Bailout deal reached

Bailout deal reached 

WASHINGTON: Warned that time was running short to bolster the distressed economy, congressional Republicans and Democrats reported agreement in principle early this morning (Singapore time) on a bailout of the US financial industry.

It will be presented to the Bush administration in hopes of a vote within days, they said.

The news came as congressman here emerged from a two-hour negotiating session.

Democratic Senator Chris Dodd said: ‘We are very confident that we can act expeditiously.’

Sen Bob Bennett, a Republican, said: ‘I now expect that we will indeed have a plan that can pass the House, pass the Senate (and) be signed by the President.’

The progress was reported just hours before President George W. Bush was to meet presidential contenders Barack Obama and John McCain at the White House to clear obstacles to the unpopular rescue plan.

Crucial lawmakers said few obstacles remain.

Associated Press

 
Source : Straits Times - 26 Sept 2008

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Amid GOP revolt, bailout deal breaks down

Amid GOP revolt, bailout deal breaks down

By JENNIFER LOVEN and JULIE HIRSCHFELD DAVIS, Associated Press Writers

 
WASHINGTON - A Republican rebellion stalled government efforts Thursday to avoid economic meltdown, a chaotic turnaround that disrupted the choreography of an extraordinary White House meeting meant to show joint resolve from the president, the political parties and the presidential candidates. Instead, the summit broke up so bitterly that Treasury Secretary Henry Paulson got on one knee before Democratic leaders in a theatrical attempt to salvage talks.

 
After six days of bare-knuckled negotiations on the $700 billion financial industry bailout proposed by the Bush administration, with Wall Street tottering and presidential politics intruding six weeks before the election, there was far more confusion than clarity.

An apparent breakthrough was announced with fanfare at midday by key members of Congress from both parties — but not top leaders. Wall Street cautiously showed its pleasure, with the Dow Jones industrials closing 196 points higher.

But the good news and the market close were followed by a rash of less-positive developments.

Washington Mutual Inc. was seized by the Federal Deposit Insurance Corp. in the largest failure ever of a U.S. bank, after which JPMorgan Chase & Co. Inc. came to its rescue by buying the thrift’s banking assets.

And the late-afternoon White House gathering of President Bush, presidential contenders John McCain and Barack Obama, and top congressional leaders turned into what one person in the room described as “a full-throated discussion” and McCain’s campaign called “a contentious shouting match.”

Conservatives were in revolt over the astonishing price tag of the proposal and the hand of government that it would place on private markets.

Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee, emerged from the White House meeting to say the announced agreement “is, obviously, no agreement.” McCain’s campaign issued a statement saying, “the plan that has been put forth by the administration does not enjoy the confidence of the American people as it will not protect the taxpayers and will sacrifice Main Street in favor of Wall Street.” The White House, too, acknowledged there was no deal, only progress.

Meanwhile a group of House GOP lawmakers circulated an alternative that would put much less focus on a government takeover of failing institutions’ sour assets. This proposal would have the government provide insurance to companies that agree to hold frozen assets, rather than have the U.S. purchase the assets.

Inside the White House session, House Republican leader John Boehner announced his concerns about the emerging plan and asked that the conservatives’ alternative be considered, said people from both parties who were briefed on the exchange.

Financial Services Chairman Barney Frank, the feisty Democrat who has been leading negotiations with Paulson, reacted angrily, saying Republicans had waited until the last moment to present their proposal.

McCain, who dramatically announced Wednesday that he was suspending his campaign to deal with the economic crisis, stayed silent for most of the session and spoke only briefly to voice general principles for a rescue plan.

After the session, Paulson, hoping to prevent any chance for agreement from being torpedoed, pleaded with Democratic leaders not to publicly disclose how poorly the session had gone, said three people familiar with the episode. Frank and House Speaker Nancy Pelosi responded angrily, and Paulson, in an attempt to lighten the mood, got down on one knee, said the sources who spoke on condition of anonymity, like the others, because the conversations were private.

Weary congressional negotiators then resumed working with Paulson into the night in an effort to revive or rework the proposal that Bush said must be quickly approved by Congress to stave off “a long and painful recession.” They gave up after 10 p.m. EDT, more than an hour after the lone House Republican involved, Rep. Spencer Bachus of Alabama, left the room.

Talks were to resume Friday morning on the effort to bail out failing financial institutions and restart the flow of credit that has begun to starve the national economy.

The Bush administration plan’s centerpiece remained for the government to buy the toxic, mortgage-based assets of shaky financial institutions in a bid to keep them from going under and setting off a cascade of ruinous events, including wiped-out retirement savings, rising home foreclosures, closed businesses and lost jobs.

The earlier bipartisan accord establishing principles and important details would have given the Bush administration just a fraction of the money it wanted up front, subjecting half the $700 billion total to a congressional veto. The treasury secretary would get $250 billion immediately and could have an additional $100 billion if he certified it was needed, an approach designed to give lawmakers a stronger hand in controlling the unprecedented rescue.

The Bush administration had already agreed to several concessions based on demands from the right and left, including that the government take equity in companies helped by the bailout and put rules in place to limit excessive compensation of their executives, according to a draft of the outline obtained by The Associated Press.

Democrat Obama and Republican McCain, who have both sought to distance themselves from the unpopular Bush, sat down with the president at the White House for the hourlong afternoon session that was striking in this brutally partisan season. By also including Congress’ Democratic and Republican leaders, the meeting gathered nearly all Washington’s political power structure at one long table in a small West Wing room.

“All of us around the table … know we’ve got to get something done as quickly as possible,” Bush declared optimistically at the start of the meeting. Obama and McCain were at distant ends of the oval table, not even in each other’s sight lines. Bush, playing host in the middle, was flanked by Congress’ two Democratic leaders, Pelosi and Senate Majority Leader Harry Reid.

But neither Bush, McCain nor Obama have been deeply involved so far in this week’s scramble to hammer out a package. The meeting was intended more to provide bipartisan political cover for lawmakers to support a plan in the face of an angry public and their own re-election bids in six weeks.

At day’s end, Frank said he told Paulson “this whole thing is at risk if the president can’t get members of his own party to participate.”

Layered over the White House meeting was a complicated web of potential political benefits and consequences for both presidential candidates.

McCain hoped voters would believe that he rose above politics to wade into nitty-gritty and ultimately successful dealmaking at a time of urgent crisis, but he risked being seen instead as either overly impulsive or politically craven, or both. Obama saw a chance to appear presidential and fit for duty but was also caught off guard strategically by McCain’s surprising campaign gamble.

___

Associated Press writers Deb Riechmann, Martin Crutsinger, Christopher Wills and Beth Fouhy in Washington and researcher Judy Ausuebel in New York contributed to this story.

Source : AP - 26 Sept 2008

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US rivals join forces to seal rescue deal

US rivals join forces to seal rescue deal

Bush, Obama, McCain put politics aside to ensure bailout goes through; key proposals watered down
By ANDREW MARKS
NEW YORK CORRESPONDENT
THE present and future presidents of the United States are coming together to clear the way for the proposed US$700 billion bailout of major banking institutions that would avert the threat of a global meltdown of the financial markets.
President George Bush announced that he had invited Senator Barack Obama, the Democratic presidential candidate, and Senator John McCain, the Republican nominee for president, to come to the Oval Office to sit down with him and leaders of Congress and hammer out a bipartisan solution. This would restore liquidity to the markets and protect the economy from the disastrous fallout should the government fail to act swiftly to aid the imperilled financial firms.

Both Mr Obama and Mr McCain, who on Wednesday announced he was suspending his campaign in order to help broker a deal in Washington, have voiced support for a rescue plan that would buy up distressed securities, most of them tied to home mortgages, from US financial firms. At the same time both were being careful to reflect the growing anger among many Americans that they are being stuck with the bill for Wall Street’s excesses.

‘We must be sure that any rescue plan include greater oversight, and assurances that taxpayer dollars not be used to enrich the very same executives who brought about this mess,’ said Mr Obama.

Senate Banking Committee chairman Christopher Dodd said late on Wednesday that while ‘we’re not there yet’, on approving the plan, there was a ‘good possibility we’ll get there in a day or so’.

 
 
Early yesterday morning, Representative Barney Frank, the Democratic chairman of the House Financial Services Committee, said Democrats in the House and Senate had reached a deal among themselves on provisions that should be in the bill and planned to meet Republicans at 10 am and meet at the White House later in the day.

Stocks were rising as trading got underway in New York early yesterday, with the Dow Jones Industrials up 110 points, or 1.02 per cent, to 10,935.5, shortly after the opening bell.

The tone had been set on Wednesday night, when President Bush signalled his determination to hammer out a rescue package - warning of a long and painful recession if nothing was done.

‘I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course. But these are not normal circumstances,’ Mr Bush said in his address. He went on to explain his rationale for the extraordinary bailout, which at US$700 billion would be larger than the cost of the Iraq war thus far and the most expensive in US history, dwarfing the estimated US$200 billion rescue during the savings & loan crisis of the late 1980s.

‘The market is not functioning properly. There has been a widespread loss of confidence, and major sectors of America’s financial system are at risk of shutting down,’ the president said.

Even as he spoke to the national television audience, warning that ‘our entire economy is in danger’, and that a ‘long and painful recession’ will ensue if Congress does not move swiftly to the plan, congressional Democrats and Republicans continued to meet Treasury Department officials, negotiating details of a bipartisan debt relief plan for the banks late into the night in order to bring calm to Wall Street and global financial markets.

President Bush signalled his willingness to make concessions in the plan, such as stricter controls and oversight of Treasury Secretary Henry Paulson’s authority over the terms and process of the bailout, limits on executive compensation at the companies participating in the rescue plan and a provision giving taxpayers an equity stake in some of the firms so that the government might profit from the costly rescue if and when the banks return to prosperity.

Meanwhile, Wall Street endured another chaotic day on Wednesday, as Secretary Paulson and Federal Reserve chief Ben Bernanke spent hours on Capitol Hill defending the bailout plan. Investors fled from stocks and into cash and safe haven assets, briefly sending short-term interest rates below zero. The stock market seemed to take heart at the end of the trading day, however, from pronouncements by Congressional leaders that a deal on the bailout appears near.

Source : Business Times - 26 Sept 2008

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Mortgage giants, Lehman and AIG face probe WASHINGTON

Mortgage giants, Lehman and AIG face probe  WASHINGTON

The four are among 26 companies that FBI is investigating for possible fraud 

WASHINGTON: Under pressure to hold Wall Street accountable for the credit crisis, the United States Federal Bureau of Investigation (FBI) has opened preliminary investigations into possible fraud at four companies at the centre of the recent turmoil - Fannie Mae, Freddie Mac, Lehman Brothers and American International Group (AIG).
A government official, speaking on condition of anonymity, said it was ‘logical to assume’ that those four companies would come under investigation because of the many questions surrounding their recent collapse.

The four are among 26 that the FBI is reviewing for possible accounting misstatements.

Mortgage finance giants Freddie and Fannie, as well as insurer AIG, were all taken over by the government earlier this month. Lehman filed for bankruptcy.

The crisis has led the Bush administration to ask Congress to approve a US$700 billion (S$1 trillion) bailout for the financial industry.

People familiar with the matter have said earlier that other companies under FBI investigation include IndyMac Bancorp and Countrywide Financial, which has since been bought by Bank of America.

FBI director Robert Mueller, testifying in Congress last week, pledged to ‘pursue these cases as far up the corporate chain as necessary to ensure those responsible receive the justice they deserve’.

Fannie and Freddie, as well as AIG, already restated their books earlier this decade and corrected billions of dollars in accounting errors.

Fannie paid a record US$400 million fine to the Securities and Exchange Commission and its regulator in 2006 to settle charges that executives fraudulently used ‘cookie jar’ reserves and other accounting gimmicks to hide US$10.3 billion in losses from 2002 to 2004 and maximise bonuses.

Freddie paid US$125 million in fines in 2003 and restated earnings from 2000 to 2002 after it replaced long-time auditor Arthur Andersen and discovered errors related to derivatives.

Regulators accused the company of manipulating its accounting to push some US$5 billion in earnings to future quarters.

The Federal Housing Finance Agency, which regulates the government-sponsored mortgage companies, seized control of both companies earlier this month after outside examiners found more accounting problems and said their capital cushion was low.

Several senators at last week’s hearing made it clear that they wanted to see the FBI take aggressive steps to investigate possible criminal wrongdoing in connection with the crisis.

‘And if people were cooking the books, manipulating, doing things they were not supposed to do, then I want people held responsible,’ said Senator Patrick Leahy, who leads the judiciary committee.

LOS ANGELES TIMES, NEW YORK TIMES

Source : Straits Times - 25 Sept 2008

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Will Paulson’s bailout plan create a monster?

Will Paulson’s bailout plan create a monster?

Like Nixon’s wage-price controls, the Treasury Secretary’s plan is no panacea
By ROBERT SAMUELSON
CALL it Paulson’s Panic. That’s both unfair and accurate. It’s unfair because Treasury Secretary Henry Paulson didn’t create the underlying conditions that led to today’s financial turmoil, and the failure for not quelling it is shared by Federal Reserve chairman Ben Bernanke. But it’s also accurate, because as world financial markets verged on panic, Mr Paulson himself panicked. He saw no remedy except a massive bailout: having the government buy up to US$700 billion worth of risky bonds.
 
Mr Paulson: Historians will judge whether his outsized US$700 billion proposal was necessary, but the notion that its congressional enactment would magically end the crisis may be wishful thinking 
Historians will judge whether his outsized proposal was necessary, but the notion that its congressional enactment would magically end the crisis may be wishful thinking. Americans often delude themselves that all problems can be ’solved’ if only government will act ‘boldly’. This may be another example.

Contrary to much commentary, Mr Paulson’s plan would not be the largest government intervention in the private economy since World War II. That distinction still belongs to Richard Nixon’s imposition of wage-price controls in August 1971. True, Mr Paulson would socialise unprecedented amounts of private debt; but Nixon asserted control over the entire economy. What’s fascinating are the possible parallels between the two episodes, starting with a shared irony: Both came from administrations committed to ‘free markets’.

When Nixon declared the wage-price freeze - a complete surprise because he had consistently opposed controls - the decision proved ‘wildly popular’, writes Rice University historian Allen Matusow in his book Nixon’s Economy. By one survey, 75 per cent of Americans supported it.

‘There was widespread public rejoicing that at last the government was protecting the people,’ Herbert Stein, a Nixon economist, later observed.

 
The difference between now and two years ago is that financial managers then thought they understood the system; now they know they don’t. Ignorance breeds risk-aversion and fear.
 
 
 
 
 
 
Consumer price inflation, which had been rising at a 4 per cent annual rate, dropped towards one per cent. People believed that by acting decisively government could outlaw inflationary psychology. It couldn’t.

Inflationary pressures built up under the artificial lid of the controls. Moreover, the faulty economic doctrines that produced inflation - easy-money policies aimed at maintaining ‘full employment’ of 4 per cent joblessness - remained. When controls ended in 1974, inflation exploded to 12 per cent. It averaged almost 9 per cent from 1975 to 1981. Only the brutal 1981-82 recession, imposed by Paul Volcker’s Fed and raising unemployment to 10.8 per cent, ended the wage-price spiral.

Mr Paulson argues that relieving banks of dubious mortgage-backed securities will ‘unclog’ the financial system and encourage essential business and consumer lending. Maybe. It’s true that these securities, because they cannot easily be valued, have created immense uncertainty.

Banks and other financial institutions reduced routine lending to each other; everyone worried that the other bank might be in trouble. Having the Treasury buy these mortgage securities, on which losses have already been booked, might minimise these fears.

The trouble is that fears extend beyond mortgage securities. It wasn’t just home mortgages that were bundled up into bonds and sold to institutional investors (pension funds, insurance companies, college endowments). Car loans, credit card debt and commercial real estate loans have been similarly packaged, US$900 billion worth in 2007. Naturally, doubts about the value of these securities have also increased. ‘Securitisation’ may survive, but this lending is already down (80 per cent in 2008), reports Thomson Reuters. Credit is tightening across the board; issuance of high-quality corporate bonds is down 22 per cent, while riskier ‘high yield’ bonds are down 65 per cent.

What we are discovering is that all the complex securities, combined with ever-greater international investment flows, have created a global financial system ’so arcane that few people can understand its workings’, writes David Smick in his book The World Is Curved: Hidden Dangers to the Global Economy. The difference between now and two years ago is that financial managers then thought they understood the system; now they know they don’t. Ignorance breeds risk-aversion and fear.

Like wage-price controls, Mr Paulson’s plan is no panacea. Banks, hedge funds, private equity funds and others are trying to reduce risk by ‘deleveraging’ - selling stocks and bonds to raise cash, increase capital and cut their own debt. The rush to cash is a hallmark of financial crises.

But what makes sense for one may be ruinous for all. Heavy selling depresses prices; lower prices then increase losses, deplete capital, prompt more selling and heighten fear. At best, Mr Paulson’s plan might pre-empt this spiral by allowing investors to unload their least attractive securities.

But it wouldn’t automatically stimulate new lending, revitalise ’securitisation’ or prevent more ‘deleveraging’. Time is needed. The rescue is being constructed so hastily that it may include all manner of flawed provisions: too much power for the Treasury Secretary; authority for bankruptcy judges to modify mortgages.

Congress faces a wrenching dilemma, imposed on it by financial markets and Mr Paulson. If it dawdles, it may invite the panic that Mr Paulson has brazenly predicted. But if it acts quickly, it may create a monster whose full implications - possibly adverse - emerge only with time. — The Washington Post Writers Group
Source : Business Times - 25 Sept 2008

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Bailout shouldn’t be a quick fix

Bailout shouldn’t be a quick fix

THE US sub-prime contagion continues and it is still impossible to predict its course or its longevity. The latest move is the US$700 billion Wall Street rescue plan proposed by US Treasury Secretary Henry Paulson. This hastily drawn-up plan is predictably facing resistance from lawmakers, who argue that the bailout does more for Wall Street than for Main Street.
Mr Paulson himself admits the bailout is ’sad’ and ‘embarrassing’ but adds that his priority is to restore confidence in markets. The Treasury secretary has Federal Reserve chief Ben Bernanke on his side - they both argue essentially that if the credit markets don’t function, jobs will be lost, interest rates will rise, more houses will be foreclosed upon, gross domestic product (GDP) will contract and that the US economy will not be able to recover in a normal, healthy way. And that, they say, would be much worse for taxpayers than a bailout.

 
However, the issue is not whether to have a bailout, but what kind of bailout it should be. What Mr Paulson is proposing appears to be modelled roughly along the lines of Sweden’s financial system rescue in the 1990s. There, the mess was cleared at the cost of a three-year recession. Analysts put that final tab at about 2.1 per cent of Sweden’s GDP. Bank shareholders lost almost all their money, but tough government intervention and nationalisation ensured an orderly return to surpluses and real growth. However, the crisis in America is different in size, scale and character. It is not just about the mortgage market, but also about a multitude of other toxic assets, which are hard to value at the best of times. Moreover, ’socialism’ is far less politically acceptable in the US than in Sweden, which means that the follow-up actions which Sweden undertook, including fiscal stringency, cannot be guaranteed after the immediate rescue. The US bailout, potentially the biggest ever, would cost every American US$2,300 per head at a minimum. Nor is it certain that US$700 billion would be enough, as the crisis is far from over and estimates of its cost are, at this stage, just guesses.

The feeling among Americans that the Bush administration is bailing out Wall Street at the expense of Main Street is also a major point of contention. There is enormous political pressure to do more to help distressed homeowners as well, not just financial institutions. There is also concern that banks burned by the crisis may not quickly return to lending liberally to the real economy, even after their balance sheets turn black.

Thus it would seem that for any plan to be politically acceptable and workable, it would need to place greater emphasis on helping the real economy and be more discriminating in bailing out Wall Street.

Thus, rushing through legislation without proper debate and a greater measure of consensus would be dangerous. No doubt, it is important to do the job quickly. But it is just as important to do it right.

Source : Business Times - 25 Sept 2008

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Anwar plans to proceed with caution- KUALA LUMPUR

Anwar plans to proceed with caution- KUALA LUMPUR

He says opposition does not want to violate constitution
(KUALA LUMPUR) Malaysian opposition leader Anwar Ibrahim said that he would ‘proceed cautiously’ in his bid to topple the government after missing a second self-imposed deadline.

Anwar: Has previously said that he had persuaded enough ruling coalition lawmakers to join his alliance to oust MrAbdullah by Sept 16 
‘We do not want to transgress the constitutional rules and procedures,’ he told reporters yesterday, one day after the date he had demanded Prime Minister Abdullah Ahmad Badawi recall parliament for a confidence vote. Anwar had previously said that he had persuaded enough ruling coalition lawmakers to join his alliance to oust Mr Abdullah by Sept 16.

Mr Abdullah, who has resisted calls from his party to quit after leading it to its worst election result since Malaysia’s independence, has called the opposition leader’s claims a ‘dream’ and refused to recall lawmakers earlier than the scheduled Oct 13 resumption of parliament. Anwar, who needs at least 30 more lawmakers to take control of the 222-seat house, declined to set a new deadline yesterday.

‘Our problem is there is no guarantee that the motion will be accepted,’ he said, asking his supporters to be ‘patient’.

Anwar was speaking after a court delayed for two weeks a decision to transfer his pending sex trial to a higher court. He faces a maximum prison sentence of 20 years if found guilty of having homosexual relations with a 23-year-old man, a crime in Malaysia.

Earlier this year, Malaysia’s parliament speaker rejected two similar attempts for a no-confidence vote against Mr Abdullah proposed by a member of the ruling coalition and an opposition party. — Bloomberg

 
Source : Business Times - 25 Sept 2008

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Singapore counts on night race to brighten economic gloom

Singapore counts on night race to brighten economic gloom

AS the economic outlook dims, Singapore is switching on floodlights to brighten its future.
The city stages Formula One’s first night race this coming Sunday under the glare of 1,600 lamps that will generate four times the brightness of a regular sports stadium.

Singapore, girding for a possible recession, is paying about US$200 million over five years for the rights to host the event, tapping the glitz of the world’s most-watched motor races to promote itself as something more than a financial hub.

‘Singapore has always been known as a good international business centre,’ S Iswaran, Senior Minister of State for Trade and Industry, said in an interview. ‘What we want to do is also raise Singapore’s profile as a global city with great lifestyle, buzz, vibrancy.’

The race is the latest attraction for the South-east Asian city, including two casino resorts and the first Youth Olympic Games in the next thee years. The world’s biggest ferris wheel - the Singapore Flyer - opened this year, towering over the pit lanes that will teem with the mechanics and drivers of Ferrari, McLaren and BMW.

 
 
Hosting major sports events is part of Singapore’s strategy to diversify the economy from its traditional manufacturing base and to attract tourists, economists say. The F1 effect will be felt over years and won’t be measured by the experience of this weekend’s race alone.

‘Singapore wants to become a global city and events like these are needed to make it one,’ said Song Seng Wun, an economist at CIMB-GK Securities Pte in Singapore. ‘The F1 race is just another piece in a big jigsaw puzzle.’

The arrival of F1 pacesetter Lewis Hamilton and world champion Kimi Raikkonen coincides with one of the closest championships - and a financial slowdown that’s pushed Singapore to cut its growth forecast to between 4 per cent and 5 per cent this year from the 7.7 per cent pace in 2007.

‘The financial turmoil throws up quite a lot of uncertainty, but tickets have sold out,’ said Vishnu Varathan, a regional economist at Forecast Singapore. ‘Retailers will probably see more restrained spending.’

Mr Iswaran expects Formula One to deliver $100 million of extra tourism revenue, with about half the 100,000 people involved in the Grand Prix flying in from overseas.

The closeness of the F1 title race - McLaren driver Hamilton leads Ferrari’s Felipe Massa by one point with five of 18 races to go - may intensify the spotlight on Singapore.

‘Just like the Beijing Olympics, all eyes will be on Singapore,’ said Michelle Denise Wan, a spokeswoman for the Ritz-Carlton hotel in the Marina Bay area, where rooms sold out by July even with a minimum four-night stay.

Not everyone is getting a slice of the windfall, including some retailers closest to the action. Road closures and entry restrictions to the race area has Melvin Yap considering shutting his watch store in Millenia Walk.

‘Things are going to be really bad,’ said Mr Yap, sales director at Precious Time. ‘Our regular shoppers won’t be coming here.’

Formula One, with about 150 million viewers per race, is becoming the sport of choice for cash-rich nations. Bahrain added a Grand Prix in 2004, while Abu Dhabi is paying a record US$45 million for rights to host its first race next year, according to Formula Money, which tracks the sport’s finances. South Korea and India will add F1 races in 2010. — Bloomberg

Source : Business Times - 25 Sept 2008

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Lehman’s failure won’t affect Singapore projects: CES

Lehman’s failure won’t affect Singapore projects: CES

The 2 condos are substantially sold; funds to complete projects secured
By LYNETTE KHOO
CHIP Eng Seng (CES) said its two joint-venture projects with a real estate equity fund managed by Lehman Brothers are unaffected by the collapse of the US investment bank.
 
CityVista: The 70-unit project at Peck Hay Rd is already 54% sold at an average $2,550 psf, while The Parc Condo at West Coast Walk is 95% sold at an average price of $880 per square foot 
Its JV partner is Lehman Brothers Real Estate Partners II (LBREP II), a US$2.4 billion fund that was closed in 2005. Only a fraction of that sum - some US$400 million - came from Lehman Brothers and its employees.

CES had formed a 50-50 JV with LBREP II’s wholly owned special purpose vehicle WM Mauritius Holdings for two high-rise freehold condominium projects.

But a reassuring fact is that the 695-unit The Parc Condominium at West Coast Walk is already 95 per cent sold at an average price of $880 per square foot (psf). The 70-unit CityVista at Peck Hay Road is 54 per cent sold at an average $2,550 psf.

All instalments of purchase money and construction loans have since been deposited into the Project Account of the building projects as stipulated by the Housing Developers Act.

‘With financing being secured with the bank, funds needed to finish the whole project was already secured. Not to mention that the projects were launched successfully and the deposits we collected are more than enough to fund the two projects till completion,’ CES chief executive Raymond Chia told BT.

The two projects are expected to be completed by the second half of 2010.

CES teamed up with Lehman to bid for four projects in total. Two tenders did not succeed.

Asked if Lehman’s collapse will cause CES to search for a new JV partner for future projects, Mr Chia said CES is not short of choice, having landed on the radar screen of equity funds since its partnership with the Lehman fund in 2006. CES has since received enquiries from large funds on opportunities to work together on projects in Singapore and Vietnam, Mr Chia said.

But he noted that CES can take on larger projects on its own now and, hence, has more options besides JVs. There also is the support of its 25 per cent shareholder Citadel Equity Fund, part of the Chicago-based Citadel Investment Group. Both are working together on a freehold condo project Grange Infinite, which is 100 per cent sold.

While Lehman’s failure may hurt US commercial property, its impact here is likely to be cushioned.

Lehman Brothers is believed to own a 45,000 square feet building at Clemenceau Avenue worth about $80 million. Its managed fund teamed up with Australia’s Lend Lease in a 75:25 JV to buy Paradiz Centre in Selegie Road for $138 million in 2006.

Paradiz Centre is being redeveloped and slated for completion by the end of this year. But it is understood that Lehman’s collapse will not affect the fund that owns this project and Lend Lease has pre-emptive rights to buy out Lehman’s stake in the venture.

Lehman Brothers also occupies minimal amount of office space here. It currently takes up about 40,000 square feet of office space in Suntec City Office Tower Five, a mere 3.1 per cent of the total Suntec City office space of 1.29 million square feet, according to DMG & Partners Securities.

Its other assets have been divested. The office building at 71 Robinson Road which Lehman jointly owned with Kajima Overseas Asia in April was sold to a German fund for $743.8 million, higher than some $613.4 million they spent on the land and redevelopment. Lehman sold Novotel Clarke Quay last year to CDL Hospitality Real Estate Investment Trust at $219.8 million, double the amount it spent on it.
Source : Business Times - 25 Sept 2008

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Tougher times for Asia-Pacific hedge funds

Tougher times for Asia-Pacific hedge funds

By EMILYN YAP
(SINGAPORE) Asia-Pacific hedge funds are bracing for tougher times, as short-selling curbs and tighter credit combine to hit the industry.
While the hedge fund industry is unlikely to crash, insiders reckon there could be more redemptions and fund closures in the months ahead.

‘Life is becoming more difficult (for hedge funds),’ said Peter Douglas, principal of Singapore-based hedge fund consultancy GFIA.

Hedge funds generally aim for absolute returns in all types of market conditions and employ various strategies to achieve this. Many in the region are long/short equity players, meaning that they take long and short positions in shares.

But new short-selling restrictions are tying the hands of these hedge funds. First imposed in the UK and US on certain stocks as the financial turmoil drove markets down, the ban has also spread to Australia and Taiwan.

The impact of such restrictions is certainly negative, said Mr Douglas. ‘Short-sellers are useful providers of liquidity, they are important to price discovery and they make it much easier to manage risks.’

The short-selling ban could lead to more redemptions and, in turn, more closures among Asian hedge funds. ‘Markets are becoming less efficient. That means that sophisticated strategies are finding it more difficult to make money consistently,’ Mr Douglas said.

Hedge funds are also under redemption pressure because of tighter credit conditions, said a manager in the industry. The funds themselves may not use leveraging techniques, but ‘the underlying investor base is often leveraged’, he explained.

And it’s not just hedge funds, he added; the entire asset management industry is facing redemption risk because markets have performed poorly.

Hedge funds in the region have been coming under pressure. According to alternative investment data provider Eurekahedge, those in Singapore, for instance, experienced net asset outflows of US$640 million from June to August. This was a sharp fall from net asset inflows of US$1.47 billion in the same period last year.

While conditions have turned more challenging for hedge funds in the region, some industry players believe the eventual impact could be limited.

The short-selling restrictions, for instance, are unlikely to hit hard because many funds do not utilise that strategy to a large extent. ‘It’s not so easy to go heavily short in Asia because of the (low) liquidity and (existing) restrictions in the markets,’ said HSBC’s head of alternative fund services Wout Kalis.

The hedge fund manager who spoke to BT also pointed out other ways of shorting the market - through the use of options, futures and other derivatives, for instance. Summing up sentiment in the industry, he said: ‘The hedge fund model ain’t bust.’

 
Source : Business Times - 25 Sept 2008

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Buffett plunks down US$5b for Goldman - NEW YORK

Buffett plunks down US$5b for Goldman - NEW YORK

Some in Street see it as a gold-plated vote of confidence

 
(NEW YORK) Warren Buffett’s Berkshire Hathaway Inc will invest US$5 billion in Goldman Sachs Group Inc, in a major boost for the Wall Street bank from perhaps the world’s best- known investor.
‘It’s a vote of confidence which is gold plated,’ said Michael Holland, a money manager at Holland & Co in New York. ‘You don’t get better than this.’

Shares of Goldman rose 8.1 per cent after the announcement, while Standard & Poor’s 500 futures SPc1 gained 15 points.

Goldman also announced plans to sell 40.65 million shares at US$123 each. Goldman, which managed its own offering, said it has an option to sell an additional 6.10 million shares to handle excess demand.

Mr Buffett is adding Goldman to a portfolio of investments at Berkshire that includes large stakes in a handful of major US commercial banks.

Mr Buffett also said that he would consider buying some units from American International Group Inc (AIG), the insurer bailed out by the US government.

Mr Buffett said he expressed interest in buying parts of AIG over the Sept 13-14 weekend, when regulators and financial industry executives were holding emergency talks on problems that included the fate of Lehman Brothers Holdings Inc, which filed for bankruptcy protection on Sept 15.

On Sunday, Goldman won Federal Reserve approval to become a bank holding company, giving it easier access to financing and adding to speculation it might buy another bank.

This came after many investors questioned its business model amid this month’s market turmoil, causing shares to fall 50 per cent from their record set last Oct 31.

‘Goldman Sachs is an exceptional institution,’ Mr Buffett said in a statement. ‘It has an unrivalled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.’

Mr Buffett is the second- richest American according to Forbes magazine, and built Berkshire into a US$199 billion conglomerate by investing in undervalued companies with strong management.

He was not available for immediate comment, according to Debbie Bosanek, who works in his Omaha, Nebraska office.

Lloyd Blankfein, Goldman’s chief executive, in a statement noted Mr Buffett’s ‘long-standing relationship’ with the company, and called the investment ‘a strong validation of our client franchise and future prospects. This investment will further bolster our strong capitalisation and liquidity position’.

Berkshire will buy US$5 billion of Goldman perpetual preferred stock that carries a 10 per cent dividend.

It also will receive warrants to buy US$5 billion of common stock, or 43.5 million shares, at US$115 per share, within five years, which could give it a roughly 9 per cent stake in Goldman. Last week, Goldman said it averaged 448.3 million common shares in the quarter ended Aug 29.

Goldman said on Sunday it intends to expand its deposit base by buying deposits from other banks, including those in distress.

The investment is Mr Buffett’s second major purchase in a week. On Thursday, Berkshire’s MidAmerican Energy Holdings Co affiliate agreed to buy power supplier Constellation Energy Group Inc for US$4.7 billion.

Despite his disdain for investment banking excess, Mr Buffett has publicly praised Goldman investment banker Byron Trott, who helped arrange Berkshire’s US$4.5 billion purchase in March of a majority stake in industrial conglomerate Marmon Holdings Inc from Chicago’s Pritzker family. — Reuters

Source : Business Times - 25 Sept 2008

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FBI probes 4 firms at heart of crisis - WASHINGTON

FBI probes 4 firms at heart of crisis - WASHINGTON

Investigators looking for possible accounting misstatements by AIG, Lehman, Fannie, Freddie
(WASHINGTON) US authorities are investigating Fannie Mae, Freddie Mac, Lehman Brothers Holdings Inc and American International Group Inc as part of a probe into the collapse of the sub-prime-mortgage market, a senior law-enforcement official said.
The four companies are among 26 that the Federal Bureau of Investigation is reviewing for possible accounting misstatements. The official, who asked to remain unidentified, said the investigations are preliminary.

The FBI has come under pressure to hold companies responsible as the loan crisis has rocked Wall Street and led to the biggest housing slump since the Depression. Financial companies worldwide have reported more than US$500 billion in losses and writedowns stemming from the sub- prime collapse.

Housing lenders Freddie Mac and Fannie Mae, as well as insurer AIG were all taken over by the government earlier this month. Lehman filed for bankruptcy. The crisis has led the Bush administration to ask Congress to approve a US$700 billion bailout for the financial industry.

James Lockhart, the director of the Federal Housing Finance Agency, tossed out both Fannie Mae’s and Freddie Mac’s boards and top management, including former Fannie chief Daniel Mudd and Richard Syron at Freddie, as part of the restructuring.

 
 
Freddie Mac spokesman Doug Duvall declined to comment on the FBI investigation. Fannie Mae spokesman Brian Faith wasn’t immediately available for comment. AIG spokesman Nick Ashooh declined to comment as did Mark Lane, a spokesman for Lehman.

The investigations of Fannie Mae and Freddie Mac were recently opened, said the official. The agency had already been looking into allegations concerning Lehman and AIG.

The Securities and Exchange Commission is also investigating the companies for civil violations.

People familiar with the matter have said earlier that other companies under FBI investigation include IndyMac Bancorp Inc and Countrywide Financial Corp, which has since been bought by Bank of America Corp.

FBI director Robert Mueller, testifying in Congress last week, pledged to ‘pursue these cases as far up the corporate chain as necessary to ensure those responsible receive the justice they deserve.’

Fannie and Freddie, as well as AIG, already restated their books earlier this decade and corrected billions of dollars in accounting errors.

Fannie Mae paid a record US$400 million fine to the SEC and its regulator in 2006 to settle charges that executives fraudulently used ‘cookie jar’ reserves and other accounting gimmicks to hide US$10.3 billion in losses from 2002 through 2004 and maximise bonuses.

Freddie paid US$125 million in fines in 2003 and restated earnings from 2000 through 2002 after it replaced long-time auditor Arthur Andersen and discovered errors related to derivatives. Regulators accused the company of manipulating its accounting to push of some US$5 billion in earnings to future quarters.

Freddie ousted chief executive Leland Brendsel in June 2003 and Fannie’s Franklin Raines left in December 2004.

The Federal Housing Finance Agency, which regulates the government-sponsored mortgage companies, seized control of both companies earlier this month after outside examiners found more accounting problems and said their capital cushion was low. — Bloomberg

Source : Business Times - 25 Sept 2008

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Bailout worries hit Dow, S&P, techs help Nasdaq

Bailout worries hit Dow, S&P, techs help Nasdaq
NEW YORK - The Dow and S&P 500 edged lower on Wednesday as uncertainty about when Congress might approve a proposed US$700 billion financial sector bailout offset Warren Buffett’s US$5 billion bet on Goldman Sachs.

Fear that congressional wrangling could delay or weaken the Bush administration’s plan to mop up bad mortgage debt from banks’ balance sheets kept stocks in check throughout the day.

The Nasdaq, though, clung to slender gains on hopes that technology spending would increase once a version of the bailout plan becomes law. The Dow and S&P declined for the third straight day.

Federal Reserve Chairman Ben Bernanke urged Congress’ Joint Economic Committee to pass the bailout, saying delay would keep lenders from extending credit to households and businesses, but lawmakers voiced doubt about the size and scope of the plan.

‘The resistance we’re seeing in Washington (to the bailout bill) is understandable, but frightening at the same time. The longer this drags on and the more bickering we see, the more frightening it is,’ said Jack Ablin, chief investment officer at Harris Private Bank in Chicago.

Indices
The Dow Jones industrial average was down 29.00 points, or 0.27 per cent, at 10,825.17. The Standard & Poor’s 500 Index was down 2.35 points, or 0.20 per cent, at 1,185.87. The Nasdaq Composite Index XIC was up 2.35 points, or 0.11 per cent, at 2,155.68.

Despite uneasiness about the bailout, traders said Buffett’s decision to invest US$5 billion in Goldman Sachs was encouraging. Goldman’s stock rose 6.4 per cent to US$133, while the Class A stock of Berkshire Hathaway, Buffett’s holding company, added 3.5 per cent to US$133,300.

‘When Buffett jumps in the pool, others may follow,’ said Andre Bakhos, president of Princeton Financial Group in Princeton, New Jersey. ‘That says to investors that all is not lost.’

But shares of Citigroup were a top drag on the Dow and S&P, falling 5.2 per cent to US$18.96, while shares of economic bellwether General Electric slipped 1.4 per cent to US$24.59.

Overall sentiment on Wednesday towards financial shares, the hardest-hit sector throughout the year-long credit crisis that has rattled Wall Street, was mixed.

‘Whether Buffett has called a bottom, I don’t think anyone knows,’ said Mr Ablin. ‘My bottom line is, yes, financial stocks are as cheap as they’ve ever been, relative to the rest of the market. Problem is, the same was true last October.’

Among Nasdaq gainers, software maker Oracle Corp rose 1.3 per cent to US$19.95 while iPod maker Apple added 1.5 per cent to US$128.71. Microsoft added 1.1 per cent to US$25.72.

The market got a brief lift from reports suggesting the Bush administration might accept curbs on executive pay as a condition for passage of the bailout, as insisted upon by Democrats, but a Treasury Department source told Reuters no such deal had been reached.

About 1.08 billion shares changed hands on the New York Stock Exchange, well below last year’s estimated daily average of roughly 1.90 billion, while on Nasdaq, about 1.81 billion shares traded, also below last year’s daily average of 2.17 billion.

Declining stocks outnumbered advancing ones on the NYSE by a ratio of about 3 to 2. On the Nasdaq, decliners beat advancers by about 2 to 1. — REUTERS

Source : Business Times - 25 Sept 2008

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Dire warnings fail to sway senators on big bailout

Dire warnings fail to sway senators on big bailout

By Jeannine Aversa, AP Economics Writer

Senators push back on bailout plan despite dire warnings from Bernanke, Paulson

WASHINGTON (AP) — Refusing to be pushed, Republicans and Democrats alike rebuffed dire warnings Tuesday from the government’s top economic officials of recession, layoffs and foreclosed homes if Congress doesn’t quickly approve the administration’s emergency $700 billion financial bailout plan.
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Congressional leaders still predicted passage — with significant changes — but Wall Street’s nerves were hardly soothed. The Dow Jones industrials sank 161 points and now are off more than 500 this week after initially surging on the bailout announcement last week.

Deepening market trouble was just one piece of the economic havoc that Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson told senators would ensue if Congress lags in acting on the administration’s proposal to rescue tottering financial institutions.

“I share the outrage that people have,” Paulson said. “It’s embarrassing to look at this. I think it’s embarrassing to the United States of America. There is a lot of blame to go around.”

But without the bailout plan, Paulson and Bernanke sketched out a dire scenario for senators at a contentious daylong hearing: Neither businesses nor consumers would be able to borrow money, and the world’s largest economy would grind to a virtual halt.

In public and in private meetings, both Democrats and Republicans said big changes are needed, presaging a difficult road ahead for the measure.

The legislation the administration is promoting would allow the government to buy bad mortgages and other rotten assets held by troubled banks and financial institutions. Getting those debts off their books should bolster those companies’ balance sheets, making them more inclined to lend and easing one of the biggest choke points in the credit crisis. If the plan works, it should help lift a major weight off the national economy that is already sputtering.

One Wall Street firm got a boost Tuesday with word that Warren Buffett’s Berkshire Hathaway Inc. is investing at least $5 billion in Goldman Sachs. It was a huge vote of confidence for one of the survivors of the credit crisis that felled two of its investment banking peers.

The news sent shares of Goldman Sachs and stock index futures soaring in electronic trading, after the Dow Jones suffered declines.

Democrats were determined to wrest concessions from the administration on domestic spending and middle-class economic aid. And they said Republicans had to share in the politically tricky task of pushing through a financial bailout six weeks before the elections at a time when millions of everyday Americans are economically strapped.

“It’s their problem. It’s their bill. And they’re going to have to figure out if they can support it,” House Speaker Nancy Pelosi, D-Calif., said of Republicans.

“Nobody wants to have to do this,” agreed Rep. John Boehner of Ohio, the Republican leader. He said he was hopeful of a quick agreement, despite withering criticism from conservative GOP lawmakers who recoiled at the prospect of federal intervention.

Sen. Jim Bunning, R-Ky., said, “This massive bailout is not a solution. It is financial socialism and it’s un-American.”

Separately, law enforcement officials said the FBI had begun investigating four institutions whose collapse helped trigger the financial crisis.

The FBI is looking at potential fraud by mortgage giants Fannie Mae and Freddie Mac, Lehman Brothers Holdings Inc. and insurer American International Group Inc., said two officials, speaking on condition of anonymity because of the sensitivity of the investigations. The inquiries, still in preliminary stages, will focus on the financial institutions and the people who ran them, one senior law enforcement official said.

As for the bailout plan, both parties’ presidential candidates joined fellow senators in insisting on alterations in the administration’s drastic prescription.

Democrats and Republicans alike demanded that the bailout limit pay packages for executives of companies helped by the rescue.

“Clipping executive compensation is easy right now — everybody wants it,” said Rep. Jack Kingston, R-Ga.

Democrats also were pushing proposals to let the government take some type of stake in the companies that it helps. The administration has balked at that, fearing it would discourage financial companies from getting the help they need through the bailout, thereby blunting the plan’s effectiveness.

Democrats also want to let judges rewrite mortgages to lower bankrupt homeowners’ monthly payments, another demand the administration is resisting.

Both Sens. Chris Dodd, D-Conn., chairman of the Banking Committee, and the panel’s top-ranking Republican, Richard Shelby of Alabama, said significant changes are needed before the rescue plan can be passed. “We have got to look at some alternatives,” Shelby said.

Getting the action right is key, Dodd said: “There is no second act to this.” He later spoke disparagingly of the administration’s proposal. “What they have sent us is not acceptable,” he told reporters.

Bernanke’s remarks about the risk of recession came in response to a question from Dodd, who seemed eager to hear a strong rationale for lawmakers to act swiftly on the administration’s unprecedented request.

“The financial markets are in quite fragile condition, and I think absent a plan they will get worse,” Bernanke said.

Ominously, he added, “I believe if the credit markets are not functioning, that jobs will be lost, that our credit rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover in a normal, healthy way.”

GDP is a measure of growth, and a decline correlates with a recession.

Across the Capitol complex, Vice President Dick Cheney and President Bush’s top advisers met privately with restive House Republicans, some of whom emerged from the session unpersuaded.

“Just because God created the world in seven days doesn’t mean we have to pass this bill in seven days,” said Rep. Joe Barton, R-Texas.

Added Rep. Darrell Issa, R-Calif., “I am emphatically against it.”

Paulson, seated next to Bernanke at the Senate hearing, objected strongly when Chuck Schumer, D-N.Y., asked if $150 billion might be enough to get the program started, with a promise of more to come.

That would be a “grave mistake,” and would fail to give the markets the confidence they needed to rebound, Paulson responded.

Rep. Barney Frank, D-Mass., the Financial Services Committee chairman who is leading talks with Paulson on the plan, also called phasing in the bailout “highly unlikely.”

Paulson was asked repeatedly why taxpayers should accept the burdens of a bailout.

“You worry about taxpayers being on the hook?” he replied at one point. “Guess what — they’re already on the hook.” Paulson suggested that the fallout from the credit crisis would hit almost everyone in the pocketbook unless forceful action was taken. Moreover, the flawed and outdated regulatory system, which didn’t catch abuses, needs to be overhauled, he said.

In New York, meanwhile, Bush was telling the U.N. General Assembly that the United States was taking “bold steps” to prevent an economic calamity that would be sure to have major effects around the world.

One of the tricky issues confronting policymakers is how to price the distressed assets that the government would ultimately buy.

Bernanke suggested buying the assets at a “hold-to-maturity” price, which would be based on an estimate of what the securities would eventually be worth as payments came in over the years.

“If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits,” Bernanke said. “First, banks will have a basis for valuing those assets and will not have to use fire-sale prices. Their capital will not be unreasonably marked down.”

In contrast, if banks use existing “mark-to-market” rules that require them to value the holdings at what similar securities have recently sold for — in some cases pennies on the dollar — it could make the whole bailout futile because it would hurt many banks’ balance sheets, causing some to fail. “This creates something of a vicious circle,” he said.

Associated Press Writers Julie Hirschfeld Davis and Martin Crutsinger contributed to this report

Source : AP - 24 Sept 2008

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Fed eases rules governing minority equity stakes in banks

Fed eases rules governing minority equity stakes in banks
(WASHINGTON) The Federal Reserve on Monday made it easier for private equity firms and other types of investors to take minority stakes in banks, a move that could usher new capital infusions to cash-hungry banks and help them cope with credit stresses.
The Fed issued policy guidance which said that it will allow investors under certain circumstances to take up to a 33 per cent equity stake in a bank without running into regulatory hurdles. Such an investment would not constitute a ‘controlling interest’ and thus would not trigger regulatory oversight. Historically, stakes of 25 per cent or more were viewed as triggering regulatory oversight.

The Fed also is making it easier for a minority investor to have representation on a bank’s board and would allow a minority investor to more freely communicate with banking management.

A global credit crisis has made it increasingly difficult for banks and other financial institutions to line up capital. Fed chairman Ben Bernanke and Treasury Secretary Henry Paulson have been encouraging banks to raise more money to rebuild balance sheets that have been hit by billions of dollars in losses from soured investments in mortgage-backed securities.

The Fed’s guidance would apply to all types of potential investors - such as private equity firms, hedge funds, sovereign wealth funds - that might be interested in taking a minority stake in a bank. — AP

Source : Business Times  - 24 Sept 2008

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