Tuesday, September 30, 2008
Monday, September 29, 2008
Markets plunge as $700-billion package fails
Markets plunge as $700-billion package fails
STEVE LADURANTAYE
Monday, September 29, 2008
North American stocks plunged Monday as the massive U.S. banking bailout was voted down by Congress.
Toronto stocks plunged 849.07 points, or 7 per cent, by mid-afternoon and the Dow Jones industrial average 443.08 points, or 3.98 per cent. The S&P 500 fell as much as 5.98 per cent, or 72.58 points, in its biggest drop since 1987.
The $700-billion (U.S.) plan, which appeared set for approval when a compromise was announced Sunday, was intended to increase liquidity in the markets and restore confidence in a shattered banking sector. The plan was rejected 228-to-205.
Critics said the bailout didn't address the concerns of the average citizen, such as job losses and the weak housing market that is at the source of the banking problems. If Monday's vote had passed, the plan would have been before the Senate Wednesday and signed by the President George W. Bush soon after.
“The immediate downside market reaction is appropriate for the decision made by the senate committee today,” said Sheryl Purdy, vice-president of Leede Financial Markets in Calgary. “They called the dare and now they're seeing what the free markets think of their decision to vote down this bill. I sincerely hope they will revise and reconsider their decision made today”
As lawmakers voted, the yield of the 3-month Treasury bill sank to 0.32 per cent – indicating their willingness to sacrifice returns for security.
Oil contributed to the deep losses in Toronto, with the energy sector down 9 per cent. Oil lost as much as $10.01 Monday to $96.88 a barrel, but had regained some of the losses to settled at $98.22.
“Oil is really down on all of the broader worries,” said Martin King, energy commodities analyst at FirstEnergy Capital Corp. in Calgary. “They're worried about demand and about this financial package in the United States. There is also general blowback – people need to raise cash again so they are selling their oil positions.”
David Cockfield, a portfolio manager at Leon Frazer Associates in Toronto, said “illogical” investors are abandoning sectors that are in relatively good shape in a bid to protect their assets. Oil may be falling, he said, but it's still 25 per cent higher than it was last year and profits are expected to by 50 per cent higher at oil producers this quarter than the same period a year ago.
“It's all somebody else's problems, being reflected in Canadian stocks,” Mr. Cockfield said. “All of our concerns are in Canada are so far imagined. We think this could hurt us, but we've seen very little evidence of that so far. People are just running for cover with the assumption that all those problems are going to cross over the border and there's no proof that this is happening.”
Earlier in the day, the credit crisis continued to claim victims.
The Federal Deposit Insurance Corp. said Citigroup Inc. would take over Wachovia's banking operations. Citigroup will absorb up to $42-billion (U.S.) in losses, with the government backing any further losses. In return, Citigroup will issue FDIC $12-billion in preferred shares and warrants.
Wachovia is the latest institution to succumb to the crisis – mortgage lenders Freddie Mac and Fannie Mae were taken over by the government to protect $5-trillion in mortgages, insurer American International Group was bailed out by the governments in an $85-billion effort, Lehman Brothers Holdings declared bankruptcy and Merrill Lynch was absorbed by the Bank of America.
The banking crisis also cut deeply into Europe over the weekend, with Fortis and Bradford & Bingley banks receiving government bailouts and other European banks getting hammered in the markets on Monday.
More to come
© Copyright The Globe and Mail
STEVE LADURANTAYE
Monday, September 29, 2008
North American stocks plunged Monday as the massive U.S. banking bailout was voted down by Congress.
Toronto stocks plunged 849.07 points, or 7 per cent, by mid-afternoon and the Dow Jones industrial average 443.08 points, or 3.98 per cent. The S&P 500 fell as much as 5.98 per cent, or 72.58 points, in its biggest drop since 1987.
The $700-billion (U.S.) plan, which appeared set for approval when a compromise was announced Sunday, was intended to increase liquidity in the markets and restore confidence in a shattered banking sector. The plan was rejected 228-to-205.
Critics said the bailout didn't address the concerns of the average citizen, such as job losses and the weak housing market that is at the source of the banking problems. If Monday's vote had passed, the plan would have been before the Senate Wednesday and signed by the President George W. Bush soon after.
“The immediate downside market reaction is appropriate for the decision made by the senate committee today,” said Sheryl Purdy, vice-president of Leede Financial Markets in Calgary. “They called the dare and now they're seeing what the free markets think of their decision to vote down this bill. I sincerely hope they will revise and reconsider their decision made today”
As lawmakers voted, the yield of the 3-month Treasury bill sank to 0.32 per cent – indicating their willingness to sacrifice returns for security.
Oil contributed to the deep losses in Toronto, with the energy sector down 9 per cent. Oil lost as much as $10.01 Monday to $96.88 a barrel, but had regained some of the losses to settled at $98.22.
“Oil is really down on all of the broader worries,” said Martin King, energy commodities analyst at FirstEnergy Capital Corp. in Calgary. “They're worried about demand and about this financial package in the United States. There is also general blowback – people need to raise cash again so they are selling their oil positions.”
David Cockfield, a portfolio manager at Leon Frazer Associates in Toronto, said “illogical” investors are abandoning sectors that are in relatively good shape in a bid to protect their assets. Oil may be falling, he said, but it's still 25 per cent higher than it was last year and profits are expected to by 50 per cent higher at oil producers this quarter than the same period a year ago.
“It's all somebody else's problems, being reflected in Canadian stocks,” Mr. Cockfield said. “All of our concerns are in Canada are so far imagined. We think this could hurt us, but we've seen very little evidence of that so far. People are just running for cover with the assumption that all those problems are going to cross over the border and there's no proof that this is happening.”
Earlier in the day, the credit crisis continued to claim victims.
The Federal Deposit Insurance Corp. said Citigroup Inc. would take over Wachovia's banking operations. Citigroup will absorb up to $42-billion (U.S.) in losses, with the government backing any further losses. In return, Citigroup will issue FDIC $12-billion in preferred shares and warrants.
Wachovia is the latest institution to succumb to the crisis – mortgage lenders Freddie Mac and Fannie Mae were taken over by the government to protect $5-trillion in mortgages, insurer American International Group was bailed out by the governments in an $85-billion effort, Lehman Brothers Holdings declared bankruptcy and Merrill Lynch was absorbed by the Bank of America.
The banking crisis also cut deeply into Europe over the weekend, with Fortis and Bradford & Bingley banks receiving government bailouts and other European banks getting hammered in the markets on Monday.
More to come
© Copyright The Globe and Mail
Red Red Red - Cash Is King!
And I'm in Cash After The Last Massive 2 Day Rally
Stocks, oil plunge as credit crisis bites STEVE LADURANTAYEMonday, September 29, 2008
The Toronto Stock Exchange plunged Monday morning, kicking off a fresh week on weaker oil and a credit crisis that continues to reverberate through the global economy.
In Toronto, the S&P/TSX lost 3.57 per cent, or 432.35, to 11693.65 at 11 a.m. (ET). Oil was down $6.55 (U.S.) a barrel to $100.34.
In Toronto, the S&P/TSX lost 3.57 per cent, or 432.35, to 11693.65 at 11 a.m. (ET). Oil was down $6.55 (U.S.) a barrel to $100.34.
“There is a ‘Just-get-me-out mentality,'” said Lyle Stein, president of Red Barn Capital in Toronto. “I think there was a bit of hope that this bailout would put a finger in the dyke, but obviously it isn't the plug people were hoping for.”
The Dow Jones industrial average fell 2.32 per cent, or 258.94 points, to 10,884.19. The broader S&P 500 fell 3.29 per cent, or 39.91 points, to 1,173.36.
“Despite the U.S. bailout plan now being committed to paper, there's hardly a jubilant mood expected as the new trading week gets under way,” commented Tony Cross, director of Monk Communications. “The fact the funds won't be released in one lot but instead a series of tranches is certainly detracting from its appeal.”
The Federal Deposit Insurance Corp. said Monday that Citigroup Inc. would take over Wachovia's banking operations. Citigroup will absorb up to $42-billion (U.S.) in losses, with the government backing any further losses. In return, Citigroup will issue FDIC $12-billion in preferred shares and warrants.
Wachovia is the latest institution to succumb to the credit crisis – mortgage lenders Freddie Mac and Fannie Mae were taken over by the government to protect $5-trillion in mortgages, insurer American International Group was bailed out by the governments in an $85-billion effort, Lehman Brothers Holdings declared bankruptcy and Merrill Lynch was absorbed by the Bank of America.
The banking crisis also cut deeply into Europe over the weekend, with Fortis and Bradford & Bingley banks receiving government bailouts and other European banks getting hammered in the markets on Monday.
“Irrespective of the current relief program, it must be recognized that the past year of deterioration in credit conditions globally argues for softer than expected order and sales activity over the next six months, at a minimum, for many industries tied to capital spending where returns on investment are compared to what have been higher costs of capital,” commented Tobias Levkovich, Citigroup's chief equities strategist.
“This reality cannot be turned around overnight and thus leaves earnings risk for technology hardware companies, industrial products producers, raw materials vendors and even energy equipment and services.”
More to come
© Copyright The Globe and Mail
Dubai's $1.5B Palm Island opens, but global money crisis may hurt its success
Island of wealth in an ocean of red ink TheStar.com - Business - Island of wealth in an ocean of red ink
Dubai's $1.5B Palm Island opens, but global money crisis may hurt its success
September 28, 2008 Adam SchreckBarbara SurkAssociated Press
DUBAI, United Arab Emirates–It's the latest word in Persian Gulf excess: a $1.5 billion (U.S.) resort boasting a $25,000-a-night suite and dolphins flown in from the South Pacific – all atop an island built in the shape of a palm tree.
Environmentalists have long criticized both Palm Jumeirah island and some of the features of the Atlantis hotel, which opened earlier this week. And analysts wonder if global financial turmoil will crimp Dubai's big hopes for tourists.
Dubai is not blinking, though.
The 113-acre resort on the artificial island off the coast is among the city-state's biggest bets that tourism can help sustain its economy once regional oil profits stop flowing.
"You don't build a billion-and-a-half dollar project just anywhere in the world," said Alan Leibman, president and managing director of Kerzner International, the hotel operator that teamed with Dubai developer Nakheel on the resort.
With its own oil reserves running dry, Dubai hopes to woo those eager to make money and those who know how to spend it – even as much of the global economy sours.
For years, the emirate – one of seven semi-independent states that make up the United Arab Emirates – has been feverishly building skyscrapers and luxury hotels.
A key piece of the strategy has been to cultivate an image in the west as a sun-kissed tourist destination despite its intense summer heat, conservative Muslim society and dearth of historic sites.
Among the daring projects are an indoor ski slope, the as-yet-incomplete world's tallest skyscraper and a growing archipelago of man-made islands such as Palm Jumeirah – the smallest of three such projects planned.
Much of the focus at the Atlantis, modelled on a sister resort in the Bahamas, is on ocean-themed family entertainment. The resort has a giant, open-air tank with 65,000 fish, stingrays and other sea creatures and a dolphinarium with more than two dozen bottlenose dolphins flown in from the Solomon Islands.
The hotel's top floor aims squarely at the ultra-wealthy. A three-bedroom, three-bathroom suite complete with gold-leaf, 18-seat dining table is on offer for $25,000 a night.
Environmental groups and some people in the Solomons protested the sale of the dolphins to the resort as well as the 30-hour plane flight to get them to Dubai.
Dubai's development has long been criticized by environmental activists, who say the construction of artificial islands hurts coral reefs and even shifts water currents. They also point to growing water and electricity consumption.
Developers seem undaunted. For the moment, the Atlantis shares the island only with rows of high-end houses and construction sites. But other international names are set to move in.
Donald Trump plans a hotel straddling the centre of the tree-shaped island's "palm," and the storied QE2 ocean liner will become a hotel and a tourist attraction docked alongside its ``trunk." An 1,800-seat theatre nearby will house a permanent Cirque du Soleil show beginning in the summer 2011.
"Palm Jumeirah in and of itself will become one of Dubai's major tourist attractions," said Joe Cita, chief executive of Nakheel's hotel division.
Boosting the number of attractions on the island will not only entice more visitors, but also persuade them to spend more time and money in the city, he said.
By 2010, Dubai aims to attract 10 million hotel visitors annually, up from about seven million in 2007. Atlantis alone will increase the city's hotel capacity by 3 per cent.
So far, demand appears strong. The Middle East had the highest hotel occupancy rates in the world during the first half of the year, with Dubai leading the region at 85.3 per cent, according to Deloitte Touche Tohmatsu.
Dubai also had the highest room rates in the region, although revenue growth is slowing, Deloitte noted.
Atlantis' backers are optimistic they can fill its 1,539 rooms despite the economic uncertainty wracking some of the world's richest economies. Their focus is on well-heeled travellers from Europe, Russia, Asia and elsewhere in the Middle East.
"People will still take family holidays," Leibman said. ``Dubai is still good value when you're paying in pounds, (or) you're paying in euros.'' Nakheel, the developer, and Kerzner, the hotel operator, are both privately held companies and do not release sales data. Leibman said demand from tour groups looks strong well into the first part of next year.
Yet Marios Maratheftis, head of regional research for the Middle East, North Africa and Pakistan at Standard Chartered Bank in Dubai, said there is "good reason" to be concerned that global financial problems could hit Dubai's tourism industry. Nevertheless, he said, the city's long-term outlook remains positive.
Kerzner has grown increasingly close to Dubai in recent years. In 2006, the company took itself private in a $3.8 billion deal partially bankrolled by a division of Nakheel's state-owned parent, Dubai World. Nakheel retains a large stake in the company.
Nakheel's hotel division has expanded rapidly. The company's holdings include New York's Mandarin Oriental, the Fontainebleau in Miami, and the W Hotel in Washington. Its parent also owns a minority stake in MGM Mirage Inc. and is teaming with that casino operator and Kerzner to build a multibillion-dollar casino on the Las Vegas Strip.
Lawmakers release plan to enact historic bailout of nation's financial system
Rescue bill unveiled
Lawmakers release plan to enact historic bailout of nation's financial system.
By Jeanne Sahadi, CNNMoney.com senior writer
Last Updated: September 28, 2008: 10:35 PM ET
NEW YORK (CNNMoney.com) -- The federal government would put up as much as $700 billion in a far-reaching plan to rescue the nation's troubled financial system, according to a bill unveiled by lawmakers on Sunday.
House Speaker Nancy Pelosi, D-Calif., said she hopes the House will take up the bill on Monday. Sen. Majority Leader Harry Reid, D-Nev., said he believes the Senate can move on the legislation by Wednesday.
Pelosi said the provisions added by Congress will protect taxpayers from having to pay for the bailout.
"We sent a message to Wall Street - the party is over," she said at a press conference with Reid and other Democratic leaders from the House and Senate.
The core of the bill is based on Treasury Secretary Henry Paulson's request for authority to purchase troubled assets from financial institutions so banks can resume lending and so the credit markets, now virtually frozen, can begin to operate more normally.
But Democrats and Republicans - concerned about the potential taxpayer cost - have added several conditions and restrictions to protect taxpayers on the down side and give them a chance at some of the potential upside if the companies benefit from the plan. "People have to know that this isn't about a bailout of Wall Street. It's a buy-in so we can turn our economy around," Pelosi said.
Key negotiators for the financial rescue plan will be busy trying to line up votes on Capitol Hill on Sunday to support the accord they reached soon after midnight. House Majority Leader Steny Hoyer, D-Md., told CNN he believes a majority of representatives on both sides of the aisle can and will support the bill.
President Bush, in a statement Sunday evening, said "this is a difficult vote, but with the improvements made to the bill, I am confident Congress will do what is best for our economy by approving this legislation promptly."
On Sunday evening, the House Republican working group, which was stringently opposed to earlier drafts of the plan and offered a counterproposal, indicated it would support the bill, and its members are encouraging other Republicans in the House to do the same.
"Nobody wants to have to support this bill, but it's a bill that we believe will avert the crisis that's out there," House Minority Leader John Boehner, R-Ohio, told reporters.
Key provisions of the bill
Doling the money out: The $700 billion would be disbursed in stages, with $250 billion made available immediately for the Treasury's use. Authority to use the money would expire on Dec. 31, 2009, unless Congress certifies a one-year extension.
Protecting taxpayers: The ultimate cost to the taxpayer is not expected to be near the amount the Treasury invests in the program. That's because the government would buy assets that have underlying value.
If the Treasury pays fair market value - which investors have had a hard time determining - taxpayers stand a chance to break even or even make a profit if those assets throw off income or appreciate in value by the time the government sells them. If it overpays for the assets, the government could be left with a net loss but would get something back on the open market for the assets when it eventually sells them.
If it ends up with a net loss, however, the bill says the president must propose legislation to recoup money from the financial industry if the rescue plan results in net losses to taxpayers five years after the plan is enacted.
In addition, Treasury would be allowed to take ownership stakes in participating companies.
Stemming foreclosures: The bill calls for the government, as an owner of a large number of mortgage securities, to exert influence on loan servicers to modify more troubled loans.
In cases where the government buys troubled mortgage loans directly from banks, it can adjust them more easily.
Limiting executive pay: Curbs would be placed on the compensation of executives at companies that sell mortgage assets to Treasury. Among them, companies that participate will not be able to deduct the salary they pay to executives above $500,000.
They also will not be allowed to write new contracts that allow for "golden parachutes" for their top 5 executives if they are fired or the company goes belly up. But the executives' current contracts, which may include golden parachutes, would still stand.
Overseeing the program: The bill would establish two oversight boards.
The Financial Stability Oversight Board would be charged with ensuring the policies implemented protect taxpayers and are in the economic interests of the United States. It will include the Federal Reserve chairman, the Securities and Exchange Commission chairman, the Federal Home Finance Agency director, the Housing and Urban Development secretary and the Treasury secretary.
A congressional oversight panel would be charged with reviewing the state of financial markets, the regulatory system and the Treasury's use of its authority under the rescue plan. Sitting on the panel would be 5 outside experts appointed by House and Senate leaders.
Insuring against losses: Treasury must establish an insurance program - with risk-based premiums paid by the industry - to guarantee companies' troubled assets, including mortgage-backed securities, purchased before March 14, 2008.
The amount the Treasury would spend to cover losses minus company-paid premiums would come out of the $700 billion the Treasury is allowed to use for the rescue plan.
Far-reaching program
Paulson first announced the administration would seek an economic bailout plan on Sept. 18, after meeting with key lawmakers in the House and Senate - a meeting that left lawmakers looking ashen when they spoke to the press afterwards.
If enacted, the rescue plan would be the most dramatic and extensive government intervention in the economy since the Great Depression. President Bush on Sept. 24 gave a prime-time address to the nation in which he urged lawmakers to pass his plan and warned that the "entire economy is in danger."
The aim of the rescue is to unfreeze the credit markets - short-term lending among banks and corporations. The core of the problem is bad real estate loans that have led to record foreclosures when the housing bubble burst and home prices declined.
In the past two weeks, the banking world and Wall Street have been reordered by a wave of collapses and corporate mergers. The most recent development was the seizure by federal regulators on Thursday night of Washington Mutual, once the nation's largest thrift and a major mortgage lender.
The chill of the credit freeze has been felt far beyond Wall Street, as well. Businesses large and small have seen the cost of borrowing spike higher.
At the same time, the scale of the administration's plan - and the quick pace of the debate over it - has given pause to many Americans and lawmakers worried about its potential cost to taxpayers.
"We begin with a very important task, a task to stabilize the markets, to protect all Americans - and do it in a way that protects the taxpayer to the maximum extent possible," Paulson said early Sunday morning.
CNN's Jessica Yellin and Deirdre Walsh and CNNMoney.com's Chris Isidore and Tami Luhby contributed to this report.
An earlier version of this article incorrectly reported that Congress had publicly released a draft bill that CNN obtained.
First Published: September 28, 2008: 10:12 AM ET
Sunday, September 28, 2008
A Canadian Perspective On The Bail-out
Rescuing a financial system from toxic waste TheStar.com - Business - Rescuing a financial system from toxic waste
September 27, 2008 David OliveBusiness Columnist
By Monday, it appears, the U.S. Congress will have approved the biggest corporate bailout in history, amounting to $700 billion (U.S.), to rescue America's stricken financial sector.
The bailout's sponsor, irony of ironies, is free-market champion George W. Bush, who used the word "panic" in justifying a massive government intervention in the private sector, using language more alarming than any president since Franklin Roosevelt in the earliest days of the Great Depression.
The fear and urgency is justified. Total losses from the low-grade residential mortgages accumulated during the U.S.'s biggest-ever housing boom are now estimated at about $2 trillion (U.S.). Only a quarter of that financial toxic waste has been written off by the world's leading banks and brokerages, leaving the potential for utter global collapse very real without a government rescue mission of drastic proportions.
And given the complexity of the work to come, getting on with the task can't begin soon enough. What comes next is more difficult than prising the bailout funds out of a reluctant Congress, and entrusting the U.S. Treasury Department with the task of buying from lenders their most toxic "assets" – that is, failed or delinquent loans for which there usually are no other buyers, and which are inhibiting lenders from providing the liquidity on which capitalism runs.
No one, least of all the managers of the crippled institutions, knows the true value of these dismal loans and other soured investments that Treasury will buy. "The reality is that we are not going to know what the right price is for years," Boston bond manager Andrew Feltus of Pioneer Investments told the New York Times on Wednesday. "It might be 20 cents on the dollar or 60 cents on the dollar, but we won't know for years. No two pieces of paper are the same."
And there is a lot of paper, about 1.1 million troubled residential mortgages of a total of 51 million U.S. home mortgages. The soured assets, as you've heard repeatedly during this crisis entering its 13th month, are monstrously complicated.
Mortgages were bought by Wall Street banks and brokerages from mortgage brokers in the field, then repackaged, or "bundled," into as many as three dozen different types of bonds. These were flipped, for lucrative upfront fees, to other banks, brokerages, pension funds, hedge funds, insurance companies and credulous buyers worldwide, until the diaspora found its way into university endowments funds, the portfolio of the Caisse de dépôt et placements du Québec and UBS AG, Europe's largest bank, which has already taken a staggering $36 billion in losses on its U.S. securities.
Some of those bundled bonds were re-bundled as "collateralized debt obligations" (CDOs), a type of derivative now trading at pennies on the dollar, since placing an accurate value on these black boxes is impossible. Citigroup Inc. carries its CDOs on its books at 61 cents on the dollar, claiming they are of relatively high quality. But Merrill Lynch & Co., forcibly merged into Bank of America Corp. this month, firesaled $31 billion worth of CDOs earlier this year at just 22 cents on the dollar in a desperate bid to shore up its eroding reserves.
In a process increasingly referred to as the Great Unwind, Treasury minions will spend years cracking open the black boxes and tracing the ultimate assets on which the Wall Street-invented paper is based – a split-level in Lansing, Mich.; a tract-home development in suburban Phoenix; a luxury condo in overbuilt Miami. Treasury will then have to decide whether to take an immediate loss on a hopeless asset, or hold the property to maturity in hopes of an eventual rebound in the local real estate market.
The quandary for the Treasury is that if Uncle Sam pays a San Diego bank the undoubtedly inflated value at which the bank is carrying a troubled loan on its books, the bank is being rewarded for its fecklessness by U.S. taxpayers.
Conversely, if Treasury officials drive a hard bargain, paying less than the bank's claimed value for its impaired assets, the bank will have to take a writedown on the difference. That would eat into the bank's reserves, and make the bank even more gun-shy about lending to creditworthy customers – the very condition the massive bailout is intended to reverse.
There is arguably a silver lining to this catastrophe, which is that capital diverted for most of this decade to housing and consumer consumption, dating from the buying panic that began after the terrorist attacks of Sept. 11, 2001, when Bush exhorted Americans to keep shopping "or the terrorists win," can now be deployed more usefully.
Housing and shopping sprees at Target and Home Depot contribute little to the nation's productivity. Economic activities that strengthen America's competitive advantage have been starved of capital for years. These heavy investments in infrastructure, education, R&D, energy saving retrofits of buildings, and more efficient – and efficacious – delivery of health care.
"This crisis could become a chance to re-evaluate our priorities as a country," Business Week economist Michael Mandel argued this week. "Rather than stressing home ownership and consumption, we should focus on investment and innovation, which have a bigger long-term payoff."
Certainly there are more productive uses of capital than the eye-popping salaries and bonuses Wall Street managers accumulated in the fat years from knowingly peddling shoddy goods.
The new government controls on executive pay that are part of the extraordinary bailout plan under negotiation are a dagger planted in the free-market doctrine of the current Republican administration.
But without them, the rescue package urgently sought by Bush would have been politically impossible.
David Olive writes on business and political issues.
Congressional leaders and the Bush administration reached a tentative deal $$$$
LAUREN VICTORIA BURKE/AP
Secretary of the Treasury Henry Paulson, left, and Kevin Fromer, Assistant Secretary of the Treasury, arrive for a meeting in Speaker Nancy Pelosi's office regarding legislation on the financial crisis, Sept. 27, 2008, on Capitol Hill in Washington.
September 28, 2008 Charles BabingtonAssociated Press WritersAlan Fram
WASHINGTON – Congressional leaders and the Bush administration reached a tentative deal early Sunday on a landmark bailout of imperiled financial markets whose collapse could plunge the nation into a deep recession.
House Speaker Nancy Pelosi announced the $700 billion accord just after midnight but said it still has to be put on paper.
"We've still got more to do to finalize it, but I think we're there," said Treasury Secretary Henry Paulson, who also participated in the negotiations in the Capitol.
"We worked out everything," said Sen. Judd Gregg, R-N.H., the chief Senate Republican in the talks. He said the House should be able to vote on it Sunday, and the Senate could take it up Monday.
The plan calls for the Treasury Department to buy deeply distressed mortgage-backed securities and other bad debts held by banks and other investors. The money should help troubled lenders make new loans and keep credit lines open. The government would later try to sell the discounted loan packages at the best possible price.
At the insistence of House Republicans, some money would be devoted to a program that would encourage holders of distressed mortgage-backed securities to keep them and buy government insurance to cover defaults.
The legislation would place limits on severance packages for executives of companies that benefit from the rescue plan, but details were sketchy.
Also, the government would receive stock warrants in return for the bailout relief, giving taxpayers a chance to share in financial companies' future profits.
To help struggling homeowners, the plan requires the government to try renegotiating the bad mortgages it acquires with the aim of lowering borrowers' monthly payments so they can keep their homes.
The measure's main elements were proposed a week ago by the Bush administration, with Paulson heading efforts to push it through the Democratic-controlled Congress. Democrats insisted on greater congressional oversight, more taxpayer protections, help for homeowners facing possible foreclosure, and restrictions on executives' compensation.
To some degree, all those items were added.
At the insistence of House Republicans, who threatened to sidetrack negotiations at midweek, the insurance provision was added as an alternative to having the government buy distressed securities. House Republicans say it will require less taxpayer spending for the bailout.
But the Treasury Department has said the insurance provision would not pump enough money into the financial sector to make credit sufficiently available. The department would decide how to structure the insurance provisions, said Sen. Kent Conrad, D-N.D., one of the negotiators.
Money for the rescue plan would be phased in, he said. The first $350 billion would be available as soon as the president requested it. Congress could try to block later amounts if it believed the program was not working. The president could veto such a move, however, requiring extra large margins in the House and Senate to override.
Despite the changes made during an intense week of negotiations, the heart of the program remains Bush's original idea: To have the government spend billions of dollars to buy mortgage-backed securities whose value has plummeted as hundreds of thousands of Americans have defaulted on their home loans.
Senate Majority leader Harry Reid, D-Nev., said Saturday that the goal was to come up with a final agreement before the Asian markets open Sunday night. "Everybody is waiting for this thing to tip a little bit too far," he said, so "we may not have another day."
Hours later, when he and others told reporters of the plan in a post-midnight news conference, Reid referred to the sometimes testy nature of the negotiations.
"We've had a lot of pleasant words," he said, "and some that haven't always been pleasant."
"We're very pleased with the progress made tonight," said White House spokesman Tony Fratto. "We appreciate the bipartisan effort to deal with this urgent issue."
Wednesday, September 24, 2008
Berkshire Hathaway Inc. agree to fund Goldman Sachs Group Inc. by buying 5-billion (U.S.) worth of preferred shares -
The Oracle weighs inRTGAMWarren Buffett to the rescue! Not only did the chairman of Berkshire Hathaway Inc. agree to fund Goldman Sachs Group Inc. by buying 5-billion (U.S.) worth of preferred shares - and restoring some confidence in at least one corner of the U.S. financial system -
Mr. Buffett also said on Wednesday morning that he supported the U.S. government's contentious $700-billion rescue package.In an interview on CNBC,
Mr. Buffett said that the bailout plan was akin to the U.S. decision to go to war after the attack on Pearl Harbor in 1941, and also warned that the past week will "look like Nirvana" if the plan is not approved by Congress. He did warn, however, that the government shouldn't pay much more than the market price for the illiquid assets it plans to buy from troubled financial firms.
U.S. stock futures were higher on Wednesday morning with about an hour before markets open, suggesting stocks will rise at the start.
Futures for the Dow Jones industrial average rose 89 points, to 10,943. Futures for the broader S&P 500 rose 13 points, to 1200. Goldman Sachs rose to $131.40, up $6.35.In Europe, the U.K.'s FTSE 100 fell 0.4 per cent and Germany's DAX index fell 0.2 per cent in afternoon trading, after a reading on business confidence in the three largest European economies fell more than expected. In Asia, Japan's Nikkei 225 rose 0.2 per cent in overnight trading.Copyright 2001 The Globe and Mail
FBI was investigating four major U.S. financial institutions whose collapse helped trigger the bailout plan.
Executive pay limits gain support as bailout questioned JULIE HIRSCHFELD DAVISWednesday, September 24, 2008WASHINGTON —
Executives whose companies get a piece of the $700-billion (U.S.) government bailout will have their pay packages strictly limited under proposals that are broadly supported by both Republicans and Democrats in Congress.
The Bush administration was resisting the move as it scrambled to overcome widespread misgivings on Capitol Hill and swiftly push through its plan to rescue tottering financial firms by buying up their rotten assets.
Lawmakers in both parties are demanding changes to the administration's rescue proposal despite dire warnings from top economic officials of recessions, layoffs and lost homes if Congress doesn't approve it quickly. Both parties' presidential candidates also insist on alterations to the drastic prescription.
“We have got to look at some alternatives,” said Sen. Richard Shelby of Alabama, the top Republican on the Senate Banking Committee.
Sen. Chris Dodd, D-Conn., the panel's chairman, said the Bush administration's position was “not acceptable.”
Congressional leaders say they are working to approve the rescue by week's end, but the chances of a quick deal were dwindling.
“Just because God created the world in seven days doesn't mean we have to pass this bill in seven days,” said Rep. Joe Barton, R-Texas.
Rep. Barney Frank, D-Mass., the House Financial Services Committee chairman, was in intense negotiations with Treasury Secretary Henry Paulson on key elements of the plan.
“As long as it looks as if we are seriously engaged, it's not too late” to act, Mr. Frank said.
Law enforcement officials, meanwhile, said Tuesday that the FBI was investigating four major U.S. financial institutions whose collapse helped trigger the bailout plan.
Two law enforcement officials said the FBI was looking at potential fraud by mortgage finance giants Fannie Mae and Freddie Mac, and insurer American International Group Inc. Additionally, a senior law enforcement official said Lehman Brothers Holdings Inc. also is under investigation. The inquiries will focus on the financial institutions and the individuals who ran them, the senior law enforcement official said.
The law enforcement officials spoke on condition of anonymity because the investigations are ongoing and are in the very early stages.
Mr. Frank has proposed adding substantial congressional oversight over the bailout and a requirement that the government make an effort to renegotiate as many of the mortgages it purchases in the rescue as possible to help strapped borrowers stay in their homes. Mr. Paulson was said to be willing to accept those revisions.
Sen. Charles Schumer, D-N.Y., said Wednesday he believes Congress must act quickly to rebuild the crumbling financial system but that lawmakers must have a strong supervisory role.
If there are provisions for a return of money in connection with the absorption of bad debt at various financial institutions, he said on NBC's “Today” show, “it should go to taxpayers before bondholders, shareholders and executives.”
Sen. Jim DeMint, a South Carolina Republican, differed with Schumer, saying Congress should resist the Bush administration's pleas for the legislation. He said, “The government broke it. I don't trust them to fix it.”
The administration was still battling calls from virtually every quarter of Congress to slap tight limits on compensation for executives whose firms get a federal rescue. Mr. Frank wants the government to restrict the bailout to firms that deny their top people golden parachutes on their way out the door and institute a “clawback” rule to revoke bonuses paid for bogus gains.
Another influential Democrat, Sen. Max Baucus of Montana, proposed tax penalties on the compensation of top executives who earn more than the U.S. president; their pay would only be tax-deductible up to $400,000. Large golden parachutes also would be taxed heavily under the plan by Baucus, the Finance Committee chairman.
Mr. Paulson says such limits would discourage participation in the program.
But the curbs appear to have widespread bipartisan support.
“Clipping executive compensation is easy right now — everybody wants it,” said Rep. Jack Kingston, R-Ga.
Mr. Frank also has been pushing to allow the government to buy equity — rather than just bad debt — in companies it helps so taxpayers can benefit from future profits. That idea is also gaining bipartisan support, but Mr. Paulson argues it would hamstring the very companies the government is trying to help.
He also is strongly opposed to another key Democratic priority: letting judges rewrite mortgages to lower bankrupt homeowners' monthly payments. Democrats view that measure as the heaviest lift and the most likely to be dropped as part of a final deal.
“I share the outrage that people have,” Mr. Paulson told the Senate Banking Committee on Tuesday. “It's embarrassing to look at this. I think it's embarrassing to the United States of America. There is a lot of blame to go around.”
Without the bailout plan, Mr. Paulson and Federal Reserve Chairman Ben Bernanke have sketched out a grave scenario for lawmakers: Neither businesses nor consumers would be able to borrow money, and the world's largest economy would grind to a virtual halt.
© Copyright The Globe and Mail
U.S. money czars on hot seat
TheStar.com - Columnist - U.S. money czars on hot seat
CHARLES DHARAPAK/ASSOCIATED PRESS
CHARLES DHARAPAK/ASSOCIATED PRESS
Fed Chair Ben Bernanke, left, and Treasury Secretary Henry Paulson seated at the witness table before testifying before the Senate Banking Committee on Sept. 23, 2008.
Paulson, Bernanke and Cox face anger from both sides of the Senate over financial system bailout dismissed as `unacceptable' for its lack of oversight, accountability
September 24, 2008 Tim HarperWashington Bureau
WASHINGTON–Congressional momentum toward quick passage of a historic, $700 billion (U.S.) economic bailout package came to a screeching halt yesterday in a Senate committee room heavy with anger and skepticism.
The triumvirate of would-be saviours – Treasury Secretary Henry Paulson, Federal Reserve Chair Ben Bernanke and Security and Exchange Commission Chair Christopher Cox – sought quick passage of the package, citing imminent economic apocalypse, albeit in understated jargon designed to exude calm.
Instead, they received a pummelling from senators from both sides of the aisle, many running for re-election in November.
Republicans and Democrats told the trio they were seeking a blank cheque which would leave American taxpayers holding the bag while providing golden parachutes for reckless Wall Street executives who brought this woe upon themselves.
The administration's three-page plan contained no oversight or accountability and was therefore "unacceptable,'' Connecticut Senator Christopher Dodd, a Democrat and the chair of the banking committee, said following a hearing which lasted almost five hours.
A new round of uncertainty on Capitol Hill about the fate of the rescue plan sent stocks plunging again, with the Dow beginning the day in positive territory before finishing down 161 points.
Negotiations on a package acceptable to a majority in Congress continued yesterday, with White House Economic Adviser Keith Hennessey telling CNBC that there was room for discussion on details of the plan.
But it was becoming clear passage would neither be swift, nor easy.
"This proposal is stunning and unprecedented in its scope and lack of detail," Dodd said.
"It would do nothing, in my view, to help a single family save a home ... it would do nothing to stop even a single CEO from dumping billions of dollars of toxic assets on the backs of American taxpayers, but at the same time do nothing to stop the very authors of this calamity to walk away with bonuses and golden parachutes worth millions of dollars."
Then Dodd took direct aim at the unfettered power Paulson was conferring on himself.
"After reading this proposal, I can only conclude that it is not just our economy that is at risk, but our constitution as well," he said.
Many observers called yesterday's hearing the most important financial meeting ever held in the capital.
And many U.S. legislators now believe the rush to action after the 9/11 attacks conferred too much power in the White House and led to speedy passage of the flawed U.S. Patriot Act.
So they resolved not to be stampeded yesterday – after hearing from outraged constituents over the weekend who wanted to know what they were going to get for such a massive outlay of taxpayers' money.
Paulson said he shared much of that outrage, admitting the crisis was "embarrassing" for the United States of America.
"You worry about taxpayers being on the hook?" he said at one point. "Guess what – they're already on the hook.
"Regrettably, not every homeowner is going to save their home," Paulson said.
As he was speaking, the U.S. government housing agency reported that house prices dropped another 0.6 per cent in June, bringing the cumulative decline across the U.S. to 5.8 per cent since housing prices peaked in April 2007.
Even before Paulson unveiled his plan, the U.S. deficit for the 2009 fiscal year was already projected to be a record $438 billion. And if only half the bailout money is used in this fiscal year, the deficit could soar to $900 billion.
Richard Shelby of Alabama, the ranking Republican on the committee, said the Paulson plan combined with an estimated $300 billion already spent propping up failing Wall Street firms has pushed the bailout price tag to $1 trillion.
He said Wall Street bet the government would ride to its rescue if it created this mess "and it appears that is the one bet which will pay off."
Both presidential candidates, Republican John McCain and Democrat Barack Obama, will vote on a final package, but neither is involved in crafting the bill.
McCain said yesterday that congress must "trust, but verify,'' but he said inaction was not an option.
Obama told a press conference the Bush administration was showing "stubborn inflexibility'' in its determination to force quick passage of the bailout plan and he said taxpayers must benefit because they are bearing the risk in the plan.
With files from Reuters News Agency
Tuesday, September 23, 2008
Q&A with ABBY BADWI and D. Pescod
Q&A with ABBY BADWI
PRESIDENT AND CEO with BANKERS PETROLEUM
(As of September 22, 2008)
As we touch base with some of the oil and gas stories that
have been beaten and battered, but still should have big to
huge production growth in the coming years, one story
that definitely comes to mind is Bankers Petroleum. Abby
Badwi who had so much success in Egypt with Rally Energy
has now reunited much of the team for their Patos-
Marinza project in Albania.
Abby was on a tour talking about Bankers through some
of the financial districts in the United States last week
when the financial crisis was at its peak. Needless to say,
he blames the financial collapse in the US for destroying
some of value he had helped create. But it’s time to get
caught up with Abby:
David Pescod: Abby, the crisis that’s just been created
has been courtesy of the financial industry – the housing
crisis and the “fly-by-nighters” that tried to finance them,
but it does make one concerned about ones banking relationships.
How does your debt/credit position sit now and
how solid do you feel about it?
Abby Badwi: Bankers is in a strong financial position. We
have a positive working capital of $60 million mainly in
cash with major Canadian Banks, minimal bank debt, for a
company our size, of $29 million and we generate $20 million/
quarter in net operating income. Our capital program
is fully funded from our cash flow.
David Pescod: We’ve had a big drop in oil prices from
$150 to $100, but no oil and gas companies were ever
priced as if oil was really that high and now we see many
oil and gas companies priced as if oil was $80. What do
you see for oil prices down the road in a very new environment?
Abby Badwi: Our capital expenditure plans for 2009 and
2010 are based on Brent oil price of $84 and $80. $100 oil
is a bonus. I am bullish on oil price since it’s a depleting
commodity and a world that is consuming some 80+ million
barrels per day.
Bankers Petroleum
Bankers Petroleum (T-BNK) $3.17 -0.01
E&P companies cannot find 80 to100 million barrel oil
fields every single day. Oil prices will continue to have
wide fluctuations due to the economic health of the US
financial sector, the US$ and geopolitical issues
around the world.
David Pescod: Albania has just increased its royalty
rates, but they still remain some of the better ones on
the face of earth, particularly compared to what has
happened in Alberta lately. Your thoughts on working
in Albania and any interesting characteristics that
should be apparent?
Abby Badwi: Albania is hungry for foreign investments
and Bankers is one of the largest investors in the country.
A democracy since 1992, Albania is pro free market
economy, privatization of the public sector corporations
and has a slogan of “Albania is open for business”.
It has been invited to join NATO and is an aspiring
nation to join the EU.
David Pescod: The Patos-Marinza project in Albania
has huge, make that enormous reserves. How much of
it do you think is recoverable and what kind of production
rates can you see going forward?
Abby Badwi: With two billion barrels of oil in place,
Patos-Marinza has already produced 120 million barrels
and has another 150 million barrels of 2P reserves remain
to be recovered through primary recovery methods
of reactivating existing wells and infill vertical and
horizontal drilling. We believe that we can recover another
10% to 20% by secondary and tertiary recovery
applications of water flood and thermal injection. The
Kucova oil field has 500 million barrels of oil in place, it
has produced 25 million barrels to date and we expect
to recover a similar amount. We will be announcing our
reserves for this field shortly. Our current plans target
is 20,000 BOPD by the end of 2010.
David Pescod: I guess in a world like this, where
things seem to be coming out of left field, what are
your concerns about the global economy and particularly
in the oil and gas business?
Abby Badwi: The escalating problems that hit major
financial institutions in the US this year reached its
peak with the downfall of Lehman last week and vulnerability
of several other big banking names being added
to the list.
David Pescod 780-408-1750 Debbie Lewis 780-408-1748 Fax: 780-408-1501 Page 3
DEB’S DITTY:
One Sunday morning, the pastor noticed little Alex standing in the foyer of
the church staring up at a large plaque. It was covered with names and small
American flags mounted on either side of it. The six-year old had been staring
at the plaque for some time, so the pastor walked up, stood beside the
little boy, and said quietly, 'Good morning Alex.'
'Good morning Pastor,' he replied, still focused on the plaque. 'Pastor, what is
this? The pastor said, 'Well son, it's a memorial to all the young men and
women who died in the service.'
Soberly, the just stood together, starring at the large plaque.
Finally, little Alex's voice, barely audible and trembling with fear asked,
'which service, the 8:30 or the 10:45?'
To receive the Late Edition and be on our daily circulation simply e-mail Debbie at
Debbie_lewis@canaccord.com and give your address, phone number and e-mail and we’ll have you
on the list tonight.
The US Government intervention stabilized the situation for the time being and I believe that the US economic
powers will do its share through M&A transactions that will create bigger and stronger financial institutions. Our
industry is strong but you will also see increased activities in M&A in our industry this year carrying on into 2009.
David Pescod: There are an awful lot of oil and gas stocks that have been absolutely beaten up over the last few
weeks. Are there any that you would recommend at these prices?
Abby Badwi: Major Canadian E&Ps such as Encana and Canadian Natural Resources lost 30% in share value over the
last three months and should recover well. Of course, Bankers Petroleum is also a very good bet.
Disclosure: Canadian Natural Resources: Canaccord Capital covers this stock and has a Buy rating on it. (Buy: The stock is
No bailout? Even scarier
Market News: After the Bell
The close: No bailout? Even scarier
RTGAM
Investors listened to Ben Bernanke and Henry Paulson make their bailout pitch before lawmakers on Tuesday, and they didn't like what they heard.
Oh sure, the $700-billion (U.S.) price tag on the rescue package for financial institutions didn't surprise anyone. But they learned that Democrat and Rebublican senators alike have voiced some opposition to the package, which could delay its passing. As well, investors learned that the plan does not involve buying toxic assets from beleaguered financial institutions at firesale prices, but rather something close to the market value. That, potentially, leaves a lot of downside risk for taxpayers and no upside potential.
As for delaying or modifying the package, Mr. Bernanke outlined the risks in his testimony before the Senate Banking Committee: "I believe if the credit markets are not functioning, that jobs will be lost, the unemployment rate will rise, more houses will be foreclosed upon, GDP will contract, that the economy will just not be able to recover."
In other words, who wants to own stocks in this uncertain environment? The Dow Jones industrial average closed at 10,854.17, down 161.52 points, or 1.5 per cent, after treading water throughout most of the day. The broader S&P 500 closed at 1,188.22, down 18.87 points, or 1.6 per cent.
The losses were widespread - and, combined with Monday's loss, erased most of the gains enjoyed during a rally last Thursday and Friday. All 10 subindexes at the S&P 500 fell. At the Dow, 27 of the 30 members fell during the day. General Motors Corp. fell 7.4 per cent, General Electric Co. fell 4.6 per cent and Bank of America Corp. fell 2.5 per cent.
In Canada, the S&P/TSX composite index closed at 12,532.63, down 105.44 points, or 1.5 per cent. There, the losses weren't nearly as widespread though, with four of the 10 subindexes rising.
Fairfax Financial Holdings Ltd., which has made bearish bets on the stock market and may benefit from the demise of American International Group Inc., rose another 5.3 per cent - bringing its cumulative rise to more than 40 per cent in the past four trading days. Other financial stocks performed well: Royal Bank of Canada rose 1 per cent, Bank of Nova Scotia rose 3.3 per cent and Manulife Financial Corp. rose 4.2 per cent.
Energy and materials stocks declined, though, following the price of crude oil and gold. Oil fell to $106.61 a barrel, down $2.76; gold fell to $891.20 an ounce, down $17.80. Suncor Energy Inc. fell 2.7 per cent, Goldcorp Inc. fell 2.1 per cent and Potash Corp. of Saskatchewan Inc. - an agriculture stock that generally moves with commodities - fell 9.7 per cent.
Copyright 2001 The Globe and Mail
This parrot is dead
This parrot is dead
Tuesday, September 23, 2008
With the markets becoming more incomprehensible by the day, Canaccord Adams decided to toss out the fundamental analysis books and instead pull the Monty Python reels off the shelf for inspiration and wisdom."Has the turmoil translated to new stability ahead? Or has a (dead) cat (bounce) temporary treed the bear (market)?," Canaccord asked investors in its weekly junior mining update. "In keeping with the loony market activity, we felt a series of Monty Python quips would help in identifying with our important question posed above."So, ladies and germs, the quips (and Canaccord's interpretations) ...
"He's not pining, he's passed on. This parrot is no more. He has ceased to be. He's expired and gone to meet his maker. He's a stiff, bereft of life, he rests in peace. If you hadn't have nailed him to the perch he'd be pushing up the daisies.
He's rung down the curtain and joined the choir invisible. This is an ex-parrot!"(replace: 'parrot/he' with 'market')'Bring out yer dead.''Here's one.''I'm not dead.''Ere, he says he's not dead.'
'Well, he will be soon, he's very ill.''I'm getting better.' (replace: 'one/he' with 'the market')
'It's just a flesh wound. 'Tis but a scratch.' 'A scratch? Your arm's off.' 'I've had worse. Oh! Had enough, eh? Come back here and take what's coming to you! I'll bite your legs off!'(market decline)"It's funny, isn't it? How your best friend can just blow up like that?"(replace 'best friend' with 'market')"When you're chewing on life's gristle,Don't grumble, give a whistle.And this'll help things turn out for the best ...And ... always look on the bright side of life ...Always look on the light side of life ...""Well, we'll not risk another frontal assault. That rabbit's dynamite."(short sellers vs. U.S. regulatiors, ie rabbits )'I'm not a witch I'm not a witch!' 'But you are dressed as one.' 'They dressed me up like this!' 'We didn't! We didn't ...' 'And this isn't my nose. It's a false one.' 'Well?''Well, we did do the nose.' 'The nose?' 'And the hat, but she is a witch!' 'Yeah! Burn her! Burn her!'"
Now, back to work.
© Copyright The Globe and Mail
Monday, September 22, 2008
Oil prices leaped more than $25 (U.S.) a barrel Monday — the biggest one-day price jump ever
Oil leaps to $130
STEVENSON JACOBS
Monday, September 22, 2008
NEW YORK — Oil prices leaped more than $25 (U.S.) a barrel Monday — the biggest one-day price jump ever — as anxiety over the U.S. government's $700-billion bailout plan battered the dollar and touched off frenzied buying of safe-haven investments including crude.
Light, sweet crude for October delivery jumped as much as $25.45 to $130 a barrel on the New York Mercantile Exchange before falling back somewhat to trade at $123.77, up $19.22. The contract was set to expire at the end of the day, adding to the volatility; the October price began accelerating sharply in the last hour of regular trading.
Crude has gained about $40 in a dramatic four-day rally that has at least temporarily halted oil's steep two-month slide below $100. At this rate, crude is within striking distance of its all-time record of $147.27, reached in July.
The Nymex temporarily halted electronic crude oil trading after prices breached the $10 daily trading limit. Trading resumed seconds later after the daily limit was increased.
The huge rally was poised to shatter crude's previous one-day price jump of $10.75, set June 6.
Oil's sharp gains came as energy traders grappled with the implications of the government's proposed initiative to stem the U.S. financial crisis by absorbing billions of dollars of banks' bad mortgage-related securities. Anxiety over the plan also sent stocks sharply lower Monday; the credit markets were calmer than they were last week, but still showing the effects of investors' nervousness.
“They're going to have to continue auctioning off a whole lot of Treasurys to finance these projects, so the dollar is going to suffer,” said Matt Zeman, head trader at LaSalle Futures in Chicago. “Right now it's fear and anxiety driving people who want tangible assets.
© Copyright The Globe and Mail
Sunday, September 21, 2008
A Wall Street Week Of Biblical Proportions
Sept. 21, 2008
(CBS) We're taking stock this morning of the economic whirlwind that swept from Wall Street across the world this past week. Our Cover Story is reported by Martha Teichner:
At least the Dow ended the week up … 410 points Thursday, 366 points Friday, a glimmer of optimism that the economy might not be allowed to implode after all.From the moment word reached Wall Street Thursday afternoon that Treasury Secretary Henry Paulson was about to meet with congressional leaders about a massive bailout plan, stocks soared.
The photo op after the meeting was a picture of cooperation and bipartisan unity. Then there was Paulson, looking like a man in a hurry, announcing his plan: "We must now take further, decisive action to fundamentally and comprehensively address the root cause of our financial system's stresses."And President Bush, speaking to an audience larger than Wall Street, on
Friday morning: "Investors should know that the United States government is taking action to restore confidence in America's financial markets so they can thrive again."Confidence … there is no more ephemeral, or essential, component in what amounts to a huge gamble that our leaders can pull our economy (perhaps even the global economy) back from the brink of collapse. Yes, that's apparently how bad things had gotten."
These are the most difficult times I think our markets have faced in the last 200 years," former Securities and Exchange Commissioner Harvey Pitt told Martha Teichner. Pitt spent a dozen years at the SEC and was its head from 2001-2003."Certainly it's been historical; it could've been Biblical," said Mark Zandi, chief economist of Moody's Economy.com and author of the book "Financial Shock: A 360º Look at the Subprime Mortgage Implosion, and How to Avoid the Next Financial Crisis" (FT press). "I mean, I was waiting for the locusts to fly through my office at one point."
"This could be comparable to the Great Depression in terms of just its effect on financial markets," said Robert Reich. Now a professor at Berkeley, Reich was Labor Secretary under Bill Clinton.
We asked him what lots of Americans are asking: How did it come to this?"The people who were issuing warnings were not listened to," he said, "partly because Wall Street is very powerful in Washington. Wall Street kept on saying, 'Well, don't worry about anything, we have everything under control, we don't need more regulation.'"Regulatory firewalls were put in place to prevent the financial excesses that led to the Great Depression. By the 1970s, banks and securities firms, caught up in major turf wars, lobbied for deregulation … and got it."We had over-leveraging in many of these firms," said Pitt, "and the net result was that people were leveraged, in some cases, as high as 100 to one."People were also making piles of money by trading in packages of questionable mortgages and complicated, unregulated securities, called derivatives."Derivatives, essentially, are bets on how stocks or how bonds are going to move, and they're called derivatives because they are derived from those movement," said Reich.But what if you bet wrong?
That, say, the housing market will just keep going up but instead, the subprime mortgage meltdown happens?
The whole house of cards collapses, taking Bear Stearns, Fannie Mae and Freddie Mac, Lehman Brothers, Merrill Lynch and AIG with it."We're scared, we're panicked, we don't even trust our money market mutual funds, which we all thought was one step removed from the mattress," said Zandi.How's this for scared: Last Wednesday, after problems emerged in several funds, investors pulled nearly $90 billion out of others. "
Confidence, or the lack thereof, is what's driving this mess that we're in," Zandi said.Which is why the U.S. government felt it had to intervene … fast. "I am convinced that this bold approach will cost American families far less than the alternative: a continuing series of financial institution failures and frozen credit markets unable to fund economic expansion," Paulson said this week, in announcing the government's bid to bail out struggling financial institutions by purchasing their bad debt, at the cost of hundreds of billions of dollars.We know a little more today about the proposal Paulson took to Congress: it would give the Treasury two years and $700 billion of taxpayer money to buy up distressed mortgages.And then there's this scary number: $11,315,000,000,000, to which the federal debt ceiling would have to be raised, from the current $10.6 trillion dollars.
So will the bailout end the crisis?"I think we're in the sixth inning of a nine-inning game," Zandi said, "and I don't think this is a double-header. So I think we're closer to the end than the beginning.""Until we know for certain we've reached the bottom, that up-and-down motion is just going to continue," Reich said.
"I think that there will be a certain amount of continued difficulty through the end of the year," Pitt predicted.But first there's tomorrow, when markets around the world take their next vote of confidence on the American economy as it prepares for emergency shock treatment.Source
House Of Cards: The Mortgage Mess
House Of Cards: The Mortgage Mess
May 25, 2008
One hundred of the world's biggest financial institutions now are on the hook for a reported total of $379 billion in bad debt - and counting. As for Stockton, it remains the nation's foreclosure capital, with more than 6,000 homes currently in default or foreclosure.
(CBS) This story was originally broadcast on Jan. 27, 2008. It was updated on May 23, 2008. Since last summer, Americans have seen their investments shrink and their property values plummet. At the heart of the problem is something called the subprime mortgage crisis, which began back then and continues to ricochet through the economy. It sounds complicated, but it's really fairly simple: banks lent hundreds of billions of dollars to homebuyers who can't pay them back. Wall Street took the risky debt, dressed it up as fancy securities, and sold it around the world as safe investments. If it sounds like a shell game or Ponzi scheme, in some ways it was a house of cards rife with corruption, greed, and negligence. And as correspondent Steve Kroft first reported in January, it started in places like Stockton, Calif.
Real estate agent Kevin Moran gave Kroft a tour of the wreckage in one subdivision called "Weston Ranch," with block after block of vacant and abandoned houses. "If you see a 'for sale' sign in this neighborhood that probably is a sign of distress, right?" Kroft asks. "I would say that, yeah. Two out of three of all the sales are probably foreclosed properties, and/or people who are in distress," Moran explains. The "for sale" signs and the overgrown lawns in Weston Ranch only show part of the picture. To get a real overview, you need to look at a map from Sean O’Toole's Web site, foreclosureradar.com, which tracks distressed properties in Stockton and other California communities. "The light blue circles are folks that have gone into default. And that means that's the first step of the foreclosure process," O'Toole says, explaining how his maps color-code properties. "The dark blue is auction properties. And the red icons are properties that were sold at auction, had no bid, and therefore went back to the lender." As of last week, there were 4,200 Stockton homes either in default or foreclosure; $1.4 billion in bad loans in just one California community, and it is far from over. "Two months from now, what's this map gonna look like? How many of those light blues are gonna be red?" Kroft asks O'Toole. "We'll probably see at least 60, 70 percent of these light blues turn red. And we'll see at least this many light blues again," O'Toole predicts. Banks are auctioning off houses all over California and in South Florida, in Nevada, and in parts of Ohio and Texas, the result of a huge real estate bubble that began forming in Stockton back in 2003, when people priced out of the Bay Area and Silicon Valley discovered that you could buy a four-bedroom home there for just $230,000. Developers started turning asparagus fields into subdivisions, and lenders handed out free money to anyone who wanted to buy. "What do you mean by free money?" Kroft asks Jim Grant, the editor of "Grant's Interest Rate Observer" and one the country's foremost experts on credit markets. "I mean free money. I mean you had to apply not to get a loan, almost. Sometimes you have to apply to get a loan, you almost had to apply not to get one," Grant says. "When you opened your mailbox in 2004, 2005, you could barely -- people were pressing on you, if you were not institutionalized, all matters of schemes in which to expand your personal debt and mortgage debt. You could, and people did, borrow more than 100 percent of the price of a house with the most fragile of financial bonafides," Grant explains. Most of the mortgages issued in Stockton, and half of those now in default or foreclosure, were something called subprime loans, meaning less than prime quality. The borrowers often had sketchy credit, were financially strapped or lacked sufficient income to qualify for a standard mortgage. After a year of artificially low payments, the interest rates on subprime loans jumped all the way to ten or 11 percent. But Jerry Abbott, who runs the Coldwell Banker office in Stockton, says it didn’t concern the borrowers, many of whom were getting mortgages for more than their houses were actually worth. "They were getting loans in excess of 100 percent of the value of the property," Abbott says. "That type of thing. So, most of 'em were actually putting a little bit of money in their pocket at close of escrow." "So, they were getting paid to buy a house?" Kroft asks. "They were getting paid to buy a house. Yes. Yeah," Abbott says. And strangely enough, it didn't seem to bother the lenders either, who were collecting huge fees just for landing the loans. "Whatever they wanted to state for their income. The bank accepted that at face value and made the loan based on that income," Abbott says. Abbott says borrowers got the money, without a down payment. Jim Grant calls it an invitation to fraud. "You apply to a bank, or a mortgage broker for a loan. And you would fill out a form. And you would say, 'I have an income of, oh, $400,000 a year.' They say, 'You do? Fine. Just sign right there.' And they would nod, and because they were being paid, not by the veracity of the information, but by the consummation of the deal. The lending office would say, 'Ah. You have verified this?' 'Why, yes, we have.' And the lending officer would say, 'Great. So do I.' And he'd pass it on to Wall Street," Grant says. "And he got a cut, too?" Kroft asks. "Yes, oh, yes. Everyone gets a cut," Grant says. Almost all of the people involved in the transactions made huge amounts of money, then passed the risk on to somebody else. Instead of keeping the dicey loans in their own portfolios, the big banks and giant mortgage companies that originally underwrote them resold the mortgages to big New York investment houses. Firms like Bear Stearns and Merrill Lynch sliced the loans into little pieces and packaged them up with other investments, then sold them to their best customers around the world as high-yield mortgage-backed securities, turning sows' ears into silk purses, all with the blessing of rating agencies like Standard & Poor’s. "At every step in the way, somebody has his or her hand out, getting paid. And everyone, for the time, is happy. The broker got paid. He or she was happy. The lending officer, ditto. The rating agencies got paid for passing judgment on these securities. They, too, were pleased, and their stockholders were happy. And on and on. And it would never end, except that it did," Grant says. It was all predicated on the idea that real estate prices would keep going up, and up and up, and for a long time they did. But by the summer of 2005, speculators flipping houses in Stockton had helped drive the price of that four-bedroom house to more than $400,000 and the market began to soften, then to tumble. All of a sudden those subprime borrowers who had taken the free money found themselves upside down, owing more on their new house than it was worth. It’s not exactly clear how a mortgage broker was able to qualify Phil Fontenot and his wife Kim Monroe for their $436,000 house, from which they run a small day care center. They say they wanted to move to a better neighborhood. A mortgage broker approached the Fontenots and offered to get them a loan. They told her the most they could afford, at most, was $2,500 a month. But the monthly payment on the adjustable rate mortgage she gave them quickly jumped to $4,200. "Did you understand any of this?" Kroft asks. "No, not really. Not much of it," says Phil Fontentot, who also says he didn't have a lawyer look over the paperwork. "But you knew this was a big decision, right? You were borrowing hundreds of thousands of dollars," Kroft remarks. "I didn't really look at it like that," Fontenot says. "How did you look at it?" Kroft asks. "I looked at it as far as my family. I can get my family off of this block," he replies. "And that we could pay the payments that she said that we could pay," Fontenot's wife Kim adds. "But after it was all said and done, and the paperwork was drawn up, it was something different." But Matt and Stephanie Valdez say they knew exactly what they were doing when they bought a small two-bedroom for $355,000. They could afford the initial payments and planned to refinance the mortgage before the interest rate jumped to 11 percent. But they couldn't do it because the value of the house had fallen below what they owed on the mortgage. They say they can afford the higher payments, but see no point in making them. "You're saying, essentially, that you're going to stop making payments on it? You're just gonna let it go into foreclosure?" Kroft asks. "You know, that's the only advice we've gotten so far is walk away from the home. We don't want to do that to our credit. Why can't our mortgage company work with us?" Stephanie Valdez says. There is a certain cold logic to just walking away. Kevin Moran, the real estate agent who gave Kroft the tour of foreclosed houses in the Weston Ranch subdivision, says it is happening every day. They were never really invested. Most of the people who lost the houses didn’t lose any money because they never put any money down. Though their credit is damaged, and they could face legal action in some circumstances, they got to live in a new house for a couple of years, and some of them even managed to get some money with home equity loans or by refinancing. "Nobody seems to be saying, 'Look, I made a contract with you. I borrowed money from you. I'm gonna do everything I can to pay off that obligation.' People just seem to be saying, 'Look, take the house. Good-bye. I'm leaving,'" Kroft says. "There was a time, I think, when people felt really bad about not paying off a debt." "Yeah, I think in those days, loans were made by your local banker or building and loan associations or savings and loan. They were guys you saw in the grocery store. They were on the little league team with you, the PTA, the school. And I think as mortgages became securitized and Wall Street became involved, they became very transactional and there was no relationship built with the borrower and the lender. And I think that makes it easier for someone to see it as an anonymous party at the other end of the transaction and just walk away from it," Moran says. "Just a business decision," Kroft says. "A business decision that has to be made," Moran agrees. "It turns out that if you give people free money, they will take it without really worrying too much about giving it back. Because after all, it was free," Jim Grant says. Asked if it's a case of greed, Grant says, "Greed, sure. Greed on both sides of the table." "What do you mean?" Kroft asks. "Lenders and borrowers," Grant says. "Everyone was gaming the system." That is not to suggest that there aren’t huge losers in all this and much suffering and particularly hard-working people who have lost their dream. Home values are plummeting, and the housing sector - one of the largest and most vital parts of the American economy - has ground to a standstill, pushing the country towards recession. The Wall Street and foreign investors are now stuck with the millions of distressed properties on Sean O’Toole's map, the unsold condos in Miami, the unfinished apartments on the Vegas Strip, the developments in Atlanta that are sitting idle and the thousand stucco houses in Stockton. Not even Kevin Moran, who has copies of the foreclosed mortgages, can figure out who exactly owns them. "That’s the fascinating part of this whole debacle we’re in. Mortgages are sold in mortgage backed securities, so they’re pooled. I’ve seen everything from some of the largest financial institutions in the country, and you see 'Deutsche Bank' in a series and a series of numbers and letters to a mortgage pool," he says. The pools are part and parcel of those high-yield mortgage backed securities everyone gobbled up a few years ago, and are now stuck in the windpipe of the world's financial system. No one wants to buy them, so no one can sell them. "Bonds marked triple-A are now quoted at 50 cents to the dollar, 40 cents on the dollar. Some of them, much less," Grant says. "How much on the dollar, do ya think?" Kroft asks. "Some of them are worth nothing on the dollar. Nothing on the dollar. This is the worst thing that has happened to Wall Street in a long time," Grant says. Asked how many of these securities are out there, Grant says, "A trillion with a T-plus." Asked who bought them and owns them, Grant says, "You know, state pension funds, the hedge funds bought them. Foreign central banks own some of these things, if you please. So the ownership is very widely dispersed, which accounts for the general anxiety, and the persistence of anxiety." There’s already a two-year supply of properties on the market in Stockton and so many foreclosures that real estate agent Cesar Diaz decided to start the "Repo Bus" to take bargain hunters and bottom feeders on a weekly tour to see some of them. He got the idea from the Hollywood tour of the stars' homes. The day Kroft went along, there were two busloads checking out houses that are now 70 percent cheaper than they were when the crisis began. The consensus seemed to be prices are going to drop still further. Not particularly encouraging news for the past two chairmen of the Federal Reserve Board. "Alan Greenspan and his successor, Ben Bernanke, would say over and over that it's contained. The problem's contained. It turns out, it is contained only on planet Earth," Grant says, laughing. "That's it."
One hundred of the world's biggest financial institutions now are on the hook for a reported total of $379 billion in bad debt - and counting. As for Stockton, it remains the nation's foreclosure capital, with more than 6,000 homes currently in default or foreclosure. Produced By L. Franklin Devine and Jennifer MacDonald
Saturday, September 20, 2008
Friday, September 19, 2008
Market rally Close 848.42 WOW
The close: Deja vu?
RTGAM
You have to feel sorry for the United States on a day like Friday: U.S. authorities made the bold moves to steady the teetering financial system, and yet U.S. stock market indexes lagged most of the rest of the world.
Not that the gains were slight, by any stretch. The Dow Jones industrial average closed at 11,388.44, up 368.75 points or 3.4 per cent - more or less erasing the horrendous losses earlier in the week. The broader S&P 500 made a similar rebound, closing at 1254.98, up 48.47 points or 4 per cent. Last Friday, before the current bout of financial mayhem struck the market, the index closed just below 1252.
But those gains were mere noise compared to what happened elsewhere, where investors took off their hard hats and danced on their heads. In Canada, the S&P/TSX composite index closed at 12,912.13, up 847.56 points or just over 7 per cent - the biggest percentage gain since 1987.In the U.K., the FTSE 100 rose 8.8 per cent. Brazil's Bovespa stock index rose 9.5 per cent and Hong Kong's Hang Seng index rose 9.6 per cent.
The interesting part about the U.S. rally was that although it was widespread, it was nowhere near as widespread as other rallies during the year. For example, it is not unheard of to see all 30 stocks in the Dow rise during a rally. On Friday, though, there were actually 7 stocks - or 23 per cent of the index - that were left out.These laggards included Wal-Mart Stores Inc., Procter & Gamble Co., Johnson & Johnson, Coca-Cola Co. and Microsoft Corp.
It seems as though investors turned their backs on highly profitable firms in favour of those whose future was uncertain just a day ago. Among stocks in the S&P 500, Morgan Stanley rose 20.7 per cent, Wachovia Corp. rose 29.3 per cent and Washington Mutual Inc. rose 42 per cent.In Canada, financial stocks also did well. Royal Bank of Canada rose 7.2 per cent, Toronto-Dominion Bank rose 9.6 per cent and Bank of Nova Scotia rose 5.6 per cent.
But bigger gains were made by materials stocks: Barrick Gold Corp. rose 12.3 per cent and Agrium Inc. rose 13.4 per cent. Among energy stocks, Suncor Energy Inc. rose 14.3 per cent and Canadian Oil Sands Trust rose 17.5 per cent after the price of oil surged to $104.55 (U.S.) a barrel, up $6.67. Where have we seen that price before? Ah yes, last week.
Market rally due to short-selling ban: Sprott
JOHN PARTRIDGE
Friday, September 19, 2008
Eric Sprott thinks most of the massive rally in world equity markets is due to temporary bans on short sales of financial services stocks already imposed by U.S. and European regulators.
“I suspect most of today's rally is because of the change in the short-sale rule,” the hedge fund manager said Friday in a telephone interview. Canada's key market regulator continued to deliberate whether to follow the lead of Britain's Financial Services Authority, the U.S. Securities & Exchange Commission and other regulators.
“You can see what stocks went up the most: they're financial stocks,” said Mr. Sprott, who heads Sprott Asset Management Inc. in Toronto, acknowledging that his firm has had “to take a bit of a hit here.”
Short-sellers borrow and then sell stocks in the belief that their prices will fall, enabling them to go back into the market later and replace the borrowed shares at lower cost and pocket the difference as profit.
However, the temporary bans have forced practitioners back into the market to cover their positions by buying up the stocks they have sold, thus driving up the prices demand for those shares.
Many market players and observers have blamed massive short-selling for decimating the stocks of several U.S. financial industry pillars, pushing them to the brink of insolvency.
In an emergency order issued late Thursday, the SEC said recent market conditions have made it concerned that short-selling of a wide range of financial stocks “may be causing sudden and excessive fluctuations of the prices of such securities in such a manner as to threaten fair and orderly markets.”
“Such price declines,” it added, “can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence, without a fundamental underlying basis.”
The move against short-sellers is just one of an array of measures taken by the U.S. government and central banks and market regulators around the world as they seek to stave off the worst financial crisis since the Great Depression. Central banks have pumped tens of billions of dollars into the banking system and Washington has unveiled plans to help banks shift bad real-estate loans off their books as well as moving to protect the value of money-market funds.
Whether or not the Investment Industry Regulatory Organization of Canada (IIROC) plans also to impose a temporary ban on short sales was still unclear as Friday wore on.
The matter is still “under discussion,” Paul Bourque, IIROC's senior vice-president of enforcement, policy and registration, said in a mid-morning telephone interview, reiterating a statement he made before the opening bell.
Mr. Bourque's comment was echoed by Jean St-Gelais, the head of Quebec's securities regulator, the Autorité des marchés financiers. “We have to see if we have a problem in Canada, first,” he said after speaking to a conference on corporate governance and financial markets in Montreal.
The key is to co-ordinate efforts with the various regulatory organizations around the globe, he added. “Everyone right now is looking to take quick action but without improvising,” he said.
However, Mr. Sprott, who opposes the clampdown, figures Canadian regulators are almost sure to follow suit.
“They're on the team, aren't they, with the U.S. and the U.K.?,” he said. “The authorities are changing the rule book because the rules aren't working for them. I'm disappointed that they have had to go so far.”
“Legitimate” shorting of financial stocks is “a portfolio technique to support you in difficult financial markets, which we are in for sure,” Mr. Sprott added.
The hedge fund chief also said, however, that he firmly supports bringing back the so-called uptick rule, a 69-year-old regulation that the SEC dropped in July 2007.
Under this rule a short sale could be made only after an uptick, or rise, in the price of a stock, which meant that shorts could not pile into a stock in an unbroken freefall. The SEC felt the rule was a constraint on market liquidity and did little to prevent market manipulation. But critics say the removal of the rule has left the market a more volatile and risky place.
Mr. Sprott agreed. “I don't know why people got rid of that rule, it just seems ridiculous,” he said. “I'd like to see that enforced.”
As IIROC continued its deliberations, at least six Canadian banks and insurers whose shares trade in New York as well as in Toronto have already won at least partial protection against the shorts by being included on a list of about 800 financial services stocks covered by the 10-day ban imposed by the SEC. They are: Royal Bank of Canada, Bank of Nova Scotia, Manulife Financial Corp., Sun Life Financial Inc., Fairfax Financial Holdings Ltd. and Kingsway Financial Services Inc.
Meanwhile, Switzerland's stock exchange issued what it called “reminder” to its members Friday that so-called naked, or uncovered, short-selling is not allowed and said it will monitor the situation strictly. In a naked short transaction, a trader sells shares before actually borrowing them.
Mr. Sprott dismissed the rules against naked shorting most jurisdictions have long had on the books as a “joke,” because regulators have simply failed to enforce them. “I think the naked shorting of Canadian stocks has been quite significant,” he added.
The SWX also warned market players that “the spreading of rumours of a nature that violates the applicable rules of conduct is also forbidden.”
However, it also said that covered shorts, where the trader has actually borrowed the shares, “remain fundamentally permissible.”
As it happens, the volume of short-selling on the Toronto Stock Exchange has been declining since peaking at a total of just under 1.43 billion shares on March 31. As of Sept. 15, the total number of shares sold short on the exchange had fallen to just over 1.2 billion.
As well, fortnightly figures compiled by the exchange show that no bank or other financial services stock has cracked the list of the top 20 largest short positions on the exchange since July 31, when Canadian Imperial Bank of Commerce came in at No. 20.
The perennial leaders include such companies as Nortel Networks Corp., Rogers Communications Inc., Research in Motion Ltd. and Bombardier Inc.
However, I-Shares Canadian S&P/TSX 60 Index Fund took over the top spot with the largest short position as of Sept. 15, up from sixth largest at Aug. 31.
With files from reporters David Parkinson in Toronto and Bert Marotte in Montreal
© Copyright The Globe and Mail
JOHN PARTRIDGE
Friday, September 19, 2008
Eric Sprott thinks most of the massive rally in world equity markets is due to temporary bans on short sales of financial services stocks already imposed by U.S. and European regulators.
“I suspect most of today's rally is because of the change in the short-sale rule,” the hedge fund manager said Friday in a telephone interview. Canada's key market regulator continued to deliberate whether to follow the lead of Britain's Financial Services Authority, the U.S. Securities & Exchange Commission and other regulators.
“You can see what stocks went up the most: they're financial stocks,” said Mr. Sprott, who heads Sprott Asset Management Inc. in Toronto, acknowledging that his firm has had “to take a bit of a hit here.”
Short-sellers borrow and then sell stocks in the belief that their prices will fall, enabling them to go back into the market later and replace the borrowed shares at lower cost and pocket the difference as profit.
However, the temporary bans have forced practitioners back into the market to cover their positions by buying up the stocks they have sold, thus driving up the prices demand for those shares.
Many market players and observers have blamed massive short-selling for decimating the stocks of several U.S. financial industry pillars, pushing them to the brink of insolvency.
In an emergency order issued late Thursday, the SEC said recent market conditions have made it concerned that short-selling of a wide range of financial stocks “may be causing sudden and excessive fluctuations of the prices of such securities in such a manner as to threaten fair and orderly markets.”
“Such price declines,” it added, “can give rise to questions about the underlying financial condition of an issuer, which in turn can create a crisis of confidence, without a fundamental underlying basis.”
The move against short-sellers is just one of an array of measures taken by the U.S. government and central banks and market regulators around the world as they seek to stave off the worst financial crisis since the Great Depression. Central banks have pumped tens of billions of dollars into the banking system and Washington has unveiled plans to help banks shift bad real-estate loans off their books as well as moving to protect the value of money-market funds.
Whether or not the Investment Industry Regulatory Organization of Canada (IIROC) plans also to impose a temporary ban on short sales was still unclear as Friday wore on.
The matter is still “under discussion,” Paul Bourque, IIROC's senior vice-president of enforcement, policy and registration, said in a mid-morning telephone interview, reiterating a statement he made before the opening bell.
Mr. Bourque's comment was echoed by Jean St-Gelais, the head of Quebec's securities regulator, the Autorité des marchés financiers. “We have to see if we have a problem in Canada, first,” he said after speaking to a conference on corporate governance and financial markets in Montreal.
The key is to co-ordinate efforts with the various regulatory organizations around the globe, he added. “Everyone right now is looking to take quick action but without improvising,” he said.
However, Mr. Sprott, who opposes the clampdown, figures Canadian regulators are almost sure to follow suit.
“They're on the team, aren't they, with the U.S. and the U.K.?,” he said. “The authorities are changing the rule book because the rules aren't working for them. I'm disappointed that they have had to go so far.”
“Legitimate” shorting of financial stocks is “a portfolio technique to support you in difficult financial markets, which we are in for sure,” Mr. Sprott added.
The hedge fund chief also said, however, that he firmly supports bringing back the so-called uptick rule, a 69-year-old regulation that the SEC dropped in July 2007.
Under this rule a short sale could be made only after an uptick, or rise, in the price of a stock, which meant that shorts could not pile into a stock in an unbroken freefall. The SEC felt the rule was a constraint on market liquidity and did little to prevent market manipulation. But critics say the removal of the rule has left the market a more volatile and risky place.
Mr. Sprott agreed. “I don't know why people got rid of that rule, it just seems ridiculous,” he said. “I'd like to see that enforced.”
As IIROC continued its deliberations, at least six Canadian banks and insurers whose shares trade in New York as well as in Toronto have already won at least partial protection against the shorts by being included on a list of about 800 financial services stocks covered by the 10-day ban imposed by the SEC. They are: Royal Bank of Canada, Bank of Nova Scotia, Manulife Financial Corp., Sun Life Financial Inc., Fairfax Financial Holdings Ltd. and Kingsway Financial Services Inc.
Meanwhile, Switzerland's stock exchange issued what it called “reminder” to its members Friday that so-called naked, or uncovered, short-selling is not allowed and said it will monitor the situation strictly. In a naked short transaction, a trader sells shares before actually borrowing them.
Mr. Sprott dismissed the rules against naked shorting most jurisdictions have long had on the books as a “joke,” because regulators have simply failed to enforce them. “I think the naked shorting of Canadian stocks has been quite significant,” he added.
The SWX also warned market players that “the spreading of rumours of a nature that violates the applicable rules of conduct is also forbidden.”
However, it also said that covered shorts, where the trader has actually borrowed the shares, “remain fundamentally permissible.”
As it happens, the volume of short-selling on the Toronto Stock Exchange has been declining since peaking at a total of just under 1.43 billion shares on March 31. As of Sept. 15, the total number of shares sold short on the exchange had fallen to just over 1.2 billion.
As well, fortnightly figures compiled by the exchange show that no bank or other financial services stock has cracked the list of the top 20 largest short positions on the exchange since July 31, when Canadian Imperial Bank of Commerce came in at No. 20.
The perennial leaders include such companies as Nortel Networks Corp., Rogers Communications Inc., Research in Motion Ltd. and Bombardier Inc.
However, I-Shares Canadian S&P/TSX 60 Index Fund took over the top spot with the largest short position as of Sept. 15, up from sixth largest at Aug. 31.
With files from reporters David Parkinson in Toronto and Bert Marotte in Montreal
© Copyright The Globe and Mail
Market gain a 21-year high on on financial rescue plan
Market gain a 21-year high on on financial rescue plan, but investors not out of woods yet 14 minutes ago TORONTO — North American stocks ended one of the most tumultuous weeks in their history with a massive bounceback Friday, propelling Canadian share prices to their biggest rally since the 1987 market crash. After falling into a bear market earlier, the Toronto Stock Exchange gained more than 850 points as investors welcomed a U.S. government plan to bail out troubled Wall Street banks to ease the global credit crunch. The surge of just over seven per cent on the TSX produced the biggest one-day percentage gain on the Canadian market since the post-Black Monday crash of Oct. 21 1987, when shares soared nine per cent two days after an 11 per cent drop. On Wall Street, the Dow Jones industrials rose nearly 370 points, on top of a 400 point gain the day before. "This is going to be remembered as a historic week in equity markets," said George Vasic, equity strategist and chief economist at UBS Warburg. With massive swings in stock prices every day this week, investors managed to break even at the end of the trading day Friday. However, brokers pocketed big trading commissions because of the huge volumes on Wall Street and Bay Street markets. In the U.S., a new government ban on short selling, or placing bets that a stock will fall, likely added to the huge Dow rally. "A big chunk of this is scaring all the shorts to cover their bets," said Joe Battipaglia, market strategist at Stifel, Nicolaus & Co. Most of Friday's investor optimism was fuelled by a series of sweeping steps taken by the U.S. government to prop up the world's biggest and most influential financial system. Key measures included rescuing banks from billions of dollars in bad debt and a ban on short selling, or placing bets that a stock will fall. Treasury Secretary Henry Paulson, speaking about the rescue plan, said a bold approach is needed to remove troubled assets from the books of financial firms. He offered few details, but said he would work on the plan through the weekend with congressional leaders. For much of the last two months, the financial world has been gripped by fear that the credit crisis sparked by millions of defaulted U.S. mortgages was not only not subsiding, but getting much worse. Danger bells were sounded with the government bailouts of mortgage giants Fannie Mae and Freddie Mac and insurer American International Group. Those fears were brought to a fever pitch by the collapse of Lehman Brothers Holdings, the fourth-largest U.S. investment bank, on Monday. For the Toronto market, that meant a big slide that took it down nearly 20 per cent over two months and put it into a what traders call a bear market, or a period of prolonged stock selloffs. When central banks began to step in on Thursday, injecting billions of dollars into the global financial system, traders took heart and North American markets began to groggily recover. Friday's big leap - the TSX soared almost 850 points, or seven per cent, while the Dow gained close to 370 - was further sparked by higher oil prices and a U.S. and European crackdown on short selling, where traders borrow stock and sell it, bet the price will take a big dive, buy it up when it gets cheaper and pocket the difference. Short selling can cause a company's stock price to drop dramatically and was blamed for eroding share values in investment and commercial banks. Canadian regulators were mulling a similar move. But Norm Rothery, chief investment strategist at Dan Hallett and Associates, said the interventionist steps taken by the U.S. government could hurt the market in the long run. "My view is this is a short-term salve that's been put on the market, but it bodes poorly for the longer term," said Rothery. "The scale of government intervention is very high, and people will now have to adjust to it." He said halting short selling could inflate stock prices, making them unreliable, which could in turn "prolong the downturn." The markets will likely stabilize on the steps taken by the U.S. government, but Rothery said he remains "moderately bearish" on concerns the financial woes on Wall Street aren't fixable by government alone. "Unless they're willing to wander out and buy up everyone's mortgages and to prop up real estate prices, you're holding a rear-guard action on the market," he said. "It's a good attempt but I think the problem is too big for them." Vasic said he expects the regulatory steps to even out some of the volatility seen this week. "Now that (investors) presumably have, or will have, some clarity on the magnitude of potential risks, they can remove a lot of the what-if scenarios they had been fearing," he said. "The worst fears are off the table, but now we can return to the ongoing cyclical fears we had previously." He added that the spike seen Thursday and Friday is a short-term trend that will be halted by ongoing economic uncertainty in global markets. "We don't think this is the beginning of a new V-shaped recovery in equity markets because there's still too much ground yet to cover," he said. Meanwhile, Prime Minister Stephen Harper again asserted there is no need for Canadians to fear financial instability. "I have to reiterate ... the Canadian financial system is very strong," he said, speaking in Farnham, Que. "The balance sheets of the Canadian financial system are very strong. The core banks and insurance companies in this country are in, for the most part, very good financial shape." "We don't anticipate any crisis in the Canadian financial system." His U.S. counterpart, President George Bush, sounded a similar, though more cautious, note. "In the long run Americans have good reason to be confident in our economic strength," Bush said as his administration announced it will move to safeguard assets in money market mutual funds. But the cost of the U.S. bailout plan "will be enormous, darkening the U.S. fiscal picture in an environment where there is already plenty of concern over rising deficits and the integrity of the Fed's balance sheet," noted Scotia Capital currency strategist Steve Malyon.
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