Breakingviews

Citi, BofA prove too big to punish harshly

By Agnes T. Crane

The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

Sticking it to Uncle Sam should attract harsh punishment. But the fines Citigroup and Bank of America will pay – $158 million and $1 billion respectively – to settle claims they defrauded the U.S. government look easily handled. Citi has even admitted fraud in its dealings over home loan insurance. A ban from participating in the government’s mortgage insurance programs would be a better deterrent. But unfortunately, Washington needs big banks too much.

BofA’s alleged misdeeds are still murky since its settlement was conveniently wrapped up in the broader $25 billion deal between federal and state enforcers and big mortgage servicing banks over so-called robo-signing transgressions. But the complaint against Citi offers a brutal account of the drive for profit squashing quality control. The Federal Housing Administration ended up insuring shoddy Citi mortgages that, in some cases, were in default within six months.

Federal insurance programs rely to a large extent on banks’ good faith in delivering mortgages that genuinely meet the required standards. Citi’s admission that it failed to do this came only after someone blew the whistle last year. It was a breach of the government’s trust and it has cost taxpayers money.

The penalties for ripping off the government usually go beyond dollars and cents. Yet Citi’s fine, in particular, is hardly crippling. And BofA has already set aside enough money to cover a good chunk of its settlement. A temporary ban on doing business with the FHA, on the other hand, would deliver more punch and show others in the industry that Washington won’t tolerate abuses of its largess.

Yet that’s unlikely to happen. The FHA, once a niche player focused on low-income housing, now backs about a third of new mortgages including super-sized ones for wealthy home buyers. The market for FHA-qualified mortgages runs $25 billion a month. While Citi has only a 2 percent share, BofA is the largest player with more than 26 percent, according to FTN Financial, using mortgage servicing as a proxy for origination activity. Booting offending banks out of the government’s program could make mortgages even harder to come by.

Political flameout shows risks hidden in China

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Twin political flameouts in China deserve investors’ attention. The tribulations of Bo Xilai and Henry Tang teach a valuable lesson about the political risk premium.

In mainland China, there’s a political mystery. Bo, a rising star in the Communist Party, was seen as a shoo-in for the nine-member Politburo Standing Committee. But he has suffered an embarrassing setback – his right-hand man Wang Lijun apparently tried to defect. The motivations of Wang, who helped Bo rid Chongqing of several organised crime gangs, are unclear, but the affair is an embarrassment for the city’s party chief.

Meanwhile, Hong Kong’s problems are an example of political mundanity. Would-be leader Henry Tang’s campaign is crumpling because he built an illegal basement, reportedly including a Japanese-style spa, under his house. He then publicly blamed his wife. His election campaign may be done for.

Tang has made the sort of mistake that trips up politicians in democracies. Bo’s problems are harder to explain. The son of a leading revolutionary, he has rarely put a foot wrong. He introduced innovative economic incentives and reforms of subsidized housing and household registration. His fall, if that is what’s happening, follows 16 percent GDP growth in China’s most populous municipality in 2011.

But sudden political upheavals are nothing new in the People’s Republic. The purges of the Mao era saw close confidantes sent to the provinces, or worse. Some, like Deng Xiaoping, recovered and rose to greater heights. Others, like Liu Shaoqi, came to dismal ends. More lately, misdemeanours and scandals often emerge around the time of the five-year party conference, possibly as rivals throw one another under the bus.

Political flameout shows risks hidden in China

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Twin political flameouts in China deserve investors’ attention. The tribulations of Bo Xilai and Henry Tang teach a valuable lesson about the political risk premium.

In mainland China, there’s a political mystery. Bo, a rising star in the Communist Party, was seen as a shoo-in for the nine-member Politburo Standing Committee. But he has suffered an embarrassing setback – his right-hand man Wang Lijun apparently tried to defect. The motivations of Wang, who helped Bo rid Chongqing of several organised crime gangs, are unclear, but the affair is an embarrassment for the city’s party chief.

Meanwhile, Hong Kong’s problems are an example of political mundanity. Would-be leader Henry Tang’s campaign is crumpling because he built an illegal basement, reportedly including a Japanese-style spa, under his house. He then publicly blamed his wife. His election campaign may be done for.

Tang has made the sort of mistake that trips up politicians in democracies. Bo’s problems are harder to explain. The son of a leading revolutionary, he has rarely put a foot wrong. He introduced innovative economic incentives and reforms of subsidized housing and household registration. His fall, if that is what’s happening, follows 16 percent GDP growth in China’s most populous municipality in 2011.

But sudden political upheavals are nothing new in the People’s Republic. The purges of the Mao era saw close confidantes sent to the provinces, or worse. Some, like Deng Xiaoping, recovered and rose to greater heights. Others, like Liu Shaoqi, came to dismal ends. More lately, misdemeanours and scandals often emerge around the time of the five-year party conference, possibly as rivals throw one another under the bus.

Would President Romney sell Uncle Sam’s GM stake?

By Antony Currie The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Mitt Romney may be unsure which hat to wear when it comes to General Motors. In a Detroit News article this week, the Republican presidential candidate exhorted President Barack Obama’s administration to offload Uncle Sam’s holding in the automaker, which reported fourth-quarter earnings on Thursday. That may be Political Romney’s take, but selling now would leave taxpayers with a hefty loss. That’s a hit Private Equity Romney would surely avoid.

Romney is right that governments should try not to hold long-term positions in private companies. So if the U.S. government were to sell its 32 percent of the Detroit automaker immediately, that would superficially satisfy Romney’s belief in free-market capitalism.

But at Wednesday’s closing share price, doing so would leave taxpayers shouldering a $14 billion loss on their GM investment – almost a third of what Presidents George W. Bush and Barack Obama poured in to keep the company on the road. Not only would crystallizing that loss offend Romney with his private equity background. It’s also a sure bet that Romney the presidential candidate would have pounced on it as evidence of Obama’s fiscal irresponsibility.

Of course, it’s not quite the same as a private equity investment – price shouldn’t trump everything else. The U.S. government invested in GM, Chrysler and hundreds of banks to keep them afloat, not to make a profit. Even so, it isn’t hard for the government to explain why it’s OK that it still holds a significant stake 15 months after GM went public.

Executive pay aside, officials have not interfered with the automaker’s business; the fact that its investment has largely been a non-issue for months speaks to that. And the Treasury has proved adept at getting out of other bailout positions relatively quickly and at a profit – just the kind of responsible approach Romney advocates. That should give non-partisans comfort that the GM stake is receiving the same treatment.

There’s also a reasonable case that GM’s market value will rise over the next year or more as it continues working on its turnaround, especially in its loss-making European operations. If Romney finds himself in the Oval Office next year and he’s able to sell the GM stake at a profit, both his political and private equity personas will find it hard to resist taking the credit.

Gridlocked Congress might respond to docked pay

By Daniel Indiviglio and Richard Beales

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

If you don’t do the basics of your job, you shouldn’t get paid. It’s a simple concept, but lately it has been a foreign idea to the U.S. Congress. Federal lawmakers haven’t passed an annual budget in over 1,000 days. A new bill could apply a little financial pressure.

The “Pass a Budget Now Act” was introduced on Wednesday by Representative Bill Johnson. The Ohio Republican proposes to stop paying members of Congress after April 15 each year if no budget has passed, until it has. The lost pay would go toward paying off the rapidly growing U.S. debt.

California started a similar experiment when residents voted in favor of Proposition 25 in November 2010. John Chiang, the state’s comptroller, last year interpreted the rule as calling for a balanced budget. Lawmakers had passed something, but it didn’t balance and it was vetoed by Jerry Brown, the California governor. Pay was halted, and legislators later sued Chiang. But something worked: after less than two weeks, a balanced budget did pass.

The situation in Congress is of course different. Though an annual budget process is enshrined in law, some would argue federal lawmakers don’t in practice really need to use it – they can rely on so-called continuing resolutions to allocate funds, the strategy over the past few years. But a budget with both revenue and expense items set out in black and white might encourage fiscal prudence as well as forward planning. After all, establishing a budget is a step any credit counselor would recommend to someone with a debt problem.

Supporters of the new bill could even go further. Members of Congress collect some pretty generous perks, including travel – sometimes by government jet – and top-of-the-line healthcare. Wall Street knows financial incentives are powerful. Stop the paychecks and the perks, and dogma could suddenly take a back seat to pragmatism.

U.S. payroll tax fight shows faux fiscal restraint

By Daniel Indiviglio The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The fight over U.S. payroll taxes just became exhibit A in political style over substance. Republicans in Congress, who have pounded the table on deficit reduction since last summer’s bruising debt battle, have backed down on a demand that spending be slashed to cover the cost of extending the tax cut. To let it ride for another 10 months will cost $100 billion. So much for fiscal discipline.

It was bad enough when legislators leaned on seized mortgage backers Fannie Mae and Freddie Mac last December to enable 160 million American workers to keep paying a rate of 4.2 percent of their wages, instead of 6.2 percent, into the Social Security fund for a couple of extra months. Now, it’s about to get worse.

Last year, when Republicans refused to raise the nation’s debt ceiling unless future deficits were shrunk, it led to a “super-committee” tasked with finding a way to lop off at least $1.2 trillion from future deficits. The group, predictably, failed. Instead, $1 trillion was automatically cut – a figure that dips to $900 billion if the payroll tax cut is extended.

It’s easy to write this off as election-year politics, but that would neglect the deeper dogma at work. The GOP pledge not to raise taxes obviously trumps any rhetoric around the deficits that have been averaging $1.3 trillion for four years running.

Of course, the Democrats aren’t acting any more responsibly. They’re happy to extend the payroll-tax cut without paying for it, too. And though willing to slash some spending elsewhere, Barack Obama’s party is still unwilling to tackle the real problem: safety-net programs. This was evidenced most recently by the president’s budget plan on Monday.

Despite losing its AAA credit rating, the United States isn’t in any real trouble yet. Its debt held by the public is about 70 percent of GDP – well below Greece’s 160 percent. But America’s ratio is also nearly double what it was just four years ago. The payroll tax fight only goes to show just how little political will there is in Washington, just as in many other capital cities around the world, to seriously address the problem.

Dreamworks’ China deal won’t be access all areas

By Wei Gu The author is a Reuters Breakingviews columnist. The opinions expressed are her own

Dreamworks may soon get an exclusive ticket to China’s closely guarded film industry. The U.S. studio is likely to announce a joint venture with China-based investors during Vice President Xi Jinping’s visit to California on Feb. 17, a person familiar with the situation has told Breakingviews. It should be a good deal for the creators of “Kung Fu Panda”, but does little to lower the Great Wall around film distribution in the People’s Republic.

Movies remain a heavily restricted industry in China. Only 20 foreign films a year can be screened nationally at cinemas, and those must be shown through a designated state-owned intermediary. Beijing said it would comply with World Trade Organisation rules on media by March 2011. But progress on books, newspapers, journals, DVDs and music hasn’t yet followed through to cinema or TV. Only this week China’s broadcast regulator banned foreign shows during prime time.

Joint ventures might get Hollywood closer to China’s giant audiences. By producing in China, Dreamworks can bypass the restrictions on foreign content. The venture will see up to $2 billion investment in the next five years, according to Caijing magazine, more than half likely to come from Chinese partners including China Media Capital and China Development Bank. Dreamworks should get low-cost local talent and wider exposure.

But the deal has political appeal too. Xi Jinping can claim the joint venture as evidence that China is creating a more open market during his closely-watched U.S. trip. And China can pick up animation techniques and merchandise promotion skills from Dreamworks. Meanwhile, more movies in the vein of “Kung Fu Panda” might help Beijing extend its “soft power” around the world.

The deal isn’t perfect by any means. Dreamworks will get only partial control. For movies other than cartoons and China-related family films, the doors may still be shut, and Dreamworks will also have to tolerate Beijing’s restrictions on content and intellectual property regime. Still, even a back-row seat in China’s $2 billion-a-year movie industry should be enough to get Hollywood’s producers feeling animated.

Chaos in Greece is not just a Greek problem

By Pierre Briançon and Neil Unmack

The authors are Reuters Breakingviews columnists. The opinions expressed are their own.

The Greek parliament has approved yet another austerity package. The governments of the euro zone and investors around the world can just about pretend that all is now well. The agreement on Greek reforms, which opens the way for a package of private creditor concessions and new public money, is supposed to bring the country’s debt back to a sustainable level. But this is little more than wishful thinking. European leaders are sighing with cowardly relief, hoping that they have finally insulated themselves from the Greek problem.

In a way they have. The Greek vote capped a few weeks of gradual easing of tensions in the euro zone’s other fiscally-challenged countries. Yields on Spanish and Italian debt have come down to almost bearable levels. Even Portuguese yields, which spiked at the end of January on fears the country was headed down the Greek path, have dropped by 3 percentage points this month.

But Greece and Europe are still a long way from safety. Athens is rioting while the country’s political leaders are devoting their energy to expelling from their ranks the MPs who dared vote against the austerity plan. This lays bare Greece’s main problem: the inability of any government to implement its decisions. There is something pathetic in the creditors’ insistence on new government programmes and reforms while they acknowledge the absence of a properly functioning state machine to implement them.

If there is no contagion, the conventional wisdom is that the euro zone could take the pain of a disorderly Greek default or a unilateral exit from the euro zone. The Greek economy is tiny, private creditors won’t have much more to lose after the current deal, and banks are being restructured. But there will still be some 150 billion euros worth of public loans and, if Athens were to leave the zone, the eurosystem’s 109 billion euro exposure to the Greek central bank. That’s without counting the adverse impact of the latest austerity plans.

The euro zone, as always, is buying time. It should make sure it uses that time to help pull Greece out of its current death spiral.

IMF offers best way for China to save Europe

By Wayne Arnold

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Beijing will almost certainly say it wants to see the euro zone survive at their joint summit on Feb. 14. If so, it should pony up – not by lending directly, but via the International Monetary Fund’s $1 trillion rescue package. That way China not only has a better chance of getting paid back, but may also win a bigger role at the world’s currency watchdog.

Europe is China’s top trading partner and Beijing already parks part of its $3.2 trillion of foreign exchange reserves in the continent’s bonds. But buying bonds from distressed euro members like Greece looks too risky. Direct loans, or asset purchases, may anger nationalists on both sides. For Beijing, it would be hard to justify a poor country like China bailing out a relatively rich one like Greece.

Contributing to the IMF’s proposed bailout fund makes more sense. Based on its relative weight at the IMF, China might put up $60 billion. Europe would provide $500 billion, and there would be strings, notably that the IMF be paid back before other creditors. Best of all, just the idea might calm down markets so much that the money itself never needs to be lent.

China still has to sell its public on bailing out Europe through a predominantly rich-country club. An agreement by IMF members in late 2010 to increase voting rights from developing economies left China, representing roughly nine percent of global GDP, with only about six percent of the vote.

How the IMF is run may seem unimportant to China, with its closed capital account and vast reserves. But China is bit-by-bit internationalising its currency and opening to currency flows. Moreover, most of China’s trade is still denominated in dollars, which leaves it exposed to U.S. monetary policy. China considers the IMF the best counterbalance to such tides. Helping fund Europe’s bailout, and getting a bigger say at the watchdog in the process, is a no-brainer.

Obama and Xi may make unhappy Valentines

By John Foley

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The Valentine’s Day summit between Xi Jinping and Barack Obama could make for uncomfortable viewing. China’s likely next president is due to meet the U.S. leader in Washington – as his predecessor did 10 years ago. Only this time the stakes are higher. Obama, facing a November election, is under pressure to talk tough. Xi is under pressure to stay cool, while appeasing hardliners back home.

When Hu Jintao visited George W. Bush a decade ago, Sino-U.S. relations were strained. Taiwan, and the crashing of a U.S. surveillance plane in Chinese airspace, loomed large. But the war on terror created a common purpose. Aside from congresswoman Nancy Pelosi’s attempt to hand Hu a wad of letters about Tibet, the visit was unremarkable.

Three things are different now. Trade, supposed to be another common purpose, has created new tensions. China has failed to open key markets, and still restricts exports of strategic commodities. Obama, desperate to create jobs, has threatened tough action against nations like China which suppress their currencies to promote trade. It’s also a popular theme with his potential Republican opponents, even though U.S. firms and consumers are big beneficiaries of China’s cheap labour.

Second, military tensions are back. America is returning troops to the Pacific, where China has low-level territorial disputes with just about everyone. And Beijing is more openly critical of U.S. interventionism. It refuses to condemn Syria’s human rights abuses, and vacillates over American sanctions on Iran. These topics vex the masses on both sides.

Then there’s Xi, who seems more three-dimensional than the taciturn Hu. He loves Hollywood; his wife is a glamorous military folk singer, and his father a famed revolutionary. Xi has already broken the mould by criticising judgmental “foreigners with full bellies” on a Mexican visit in 2009. Some personality may be beneficial: Hu’s indecipherability has only widened the Sino-U.S. trust deficit.