

Instead, if you do see manipulation permeating the silver market, that is the best reason for buying. If you see manipulation, you see an artificially depressed price, a price screaming to be bought. If you see manipulation, you see a condition that can’t last, that must end. If you see manipulation, then everything makes sense about silver’s price history and circumstances. If you see manipulation, you know the usual commentary about silver is nonsense. If you see manipulation, you can understand the sharp sell-offs. If you see manipulation, you know it will end explosively to the upside.

While deciding for yourself whether silver is manipulated or not, here are some additional reasons to consider silver at this time.

TEN REASONS TO BUY SILVER NOW

Amid all the recent attention I’ve placed on the continued manipulation in silver, some may mistakenly assume that diminishes the case for silver. Nothing could be further from the truth. I’m convinced that silver is a better buy than ever before. Here are detailed reasons why I believe that is the case.

One, the near-term emotional temperature of the market is low. There is no bullish "fever" where uniformed investors are driven to buy silver because of a sharply rising price. That will happen, but it’s not true now. While silver is still above the price lows of last fall and higher than year-end prices, the recent price action is nothing to write home about. The price has been below most of the important moving averages, causing silver to be "oversold." This is a much better time to buy than when prices have already climbed and many are buying just because prices are rising. At those times the risk of a sharp sell-off is high. Now the risk of a prolonged price decline is much lower. Now is the time to buy low.

Two, leveraged speculators who normally buy COMEX futures contracts and Over The Counter (OTC) derivatives do not hold a historically significant number of long contracts. The big dealers have been so successful at forcing long speculators out of the market, that the speculative long position is at important low levels. This means that long speculators have already been forced to sell and no big selling from them appears probable. On any rise in price, they are likely to buy, adding a force to rising prices. Buy before they turn buyers.

Three, available wholesale silver inventories appear to be tight. These physical silver inventories are falling into stronger hands. For decades the world’s largest stockpiles of silver were the COMEX warehouse inventories. These COMEX inventories were considered mostly commercial in nature with some portion being held for investment purposes. The COMEX inventories peaked at around 280 million ounces in the early 1990’s, and accounted for 90% of all visible silver inventories. After the introduction of silver Exchange Traded Funds (ETFs), there was a profound shift in the location and structure of world visible silver inventories.

Now, the combined inventories in the ETFs and other investment vehicles tower over the holdings in the COMEX by almost 4 to 1. (Over 400 million ounces in the ETFs compared to 120 million oz in COMEX inventories). Given the long-term nature of ETF investment holdings, this massive and historic shift in inventory composition means much less silver is now available to the market. This will exert a strong upward influence on price.

Four, all signs indicate that physical investment demand for silver on both a retail and wholesale basis is strong and could surge further. Until a few years ago, there was no net silver investment buying for decades. That pattern has changed with a vengeance. Clearly, the introduction of the ETFs has played a major role in this investment transformation.

The strong buying that we have seen does not appear to be "hot" money, but sober and determined accumulation. It wasn’t surging prices prompting buyers over the last six months. It’s due to a growing awareness and conviction about silver’s real supply and demand fundamentals. Importantly, there has been practically no buying of silver on a leveraged or margin basis. It’s mostly been cash on the barrel. These strong silver buyers will wait for significantly higher prices before selling. With higher prices inevitable at some point, the hot-money crowd should come in and blow the doors off the price.

Five, silver production is tightening, given the byproduct-nature of silver mining. As I have written recently, base metals production like copper, lead and zinc appears to have fallen significantly, also reducing the production of silver as a byproduct.

Six, world economic and financial conditions appear lined up to favor higher silver prices, no matter what occurs. If financial conditions remain unsettled, flight to quality buying in silver appears likely. If the world does return to better economic growth patterns, silver will benefit as a result of increased industrial consumption. Heads silver benefits, tails it also benefits.

Seven, more investors than ever have come to realize that the silver market has been manipulated and the government regulators and exchange officials are unable to persuasively address the growing evidence of a silver manipulation. The manipulation debate has become widespread in metal circles. It isn’t going away. The best the regulators have been able to do is to stall and pretend to be investigating. Fewer people are being fooled by such actions. A scam like the silver manipulation can’t continue when so many know about it. This scam will end suddenly and sharply in a price jump to the upside.

Eight, industrial demand for silver will continue to grow in the years ahead. New uses for silver appear regularly. A robust worldwide economy will initiate a new phase of silver demand. Higher prices will not diminish this demand because small amounts of silver are used in each industrial application.

Reasons nine and ten, silver prices are cheap on several important objective measurements. Silver is cheap compared to its own recent price. It is down more than 40% from its highs of one year ago, in spite of the strongest physical demand in history. More investment silver has been purchased over the past year than at any other period in history. At precisely the same time that prices have declined so sharply, more ETF-type buying has occurred than ever before and more Silver Eagles have been sold by the US Mint than ever before. We have witnessed the highest premiums on all retail forms of silver in history. This isn’t just me saying silver is cheap, this is the investment world voting with its collective wallet. Clearly, there is something wrong with this picture that can only be explained by manipulation on the COMEX and the OTC market by a few giant financial institutions, led by JPMorgan.

Silver is cheap on a cost of production basis. Never have the net operating results of so many different silver miners been so poor. The common denominator is too low a price for their main product. Silver is up three-fold from the lows of a few years ago, yet the silver mining industry still suffers. That’s because the cost of production has risen faster than the price of silver. That must be rectified.

Silver is dirt cheap relative to gold. While there is less above ground silver than gold, silver’s price has rarely been this low compared to gold.

The manipulation that explains why silver is so cheap cannot exist in a bona fide physical shortage. If the price stays low, growing numbers of investors buy real silver. That makes it harder for the manipulators to keep the price contained with paper derivatives. Some fret the scam can be continued indefinitely. If it were just a question of printing more money or more paper derivatives, perhaps that might be true. But it’s not about an unlimited supply of paper silver, it’s about a limited supply of physical silver that guarantees the manipulation will end soon. The termination of controls on the price of silver will be something we look back upon and marvel over how long it existed. Just make sure you are looking back while holding as much real silver as you can.

By: Theodore Butler
Posted on 7 April, 2009