Posted in News on May 22nd, 2009 by admin – Comments Off
From the what-a-world department: Daimler AG’s $50 million investment in Tesla Motors this week means the San Carlos electric car maker is worth roughly half the value of the world’s largest auto manufacturer, General Motors Corp. With one roadster on the market and one sedan in prototype, Tesla, thanks to Daimler’s 9 percent stake, is valued at $550 million. GM sold 8.35 million vehicles worldwide in 2008; its market value as of Thursday was $1.17 billion, based on the closing stock price of $1.92.
“It’s sort of amusing,” remarked Daimler co-founder, Martin Eberhard.
Green throwdown: Faster than a speeding bullet, San Jose Mayor Chuck Reed’s office sent us the news that his city is now considered America’s greenest. At least Greentech Media says it is, citing Reed’s drive to bring 25,000 green tech jobs to San Jose, among other items in his 15-year “Green Vision” program. Special mentions go to Palo Alto, Berkeley, Greensburg, Kan., and Gainesville, Fla. San Francisco is little more than an afterthought in the online magazine’s list of 12. Its green cred: “More than half the city’s residents use public or alternative transportation to get to work.”
But hasn’t Mayor Gavin Newsom repeatedly told us San Francisco is the greenest of them all? “With all due respect to other cities, San Francisco is much greener than everyone else on this list,” Nathan Ballard, Newsom’s spokesman, e-mailed me. “Sure, mayors around the country have made a lot of pledges, but we have actually done the work.” Ballard says the city’srecord on green building, recycling and reducing greenhouse gases is second to none. Newsom “would be more humble about it,” Ballard added. Right.
Dark (green) horse: It should be said that this is about the 984th “green cities” survey that has crossed our desk in oh, about the past three months, so one shouldn’t treat it as gospel.
However, Reed, I’m told, takes his ambition to be the green leader very seriously. Thus, it was no surprise that he was on hand Monday at the ribbon-cutting on San Jose’s Santana Row for one of the first U.S. dealerships to sell Southern California-based Fisker Automotive’s plug-in hybrids. Coulomb Technologies, headquartered in Campbell, was also on hand for the installation of one of its electric car-charging stations. Newsom might humbly point out that San Francisco’s City Hall already has one of those.
Now if only Tesla Motors, flush with Daimler’s $50 million, would open a manufacturing plant, as it once said it would, in San Jose.
Satisfied customers: Of all the banks in California, Oregon and Washington, San Francisco’s Bank of the West ranks highest in customer satisfaction, according to the latest J.D. Power and Associates survey.
That’s the second year in a row for Bank of the West, a subsidiary of France’s BNP Paribas, with branches in 19 Western and Midwestern states. Not that California’s fifth-largest bank has escaped the woes of its peers. It recorded an $85 million loss in the last quarter, mainly because it raised its reserves to cover loan losses, primarily commercial.
“Prudent management,” said bank spokesman John Stafford, pointing to a Tier 1 capital ratio of 9.3 percent as an example of the bank’s sound fundamentals. Bank deposits also grew 12 percent compared with a year earlier. ( www.bankofthewest.com )
Down the hatch: Here’s a money-raising idea for our budget-challenged leaders. A 25-cent per-drink increase in California’s alcohol tax. Yes, it’s that dreaded TAX word, but the Marin Institute, San Rafael’s self-styled “alcohol industry watchdog,” says it would raise $3.4 billion.
A small recompense for the $38.4 billion the state lays out in connection with alcohol-related illnesses and lost productivity, according to the organization ( www.marininstitute.org). Alcohol tax measures are floating around the Legislature, but their prospects are murky at best.
You may have noticed, however, that the Senate Finance Committee just voted for a federal excise tax on alcohol and “sugar-sweetened beverages” to help pay for President Obama’s health care reforms.
That’s what CEO Eric Schmidt told the Financial Times yesterday. In an extensive Q&A with the newspaper, Schmidt reveals that Google (GOOG) seriously considered either buying a newspaper as a for-profit enterprise or hiring a pack of smart lawyers to reconfigure the paper as a nonprofit venture. He doesn’t name which paper, of course, but the Financial Times reporters pointedly remind their readers that the hedge fund Harbinger Capital Partners offered Google its twenty percent stake in the New York Times. Ultimately, however, the company decided that going so far as owning an outlet that actually produced copy, rather than simply aggregating and organizing it, would be “crossing the line” between a content company and a technology company. Wall Street Journal writer Jessica Vascellaro argues that this position is growing increasingly flimsy. After all, she writes, both YouTube and Google’s Book Search project are awfully close to resembling content production.
The real reason may be twofold. First, as Schmidt readily concedes, the targeted papers are either far too expensive or burdened with too much debt and liabilities. Second, the advertising model for general news reporting is obsolete, and Google’s execs have decided instead to work with papers such as the Washington Post (the parent company of which also owns TBM) to come up with a new model that can subsidize serious general news gathering. The days when general display ads would float on the page, contextually disconnected from the substance of the stories, are over. But who wants their ads tied to stories of Gitmo torture? Unless the business model radically changers, there will be no revenue stream that props up the most serious and important news stories.
So what does Schmidt have in mind for the Washington Post? “It seems to me that the newspaper that I read online should remember what I read. It should allow me to go deeper into the stories. It’s that kind of a discussion that we’re having.” In other words, the paper will store and archive a catalogue of the stories you read, steer more stories along those lines to your eyeballs, and keep you coming back for more by knowing what you’re most interested in. Google already remembers what you search for, in order to more accurately match ads to your search screen. Now, it seems, Schmidt would like to apply this technique to news gathering.
In other news, Schmidt flatly refused to share more revenue with newspapers whose headlines Google aggregates. He argues that the traffic Google steers toward media outlets more than makes up for the ad revenue it gets from collecting headlines. And he’s probably right. If you want to read the entire Q&A, click here.
May 21 (Bloomberg) — Britain’s top-level credit rating is more likely to be cut by Standard & Poor’s as the government’s finances deteriorate amid the worst recession since World War II.
The U.K.’s AAA outlook was lowered to “negative” from “stable” because of the nation’s increasing “debt burden,” S&P said in a statement today. The government’s budget deficit this year will reach 175 billion pounds ($273 billion), or 12.4 percent of gross domestic product, Chancellor of the Exchequer Alistair Darling said on April 22.
A downgrade would make Britain at least the fifth European Union nation to be cut this year because of the economic slump, joining Ireland, Greece, Portugal and Spain. The U.K. plans to sell a record 220 billion pounds of bonds in the fiscal year through March 2010 as the recession cuts revenue and forces the government to raise spending.
“We have revised the outlook on the U.K. to negative due to our view that, even assuming additional fiscal tightening, the net general government debt burden could approach 100 percent of gross domestic product and remain near that level in the medium term,” S&P analysts including David Beers in London, said in a report today.
The difference in yield, or spread, between U.K. 10-year bonds and equivalent German securities widened nine basis points to 24 basis points following the statement.
The British economy, the second largest in Europe, shrank 1.9 percent in the first quarter, the biggest contraction since 1979, when Margaret Thatcher became Prime Minister, the Office for National Statistics said on April 24. Darling said in his budget the economy will slump about 3.5 percent this year, before expanding in 2010.
To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net
Note to Californians: Get ready for larger class sizes, fewer police patrolling the streets and more public offices shuttered on weekdays.
State officials are now scrambling to close a $21.3 billion fiscal shortfall, a gap that grew by $6 billion overnight after residents voted down five budget propositions Tuesday.
The state must make “severe cuts now,” Gov. Arnold Schwarzenegger said Wednesday. He and state legislative leaders will have to hammer out a budget deal before the fiscal year ends on June 30. The gap covers the rest of this fiscal year and the next.
“There will be around $5.3 billion in additional cuts in education, there will be severe cuts in health care, which is another area where you know we spend a lot of money, and then of course you have to go and look in other areas like prisons,” said the governor, who was in Washington, D.C., meeting with the Obama administration.
While most states are facing cash crunches as the economy weakens, California’s problems are larger than most. Only three months ago, state officials agreed on a budget deal that closed a $40 billion gap by cutting $15.8 billion in spending, temporarily raising the state sales tax by a penny, borrowing $5.4 billion and using nearly $8 billion in federal stimulus funds.
The state has also suffered mightily in the economic downturn. Its unemployment rate hit 11.2% in March, fourth highest in the nation, while its median home price dropped 54% over the past two years, according to the California Budget Project.
Meanwhile, revenues are running $2.1 billion below estimates, according to the state controller.
Back at the budget table
Now they are back at the table, facing another massive shortfall. And unless the budget problems are addressed, the nation’s most populous state won’t have enough money to pay many of its bills on time in the coming fiscal year, the California Legislative Analyst’s Office said earlier this month. The state controller already had to delay $3 billion in payments in February because of a lack of cash.
California’s options are more limited than most. Leaders are constrained by having the nation’s lowest state bond rating, which makes borrowing more expensive, and by a multitude of voter-approved propositions that dictate their spending.
“They are not flush with choices,” said Jerry Nickelsburg, senior economist with the UCLA Anderson Forecast. Officials will look to education, health care and prisons because “they are about the only places you can find the money.”
The defeated proposals would have allowed the state to divert money earmarked for early childhood education and mental health programs into the general fund and to borrow funds from the state lottery.
Even if these measures had passed, Schwarzenegger said he still needed to cut $3 billion from education spending, reduce funding for the state’s Health and Human Services department, reduce the state workforce by 5,000 people and obtain $6 billion through short term borrowing to close a $15.4 billion gap.
Last week, the governor said that if the propositions are defeated, he’d be forced to cut another $2.3 billion from the education budget, eliminate funding for substance abuse treatment, crime prevention, HIV education and prevention and outreach efforts by the state public college systems. He would also have to borrow $2 billion from local governments, forcing them to cut back their spending on law enforcement and other services.
California residents will likely see teachers laid off and a shorter school year, said Daniel J.B. Mitchell, professor of management and public policy at the University of California at Los Angeles. Already, the Los Angeles court system announced it will be closed one day a month to conserve funds.
“There’s no end to the things you can cut,” Mitchell said.
State officials are also looking to Washington, D.C., for additional help. Treasurer Bill Lockyer last week sent a letter to Treasury Secretary Tim Geithner, renewing his call for the federal government to backstop the state’s debt. This will help lower California’s borrowing costs, freeing up more money for services.
“It’s critical,” said Jean Ross, executive director of the California Budget Project. “Otherwise, you end up with California cutting deeper or taxing more.”
Posted in News on May 18th, 2009 by admin – Comments Off
(CNN) — Joaquin “El Chapo” Guzman Loera, a 54-year-old drug cartel leader whose nickname means “Shorty,” is the most wanted man in Mexico. He’s also one of the most wanted men in the United States.
For five years, the State Department has kept a $5 million bounty on his head, calling Guzman a threat to U.S. security.
Guzman, who leads the Sinaloa cartel, is a key player in the bloody turf battles being fought along the border.
He recently upped the stakes, ordering his associates to use lethal force to protect their loads in contested drug trafficking corridors, according to the Los Angeles Times.
The cartel’s tentacles and those of its chief rival, the Gulf cartel, already reach across the border and into metropolitan areas such as Atlanta, Georgia; Chicago, Illinois; Seattle, Washington; St. Louis, Missouri; and Charlotte, North Carolina, Drug Enforcement Administration Agent Joseph Arabit told a subcommittee of the House Appropriations Committee in March.
“No other country in the world has a greater impact on the drug situation in the United States than Mexico does,” said Arabit, who heads the DEA’s office in this year’s border hot spot, El Paso, Texas.
A December 2008 report by the Justice Department’s National Drug Intelligence Center revealed that Mexican drug traffickers can be found in more than 230 U.S. cities.
So far, the U.S. has largely been spared the violence seen in Mexico, where the cartels’ running gunbattles with police, the military and each other claimed about 6,500 lives last year. It was a sharp spike from the 2,600 deaths attributed to cartel violence in 2007.
Once again, drug war casualties are mounting on the Mexican side at a record pace in 2009 — more than 1,000 during the first three months of the year, Arabit said. See who the key players are »
The violence that has spilled over into the U.S. has been restricted to the players in the drug trade — trafficker-on-trafficker, DEA agents say. But law enforcement officials and analysts who spoke with CNN agree that it is only a matter of time before innocent people on the U.S. side get caught in the cartel crossfire.
“It’s coming. I guarantee, it’s coming,” said Michael Sanders, a DEA spokesman in Washington.
Sinaloa cartel leader Guzman’s shoot-to-kill instructions aren’t limited to Mexican authorities and cartel rivals; they also include U.S. law enforcement officials, the Los Angeles Times reported, citing sources and intelligence memos. The move is seen as dangerously brazen, the newspaper reported. In the past, the cartels have tried to avoid direct confrontation with U.S. law enforcement.
U.S. officials are trying to stop the violence from crossing the border.The Obama administration committed to spending an additional $700 million to help Mexico fight the cartels and agreed to double the number of U.S. agents working the border.
But $700 million pales in comparison with the wealth amassed by just one target.Guzman, who started in collections and rose to lead his own cartel, is said to be worth $1 billion after more than two decades in the drug trade.
He made this year’s Forbes list of the richest of the rich, landing between a Swiss tycoon and an heir to the Campbell’s Soup fortune. Popular Mexican songs, called narcocorridos, embellish the myth of the poorly educated but charismatic cartel leader.
“Shorty is the Pablo Escobar of Mexico,” said security consultant Scott Stewart, invoking the memory of the colorful Medellin cartel leader who also landed on the Forbes list and thumbed his nose at Colombian authorities until he died in a shower of police bullets in December 1993.
Stewart, a former agent for the Bureau of Diplomatic Security, gathers intelligence on the cartels for Stratfor, a Texas-based security consulting firm that helped document Guzman’s worth.
Just a decade ago, Mexican smugglers worked as mules for Colombians, moving their cocaine by land across the U.S. border when the heat was on in the Caribbean. But Colombian President Alvaro Uribe’s campaign of arrests and extraditions made ghosts of the Medellin and Cali cartels.
The mules stepped into the power vacuum and never looked back. Now they buy cocaine from the Colombians and take their own profits.
Mexican cartels now bring in about 90 percent of the cocaine consumed in the United States, according to the DEA. Mexico also is the top foreign supplier of marijuana and methamphetamine.
Marijuana became the cartels’ biggest revenue source for the first time in 2007, bringing in $8.5 billion. Cocaine came in second, at $3.9 billion, and methamphetamine earned $1 billion, a top U.S. drug policymaker told a group of U.S. and Mexican law enforcement officials last year. Watch how marijuana became the cartels’ top cash crop »
The Mexican government recognizes seven cartels, but the Sinaloa and Gulf cartels are the major players along the U.S. border, according to the DEA agents, local police officials and security analysts who spoke with CNN. The cartels’ enforcers — Los Negros for Sinaloa, Los Zetas for Gulf — are believed to be responsible for most of the violence.
The status and alliances of the players continue to shift. Although the DEA and some analysts disagree, others say the Zetas, a paramilitary group of turncoat soldiers and anti-narcotics police, are now running the Gulf cartel.
“From what we’ve seen, the Zetas have taken over the Gulf cartel,” analyst Stewart said. “In violent times, soldiers tend to rise to the top.”
These soldiers are incredibly well-armed, police learned after a November raid that resulted in the arrest of top Zeta lieutenant Jaime “Hummer” Gonzalez Duran. It was the largest weapons seizure in Mexican history — 540 rifles, including AK-47s; 287 grenades; two rocket launchers; and 500,000 rounds of ammunition.
At the very least, the Zeta enforcers now have a seat at the table. The DEA’s Arabit testified that the Gulf cartel is now run by a triumvirate. Included is Los Zetas leader Heriberto Lazcano Lazcano, a former military man who is also known as “El Lazco,” or “The Executioner.”
The past year witnessed unprecedented bloodshed as the two cartels battled for control of the border’s lucrative drug-trafficking corridors.The cartels are fighting over control of Ciudad Juarez, across the border from El Paso, Texas; Sonora Nogales, across from Nogales, Arizona; and Tijuana, across the border from San Diego, California.
Two years ago, the turf battle was over Nuevo Laredo, across the border from Laredo, Texas.
It’s all about the highways that help move the drugs. Nuevo Laredo is close to the Interstate 35 corridor, and Juarez has easy access to I-10, a major east-west interstate, and I-25, which runs north to Denver, Colorado. Tijuana is also conveniently near I-10 and I-5, which heads north all the way to the Canadian border.
Some of the battles are internal, Arabit said. Some are with other cartels. And some, he said, can be attributed to the cartels’ “desperate” attempt to resist Mexican President Felipe Calderon’s unprecedented attack on drug traffickers.
As soon as he took office in January 2007, Calderon called out the cartels. He has deployed about 30,000 troops to back up and, in some cases, do the job of local police. Mexico also has extradited about 190 cartel suspects to the United States since Calderon took office.
The violence involves beheadings, running gunbattles and discoveries of mass graves and huge arms caches. Police and public officials have been gunned down in broad daylight. The cartels’ enforcers boldly display recruitment banners in the streets.
“The beheadings started at the same time the beheading videos started coming out of Iraq,” analyst Stewart said. “It was simple machismo. The Sinaloa guys started putting up videos on YouTube of them torturing Zetas.”
When Mexicans first stepped into the role of Colombians in the mid-1990s, the Juarez and Tijuana cartels were dominant, beneficiaries of their location. Today, they are shadows of their former selves, weakened by the deaths and arrests of their leaders.
Juarez cartel leader Amado Carrillo Fuentes died of complications from plastic surgery in 1997. Known as “The King of the Skies” for his fleet of cocaine-carrying planes, he was said to be undergoing liposuction and other appearance-altering procedures to avoid arrest.
Three of his doctors were charged with killing the cartel leader with an overdose of anesthetic during his surgery. Two of them later were killed.
His death, along with the 2003 arrest of Gulf cartel founder Osiel Cardenas Guillen, set the stage for the ongoing turf battle. When Cardenas was extradited in 2007, Guzman set his sights on controlling Juarez as well as Nogales.
Cardenas is awaiting trial in October in federal court in Houston, Texas, where he is accused of drug trafficking and attempting to kill two federal agents and an informant on the streets of Matamoros, Mexico.
Arrests and extraditions crippled the Arellano-Felix Organization in Tijuana, and last year, Guzman made a move on that plaza as well.
“Right now, they are fighting to survive much like Pablo Escobar,” said the DEA’s Elizabeth Kempshall, who heads the agency’s office in Phoenix, Arizona. Phoenix has become the nation’s kidnapping capital, largely because of the cartels’ increasing presence.
Kempshall said that cartel leaders fear nothing more than extradition: “That is the worst thing for any cartel leader, to face justice in the United States.”
America’s auto titans are dismantling their global empires. But across the Pacific, it’s as if the global economic forces that have pummeled Detroit never struck. Chinese auto sales are up, and this year China is projected to displace Japan as the world’s largest car producer.
Now, the auto world is buzzing that China’s auto industry may try to pick up the pieces of Detroit — at a bargain.
Chinese companies have tried to dampen speculation, issuing regulatory filings that deny bids to buy Ford’s Volvo or General Motor’s Saab. But there’s little doubt among analysts that Chinese automakers are interested in the United States and that Detroit’s automakers are interested in them.
Buying up iconic brands such as Hummer or Saturn could supply Chinese automakers with the technological expertise to help them leapfrog past long-established competitors, said Kelly Sims Gallagher, a lecturer at Harvard University’s Kennedy School of Government, who wrote a book on Chinese automakers.
“That’s where Chinese firms are weakest,” she said. “They have world-class business and manufacturing capabilities now. What they still lack is technological know-how, systems integration, being able to design new vehicles from scratch and get them to a manufacturing line.”
China still suffers from its reputation of being a copycat manufacturer. An acquisition could lend clout to some of the nation’s 100 car companies that are largely unknown outside their home country.
Such a deal would be “off-the-shelf legitimacy that you can purchase,” said Aaron Bragman, an auto analyst with IHS Global Insight.
‘Center of gravity is moving eastward’
The global auto industry is restructuring. Italy’s Fiat is on the verge of taking control of Chrysler. Last year India’s Tata Motors, already famous for its $2,000 Nano, acquired Jaguar and Land Rover.
And China’s auto sector has emerged as a threat to the long-standing pecking order. Earlier this year, Geely Automobile, one of China’s largest private carmakers, purchased an Australian drivetrain transmission supplier, a leading gearbox manufacturer. Weichai Power, one of China’s top diesel engine manufacturers, acquired a French diesel engine producer. Another Chinese company, BYD, which counts Warren E. Buffett as an investor, launched a mass-market plug-in electric car, ahead of GM’s anticipated Chevrolet Volt.
Detroit’s annual auto show in January was somber, but Shanghai’s show dazzled attendees with throngs of models, rock bands and light shows. This year, Nissan skipped Detroit and attended the Chinese event in April. Mercedes-Benz, BMW and Porsche all unveiled new-vehicle models in Shanghai.
“The center of gravity is moving eastward,” Dieter Zetsche, chairman of Daimler, told reporters at the show.
“When we look back 20 years from now, the year 2009 is likely to be viewed as the year in which the baton of leadership in the global auto industry passed from the United States to China,” Jack Perkowski, a Western transplant and former chairman of a Beijing auto parts company, wrote in his blog “Managing the Dragon.”
Hurdles ahead for exports to U.S.
Some of China’s bigger manufacturers, such as Chery Automobile, have trumpeted their intent to export Chinese-made vehicles to the United States in the next few years. To get there, they’ll need to revamp their products to meet stringent U.S. emissions and safety standards.
That’s no simple problem. Previous plans to ship Chinese cars to U.S. soil have crumbled. A company called Brilliance missed its goal of launching U.S. sales in 2009. BYD said it would introduce its cars to Americans in 2010, but has pushed their arrival to 2011. Other potential contenders have gone out of business or are struggling to stay afloat.
In 1994, Beijing released a plan to triple auto production by 2000 and reduce imports. The government lured foreign producers to bring their technology overseas and invest in Chinese auto parts firms. It aimed to modernize domestic manufacturing by creating joint ventures with foreign automakers such as GM.
As a result, China’s auto sales took off in 2000. In 2002, they crossed the 1 million mark. More recently, the numbers have taken a hit in the economic crisis, forcing companies to curb exports to countries such as Russia and Vietnam.
Stimulus, growing middle class spur growth
But after the industry pressed Beijing for a bailout late last year, the central government responded with subsidies and slashed the sales tax on small, fuel-efficient cars, spurring demand. And analysts say the expansion of the country’s web of roads and highways — part of an economic stimulus package — coupled with a growing middle class could fuel more sales for years to come.
In April, China’s vehicle sales jumped 25 percent, compared with a year earlier, to a record monthly high of 1.15 million units. It was the third consecutive month that China has surpassed the United States in sales.
GM, which has two joint ventures in the country, also hit a monthly record in April with its sales jumping 50 percent from a year earlier. The automaker plans to import cars from China starting in 2011, according to a GM plan circulating in Congress.
But in the United States, auto sales fell 34 percent last month. And GM, which has received $15.4 billion in U.S. government loans, says it is likely to file for bankruptcy protection.
Back in what felt like the golden age of finance, before the fine print of mortgage documents suddenly became relevant and ordinary people in bars began sharing their worries about credit default swaps, American banking was celebrated as the envy of the world.
Joon Mo Kang
Blue jeans and electronics were arriving from factories scattered from China to Costa Rica, and even white-collar jobs were slipping overseas, but the sophisticated work of measuring risk and engineering investments remained the province of the geniuses running Wall Street. Their mastery was more lucrative than ever, and it was emulated around the globe.
So it registered as a comedown last week to read that Bank of America was selling part of its stake in the Construction Bank of China, as it scrambled to secure cash in the face of its real estate-related disasters.
Yes, it has come to this: The largest bank in the United States, putative citadel of free enterprise, must desperately unload shares in a bank controlled by the Communist Party of China. That, or risk the wrath of American regulators, newly concerned about how much money financial institutions have on hand.
Meanwhile, the Treasury last week outlined proposed new rules for derivatives, the exotic investments whose unsupervised trading was once offered up as a sign of the vibrancy of American financial innovation, only to become a prime example of how Wall Street set fire to the global economy.
Not four years ago, when Bank of America paid $3 billion for a 9 percent stake in Construction Bank as part of a wave of foreign investment into China, it was supposed to be a sign of Wall Street’s superior money management. American banks — not just Bank of America, but Citibank, Merrill Lynch and others — portrayed their purchases of Chinese institutions as savvy, strategic plays; a way to get a foothold in the world’s largest potential market for seemingly everything.
Still shaking off the cobwebs of its failed experiment in Maoist utopia, China was home to 1.3 billion people whose wallets awaited credit cards, 2.6 billion feet eager for Nike sneakers, and 13 billion fingers waiting to be licked in the thrall of KFC chicken.
American banking executives spoke paternalistically of their Chinese counterparts. Yes, China’s banking system was laced with corruption, but the American banks would bring their culture of modern finance and teach their new charges how to lend with a dispassionate eye on the bottom line.
“We see value in combining their local knowledge and distribution with our product expertise, technology and experience with size and scale,” Bank of America’s chief executive, Ken Lewis, said as he consummated the deal to purchase a piece of Construction Bank in June 2005.
Chinese leaders spoke of their great fortune in gaining Wall Street’s tutelage. “We have much to learn from our partner in serving customers and creating shareholder value,” said Construction Bank’s chairman, Guo Shuqing.
These days, of course, talk of Bank of America and shareholder value centers on how much of the company its newest shareholder — Uncle Sam — is destined to own, and whether the bank’s shares retain any value. Bank of America’s expertise with size and scale has expanded to encompass the management of $45 billion in bailout funds.
For much of Wall Street, the expertise that once was expected to elevate China’s financial system increasingly looks like sorcery, or a vast Ponzi scheme in which banks borrowed vast sums, lent to virtually anyone, and used incomprehensible models to convince markets that all was fine. They scattered low-interest credit cards and home equity loan offers like takeout menus, creating the illusion of prosperity by driving up home values.
In effect, American banks operated not unlike the Chinese banks they were supposed to modernize. They extracted profits by following a variation of the principle long pursued by their Chinese counterparts: lend without hesitation while extracting your cut, confident that the government is on the hook for the losses.
In China, ventures may be spectacularly unprofitable, yet enrich everyone lucky enough to get a piece. Developers, for example, construct vacant office buildings as an excuse to borrow from state banks. They rake off a cut for themselves, pay bribes to the party officials who deliver the land and reward bank functionaries with sumptuous banquets and trips to Macao. Soon enough, the trophy skyscraper descends into financial disaster, but the developers, bankers and party officials have already extracted their riches, and for long afterward they will still enjoy them.
Much the same can be said of Countrywide, the mortgage lender that sold itself to Bank of America last year in a fire sale, after many of its loans went bad. Shareholders were mostly wiped out. Homeowners suffered foreclosure. But the company’s executives made out brilliantly, cashing stock options amassed during the real estate boom, when Countrywide’s share price soared along with its loan volume. Ditto the Wall Street bankers who enabled Countrywide to lend with abandon by selling their mortgages to investors.
Now the easy money is gone. Wall Street’s financial alchemy has broken down, and bankers are freshly concerned about the creditworthiness of their borrowers. Bank of America is in such a fix that the investment it once portrayed as a helping hand to the primitive Chinese banking system must be sold off in haste just to stay alive.
Shorn of their auras as global paragons of excellence, American banks are even facing pressure to act more like the Chinese banks they were supposed to reform — by lending in support of politically necessary projects.
The biggest criticism of Chinese banks has been that they lend not on the financial merits but in adherence to the wishes of party leaders. Fearful that a large state company may fail and disgorge angry, unemployed peasants onto the streets, local party officials pressure state banks to keep the credit flowing and spare the jobs.
In recent months, the center of the American financial system has effectively shifted from New York toward Washington, as taxpayer funds keep many institutions in business. Lawmakers and Treasury officials now implore the banks to use their bailout funds to increase lending, even as the banks themselves worry about the merits of making loans in a weak economy — the very conundrum Chinese bankers understand all too well.
Perversely, Bank of America is being forced to shrink its China stake just as it might actually have something to learn about banking from its Chinese partner.
Each day, the contents of the bags spill into the stainless steel hoppers of the receiving room. The diamonds are washed and sorted by size, clarity, shape and quality; then, rather than being sent to be sold around the world, they are wrapped in paper and whisked away to a vault — about three million carats worth of gems every month.
“Each one of them is so unusual,” said Irina V. Tkachuk, one of the few hundred people, mostly women, employed to sort the diamonds, who sees thousands of them every day.
“I’m not a robot. I sometimes think to myself ‘wow, what a pretty diamond. I would like that one.’ They are all so beautiful.”
It could be years before another woman admires that stone. Russia quietly passed a milestone this year: surpassing De Beers as the world’s largest diamond producer. But the global market for diamonds is so dismal that the Alrosa diamond company, 90 percent owned by the Russian government, has not sold a rough stone on the open market since December, and has stockpiled them instead.
As a result, Russia has become the arbiter of global diamond prices. Its decisions on production and sales will determine the value of diamonds on rings and in jewelry stores for years to come, in one of the most surprising consequences of this recession.
Largely because of the jewelry bear market, De Beers’s fortunes have sunk. Short of cash, the company had to raise $800 million from stockholders in just the last six months.
The recession also coincided with a settlement with European Union antitrust authorities that ended a longtime De Beers policy of stockpiling diamonds, in cooperation with Alrosa, to keep prices up.
Though it is a major commodity producer, Russia has traditionally not embraced policies that artificially keep prices up. In oil, for example, Russia benefits from the oil cartel’s cuts in production, but does not participate in them.
Diamonds are an exception. “If you don’t support the price,” Andrei V. Polyakov, a spokesman for Alrosa, said, “a diamond becomes a mere piece of carbon.”
In an attempt to carefully calibrate its re-entry on the global market, without forcing prices still lower, Russia is relying on two things: the Soviet-era precious gem depository — created to hold jewelry confiscated from the aristocracy after the 1917 revolution — and capitalist investors, whom Alrosa hopes will buy diamonds as an investment, like gold.
Russia is taking a leadership role in other ways, too.
Sergei Vybornov, Alrosa’s chief executive, said that he had helped persuade the central bank of Angola — which, like Russia, is still relatively flush with oil money — to buy 30 percent of the production of Angola’s diamond mines, keeping these stones off the market.
And last fall, Alrosa began what it called the St. Petersburg Initiative, along with De Beers and other large producers, to invest collectively in generic diamond advertising, akin to De Beers’s promotion of the slogan “Diamonds are forever.” Russia assumed the task as De Beers has principally shifted to promoting its own branded gems.
Still, it is a precarious time for the Russian diamond company to assume leadership of the industry.
Until last year, De Beers produced about 40 percent of the global rough stone supply, and Alrosa 25 percent. But De Beers, which is prohibited under its European Union antitrust agreement from stockpiling, closed mines in response to the glut in rough stones. Russia is loath to do that, as authorities in Moscow, gravely concerned about potential unrest by disgruntled unemployed workers, try to keep workers on the payroll.
In the first quarter, De Beers reduced output by 91 percent compared with the previous year. The diversified mining companies Rio Tinto and BHP Billiton also curbed production.
Meanwhile, the market for wholesale polished diamonds, worth about $21.5 billion, is expected to fall to about $12 billion in 2009, according to Polished Prices, an analytical service for the industry.
Rough diamond prices have fallen even more, as much as 75 percent since their peak last July at some auctions.
The two markets are distinct. Typically, about 60 percent of a rough diamond is lost as dust or shavings in the cutting process.
Mr. Vybornov blames diamond traders who pledged diamond stocks as loan collateral for part of the world glut. When credit dried up last fall, banks and other creditors seized those gems and sold them, he says, flooding the market. By December, his company decided to withdraw entirely from the market rather than further erode prices.
Russia historically remained mostly a behind-the-scenes player, perhaps because Soviet authorities would have had to perform some ideological gymnastics to promote a product consumed principally by the rich of the capitalist world.
Instead, twisting politics, the Soviets concluded a semisecret agreement with apartheid-era De Beers to sell Siberian diamonds in a way that would not undercut the market.
After the collapse of the Soviet Union, the Russian diamond industry created a formal alliance with De Beers, selling the South African company half of each year’s production at a discount intended to subsidize De Beers’s generic diamond advertising undertaken in the 1990s, mostly in the United States.
Now, the Russians are in the driver’s seat.
Charles Wyndham, a former De Beers evaluator and co-founder of Polished Prices, said Russia had thus far managed the transition well: withholding gems to make more money in the long run rather than further depressing the market.
“Whatever one wants to say about the Russians, they certainly aren’t stupid,” Mr. Wyndham said.
Alrosa is seeking to jump-start demand by selling gems under long-term contracts to wholesale buyers in Belgium, Israel, India and elsewhere. Under these contracts, six of which have been signed, prices are set at a midpoint between the peak last August and this winter, and fixed for a period of several years.
“A diamond ring should not cost $100,” Mr. Vybornov said. “We don’t want that type of client.”
Alrosa is also working with a Moscow investment bank, Leader, a subsidiary of the Russian natural gas monopoly Gazprom, to market diamonds to investors. Under the plan, investors would buy diamonds but the gems would not be released to jewelers for several years.
It is a program, essentially, of outsourcing the stockpiling function to investors in exchange for the chance to profit from a possible recovery in the market.
At one of Alrosa’s cutting shops in one of Moscow’s outer districts, Aleksandr A. Malinin, an adviser to the president of Alrosa, showed a typical collection that might become the basis for such an investment vehicle.
The gems fit in a felt box about the size of a laptop computer.
The larger stones, a circular-cut 10 carat flawless white and a princess-cut yellow, were estimated at about $400,000. The smaller ones ranged from $16,000 to $100,000. But the value of the box, while surely several million dollars, is something of a mystery just now given the depressed market.
How the buy-in price for the stones will be set, and how the company will determine when the price goes up and down, is unclear, Mr. Malinin said.
“We have to tell people that diamonds are valuable,” he said. “We are trying to maintain the price, just as De Beers did, as all diamond producing countries do. But what we are doing is selling an illusion,” meaning a product with no utility and a price that depends on the continued sense of scarcity where there is none.
At the Alrosa unit that receives diamonds, called the United Selling Organization, where about 90 percent of the output of the Siberian mines arrives for processing, Elena V. Kapustkina pours about 45,000 carats of diamonds though a stainless steel sieve every day to sort them by size.
“It’s just a job,” she said.
When asked whether diamonds had lost their romance for her, Ms. Kapustkina paused, looked down at the pile of gems on her table and blushed.
In fact, she said, her husband, a truck driver, gave her a half-carat ring 22 years ago. “Of course I love it,” she said. “It’s from my husband.”
WASHINGTON — President Obama’s top antitrust official this week plans to restore an aggressive enforcement policy against corporations that use their market dominance to elbow out competitors or to keep them from gaining market share.
The new enforcement policy would reverse the Bush administration’s approach, which strongly favored defendants against antitrust claims. It would restore a policy that led to the landmark antitrust lawsuits against Microsoft and Intel in the 1990s.
The head of the Justice Department’s antitrust division, Christine A. Varney, is to announce the policy reversal in a speech she will give on Monday before the Center for American Progress, a liberal policy research organization. She will deliver the same speech on Tuesday to the United States Chamber of Commerce.
The speeches were described by people who have consulted with her about the policy shift. The administration is hoping to encourage smaller companies in an array of industries to bring their complaints to the Justice Department about potentially improper business practices by their larger rivals. Some of the biggest antitrust cases were initiated by complaints taken to the Justice Department.
Ms. Varney is expected to say that the administration rejects the impulse to go easy on antitrust enforcement during weak economic times.
She will assert instead that severe recessions can provide dangerous incentives for large and dominating companies to engage in predatory behavior that harms consumers and weakens competition. The announcement is aimed at making sure that no court or party to a lawsuit can cite the Bush administration policy as the government’s official view in any pending cases.
In the speeches, Ms. Varney is expected to explicitly warn judges and litigants in antitrust lawsuits not involving the government to ignore the Bush administration’s policies, which were formally outlined in a report by the Justice Department last year. The report applied legal standards that made it difficult to bring new cases involving monopoly and predatory practices.
As a result of the Bush administration’s interpretation of antitrust laws, the enforcement pipeline for major monopoly cases — which can take years for prosecutors to develop — is thin. During the Bush administration, the Justice Department did not file a single case against a dominant firm for violating the antimonopoly law.
Many smaller companies complaining of abusive practices by their larger rivals were so frustrated by the Bush administration’s antitrust policy that they went to the European Commission and to Asian authorities.
Ms. Varney’s new policy more closely aligns American antitrust policy on monopolies and predatory practices with the views of antitrust regulators at the European Commission.
Herbert Hovenkamp, a leading antitrust scholar regarded as a centrist between those seeking more aggressive enforcement and those who generally argue for restraint, said the guidelines by the Bush administration were “a brief for defendants.”
He said that the repudiation of those guidelines by the Obama administration “will almost certainly have a greater impact than the guidelines themselves had.”
“This will be bad news for heavyweights in the tech industries — companies like Google and Microsoft,” said Professor Hovenkamp, who teaches at the University of Iowa College of Law.
“People aligned with plaintiffs will rejoice. Those aligned with defendants will wring their hands. A lot of law firms will be indifferent because they take money from both sides.”
Ms. Varney is expected to say that the Obama administration will be guided by the view that it was a major mistake during the outset of the Great Depression to relax antitrust enforcement, only to try to catch up and become more vigorous later. She will say the mistake enabled many large companies to engage in pricing, wage and collusive practices that harmed consumers and took years to reverse.
While Ms. Varney is not expected to mention any specific companies or industries vulnerable under the new policy, those who have talked to her about the speech say she is aiming at agriculture, energy, health care, technology and telecommunications companies. She may also be reviewing the conduct of some in the financial services industry, which is now undergoing a wave of consolidation as a result of the financial crisis.
Ms. Varney, who headed the Internet practice group of the Washington-based Hogan & Hartson law firm, served as a commissioner at the Federal Trade Commission in the 1990s after working in the White House during the early years of the Clinton administration.
Signaling her intent to revive a moribund antitrust program, she has recruited a collection of senior aides, many of whom are seasoned antitrust litigators or worked in the Clinton administration and the Federal Trade Commission and were involved in many prominent cases, including the one against Microsoft. They include Molly S. Boast, William Cavanaugh, Gene Kimmelman, Carl Shapiro and Philip J. Weiser.
Antitrust policy is set by Washington in two ways: by the interpretation of laws announced by the Justice Department and the Federal Trade Commission through guidelines for the courts and private litigants, and by the enforcement cases that those agencies decide to bring. The government’s guidelines are often cited by lawyers and given considerable weight by judges in antitrust cases, including those lawsuits that the government does not participate in.
It is not unlawful for a company to gain control of a market. It becomes unlawful if the company engages in conduct to exclude or harm competitors with no business justification.
Conservative antitrust experts, some judges and defendants in such cases have said that the line is too difficult to draw and that it is better to let rivalries play out in the marketplace than in the courts.
After more than a year of hearings and studies, the Justice Department in 2008 published a 215-page report analyzing Section 2 of the Sherman Antitrust Act, explaining the government’s approach to the monopolistic and predatory practices of companies.
Reflecting deep skepticism of the role of government in the marketplace, the 2008 report made formal a set of policies that had largely been followed by the Justice Department, but not by the Federal Trade Commission, during the Bush administration.
When the report was issued, Thomas Barnett, then the head of the antitrust division and the architect of the guidelines, said that they were meant to articulate “clear standards” for determining whether certain types of conduct by large companies would harm competition.
In a rare split with the Justice Department, three of the four commissioners at the Federal Trade Commission denounced the guidelines, calling them “a blueprint for radically weakened enforcement” against anticompetitive practices.
Posted in News on May 6th, 2009 by admin – Comments Off
The downturn in home prices has left about 20% of U.S. homeowners owing more on a mortgage than their homes are worth, according to one new study, signaling additional challenges to the Obama administration’s efforts to stabilize the housing market.
The increase in the number of such “underwater” borrowers comes amid signs that falling prices are making homes more affordable for first-time buyers and others who have been shut out of the housing market. But falling prices also make it more difficult for homeowners who get into financial trouble to refinance or sell their homes, and for others to take advantage of lower interest rates.
For instance, fewer will qualify to take advantage of a key component of the Obama administration’s plan to stabilize the housing market. Under the plan, announced in February, as many as five million homeowners whose loans are owned or guaranteed by government-controlled mortgage giants Fannie Mae and Freddie Mac can refinance their mortgages, but only if the mortgage loan is a maximum of 105% of the home’s value.
Government officials are considering an increase in that limit. “It’s a question that we’re looking at,” said James Lockhart, director of the Federal Housing Finance Agency, which regulates Fannie and Freddie.
Real-estate Web site Zillow.com said that overall, the number of borrowers who are underwater climbed to 20.4 million at the end of the first quarter from 16.3 million at the end of the fourth quarter. The latest figure represents 21.9% of all homeowners, according to Zillow, up from 17.6% in the fourth quarter and 14.3% in the third quarter.
“What’s going on here is that you don’t have any markets that have turned around and you have new markets, like Dallas, that have joined the ranks” of communities where home prices have fallen, said Stan Humphries, a Zillow.com vice president.
Borrowers who owe far more than their home is worth may also be less likely to participate in another part of the government’s housing plan, which provides incentives for mortgage companies to modify loans to make payments more affordable. Thomas Lawler, an independent housing economist, said borrowers who owe 30% more than their homes are worth are far more likely to walk away from their property than those who owe just 5% or 10% more and expect prices to rebound. More than one in 10 borrowers with a mortgage owed 110% or more of their home’s value at the end of last year, according to First American CoreLogic.
There are some recent indications that the housing market could be beginning to stabilize. The National Association of Realtors pending home-sales index, for instance, increased 3.2% in March.
Just how many borrowers are underwater is a matter of some dispute, with the answer depending in part on assumptions regarding home values and mortgage debt outstanding. Variations in home-price estimates can make a major difference in the number of borrowers who are underwater. In addition, borrowers who are already in the foreclosure process may be counted as being underwater if the title to their property hasn’t changed hands.
Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, said underwater estimates can be too high if they use price data that includes a large number of foreclosures. Foreclosed homes tend to sell at a discount, he said, making it appear that prices have fallen more than they actually have.
Moody’s Economy.com estimates that of 78.2 million owner-occupied single-family homes, 14.8 million borrowers, or 19%, owed more than their homes were worth at the end of the first quarter, up from 13.6 million at the end of last year.
Part of the reason Zillow’s numbers are higher may be that it looks at mortgage debt taken out at the time the home was purchased and doesn’t adjust for any payments since made toward the outstanding mortgage balance. It also assumes that borrowers who took out home-equity lines of credit at the time of purchase have fully tapped the amount they can borrow. That approach can overstate the portion of borrowers who are underwater, Mr. Zandi said.
Mr. Humphries of Zillow calls his methodology conservative and said Zillow’s use of pricing for individual homes provides a better measure of home valuations than Mr. Zandi’s approach, which relies on market-level estimates of home values. He adds that Zillow doesn’t include foreclosures in its pricing models.
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