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Coping with Neighbors in an Apartment | Instant Payday Loans

by on June 4, 2011

One of the main disadvantages to renting an apartment could be the risk of disagreement with other neighbors. While some renters may foster incredible relationships with all of their neighbors and not at all have a …

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Subprime Auto Loans Growing In Popularity

by on May 31, 2011

Huffington Post…

NEW YORK (David Henry) – Ally Financial Inc, the United States’ largest maker of car loans, hopes that people have forgotten the time when “subprime” became a synonym for “disaster.” Ally, once known as GMAC Financial Services, is getting ready to go public this year, and is making the case that subprime loans for used car buyers are not about to produce the same results that they did in the housing market a few years ago — a near-collapse of the financial system. Auto loans performed relatively well during the downturn, and demand for cars is up, so auto lending is one of the few types of consumer debt that is growing. Ally wants to show investors that this makes it different from many other banks, which are struggling with weak loan demand and their own soured mortgages. The company is making more loans to subprime borrowers, and financing more purchases of used cars, both steps with higher risk. It has said it wants to raise the percentage of auto loans on used cars that it makes to 50 percent from its current 20 percent. Subprime car lending is “a very attractive business today,” Ally President William Muir told analysts on May 3. Profit margins on the loans more than cover the cost of expected losses from borrowers who fail to repay, he said. Plus, providing loans on used cars endears the company to dealers. That may sound like a great plan now, but similar arguments about subprime mortgages were common in 2003, analysts said. And, Ally and its competitors may follow the pattern of past credit cycles, where lenders make increasingly risky loans at lower interest rates until waves of defaults and losses swamp them. Loans that seem safe can sour quickly. Some banks, including JPMorgan, are already tapping the brakes on auto loans because profit margins have become too slim given the risk. Ally needs to stretch. Its funding costs are several percentage points higher than most of its banking rivals, which puts it at a disadvantage. Ally also uses a lot of money from the fickle credit markets. And General Motors is making more of its own loans, which could make Ally’s future revenue less dependable than it is now. Ally is the kind of company that “will likely need to call for the government’s financial ambulance at some point in the future,” said James Ellman, a hedge fund portfolio manager at Seacliff Capital in San Francisco. “I don’t know if it is sooner, or later, but it will happen.” In a written comment for this story, company spokesman James Olecki said, “Ally Financial’s strategy is to extend credit using sound underwriting criteria and responsible financing practices.” “We accept retail auto contracts through the full credit spectrum — including nonprime — as a normal part of our business,” he said. “We place greater emphasis on the higher end of the nonprime spectrum and we only approve credit for qualified customers who demonstrate the ability to pay.” TOUGH COMPETITION The government’s ambulance came for Ally three times during the financial crisis as Ally’s book of subprime mortgages collapsed. Taxpayers injected more than $17 billion into the company, which had assets of $287 billion in 2006 before loan values collapsed. Those bailouts left the government holding a 74 percent stake in Ally, which the Treasury plans to sell, starting with the company’s initial public offering. The deal could seek about $5 billion from investors in what may be the biggest IPO by a U.S. lender in more than a decade, according to Renaissance Capital, an investment advisory firm. Ally filed its initial prospectus with regulators in March, and stock sales often come within three months of such a filing. Public companies face much more pressure to boost profits, which is where things could get tough for Ally. “If Ally wants to achieve the kind of growth shareholders will be looking for, it has to look beyond the business of prime loans,” said Gimme Credit analyst Kathleen Shanley. “This segment of the market is extremely competitive; hence the company’s increased focus on used cars and nonprime buyers.” To many analysts, those steps make sense. Used car rates can be several percentage points higher than new car rates. Subprime lending adds more. Loans on used cars to borrowers with subprime credit scores paid lenders more than 9 percent, compared with 5 percent or less for used car buyers with solid credit, according to data from credit bureau Experian. “The risk-adjusted returns in the used car market look very favorable,” said Credit Sights analyst Adam Steer. Used car buyers taking out loans tend to be less credit-worthy than new car buyers. Borrowers buying used cars in the first quarter had average credit scores of 663, compared with scores 766 for new car buyers, according to Experian. That may seem worrisome, but subprime auto lending is not as risky as subprime mortgage lending, said Steer. Car loan payments are smaller and more manageable for borrowers than mortgage payments, he said. Plus, the money is scheduled to be repaid faster, and the loan collateral, the cars, is more easily seized and resold than are houses. The average used car loan in the first quarter was made for $16,636 and required monthly payments of $343 for 58 months, according to Experian. “A lot of consumers chose to default on their mortgage, but remain current on their car loan,” said Kirk Ludtke, an analyst at CRT Capital LLC in Stamford, Connecticut. Default rates for auto loans were relatively low from May 2007 through October 2010, according to David Blitzer, managing director at Standard & Poor’s. The peak rate for auto loan defaults was 2.75 percent in February 2009, which was less than half of the peak rate experienced by first mortgages and less than a third of the rate seen in bank-issued credit cards. The lower default rates make car loans attractive for other lenders, not just Ally. Banks including TD Bank Group, which bought Chrysler Financial in December, and Spanish banking giant Santander, which bought auto finance units from Citigroup and HSBC, are piling into the market and squeezing profit margins as they offer borrowers more choices. Copyright 2011 Thomson Reuters. Click for Restrictions .

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Lockheed Martin Hit By Cyber Attack

May 29, 2011

WASHINGTON — Hackers launched a “significant and tenacious” cyber attack on Lockheed Martin, a major defense contractor holding highly sensitive information, but its secrets remained safe, the company said Saturday. Lockheed Martin, the Department of Homeland Security and the Pentagon confirmed that the contractor’s information systems had come under attack. Lt. Col. April Cunningham, speaking for the Defense Department, said the impact on the Pentagon “is minimal and we don’t expect any adverse effect.” Still, the concerted attempt to breach the contractor’s systems underscored the risk to the nation’s critical defense data. Chris Ortman, Homeland Security spokesman, said his agency and the Pentagon were working with the company to determine the breadth of the attack and “provide recommendations to mitigate further risk.” Lockheed Martin said in a statement that it detected the May 21 attack “almost immediately” and took countermeasures. As a result, “our systems remain secure; no customer, program or employee personal data has been compromised.” The company’s security team is still working to restore employee access to the targeted network. Neither Lockheed Martin nor the federal agencies revealed specifics of the attack. ___ AP writer Jennifer Malloy contributed to this report from Los Angeles.

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Fraud Within Finance Departments On The Rise, Survey Finds

May 15, 2011

ORLANDO, Florida (Barbara Liston) – “Back office” fraud is draining corporate treasuries of billions of dollars a year, and the risk is growing as companies and employees struggle in the wake of the recession, finance managers and experts say. Fraud schemes in company finance departments include the creation of fake vendors, billings for nonexistent goods, checks written to dummy companies and kickbacks from vendors. “Most companies are weak in the area of back office and vendor fraud and that poses a significant threat to them,” Michele Edwards, a fraud expert, told Reuters this week on the sidelines of a corporate finance professionals’ conference. Typically, it takes 18 months to detect a fraud, Edwards said. In an informal poll of 622 finance managers during the May 8-12 Orlando conference, 72 percent reported seeing an increase in cases of back office fraud, Tom Bohn, president of the Institute of Financial Operations, said on Friday. The institute, which groups several associations of corporate finance professionals from across the world, was launched this week during the Orlando conference. Bohn and Edwards said some of the rise in reported losses might be a result of companies’ increased focus on, and detection of, back office fraud over the past two years. That focus came in response to U.S. federal regulators taking a harder line against companies that were not doing enough to prevent fraud that caused shareholder losses. SQUEEZE ON PERSONAL FINANCES But Edwards and Bohn said the recent recession had increased the risk of fraud. Company budget cutbacks had resulted in some employees becoming solely responsible for what previously had been two or more separate duties, and there had been a reduction in internal checks and balances and office controls. The squeeze from the recession on employees’ personal finances and family life also was a factor, Edwards said. “They didn’t get a raise. They didn’t get a 401k (retirement plan) match. Those are all additional pressures that have been on a lot of people over the past couple of years that may have caused them — where they might not have in a normal environment — to do something unfortunate like fraud,” Edwards said. She said the end of the recession won’t solve the problem. “You’ve got those expectations from the shareholders and the CEO that, hey, we’re coming out of the recession. It’s back to business. It’s back to growth mode. That pressure isn’t really going away,” Edwards said. Companies are beginning to employ safeguards such as software, analytical tools and fraud prevention specialists to detect problems early. They are also starting to search out and shut down opportunities for fraud, and to build a corporate culture that discouraged it. “If you focus on the culture, you can reduce the risk from day one,” said Bohn. “The more dollars you can save leaving the corporation, the better your bottom line is going to be.” (Editing by Pascal Fletcher and Xavier Briand) Copyright 2011 Thomson Reuters. Click for Restrictions .

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Gemma Godfrey: Hedge Funds — to Be Feared or Favored?

April 21, 2011

As the biggest hedge fund insider trading case comes to a close, we are reminded of the risks of investing in the asset class. Ever since generating losses in 2008, the reputation of these ‘absolute return’ vehicles has been damaged. The Madoff scandal which topped off the year did not help. Nevertheless, whilst clarity in the markets remains illusive and with a wider range of tools to exploit opportunities, are they a form of investment to be feared or favored? A Tainted Asset Class Disappointed and disillusioned, many investors are reluctant to revisit the asset class run by managers once hailed as the new ” masters of the universe “. Sold on the promise of generating positive performance in any market environment or at the very least preserving capital in times of stress, losses generated in 2008 came as a shock. With the Madoff scandal came the realization that even funds that did consistently generate steady returns were not immune to trouble. There is even an aptly named ” Hedge Fund Implode-o-Meter ” website tracking the number of major funds which have “imploded” since late 2006 (out of interest the number at last look stands at 117 , although this includes all funds suffering any form of ” permanent adverse change “, not just total shutdown). But Not All Are Created Equal Not all hedge funds should be tarred with the same brush and although grouped within the same category, they can differ tremendously. From the investment vehicles in which they invest to the stringency of their risk management, not all are created equal. The Hedge Fund Association summed the situation up succinctly with the assertion that “investment returns, volatility, and risk vary enormously among the different hedge fund strategies. Some strategies which are not correlated to equity markets are able to deliver consistent returns with extremely low risk of loss, while others may be as or more volatile than mutual funds.” Losses Were Often Greater Elsewhere Putting aside the often misleading ‘absolute return’ banner, the average hedge fund was better able to preserve capital through the market downturn than a regular ‘long-only’ mutual fund. Whilst the MSCI World Index fell 42% in 2008, the Credit/Suisse Tremont Hedge Fund Index fell 19%, More impressive still were the 21% of funds which posted positive returns for the year (the majority of which were up double digits). Crucially, over a more appropriate investment horizon of 3 years, according to figures by EDHEC Business School, ” The majority of hedge funds delivered better returns than the S&P 500 index “. Hedge Funds have shown themselves able of generating highly attractive returns. The Tide Has Changed Investors have demanded more. In 2008 they ‘spoke with their feet’ and the hedge fund industry suffered $782bn of redemptions. The Hedge Funds had to listen. What was requested, according to a report by Scorpio Partnership , was ” transparency, simplicity and liquidity “. Likewise, the Hedge Fund Scandals were a wake up call to investors and much more focus is being placed on operational due diligence , to avoid investing in any future hedge fund failures. Investment Conclusion: Well-Positioned to Exploit Opportunities With the risk of future macro shocks clouding the horizon (read: Japan , Middle East , EU Sovereign Debt ), the direction of the markets is somewhat hard to predict. Therefore investing with flexible managers able to react to the quickly changing environment and nimble enough to exploit opportunities when they present themselves seems an attractive move. Not all investments are created equal, but some are more equal than others.

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Geithner: Not Raising Debt Ceiling Would Be ‘Catastrophic’

April 17, 2011

WASHINGTON — Treasury Secretary Timothy Geithner said Sunday he’s certain congressional lawmakers will come together to raise the nation’s debt limit and warned of dire consequences if they don’t. “I want to make it perfectly clear that Congress will raise the debt ceiling,” Geithner told ABC News “This Week” anchor Christiane Amanpour. According to Geithner, members of Congress conveyed this view to President Obama on Wednesday at the White House. “I sat there with them, and they said, we recognize we have to do this. And we’re not going to play around with it,” Geithner said. “We know that the risk would be catastrophic. It’s not something you can take too close to the edge.” This sentiment differs significantly from what some lawmakers say publicly. “I will oppose any attempt to vote to raise the limit on our $14 trillion debt until Congress passes the balanced-budget amendment,” declared Sen. Jim DeMint (R-S.C.). Sen. Rand Paul (R-Ky.) has made similar statements . On NBC’s “Meet the Press,” Geithner said lawmakers who play politics with the debt ceiling will have to own the consequences. “I’ve spent a lot of time with Republicans and Democrats on this — I saw with the Senate Finance Committee last week — and they absolutely understand the stakes in this, and the leadership understand that you can’t play around with this,” he said. “You can’t take it too long. And those people up there who are telling people that you can take this to the brink because it gives them some leverage, they’re going to own the responsibility for the risk that creates for the American economy.” On CNN’s “State of the Union,” Rep. Anthony Weiner (D-N.Y.) seemed willing to explore attaching provisions to a debt ceiling hike. When asked by host Candy Crowley whether he would consider some spending cuts, he replied, “Of course. I think that we need to have conversations about how we reduce spending. We also need to have a conversation about how we get some equality into our tax code again.” Federal law currently caps the federal debt at $14.3 trillion . But sometime in the next month, the United States will inevitably surpass that amount. Congress consistently votes to raise the nation’s debt ceiling, a decision it face again in the coming weeks. Geithner outlined myriad consequences should Congress decide, for some reason, not to raise the debt ceiling by June. “What will happen is that we’d have to stop making payments to our seniors — Medicare, Medicaid, Social Security. We’d have to stop paying veterans’ benefits,” he told Amanpour. “We’d have to stop paying all the other payments on all the other things the government does. And then we would risk default on our debt — and if we did that, we’d tip the U.S. economy and the world economy back into recession — depression.” Watch Geithner’s appearance on “This Week” below (via ABC News ):

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A Major Risk To U.S. Nuclear Reactors

March 29, 2011

WASHINGTON — Long before the nuclear emergency in Japan, U.S. regulators knew that a power failure lasting for days at an American nuclear plant, whatever the cause, could lead to a radioactive leak. Even so, they have only required the nation’s 104 nuclear reactors to develop plans for dealing with much shorter blackouts on the assumption that power would be restored quickly. In one nightmare simulation presented by the Nuclear Regulatory Commission in 2009, it would take less than a day for radiation to escape from a reactor at a Pennsylvania nuclear power plant after an earthquake, flood or fire knocked out all electrical power and there was no way to keep the reactors cool after backup battery power ran out. That plant, the Peach Bottom Atomic Power Station outside Lancaster, has reactors of the same older make and model as those releasing radiation at Japan’s Fukushima Dai-ichi plant, which is using other means to try to cool the reactors. And like Fukushima Dai-ichi, the Peach Bottom plant has enough battery power on site to power emergency cooling systems for eight hours. In Japan, that wasn’t enough time for power to be restored. According to the International Atomic Energy Agency and the Nuclear Energy Institute trade association, three of the six reactors at the plant still can’t get power to operate the emergency cooling systems. Two were shut down at the time. In the sixth, the fuel was removed completely and put in the spent fuel pool when it was shut down for maintenance at the time of the disaster. A week after the March 11 earthquake, diesel generators started supplying power to two other two reactors, Units 5 and 6, the groups said. The risk of a blackout leading to core damage, while extremely remote, exists at all U.S. nuclear power plants, and some are more susceptible than others, according to an Associated Press investigation. While regulators say they have confidence that measures adopted in the U.S. will prevent or significantly delay a core from melting and threatening a radioactive release, the events in Japan raise questions about whether U.S. power plants are as prepared as they could and should be. “We didn’t address a tsunami and an earthquake, but clearly we have known for some time that one of the weak links that makes accidents a little more likely is losing power,” said Alan Kolaczkowski, a retired nuclear engineer who worked on a federal risk analysis of Peach Bottom released in 1990 and is familiar with the updated risk analysis. Risk analyses conducted by the plants in 1991-94 and published by the commission in 2003 show that the chances of such an event striking a U.S. power plant are remote, even at the plant where the risk is the highest, the Beaver Valley Power Station in Pennsylvania. These long odds are among the reasons why the United States since the late 1980s has only required nuclear power plants to cope with blackouts for four or eight hours, depending on the risk. That’s about how much time batteries would last. After that, it is assumed that power would be restored. And so far, that’s been the case. Equipment put in place after the Sept. 11, 2001, terrorist attacks could buy more time. Otherwise, the reactor’s radioactive core could begin to melt unless alternative cooling methods were employed. In Japan, the utility has tried using portable generators and dumped tons of seawater, among other things, on the reactors in an attempt to keep them cool. A 2003 federal analysis looking at how to estimate the risk of containment failure said that should power be knocked out by an earthquake or tornado it “would be unlikely that power will be recovered in the time frame to prevent core meltdown.” In Japan, it was a one-two punch: first the earthquake, then the tsunami. Tokyo Electric Power Co., the operator of the crippled plant, found other ways to cool the reactor core and so far avert a full-scale meltdown without electricity. “Clearly the coping duration is an issue on the table now,” said Biff Bradley, director of risk assessment for the Nuclear Energy Institute. “The industry and the Nuclear Regulatory Commission will have to go back in light of what we just observed and rethink station blackout duration.” David Lochbaum, a former plant engineer and nuclear safety director at the advocacy group Union of Concerned Scientists, put it another way: “Japan shows what happens when you play beat-the-clock and lose.” Lochbaum plans to use the Japan disaster to press lawmakers and the nuclear power industry to do more when it comes to coping with prolonged blackouts, such as having temporary generators on site that can recharge batteries. A complete loss of electrical power, generally speaking, poses a major problem for a nuclear power plant because the reactor core must be kept cool, and back-up cooling systems – mostly pumps that replenish the core with water_ require massive amounts of power to work. Without the electrical grid, or diesel generators, batteries can be used for a time, but they will not last long with the power demands. And when the batteries die, the systems that control and monitor the plant can also go dark, making it difficult to ascertain water levels and the condition of the core. One variable not considered in the NRC risk assessments of severe blackouts was cooling water in spent fuel pools, where rods once used in the reactor are placed. With limited resources, the commission decided to focus its analysis on the reactor fuel, which has the potential to release more radiation. An analysis of individual plant risks released in 2003 by the NRC shows that for 39 of the 104 nuclear reactors, the risk of core damage from a blackout was greater than 1 in 100,000. At 45 other plants the risk is greater than 1 in 1 million, the threshold NRC is using to determine which severe accidents should be evaluated in its latest analysis. The Beaver Valley Power Station, Unit 1, in Pennsylvania had the greatest risk of core melt – 6.5 in 100,000, according to the analysis. But that risk may have been reduced in subsequent years as NRC regulations required plants to do more to cope with blackouts. Todd Schneider, a spokesman for FirstEnergy Nuclear Operating Co., which runs Beaver Creek, told the AP that batteries on site would last less than a week. In 1988, eight years after labeling blackouts “an unresolved safety issue,” the NRC required nuclear power plants to improve the reliability of their diesel generators, have more backup generators on site, and better train personnel to restore power. These steps would allow them to keep the core cool for four to eight hours if they lost all electrical power. By contrast, the newest generation of nuclear power plant, which is still awaiting approval, can last 72 hours without taking any action, and a minimum of seven days if water is supplied by other means to cooling pools. Despite the added safety measures, a 1997 report found that blackouts – the loss of on-site and off-site electrical power – remained “a dominant contributor to the risk of core melt at some plants.” The events of Sept. 11, 2001, further solidified that nuclear reactors might have to keep the core cool for a longer period without power. After 9/11, the commission issued regulations requiring that plants have portable power supplies for relief valves and be able to manually operate an emergency reactor cooling system when batteries go out. The NRC says these steps, and others, have reduced the risk of core melt from station blackouts from the current fleet of nuclear plants. For instance, preliminary results of the latest analysis of the risks to the Peach Bottom plant show that any release caused by a blackout there would be far less rapid and would release less radiation than previously thought, even without any actions being taken. With more time, people can be evacuated. The NRC says improved computer models, coupled with up-to-date information about the plant, resulted in the rosier outlook. “When you simplify, you always err towards the worst possible circumstance,” Scott Burnell, a spokesman for the Nuclear Regulatory Commission, said of the earlier studies. The latest work shows that “even in situations where everything is broken and you can’t do anything else, these events take a long time to play out,” he said. “Even when you get to releasing into environment, much less of it is released than actually thought.” Exelon Corp., the operator of the Peach Bottom plant, referred all detailed questions about its preparedness and the risk analysis back to the NRC. In a news release issued earlier this month, the company, which operates 10 nuclear power plants, said “all Exelon nuclear plants are able to safely shut down and keep the fuel cooled even without electricity from the grid.” Other people, looking at the crisis unfolding in Japan, aren’t so sure. In the worst-case scenario, the NRC’s 1990 risk assessment predicted that a core melt at Peach Bottom could begin in one hour if electrical power on- and off-site were lost, the diesel generators – the main back-up source of power for the pumps that keep the core cool with water – failed to work and other mitigating steps weren’t taken. “It is not a question that those things are definitely effective in this kind of scenario,” said Richard Denning, a professor of nuclear engineering at Ohio State University, referring to the steps NRC has taken to prevent incidents. Denning had done work as a contractor on severe accident analyses for the NRC since 1975. He retired from Battelle Memorial Institute in 1995. “They certainly could have made all the difference in this particular case,” he said, referring to Japan. “That’s assuming you have stored these things in a place that would not have been swept away by tsunami.”

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José Viñals: Government Bonds: No Longer a World Without Risk

March 25, 2011

The risk free nature of government bonds, one of the cornerstones of the global financial system, has come into question as the global crisis unfolds. One thing is now very clear: government bonds are no longer the risk-free assets they once were. This carries far reaching implications for policymakers, central bankers, debt managers, and how the demand and supply sides of government bond markets function. After a recent IMF conference on a new approach to government risk, I’d like to highlight three key aspects: In a world without a risk free rate, the health of the financial sector and the government are closely interconnected. We need to better understand the linkages between sovereign and financial risks, and conduct a thorough analysis of the channels of cross-border spillovers. Policies to help manage sovereign risk will have a positive impact on financial stability, and measures to stabilize the banking sector will have a favorable impact on sovereign balance sheets. Countries with large potential liabilities from their banking sectors need to identify, assess, monitor, and report related risks closely. The impact of these contingent liabilities on the government’s financial position, including its overall liquidity, needs to be assessed when making borrowing decisions. The risks involved call for stronger emphasis on stress tests. There is anecdotal evidence that some debt managers are complementing existing analytical approaches with a greater focus on stress scenarios, including extreme financing shocks. Policymakers could take the extra step and contemplate the role for a joint stress test for systemically important financial institutions and sovereigns. The outcomes of such stress tests could help inform crisis preparedness, debt strategies, as well as financial supervision and regulation. Implications for supply and demand These views are the result of some recent profound changes in the way government bond markets operate. On the demand side of the market, dealers and investors no longer treat these bonds as purely interest rate products. Far from it, government bonds have assumed characteristics typical of credit products, for which prices mainly provide measures of borrowers’ probabilities of default. Many are not as liquid as before and their investor base is not as diversified as it used to be. During phases of risk aversion, they do not benefit from flight to quality flows. On the contrary, they correlate with risky assets. Credit rating downgrades play a procyclical role and can exacerbate these adverse dynamics. Central bankers generally accept government bonds as collateral in refinancing operations, but, below certain thresholds, lower ratings could trigger sizeable haircuts, in other words, revaluing the bonds substantially below their market value. Regulators could also assign them a non-zero risk weight under the standardized approach and suddenly these bonds are not risk-free rates any longer. And even if bonds such as United States Treasuries and German Bunds have retained most of their risk-free characteristics, the once solid dividing line between interest rate and credit products has become blurred. In the long run, such changes can profoundly affect investors’ choices. One example of these changes is that more capital may flow towards emerging markets. These economies have been able to absorb the recent inflows, but the increase in corporate and financial leverage, rising asset prices, and building inflationary pressures may soon translate into growing imbalances and open the door to a new set of challenges to financial stability. On the supply side of the market, debt managers in advanced economies have started behaving a bit like their emerging market colleagues. Given the increased exposure to economic and financial risks, they have started placing stronger emphasis on risk mitigation strategies , well beyond what traditional debt management objectives would indicate. Confronted with the usual trade-off between being predictable or flexible, most of them have erred on the side of flexibility. While retaining an open dialogue with financial markets, they realize that annual programs have to offer sufficient flexibility to cope with the challenges of issuing and managing larger amounts of debt. Finally, debt managers are putting a high premium on proactive and timely communication as well as on understanding the evolving nature of the investor base. These are precisely the elements that were outlined in the ‘Stockholm Principles’ IMF facilitated with the debt managers in September 2010. The global crisis is sending many of us back to the drawing board to take a fresh look at old assumptions and long cherished principles, and the risk free nature of government bonds is no exception. From iMFdirect blog

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Video: Forrester Says European Debt Contagion Has Decreased

March 25, 2011

March 25 (Bloomberg) — David Forrester, a Singapore-based currency economist at Barclays Capital, discusses the outlook for the euro and the risk of contagion from the debt crisis in Portugal. He talks with Linzie Janis on Bloomberg Television’s “Global Connection.”

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The Follow Through in the Risk Rebound Extends Aussie Rally, Dollar’s Tumble

March 19, 2011

The Follow Through in the Risk Rebound Extends Aussie Rally, Dollar’s Tumble

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Stephen Herrington: Swarm of the Black Swans

March 17, 2011

Moving to Southwest Washington State where I built a house on the beach with my hands and the skill and hands of a couple of excellent German expatriates, I was struck with the attitude of locals toward storm surge and possible tsunami. It had never happened the locals said, dismissively. Last week a tsunami happened, and, thankfully, we were spared. We weren’t so in 2007 when a hurricane force storm hit and denuded the surrounding tree farms of hundred year old trees and took 30 feet out of the barrier dunes. Luckily, it hit at low tide. They have no name classification for a storm like that in this place because there’s no cultural memory for it — it’s named by the date, December 7, 2007. Fortunately I built an octagon house to slip through the wind and to withstand it with integral shear walls, thick and wide earthquake foundation footers, hurricane rafter ties, a 140 mph roof and a backup generator. In the aftermath, my neighbors wandered around picking up parts of their houses and burning them for heat and light for five days until power was restored. All roads in or out were blocked by thousands of fallen 100′ fir trees. Record snows and flooding and record heat and drought stalk the land in the same year now. Call it climate change or an act of God or whatever you want. Tornadoes and wildfires in the winter? But I’m not here to argue climate change. Whether it’s manmade or not or whether it even exists. I’m here to argue that unexpected things happen to people who refuse to expect them. Nassim Nicholas Taleb coined the term Black Swan as a metaphor of something so unexpected in markets and finance that it was generally considered to be statistically impossible, like the birth of a black swan to snow white parent swans. His point was that if it were statistically so unlikely that it seemed it shouldn’t happen that would not mean that it couldn’t happen. What they try and stress in statistics theory is that likelihood is not preventative, not a shelter. Standing away from a tree during a lightening storm is preventative. Not betting you can fill an inside straight in draw poker is preventative. Probability is not an affirmative defense. Hedge funds were built on the unlikelihood of combinations of events ever happening. Hedge funds eventually evolved, by intentional design effort, insurance policies against unlikely things happening because of the actuarial unlikeliness of those things happening. The volumes in derivatives seems to indicate that everybody with a net worth of or operating expenses of $10 million bought them to hedge against unforeseeable disaster. Trouble was, the disaster that would follow was because the actuarial assumptions didn’t account for the unforeseeable, they accounted for the foreseeable and the statistical likelihood of the foreseeable. Disasters routinely smack actuarials in the face with a brick. A “hurricane” in the Pacific Northwest was foreseeable but it had been discounted by folk wisdom. A hurricane of the force and site of Katrina was foreseeable but had been statistically discounted in likelihood the way my neighbors had discounted the largest storm anyone had ever seen in their lifetimes. Hundred year floods and hundred year snows and hundred year heat waves and droughts had not happened in the Midwest and east for lifetimes, let alone in the same year. The oil rig with the best performance record in the fleet had the worst oil spill since drilling for oil became a practice of humans. A little extra pressure on the crew and management to meet a schedule in a difficult bore caused the accident that killed 11 and saturated a quarter of the Gulf with crude. That little extra performance pressure was not foreseen because no one had ever pushed the limits of performance like that before. The consensus of the foreseeable was that no such thing could happen. Somehow, and for some time, someone, perhaps a driller (master foreman) or a roughneck, had punched an ambitious corporate prick in the face to stop a disaster, again and again. That last safety valve didn’t work this time. The consensus foreseeable had been designed into Fukushima nuclear facilities. Likely earthquake intensities were designed into the structures. A tsunami sea wall had been built for the likely size of tsunami. But intensity and tsunami were surpassed at once, and the redundant systems failed to arrest the dangers of damaged nuclear facilities. Obvious design flaws in those backup systems were excused by assumptions of what is probable given the sea wall and earthquake measures. The housing bubble collapsed, and because of assumptions that all risk had been taken out of the system by laying it off on counterparties to bad loan practices, it became a disaster in catastrophic scale. No one foresaw that the counterparties couldn’t absorb the scale of claims against them. The consensus wisdom was that they could underwrite it all, the consensus not knowing the depths of exposure they were buying into because of the lack of transparency in the private equities markets. The perfect financial tsunami took out the engine of American finance in a sequence of events not unlike events that triggered the melting down of Fukushima nuclear reactors. 9/11 happened because even the small measures necessary to stop it weren’t considered by reason of the likelihood of it being so small. When the personal ego ambitions of George W. Bush were added to the catastrophe, it was multiplied into 1,000 times the original tragedy to persons and properties and our international standing. Bush’s ambition to be a “war president” was not calculated into the risk assessments. A conflagration could have been stopped by measures at airport check in, and would have had we foreseen the magnitude of the eventual outcome. Black Swans. The world is so big, so volatile, there are so many people living on the edge of volcanoes both natural and manmade, it’s impossible to excuse the thinking that governments are not responsible, or that governments are not needed to correct their own irresponsibility and the irresponsibility of their private enterprises. The American housing bubble collapse triggered the near failure of global finance. Only government, by harnessing the power of the worlds largest economy through borrowing, saved the globe from total financial meltdown. Only governments can repair the damages of events so calamitous that they swallow up private capital’s ability to underwrite the risks. To make governments smaller is to take the biggest risk of all. That risk is that nothing will happen that it will take a government to fix. Bad decisions are made by governments. Bad decisions are made by private enterprise. Independent of each other, they would still both make bad decisions. But together, enterprise looks to influence government to sanction their mistakes and correct them if they go terribly wrong. Government makes fewer mistakes unencumbered by the influence of private enterprise to backstop enterprise’s willingness to take risks or it’s just plain stupidity. Government and business is a union that is mutually and universally destructive because of the quid pro quo of campaign finance. Business influences government to think poorly, an outcome which abrogates it’s charter to “promote the general welfare.” The ability to foresee is not that hard. I figured to build a house that would stand a 100 years in an environment of horizontal rain and an unpredictable sea and sand. So what could happen in a 100 years was input into how I built it. Unfortunately, this is a skill of foresight lost by politicians, most particularly those on the right. My house may yet not survive a 100 years. But it will not be for the lack of the foresight I had while building it. It will be lost for the risk of a foreseen earthquake in the subduction fault just a few miles off shore, the last rupture of which happened 300 years ago. The Monday Morning Economist

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Zachary Karabell: The Insider Trading Scandal: Is It the Crime or the Prosecution?

March 2, 2011

The media is abuzz with the news that the former head of McKinsey consulting, Goldman Sachs director and current board member of Proctor & Gamble Rajat Gupta has been charged with insider trading by the Securities and Exchange Commission. He is now the highest-profile individual to be implicated in the widespread investigation driven by U.S. Attorney Preet Bharara that has already ensnared dozens of lower-level traders and Raj Rajaratnam , former head of hedge fund Galleon. The spin has been predictably excoriating, describing Gupta as yet another Wall Street/business titan warped by greed and hubris who is now witnessing his fall. Though he has not been convicted of anything, he has already been found guilty in the press, and it’s safe to say that if the day comes when charges are dropped or he is exonerated, that news will not be on the front page of any paper or grace the home page of any web site. Such is the court of public opinion, which has little sympathy for the masters of finance who so recently contributed to a near-meltdown of the very system that made them so rich. I have opinion about the guilt or lack thereof of Gupta or Rajaratnam. Like almost everyone save for a handful involved, I don’t know what happened and likely never will. But the nature of this investigation should raise the eyebrows even of those who believe that there is something rotten at the heart of American business. In essence, this investigation and its prosecutions raise the question of whether we are criminalizing behavior simply because it is deemed immoral and allowing prosecutors too much latitude to pry into personal relationships. Both the left and the right are wary of the potential abuses of government investigatory power, and the United States has nurtured a long and powerful tradition of wariness of the claims of officials to be on the side of the angels in pursuing wrong-doing. Until 2000, when Regulation FD (“fair disclosure”) was created by the SEC to curb the trading abuses of the internet bubble of the 1990s where large institutional investors were seen as having an unfair advantage and access to information compared to the masses who bought and sold shares on-line. Reg FD holds that no employee of a publicly traded company could disclose material non-public information on a selective basis. Give it to one person and you had to give to all people, in order to level the investing playing field. Fair enough in theory, but much stickier in practice. There’s a bright line between someone at Intel sharing what the company’s sales are to a friend who trades stocks and having a general conversation about how business is going, but a much fuzzier line between having a general conversation over drinks and complaining that senior management doesn’t appreciate some new business trend. There have been many cases of prosecution of individuals who have crossed the bright line, but ensnaring big fish is often harder, so prosecutors become more creative. In the case of Gupta, he made calls to Rajaratnam just after several important meetings of the Goldman Sachs board, and Galleon then made trades of Goldman stock (or options) just after those calls. So it’s hard to deny the appearance that information was exchanged. But just what information? What if Gupta simply said “It went well.” Or “it didn’t.” That might have been sufficient information to trade on, and it certainly was information that the general public didn’t have. But is that insider trading according to the definition? Is it disclosure of material non-public information? Are all forms of communication between insiders and outsiders to be criminalized? And if such communication creates some advantages, are advantages born of personal relationships “unfair” to the point where there should be legal action? In part, all of this is the fallout of a culture looking for villains for the financial crisis. As Charles Ferguson, director of the documentary Inside Job said in accepting his Academy Award, no financial executive has gone to jail for their role in the financial meltdown, and in his view, that is wrong. But is it? Generals routinely mess up during war, either from incompetence, vanity, arrogance or simply the unexpected. They are recalled and sacked, we hope, but unless it can be shown that they willfully and purposely screwed up, they are in our society rarely see a court-martial. Financial executives were culpable in myriad decisions that led to the financial crisis, but that in itself does not translate into prosecution and jail time. Finally, prosecutors have extraordinary powers in our society, and it is difficult for them to resist the temptation to use the law to enforce public mores. At any given time, some law on the books can be used to police a wide range of behavior. That’s great if you agree with the morality that they are enforcing (no abortions, for instance, or no emissions by chemical companies). But it’s not so great when that morality is at odds with yours (no abortions, for instance, or no emissions by chemical companies). We live in a system where trials are supposed to afford the accused a chance to clear their name or face penalty, but in a world where reputations are hard to build and easy to lose, prosecutors have undeniable advantages. It is up to them to use that power judiciously. I have managed money and still do. Stocks today move for all sorts of reasons, are traded globally and electronically often by programs rather than people, and often based on factors having nothing to do with the company per se. Rarely is one data point sufficient. As a result, insider information is neither worth the risk of obtaining it nor usually worth much even if you do . What is perhaps most striking about this case from that perspective is that Galleon is alleged to have made a grand total of $17 million in profit from this inside information. That is a lot of money in the real world, but for Galleon’s bottom line, it hardly rates, and certainly would be worth nowhere near the risk of obtaining it by violating Reg FD. If the charges are true as alleged, then these individuals destroyed careers and their future not for untold riches but for minimal advantage relative to others who did not flirt with the rules. The narrative may say greed, but in truth, the gain wasn’t enough for the risk. Galleon reaped hundreds of millions annually by legitimate means, and Gupta supposedly reaped nothing for his insider troubles. We like the simple narratives, but human motives, those are often far more complicated.

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With Growth in Financial Institutions’ Need for Enterprise Risk Management Solutions, Wolf & Company, P.C. Adds Midwest Sales Executive, Victor Imes, to Meet Strong Demand for Wolfpac Integrated Risk Management(R)

February 28, 2011

BOSTON, MA–(Marketwire – February 28, 2011) – Wolf & Company, P.C. (“Wolf”), a leading CPA and Business Consulting firm, today announces the appointment of Victor L. Imes as Midwest Regional Sales Manager. Based in Indianapolis, Indiana, Mr. Imes will focus on assisting financial institutions with their risk management needs using Wolf’s online risk assessment solution, WolfPAC Integrated Risk Management ® (“WolfPAC ® “).

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Economists’ Number 1 Risk: The Budget Deficit

February 28, 2011

WASHINGTON: The massive U.S. budget deficit is the gravest threat facing the economy, topping high unemployment and the risk of inflation or deflation, according to a survey of forecasters released on Monday. The National Association for Business Economics said its 47-member panel of forecasters increased its estimate for the 2011 federal deficit to $1.4 trillion from $1.1 trillion in its previous survey in November. “Panelists continue to characterize excessive federal indebtedness as their single greatest concern,” with state and local government debt the second-biggest worry, the survey said. It was conducted between January 25 and February 9. The panel’s deficit forecast is lower than the Obama administration projection of a record $1.65 trillion this fiscal year, or 10.9 percent of U.S. gross domestic product. Although the White House budget proposes $1.1 trillion in deficit reductions over 10 years, Republicans in the House of Representatives say that is not enough. Republicans are pressuring the administration to reduce spending by $61 billion by September, and the dispute threatens to shut down the government if Democrats and the White House refuse to go along. NABE panelists tweaked their previous stance on the Federal Reserve’s decision to pump more money into the economy by buying government bonds. Most panelists now view the Fed’s decision to buy an additional $600 billion in longer-term Treasury securities as having either somewhat diminished the risk of deflation or having had no impact on inflation whatsoever. November’s survey showed economists worried that the bond purchases could stoke inflation. Panelists forecast core inflation, which excludes volatile food and energy prices, to rise gradually from 0.8 percent in the final quarter of last year to 1.2 percent in 2011. GDP growth for 2011 is expected to advance 3.3 percent year over year, up from the panel’s previous estimate of 2.6 percent, the survey said. “Factors supporting growth going forward include pent-up consumer and business demand, strong growth in foreign economies, especially those in Asia, and accommodative monetary policy,” NABE President Richard Wobbekind said in a statement. “Factors restraining growth include financial headwinds, uncertainty about future federal government economic policies, a tepid housing market and sustained high unemployment,” he said. (Reporting by Rachelle Younglai; Editing by Dan Grebler) Copyright 2010 Thomson Reuters. Click for Restrictions .

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Video: IMF’s Lipsky Says ‘Never Say Never’ to More EU Bailouts

January 28, 2011

Jan. 28 (Bloomberg) — International Monetary Fund First Deputy Managing Director John Lipsky talks about the European debt crisis and the risk of inflation in emerging economies. He speaks with Francine Lacqua on Bloomberg Television’s “The Pulse” from the World Economic Forum meeting in Davos, Switzerland.

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U.S. Federal Court Orders Two Real Estate Companies to Pay CoStar Group $1.1 Million in Damages for Illegal Password-Sharing

December 23, 2010

Think illegally sharing passwords to online services is worth the risk? A landmark verdict handed down this week by a federal court that awarded more than $1.1 million in damages for illegally sharing passwords may convince you otherwise. CoStar Group, Inc. (Nasdaq: CSGP) announced a significant legal victory in breaking up a multi-state, multi-defendant password-sharing network that involved companies in Orange County, California, Houston, Texas…

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Larry Summers: If Tax Deal Goes Down There’s A ‘Significant Risk’ Of A Double Dip Recession

December 8, 2010

Senior White House officials significantly raised the stakes on congressional Democrats in their efforts to get a deal passed on the Bush tax cuts, warning on Wednesday that inaction would “significantly increase the risk” of a double dip recession. It wasn’t quite the metaphorical flare of mushroom cloud imagery, but outgoing senior economic adviser Larry Summers offered a fairly dire assessment of the stakes in the tax cut debate. “If they [Democrats] don’t pass this bill in the next couple weeks it will materially increase the risk that the economy would stall out and we would have a double dip,” he told a gathering of reporters at an off camera briefing. A double dip recession? “What I said it would significantly increase the risk,” Summers replied. The message was hardly subtle. But it certainly was debatable. Summers himself, downplayed the significance of continuing the Bush tax cuts back in September — though he was speaking, then, about the rates for the rich and the tax cut deal, at that point in time, did not include money for a 13-month extension of unemployment insurance or other tax incentives to help lower income workers. Asked whether the country would find itself dipping towards the economic doldrums if Congress waited a month or two to get a tax cut package passed, Rob Shapiro, a former commerce official in the Clinton White House and a proponent of the current tax cut deal, offered more sober-minded analysis. “The wait would not cause a double dip,” he said. “A double dip would come out of the reality of a relatively contractionary fiscal policy… I do think the deal that they announced is stimulative. And it ought to boost growth by some increment… But the issue is, that the deal certainly is not enough to lift the economy to a different place. Will we see what happened with the large stimulus happen here, which is once the stimulus is over the economy returns to slow growth? That’s the danger. And I keep on saying this, the single most important thing they can do to avert that is to stabilize housing prices.” Stabilizing the housing market, however, is not on the current congressional docket. And on Wednesday, the White House began a robust process of selling the deal to Democrats — skeptical, as they are, about an extension of Bush tax cuts for the wealthy and a generous revision of the estate tax. There were few carrots to go along with the sticks. Asked, for instance, if the White House would be willing to revise the informal compromise to bring more Democratic lawmakers on board, White House Press Secretary Robert Gibbs said any changes would be fine, so long as they didn’t result in decreased support. Then he cautioned: “The physics and the blood and the sweat that might be involved in that, I’m not entirely sure I would put it quite as simply as that.” If anything, the pitch being offered from the administration to the rest of the party was: take the package now or risk being blamed for an economic downturn. “I guess the question back for those who ask [why not fight for more] is where does this go, what is the end game and what are the consequences of playing it?” said senior adviser David Axelrod. “Do they have a sense of how this ends and how long will that take, because as Larry said there are real consequences to that. Just as the forecasts went up on the basis of this agreement they will go down if this agreement fails. That we know. We know that on January 1 people’s taxes will go up, we know that at the end of this month 2 million people will lose their unemployment insurance. And so there are real consequences to that decision. We, I think we all stipulate, the president did, no one likes those provisions that they dislike but on the other side of the ledger are significant things that will help people and help the economy. And what we know for sure is that without any of it we are facing a really difficult situation.” Added Gibbs: “I think you would really have to ask somebody who says… lets have some eight week fight and on February the 15th come in and say, alright, now we are ready to make a compromise, who on earth, who on earth thinks that that is somehow going to be a fundamentally better agreement than the one we are looking at right now? No one I have ever talked to.”

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Higher Risk Currencies Edge up over Safe Haven USD

December 1, 2010

Higher Risk Currencies Edge up over Safe Haven USD

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Video: Firoozye Says Irish Aid Rebuff May Turn Heat on Portugal

November 17, 2010

Nov. 17 (Bloomberg) — Nick Firoozye, head of interest-rate strategy at Nomura International Plc, talks about the outlook for Irish public finances and the risk of debt contagion across Europe. He speaks with Maryam Nemazee on Bloomberg Television’s “Countdown.”

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RMBS Case Against Countrywide Dismissed

October 4, 2010

A federal judge in New York has dismissed a lawsuit against Countrywide Financial charging that it misled investors about the risk level in its residential mortgagebacked securities reports Reuters

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Dan Solin: Higher Returns. Lower Risk.

September 29, 2010

Defining the holy grail of investing is easy. Achieving it is hard. I define it as additional returns without greater risk. Most investors don’t appreciate that increased returns typically involve more risk. You can get a higher return on lower rated bonds, but the risk of default is higher. There’s no free lunch. Or is there? Here’s an example of an exception to the rule. A small community bank offers a higher interest rate on its Certificate of Deposit than a large national bank. Both banks are FDIC insured and the amount of your deposit is within FDIC coverage guidelines. By purchasing the higher interest rate CD, you have obtained more return, but have incurred no additional risk. Here’s another anomaly I recently discovered. I was asked by a wealthy prospective client to put together a laddered portfolio of low cost, bond index funds. The client was adamant that he wanted no exposure to the stock market, because he is concerned about the risk. A laddered portfolio staggers the maturity date of the bonds. When the bonds mature, the investor can reinvest the proceeds, taking into consideration the interest rate climate at the time. I had suggested to the client that he read The Big Short , by Michael Lewis. It’s my belief that anyone who reads that book would never do business with any broker, and would be especially terrified of purchasing individual bonds. I also referred him to excellent study from Vanguard which explained why bond investors should use bond funds and not individual bonds. Among the advantages of bond funds noted were diversification, cash-flow treatment, liquidity and costs. To those benefits I would add honesty and transparency, both of which are in short supply at your brokerage firm. He was persuaded by this data, but here’s what neither of us expected. We built a ten year ladder of very high quality, low cost, passively managed, bond funds and ran the returns for the period from January, 1973 to August, 2010. We wanted to measure the returns over a significant period of time so they would be representative. This laddered bond portfolio had an annualized return of 6.71%, with a risk (as measured by standard deviation) of 4.27%. Standard deviation measures volatility of a portfolio (or stock or bond). It shows how much variation there is from the “average” over a given period of time. A low standard deviation means the portfolio measure is unlikely to deviate significantly from its average, based on historical data. While standard deviation is not predictive, it is a useful historical measurement of risk. This data told us the ten year laddered bond portfolio we constructed had a very decent annualized return, with low risk. We wanted to find out what would happen if we added a globally diversified portfolio of low cost, passively managed, stock funds to the mix. The stock portion would make up only 15% of the portfolio. We reduced the bond ladder to five years. Here’s what we found: The annualized returns increased to 7.16% and the risk decreased to 3.72%! For those who believe I have cherry picked the numbers, or used an unrealistically long time period, I ran the returns for this portfolio for the past ten years, which is often incorrectly referred to as “the lost decade.” The portfolio had an annualized return of 4.14%, with an annualized standard deviation of 2.74%. An investment of $50,000 grew to $75,250.68. Nothing was “lost.” How can that be? We added a riskier asset class which we expect would increase returns, but it should also have increased risk. It didn’t. The explanation can be found in Modern Portfolio Theory , the Nobel Prize winning work of Harry Markowitz, which explained how to construct optimal portfolios for a given amount of risk. It’s possible to achieve decent returns with relatively low risk. A portfolio of 100% bonds may not be less risky than a portfolio with a small exposure to the global stock markets. Don’t expect to get this advice from your broker. The views set forth in this blog are the opinions of the author alone and may not represent the views of any firm or entity with whom he is affiliated. The data, information, and content on this blog are for information, education, and non-commercial purposes only. Returns from index funds do not represent the performance of any investment advisory firm. The information on this blog does not involve the rendering of personalized investment advice and is limited to the dissemination of opinions on investing. No reader should construe these opinions as an offer of advisory services. Readers who require investment advice should retain the services of a competent investment professional. The information on this blog is not an offer to buy or sell, or a solicitation of any offer to buy or sell any securities or class of securities mentioned herein. Furthermore, the information on this blog should not be construed as an offer of advisory services. Please note that the author does not recommend specific securities nor is he responsible for comments made by persons posting on this blog. Here is the trailer for my new book, Timeless Investment Advice .

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Video: Davies Sees Global Bank Capital Requirements Rising: Video

September 13, 2010

Sept. 13 (Bloomberg) — Howard Davies, chairman of the London School of Economics, talks about bank capital rules agreed to by regulators yesterday in Basel, Switzerland. The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Davies speaks on Bloomberg Television’s “In the Loop With Betty Liu.” (Source: Bloomberg)

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Video: Davies Sees Global Bank Capital Requirements Rising: Video

September 13, 2010

Sept. 13 (Bloomberg) — Howard Davies, chairman of the London School of Economics, talks about bank capital rules agreed to by regulators yesterday in Basel, Switzerland. The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. Davies speaks on Bloomberg Television’s “In the Loop With Betty Liu.” (Source: Bloomberg)

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Video: RCM’s MacDonald Sees More Market ‘Certainty’ After Basel

September 13, 2010

Sept. 13 (Bloomberg) — Lucy MacDonald, chief investment officer at RCM UK Ltd., talks about new bank capital rules agreed by regulators yesterday in Switzerland. The Basel Committee on Banking Supervision will require lenders to have common equity equal to at least 7 percent of assets, weighted according to their risk, including a 2.5 percent buffer to withstand future stress. She speaks with Maryam Nemazee on Bloomberg Television’s “Countdown.”

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Video: Doha Bank’s Seetharaman Says `World is Due a Double Dip’

September 10, 2010

Sept. 10 (Bloomberg) — Raghavan Seetharaman, chief executive officer of Doha Bank QSC, talks about the business model of Middle East banks and the risk of a double-dip recession. He speaks on Bloomberg Television’s “On The Move” with Francine Lacqua.

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Sheldon Filger: Nouriel Roubini Sees Growing Risk of Double Dip Recession in the U.S.

September 7, 2010

NYU Economics Professor Nouriel Roubini believes that the risk of a double dip recession is growing in the United States. He assesses the probability of a double dip at 40%, the other scenario being subpar economic growth (under one percent), which feels like a recession in terms of high unemployment, growing public deficits, declining home values and increased losses among banks and financial institutions. “You don’t need negative economic growth to feel like a recession when growth is well below trend growth,” Roubini said in a recent Financial Times interview. Even if a double dip is technically avoided in the last quarter of 2010, Nouriel Roubini’s forecast for 2011 is dire. He sees the risk of a double dip recession increasing, along with widening credit spreads and interbank lending rates. Compounding his gloomy projection, Roubini sees little left for policymakers to grapple with, either on the monetary or fiscal side. In particular, he sees another flurry of quantitative easing by the U.S. Federal Reserve as being “impotent.” The downbeat perspective of Roubini on the U.S. economy extends to Europe, where he believes the recent impressive growth figures in Germany are merely temporary. Furthermore, he points out, Germany is the best performing economy in the Eurozone, where the remaining countries are facing disaster. Half of the Eurozone is already experiencing a double dip recession. In addition, Japan is courting a double dip, and even strong emerging economies such as China are showing signs of an economic slowdown. The economist known as “Dr. Doom” is actually trying to view economic trends in a realistic manner. If his interpretation of emerging trends strikes a chord of doom and gloom, one needs to look critically at those trends rather than marginalize the messenger. It should be recalled that when Nouriel Roubini issued his warning about the coming collapse of the financial order as we once knew it, based on a house of cards and subprime mortgages, he was harshly ridiculed by many mainstream economists. All the more reason to listen to what he has to say about the current state of the global economy. Overall, I have not seen Professor Roubini so gloomy on the state of the global economy since his prescient warnings of financial Armageddon approaching in the months leading up to the implosion of the investment banks in the summer and fall of 2008.

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Eric Schurenberg: 5 Reasons to Stop Worrying About Home Prices

August 26, 2010

The New York Times more or less pronounced the single family home dead as an asset this week. Data from the National Association of Realtor s and the Federal Home Financing Agency hammered some nails into the coffin. But come now, folks. Let’s apply a little perspective: The pessimistic scenario isn’t all that pessimistic One downbeat economist quoted by the Times predicted that housing will rise at the rate of inflation for the foreseeable future. The rate of inflation happens to be roughly the long-term return on residential real estate over the past century, according to Robert Shiller, the Yale economist and real estate historian. So the bubble of 2000 to 2006 was the anomaly, not the “grim” long-term future foreseen by the Times . (Speaking of anomalies, Shiller in this interview warns against over-reacting to the lousy housing numbers that came out this week since they were skewed by the expiration of Uncle Sam’s homebuyer’s credit.) Yo u can still make money on a house, even if the pessimists are right. If you put 20% down on a home and it rises by the rate of inflation, your equity appreciates at five times the rate of inflation. There’s no guarantee that there will be any appreciation at all–that’s the risk–and maintenance and taxes will take away some of your return. But you don’t need a bubble to be rewarded for taking the risk. You still get plenty of value from owning a home, even if you don’t make a killing. As my colleague Charlie Farrell points out, paying down a mortgage allows you to accelerate your single biggest housing expense into your peak earning years when you can best afford it. Once you’ve paid it off-at retirement, presumably-you’ve significantly pared your living expenses. And as my colleague Linda Stern points out, you also get a place to call your own for all that time-which is really the point, after all. If history is any guide, the Times story is a buy signal. These are the kinds of stories that tend to appear on front pages at market bottoms. Yes, the weak economy is keeping home buyers off the market. Yes, foreclosures are clogging the market, and smart people like Barry Ritholtz believe that homes have further to fall. There are dozens of reasons no one will ever buy a home again. But that’s how it always looks at a bottom. At some price, people will still buy. A house in a reasonably viable neighborhood is not an AIG bond or a share of Lehman Brothers. It has an intrinsic value. People need somewhere to live, and prices have been falling faster than rents. The National Association of Home Builders Affordability Index is near record levels. The CoreLogic home price to rental ratio , which compares prices and rents, shows that the rents and ownership costs are coming back into line, even if they’re not historically cheap yet. But at some price, a home becomes so attractive compared to renting that it becomes foolish not to buy. That price may not be what you hoped. It may well be even lower than today’s price. But your home’s price now is far closer today to that intrinsic value than it was in 2007. Why wasn’t the Times calling the housing market dead then? More on CBS MoneyWatch: Is Housing a Dumb Investment Now? Is Your House an Asset or a Liability? Home Sales Still Stink

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Video: Wesbury Says U.S. Has Been in Recovery `About a Year’: Video

August 25, 2010

Aug. 25 (Bloomberg) — Brian Wesbury, chief economist at First Trust Portfolios LP, talks with Bloomberg’s Melissa Long about the outlook for the U.S. economy. Orders for durable goods in the U.S. increased less than forecast in July and sales of new homes unexpectedly dropped, increasing the risk of a renewed recession in the world’s largest economy. (Source: Bloomberg)

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Janet Tavakoli: JPMorgan’s Losses From Indecent Overexposure

August 9, 2010

JPMorgan Chase’s fixed-income revenue fell almost 28% to $3.6 billion in the second quarter, down from $5.5 billion in the first quarter, and down from $4.9 billion for the same period last year. JPMorgan blamed an interest rate squeeze and bad results in the credit markets and the commodities markets. There were no details of its significant loss from unwise, gigantic, wrong-way wartime coal bets. The bank took a short position so enormous that it was oversized relative to the global coal market, and second quarter losses reportedly were in the hundreds of millions of dollars . Financial Reform Failure Blythe Masters, managing director in charge of JPMorgan’s global commodities group, spent time lobbying in Washington to dilute financial reform. By her own admission, JPMorgan’s recent speculation in coal wasn’t client driven; the risk was taken on JPMorgan’s behalf. The Dodd-Frank Financial Reform Bill does nothing to prevent a repeat — or even a potentially worse — debacle. The commodities division isn’t the only area in which JPMorgan is vulnerable. Credit derivatives, interest rate derivatives, and currency trading are vulnerable to leveraged hidden bets. Ambitious managers strive to pump speculative earnings from zero to hero. Instead of transparent and regulated markets, we have dark markets, hidden leverage, proprietary speculative trading, lax regulation and oversized risks. “Scared Sh*tless” Blythe Masters told her remaining employees that competitors are “scared sh*tless” of JPMorgan’s commodities division. She claimed the layoffs of 10% of front office staff are not a sign of JPMorgan “panicking” and called the risk taking in coal trading that left JPMorgan wide-open to a massive short squeeze a “rookie error.” For individual traders, JPMorgan doesn’t follow the Wall Street maxim: He who sells what isn’t his’n, must buy it back or go to pris’n. The U.S. can count on JPMorgan to continue both long and short market manipulation and take its winnings and losses from blind gambles. Shareholders, taxpayers, and consumers will foot the bill for any unpleasant global consequences. Physical oil traders from JPMorgan’s brand new RBS Sempra Commodities LLP acquisition (JPMorgan paid $1.7 billion) left of their own accord to join smaller firms with less capital. Masters said these were “very interesting career decisions.” The defections were all the more interesting, because Masters began her career as a JPMorgan commodities trader. RBS Sempra’s oil traders gave Masters a vote of no confidence. Their flight was a loss of “key people,” whom she said she needs to replace. Masters is poised for more debacles: “All it’s going to take is a little pop to the upside. We could be producing a 30 to 35 percent ROE and looking like gods.” Good luck with that. Masters also noted that this potential windfall might come at the expense of others: “We’ve got too many banks chasing too little volume and margins have compressed.” The United States is trying to pull out of the greatest financial tailspin in its history. Dice-rolling braggadacio by a key officer at one of the nation’s largest banks is exactly the kind of thing Congress, taxpayers, and voters should find scary. Arianna Huffington explains the consequences for middle class Americans, who pay a disproportionate share of the bill in her upcoming book, Third World America . Ramp up Risk and Cross Your Fingers Big unanticipated market moves always result in big winners and big losers among big gamblers. After the fact, most winners claim they were smart–not just lucky. When bank managers take a big gamble and lose hundreds of millions of dollars, they don’t call it reckless; they spin it as an error of “judgment.” The directive is to “put on risk” and “generate results.” This may be why Masters cautioned employees: “I don’t want us talking to the outside world, neither about successes nor about failures.” JPMorgan is making big bets and crossing its fingers in a dangerous and volatile market. Masters takes “pleasure” in the “ballsiest” business, and she wants her traders to get lucky. Moreover, she’s engaged in internal spin control and plans a “deep dive” with the Board and the CFO. This may reduce her chances of walking Wall Street. No one should be concerned for the job security of managers like Masters at JPMorgan, and that is precisely the problem. Delusional risk-taking and lack of transparency at Too-Big-To-Fail banks — especially in the areas most vulnerable to rampant speculation — were ignored by so-called financial reform.

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Video: Swisscanto’s Esterer Says Greece to Default in 2012-13

July 22, 2010

July 22 (Bloomberg) — Florian Esterer, a senior portfolio manager at Swisscanto Asset Management AG, talks about bank stress tests and the risk of European debt defaults. He speaks on Bloomberg Television’s “Countdown” with Francine Lacqua.

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Geithner On Failing Firms: ‘We Will Dismember Them’

July 9, 2010

The finance-reform bill Congress is likely to pass this summer won’t eliminate the risk of failure for financial firms, Treasury Secretary Tim Geithner says in an interview on Friday’s Morning Edition. But the bill means that, when firms get into trouble in the future, “we won’t give them a second chance,” he tells NPR’s Renee Montagne. “We will dismember them, put them out of existence.”

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Robert Siciliano: Wireless Security is an Oxymoron, But There is Hope

July 6, 2010

WiFi is everywhere. Whether you travel for business or simply need Internet access while out and about, your options are plentiful. You can sign on at airports, hotels, coffee shops, fast food restaurants, and now, airplanes. What are your risk factors when accessing wireless? There are plenty. WiFi wasn’t born to be secure. It was born to be convenient. Wireless networks broadcast messages using radio and are thus more susceptible to eavesdropping than wired networks. Anyone using an open unsecured network risks exposing their data. There are many ways to see who’s connected on a wireless connection, and to gain access to their information. As more sensitive data has been wirelessly transmitted over the years, the need for security has evolved. Today, with criminal hackers as sophisticated as they ever have been, wireless communications are at an even higher risk. When setting up a wireless router, there are two different security protocol options. WiFi Protected Access (WPA and WPA2) is a certification program that was created in response to several serious weaknesses researchers had found in the previous system, Wired Equivalent Privacy. Wired Equivalent Privacy was introduced in 1997 and is the original version of wireless network security. There are a few things you should do to protect yourself while using wireless. Be smart about what kind of data you transmit on a public wireless connection. Only transmit critical data from secure sites, ones where “http”‘s appears in the address bar. These sites have additional encryption built in. Don’t store critical data on a device used outside the secure network. I have a laptop and an iPhone. If they are hacked, there’s no data on either device that would compromise my identity or financial security. If you have file sharing set up on a home network, when venturing to wireless hot spots you need to manually turn it off on your laptop. Turn off WiFi and Bluetooth on your laptop or cell phone when you’re not using them. An unattended device emitting wireless signals is very appealing to a criminal hacker. Beware of free WiFi connections. Anywhere you see a broadcast for “Free WiFi,” consider it a red flag. It’s likely that free WiFi is being used as bait. Beware of evil twins. Anyone can set up a router to say “T-Mobile” “ATT Wireless” or “Wayport”. These are connections can appear legitimate but are actually traps set to snare anyone who connects. Keep your anti-virus software and operating system updated. Make sure your antivirus software is automatically updated and your operating system’s critical security patches are up to date. Robert Siciliano, personal security and identity theft expert adviser to Just Ask Gemalto , discusses hackers hacking wireless networks on Fox Boston. ( Disclosures )

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Video: Del Conte Says Middle East Investment Key Option for BP

July 6, 2010

July 6 (Bloomberg) — Luca Del Conte, executive director for treasury and capital markets at MediCapital Bank Plc, talks about the outlook for investment from the Middle East in BP Plc and the risk of a hostile takeover. He speaks on Bloomberg Television’s “Countdown” with Maryam Nemazee.

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Video: Fathom’s Gabay Says Deflation Becoming `Primary Concern’

June 28, 2010

June 28 (Bloomberg) — Danny Gabay, managing director of Fathom Financial Consulting, talks about the risk of a renewed recession and delays in banks writing down losses. Gabay speaks with Francine Lacqua on Bloomberg Television’s “Countdown”

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Video: Feinberg Is Focused on Minimizing Fraudulant BP Claims: Video

June 25, 2010

June 25 (Bloomberg) — Kenneth Feinberg, the government-appointed administrator of a $20 billion fund to compensate victims of the BP Plc oil spill in the Gulf of Mexico, says he will work to minimize the risk of fraudulant claims. Bloomberg’s Al Hunt reports on Feinberg, legislation to overhaul the U.S. financial regulatory system and the outlook for this weekend’s meetings of the Group of 20 nations. (Source: Bloomberg)

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Goldman Sachs Not Losing Big Clients Over Fraud Case: Andrew Ross Sorkin

June 15, 2010

Despite all the bad headlines — the accusations of fraud, the talk of a big settlement, the risk, however remote, of criminal charges — there’s an inconvenient truth that’s been largely ignored: Most of Goldman’s big customers are not bolting.

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Europe’s Debt Crisis Causing Investors to Ignore Positive News, BIS Says

June 13, 2010

By Emma Ross-Thomas June 14 (Bloomberg) — Europe’s sovereign debt crisis has created an environment in which investors are dwelling on negative developments even when data show economic recovery, the Bank for International Settlements said. “Against this background of heightened uncertainty, market participants focused on the deteriorating financial-market conditions while often ignoring positive macroeconomic news,” the Basel, Switzerland-based BIS said in its quarterly report yesterday. “The April jobs report, for example, saw U.S. non- farm payrolls increase by 100,000 more jobs than expected to 290,000, but the S&P 500 Index fell by 1.5 percent on the day.” The debt crisis sent the euro to a four-year low against the dollar on June 7 and has wiped out more than $4 trillion from global stock markets this year. European leaders unveiled a 750 billion-euro ($910 billion) rescue mechanism last month to stem contagion from Greece, initially reversing a surge in the risk premium on Spanish and Portuguese bonds. “The relief in markets turned out to be temporary, however, as investor confidence soon deteriorated on worries about the possible interactions between public debt and growth,” the BIS said. As investors’ attention turned to growth prospects on the periphery of the euro region and Fitch Ratings stripped Spain of its AAA rating, citing a sluggish growth outlook, the extra yield investors demand to hold Spanish debt rather than German equivalents rose to a euro-era high of 216 basis points on June 8, easing to 188 basis points on June 11. The differential on Portuguese debt stood at 255 basis points on June 11. Investor Concerns “Investors questioned the robustness of global growth due to a number of factors in recent weeks, including the risk that the surge of public debt could derail the economic recovery and growing concerns that the financial system was more fragile than previously thought,” BIS Economic Adviser Stephen Cecchetti , head of the monetary and economic department, told journalists in a June 11 conference call. Some European nations risk a “double dip” economic slowdown if the region fails to manage its debt crisis, the World Bank said June 9. “If markets lost confidence in the credibility of efforts to put policy on a sustainable path, global growth could be significantly impaired and a double-dip recession could not be excluded,” the Washington-based lender said in its report. To contact the reporter on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net

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Max Fraad Wolff: Moving Forward?

June 7, 2010

The great oil spill of 2010 has called forth anger, sadness and opinion from all quarters. It is truly mesmerizing to watch our present technologies, regulations, habitat and livelihoods fail as oil sprays out from a ruptured pipe on the sea bed. We have all heard and shared passions on the lives lost and permanently degraded. It is clear that our regulatory systems, technological attainment and disaster planning were terribly and painfully inadequate. So they remain. BP and associates will be fighting court claims, civil issues and possibly criminal inquiries for decades. Likewise, the citizens of the gulf-plant, animal, human, ecological — will be struggling with wounds for a long time. There is every indication that this long ago became a national emergency. Anger has boiled over, justifiably. Aggrieved parties are bandying about jail sentences, nationalizations and radical departures from coastal drilling plans. We are not seeing careful, historical and best practices based suggestions. There is a century of study, policy and critique of the relationship between extractive industry, the environment and stakeholder interest. The oil and gas industries have struggled with angered local communities, spills and lost local ways of life for over 100 years. BP, formerly Anglo-Iranian, has a 104 year history of struggle with various host nations and communities. For most of its modern history, 1913-1987, what is now BP was partially or entirely a national oil company in the UK. Anglo-Iranian became British Petroleum and then BP across waves of mergers and privatizations. The firm and industry were made and remade as local communities, crises and critics shaped the industry and the company. We do not need to start from scratch in assessing the situation. We are not the first to face these issues. We don’t need to be led solely by our sadness and rage about what is and will be happening as a result of the Deepwater Horizon disaster. The literature on the curse of oil and the best practices for handling economic and ecological issues is immense and has made great strides in the past 10 years. This literature and its leading lights should be front and center in our debates on this spill and our contentious future relationship with oil and gas exploration, development, refining. The spill highlights the inadequacies of our present system. We need a system where large, systemically relevant firms pay into a transparently managed national clean up and environmental restitution fund. The payments made should be indexed to the amount of oil produced. Bigger operations will pay more into the fund and smaller operations will pay less. Payments into the fund will also be weighted for the risk of ecological damages. Higher risk programs will either face regulatory rejection, or be assessed scaled up risk payment. All information on payments to and operations of the funds must be made available. Councils comprised of regulators, stakeholders and industry should administer funds. In the event of major spills and accidents, damages will be assessed by these councils. Serious and long term damages — like those flowing from the Deepwater Horizon failure should have their own remediation funds. In disasters, councils of industry, regulators and stakeholders should be immediately empowered to direct operations. If significant dereliction of safety and regulatory duties are established, all profits should be paid into a remediation fund for the producing life of the project in question. The Deep Water Horizon could become our test of this approach?

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Indian Economic Growth Accelerates, Increasing Pressure on Interest Rates

May 30, 2010

By Kartik Goyal May 31 (Bloomberg) — India’s economic growth accelerated, adding pressure on the central bank to raise interest rates even as Europe’s sovereign-debt crunch threatens the global recovery. Gross domestic product rose 8.6 percent in the three months ended March 31 from a year earlier after a revised 6.5 percent gain in the previous quarter, the statistics office said in a statement in New Delhi today. That matched the median estimate in a Bloomberg News survey of 22 economists. India and China, the world’s fastest-growing major economies, are weighing the risk of Europe’s debt crisis reducing demand in the market that accounts for a fifth of their exports. For India, the room to pause on monetary tightening is limited because its benchmark inflation rate is more than three times that in China. “The biggest threat in India is from inflation and the risk that the economy overheats,” Kevin Grice , an economist at Capital Economics Ltd. in London, said before the report. “This, in the end, would force the Reserve Bank of India to aggressively hike policy rates, which would inevitably bring far lower growth later on.” India’s central bank said May 19 that it will raise rates only cautiously even though they are “out of line” with the key wholesale-price inflation rate, running at 9.59 percent. In comparison, China’s $4.3 trillion economy expanded 11.9 percent in the first quarter and consumer prices rose 2.8 percent in April from a year earlier. Stocks Gain India’s Sensitive Index extended gains after the GDP report, increasing 0.4 percent to 16,935.70 at 11:10 a.m. on the Bombay Stock Exchange. The yield on the 10-year government bond rose 3 basis points to 7.51 percent from before the report. The rupee was little changed, maintaining the 4.5 percent drop against the U.S. dollar this month, making imports costlier and impeding central bank Governor Duvvuri Subbarao’s efforts to cool inflation. The Reserve Bank’s benchmark reverse repurchase rate is at 3.75 percent after two quarter percentage point increases since mid-March. Manufacturing rose 16.3 percent in the three months through March from a year earlier, compared with a 13.8 percent gain in the previous quarter, today’s report showed. Farm output rose 0.7 percent from a contraction of 1.8 percent and mining grew 14 percent. ‘Source of Strength’ European Central Bank President Jean-Claude Trichet said today that emerging nations have weathered the global recession better and are a “source of strength” for the world economy. GDP in the euro region rose 0.5 percent in the first quarter from a year earlier, according to the European Union’s statistics office. Growth in India’s $1.2 trillion economy, Asia’s largest after Japan and China, is accelerating as rising incomes boost demand for cars, mobile phones and air travel. Salaries in India may increase at the fastest pace in the Asia Pacific in 2010, according to Hewitt Associates Inc., the Lincolnshire, Illinois- based human resources adviser. Car sales by companies including Maruti Suzuki India Ltd. and Tata Motors Ltd. rose 39.5 percent in April from a year earlier, the biggest jump for the month since 1999, according to the Society of Indian Automobile Manufacturers. 3G Auction The government’s auction of high-speed wireless licenses this month highlights corporate enthusiasm for the nation’s prospects. Companies including Newbury, England-based Vodafone Group Plc, the world’s biggest mobile-phone operator by sales, took part and the sale raised 677.2 billion rupees ($14.3 billion), almost double the amount budgeted by Finance Minister Pranab Mukherjee . Services including air travel, which account for about 55 percent of India’s economy, expanded the most in 21 months in April, according to the Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics. The Organization for Economic Cooperation and Development said May 26 that China and India need “a much stronger tightening of monetary policy” to counter inflation and reduce the risk of asset bubbles. Some economists say Indian Prime Minister Manmohan Singh’s government has made slow progress in creating new capacity in infrastructure such as power, roads and ports, which is adding to inflation pressures and limiting economic expansion. Infrastructure Woes “The shortage of infrastructure has an adverse impact on growth and it increases the cost of operations for companies,” said Shashanka Bhide , chief economist at the New Delhi-based National Council of Applied Economic Research. The finance ministry estimates that India produces about 10 percent less electricity than it needs, and roads, which account for 65 percent of the nation’s cargo, are plagued by single lanes and irregular surfaces. India, ranked below war-ravaged Ivory Coast and Sri Lanka for the quality of infrastructure, in March lowered its target for spending on roads and ports, after failing to complete planned projects. Projected investment in electricity, roads and wharves may reach 407 billion rupees in the five years to March 2012, half the original goal, according to the Planning Commission, a government office that sets investment targets. Singh wants to boost growth to a 10 percent pace, which he says is needed to pull the 828 million people living on less than $2 a day out of poverty. To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

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Indian Economic Growth Accelerates, Increasing Pressure on Interest Rates

May 30, 2010

By Kartik Goyal May 31 (Bloomberg) — India’s economic growth accelerated, adding pressure on the central bank to raise interest rates even as Europe’s sovereign-debt crunch threatens the global recovery. Gross domestic product rose 8.6 percent in the three months ended March 31 from a year earlier after a revised 6.5 percent gain in the previous quarter, the statistics office said in a statement in New Delhi today. That matched the median estimate in a Bloomberg News survey of 22 economists. India and China, the world’s fastest-growing major economies, are weighing the risk of Europe’s debt crisis reducing demand in the market that accounts for a fifth of their exports. For India, the room to pause on monetary tightening is limited because its benchmark inflation rate is more than three times that in China. “The biggest threat in India is from inflation and the risk that the economy overheats,” Kevin Grice , an economist at Capital Economics Ltd. in London, said before the report. “This, in the end, would force the Reserve Bank of India to aggressively hike policy rates, which would inevitably bring far lower growth later on.” India’s central bank said May 19 that it will raise rates only cautiously even though they are “out of line” with the key wholesale-price inflation rate, running at 9.59 percent. In comparison, China’s $4.3 trillion economy expanded 11.9 percent in the first quarter and consumer prices rose 2.8 percent in April from a year earlier. Stocks Gain India’s Sensitive Index extended gains after the GDP report, increasing 0.4 percent to 16,935.70 at 11:10 a.m. on the Bombay Stock Exchange. The yield on the 10-year government bond rose 3 basis points to 7.51 percent from before the report. The rupee was little changed, maintaining the 4.5 percent drop against the U.S. dollar this month, making imports costlier and impeding central bank Governor Duvvuri Subbarao’s efforts to cool inflation. The Reserve Bank’s benchmark reverse repurchase rate is at 3.75 percent after two quarter percentage point increases since mid-March. Manufacturing rose 16.3 percent in the three months through March from a year earlier, compared with a 13.8 percent gain in the previous quarter, today’s report showed. Farm output rose 0.7 percent from a contraction of 1.8 percent and mining grew 14 percent. ‘Source of Strength’ European Central Bank President Jean-Claude Trichet said today that emerging nations have weathered the global recession better and are a “source of strength” for the world economy. GDP in the euro region rose 0.5 percent in the first quarter from a year earlier, according to the European Union’s statistics office. Growth in India’s $1.2 trillion economy, Asia’s largest after Japan and China, is accelerating as rising incomes boost demand for cars, mobile phones and air travel. Salaries in India may increase at the fastest pace in the Asia Pacific in 2010, according to Hewitt Associates Inc., the Lincolnshire, Illinois- based human resources adviser. Car sales by companies including Maruti Suzuki India Ltd. and Tata Motors Ltd. rose 39.5 percent in April from a year earlier, the biggest jump for the month since 1999, according to the Society of Indian Automobile Manufacturers. 3G Auction The government’s auction of high-speed wireless licenses this month highlights corporate enthusiasm for the nation’s prospects. Companies including Newbury, England-based Vodafone Group Plc, the world’s biggest mobile-phone operator by sales, took part and the sale raised 677.2 billion rupees ($14.3 billion), almost double the amount budgeted by Finance Minister Pranab Mukherjee . Services including air travel, which account for about 55 percent of India’s economy, expanded the most in 21 months in April, according to the Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics. The Organization for Economic Cooperation and Development said May 26 that China and India need “a much stronger tightening of monetary policy” to counter inflation and reduce the risk of asset bubbles. Some economists say Indian Prime Minister Manmohan Singh’s government has made slow progress in creating new capacity in infrastructure such as power, roads and ports, which is adding to inflation pressures and limiting economic expansion. Infrastructure Woes “The shortage of infrastructure has an adverse impact on growth and it increases the cost of operations for companies,” said Shashanka Bhide , chief economist at the New Delhi-based National Council of Applied Economic Research. The finance ministry estimates that India produces about 10 percent less electricity than it needs, and roads, which account for 65 percent of the nation’s cargo, are plagued by single lanes and irregular surfaces. India, ranked below war-ravaged Ivory Coast and Sri Lanka for the quality of infrastructure, in March lowered its target for spending on roads and ports, after failing to complete planned projects. Projected investment in electricity, roads and wharves may reach 407 billion rupees in the five years to March 2012, half the original goal, according to the Planning Commission, a government office that sets investment targets. Singh wants to boost growth to a 10 percent pace, which he says is needed to pull the 828 million people living on less than $2 a day out of poverty. To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net

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Ian Welsh: As the Euro and the Pound come under pressure bend over and kiss Europe’s economy goodbye

May 24, 2010

The catch-22 continues. First, the Euro under pressure: Global Markets Overview: A sudden drop in the single currency reverses an early tentative advance for stocks as traders once again frett about the fragility of the eurozone economy Second, the Pound under pressure: Speculators extended their short positions in sterling to record levels after the recent UK election as worries escalated over the government’s finances Third, a usterity in Britain: Britain will be a “leading voice for fiscal responsibility” within Europe as it embarks on a sustained programme of cutting public spending, chancellor George Osborne said on Monday. Announcing an initial £6.2bn of cuts for the current financial year, Mr Osborne said it was important to cut the deficit urgently so that debt repayments did not “spiral out of control.” Fourth, a bank in Spain goes under: The euro came under renewed attack on Monday as concerns over Europe’s fiscal problems intensified after Spain’s central bank took control of a savings bank.. A 146-year-old lender owned by the Catholic Church, was taken over by the Bank of Spain in the latest move by the central bank to restructure the country’s troubled mutually owned banks, or “cajas”. Here’s the catch-22. Investors are worried about deficits, so they get out of bonds or demand higher bond rates and attack currencies. The response to that by governments is to slash spending: austerity. But austerity will crash out the economy, which will hurt the stock market and damage the ability of governments to pay their debts. As long as governments feel they are at the mercy of the hot money, and as long as the hot money insists that governments both be fiscally austere and have good economies, there is no way out. Notice, that while China has significant issues, it does not have this issue because it does not rely on hot money. No smart government should. Currency flows are far too fast, not only should there be a tax on all currency flows but every smart country should make it essentially impossible to move large amounts of money in and out of its economy quickly without taking a huge haircut. Flighty money is more trouble than it’s worth. Money that wants to come, and stay, and really invest in the economy should be welcome, but fast money should be heavily discouraged. The harm done by such money is far larger than the good. Likewise the hot money needs to be taught a lesson. Such “investors” seem to think that they deserve higher than market returns in exchange for lending money. The people lending money are expected to bear all the risk, and expected to get less than market returns (since they’re giving the surplus to the hot money). Would you borrow money under such circumstances? Of course not, which is why no one who doesn’t have a sure thing does, which is why the economy doesn’t grow, because the idle money thinks it deserves most of the returns and none of the risk, and entrepreneurs aren’t interested in that deal.

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Berner at Morgan Stanley Boosts U.S. Growth Forecast, Says Fed Will Wait

May 10, 2010

By Carlos Torres May 10 (Bloomberg) — The U.S. economy will expand more than previously estimated as jobs and rising incomes overcome any drag from the European debt crisis, according to economists at Morgan Stanley. Gross domestic product will rise 3.5 percent in the fourth quarter of 2010 compared with the same period last year, and increase 3 percent next year, according to revised forecasts issued today by the bank’s economists in New York, headed by Richard Berner and David Greenlaw . The projections were up from prior estimates of 3.2 percent and 2.5 percent respectively. The world’s largest economy is shifting “from reliance on the strength of global growth to domestic forces of output, employment and income gains that make recoveries self- sustaining,” the economists wrote in an e-mail to clients. If it weren’t for the European debt crisis, “we would likely make more significant upward revisions to our outlook.” Employers added 290,000 workers to payrolls in April, the most in four years, data from the Labor Department showed last week. Revised figures also showed the economy gained jobs in each of the first four months of the year. Stephen Roach , chairman of Morgan Stanley Asia Ltd., was less sanguine about the outlook. The fallout from the European debt crisis raises the risk of a “double dip” recession for the global economy, he said in an interview today on Bloomberg Radio with Tom Keene . “When you have a vulnerable post-crisis economic recovery and crises reverberating in the aftermath of that, you have some very serious risks to the global business cycle,” he said. Less Inflation One casualty of the mounting risk a European government defaults on its debt will be inflation, Berner and Greenlaw said, citing declining measure of price expectations . For that reason, the analysts projected Federal Reserve policy makers will now wait until early 2011 to start raising the benchmark interest rate, rather than in September as they previously estimated. “The threat of contagion from the sovereign credit crisis does pose a clear downside to our sustainable growth scenario, and with inflation low, gives the Fed ample reason to wait and make sure the risk is limited,” according to the e-mail. The yield on the 10-year Treasury note will end the year at 4.5 percent, down from a previous estimate of 5.5 percent, the economists said. The notes yielded 3.54 percent at 1:06 p.m. in New York today. The Morgan Stanley economists also predicted the spread between short- and long-term rates, known as the yield curve, will steepen this year as the former remain near zero and the latter climb. The curve will then see a “significant flattening” in 2011 as the Fed is forced to boost the target rate on overnight loans between banks to 2.5 percent by the end of the year, swamping their projected half percentage-point increase in the 10-year note yield to 5 percent. To contact the reporters on this story: Carlos Torres in Washington Ctorres2@bloomberg.net

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Felix Salmon’s Message To Investors: Get Out Of The Stock Market Right Now (VIDEO)

May 8, 2010

Financial blogger Felix Salmon has a message to investors: unless you’re a large institution, get out of the stock market right now. The lesson from the near instant crash and rebound of the Dow on Friday is that “stocks are dangerous things to own.” Salmon cautions that we are “entering an era of massive volatility. You, as an individual investor, just simply don’t have the risk appetite to be able to deal with that kind of volatility.” It’s best to get out now because you can sell now “without taking a big loss because they’ve come back a lot from their lows.” WATCH:

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Banks in Portugal, Spain, Italy, U.K. Face Contagion Threat, Moody’s Says

May 6, 2010

By John Fraher May 6 (Bloomberg) — Europe’s fiscal crisis could threaten banks in Portugal, Spain, Italy, Ireland and the U.K. as the risk of contagion grows, Moody’s Investors Service said in a report published today. “Overall, Moody’s notes that each of these countries’ banking systems faces different challenges of different magnitudes, but warns that contagion risk could dilute these differences and impose very real, common threats on all of them,” Moody’s said in the report.

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Higher Risk Currencies Slip against Yen in Asian Trading

April 16, 2010

Higher Risk Currencies Slip against Yen in Asian Trading

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