Clock is ticking; how will Congress act?

Clock is ticking; how will Congress act?

Fate of world financial system rests on what US lawmakers do next

By Goh Eng Yeow, Markets Correspondent

Grim-faced House Democrats (from left) Majority Leader Steny Hoyer, Speaker Nancy Pelosi and Caucus Chair Rahm Emanuel meeting reporters on Monday. — PHOTO: ASSOCIATED PRESS

WALL Street’s Black Monday plunge of 778 points - its biggest one-day points drop ever - has been likened to a financial nuclear bomb, maiming investors far and wide as its impact reverberates across the globe.
So it is no surprise to find many investors cursing US politicians for rejecting the US$700 billion (S$1 trillion) bailout that was supposed to inject a massive jolt of confidence into battered financial systems and get them operating smoothly again.

For Asian investors, it is double jeopardy. They have worked hard to pay off the massive debts incurred during a similar banking crisis a decade ago when Indonesia, South Korea and Thailand were nearly bankrupted by immense currency devaluations.

Now, just as they are beginning to enjoy the fruit of their success, Wall Street’s turmoil threatens to spill over, creating chaos in regional stock markets and sending currencies sliding.

Yet, blaming US politicians facing re-election in five weeks’ time for a problem created by Wall Street may be unfair. As The Economist observes: ‘Devoting US$700 billion of taxpayers’ money to rescuing the country’s least popular industry is clearly not a vote winner.’

But try telling that to investors.

Yes, Wall Street was instrumental in getting the US and the rest of the world into a financial mess of colossal proportions, yet for lawmakers to do nothing and watch the global financial system go belly-up is irresponsible.

Some will argue that while the bailout would have cost US taxpayers US$700 billion at most, Wall Street’s Monday losses alone came to US$1.2 trillion.

Still, is it wise to approve a plan - any plan - just so that Wall Street can stay afloat? It sounds too much like giving a drowning man a straw to clutch at.

US lawmakers were right to reject Treasury Secretary Hank Paulson’s flawed plan involving buying troubled assets off battered banks at unspecified prices as it would do little to restore jittery financial markets to health.

A similar plan being operated by the US Federal Reserve involving US banks exchanging illiquid assets for cash has yet to reap any appreciable benefit, despite costing hundreds of billions of dollars.

Given the ability of Asian markets to recover their poise yesterday after the initial knee-jerk selldown, some believe that the sense of panic that caused Mr Paulson to conceive his rescue package might have ebbed.

Similar sanguine reactions by European bourses suggest that US lawmakers may get a much-needed break to take another shot at coming up with a sensible alternative plan to safeguard the investments, deposits, money market funds and life savings of millions of Americans and people around the world.

Certainly, the US ban on short-selling financial stocks imposed two weeks ago has left banks in a race against time to restructure their operations or find a stronger partner to help them weather the financial storms.

In the last few days, Citigroup has bought most of the assets of beleaguered Wachovia, the sixth-largest bank in the US by assets, while JPMorgan Chase has snapped up deathbed bank Washington Mutual.

Goldman Sachs and Morgan Stanley - the two remaining Wall Street titans - have sought the safeguards offered by the US Federal Reserve by converting themselves into commercial banks.

Europe is not immune from the fallout, as any investor in Swiss giant UBS can tell you. But as the US contagion flares up with a vengeance across the Atlantic, European governments have taken decisive actions since Sunday to shore up investor confidence.

Belgian-Dutch banking group Fortis was partly nationalised after being thrown a ¥11 billion (S$22.3 billion) lifeline by three European governments, while troubled Belgian lender Dexia received a ¥6.4 billion cash infusion.

The Irish government even gave a two-year guarantee on savers’ deposits for its six major local banks to stop the contagion.

This has, so far, managed to stanch a systemic risk in the European banking system and prevent panic over a stricken bank from triggering a collapse in others as well.

In the days ahead, there will be a confluence of factors that will determine whether the year-old credit crunch crisis shows signs of ending or continues to snowball out of control.

Tomorrow marks the last day of a temporary ban on short-selling of financial stocks in the US, unless it is extended.

Given the jittery state of Wall Street, it could lead to even more hysterical selling.

Hopefully, next month’s elections will focus the minds of US lawmakers on devising a sensible plan to tackle the fear in financial markets while not alienating their constituents back home.

Given the precedent set by European governments in trying to restore calm to their own financial markets by throwing lifelines to ailing banks, suggestions are gaining ground that the US government should rescue wobbly financial institutions directly rather than buy troubled assets.

One way or another, investors may know the answer by Friday.

The clock is ticking. The fate of the fragile global financial system rests on the US Congress’ wager.

In Brief
Borrowing costs spike

LONDON: The cost of borrowing in dollars overnight rose the most on record after the US Congress rejected a US$700 billion bank-rescue plan, putting an unprecedented squeeze on the global financial system.

The London interbank offered rate, or Libor, that banks charge each other for such loans climbed 431 basis points to an all-time high of 6.88 per cent today, the British Bankers’ Association said.

The euro interbank offered rate, or Euribor, for one-month loans jumped to a record 5.05 per cent, the European Banking Federation said. The Libor-OIS spread, a gauge of the scarcity of cash, also increased to an all-time high.

‘This is unheard of, the money markets should be the engine driving the financial system but they have broken down,’ said Kornelius Purps, a fixed-income strategist in Munich for UniCredit Markets and Investment Banking, a unit of Italy’s largest lender.

BLOOMBERG

Lloyds may reduce offer for HBOS

LONDON: Shares in HBOS, the British bank which has accepted a bid from rival Lloyds TSB Group, fell as much as 20 per cent yesterday amid market talk that Lloyds could reduce its offer by a quarter.

Several dealers cited talk that the offer could be revised to 0.6 of its shares per HBOS share.

Both banks declined to comment on the talk of a possible renegotiation, but said they were pressing ahead with the acquisition.

One top shareholder in Lloyds TSB said the absence of rival suitors would make it easier for Lloyds to reduce its offer.

‘Within the current market HBOS is unlikely to find another bidder, so Lloyds will have some flexibility in the terms,’ the shareholder said.

REUTERS

Source : Straits Times - 01 Oct 2008

Singapore Property - Buy, Sell, Rent, Invest

Mindy Yong

(+65)91002985

mindy@mindyyong.com ( email me )

F1 race can and will be improved: Iswaran -Singapore

F1 race can and will be improved: Iswaran -Singapore

Singapore cannot rest on its laurels, he says, as more night races will be added

By NISHA RAMCHANDANI

SINGAPORE may have a successful Formula One Grand Prix under its belt, but lessons learned from the first race need to be applied next year, says Senior Minister of State for Trade and Industry S Iswaran.

More night races and Asian cities will be added to the F1 schedule, he said. So Singapore cannot rest on its laurels.

Abu Dhabi will be on the schedule in 2009 and Japan may be next in line to host a night race. So Singapore needs to work hard to make sure visitors still turn up for its race.

‘Overall, the reaction (to the first race) far surpassed what we expected,’ said Mr Iswaran. But he called the race a ‘work in progress’ and said feedback needs to be taken into account and analysed.

Road closures and diversions seemed to rank high on the list of bugbears. So down the track, the government is looking to close roads two days at most before the race, versus almost a week ahead this time around.

Being the first race, consultants and organisers wanted to create a buffer to accommodate any contingencies, said Mr Iswaran.

But they will be able to run a tighter ship for the second race now that they have experience to fall back on.

Other areas that need to be improved on include clearer signs and more efficient dispersal of crowds, as well as greater engagement of stakeholders in the area, he said.

Feedback so far puts the increase in F&B, hospitality and entertainment sales at 20-30 per cent, and in some cases higher.

But some businesses in the circuit area suffered a drop in sales as shoppers stayed away, discouraged by road closures and race crowds.

In future there will be greater emphasis on integrating these businesses into circuit park activities, but retailers will need to play their part to entice customers, which may require some creativity.

‘Businesses have a better sense of the event and the people that come. They are in a better position to plan for next year,’ Mr Iswaran said.

At least 50,000 foreigners were in town for the race, 25 per cent more than the target of about 40,000.

While numbers are still being tallied, Mr Iswaran said the 50,000 figure is probably ‘conservative’ and that guests came from as far away as Croatia, Guatemala and Norway.

Source : Business Times - 01 Oct 2008

Singapore Property - Buy, Sell, Rent, Invest

Mindy Yong

(+65)91002985

mindy@mindyyong.com ( email me )

Western financial crisis will hit Asian earnings: economist

Western financial crisis will hit Asian earnings: economist

He reckons regional stocks may pick up only in 2H 2009

By EMILYN YAP

(SINGAPORE) The financial crisis in the West will hit earnings in Asia, and regional equity markets may only pick up in the second half of 2009, a private equity conference heard yesterday.

But despite this, prospects for the private equity industry are not entirely bleak, said economist Jim Walker. Market watchers reckon that while fund-raising could get tougher, more investment opportunities could arise as valuations fall and banks cut back lending.

Dr Walker, managing director of research firm Asianomics and former chief economist at CLSA Asia-Pacific Markets, spoke at the Rediscovering Southeast Asia conference yesterday.

According to him, economic indicators point to a US recession, as rising bank failures, mounting unemployment and other factors work through the economy.

And the fray is likely to spread to Europe and Asia. While Dr Walker expects Asia to keep growing, earnings could sink into the red next year. This would be a time to start accumulating equities, but Asian stock markets may only start picking up slowly in 2H09.

Bleak prognoses also followed as the US$700 billion Wall Street bailout effort fell through yesterday. Citi said in a note that Asian asset prices could dive further and ‘growth forecasts could face substantial downside risks unless the global conditions reverse quickly’.

In terms of the impact on private equity funds, ‘(fund-raising) becomes much tougher’, Dr Walker said on the sidelines of the conference.

Many private equity funds draw capital from institutional investors such as pension and endowment funds. But as these investors are hit by falling markets, the amount they can allocate to private equity is affected, said 3i’s co-head in Asia, Mark Thornton.

Private equity funds could also become more cautious with new investments in a volatile market, industry players said. Not only will the funds have to deliver returns on these new ventures, they now need to spend more time helping existing companies in their portfolio ride through the crisis.

Despite the challenges, ‘golden opportunities’ will await cash-rich private equity funds, Dr Walker said. As banks pull back and capital becomes scarcer in the next few months, more companies could turn to private equity for funding.

Falling company valuations also present attractive investment opportunities. For instance, the volume of public-to-private transactions has increased, said senior vice-president at Partners Group, Kelvin Chan. ‘If you have money, time is on your side.’

Mr Chan is also chairman of the Singapore Venture Capital & Private Equity Association, which organised yesterday’s conference.

Source : Business Times - 01 Oct 2008

Singapore Property - Buy, Sell, Rent, Invest

Mindy Yong

(+65)91002985

mindy@mindyyong.com ( email me )

Who is behind the mess at the Capitol?-WASHINGTON

Who is behind the mess at the Capitol?-WASHINGTON

By LEON HADAR

IN WASHINGTON

CAPITOL Hill is a place where US lawmakers have supported policies and approved legislation that changed American and world history, including the protectionist Hawley-Smoot Tariff Act that accelerated the coming of the Great Depression and the global economic crisis of the 1930s.

It’s not inconceivable that the last days of September 2008 would be recalled by future historians as a time when US lawmakers, driven by a desire for political self-preservation and ideological dogma, helped set in motion the Great Depression II.

Leading the set of villains would be those lawmakers who would be seen as responsible for one of the most shocking legislative debacles in American history, the Monday vote having scuttled the proposed US$700 billion financial bailout plan.

Heading the charge were a group of conservative Republican lawmakers in the House of Representatives who decided to vote ‘no’ for the compromise legislation that had been worked out over the weekend by Democratic and Republican leaders on Capitol Hill and Bush administration officials, led by Treasury Secretary Henry Paulson.

And why did they decide to change their vote in the last minute, causing the stock market to plunge and to wipe US$1.2 trillion off the books?

Well, it seems that the oh-so-sensitive Republican lawmakers were furious at the Democratic Speaker of the House, Representative Nancy Pelosi from California, for criticising the Bush administration’s economic policies when she introduced the legislation. The poor kids. Teacher Pelosi hurt their feelings so much.

So they decided to punish the Republican Bush administration and anxious investors who were waiting for Washington to come to their rescue.

Bipartisan negotiation

In fact, in her short speech before the vote, Ms Pelosi expressed her own shock when Mr Paulson and US Federal Reserve chairman Ben Bernanke had warned her and other Congressional leaders of the danger of a financial meltdown, and pleaded for a bailout.

She stressed that she and her fellow Democrats felt that they had no choice but to negotiate with the Republicans on a legislative deal to help save the economy. But the House Republicans claimed that they were appalled that the Speaker would say such things. In fact, they just used Ms Pelosi’s speech as an excuse to vote against the Bill that they and their constituents at home didn’t like. (The Congressional election takes place next month.)

‘We put everything we had into getting the votes to get there today,’ said John Boehner, the Republican Minority Leader in the House. ‘But the Speaker had to give a partisan voice that poisoned our conference; it caused a number of members, who we thought we could get, to go south,’ he explained.

‘There’s a terrible crisis affecting the American economy,’ responded House Financial Services chairman Barney Frank, a Democrat from Massachusetts. ‘We have come together on a Bill to alleviate the crisis. And because somebody hurt their feelings, they decide to punish the country?’ he said.

The result was a defeat for the Bill, 205-228, with two-thirds of Republicans and more than a third of Democrats (most of them were members of the Black Caucus) voting ‘no’ - which stunned officials, lawmakers and the media in Washington. It was greeted in Wall Street with a sense of foreboding. Pundits raised the possibility that the American economy was heading, indeed, into a painful and long recession as the credit freeze creates disincentives for new investment. There is going to be more personal and business bankruptcies, followed by rising unemployment.

No new votes were scheduled for yesterday and today over the Jewish New Year, which means that the American and global financial markets would probably continue to slide down in the next two days.

‘Grown-ups’ will take charge

But top Democratic and Republican leaders insisted that the ‘grown-ups’ would take charge before the end of the week and get the bailout plan approved by both the House of Representatives, followed by the Senate (where there seems to be a clear majority in favour of the legislation).

So everyone seems to be waiting for those ‘grown-ups’, although one of the main concerns on Capitol Hill is that the Republican presidential candidate, Senator John McCain, would attempt once again - like he did last week - to interject himself into the negotiations in Washington. He may demand perhaps that the televised debate between the two vice-presidential candidates scheduled for tomorrow be cancelled.

Who knows? Is it possible that his running mate, Alaska governor Sarah Palin - who boasted about her foreign policy credentials by noting that she can see Russia from the window of her home in Alaska - might try to help end the financial crisis? Perhaps she can also see Wall Street from the window of her house.

Source : Business Times - 01 Oct 2008

Singapore Property - Buy, Sell, Rent, Invest

Mindy Yong

(+65)91002985

mindy@mindyyong.com ( email me )

Hope flickers as US seeks to revive bailout - SINGAPORE

Hope flickers as US seeks to revive bailout - SINGAPORE

Interbank markets severely strained, but stocks recover on hopes US rescue plan may be saved

By CONRAD TAN

(SINGAPORE) Stocks worldwide plunged yesterday and then clawed their way back after US lawmakers stunned investors by rejecting a sweeping plan to save the financial sector.

Plans to salvage the massive rescue package aimed at removing the rot from banks and other financial institutions there are already underway.

Last night, Keith Hennessey, director of the National Economic Council which advises the US president on economic policy, said the government is considering changes to the proposals that were rebuffed by lawmakers on Monday, according to Bloomberg. President George Bush himself warned of ‘painful and lasting’ economic damage to the country if the rescue plan is delayed further.

The idea is to make minor amendments and pass the bill, whose failure wiped more than US$1 trillion from financial markets.

‘We don’t intend to leave here without the job being done,’ said Christopher Dodd, who chairs the high-level banking committee in the US Senate, one of the two lawmaking bodies in the US Congress. He said US senators may deal with the bill as early as today.

Members of the House of Representatives, the lower house of Congress, who defeated the bailout package by 228 votes to 205, are also expected to do a rethink. ‘The Dow dropping 777 points is a pretty powerful force to find another 12 votes,’ said Chris Lehane, a political consultant for the Democratic Party.

US lawmakers were expected to reconvene only tomorrow after a two-day holiday but efforts are now afoot to push this forward.

Even if the plan is approved, ‘we should expect a longer, deeper recession’ and further consolidation of the banking sector in the US, said Gerard Lyons, chief economist at Standard Chartered Bank, in a report yesterday. ‘Across Europe we will see a deteriorating economic situation and further financial fallout.’

If the rescue plan fails, it ‘could accelerate the downward spiral in global financial markets, as markets are dragged into a new vicious cycle of losses and accelerated deleveraging’, said Citigroup analyst Kit Wei Zheng in a separate report.

If so, Singapore would likely suffer a more prolonged and severe slump in exports than expected, as well as damage to domestic demand and the local property sector, he added.

Reflecting the uncertainty, Asian markets swung between despair and hope. Major share indices plummeted at the start of trading with the Dow Jones Industrial Average falling 7 per cent on Monday. But most stock benchmarks in the region recovered later in the day, as the price of futures contracts traded on major US equity indices rose on hopes that the bailout plan may still be saved.

Stocks in Europe also opened lower, but reversed losses to trade higher. By midday in London, the FTSE-100 index was up 0.2 per cent.

Investors around the world had earlier believed that the proposals, which include a plan for the US government to buy up to US$700 billion worth of troubled assets from banks and other financial institutions, would be approved after a weekend of frenzied talks between leaders from both major political parties.

Multiple bank failures across Europe on Monday added to the shock of the plan’s defeat by a narrow margin, sending shares in the US into free-fall, while indices tracking stock market volatility there soared to record highs.

‘We hit a policy brick wall - and confidence across the financial sector collapsed,’ said Mr Lyons. ‘The big worry is that the lack of trust now being seen in the banking market spreads and we see contagion into other markets.’

The Straits Times Index ended just 0.1 per cent down after falling 5.1 per cent earlier, while Hong Kong’s Hang Seng Index actually finished 0.8 per cent higher after sliding 6 per cent in the morning. In Japan, where trading ended before markets in Europe opened, the Nikkei-225 index sank 4.1 per cent.

‘Despite the serious setback, it remains our view that Congress will eventually vote to approve the bailout package,’ said UBS analysts in a report.

Interbank lending was once again under extreme stress, even as central banks worldwide continued to flood the banking system with liquidity in a desperate attempt to unblock credit channels and bring down short-term borrowing costs.

Here, the Singapore interbank offered rate or Sibor for overnight US dollar loans more than doubled to 6.25 per cent from 2.67 per cent on Monday - the biggest one-day jump on record. Interest rates for US dollar loans between banks of longer maturities also rose, but less sharply, while rates for Singapore dollar interbank loans eased from earlier highs.

Banks in Hong Kong, Australia and Japan were also charging each other unusually high rates for funds or hoarding cash, prompting regulators to take drastic measures to get banks to resume lending to each other.

In a statement last night, the Monetary Authority of Singapore said it had intervened to ease recent upward pressure on Singapore dollar interbank rates and is ready to inject additional liquidity if needed. ‘Financial institutions in Singapore are functioning normally,’ it added.

Indonesia, Taiwan and South Korea announced restrictions on short-selling stocks - betting that share prices will fall - while Hong Kong regulators warned that they would act against abusive short-sellers.

In a statement just past noon yesterday, the Singapore Exchange said trading here remained orderly.

Source : Business Times - 01 Oct 2008

Singapore Property - Buy, Sell, Rent, Invest

Mindy Yong

(+65)91002985

mindy@mindyyong.com ( email me )