ft: the global free-market capitalism is dead

http://www.ft.com/cms/s/0/451010e4-fad7-11dc-aa46-000077b07658.html

The rescue of Bear Stearns marks liberalisation's limit

By Martin Wolf

Published: March 26 2008 02:00 | Last updated: March 26 2008 02:00

Remember Friday March 14 2008: it was the day the dream of global free- market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Joseph Ackermann, chief executive of Deutsche Bank, that "I no longer believe in the market's self-healing power". Deregulation has reached its limits.

Mine is not a judgment on whether the Fed was right to rescue Bear Stearns from bankruptcy. I do not know whether the risks justified the decisions not only to act as lender of last resort to an investment bank but to take credit risk on the Fed's books. But the officials involved are serious people. They must have had reasons for their decisions. They can surely point to the dangers of the times - a crisis that Alan Greenspan, former chairman of the Federal Reserve, calls "the most wrenching since the end of the second world war" (this page, March 3) - and the role of Bear Stearns in these fragile markets.

Mine is more a judgment on the implications of the Fed's decision. Put simply, Bear Stearns was deemed too systemically important to fail. This view was, it is true, reached in haste, at a time of crisis. But times of crisis are when new functions emerge, notably the practices associated with the lender-of-last-resort function of central banks, in the 19th century.

The implications of this decision are evident: there will have to be far greater regulation of such institutions. The Fed has provided a valuable form of insurance to the investment banks. Indeed, that is already evident from what has happened in the stock market since the rescue: the other big investment banks have enjoyed sizeable jumps in their share prices (see chart). This is moral hazard made visible. The Fed decided that a money market "strike" against investment banks is the equivalent of a run on deposits in a commercial bank. It concluded that it must, for this reason, open the monetary spigots in favour of such institutions. Greater regulation must be on the way.

The lobbies of Wall Street will, it is true, resist onerous regulation of capital requirements or liquidity, after this crisis is over. They may succeed. But, intellectually, their position is now untenable. Systemically important institutions must pay for any official protection they receive. Their ability to enjoy the upside on the risks they run, while shifting parts of the downside on to society at large, must be restricted. This is not just a matter of simple justice (although it is that, too). It is also a matter of efficiency. An unregulated, but subsidised, casino will not allocate resources well. Moreover, that subsidisation does not now apply only to shareholders, but to all creditors. Its effect is to make the costs of funds unreasonably cheap. These grossly misaligned incentives must be tackled.

I greatly regret the fact that the Fed thought it necessary to take this step. Once upon a time, I had hoped that securitisation would shift a substantial part of the risk-bearing outside the regulated banking system, where governments would no longer need to intervene. That has proved a delusion. A vast amount of risky, if not downright fraudulent, lending, promoted by equally risky finance, has made securitised markets highly risky. This has damaged institutions, notably Bear Stearns, that operated intensively in these markets.

Yet the extension of the Fed's safety net to investment banks is not the only reason this crisis must mark a turning-point in attitudes to financial liberalisation. So, too, is the mess in the US (and perhaps quite soon several other developed countries') housing markets. Ben Bernanke, Fed chairman, famously understated, described much of the subprime mortgage lending of recent years as "neither responsible nor prudent" in a speech whose details make one's hair stand on end.* This is Fed-speak for "criminal and crazy". Again, this must not happen again, particularly since the losses imposed on the financial system by such lending could yet prove enormous. The collapse in house prices, rising defaults and foreclosures will affect millions of voters. Politicians will not ignore their plight, even if the result is a costly bail-out of the imprudent. But the aftermath will surely be much more regulation than today's.

If the US itself has passed the high water mark of financial deregulation, this will have wide global implications. Until recently, it was possible to tell the Chinese, the Indians or those who suffered significant financial crises in the past two decades that there existed a financial system both free and robust. That is the case no longer. It will be hard, indeed, to persuade such countries that the market failures revealed in the US and other high-income countries are not a dire warning. If the US, with its vast experience and resources, was unable to avoid these traps, why, they will ask, should we expect to do better?

These longer-term implications for attitudes to deregulated financial markets are far from the only reason the present turmoil is so significant. We still have to get through the immediate crisis. A collapse in financial profits (so significant in the US economy), a house-price crash and a big rise in commodity prices are a combination likely to generate a long and deep recession. To tackle this danger the Fed has already slashed short-term rates to 2.25 per cent. Meanwhile, the Fed also clearly risks a global flight from dollar- denominated liabilities and a resurgence in inflation. It is hard to see a reason for yields on long-term Treasuries being so low, other than a desire to hold the liabilities of the US Treasury, safest issuer of dollar- denominated securities.

"Some say the world will end in fire, Some say in ice." Harvard's Kenneth Rogoff recently quoted Robert Frost's words in describing the dangers of financial ruin (fire) and inflation (ice) confronting us.** These are perilous times. They are also historic times. The US is showing the limits of deregulation. Managing this unavoidable shift, without throwing away what has been gained in the past three decades, is a huge challenge. So is getting through the deleveraging ahead in anything like one piece. But we must start in the right place, by recognising that even the recent past is a foreign country.

*Fostering Sustainable Homeownership, March 14 2008, www.federalreserve.gov ; **Globalization and Monetary Policy, March 7 2008, conference on globalization, inflation and monetary Policy, www.banque-france.fr

martin.wolf@ft.com

Copyright The Financial Times Limited 2009

US legal system ‘worse than Russia’

From Times OnlineMarch 18, 2008

US legal system ‘worse than Russia’

A survey shows that European in-house lawyers would rather face litigation in China and Russia than in AmericaMichael Herman Fear of the American legal system has created an atmosphere in which lawyers working for European businesses would prefer to face a major dispute in Russia or China than the US, a study has revealed.
A survey of 180 in-house counsel working in five European countries identified the US as the jurisdiction they were keenest to avoid, with 29 per cent naming it the country they were most concerned about facing a major dispute in.
The US attracted almost twice as many votes as Russia and China. Despite fears of political interference and corruption in their legal processes, both were named by just 16 per cent of in-house counsel as their most feared jurisdiction.
The survey, commissioned by Lovells, the international law firm, noted that “while in-house lawyers are relatively comfortable with managing disputes in their own countries, there is great concern regarding the unknowns in different markets”.
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Beware the long arm of American law Partial win for Norris in US extradition battle Long arm of US could put Britons in prison It said the US system, although less corrupt than most, is « filled with traps in which the inexperienced or uninformed may easily become caught”.
Marc Gottridge, Lovells’ US managing partner, said these traps include the complexity of the US federal system, with its « multiplicity of courts, prosecutors and regulators at state and federal levels » and the tradition of targeting corporations as well as individuals in criminal cases.
Although the survey found that businesses were most concerned about disputes with customers, suppliers and employers, the fear of clashing with regulators stands out as an emerging area of concern that will « keep lawyers awake at night”.
In particular, Lovells highlighted the aggressiveness of American prosecutors and their willingness to apply US laws overseas as another factor making European lawyers nervous.
Last week Ian Norris, a retired British businessman wanted on price-fixing charges in the US, secured an important victory in his fight against extradition at the House of Lords. But lawyers said American prosecutors were unlikely to be discouraged by this and would continue to pursue other businesses and executives they suspect of breaking its laws.
Joanna Wood, an extradition expert at Allen & Overy, said: “The risk of extradition in appropriate cases is still a real one and US prosecutors are unlikely to be deterred.”
Overall, the survey found European in-house lawyers indicated a trend towards more litigation with 38 per cent saying they had seen increasing numbers of disputes in the last 12 months compared to 14 per cent who reported a fall in numbers.
Despite widespread fears that Europe was moving more towards a more consumer-oriented litigation culture, less than a quarter (22 per cent) of European in-house counsel said they had been threatened with, or actually faced, a class action lawsuit.

a fund tied to carlyle group sunk

Carlyle Capital expects banks to seize some $16B in
assets

Joseph Altman, THE ASSOCIATED PRESS

March 13, 2008

NEW YORK - Carlyle Capital Corp. said it expects creditors to seize all of the fund’s remaining assets after unsuccessful negotiations to prevent its liquidation, sending its shares plunging. The Amsterdam-listed fund shook financial markets last week after missing margin calls from banks on its US$21.7 billion portfolio of residential-mortgage-backed bonds. Carlyle’s troubles have amplified fears that billions of dollars of depressed mortgage-backed securities will flood the market, reducing their value even further. More than $5 billion of Carlyle’s securities have already been sold, but the fund tried to negotiate with the banks to prevent the liquidation of the remaining $16 billion.
« Although it has been working diligently with its lenders, the company has not been able to reach a mutually beneficial agreement to stabilize its financing, » Carlyle said in a news release. Shares tumbled 94 per cent to 18 cents in Amersterdam. The shares have lost more than 98 per cent of their value this year and traded at $12 just last week. Carlyle posted the securities as collateral under repurchase agreements, so if the value of the securities fall, the lender has the right to ask for more collateral - a margin call - to secure the loan. If the borrower does not meet the margin call, the lender may sell the security.
The value of mortgage-backed securities plummeted as U.S. home prices fell and foreclosures surged, prompting the banks to ask Carlyle for more than $400 million in additional capital. The fund was unable to come up with the money, prompting lenders to start foreclosing on the securities.
As of Wednesday, Carlyle said it has defaulted on about $16.6 billion of its debt, and the rest is expected to go into default soon.
Carlyle Capital Corp. is one of 55 funds managed by the Washington, D.C.-based Carlyle Group, one of the largest private equity firms in the world with US$76 billion in assets.
Carlyle Group « participated actively » in the fund’s negotiations with its lenders to refinance its portfolio and was prepared to provide substantial additional capital if sustainable terms could be achieved, the fund’s statement said.
But hopes for refinancing fell apart after some lenders said the value of the collateral had declined further, which would result in additional margin calls Thursday of about $97.5 million.
Carlyle Capital is registered in Guernsey, a U.K. dependency in the English Channel off the coast of Normandy, but managed by New York-based executives. It was the first Carlyle Group fund to go public, at $19 a share in July on the Euronext exchange in Amsterdam.
Trading of the fund’s shares was suspended last week after tumbling more than 50 per cent to $5 apiece on the news that the fund wasn’t able to meet the margin calls.

food riots spread in africa, america and asia

The Times

March 7, 2008

Already we have riots, hoarding, panic: the sign of things to come?

Carl Mortished, World Business Editor

The spectre of food shortages is casting a shadow across the globe, causing riots in Africa, consumer protests in Europe and panic in food-importing countries. In a world of increasing affluence, the hoarding of rice and wheat has begun. The President of the Philippines made an unprecedented call last week to the Vietnamese Prime Minister, requesting that he promise to supply a quantity of rice.
The personal appeal by Gloria Arroyo to Nguyen Tan Dung for a guarantee was a highly unusual intervention and highlighted the Philippines’ dependence on food imports, rice in particular.
“This is a wake-up call,” said Robert Zeigler, who heads the International Rice Research Institute. “We have a crisis brewing in rice supply.” Half of the planet depends on rice but stocks are at their lowest since the mid1970s when Bangladesh suffered a terrible famine. Rice production will fall this year below the global consumption level of 430 million tonnes.
Street protests and rioting in West Africa towards the end of last year were a harbinger of bigger problems, the World Food Programme said. The global information and early warning system of the Food and Agricultural Organisation (FAO) has monitored outbreaks of rioting in Mexico, Morocco, Uzbekistan, Yemen, Guinea, Mauritania and Senegal. There have also been protests in Jakarta, the Indonesian capital, over government price increases.Population pressure and increased wealth are mainly to blame for the resurgence of food insecurity. More people are eating meat and dairy products in Asia, which increases the demand on the animal-feed industry. Milk powder prices rose from $2,000 to $4,800 per tonne last year as rising consumption of milk products in Asia coincided with shortages in the Western world. Drought in Australia has worsened the problem as have government policies in Europe and America to increase the use of biofuels.
Price rises feed through to shopping basket Biofuels cannot save the planet Mounting concern about rice has prompted the Indian Government to restrict exports of certain varieties. The measure triggered a surge in global rice prices, which have risen 50 per cent in a year, according to the FAO. The rice shortage is even felt in Britain where the price of basmati, the biggest-selling variety, is rising rapidly.
Wheat is suffering even greater pressures, with prices up 115 per cent in a year. A succession of droughts in Australia has put upward pressure on the cost of a food commodity that is already in short supply. Stocks are at a 40-year low and exports are being restricted from Beijing to Buenos Aires. Ukraine started closing its door to grain exports in June and Russia set a 40 per cent export tariff on wheat in January.
Argentina has delayed the reopening of its wheat export registry until April to protect domestic supplies, and China, a net exporter of corn, rice and wheat last year, has imposed export quotas on grain in order to stem runaway food price inflation. A surge in its inflation index in December was blamed entirely on rising food prices, notably pork, which rose 48 per cent.
Farmers worldwide are worried about feed costs. In Europe pig and poultry breeders are threatening to cut production unless they are paid higher prices.

carlyle supports sarkozy

Carlyle poaches Olivier Sarkozy

Independent.co.uk Nick Clark

Tuesday, 4 March 2008

The French President Nicolas Sarkozy’s ratings may be plummeting, but his half-brother’s star continues to rise in the world of financial markets as he prepares to take a senior role at the buyout company Carlyle.

Olivier Sarkozy, 38, is to join Carlyle as co-head and managing director of its recently launched global financial services division. He will be based in New York, and starts next month.
Mr Sarkozy, who is believed to be on good terms with the President despite not attending his recent wedding to the actress and model Carla Bruni, arrives from the investment banking giant UBS, where he was joint global head of financial institutions. David Rubenstein, one of Carlyle’s founders, called it a « remarkable addition » to the buyout group’s financial services team, which was set up in June.
Olivier Sarkozy expressed his « great sadness » at leaving UBS, but added that the opportunity to help Carlyle establish a new global practice was too compelling. Carlyle remains a client of the Swiss bank. « I will continue to work with UBS in an advisory capacity and welcome UBS’s support of Carlyle’s financial services investment efforts, » he said.
Mr Sarkozy, who has focused his entire career on the financial institutions sector, has worked on mega-deals including the $35bn (£17.6bn) sale of MBNA to Bank of America in 2005. He joined UBS in 2002 after defecting from arch-rival Credit Suisse.
UBS is not replacing Mr Sarkozy. His co-head of financial institutions, John Cryan, will take over the role fully.
A spokeswoman for Carlyle said the appointment had no political motivations.
Nicolas and Olivier are related through their father, a Hungarian immigrant, although they did not grow up together.
President Sarkozy, who took office in May last year, has seen his approval ratings fall after a divorce and remarriage and a slanging match with a visitor to an agricultural show.

franco german relation becomes problematic

Europe’s closest friendship falls apart

Independent.co.uk Web

John Lichfield in Paris and Tony Paterson in Berlin

Thursday, 28 February 2008

To cancel one high-level Franco-German meeting is unfortunate. To cancel two in less than a week implies a bank of freezing fog is descending over the Rhine.

French and German officials sought yesterday to play down the significance of the abrupt postponement –both by Paris – of two meetings between the countries’ most senior politicians.
Privately, and not so privately, the talk in both capitals is of a serious rift in the single most important national partnership in Europe. Officials blame an increasingly difficult relationship between President Nicolas Sarkozy and Chancellor Angela Merkel.
With France scheduled to take the presidency of the European Union in July, the Franco-German tiff could not be timed worse.
Berlin has been especially annoyed by M. Sarkozy’s determination to push ahead with a so-called « Club Med » or formal union of countries on the shores of the Mediterranean. Chancellor Merkel believes that such an organisation would be either a pointless distraction or a threat to the unity of the EU.
There have also been tensions over the management of the euro and on foreign and defence policy. France has repeatedly criticised the monetary policy of the European Central Bank while ignoring its European commitments to restrain its budget deficit. Germany has refused to join a French-sponsored EU military mission to Darfur.
At the heart of the quarrel – not yet an overt crisis – is the strained relationship between the two leaders.
German officials say that the hyperactive and boastful behaviour of the French President – and his over-familiar personal style – has irritated Ms Merkel. French officials suggest M. Sarkozy finds Ms Merkel too cautious and too ponderous. French diplomats also complain that M. Sarkozy – in his determination to shake up all aspects of French government – wants to play down the Paris-Berlin relationship that has been the bedrock of France’s domestic and European policy for half a century. « For Sarkozy, the West very much means UK and the US, » one French source said.
Late last week, Paris postponed for three months a Franco-German summit that had been scheduled for next Monday in Bavaria. The Elysée Palace said that President Sarkozy’s diary was too busy.
Early this week, France called off at, one day’s notice, a meeting between the French Finance minister, Christine Lagarde, and her German counterpart, Peer Steinbrück.
The reason given was trivial, bordering on the insulting. Mme Lagarde had to accompany M. Sarkozy on a visit to a provincial health centre and luxury goods factory.
Eckart von Klaeden, chief parliamentary spokesman for Ms Merkel’s ruling conservatives, said the French explanation was « hardly convincing ». Martin Schulz, the German Social Democrat leader in the European parliament, said: « I think that Sarkozy has hit such a low that his internal political weaknesses are now beginning to affect Franco-German co-operation. »
The newspaper Le Monde said that, whatever excuses were put forward, it was clear that Franco-German relations had fallen victim to a « maladie diplomatique ».
Le Monde said that you had to go back eight years, to a spat over EU voting rights between Chancellor Gerhard Schröder and President Jacques Chirac, to find such a « sullen » relationship between the « countries which once claimed to be the motors of Europe ». M. Sarkozy wants to make his plans for a Mediterranean Union one of the centrepieces of his six- month presidency of the EU from 1 July. He has invited the Mediterranean states to a summit in Paris on 13 July and wants other EU countries to come along the next day – France’s national day – to bestow their blessings.
However, several northern EU countries, led by Germany, are deeply unhappy about the French initiative. They complain that there is no need for a separate Mediterranean Union, distinct from the EU’s own partnership agreements with its southern and eastern neighbours.
The German newspaper Die Welt said M. Sarkozy had tried to persuade Ms Merkel to write a joint article, praising the Club Med idea, for publication in French and German newspapers before next week’s bilateral summit. She refused. M. Sarkozy then postponed the meeting.
The French and German governments insisted officially that the postponement was a timetabling problem.

biofuels leading to food shortages

.
Food and the spectre of Malthus

By Mark Thirlwell

Published: February 26 2008 17:53

February has been the month for revisiting old and unpleasant economic concepts. Last week, financial markets experienced that 1970s feeling, as a combination of rising inflation and unemployment in the US triggered unwelcome memories of the decade of stagflation that ended the postwar golden age and the Keynesian consensus. Then came this week’s report that the United Nations’ world food programme might have to ration food aid. Set against a backdrop of rising food prices worldwide – global food prices have now risen by more than 75 per cent since their lows of 2000, jumping more than 20 per cent in 2007 alone – the news revived fears from a much earlier era, conjuring up the Reverend Thomas Malthus.
Soaring food prices have also revived some more contemporary worries. When China’s annual inflation rate spiked to an 11-year high in January on the back of an 18 per cent increase in food prices, China-watchers found themselves casting their minds back to the food price rises of 1988 and the social disturbances, protests and civil unrest that followed. Inflation is often cited as one of the factors behind the major demonstrations in 1989.
This rise in prices is a consequence of both demand and supply trends. On the demand side, the key factor has been the strong consumption growth in emerging markets, which in turn has been powered by those countries’ impressive income gains. China, for example, has accounted for up to 40 per cent of the increase in global consumption of soyabeans and meat over the past decade. At the same time, a series of supply-side disruptions in key commodity markets ranging from drought to disease have been at work.
Perhaps the most important drivers of price gains over the past year are developments in world energy markets. High oil prices have encouraged a policy focus on biofuels, including lashings of generous financial support. Production has responded quickly to these incentives: the World Bank reports that the US has used 20 per cent of its maize production for biofuels and the European Union 68 per cent of its vegetable oil production. This change in usage has boosted prices, reduced the supply of these crops available for food and encouraged the substitution of other agricultural land from food to biofuel production.
This is not the first time in modern economic history that the Malthusian spectre of global food shortages has stalked the world economy. Surges in food prices in the 1970s and then again in the mid-1990s both prompted warnings that agricultural capacity was failing to keep pace with a growing world population. Each time, the prices jumped it proved to be temporary as supply responded. There are good reasons for believing that this latest bout of market disequilibrium will ultimately reach the same resolution. That said, however, there are two important caveats to set against such an optimistic reading of current circumstances.
First, the lag in supply response to the stimulus provided by higher prices may prove to be of greater duration than its predecessors, to the extent that the current changes in world energy markets – and hence the associated demand for biofuels – are likely to be lasting ones. With climate change and environmental degradation threatening agricultural capacity in several key regions, the elasticity of past supply responses may prove to be a poor guide to the future.
Second, during the extended period in which supply continues to lag behind demand there are likely to be significant social and economic costs. Three in particular stand out.
Most important, a period of protracted higher food prices will be bad news for many of the world’s poorest people and its poorest economies. While the share of food in the consumption basket of a rich country such as the US is relatively low, at about 10 per cent, it averages about 30 per cent in China and more than 60 per cent in sub-Saharan Africa. Those countries that are most vulnerable are the low-income net food importers. Higher food prices add more strain to import bills that have often already been stretched by higher energy prices. Several of the poorest economies fall into this category and are heavily dependent on food aid to meet their needs. But the worldwide volume of such aid has stagnated for the past two decades and, what is worse, the quantity of aid delivered tends to fall as prices rise, given that a large proportion comprises a fixed annual dollar amount.
Next, there are important social strains to be managed. These may be particularly problematic for those emerging markets that are already struggling to deal with the consequences of growing inequality. Granted, higher food prices are something of a two-edged sword here, since higher agricultural earnings could reduce rural-urban income disparities. But the big losers are likely to be the urban poor, typically a politically volatile group, while many of the rural poor will also suffer.
Finally, higher food prices will call for tighter monetary policy. Given the disparity in the share of food in consumption baskets, and the fact that rich country central banks tend to exclude food prices from their core inflation measures, the policy reaction will tend to be greater in developing economies. Authorities may also be tempted by price controls and other direct measures. However, rich country central banks will also have to keep a close watch on any spillover effects that tighter monetary policy could have on non-food prices.
The writer is director of the international economy
programme at the Lowy Institute for International
Policy in Sydney
Copyright The Financial Times Limited 2008