The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
The tax deductibility of mortgage interest is almost as inviolable a part of the American dream as is the U.S. Constitution. The co-chairs of the White House deficit commission have boldly, and rightly, put this almost century-old sacred cow on the chopping block. Now they just have to convince legislators to swing the axe. They could start by killing the myth that the subsidy is all about middle class homeownership.
Investors feel better when risky bonds come with flak jackets. Drive-by deals, so named for skipping over the conventional road-show route in favor of a one-day turnaround, don’t give investors much time to ensure they’re protected. Shoddier bondholder provisions in a slew of recent, often rushed, deals indicate many are not.
MetroPCS is a case in point. The cellphone service provider secured itself considerably more leeway than other similar borrowers in a hastily arranged $1 billion sale last week. To ensure they’re paid back, bond holders like to restrict a heavily indebted company’s spending, investment and borrowing. As a general rule, high-yield issuers have been able to tap only about 5 percent of their available assets, according to Moody’s Investors Service median estimate. MetroPCS was granted access to close to 30 percent.
Nigeria has a bad rap in the developed world. Renowned for email scams and widespread corruption, Nigeria runs the risk of being judged, perhaps unfairly, by investors looking warily at its $500 million bond offering scheduled for later this year or in early 2011. But Africa’s most populous nation, in a post-crisis world, actually looks deserving of the funds.
First, Nigeria has very little debt—it stands at just 16 percent of GDP. Compare that with the United States, where public debt stands at 88 percent of GDP, or worse, Greece, where the debt load has soared to 133 percent, according to JPMorgan. That also means a scarcity of Nigerian paper may appeal to investors wanting to diversify into frontier economies.
You know the global refinancing fiesta is raging when a newspaper publisher can join in the fun. The New York Times is paying just 6.6 percent on $225 million of debt sold Monday. A good chunk should help repay Carlos Slim Helu—the Mexican billionaire who lent a similar amount at a hefty 14 percent when no one else would. That said, the publisher has already paid plenty for the favor.
Slim swooped in to help out the Times in January 2009. Not only did the newspaper’s prospects look dim at the time. The global financial system was on its knees. As a result, some thought Slim had a bigger motive in mind, namely becoming a newspaper mogul. In hindsight it looks as if Slim was simply, and smartly, in it for the money.
– The author is a Reuters Breakingviews columnist. The opinions expressed are her own –
By Agnes T. Crane
NEW YORK (Reuters Breakingviews) – Investors desperate for yield and protection against a sagging dollar are flocking to bonds denominated in emerging market currencies. Some appear to be overlooking one important aspect amid the frenzy. If things go bad, local sheriffs playing by different rules will lay down the law.
The wrangling over AIG’s Asian insurance unit AIA clarifies what Prudential’s board should have known all along: AIG is beholden to the U.S. taxpayer. While accepting a lower price might have been a rational business decision, it also would have further opened AIG to charges of shortchanging its owners — this time to help Pru.
Prudential Chief Executive Tidjane Thiam may be fighting for his job. His shareholders couldn’t get past sticker shock on the $35.5 billion deal to buy the pan-Asian insurer. That forced him to try to renegotiate at a lower price.
Are the largest U.S. banks too big to downgrade? Laws to tackle the too-big-to-fail problem are supposed to force Bank of America, Citigroup and other financial firms to stand on their own feet.
But at least for a while, U.S. bank credit ratings will continue to factor in government backing.
By Agnes Crane and Christopher Swann
Haven status in a market storm sounds good for the United States — but could make it less safe. Sure, it bolsters the dollar’s standing and delivers the perk of cheap financing. But for a nation that desperately needs to kick its borrowing habit, the weak euro could be a bad influence.
Global financial markets have been rattled for weeks as euro zone leaders have clumsily tried to contain the Greek contagion. A nearly $1 trillion rescue package has done little to stop the carnage. The euro has been hammered, though recovered some lost ground in the last two days. Stock markets around the world took another beating Thursday as investors feared a global economic slump. The S&P 500 index fell 3.9 percent.
The bailout of America’s failed housing finance giants is taking on Greek proportions. On Wednesday, Freddie Mac said it would tap the Treasury for another $10.6 billion after first-quarter losses. Together, Freddie and its cousin Fannie Mae have drawn $136.5 billion from Treasury’s unlimited equity line since they were seized in September 2008. The European and International Monetary Fund rescue package for Greece – one that was supposed to shock and awe international markets – comes in at the same kind of figure, around $139.7 billion.
The tragedy, as far as U.S. taxpayers are concerned, is that Fannie and Freddie will most likely need much more capital in coming years. High unemployment and the shaky housing market all but ensure more losses for the two agencies responsible for guaranteeing the majority of mortgages.
The United States is a great distance from Greece and its economy is moving in a better direction. But the subprime crisis showed how fast and how far local financial problems can spread. If the euro zone gets into real trouble, the United States may be a safe-ish haven, but can’t hope to escape unscathed.
American investors got a sampling this week of what further deterioration in the euro zone could taste like. On the good side, investors rushed into perceived harbors – the dollar and Uncle Sam’s own debt. On the bad side, the swoon in prices of American shares and corporate debt indicated the long reach of a foreign crisis.