S&P 500 Breaks To New Rally Highs

That was fast. The market's losses last Friday and this Monday were supposed to be the start of the much anticipated "correction," but it was pretty much over before it started. After gains on Tuesday, Wednesday, and Thursday, and a +1.70% jump in the S&P 500 today following the 10 AM Existing Home Sales report, the US stock market has...

Should the Fed Get Into the CDS Business?

Exotic financial instruments known as credit default swaps played a central role in the crisis that brought the U.S. economy to its knees last year. Ricardo Caballero and Pablo Kurlat, two M.I.T. economists, have an audacious response:  The Federal Reserve itself should get into the credit default swap business to prevent the next crisis.

Their proposal will be debated today at the Fed’s annual Jackson Hole, Wyo., symposium by the world’s leading central bankers and economists. Harvard’s Kenneth Rogoff, former chief International Monetary Fund economist, will present a critique.

A credit default swap is an insurance policy for financial storms. A firm selling a swap — a hedge fund, an insurance company, a big bank — promises the buyer that it will be repaid if an underlying debt defaults.

Use of these instruments soared during the credit boom earlier this decade. Many investors and banks went beyond using them as insurance protection against defaults and instead used them to make bets on the ups and downs of firms and markets. Many sellers of the protection also gravely misjudged the risk they were insuring. When American International Group Inc.’s financial services unit fell deep into the hole on mortgage-related CDS promises, it collapsed and helped sink the global financial system.

The two professors say the underlying idea — selling insurance against extreme financial risk — should be in the Fed’s arsenal to manage financial crises.

“Insurance is an effective and cheap tool during a panic,” they say in their Jackson Hole paper. The Fed did provide an ad-hoc form of insurance during the crisis -– guarantees to Citigroup Inc. and Bank of America Corp. on the value of more than $400 billion in assets they held. More broadly, the Fed provided insurance to the whole financial system when officials there vowed to do “whatever it takes” to stabilize markets last fall and extended their safety net beyond banks to AIG. The professors say the bank guarantee program should be formalized in instruments called tradable insurance credits which could be triggered by banks and even hedge funds if another crisis erupts.

There are some practical problems with the idea. The Fed was able to offer these guarantees to Bank of America and Citigroup using legal authority only allowed during “unusual and exigent” emergencies. To make ‘TICs’ a formal part of its toolkit, it would likely need congressional approval. That would likely be a tough sell with Congress now populated by many restive lawmakers who complain the Fed used its power too expansively during the crisis.

There will be fertile ground for philosophical debate on the idea. The professors say the mere presence of the insurance –- which would only be used in a panic –- would reduce the likelihood of a panic ever happening. But critics might argue the presence of such insurance also induces investors to engage in even riskier behavior. Government flood insurance, by way of analogy, has the perverse effect of giving people an incentive to live in flood plains. Economists call this broad problem ‘moral hazard.’ After a year of history-making rescues, that problem is likely to be one of the livelier issues debates at Jackson Hole.

Intuit: Citing Weak Guidance, Credit Suisse Downgrades

Adding to the pressure from weaker-than-expected FY 2010 guidance, Credit Suisse analyst Bryan Keane this morning downgraded Intuit (INTU) to Neutral from Outperform. He cut his price target on the stock to $30, from $33.

“With upside looking unlikely and with INTU’s recent history of guiding too aggressively to start the [fiscal year], we are downgrading shares to Neutral,” he writes. Keane noted that for the first time the company is guiding the consumer tax business to below double-digit growth to start a fiscal year, “suggesting potential saturation and pricing pressure.”

He adds that In small business, “we are hard pressed to find upside and believe the sustainability of a strong [QuickBooks] upgrade cycle and price increases in payroll are unlikely.”

INTU today is down $2.03, or 6.6%, to $28.82.

Deaf and Dumb in America – No Peak Oil for Us!

This is a guest post by Debbie Cook.

The failure of mass media to cover the peak oil story has been well documented and discussed on the pages of The Oil Drum. As recently as May 3, Kurt Cobb presented the challenges in marketing “peak oil” to main stream media. His article and subsequent comments are worth re-reading. Many of us believed that if we could just get the stories published, we’d be on our way to addressing our energy challenges. As a testament to the strength of The Oil Drum and its community, the very next day Peak Oil Entrepreneur responded with a marketing plan for peak oil. Seemingly all that is needed is money and a willingness to “get our hands dirty with unclean business.”

Failing to attract sufficient budgets for such a campaign, many of us have plodded on in our individual ways. We’ve met with editors/reporters/publishers. We’ve had our op-ed pieces rejected. We’ve assembled media panels at conferences. Are we making a difference? If we are, how would we know?

At the 2005 ASPO-Denver conference I met John Theobald who uses the peak oil theme in teaching his communications courses at UC Davis. At one of his Oil Forum events in 2007 I was introduced to his novel way of measuring media coverage in a given market—by using the search term “peak oil” in a paper’s search engine. It was certainly an attention grabber.

This may not be a very scientific way of measuring media coverage, but it can be instructive. I sat down yesterday and spent a few hours perusing various papers around the world. The results, while not surprising to TOD readers, are disappointing:

On the international scene there seems to be more mention of peak oil on television, as well. As an example, here is a seven minute panel discussion on peak oil, that we are not likely to see in America.

I won’t try to read too much into this little exercise, but with few exceptions, US papers have clearly turned a deaf ear to this issue. The Cleveland Plain Dealer is a bit surprising given that Pat Murphy’s Community Solutions is a 3-4 hour drive from the Cleveland area. My personal disappointment is in my newspaper, the Los Angeles Times. Frankly, all of the Tribune papers turned up goose eggs; it can’t just be a coincidence. Just as with the climate debate, the international media is light years ahead of the U.S. It’s as if we aren’t grown up enough to read adult issues.

Cynicism does creep in. I can’t help but wonder whether the current mindset can be dislodged by another meme or if our peak oil reality will just live as small mammals alongside dinosaurs as postulated by Greenish back in May:

Windows was a terrible OS, but Mac didn't dislodge it. Likewise VHS and Betamax machines. Likewise, mammals existed alongside dinosaurs, stably, and the dinosaurs were in no danger of being displaced without some huge perturbation. There we have examples of virtual, mechanical, and biological cases; the rules are the rules and are remarkably similar across seemingly conceptually disparate kinds of systems.

I’ll check back…after the perturbation.

Strong Seasonal Gains in Existing Home Sales

Existing-home sales have increased for fourth month in a row, as a combination of historically low rates, first-time home buyer $8,000 tax credit, and foreclosure pummeled prices have combined to move some inventory.

The seasonal strength peaks each summer around August, so this is the penultimate high point for the year’s housing market.

Existing-home sales rose 7.2% from June, and more importantly, gained 5.0% from July 2008. The month-to month gain was aberrational, marking was the single biggest gain since 1999.


Strong Gain in Existing-Home Sales Maintains Uptrend
NAR August 21, 2009

Contract Manufacturers: Citi Upgrades FLEX, JBL, CLS

Citigroup analyst Jim Suva this morning turned “more constructive” on the contract electronics manufacturers, raising his ratings on Flextronics (FLEX) and Jabil (JBL) to Buy from Hold, lifting Celestica (CLS) to Hold from Sell and adding FLEX to the firm’s Top Picks Live list.

“In our view, industry fundamentals have bottomed, and we see revenue growth and margin expansion over the next 24 months,” he writes.

Suva reports that a survey of 160 global electronics companies find inventory days have dropped 5 days quarter-over-quarter across the supply chain. “In our view, the de-stocking process is over, and we expect revenue trends across the supply chain to begin more closely to reflect end demand,” he writes,

Suva upped his price target for FLEX to $8.50 from $5. For JBL, he goes to $13, from $8. For CLS, his new target is $10, up from $6.75.

In today’s trading:

  • FLEX is up 22 cents, or 3.9%, to $5.86.
  • JBL is up 49 cents, or 5.1%, to $10.15.
  • CLS is up 34 cents, o4 4.2%, to $8.50.

Drumbeat: August 21, 2009

“Peak Oil” Has Gone

Still not convinced about ‘Peak Oil’? Then review Figure 2 which charts the expected combined flow rates for crude oil, lease condensates and Canadian Oil Sands. As you can see from the grey shaded area, production is about to decline by roughly 5 million barrels per day by 2012.

Ironically, Figure 2 also plots the optimistic (almost laughable) forecast made by the International Energy Agency (IEA) in its “World Energy Outlook 2008”. Interestingly, in last year’s “World Energy Outlook”, the IEA stated that in order to fulfill its optimistic projections, the world had to install 64 million barrels per day of new supply by 2030 or the equivalent of six times the Saudi Arabian output! Furthermore, the IEA declared that the energy industry had to invest hundreds of billions of dollars every year to achieve this favourable outcome.

Oil hits 2009 high above $74, eyes Fed speech

LONDON (Reuters) - Oil touched a high for this year above $74 a barrel on Friday ahead of further pointers on the economic health of the United States and as the dollar flagged against a stronger euro.

By 1145 GMT (7:45 a.m. EDT), the new front month U.S. crude futures contract for October delivery was up $1.04 at $73.94 a barrel, after briefly touching $74.05, its highest of the year. London Brent crude for October was up 99 cents at $74.32.

Oil is on track for a 7.3 percent gain this week, and was last at this level on October 21, 2008 when it closed at $75.22 a barrel on its way down from a record peak above $147.

Is Iran gas ban a step toward war?

As the Barack Obama administration struggles to devise a strategy for dealing with Iran's intransigence on the uranium-enrichment issue, it appears to be gravitating toward the imposition of an international embargo on gasoline sales to that country.

Such a ban would be enacted if Iranian officials fail to come up with an acceptable negotiating plan by the time the United Nations General Assembly meets in late September - the deadline given by the White House for a constructive Iranian move.

Iran, of course, is a major oil producer, pumping out some 4.3 million barrels per day in 2008. But it is also a major petroleum consumer. Its oil industry has a significant structural weakness: its refinery capacity is too constricted to satisfy the nation's gasoline requirements. As a result, Iran must import about 40% of the refined products it requires. Government officials are attempting to reduce this dependency through rationing and other measures, but the country remains highly vulnerable to any cutoff in gasoline imports.

US Coast Guard steels for role in Arctic as exploration increases

Anchorage (Platts)- The US Coast Guard is strengthening its presence in US Arctic regions, testing equipment and operating strategies for the third summer season, to ensure safety as oil and gas exploration and commercial shipping in the area increases, the agency's commandant told a US Senate subcommittee Thursday.

Climate change and the retreating polar icepack makes the Arctic more accessible, and the Coast Guard must have emergency search and rescue and oil spill responses and be able to provide security in regions with virtually no infrastructure, Coast Guard Commandant Admiral Thad Allen told the Homeland Security subcommittee.

Russia hosts international meeting on Arctic security

An international conference on Arctic security attended by several of the region's neighbours including the United States opened in Russia on Wednesday, Russia's ministry for emergency situations said.

Canada, Denmark, Finland and Sweden are also taking part in the three-day conference in Anadyr, capital of the far eastern region of Chukotka, an unnamed ministry spokesman said.

Construction to begin on Minn. oil pipeline

MINNEAPOLIS – The U.S. State Department issued a permit Thursday allowing construction of a pipeline that will bring crude oil to the U.S. from Canada's oil sands, where environmental groups say extraction and refinement methods are contributing to global warming.

With the permit in hand, Enbridge Inc. plans to start construction work on the Alberta Clipper pipeline, which will run through Minnesota and the northeastern corner of North Dakota from Superior, Wis., to Hardisty, Alberta.

Oil Sands May Get Cleaner as Shell, Exxon Bubble Tar to Froth

(Bloomberg) -- Royal Dutch Shell Plc and Exxon Mobil Corp., the world’s biggest energy companies, are rolling out technology intended to eliminate the environmental disadvantage of Canadian oil sands.

A new process known as high-temperature froth treatment cuts carbon emissions from extracting crude from sand and mud by 10 to 15 percent, said Brad Komishke, a Shell chemist who leads 50 scientists developing new oil-sands techniques in Calgary.

Petrobank and Tristar become PetroBakken

They are showing that they can upgrade thick heavy oil (8-12 API) to light crude quality (36 API) using underground THAI/CAPRI technology. (Underground upgrading of oil). If successful and scaled up THAI/CAPRI could revolutionize the recovery and economics of heavy oil and oilsands reserves. The Canadian oilsands which is an amount of oil several times Saudi Arabian oil reserves could become cheaper and cleaner to develop and basically push off peak oil for a decade or two.

Australia gas deal to get green light 'within week'

SYDNEY (AFP) – Australia will decide "in the next week" whether to grant environmental approval to a project that will supply natural gas to China under Canberra's biggest ever trade deal, a minister said Friday.

Gazprom Seeks East Siberia Tax Break, Yakutia Permits

(Bloomberg) -- OAO Gazprom Chief Executive Officer Alexei Miller called for tax holidays for natural-gas production in eastern Siberia and urged the government to grant new licenses, after cutting output targets at a field in the region.

Projects should be tax-exempt during their “payback period,” while export duties on gas from eastern Siberia and Russia’s Far East should be reduced or canceled, Miller said today at a meeting chaired by Prime Minister Vladimir Putin. Gazprom’s Chayanda field in Yakutia will pump less gas than planned, Miller said, without giving a forecast.

Gas producers in Russia, fighting a decline in energy demand, are pushing for tax breaks as a drop in prices for the fuel curbs revenue and output from older fields dwindles.

Asia's coal seam gas projects charge ahead, China leads

SINGAPORE (Reuters) - Projects to exploit coal-bed methane, once the bane of miners, are surging in Asia, with China out front as it strives to find ways of satisfying its prodigious appetite for energy.

Industry players gathered at a conference in Singapore this week to explore opportunities in a region where CBM is in its infancy, except for Australia, whose coal seam gas industry has flourished over the past decade.

While some CBM projects in the United States have shut down, discouraged by very low gas prices, in Asia, the focus is on conversion of CBM to LNG and it will be priced using traditional Asian LNG formulas linked to oil, Tony Regan, a consultant with Tri-Zen International, said.

China coal-electricity project to increase coal output

BEIJING (Xinhua) -- China's first large coal-electricity joint project, Huaneng Yimin Coal Electricity Corp. aims to increase its annual coal output to 20 million tones this year, reported Friday's China Daily.

Militants claim Russia dam disaster

MOSCOW (AFP) – An Islamist group Friday claimed it carried out deadly attacks on the same day this week against Russia's biggest hydroelectric power station and a police station in the Caucasus that left dozens dead.

Russian investigators strongly denied the claim by Riyadus Salikhiin, a militant group with roots in Chechnya, that it had hit the power station as part of a new campaign of "economic war" in Russia.

Putin orders probe of creaking infrastructure

MOSCOW (Reuters) – Prime Minister Vladimir Putin called for a sweeping probe of Russia's creaking Soviet-era infrastructure on Thursday after a disaster at its largest hydroelectric power station.

A water surge caused aging turbines to explode at a 31-year-old Siberian dam on Monday, starting a chain reaction that sent a cascade of water into a 100-meter (yard) turbine hall and the four floors below it, and dumped 45 tons of fuel oil into the Yenisei River below.

Russian PM Putin wants electricity prices regulated

CHERYOMUSHKI, Russia, Aug 21 (Reuters) - Russian Prime Minister Vladimir Putin on Friday ordered his government to prepare a draft decree on the temporary regulation of wholesale electricity prices after a disaster at a hydro dam this week.

North Dakota: Flares burn a third of natural gas

Enough natural gas to heat every home in North Dakota through at least two brutal winters was burned off as an unmarketable byproduct in the state's oil patch in 2008, government and industry officials say.

North Dakota produced a record 62.8 million barrels of oil last year, up nearly 18 million barrels from 2007. Natural gas, a byproduct of oil production, was pegged at 86 billion cubic feet, of which 26 billion cubic feet was "flared" because of the lack of collecting systems and pipelines needed to move it to market, said Lynn Helms, director of the state Department of Mineral Resources.

"Although natural gas creates much less revenue than oil, there is still a lot of value there," Helms said. "We don't want to see it go up in smoke."

NKorea-US talks shift to clean energy

SANTA FE, New Mexico (AFP) – A North Korean delegation held talks Thursday on renewable energy in New Mexico after pushing hard in earlier discussions for one-on-one nuclear talks with the United States.

A spokesman for New Mexico state Governor Bill Richardson, who has been hosting the two North Korean diplomats at his sprawling hacienda overlooking Santa Fe, said meetings were shifting to focus on renewable energy.

Wisconsin's gas markup law gets new life

MADISON—Wisconsin's controversial minimum markup law for gasoline isn't dead yet.

The 7th U.S. Circuit Court of Appeals said Thursday that it would allow a business group to appeal a February ruling that struck down the law, which critics say needlessly drives up the price of gas.

Utility sweats over bills when air's off

The news that electricity use in the state is down is good on many fronts. People are conserving energy and reducing the output of greenhouse gas and other pollutants from power plants.

But the change is also a symptom of the downturn in the economy. And for Public Service of New Hampshire, the state's largest electric utility, it's a blow to the bottom line.

PSNH is asking the state to change the way the company is required to collect money from its ratepayers to make it less vulnerable to such dips in energy use.

The proposed change relates to what customers see on their bills as delivery charges, which address the cost of maintaining the infrastructure - such as poles and wires - used to deliver electricity to homes and businesses, as opposed to the cost of the energy itself.

Global Economy: This Ain't No Crisis

Well, I think it is entirely misleading to describe the current state of affairs as a "crisis". The term denotes a sharp, but short-lived condition leaving behind an aural after-taste that everything will be OK pretty soon. Particularly when combined with talk about massive doses of monetary and fiscal sauce being poured over the cooked goose of the economy.

Instead, we should be using a terms like Stagnation or "The Long Emergency" (note: I am NOT fond of Mr. Kunstler's tirades and expletive-laden tent-revival style. But this book is not half bad).

Getting Real About the High Price of Cheap Food

But we don't have the luxury of philosophizing about food. With the exhaustion of the soil, the impact of global warming and the inevitably rising price of oil — which will affect everything from fertilizer to supermarket electricity bills — our industrial style of food production will end sooner or later. As the developing world grows richer, hundreds of millions of people will want to shift to the same calorie-heavy, protein-rich diet that has made Americans so unhealthy — demand for meat and poultry worldwide is set to rise 25% by 2015 — but the earth can no longer deliver. Unless Americans radically rethink the way they grow and consume food, they face a future of eroded farmland, hollowed-out countryside, scarier germs, higher health costs — and bland taste. Sustainable food has an élitist reputation, but each of us depends on the soil, animals and plants — and as every farmer knows, if you don't take care of your land, it can't take care of you.

Tim Halbur on sprawl, propaganda, and Obama’s approach to urban issues

The picture of cities being dirty, violent, and poor is where I think the propaganda aspect of the films kicks in. Cities were certainly dirty with pollution through the period of the 1930s-‘60s, which these films cover. And health issues were a reasonable concern with crowded conditions in big cities back in the early 20th century. But I believe these films were edited to make things look much worse, and again, the solutions they proposed were well-intentioned, but wrong. The issue of cities being “clean” led to the creation of those depressing housing projects with empty stretches of grass around them, where residents would supposedly enjoy being surrounded by a healthier atmosphere. Today we know better.

As to being able to enjoy the advantages of a large city without paying the penalties, I think in some ways yes: we’ve learned more about how to make downtown urban areas work well. But I also believe that there are always tradeoffs. As David Sucher, who wrote a book called City Comforts, put it, people today want an “urban village.” And those terms are in many ways contradictory. Urbanity means accepting some chaos, anonymity and proximity to strangers. Village life is about stability and community. You can work to bring aspects of both to city life, but city living is really a choice to embrace vibrancy, which includes a little chaos and grit.

Are You Prepared for Transition Time?

Our industry is in the midst of some wrenching changes, but a much deeper transition is just over the horizon.

You could be forgiven for thinking the economic crash was bad enough. The next big shift will affect the way we grow our food, manage our buildings, and transport ourselves and the products we use every day. We’ve reached the end of cheap oil, and the effects were captured in this short video, aired at MPI’s 2009 World Education Conference by panelists Elizabeth Valestuk Henderson and Fiona Pelham.

Cynicism springs eternal, offers little but wasted time

Like Al Gore, Gwynne Dyer and other dour prognosticators, McKeag brings up the oil crisis, that we’ve reached “peak oil” and have about 30 years left before everything — including food production — grinds to a halt.

What they all fail to consider is that long before oil runs out, it will become so expensive that even the most outlandish hippie pipe dream of alternative energy will look good, and just watch the money roll in if you’re in solar panels.

As galling as it could be for some doom-mongers, the free market may solve the oil problem.

Moving on, why do the modern Nostradamuses think that because climate change is caused by humans, it can’t be solved by humans?

They’re not being creative enough.

The next big investment bubble - obscure metals

I notice in recent weeks that one entire sector has gone ballistic – lithium. Just about every company that is exploring for this reactive silvery-white metal has seen its stock price double. Why?

2nd lead poisoning case hits China, 1,300 sick

BEIJING – China has detained two factory officials after 1,300 children were poisoned by pollution from a manganese processing plant, days after emissions from a lead smelter in another province sickened hundreds.

Both cases have sparked unrest and come amid growing anger in China over public safety scandals in which children have been the main victims. Tainted infant formula milk and the mass collapse of schools in a huge earthquake last year have also provoked widespread dissent.

Election likely to reset Japan climate target

TOKYO (AFP) – When Japan elects its next government this month, climate change campaigners will be watching closely to see which party takes the levers of power in the world's second-largest economy.

Seattle mayor fighting to hold onto his job

SEATTLE – Seattle Mayor Greg Nickels has been hailed as a visionary and a leader on environmental issues, helping persuade nearly 1,000 mayors around the country to abide by the standards of the Kyoto Protocol on global warming.

But an environmental issue of a more basic sort — the city's inability to clear streets during paralyzing snowstorms last winter — might have set the stage for his political undoing.

B.C. must curb new gas plant emissions

A proposed $500-million natural-gas-processing plant in northeast British Columbia will become the province's single-largest source of carbon dioxide unless the government tightens the rules for greenhouse gas emissions, the Pembina Institute said yesterday.

Agency warns current climate proposals won't work

BRUSSELS – Reversing global warming will cost up to $185 billion (euro130 billion) a year before 2020 and require more action by world governments than currently pledged, an international environmental analysis group said Thursday.

ClimateWorks Foundation said U.N. climate change talks would fail to reach a meaningful agreement with the proposals made so far, and that a new approach was needed.

"Climate change is a solvable problem, and the solution presents a major opportunity in terms of both economic growth and global development," said a report by the foundation's European branch. But it warned that "current commitments and actions are insufficient" to ensure deep cuts by 2050 in carbon dioxide emissions.

Poor Farmers Biggest Losers From Warming Planet, Study Says

(Bloomberg) -- Farmers in sub-Saharan Africa and similarly poor nations have the most to lose as the Earth gets warmer, highlighting the need to supply them with drought- resistant seeds and more effective water irrigation.

A study by Danish professor Bjoern Lomborg showed that faltering crops may cut as much as 4 percent of gross domestic production in southern Asia by 2050. It also said climate change will impact other sectors including health and energy less.

A net-benefit greenhouse gas plan

In the beginning, the science of climate change was emphatically apocalyptic, with its images of starving multitudes, global plagues and civilizations lost, like Atlantis, to the relentless rising of seas and oceans. Although the beginning wasn't all that long ago (roughly dated to the 1980s), the scientific consensus is already more muted.

Now, increasingly, science advises people to turn off the alarms. The question arises: Why are so many people still going berserk? Richard S.J. Tol, a distinguished climate scientist, remarked on this phenomenon in a paper published last week. "Projections of ... future climate change have become less severe over time," he observes, "even though public discourse has become shriller."

Bernanke: Economy on Cusp of Recovery

Full text of Fed Chairman Ben Bernanke’s speech to the Federal Reserve Bank of Kansas City’s Annual Economic Symposium in Jackson Hole, Wyo.

Reflections on a Year of Crisis

By the standards of recent decades, the economic environment at the time of this symposium one year ago was quite challenging. A year after the onset of the current crisis in August 2007, financial markets remained stressed, the economy was slowing, and inflation–driven by a global commodity boom–had risen significantly. What we could not fully appreciate when we last gathered here was that the economic and policy environment was about to become vastly more difficult. In the weeks that followed, several systemically critical financial institutions would either fail or come close to failure, activity in some key financial markets would virtually cease, and the global economy would enter a deep recession. My remarks this morning will focus on the extraordinary financial and economic events of the past year, as well as on the policy responses both in the United States and abroad.

One very clear lesson of the past year–no surprise, of course, to any student of economic history, but worth noting nonetheless–is that a full-blown financial crisis can exact an enormous toll in both human and economic terms. A second lesson–once again, familiar to economic historians–is that financial disruptions do not respect borders. The crisis has been global, with no major country having been immune.

History is full of examples in which the policy responses to financial crises have been slow and inadequate, often resulting ultimately in greater economic damage and increased fiscal costs. In this episode, by contrast, policy makers in the United States and around the globe responded with speed and force to arrest a rapidly deteriorating and dangerous situation. Looking forward, we must urgently address structural weaknesses in the financial system, in particular in the regulatory framework, to ensure that the enormous costs of the past two years will not be borne again.

September-October 2008: The Crisis Intensifies

When we met last year, financial markets and the economy were continuing to suffer the effects of the ongoing crisis. We know now that the National Bureau of Economic Research has determined December 2007 as the beginning of the recession. The U.S. unemployment rate had risen to 5-3/4 percent by July, about 1 percentage point above its level at the beginning of the crisis, and household spending was weakening. Ongoing declines in residential construction and house prices and rising mortgage defaults and foreclosures continued to weigh on the U.S. economy, and forecasts of prospective credit losses at financial institutions both here and abroad continued to increase. Indeed, one of the nation’s largest thrift institutions, IndyMac, had recently collapsed under the weight of distressed mortgages, and investors continued to harbor doubts about the condition of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, despite the approval by the Congress of open-ended support for the two firms.

Notwithstanding these significant concerns, however, there was little to suggest that market participants saw the financial situation as about to take a sharp turn for the worse. For example, although indicators of default risk such as interest rate spreads and quotes on credit default swaps remained well above historical norms, most such measures had declined from earlier peaks, in some cases by substantial amounts. And in early September, when the target for the federal funds rate was 2 percent, investors appeared to see little chance that the federal funds rate would be below 1-3/4 percent six months later. That is, as of this time last year, market participants evidently believed it improbable that significant additional monetary policy stimulus would be needed in the United States.

Nevertheless, shortly after our last convocation, the financial crisis intensified dramatically. Despite the steps that had been taken to support Fannie Mae and Freddie Mac, their condition continued to worsen. In early September, the companies’ regulator placed both into conservatorship, and the Treasury used its recently enacted authority to provide the firms with massive financial support.

Shortly thereafter, several additional large U.S. financial firms also came under heavy pressure from creditors, counterparties, and customers. The Federal Reserve has consistently maintained the view that the disorderly failure of one or more systemically important institutions in the context of a broader financial crisis could have extremely adverse consequences for both the financial system and the economy. We have therefore spared no effort, within our legal authorities and in appropriate cooperation with other agencies, to avert such a failure. The case of the investment bank Lehman Brothers proved exceptionally difficult, however. Concerted government attempts to find a buyer for the company or to develop an industry solution proved unavailing, and the company’s available collateral fell well short of the amount needed to secure a Federal Reserve loan of sufficient size to meet its funding needs. As the Federal Reserve cannot make an unsecured loan, and as the government as a whole lacked appropriate resolution authority or the ability to inject capital, the firm’s failure was, unfortunately, unavoidable. The Federal Reserve and the Treasury were compelled to focus instead on mitigating the fallout from the failure, for example, by taking measures to stabilize the triparty repurchase (repo) market.

In contrast, in the case of the insurance company American International Group (AIG), the Federal Reserve judged that the company’s financial and business assets were adequate to secure an $85 billion line of credit, enough to avert its imminent failure. Because AIG was counterparty to many of the world’s largest financial firms, a significant borrower in the commercial paper market and other public debt markets, and a provider of insurance products to tens of millions of customers, its abrupt collapse likely would have intensified the crisis substantially further, at a time when the U.S. authorities had not yet obtained the necessary fiscal resources to deal with a massive systemic event.

The failure of Lehman Brothers and the near-failure of AIG were dramatic but hardly isolated events. Many prominent firms struggled to survive as confidence plummeted. The investment bank Merrill Lynch, under pressure in the wake of Lehman’s failure, agreed to be acquired by Bank of America; the major thrift institution Washington Mutual was resolved by the Federal Deposit Insurance Corporation (FDIC) in an assisted transaction; and the large commercial bank Wachovia, after experiencing severe liquidity outflows, agreed to be sold. The two largest remaining free-standing investment banks, Morgan Stanley and Goldman Sachs, were stabilized when the Federal Reserve approved, on an emergency basis, their applications to become bank holding companies.

Nor were the extraordinary pressures on financial firms during September and early October confined to the United States: For example, on September 18, the U.K. mortgage lender HBOS, with assets of more than $1 trillion, was forced to merge with Lloyds TSB. On September 29, the governments of Belgium, Luxembourg, and the Netherlands effectively nationalized Fortis, a banking and insurance firm that had assets of around $1 trillion. The same day, German authorities provided assistance to Hypo Real Estate, a large commercial real estate lender, and the British government nationalized another mortgage lender, Bradford and Bingley. On the next day, September 30, the governments of Belgium, France, and Luxembourg injected capital into Dexia, a bank with assets of more than $700 billion, and the Irish government guaranteed the deposits and most other liabilities of six large Irish financial institutions. Soon thereafter, the Icelandic government, lacking the resources to rescue the three largest banks in that country, put them into receivership and requested assistance from the International Monetary Fund (IMF) and from other Nordic governments. In mid-October, the Swiss government announced a rescue package of capital and asset guarantees for UBS, one of the world’s largest banks.1 The growing pressures were not limited to banks with significant exposure to U.S. or U.K real estate or to securitized assets. For example, unsubstantiated rumors circulated in late September that some large Swedish banks were having trouble rolling over wholesale deposits, and on October 13 the Swedish government announced measures to guarantee bank debt and to inject capital into banks.2

The rapidly worsening crisis soon spread beyond financial institutions into the money and capital markets more generally. As a result of losses on Lehman’s commercial paper, a prominent money market mutual fund announced on September 16 that it had “broken the buck”–that is, its net asset value had fallen below $1 per share. Over the subsequent several weeks, investors withdrew more than $400 billion from so-called prime money funds.3 Conditions in short-term funding markets, including the interbank market and the commercial paper market, deteriorated sharply. Equity prices fell precipitously, and credit risk spreads jumped. The crisis also began to affect countries that had thus far escaped its worst effects. Notably, financial markets in emerging market economies were whipsawed as a flight from risk led capital inflows to those countries to swing abruptly to outflows.

The Policy Response

Authorities in the United States and around the globe moved quickly to respond to this new phase of the crisis, although the details differed according to the character of financial systems. The financial system of the United States gives a much greater role to financial markets and to nonbank financial institutions than is the case in most other nations, which rely primarily on banks.4 Thus, in the United States, a wider variety of policy measures was needed than in some other nations.

In the United States, the Federal Reserve established new liquidity facilities with the goal of restoring basic functioning in various critical markets. Notably, on September 19, the Fed announced the creation of a facility aimed at stabilizing money market mutual funds, and the Treasury unveiled a temporary insurance program for those funds. On October 7, the Fed announced the creation of a backstop commercial paper facility, which stood ready to lend against highly rated commercial paper for a term of three months.5 Together, these steps helped stem the massive outflows from the money market mutual funds and stabilize the commercial paper market.

During this period, foreign commercial banks were a source of heavy demand for U.S. dollar funding, thereby putting additional strain on global bank funding markets, including U.S. markets, and further squeezing credit availability in the United States. To address this problem, the Federal Reserve expanded the temporary swap lines that had been established earlier with the European Central Bank (ECB) and the Swiss National Bank, and established new temporary swap lines with seven other central banks in September and five more in late October, including four in emerging market economies.6 In further coordinated action, on October 8, the Federal Reserve and five other major central banks simultaneously cut their policy rates by 50 basis points.

The failure of Lehman Brothers demonstrated that liquidity provision by the Federal Reserve would not be sufficient to stop the crisis; substantial fiscal resources were necessary. On October 3, on the recommendation of the Administration and with the strong support of the Federal Reserve, the Congress approved the creation of the Troubled Asset Relief Program, or TARP, with a maximum authorization of $700 billion to support the stabilization of the U.S. financial system.

Markets remained highly volatile and pressure on financial institutions intense through the first weeks of October. On October 10, in what would prove to be a watershed in the global policy response, the Group of Seven (G-7) finance ministers and central bank governors, meeting in Washington, committed in a joint statement to work together to stabilize the global financial system. In particular, they agreed to prevent the failure of systemically important financial institutions; to ensure that financial institutions had adequate access to funding and capital, including public capital if necessary; and to put in place deposit insurance and other guarantees to restore the confidence of depositors.7 In the following days, many countries around the world announced comprehensive rescue plans for their banking systems that built on the G-7 principles. To stabilize funding, during October more than 20 countries expanded their deposit insurance programs, and many also guaranteed nondeposit liabilities of banks. In addition, amid mounting concerns about the solvency of the global banking system, by the end of October more than a dozen countries had announced plans to inject public capital into banks, and several announced plans to purchase or guarantee bank assets. The comprehensive U.S. response, announced on October 14, included capital injections into both large and small banks by the Treasury; a program which allowed banks and bank holding companies, for a fee, to issue FDIC-guaranteed senior debt; the extension of deposit insurance to all noninterest-bearing transactions deposits, of any size; and the Federal Reserve’s continued commitment to provide liquidity as necessary to stabilize key financial institutions and markets.8

This strong and unprecedented international policy response proved broadly effective. Critically, it averted the imminent collapse of the global financial system, an outcome that seemed all too possible to the finance ministers and central bankers that gathered in Washington on October 10. However, although the intensity of the crisis moderated and the risk of systemic collapse declined in the wake of the policy response, financial conditions remained highly stressed. For example, although short-term funding spreads in global markets began to turn down in October, they remained elevated into this year. And, although generalized pressures on financial institutions subsided somewhat, government actions to prevent the disorderly failures of individual, systemically significant institutions continued to be necessary. In the United States, support packages were announced for Citigroup in November and Bank of America in January. Broadly similar support packages were also announced for some large European institutions, including firms in the United Kingdom and the Netherlands.9

Although concerted policy actions avoided much worse outcomes, the financial shocks of September and October nevertheless severely damaged the global economy–starkly illustrating the potential effects of financial stress on real economic activity. In the fourth quarter of 2008 and the first quarter of this year, global economic activity recorded its weakest performance in decades. In the United States, real GDP plummeted at nearly a 6 percent average annual pace over those two quarters–an even sharper decline than had occurred in the 1981-82 recession. Economic activity contracted even more precipitously in many foreign economies, with real GDP dropping at double-digit annual rates in some cases. The crisis affected economic activity not only by pushing down asset prices and tightening credit conditions, but also by shattering household and business confidence around the world.

In response to these developments, the Federal Reserve expended the remaining ammunition in the traditional arsenal of monetary policy, bringing the federal funds rate down, in steps, to a target range of 0 to 25 basis points by mid-December of last year. It also took several measures to further supplement its traditional arsenal. In particular, on November 25, the Fed announced that it would purchase up to $100 billion of debt issued by the housing-related GSEs and up to $500 billion of agency-guaranteed mortgage-backed securities, programs that were expanded substantially and augmented by a program of purchases of Treasury securities in March.10 The goal of these purchases was to provide additional support to private credit markets, particularly the mortgage market. Also on November 25, the Fed announced the creation of the Term Asset-Backed Securities Loan Facility (TALF). This facility aims to improve the availability and affordability of credit for households and small businesses and to help facilitate the financing and refinancing of commercial real estate properties. The TALF has shown early success in reducing risk spreads and stimulating new securitization activity for assets included in the program.

Foreign central banks also cut policy rates to very low levels and implemented unconventional monetary measures. For example, the Bank of Japan began purchasing commercial paper in December and corporate bonds in January. In March, the Bank of England announced that it would purchase government securities, commercial paper, and corporate bonds, and the Swiss National Bank announced that it would purchase corporate bonds and foreign currency. For its part, the ECB injected more than €400 billion of one-year funds in a single auction in late June. In July, the ECB began purchasing covered bonds, which are bonds that are issued by financial institutions and guaranteed by specific asset pools. Actions by central banks augmented large fiscal stimulus packages in the United States, China, and a number of other countries.

On February 10, Treasury Secretary Geithner and the heads of the federal banking agencies unveiled the outlines of a new strategy for ensuring that banking institutions could continue to provide credit to households and businesses during the financial crisis. A central component of that strategy was the exercise that came to be known as the bank stress test.11 Under this initiative, the banking regulatory agencies undertook a forward-looking, simultaneous evaluation of the capital positions of 19 of the largest bank holding companies in the United States, with the Treasury committing to provide public capital as needed. The goal of this supervisory assessment was to ensure that the equity capital held by these firms was sufficient–in both quantity and quality–to allow those institutions to withstand a worse-than-expected macroeconomic environment over the subsequent two years and yet remain healthy and capable of lending to creditworthy borrowers. This exercise, unprecedented in scale and scope, was led by the Federal Reserve in cooperation with the Office of the Comptroller of the Currency and the FDIC. Importantly, the agencies’ report made public considerable information on the projected losses and revenues of the 19 firms, allowing private analysts to judge for themselves the credibility of the exercise. Financial market participants responded favorably to the announcement of the results, and many of the tested banks were subsequently able to tap public capital markets.

Overall, the policy actions implemented in recent months have helped stabilize a number of key financial markets, both in the United States and abroad. Short-term funding markets are functioning more normally, corporate bond issuance has been strong, and activity in some previously moribund securitization markets has picked up. Stock prices have partially recovered, and U.S. mortgage rates have declined markedly since last fall. Critically, fears of financial collapse have receded substantially. After contracting sharply over the past year, economic activity appears to be leveling out, both in the United States and abroad, and the prospects for a return to growth in the near term appear good. Notwithstanding this noteworthy progress, critical challenges remain: Strains persist in many financial markets across the globe, financial institutions face significant additional losses, and many businesses and households continue to experience considerable difficulty gaining access to credit. Because of these and other factors, the economic recovery is likely to be relatively slow at first, with unemployment declining only gradually from high levels.

Interpreting the Crisis: Elements of a Classic Panic

How should we interpret the extraordinary events of the past year, particularly the sharp intensification of the financial crisis in September and October? Certainly, fundamentals played a critical role in triggering those events. As I noted earlier, the economy was already in recession, and it had weakened further over the summer. The continuing dramatic decline in house prices and rising rates of foreclosure raised serious concerns about the values of mortgage-related assets, and thus about large potential losses at financial institutions. More broadly, investors remained distrustful of virtually all forms of private credit, especially structured credit products and other complex or opaque instruments.

At the same time, however, the events of September and October also exhibited some features of a classic panic, of the type described by Bagehot and many others.12 A panic is a generalized run by providers of short-term funding to a set of financial institutions, possibly resulting in the failure of one or more of those institutions. The historically most familiar type of panic, which involves runs on banks by retail depositors, has been made largely obsolete by deposit insurance or guarantees and the associated government supervision of banks.13 But a panic is possible in any situation in which longer-term, illiquid assets are financed by short-term, liquid liabilities, and in which suppliers of short-term funding either lose confidence in the borrower or become worried that other short-term lenders may lose confidence.14,15 Although, in a certain sense, a panic may be collectively irrational, it may be entirely rational at the individual level, as each market participant has a strong incentive to be among the first to the exit.

Panics arose in multiple contexts last year. For example, many financial institutions, notably including the independent investment banks, financed a portion of their assets through short-term repo agreements. In repo agreements, the asset being financed serves as collateral for the loan, and the maximum amount of the loan is the current assessed value of the collateral less a haircut. In a crisis, haircuts typically rise as short-term lenders attempt to protect themselves from possible declines in asset prices. But this individually rational behavior can set off a run-like dynamic: As high haircuts make financing portfolios more difficult, some borrowers may have no option but to sell assets into illiquid markets. These forced sales drive down asset prices, increase volatility, and weaken the financial positions of all holders of similar assets, which in turn increases the risks borne by repo lenders and thus the haircuts they demand.16 This unstable dynamic was apparent around the time of the near-failure of Bear Stearns in March 2008, and haircuts rose particularly sharply during the worsening of the crisis in mid-September.17 As we saw last fall, when a vicious funding spiral of this sort is at work, falling asset prices and the collapse of lender confidence may create financial contagion, even between firms without significant counterparty relationships. In such an environment, the line between insolvency and illiquidity may be quite blurry.

Panic-like phenomena occurred in other contexts as well. Structured investment vehicles and other asset-backed programs that relied heavily on the commercial paper market began to have difficulty rolling over their short-term funding very early in the crisis, forcing them to look to bank sponsors for liquidity or to sell assets.18 Following the Lehman collapse, panic gripped the money market mutual funds and the commercial paper market, as I have discussed. More generally, during the crisis runs of uninsured creditors have created severe funding problems for a number of financial firms. In some cases, runs by creditors were augmented by other types of “runs”–for example, by prime brokerage customers of investment banks concerned about the funds they held in margin accounts. Overall, the role played by panic helps to explain the remarkably sharp and sudden intensification of the financial crisis last fall, its rapid global spread, and the fact that the abrupt deterioration in financial conditions was largely unforecasted by standard market indicators.

The view that the financial crisis had elements of a classic panic, particularly during its most intense phases, has helped to motivate a number of the Federal Reserve’s policy actions.19 Bagehot instructed central banks–the only institutions that have the power to increase the aggregate liquidity in the system–to respond to panics by lending freely against sound collateral.20 Following that advice, from the beginning of the crisis the Fed (like other central banks) has provided large amounts of short-term liquidity to financial institutions. As I have discussed, it also provided backstop liquidity support for money market mutual funds and the commercial paper market and added significant liquidity to the system through purchases of longer-term securities. To be sure, the provision of liquidity alone can by no means solve the problems of credit risk and credit losses; but it can reduce liquidity premiums, help restore the confidence of investors, and thus promote stability. It is noteworthy that the use of Fed liquidity facilities has declined sharply since the beginning of the year–a clear market signal that liquidity pressures are easing and market conditions are normalizing.

What does this perspective on the crisis imply for future policies and regulatory reforms? We have seen during the past two years that the complex interrelationships among credit, market, and funding risks of key players in financial markets can have far-reaching implications, particularly during a general crisis of confidence. In particular, the experience has underscored that liquidity risk management is as essential as capital adequacy and credit and market risk management, particularly during times of intense financial stress. Both the Basel Committee on Banking Supervision and the U.S. bank regulatory agencies have recently issued guidelines for strengthening liquidity risk management at financial institutions. Among other objectives, liquidity guidelines must take into account the risks that inadequate liquidity planning by major financial firms pose for the broader financial system, and they must ensure that these firms do not become excessively reliant on liquidity support from the central bank.

But liquidity risk management at the level of the firm, no matter how carefully done, can never fully protect against systemic events. In a sufficiently severe panic, funding problems will almost certainly arise and are likely to spread in unexpected ways. Only central banks are well positioned to offset the ensuing sharp decline in liquidity and credit provision by the private sector. They must be prepared to do so.

The role of liquidity in systemic events provides yet another reason why, in the future, a more systemwide or macroprudential approach to regulation is needed.21 The hallmark of a macroprudential approach is its emphasis on the interdependencies among firms and markets that have the potential to undermine the stability of the financial system, including the linkages that arise through short-term funding markets and other counterparty relationships, such as over-the-counter derivatives contracts. A comprehensive regulatory approach must examine those interdependencies as well as the financial conditions of individual firms in isolation.


Since we last met here, the world has been through the most severe financial crisis since the Great Depression. The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge.

As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal, and financial policies around the world have been aggressive and complementary. Without these speedy and forceful actions, last October’s panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted.

Although we have avoided the worst, difficult challenges still lie ahead. We must work together to build on the gains already made to secure a sustained economic recovery, as well as to build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years. I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress toward both those objectives.

Source: The Federal Reserve

Cash For Clunkers’ success actually proves what a horrible program it was

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With Cash For Clunkers set to end on Monday because all the money has been spent, pundits and politicians are applauding the program as a great success.

Transportation Secretary Ray LaHood said the program has been "a lifeline to the automobile industry, jump starting a major sector of the economy and putting people back to work." He added that his department was "working toward an orderly wind down of this very popular program."

Continue reading Cash For Clunkers' success actually proves what a horrible program it was

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Leading Ladies

Yesterday Forbes released its annual “Most Powerful Women” list, which is different from its lists of highest paid CEOs, richest billionaires, and highest-paid celebrities. Those are all about money. But since even women with great responsibilities and influence are still paid less than men, we get our own get a special “Power” list. And by special I mean consolation.

The list is determined, according to Forbes, not by “celebrity or popularity,” but by influence. It should be determined by money, just like the other lists, but it’s not a perfect world. Sadly, the world of finance has lost some of its most “Most Powerful Women” over the past few years-aside from FDIC Chairman Sheila Bair and FDIC Chairman Mary Shapiro, the list is dominated by CEOs and political figures.

Only one private equity pro earned a spot on Forbes’ Most Powerful Women list. Dominique Senequier, Chief executive of France’s AXA Private Equity, was ranked number 50.

Notably, Sheila Bair held steady this year at number two, but beyond that, several of the highest ranking women in finance have left their positions or been ousted. See them below:

5 Ho Ching Chief executive, Temasek
20 Chanda Kochhar Chief executive, ICICI Bank
33 Marina Berlusconi Chairman, Fininvest Group
58 Ellen Alemany Chief executive, RBS Americas and Citizens Financial Group
72 Terri Dial Chief executive, North America Consumer Banking, Citigroup
88 Sallie Krawcheck Chief executive global wealth management, Bank of America
99 Heidi Miller Chief executive Treasury & Securities Services, JPMorgan Chase
94 Efrat Peled Chief executive, Arison Investments
96 Charlene Begley Chief executive, GE Enterprise Solutions
100 Mary Erdoes Chairman, JPMorgan Global Wealth Management

See entire list.


Pershing 90

Light posting this weekend as I will be talking the big boat out for a cruise.


That 4300 gallon tank means you may be dropping $200k per fillup, but you probably don’t have to do it every week.

Cruise Missile: Pershing 90
Diane M. Byrne

Apple: Weisel Ups Estimates After Management Mtgs

Thomas Weisel analyst Doug Reid this morning upped his estimates on Apple (AAPL) after meetings with management yesterday in Cupertino.

“We come away from the meetings with increased confidence in our positive view of AAPL’s current competitive position and long-term growth outlook,” he writes in a research note.

Reid isn’t changing revenue estimates, but he is increasing his EPS estimates for fiscal 2009 and 2010 to reflect higher assumed gross margins. “Following our meetings we expect positive benefit from deferred iPhone gross margin to more than offset potential headwinds from rising component costs or likely lower ASPs on future, lower-cost MacBooks.”

Reid says management indicated “a clear preference for movement further away from exclusive carrier agreements for iPhone.” He thinks the company is “making every effort possible to road map toward an agreement with Verizon in the U.S.” While management would not comment, Reid writes that he expects a calendar second half deal with China Unicom (CHU).

On the Mac business, Reid reports that “management acknowledged that the low-end of the MacBook line appears tired.” He thinks the company will launch a MacBook in the $700-$800 range. He also believes that Apple is “less likely to pursue a tablet than many investors expect.”

On the company’s growing cash position, he thinks the company will launch a stock repuchase program sometime in the next four quarters.

For the September 2009 fiscal year, Reid now sees EPS of $5.83 a share, up from $5.77. For FY 2010, he goes to $6.51, from $6.06. He rates the stock Overweight, with a $180 price target.

AAPL today is up 81 cents, or 0.5%, to $167.14.

Say Hello at the San Francisco MoneyShow Tomorrow

Since I started this blogging adventure in early 2007, I have had the pleasure of developing relationships with quite a few people across the globe. So far I have had an opportunity to meet only a few of them in person, but that will start to change in the coming year, as I expect to attend a number of industry functions. Tomorrow I will be at the local San Francisco MoneyShow at the San Francisco Marriott and will be at the greenfaucet booth (#616) from noon until 1:30 p.m. If you are at the event and want to stop by and say hello, I am looking forward to putting some faces behind the names. If you are on the fence about coming, registration is free (register here) and between the speakers and the exhibitors, there is sure to be something in the investment world that is of interest to you.

Of course, if you can’t make it to San Francisco, feel free to drop me a note any time. While not always successful, I do my best to stay current with email and comments on the blog.

Deals of the Day: Selling AIG — There’s a New Sheriff in Town

Deals of the Day gathers all the biggest news of the morning related to mergers and acquisitions, bankruptcies, financing and private equity. Deal Journal’s homepage is http://blogs.wsj.com/deals. You can see real-time updates of our posts and our favorite deal-related articles on other Web sites through our Twitter feed at http://twitter.com/wsjdealjournal.

Mergers & Acquisitions

Selling AIG: The insurers new head Robert Benmosche halted the auction of an investment advisory unit and told employees he’ll rebuild businesses and won’t be rushed by the U.S. into selling assets at unfavorable prices. [Bloomberg]

Those lovable losers: The sale of the Chicago Cubs to the Ricketts family is “imminent.” [Chicago Tribune]

Oracle: U.S. antitrust regulators have cleared its $7.4 billion deal to buy Sun Microsystems. EU regulators are still looking at the deal. [WSJ]

Citigroup: The bank’s Japanese private equity arm has restarted efforts to sell the country’s largest call center company, with the first round of bidding due to close Sept. 1. [WSJ]

Just make a decision: GM directors will meet to discuss bids for its Opel division. [Bloomberg]

Stella D’Oro Biscuit: Nonni’s Food Co. is in talks to buy the operation, which is owned by Greenwich, Conn.-based Brynwood Partners, with the hopes the cookie company would complement Nonni’s Old London Foods. [NY Post]

Financial Institutions

The next stage: The U.S. banking crisis is entering a new stage, as lenders succumb to large amounts of toxic loans and securities they bought from other banks. [WSJ]

J.P. Morgan’s Auction Conundrum: No word yet on when the Treasury will auction warrants it holds in J.P. Morgan Chase. But we have an idea who one bidder might be: J.P. Morgan. [WSJ]

UBS: Switzerland pocketed $1.13 billion as it sold its UBS stake, making it Europe’s first government to declare a major crisis-hit bank fit enough for state ownership to be withdrawn. [WSJ]

Morgan Stanley: The firm will fill up to 400 trading and sales positions as it tries to gain a share of the profits rivals have recently enjoyed. [WSJ]

CIT Group: The lenders bondholders stand to make a lot of money. [The Street]

Bankruptcy & Restructuring

Tribune: Its ownership is likely to change as the company emerges from bankruptcy protection, a shift that could put the company in the hands of its lenders. [WSJ]

The Philadelphia Inquirer: The newspaper company filed a plan to sell itself to a group of investors led by a real-estate executive who was a key investor in the company’s 2006 buyout. [WSJ]

Reader’s Digest: The publisher is set to file for bankruptcy as early as next week after reaching a deal to turn the company over to senior lenders. [WSJ]


Dollar General: The discount retailer owned by KKR, registered Thursday to sell stock through an initial public offering, the first in what is expected to be a wave of buyout-owned companies trying to sell shares into a rallying stock market. [WSJ]

Macquarie: Macquarie Infrastructure Group said it may split into two listed entities and will also consider separating from its manager, Macquarie Group Ltd., in an effort to make the group more palatable to investors and boost security-holder value. [WSJ]

PE and Banks: The Federal Deposit Insurance Corp. is expected next week to soften its proposed restrictions on private-equity firms buying collapsed lenders. [WSJ]

The next Buffett? Is the Sears cupboard bare? The retailer’s shares have almost doubled since March, but the enthusiasm has faded. [WSJ]

College try: The University of Chicago last year sold $600 million in stock after a battle that split the endowment’s bosses. [WSJ]

Capital Markets

Las Vegas Sands: The casino operator filed an application for a possible listing on the Hong Kong Stock Exchange, sending its shares up 3.5%. [Reuters]

Solar: Jefferies Turns Cautious; Downgrades Many Stocks

Jefferies & Co. analyst Paul Clegg this morning turned cautious on the solar sector, slicing his ratings on many companies in the sector.

A key issue, Clegg writes in a research note, is that the downward spiral in pricing is likely to continue. “While accompanied by reduced production costs, we believe this could lead to weaker-than-expected 2010 ests and concerns about value destruction in the sector,” he writes. ” In our view, liberal Chinese lending practices encourage over-production and capacity expansions in a market that needs rationalization.”

Clegg concedes that falling prices bring the market closer to grid parity, but he adds that the slide could also trigger political backlash to government incentives, as European PV makers get hurt by Chinese competition with the help of European tax-payer and rate-payer money. While end markets are showing signs of improvement, he adds, “they are slow and do not appear ready to support the levels of volume production being planned for 2010.”

Clegg adds that even if falling silicon prices help solar companies maintain unit gross margins, “lower ASPs make them more dependent on chasing volumes to support the marketing and distribution networks necessary to drive growth.”

The Jefferies analyst sees ASPs down 20%-25% by Q4 from Q2, with another 15%-20% drop by Q4 2010.

Here’s a rundown on his downgrades today:

  • Ascent Solar (ASTI):  To Underperform from Hold.
  • China Sunergy (CSUN): To Underperform from Hold.
  • Energy Conversion Devices (ENER): To Underperform from Hold.
  • Evergreen Solar (ESLR): To Underperform from Buy.
  • First Solar (FSLR): To Hold from Buy.
  • Solarfun (SOLF): To Underperform from Hold.
  • SunPower (SPWRA): To Hold from Buy.
  • Suntech (STP): To Underperform from Hold.
  • MEMC Electronic Materials (WFR): Maintains Buy rating.

Housing Market: Strength vs Stabilization

Existing Home Sales scheduled to be released at 10am; look for the usual seasonal strength, and improving but weak year over year numbers.

In light of this data, the WSJ’s Ahead of the Tape column looks at the Housing Market. Their conclusion? Do not confuse the end of the tailspin for actual strength.

“A survey conducted in June of 1,500 real-estate agents sponsored by the trade publication Inside Mortgage Finance found that 36% of all sales involve “nondistressed” properties. Of the nondistressed sales, only 31% were what the survey described as “unforced or optional.” The rest were sales by homeowners in some kind of financial or personal crisis . . .

Meanwhile, the Mortgage Bankers Association said Thursday that the number of homeowners behind on their mortgage payments hit a new high during the second quarter, with more than one in eight homeowners delinquent or in the foreclosure process.

So it is likely that sales will stay mired on the low end of the housing barbell . . .”

Two other factors the article pointed out:

1) Two-thirds of home sales are either foreclosures or banks taking a loss on the mortgage. The remaining one-third (~10% of overall sales) is what you might call “normal.”  (That 2/3rds number seems rather high even to me)

2) In July 2008, sales of existing homes hit a five-month high, and the NAR called a “sustained upturn coming.”  Once agian, their forecasting prowess was proven to be non existent . . .


Improving Home Sales Belie Market Reality
WSJ, 08/21/09

After Crisis, Mood Improves at Jackson Hole

The annual summer retreat of Federal Reserve officials and their counterparts from around the world in Jackson Hole , Wyo., kicks off this morning with opening remarks by Fed Chairman Ben Bernanke’s look at lessons learned in the past year of historic financial rescues.

One point is already clear about this year’s meetings – the atmosphere is palpably less tense than it has been the past two years. Mr. Bernanke flew in yesterday. He changed into hiking gear at the airport and along with Fed vice chairman Donald Kohn, governor Kevin Warsh, a security detail and Fed staff, set off for a more-than-two-hour excursion in the mountains, spotting some moose and elk along the way. The voyage stood in stark contrast to last year, when Fed officials spent most of their time at the Jackson Hole meetings in a make-shift command center in the Jackson Lake Lodge plotting out policies for the crisis. The command center is ready again at this meeting, armed with Bloomberg data terminals, but wasn’t in much use on the first night of the meetings.

At a Thursday night dinner kicking off the meetings, Mr. Bernanke took a light-hearted jab at his own forecasting abilities. After noting that the proceedings will include a night of star gazing with an astronomy club for attendees and their families, he joked with Kansas City Fed President Thomas Hoenig, who organizes the annual Jackson Hole meeting, “Do you know if they do astrology? It couldn’t hurt.”

Mr. Hoenig tried a few economist-jokes too. Playing off the phrase “too-big-to-fail” – a reference to banks that would topple the financial system if regulators let them collapse - he joked with the audience that he doesn’t want the Jackson Hole meetings to get too big. They could become “too big to feed.”

The (un-Economic) Party of Japan

Japan is set to go to the polling booth on August 30. It's widely expected that the governing party Liberal Democratic Party will be voted out and replaced by the opposition, the Democratic Party of Japan (DPJ). It may be useful, therefore, to take a look at the economic policies the DPJ is proposing,...