FiNETIK – Asia and Latin America – Market News Network

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China Investment Corp (CIC) cautious about financial derivatives

China Investment Corp. (CIC), the country’s sovereign wealth fund, was taking a cautious stance toward investments and would not invest in financial derivatives that had no obvious relationship with the real economy, CIC chairman Lou Jiwei said here Saturday at the China Development Forum 2009.

These derivative financial products should be phased out of the financial market, Lou said.

The CIC suffered big loss from its two major investments in the U.S. private equity firm Blackstone and investment bank Morgan Stanley during the global financial crisis.

The CIC has invested 3 billion U.S. dollars in the Blackstone and 5 billion U.S. dollars in the Morgan Stanley.

The CIC was set up in September, 2007, with an initial capital of 200 billion U.S. dollars from the country’s massive foreign exchange reserves, which stood at 1.95 trillion U.S. dollars by the end of 2008.

Source: http://www.sohu.com, CITI Liang Haisan, 21.03.2009

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Filed under: China, News, , , , , , , , , , , ,

Mexico’s Finance Minister says U.S. Gov. Citigroup stake temporary

March 20 (Bloomberg) — Mexican Finance Minister Agustin Carstens said U.S. Treasury Secretary Timothy Geithner told him the government’s stake in Citigroup Inc. is temporary, a position that will help avoid conflicts with Mexican law.

Carstens said the U.S. bailout of Citigroup has helped strengthen its Mexican unit, Grupo Financiero Banamex SA, and that he thinks the U.S. will relinquish its stake in Citigroup by 2012. That forecast was seconded by Manuel Medina-Mora, the chief executive officer for Citigroup’s Latin American division.

President Felipe Calderon’s government had come under pressure from local lawmakers to force Citigroup to dispose of its Banamex unit after the U.S. Treasury agreed to take a 36 percent stake in the New York-based lender. The finance ministry yesterday said that “foreign government aid programs don’t violate Mexican law.”

“We are living through an exceptional, transitory, temporary period,” Carstens said. “The assistance of the U.S. to Citigroup is helping Banamex.”

Calderon will send a bill to Congress that seeks to maintain a restriction on foreign governments holding stakes in Mexican banks while more clearly stating the permissible exceptions during times of crisis, the finance ministry said in a statement yesterday.

Third Rescue

The U.S. government agreed on Feb. 27 to a third rescue of Citigroup, prompting Mexico’s National Banking and Securities commission to say it would study legal implications of the U.S. government’s stake. Citigroup bought Banamex, Mexico’s second- largest bank, for $12.5 billion in 2001.

The new proposed legislation “would establish with total clarity the exceptions strictly necessary to face crises such as those that present themselves today,” the ministry said.

The proposal would specify that banks, after three years of operating under the exemption to allow foreign government stakes, would have to sell 25 percent of their Mexican unit’s shares on the local market. That requirement would rise to 50 percent of shares after six years.

Carstens also said he wants to see the peso strengthen beyond a 14 peso per dollar exchange rate. The Mexican currency rose 0.8 percent to 14.1318 pesos per dollar at 11:30 a.m. New York time.

Source: Bloomberg, 20.03.2009  Bill Faries  wfaries@bloomberg.net; Valerie Rota  vrota1@bloomberg.net in Acapulco, Mexico

Filed under: Banking, Mexico, News, , , , , , , ,

FiNETIK and the latest on ITAU / Banamex / Citi

Via the Finetik blog linked here, your info-hungry Otto finds out that Banco Itau (ITU) sent an official communication to the Brazilian regulators last night stating that Itau “..is not negotiating any stake in Banamex’s capital..”.

Now that doesn’t mean there’s no interest, of course. The ITU honchos have already said they’d be interested purchasers if and when Banamex went up for sale. It does mean, however, that ITU isn’t doing anything proactive right now. This fits with the official Citigroup (C) line that Banamex is not up for sale, of course. This won’t quell the rumours, but it will put a dampener on short-term speculation for sure. However it should be clearly pointed out that none of this addresses the core issue here: As explained previously if the US gov’t takes its 36% interest in Citigroup as planned, C will be breaking the Mexican law and cannot hold onto Banamex as things stand. That’s as plain as day.

Finally, a word of kudos for the people at Finetik; I’ve only recently discovered the blog (which is part of a wider capital markets company that specializes in Latin America as well as Asia) and put it on my RSS, but I’ve been very impressed with the quality of information passed over there. I can thoroughly recommend it and say it would be a good addition to your own RSS feed (or regular bookmarked visit). Here’s the link to the blog’s main page.

Disclosure: I have no affiliation whatsoever with Finetik and have never even spoken to the people in my time. I just think it’s a good blog that covers LatAm finance well.

Source: Inca Kola, 05.03.2009

Filed under: Banking, Mexico, News, , , , , , , , , , ,

Citigroup-Banamex: Failed US Banks vs. Soild Mexican Institutions

Does the US government’s 36 per cent stake in Citi violate Mexican ownership laws? Have we got our countries confused? No. Citi owns Banamex, a Mexican bank with circa 1,200 branches and 2.6m checking accounts. And Latin American finance blog Inca Kola sees a fight brewing over the Southern subsidiary:

The nub of the issue revolves around Mexican law, which states in crystalline manner that foreign governments cannot own more than 10% of any bank that operates inside Mexico. It’s as clear as a bell and on the statute. So as Banamex is a wholly owned subsidiary of Citigroup (C paid $12.1Bn or so back in 2001 for the bank) if the US Gov’t takes its 36% stake in Citigroup then it will be a larger-than-10% shareholder of Banamex, something against Mexican law. Won’t it?

Mexico’s National Banking ans Securities Commission is therefore investigating, while Banamex is saying that the North American Free Trade Agreement will (somehow) protect it.

Selling Banamex would effectively mean an even worse deal for the US government. The unit’s been described by Citi as one of its “crown jewels”, managing to post an $896m net profit for 2008, making it one of the least toxic parts of the banking group. Banamex is accordingly part of Citicorp — the retail (read: non-toxic) part of the Citi empire. Full Article click here.

Source: FT Alphaville 02.03.2009, Inca Kola News 01.03.2009

Mexico Gov. Studying Effect on Banamex of U.S. Aid to Citi,

(Bloomberg) Mexico’s National Banking and Securities commission said it’s studying the legal impact of the U.S. government’s stake in Citigroup Inc., which owns Grupo Financiero Banamex SA.

The U.S. government announced today it plans to convert as much as $25 billion of preferred shares of Citigroup into common stock. The conversion would give the U.S. a 36 percent stake in the New York-based company. Mexico’s banking law prohibits foreign governments from owning or having a stake in banks that operate in Mexico, like Banamex. Citigroup purchased Banamex for $12.5 billion in 2001.

The commission has asked all banks operating in Mexico that have received help from governments to provide information on the aid, the statement said. The banking commission and other financial authorities will “soon” release information on the study, the body said in a statement.

“The Mexican financial authorities are analyzing the legal implications of the aid that foreign governments have granted foreign financial entities that have subsidiaries in Mexico,” the agency said.

Speculation has mounted in recent weeks that Citigroup may sell Banamex to raise cash and shore up capital amid the global financial crisis. Chief Executive Officer Vikram Pandit flew to Mexico Feb. 19 for two days of meetings with clients, Banamex officials and government officials, including Finance Minister Agustin Carstens and central bank Governor Guillermo Ortiz.

Citigroup fell 96 cents, or 39 percent, to $1.50 at 4 p.m. in New York Stock Exchange composite trading as a record 1.87 billion shares changed hands. The stock has plummeted 94 percent in the past year.

Source: Bloomberg 27.02.2009 Andres R. Martinez in Mexico City at amartinez28@bloomberg.net

Mexican Bank Asset Value

(IXE) According to local newspaper EL UNIVERSAL columnist Alberto Aguilar, ITAU is one of the government’s favorite candidates to acquire Citigroup’s BANAMEX if they have a minority stake in a group led by Mexican investors.Other candidates that have expressed interest are JP Morgan Chase and HSBC.

IXE understands that if Citibank sells Banamex, it will likely sell its BZ.Bradesco branch as well. Due to the fact that Banamex ranks in second in Mexico (assets) and first (equity), along with an important corporate loans book, while the BZ subsidiary present loans book smaller than the ones presented by mid-size banks, and with a lower ROE, which could be higher considering its BZ peers. Furthermore, Citibank BZ does not present important market share in any particular segment in Brazil.

Banamex instead, possess a significant Mexican banking market (see file attached). This would be a very important operation for Itau if it materializes. We believe foreign players could be potential acquirers of Banamex (including Itau) because local players could end up having problems to find funding to finance the operation in the future. If Itau buys Banamex, it will be coherent with Itau’s Roberto Setubal past speeches.

The following is a table of the size of Mexican Banks (Tot. Assets 2Q08 in billion US$)

US$ 53.4 bn BBVA Bancomer
US$ 38.9 bn Banamex
US$ 31.5 bn Santander
US$ 26.8 bn HSBC
US$ 21.0 bn Bannorte
US$ 12.7 bn Inbursa
US$ 10.0 bn Scotia

Source: IXE Casa de Bolsa, 28.01.2009

Filed under: Banking, Mexico, News, Risk Management, , , , , , , , , , , , , , , ,

Global Megatrends 2009: Ernest & Young Analysis

Download report Global Megatrends 2009 EY

Each year, the EY Global Strategy Team conducts an analysis of external trends to inform the Global Executive’s discussion about priorities and initiatives for the coming year.

The report provides a good overview of important external influences affecting all organizations.

While the EY megatrends document was previously for limited distribution, this year the report is shared more broadly since the issues it addresses are no doubt also on the top of mind for many.

Source: Ernest & Young, 29.01.2009

Filed under: Asia, Banking, Energy & Environment, Islamic Finance, Latin America, Library, News, Wealth Management, , , , , , , , , , , , , , , , , , , , , , , , , , ,

Failed bank regulation marks end of Basle II: John Kemp

The international system of bank regulation, epitomised by the Basle II process and light-touch principles-based regulation of Britain’s Financial Services Authority has comprehensively failed.

In too many instances, light-touch principles-based regulation with an emphasis on banks’ internal risk controls turned out to be no effective regulation at all.

Former Fed Chairman Alan Greenspan was the most prominent proponent of this approach, which relied on the profit-maximising self interest of financial institutions to limit risk-taking to prudent levels.

In this view, bank leaders themselves could be relied upon to manage their institutions prudently — after all bankruptcy is not in the interest of shareholders. Previous bank failures were the result of failure to measure risks properly, or failures of internal communication and control.

So the job of regulators was to set out principles and ensure banking institutions had adequate internal systems and controls, then allow senior management to ensure the overall level of risk was prudent.

This reliance on internal risk-management systems has proved to be a huge error. As Greenspan himself noted recently, bank leaders had not acted in the careful manner he had expected when he pushed for them to be freed from the old, more restrictive regime.

As a result, credit control will be much more intrusive in future. As noted in a companion column [ID:nLQ274403], there is renewed interest in some form of overall credit policy to limit the quantity of credit within the economy and ensure it is consistent with macroeconomic stability.

But intensive contra-cyclical credit controls will only work if they are imposed on a broad range of institutions and on a worldwide basis — otherwise the banking system will arbitrage between regulators, and business will be booked in the jurisdiction with the “lightest touch”.

This is precisely what happened in the last decade, when the FSA, and the Commodity Futures Trading Commission in the United States, arguably led a race to the bottom among regulators to offer the most generous regime in the hope of creating a competitive advantage for their home jurisdiction and winning more business.

So any new credit control instruments will need to be implemented on a multilateral basis and agreed through the Basle Committee on Banking Supervision, in tandem with the Madrid-based International Organisation of Securities Commissions .

The Basle Committee’s updated Capital Accord has already been rendered moot even before it has been fully implemented. Basle II’s decision to allow banks to rely on their own complex internal risk control systems when judging how much regulatory capital they need to hold now looks quaint.

Of the three pillars in Basle II — capital requirements, market discipline — the third now looks wholly outdated, and elements of the first and second need substantial re-working.

Some form of Basle III will be needed to buttress the contra-cyclical credit instruments which national regulators and central banks will deploy to manage the credit cycle and limit debt to GDP ratios to more safe levels.

Basle III needs to settle on an agreed range of credit instruments and credit-creating institutions that will be subject to regulation, how regulation will be applied on a counter-cyclical basis, the respective roles of supervisors and bank management, and how to ensure against regulatory arbitrage.

BANK REGULATION AND MONETARY POLICY

The failure of Basle II process bank regulation at multilateral level has been matched by failure among national regulators. The events of the last 18 months have demonstrated that a credit-fuelled banking crisis cannot be contained within the financial sector and has potential to destabilise the rest of the economy severely. Credit policy is a matter of macroeconomic strategy, not just financial regulation.

If credit expansion has the potential to destabilise the real economy, and the liabilities of much or all of the financial system are contingent liabilities of the central bank and the finance ministry as lenders of last resort, then the quantitative control of credit is arguably too important to be left to a financial regulator, such as the FSA or the U.S. Office of the Comptroller of the Currency and U.S. Office of Thrift Supervision .

Quantitative credit control needs to be brought within the remit of the central bank, so that credit expansion can be adjusted in tandem with interest rates (and indirectly in response to changes in government fiscal policy) to ensure internal, external and financial balance simultaneously.

While banking regulators may still have a “tactical” role in supervising prudential management and risk controls within individual institutions, the “strategic” role of limiting credit extension across the financial system as a whole to a safe level is too important, and properly belongs to the macroeconomic managers at the central bank.

Recent regulatory trends have seen institutional responsibility for financial regulation dispersed across multiple institutions, and separated from monetary policy at the central bank. This trend may now have to be reversed.

A more consolidated and intensive approach appears inevitable. Proposals to combine the various US regulators or at least to give the Fed over-arching responsibility as a super-regulator for the financial system have received widespread support, though the details of institutional reform have yet to be agreed.

In the United Kingdom, the wisdom of separating financial regulation from the Bank of England and passing responsibility to the FSA is increasingly questioned. The need for a lender of last resort support to a wide range of institutions, and the macroeconomic consequences of a widespread debt crisis, have pushed the Bank of England back into the heart of financial regulation.

If a new instrument for controlling the quantity of credit is eventually implemented, it will probably have to be managed out of the central bank. The FSA may retain responsibility for the prudential supervision of individual banking institutions, but the overall framework of control will need to be set by the central bank.

EMERGING REFORM AGENDA

If proposals for regulatory reform are to stand any chance of being implemented, they will need to move beyond a sterile debate over market-led discipline and innovation versus stodgy heavy-handed state regulation.

They will have to recognise that collective action problems and moral hazards in the credit creation process make some form of quantitative control essential. The system needs to achieve a financial balance alongside internal balance and external balance, and for that it needs to develop a third instrument, credit policy, alongside the traditional monetary and fiscal policies.

Credit policy will need to act directly on the volume of credit created, and amount of risk, independently of its price, which is the province of interest rates and monetary policy.

It will need to be contra-cyclical and apply to a broad range of institutions to be effective.

It must be dynamic, capable of being modified as the financial system evolves and pioneers new ways to circumvent the existing controls.

It must also be applied on a multilateral basis to prevent the type of regulatory arbitrage which occurred in the late 1990s and 2000s.

The Basle Committee is the most promising forum for reaching agreement. But Basle III will need to be developed much more quickly than Basle II, which took more than a decade, has still not been implemented fully, and risks becoming a stillborn historical curiosity, a monument to an age which has passed.

That suggests Basle III should focus on a much simpler set of credit control instruments, and eschew complexity in favour of a blunter but more effective approach. Crude but effective safeguards may be preferable to interminable arguments and theoretical elegance.

Source: Reuters by John Kemp 26.01.2009

Filed under: Banking, News, Risk Management, , , , , , , , , , , , ,

Mexico Stimulus Plan Fails to Spur Building > a Lesson for Obama

Mexican President Felipe Calderon’s infrastructure-spending plan is too small and too slow to lift the economy out of recession this year, said Luis Arcentales, a New York-based economist with Morgan Stanley. That should serve as a lesson for the Obama administration as it prepares an $825 billion stimulus package that includes $90 billion for public works projects in the U.S., he said.

Calderon, who promised to make spending on roads, bridges, hospitals and sewage systems an engine for growth during his six- year term, increased government investment in such projects by 29 percent to 229.8 billion pesos ($16.6 billion) in the first nine months of 2008 from the previous year. The result: a 0.2 percent drop in construction activity from January to October.

“The headwinds facing the economy in 2009 appear to be so strong that probably the construction spending, if it takes place, won’t be able to offset them,” Arcentales said in an interview.

Calderon’s pledge to boost investment from government and private-sector partnerships by 7.5 percent this year may at best keep the industry from declining and adding to the country’s 4.5 percent unemployment rate, the highest since at least 2000, said Gabriel Casillas, an economist with UBS AG in Mexico City. The economy will likely contract 2 percent this year, he said.

“We’re going to see the government doing more public investment, but that’s only going to compensate for the drop in private construction,” Casillas said.

Lending ‘Paralyzed’

Private building and housing, which make up about two-thirds of construction activity in Mexico, are expected to decline this year on lack of credit and slack demand. The postponement last week of a government-backed $4.88 billion port project at the west coast town of Punta Colonet dealt a blow to Calderon’s strategy for public- private partnerships to drive construction in Mexico.

“We have a full-fledged credit crunch going on in Mexico,” said Edgar Amador, strategy director for the Mexican unit of Paris-and Brussels-based Dexia SA, the world’s largest lender to local governments. “My bank and everybody else’s bank are just paralyzed.”

Dexia made 22 billion pesos of loans to Mexican state and local governments for infrastructure projects in the last three years. The bank was looking at more than a dozen projects to finance, including highways, waste-water treatment and railroads before the September credit crunch hit.

“We had to kill them all,” Amador said. “We’re sitting on the sidelines now.”

Limited Impact

The number of construction workers registered with Mexico’s social security system declined to 1.01 million in December from 1.24 million in September, according to the Mexican Social Security Institute.

Construction projects, which can take months to get started, aren’t the best way to stimulate an economy quickly, Arcentales said. The industry is three times smaller than manufacturing and makes up only 6 percent of the Mexican economy, limiting its impact, he said.

“If you tell me you’re going to build a refinery, which is a multiyear project, it’s probably the right thing to do,” Arcentales said. “In terms of stimulating economic activity immediately, it’s just not there.”

Obama’s Plan

Alfredo Coutino, a senior economist for Latin America at Moody’s Economy.com in West Chester, Pennsylvania, said that most governments, including the U.S., face delays in getting projects out to bid.

“Mexico is not a unique case in that sense,” Coutino said.

In the U.S., Democrats in the House of Representatives are proposing to spend $30 billion on highway construction and $10 billion on transit and rail projects over two years as part of an $825 billion stimulus package. Lawmakers are planning to have legislation ready for President-elect Barack Obama to sign by Feb. 14. Obama will we sworn in tomorrow.

Calderon, who took office Dec. 1, 2006, still is betting on construction to stimulate the Mexican economy. On Jan. 7, he announced plans for record public-private investment of 570 billion pesos this year.

Humberto Armenta, president of the Mexican Construction Industry Chamber, forecasts construction will only increase as much as 1 percent in 2009 as private projects and home building struggle.

Private construction may pick up in the second half of this year as banks and foreign investors begin to lend again, Armenta said.

Too Timid

“Once the global risk capital begins to move, Mexico will be a prime destination,” he said in a telephone interview.

Fernandez, the owner of Juarez-based company Constructora Electrica Fer SA, hopes to win government work and keep sales from sinking further. Fernandez employs 50 workers to provide lighting for shopping centers and hospitals and had sales of $5 million in 2007.

“The situation is very difficult,” Fernandez said.

Bigger contractors also are looking to the government to help weather the recession. Empresas ICA, Mexico’s largest construction company, forecast revenue will rise as much as 30 percent this year from an estimated 29 billion pesos in 2008.

Amador of Dexia bank doesn’t share ICA’s optimism on Calderon’s spending plan.

“You need a serious package here, something massive to keep the economy out of the doghouse,” Amador said. “I think they’re being very timid.”

Source: Bloomberg,  Thomas Black in Monterrey, Mexico, at tblack@bloomberg.net, 19.01.2009

Filed under: Mexico, News, , , , , , , ,

Bailout Bust: Why Big Finance Is Laughing All the Way to the Bank

Instead of making loans to help the economy, they’re shoring up their own finances and buying up their competitors.

[Exerpt] The country’s financial markets have collapsed, as they tend to do when left without adult supervision, and they’re taking our economy with them. With the large banks refusing to make loans after losing billions on worthless subprime derivatives, the government stepped in and agreed to October’s financial bailout package.

The $700 billion legislation was meant to buy banks’ “troubled assets” for cash, and thus improve banks’ balance sheets to the point that they would lend again. This would mean credit for struggling businesses and households and could encourage expansion and hiring, thus pulling us out of recession.

But it turns out the banks haven’t held up their end of the bargain. All they’re holding up is a glass to a government that would rather shovel cash into the largest banks than take the edge off the recession.

…The fact is that the banks are not making loans — the “credit crunch” goes on, and the economy is the worse for it. After so many of Wall Street’s great investment banks went bankrupt, or were bailed out by the government, or were bought by competitors, the banks want to “hoard cash” to avoid a similar fate.  But besides shoring up their own finances, the banks are putting our public bailout money to another purpose — buying up their smaller competitors.

The mergers are large-scale — the Financial Times calls them a “wave of consolidation as banks scramble to use the cash on takeovers and bolt-on acquisitions.”  BusinessWeek reports “what could emerge is a barbell-shaped system with megabanks, small banks and little in between.” The business reporters for the New York Times describe the Treasury Department as “using the bailout bill to turn the banking system into the oligopoly of giant national institutions.”  An oligopoly is a market, such as banking, dominated by a few very large companies.

…. If any doubt remained, it was put to rest by the minor scandal that has emerged over a quiet change to the tax code made by the Treasury Department. This change allows banks to apply the losses of other banks they buy against their own taxes. In other words, when a bank buys a struggling smaller bank, the buyer can deduct the money lost by the struggling bank against its own tax bill. This is clearly meant to further encourage merger activity — for example, when Wells Fargo bought Wachovia, it paid $15 billion. But Wachovia’s losses total over $19 billion. Meaning, Wells Fargo was paid by the government for buying a highly valuable bank, for a profit of $4 billion, at our expense… for full article click here

Source: Alternet.org, Rob Larson, 05.01.2009

Filed under: Banking, News, , , , ,

The Truth behind the Citigroup Bank “Nationalization”

“Global Research”  Excerpt — The clumsy way in which US Treasury Secretary Henry Paulson, himself not a banker but a Wall Street ‘investment banker’, whose experience has been in the quite different world of buying and selling stocks or bonds or underwriting and selling same, has handled the unfolding crisis has been worse than incompetent. It has made a grave situation into a globally alarming one.

‘Spitting into the wind’
A case in point is the secretive manner in which Paulson has used the $700 billion in taxpayer funds voted him by a labile Congress in September. Early on, Paulson put $125 billion in the nine largest banks, including $10 billion for his old firm, Goldman Sachs. However, if we compare the value of the equity share that $125 billion bought with the market price of those banks’ stock, US taxpayers have paid $125 billion for bank stock that a private investor could have bought for $62.5 billion, according to a detailed analysis from Ron W. Bloom, economist with the US United Steelworkers union, whose members as well as pension fund face devastating losses were GM to fail.

That means half of the public’s money was a gift to Paulson’s Wall Street cronies. Now, only weeks later, the Treasury is forced to intervene to de facto nationalize Citigroup. It won’t be the last.

Paulson demanded, and got from a labile US Congress, Democrat as well as Republican, sole discretion over how and where he can invest the $700 billion, to date with no effective oversight. It amounts to the Treasury Secretary in effect ‘spitting into the wind’ in terms of resolving the fundamental crisis.

It should be clear to any serious analyst by now that the September decision by Paulson to defer to rigid financial ideology and let the fourth largest US investment bank, Lehman Brothers fail, was the proximate trigger for the present global crisis. Lehman Bros.’ surprise collapse triggered the current global crisis of confidence. It was simply not clear to the rest of the banking world which US financial institution bank might be saved and which not, after the Government had earlier saved the far smaller Bear Stearns, while letting the larger, far more strategic Lehman Bros. fail.

Some Citigroup details
The most alarming aspect of the crisis is the fact that we are in an inter-regnum period when the next President has been elected but cannot act on the situation until after January 20, 2009 when he is sworn in.

Consider the details of the latest Citigroup government de facto nationalization (for ideological reasons Paulson and the Bush Administration hysterically avoid admitting they are in the process of nationalizing key banks). Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got some $150 billion in US taxpayer funds in the past two months. Ironically, only eight weeks before, the Government had designated Citigroup to take over the failing Wachovia Bank. Normally authorities have an ailing bank absorbed by a stronger one. In this instance the opposite seems to have been the case. Now it is clear that the Citigroup was in deeper trouble than Wachovia. In a matter of hours in the week before the US Government nationalization was announced, the stock value of Citibank plunged to $3.77 in New York, giving the company a market value of about $21 billion. The market value of Citigroup stock in December 2006 had been $247 billion. Two days before the bank nationalization the CEO, Vikram Pandit had announced a huge 52,000 job slashing plan. It did nothing to stop the slide.

The scale of the hidden losses of perhaps the twenty largest US banks is so enormous that if not before, the first Presidential decree of President Barack Obama will likely have to be declaration of a US ‘Bank Holiday’ and the full nationalization of the major banks, taking on the toxic assets and losses until the economy can again function with credit flowing to industry once more.

Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses. After that, remaining losses will be split between Citigroup and the government, with the bank absorbing 10% and the government absorbing 90%. The US Treasury Department will use its $700 billion TARP or Troubled Asset Recovery Program bailout fund, to assume up to $5 billion of losses. If necessary, the Government’s Federal Deposit Insurance Corporation (FDIC) will bear the next $10 billion of losses. Beyond that, the Federal Reserve will guarantee any additional losses. The measures are without precedent in US financial history. It’s by no means certain they will salvage the dollar system.

The situation is so intertwined, with six US major banks holding the vast bulk of worldwide financial derivatives exposure, that the failure of a single major US financial institution could result in losses to the OTC derivatives market of $300-$400 billion, a new IMF working paper finds. What’s more, since such a failure would likely cause cascading failures of other institutions. Total global financial system losses could exceed another $1,500 billion according to an IMF study by Singh and Segoviano.

Source: Global Research by F. William Engdahl / Information Clearing House 25.11.2008, full article here

Filed under: Banking, News, Services, , , , , , , , , ,

Get your Dollars Out Now!

ICH Excerpt– As Argentine citizens, we have a huge advantage over other peoples including US citizens when it comes to understanding and coping with this kind of crisis. I say this because in our own lifetimes we have suffered in Argentina all of what is now happening globally – albeit on a much smaller scale in our case. We’ve seen this movie… We’ve been there, and done that…

The events of the last two weeks have clearly revealed that the global financial, monetary and banking system imposed on the world by the power structures promoting “globalization” is fundamentally flawed, unviable and immoral in its effects upon the most all of Mankind. After allowing a small cabal of shady characters to illegitimately accumulate vast amounts of wealth and power over markets, corporations, industries, media, armed forces and entire nations, like the World Trade Center towers on 9/11, this entire System is now in free-fall, collapsing into itself in one massive implosion.

The 4 Pillars of the Extreme Capitalist Model – In short the key factors described above, in the long-term all function together in a coordinated, consistent and synchronized manner, which means that, even if in the short- and medium-terms there are spates of high profits where money is sloshed around big time, in the long-term the whole system just doesn’t add up. That’s when you have periodic meltdowns like today’s. Usually, they are explained away by well-paid economic gurus writing brainy explanations in The Wall Street Journal, Financial Times or New York Times, who tell us that this is all just part of “the economic cycle”. For the most part, they can isolate sections of those downturns and localize them, so that they only affect a couple of emerging markets…

Like Argentina in 2001, or Brasil in 1999, or Mexico in 1997. In short, these four pillars are:

1. Programmed Monetary Insufficiency – Artificially generated by an “independent” central bank, controlled by the local and global private banking institutions superstructure;

2. Private banking based on Fractional Reserves – As a system, this allows banks to create money out of thin air, charging interest for it – often at usury rates -, and generating huge profits for “investors” and creditors;

3. Debt – This is the key concept that “fuels” private and public economies replacing the far more economically sound concept of reinvesting company profits and promoting a savings culture. Those who benefit from the unnecessary creation of debt need to promote and instigate among the public at large in all countries, fericiously undisciplined consumerism and greed, which goes hand in hand with total rejection of the very concept of saving and preparing for a rainy day. (4)

4. Privatize Profits /Socialize Losses – As a channelling and transference scheme for the various stages of the recurrent “cycles”, so that when they reach the inexorable stage where collapse is nunavoidable, there is always a way of making the population at large pay the bill.

Source: Information Clearning House 3.10.2008, by Adrian Salbuchi economic analyst based in Argentina

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Chinese regulator says US lending was ‘ridiculous’

TIANJIN, China – U.S. lending standards before the global credit crisis were “ridiculous” and the world can learn from China’s more cautious system as it considers financial reforms, the top Chinese bank regulator said Saturday.

Beijing curbed mortgage lending in 2003 and 2006 to keep debt manageable amid a real estate boom, while American regulators responded to a similar situation by letting credit grow, said Liu Mingkang, chairman of the Chinese Banking Regulatory Commission.

“When U.S. regulators were reducing the down payment to zero, or they created so-called ‘reverse mortgages,’ we thought that was ridiculous,” Liu said at a World Economic Forum conference in the eastern Chinese city of Tianjin.

He said debt in the United States and elsewhere rose to “dangerous and indefensible” levels.

Liu’s comments were unusually pointed criticism of U.S. financial regulation for a Chinese official. They added to suggestions by countries that are under U.S. pressure to liberalize their financial markets that Washington’s model might not be ideal.

China has based its reforms on the U.S. system but has moved gradually. It has kept its financial markets isolated from global capital flows, prompting complaints by its trading partners.

As China made changes, “a lot of the time, we learned that what we had learned from our teacher the day before was wrong,” Liu said, referring to the U.S.

China’s state-owned banks have avoided the turmoil roiling Western markets. Chinese banks hold bonds from failed Wall Street house Lehman Brothers, but they are a tiny fraction of their vast assets.

Liu compared Washington’s proposed US$700 billion plan to revive credit markets to fast food and said the world needed to look at longer-term solutions.

“Fast food is convenient. This US$700 billion package must ease the concerns and build up confidence. But if you only take this, it doesn’t agree with your stomach. You should think about Chinese slow cooking and slow food,” he said.

Liu called for governments to create international standards and regulatory systems for globalized financial markets. He said Beijing has signed information-exchange agreements on financial regulation with 32 other countries since the turmoil began.

Liu pointed to China’s experience with real estate and the collapse of a stock market boom.

As stock prices in China soared, banks were ordered to make sure customers were not using loans or credit cards to finance speculation. As a result, Liu said banks have suffered no rise in loan defaults even though stock prices have plummeted 63 percent since the October 2007 peak.

“We Chinese can share our own experiences with all the market practitioners,” Liu said. “Maybe our experience cannot be applicable to developed markets fully. But still, I think it might be useful and helpful to those in emerging markets.”

Chinese and foreign businesspeople at the World Economic Forum, the Chinese leg of the forum based in Davos, Switzerland, said the credit crisis is likely to increase the influence of China and other emerging economies in the world financial system, though Wall Street will retain its leading role.

“I believe this kind of regional financial strength will play a bigger and more important role,” said Jiang Jianqing, chairman of state-owned Industrial & Commercial Bank of China Ltd., the world’s biggest commercial lender by market capitalization.

“Right now the market is very unitary,” with U.S. bonds dominating global holdings, Jiang said. “This kind of a unitary, overcentralized market is something we need to change.”

Still, he said, Wall Street’s “dominance will continue.”

The European Union trade commissioner, Peter Mandelson, defended the global capital markets structure, warning that drastic change might hurt prosperity.

“The capital market system, fundamentally, is not flawed,” Mandelson said. “We are not looking for some alternative, and I hope that people in the emerging markets, in China for example, are not looking for an alternative to properly functioning capital markets.”

The crisis is likely to reduce resistance in the West to investments by government funds as companies urgently seek capital, said Thomas Enders, CEO of the European aircraft producer Airbus Industrie.

Critics have questioned the possible political motives of state-run funds and an EU official warned last year they might face restrictions if they fail to disclose more information about their goals and tactics.

“I would dare to predict that, yes, one of the big changes we will see is greater acceptance of sovereign wealth funds,” Enders said.

Source: AP 26.09.2008 JOE McDONALD,AP Business Writer

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Mexico Bailout Mistakes May Provide Lessons for U.S. Lawmakers

Sept. 25 (Bloomberg) — U.S. legislators, under pressure to vote quickly on a $700 billion rescue fund for the U.S. financial system, may want to heed the missteps Mexico made more than a decade ago when its banks collapsed.

Mexico’s bailout, which the government said was needed to protect savings and homeowners, ended up costing taxpayers an estimated 20 percent of gross domestic product and slowed growth as credit dried up for consumers and small businesses instead of being re-activated. Many of the mistakes were rooted in a lack of oversight, said Bernardo Gonzalez-Arechiga, who served as a commissioner from 2002 to 2003 on the bailout agency, now known as the Bank Savings Protection Institute.

‘There’s a basic similarity, as it happened in Mexico, in the sense that the federal government is attempting to have an extremely broad capacity to conduct all types of activities with very weak oversight by Congress,” Gonzalez-Arechiga, a former head of Mexico’s derivative market, said in an interview.

Mexico is still paying on bonds it used to buy bad debt from banks that faced failure after the currency fell as much as 65 percent in December 1994 and Treasury-bill rates shot up to more than 80 percent. The government wasn’t able to ease the credit crunch, and the bailout also altered Mexico’s financial system, eventually putting the country’s four largest banks and 77 percent of all banks by assets in foreign hands.

U.S. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are asking Congress to approve $700 billion for the government to buy bad loans, improving banks’ balance sheets so they can continue loaning to consumers and businesses. The plan calls for eventually selling the assets to recover part or all of the money used in the rescue.

Grave Threats
Bernanke warned on Sept. 24 that the U.S. financial system faces “grave threats” if a rescue package isn’t approved.

The Treasury and Federal Reserve should seek an outside opinion on the breadth of the crisis to avoid having to come back to Congress for more funding, Gonzalez-Arechiga said. Mexico failed to grasp the magnitude of its financial crisis and was forced to introduce four debtor-relief programs that ended up treating different individuals unevenly, he said.

“Very often the politicians and government officials have an incentive to underestimate the extent of the problem,” he said.

According to a Mexican congressional auditor’s report, the bank bailout cost the government 1.25 trillion pesos ($99.7 billion) or 17 percent of the economy from 1995 through 2004. The government only recovered 43.6 billion pesos from the assets backing bad loans, the report said.

Pennies on the Dollar
The government issued Treasury notes to buy the bank loans at book value and then got pennies on the dollar with they resold them, said Rogelio Ramirez de la O, the founder and president of Ecanal, a Mexico City-based economic consulting firm.

Meanwhile, Mexican banks profited on the Treasury bills they received in exchange for bad loans, giving them a steady source of income and less incentive to provide loans to small businesses and consumers. Credit plummeted for more than a decade, delaying a recovery in wages and employment. The banks’ outstanding loans dropped by more than half to 1.08 trillion pesos at the end of 2004 from 2.22 trillion pesos a decade earlier.

“It was a great trade for the banks. For a while, the biggest asset in their balance sheets was government paper,” said Alonso Cervera, a senior economist with Credit Suisse in New York, who has covered Mexico since 1995. “They made a lot of money on these instruments.”

Don’t-Pay Culture

The U.S. also needs to safeguard against consumers and businesses adopting an attitude that they don’t need to meet their obligations because of the rescue, said Christopher Palmer, chief of global emerging markets for Gartmore Investment Management in London. Many Mexicans stopped paying on home, car and other loans after the government announced it was bailing out the banks, creating a phenomenon that Mexican bankers at the time labeled the “culture of not paying.”

“The lasting legacy of the Mexican crisis is that credit functions dried up because of this culture of not paying,” Palmer said. “That’s what Washington needs to be the most on the lookout for.”

The lack of capital in the Mexican financial system finally was resolved when foreign banks, such as Citigroup Inc., Banco Bilbao Vizcaya Argentaria SA, Banco Santander SA and HSBC Holdings PLC bought the country’s four largest banks.

“The main lesson is not to follow the Mexican example,” said Ramirez de la O, who advised former presidential candidate Andres Manuel Lopez Obrador during the 2006 election campaign. “The Mexican rescue was much more wild and disorderly. It lent a lot to corruption because it was open-ended.”

Although Mexico’s tab exceeded original forecasts, the country did end up with tougher regulations that put the banks on more solid footing, Cervera said.  “The banks are now in very good shape,” Cervera said.

Source: Bloomberg 25.09.2008, Thomas Black in Monterrey, Mexico, at tblack@bloomberg.net.

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