Commentaries

from Rolfe Winkler:

Afternoon Links 1-20

Must Read -- Short sale fraud + follow-up (Olick, CNBC) Great sleuthing from Diana Olick. Sounds like outright fraud being committed by big banks. One follow up question: In many cases, the second-lien holder is also the first lien holder. How is that impacting short-sales?

Buffett opposes bank fee (CNBC) See 2/3rds down the page. Obfuscation worthy of a banker. This should come as no surprise as Buffett is Wells' top shareholder. He previously opposed the bank stress tests because it diluted his shareholdings. Nevermind that the stress test forced the bank to raise desperately needed capital. It's a shame, really. As his career winds down, he's sacrificed his reputation as a financial straight-shooter to protect his wealth.

In other Buffett news: He's opposed to Kraft's bid for Cadbury (he's a big Kraft shareholder) and he split his shares, something he never wanted to do. So not a great day for the Oracle.

FT as shameless Fed booster (NakedCapitalism) Yves takes down the FT piece that said the Fed has made a killing on its AIG holdings.

CRE prices up 1.0% in November, not expected to continue (CR) Moody's released its data for CRE prices for November today. They showed a month over month uptick for the first time in a while. That said, this is not a super reliable index due to the few number of data points available. And Moody's says to expect prices to head back down.

Scott Brown successfully capitalized on bank bailout blues (Bottari, CMD) Walker Todd sent a missive over this morning noting, too, that while the healthcare bill's unpopularity certainly played a role in Brown's surprise win, anger over Obama's kowtowing to banks may have pushed him over the edge. Unfortunately, Republicans are equally captured by the bank/homeowner lobby.

Foreclosure efforts failing b/c don't reduce principal (Nasiripour, HuffPo) Helpful confirmation of a fact that is well-known.

from Rolfe Winkler:

Afternoon links 1-13

Must Read -- Kyle Bass: Testimony before the FCIC (fcic.gov) Bass is a hedgefunder that made big profits betting against subprime. His testimony has many fascinating facts and figures. [The pie charts on page 9 look familiar.]

Obama to push tax on too-big-to-fail banks (Nasiripour) Not a lot of details: "the planned tax would be imposed in a way that targets firms' riskiest activities, such as proprietary trading. It would be crafted in a way that doesn't affect a financial company's retail banking, so that the cost theoretically would not be passed on to retail customers -- but it wasn't clear exactly how that would work." And will it tax other TBTF firms besides banks? What about insurers? What about GE? Update: WSJ says the tax will target bank liabilities.

Earthquake in Haiti may have killed over 100,000 (Farie/Varner, Bloomberg) The epicenter of the 7.0 magnitude quake was 10 miles from Haiti's capital city.

Google China spat shines spotlight on cyberspying (Prodhan/Lee, Reuters) Google has consistently tried to thread the needle between the revenue opportunities provided by the Chinese market, and the censorship restrictions imposed by the Communist Party. This attack was so egregious that Google said it's had enough.

Prime jumbo RMBS delinquencies jump to 9.2%: Fitch (Golobay, HousingWire) ht Implode-o-Meter.

SEC proposes effective ban on naked access (Younglai/Spicer, Reuters)

FDIC's Bair blasts other regulators for reluctance on banker pay plan (Paletta, WSJ) I'd hoped to share the video archive with all of you but a day later it's still not available. There are good arguments that additional curbs on pay will be both tough to design and ineffective at curbing risk. A better regulator is failure. But that's not Dugan's point. He just wants to protect banks.

from Rolfe Winkler:

Lunchtime Links 1-12

China surprises with bank reserve hike (Xin/Rabinovith, Reuters) The Fed could learn something from the PBOC. This sudden move to tighten bank lending maintains the PBOC's reputation for acting without warning. If the Fed had a similar rep, U.S. lenders wouldn't be so cavalier taking interest rate risk.

Special bankruptcy court for banks mulled in Senate (Younglai, Reuters) Interesting proposal for Dodd's Senate financial reform bill. Can't really comment until details are made available.

Citi unit grows -- with Fed's help (Enrich, WSJ) The fact that Citi subsidiary GTS is so important to the global financial system -- and that its failure would be disastrous -- is a good argument that regulators should find a way to wind it down...

Obama weighs tax on banks to cut deficit (Calmes, NYT) No details here either, but I expect whatever is proposed to pass, as the proposal will come not long after banks announce bonuses. Plan would raise as much as $120 billion. Taking money away from the financial sector, including its customers, is a necessary step towards de-leveraging the economy.

Devaluation sparks chaos in Caracas (Lyons/Crowe, WSJ)

Single stock dividend futures launched (Hedgeweek, ht Nick Gogerty) Not sure what the value of these is, but Nick points out that the leverage available to those trading futures means someone in need of a trading fix will get it...

Mark McGwire admits using steroids (ESPN) He cries a lot, complains of the pressure he was under and the difficulty of a 162 game schedule.

from Rolfe Winkler:

Lunchtime Links 12-18

(Reader note: still working on

MUST READ -- Strict framework leaves room for maneuver (Masters/Jenkins, FT) While this subject may seem a little dry, it's the Basel Committee in Switzerland that will lead the way when it comes to how banks measure capital and how much they need to have. I'll offer more detailed thoughts on this later today.

Saab to be shuttered (Reuters wire) More creative destruction in the auto industry. In the end, the best Saab could do was sell the intellectual property for the 9-5 and 9-3 sedans...

China central banker says harder to buy Treasuries (Xin/Subler, Reuters) How ironic. The current account deficit is shrinking as the import/export imbalance with China is shrinking. So we're not stuffing as many dollars down China's throat which it is forced to recycle into Treasuries. Watch out for calls to buy Chinese so that the Treasury can finance its deficits! ;)

China asset bubbles will burst on inflation (Chen, Bloomberg)

Greenspan backs deficit reduction commission (Ferraro/Sullivan, Reuters)

Harvard swaps are so toxic, even Summers won't explain (McDonald/Lauerman/Wee, Bloomberg)

Don’t worry about the weak dollar

By John M. Berry

There’s no way to shut off the incessant warnings about a weak dollar from foreign officials and some economists, but it’s perfectly safe to ignore them.

You can also yawn the next time Treasury Secretary Timothy Geithner repeats the mantra, “It is very important to the United States that we continue to have a strong dollar.”

Everybody is blowing smoke. (more…)

China can be smarter on reserving more resources

China might have good environmental reasons to restrict the production of rare earth metals, but export quotas and duties are not the way to do it.

Instead, it should raise environmental standards which will force consolidation in the production of these metals, which are key to green technologies. That will improve China’s environment, give it greater control over output, but reduce the risk of a trade battle.

China dominates the global production of rare earth metals — a collection of 17 chemical elements in the periodic table that are key materials for making hybrid cars, wind turbines and smart phones. This is unusual, as China depends on imports from abroad for most of its raw materials. However, the country’s control of supply has not helped it control prices.

Although demand has been rising more than 10 percent each year, prices were a third lower in 2005 than in 1990, mainly because of a surge of exports. Meanwhile, China’s reserves are being used up rapidly. They now account for only half of the world’s total, down from almost 90 percent in 1990.

In response, China has started to impose quotas and duties on rare earth exports in the hope that less supply might help improve prices. This has had some success: since 2004, exports from China have shrunk by about 10 percent each year. But it has angered China’s trading partners. Concerned that China wants to use its resources mainly for its domestic consumption, the U.S. and EU both filed complaints with the World Trade Organization earlier this year.

China’s move to restrict exports looks poorly coordinated with its recent resources acquisition frenzy. If this is how it behaves when it is the dominant supplier of a valuable resource, how can it complain that the rest of the world does not want to sell it more?

A better solution would be for China to raise environmental standards in rare earth production. This would squeeze out smaller producers and give China greater control over exports.

Bankers leave little upside for new Hong Kong IPO

A dozen or so companies have raised money in Hong Kong over the past month to cash in on rebounding equity markets, but that window is threatening to close after a string of poor debuts.

   Glorious Property was the latest, falling by 15 percent on its debut on Friday. Its poor performance came on the heels of China South City, a real-estate developer in Guangdong province, which had the worst trading debut in Hong Kong this year by falling 23 percent.     Even companies in more stable businesses, such as men’s clothing retailer Lilang and sports shoes maker Peak Sport, also fell below their offer prices last month.

   One reason for the wobble is that issuers and investment banks seem to have been greedy. IPOs are generally priced at a discount to comparable listed stocks to reflect risk and to encourage trading in the after market. But with strong investor demand, they have steadily been whittling away at the discount and relying on the froth in the market to get issues away.

   Of late, IPOs have often been more than 100 times oversubscribed with institutions as well as retail investors vying for stock. Thanks to cheap and freely available money, it has been possible for investors to borrow to fund their IPO purchases. Banks have been offering interest rates on IPO loans as low as 1.8 percent.

   But market sentiment has changed dramatically, with the Heng Sang Chinese Enterprises Index <.HSCE> down almost 10 percent in the past two weeks. This has suddenly made IPOs which had set aggressive ranges seem expensive. Glorious Property actually priced its IPO towards the bottom of the range but it still received a poor response.

   From a position of excessive enthusiasm, sentiment has now snapped the other way. Retail investors have become more cautious. Some banks have stopped offering IPO loans to retail investors, which will further temper demand for new issues.

   But the message hasn’t yet got through to some issuers. Las Vegas casino company Wynn Resorts priced its Hong Kong IPO at the top of its indicated range, which values it at a much higher multiple than Macau gambling tycoon Stanley Ho’s flagship casino firm SJM Holdings. This looks pretty daring.

China might keep the weakest bank all to itself

Faced with a backlash against foreign investors, Beijing may be tempted to offer shares in the last of its big four banks to a domestic audience.

That decision may reflect China’s new found confidence in the wake of the credit crisis. But it also means Chinese investors will retain full responsibility for the country’s weakest bank.

The Agricultural Bank of China might end up just listing in Shanghai without any endorsement from foreign institutions, bankers close to the deal say. The bank claims it is still keeping its options open.

But if AgBank pursues this path, it would be in sharp contrast to the privatisation of China’s three other large banks, all of which attracted foreign strategic investors before listing in both Hong Kong and Shanghai.

There are three explanations for this change of direction. First, China has become a lot more confident in its banks, which have weathered the financial storm better than their foreign counterparts.

This means it has less need for foreign banks to provide a seal of approval before launching a public offering. China’s Social Security fund is expected to be AgBank’s only strategic investor, though China Life also stands a good chance of participating, bankers say.

AgBank is probably not happy with the arrangement, as its chairman has said it wanted to have foreign strategic investors and failure to attract them will be regarded as a loss of face. But the post-credit crunch list of qualified foreign investors with deep pockets and rural banking expertise is very short.

Imagine when China runs a trade deficit

If current trends continue, China might swing to a trade deficit in the not-too-distant future. Given that China has enjoyed more than a decade of strong exports, this may sound a bit far-fetched. But even if it happens, this would not necessarily be something for the world to worry about.

Some economists have recently sounded alarm bells about the possibility of a Chinese trade deficit. They argue that if the Chinese current account surplus shrinks, it would leave Beijing with less spare cash to buy U.S. Treasury bonds. Then who would fund the U.S. budget deficit — and, by implication, U.S. consumers?

Those worries are largely misplaced. First, it is unlikely to happen any time soon. In order for China to have a trade deficit next year, imports would have to outgrow — or shrink less than — exports by at least 23 percentage points.

In August, exports fell 23.4 percent while imports fell 17 percent. So while the trade surplus is diminishing, a deficit is not around the corner.

If China’s trade surplus shrinks, it will most likely be caused by a contracting U.S. deficit, in which case Americans will be saving more and the U.S. will be less dependent on overseas investors to finance its government debt. That would be a sign that the long-overdue rebalancing of the global economy was beginning to take place.

It would not be so bad for the Chinese economy either, because China is a lot less dependent on exports than many people assume. Although exports have accounted for a whopping 50 percent of the economy in the past few years, the contribution of net exports to economic growth is actually much smaller, because a lot of what China sells abroad is low value-added assembly work.

In the same way, one cannot just look at China’s large imports number and jump to the conclusion that China is a big end-user of the world’s goods. China’s imports accounted for a third of its gross domestic product last year, versus about 17 percent in the U.S. during the same period. But this is because a lot of what China imports, such as computer parts, eventually finds its way abroad.

West raises stakes over Iran nuclear programme

President Obama and the leaders of France and Britain have deliberately raised the stakes in the confrontation over Iran’s nuclear programme by dramatising the disclosure that it is building a second uranium enrichment plant. Their shoulder-to-shoulder statements of resolve, less than a week before Iran opens talks with six major powers in Geneva, raised more questions than they answer.

It turns out that the United States has known for a long time (how long?) that Iran had been building the still incomplete plant near Qom. Did it share that intelligence with the U.N. nuclear watchdog, and if not, why not? Why did it wait until now, in the middle of a G20 summit in Pittsburgh, to make the announcement — after Iran had notified the International Atomic Energy Authority of the plant’s existence on Monday, after Iranian President Mahmoud Ahmadinejad had delivered a defiant speech to the U.N. General Assembly on Wednesday and after the Security Council had adopted a unanimous resolution calling for an end to the spread of nuclear weapons on Thursday?

Is this all part of Obama’s choreography to  build international pressure on Iran by getting Russia, in return for the dropping of plans to put a U.S. missile shield in Poland the Czech Republic, to threaten more sanctions against Tehran? A U.S. official says Obama shared the intelligence with Russian President Dimitry Medvedev at the United Nations this week and China had only just been informed. Did Obama try and fail to get Medvedev and Chinese President Hu Jintao — both in Pittsburgh — to join the three Western leaders on the podium? Or was his hand forced on timing by the fact that the New York Times had got wind of the Iranian nuclear plant and was set to publish the news on Friday?

The division of labour between Obama, Sarkozy and Brown was striking. The U.S. president sounded stern but his tone was measured. He stressed his commitment to dialogue and negotiation with Iran and to Tehran’s right to peaceful nuclear energy. He did not mention sanctions, let alone the possibility of military action. It fell to the Europeans to inject a tone of menace.

Sarkozy accused Iran of defying the international community and taking the world on a dangerous path, and said that unless Tehran changed course by December, there would be tougher sanctions. Brown charged the Islamic Republic with deception and said the international community had no choice but “to draw a line in the sand”, and that he did not rule out anything although sanctions were the preferred route. 

Will the latest disclosure on what Iran insists is a peaceful nuclear programme persuade Russia to renounce the sale of advanced S-300 anti-aircraft missiles to Tehran? Will it persuade China, which reaffirmed its scepticism about more sanctions this week and has begun supplying gasoline to Iran, to change its mind? The West sees Iran’s dependency on imported fuel as a key vulnerability.

Friday’s dramatic announcement was a clear effort to appeal to the world court of public opinion and maximise pressure on Tehran before the Oct. 1 talks, but there is no sign that the Islamic Republic’s leaders are even considering yielding on their nuclear ambitions. On the contrary, they seem convinced that the nuclear standoff will enable them to patch over deep internal divisions over the disputed June presidential election by playing the patriotic card.