Monday, October 30, 2006

Of Refco, Bawag, Vienna, Elsner, embezzlement, Flottl, fraud, and such

Austria Charges Nine In Probe of Refco-Bawag Ties (WSJ articles require ticket to read)
Prosecutors in Vienna have charged nine men, including the former chief executive officer of Bawag PSK, on charges ranging from embezzlement to fraud amid an Austrian probe into ties between U.S. commodity brokerage Refco Inc. and the Vienna bank.

Among those charged was the former CEO of Bawag, Helmut Elsner, and Wolfgang Flöttl, who traded on behalf of Bawag from New York and is the son of another former Bawag CEO, Walter Flöttl. Robert Reiter, a former auditor at KPMG Alpen-Treuhand GmbH, which oversaw Bawag's books, also was charged. In the indictment, which was made public yesterday in Vienna, prosecutors allege the nine men "intentionally abused their positions of trust at Bawag" and engaged in transactions that cost the bank €1.44 billion ($1.81 billion).

The charges come a year after Refco, a large New York broker of commodities and other securities that catered to corporations, government agencies and hedge funds, disclosed that then-CEO Phillip R. Bennett had used a scheme to hide bad debt from Refco investors. Refco investors and U.S. prosecutors allege the scheme included Bawag, which sought to hide its own bad debt that largely was a result of Wolfgang Flöttl's trading losses.

In Vienna, prosecutors allege that Mr. Elsner hired Wolfgang Flöttl to trade in currency markets. Initially, the trading was successful but ultimately led to massive losses. Wolfgang Flöttl handled much of the trading in the New York area, while at the same time establishing himself as a benefactor of New York arts and charities.

Austrian prosecutors allege that Mr. Elsner then used a complex coverup with the assistance of Wolfgang Flöttl, senior Bawag officials, the chairman of the Bawag supervisory board and a former senior KPMG auditor, Mr. Reiter. Mr. Elsner is charged with embezzlement and fraud, according to the indictment. Wolfgang Flöttl, Mr. Reiter and the other Bawag officials are charged with embezzlement, according to the indictment.

See more Guambat Stew related pieces here.

A nice, big, juicy subprime stake

The Venerable Wall Street Journal is shadowing the Bloomberg reports that Guambat added to his stew a week back.

How to gain from their pain, Guambat "networked" the idea, first reported by Bloomberg journalists, that you can profit from those edgy marginal borrowers, betting they really will go down with their ships, and make money on your bet if they do.

Whoo-hoo. Financial carnage as a profitable spectator sport, sort of like the cock-fights as the financially strapped battle to the death for their piece of the American Dream. Damn, you gotta love this system.

First, the VWSJ sets the stage: Pain From U.S. Housing Slump Is Likely
To Linger, but Some Say Worst May Be Past
(VWSJ articles require a ticket to read):
Former Federal Reserve Chairman Alan Greenspan, whose interest-rate cuts helped create what he once called "froth" in house prices, said in a speech last week that he detected "early signs of stabilization" in the housing market. [But see Paul Krugman's VNYT piece,Housing Gets Ugly, brought to you without payment of the toll by the Economist's View blog.] Some Wall Street economists also are saying the worst may be behind us.

Not so fast, replies Ian Shepherdson, chief U.S. economist at High Frequency Economics Ltd., a Valhalla, N.Y., research firm: "It's going to get worse before it gets better."

Both camps are making valid points. For now, the consensus among economists is that the housing downturn will remain a drag on the economy but probably won't sink the U.S. into a recession next year.

Then the VWSJ walks us through the various dark corners of the debt markets where vampires and werewolves prey on the weak and defenseless, sucking the life blood out of them. Ooops, sorry. Too much hallowweenie in my beanie.

Back to the sober VWSJ:

Risk Management
As Home Owners Face Strains, Market Bets on Loan Defaults
New Derivatives Link Fates Of Investors and Borrowers In Vast 'Subprime' Sector
'These Are the Marginal Guys'

Mr. Whalen, who manages a multibillion-dollar mortgage-bond portfolio at Los Angeles-based Metropolitan West Asset Management, stands to gain if Mr. Spirou, a financially stretched homeowner in New York City, reneges on his mortgage loan. That's because Mr. Spirou's $360,000 loan was packaged with thousands of others into a bond, and Mr. Whalen has entered a newfangled derivative contract -- similar to an insurance policy -- that will pay off if enough loans in the bond go bad.

"The sophistication is remarkable right now," says Mr. Whalen. "You can profit in any scenario."

Mr. Whalen represents a new breed of investor: people who are using financial instruments to bet against the homeowners they consider most likely to suffer in a housing downturn. Many such investors, including Mr. Whalen, don't expect the current slide in house prices to lead to widespread economic malaise. Rather, they're betting on trouble for folks like Mr. Spirou -- so-called "subprime" borrowers who have become homeowners thanks to the increasing availability of easy credit.

Whatever happens with Mr. Whalen's wager, there's a lot more at stake than his fund's performance or the roof over Mr. Spirou's head. Subprime lending has put as many as two million families into homes over the past decade, helping push the U.S. homeownership rate up to 69% from 65% -- a major shift toward an "ownership society" that politicians of all stripes have touted as one of the nation's economic successes. As the bets play out, they will show how much of that success is permanent, and how much a temporary phenomenon fueled by overly aggressive lending.

"You've got a lot of borrowers who didn't have credit before, and a lot of them don't know how to manage that credit," says Dan Castro, managing director at GSC Group, a New York asset-management firm that focuses on the mortgage market. "The place where you're really going to see fallout is in the subprime."

The advent of the subprime market reflects a sea change in the way banks make home loans. As recently as the mid-1990s, potential homeowners had to get over high hurdles to borrow money. Background checks could take weeks or months. Lenders typically required down payments of at least 20% of a home's value. People with dented credit, or young folks without adequate credit histories, had few if any options.

Over the past decade, though, a convergence of factors has emboldened banks to lend where they wouldn't before. For one, the development of the Internet and advances in computing technology have made it much easier and cheaper to process and package new loans. Electronic databases on borrowers have made it easier for banks to assess the risk of lending to people with shakier credit, while new insurance-like derivatives have helped them mitigate that risk. And robust demand from investors -- both in the U.S. and abroad -- has given banks a big incentive to lend, because they can easily turn around and resell the loans in the form of bonds, reaping a tidy profit.

As a result, both the volume and variety of subprime loans have boomed. Since the beginning of 2002, banks and specialized lenders such as ACC Capital Holdings Corp.'s Ameriquest Mortgage Co., New Century Financial Corp., and H&R Block Inc.'s Option One Mortgage Corp. have made some $2.2 trillion in loans. That is more than five times the amount in the preceding five-year period, and includes a growing share of "affordability" products such as "piggyback," "interest-only" and "no-doc" loans. These products, respectively, allow borrowers to avoid a down payment, make extra-low payments in a loan's early years, and state their income without supporting documentation. Subprime loans' actual interest rates are typically much higher than those on more traditional "prime" loans.

A recent study by two researchers at the Federal Reserve Bank of Chicago, Jonas Fisher and Saad Quayyum, suggests that subprime lending alone could account for close to half of the four-percentage-point rise in the ownership rate since 1995, almost as much as demographic changes, low interest rates and government programs combined.

"We looked at this and thought we're going to see lenders who are misusing these tools," says Mr. Whalen. "We're going to see the performance of their bonds deteriorate."

At about the same time, in early 2005, Wall Street bankers were developing a new kind of derivative contract that would allow investors such as Mr. Whalen to make bets based on their misgivings. Called a credit-default swap, it had previously been applied mainly to corporate and sovereign bonds. Like an insurance contract, it pays off if a subprime-backed bond suffers a certain amount of losses to defaults. The holder, known as a protection buyer, makes regular payments to a bank or other counterparty for the insurance, and also has the right to resell the contract. If defaults prove higher than expected and the bond starts to look riskier, the value of the contract rises, and the holder can resell it at a profit.

In January 2005, for example, Mr. Whalen bought an insurance contract on the Long Beach Mortgage Loan Trust 2004-2, the bond into which Mr. Spirou's loan had been packaged. He agreed to pay the counterparty, Citigroup Inc., $20,300 a year for a contract that would pay up to $1 million if more than 3.35% of the loans originally in the bond went bad. So far, the wager hasn't made money: He says he could sell the insurance for close to what he paid.

Lately, though, more investors have started worrying about what will happen to subprime borrowers as house prices plateau and start to fall. Rising home values rescued many borrowers who didn't have enough income to make their payments, because they were able to take the needed cash out of their homes. Now, if homeowners run into income problems and can't sell their houses for enough to pay off their loans, they will be left with no option but to let the bank take the house.

"While prices are appreciating or steady, people try harder to make those mortgage payments," says Stuart Feldstein, president of SMR Research Corp. in Hackettstown, N.J., which has done studies of house prices and foreclosures during previous downturns in California, Texas and other states. "But when their investments become worth less than what they owe, they tend to just walk away."

What's more, many will face an added shock as the monthly payments on their loans -- most of which are fixed for only two years -- reset to reflect higher interest rates. Christopher Cagan, director of research at First American Real Estate Solutions in Santa Ana, Calif., estimates that about $640 billion in subprime loans made in 2004 and 2005 will reset to higher rates over the next five years -- a trend that he expects will lead to some 450,000 added defaults.

"And that's just resets," he says. "That's not including things like job loss, divorce, death in the family or serious illness."

Meanwhile, data on loan delinquencies suggest that lending standards have indeed fallen. As of August, about 3% of borrowers who took out subprime loans in 2006 were more than 60 days behind on their payments -- about three times the level two years earlier and more than four times the level for all types of borrowers. Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley, predicts that by 2008 as many as one in five of all subprime borrowers will be in arrears, and that foreclosures will help send the homeownership rate back down by about a percentage point.

"While 80% of this is a good thing, the 20% that's bad is going to come home to haunt us," he says. "That's just the way it happens: Bad practices get exposed in the downturns."

That worry is reflected in the derivatives market. The annual cost of $1 million in insurance against moderately risky subprime-backed bonds has gone from a low of about $21,500 in early August to $25,000 Friday, and has spiked as high as $27,800. Market participants say big hedge funds increasingly are using the derivatives to make outright bets against U.S. homeowners. This summer, for example, New York hedge-fund manager Paulson & Co. launched a fund that has aimed specifically at profiting on subprime defaults.

It's the stupid economy

Accountant aims to tell voters what politicians won't: America is on the brink of disaster
From the hustings and the airwaves this campaign season, America's political class can be heard debating Capitol Hill sex scandals, the wisdom of the war in Iraq and which party is tougher on terrorism. Democrats and Republicans talk of cutting taxes to make life easier for the American people.

What they don't talk about is a dirty little secret everyone in Washington knows, or at least should. A majority of economists and budget analysts agree: The ship of state is on a disastrous course and will founder on the reefs of economic disaster if nothing is done to correct it.

There's a good reason politicians don't like to talk about the nation's long-term fiscal prospects. The subject is short on political theatrics and long on complicated economics, scary graphs and very big numbers. It reveals serious problems and offers no easy solutions. Anybody who wanted to deal with it seriously would have to talk about raising taxes and cutting benefits, nasty nostrums that might doom any candidate who prescribed them.

Fiscal roadshow warns United States of trouble ahead
David M. Walker sure sounds like he's running for office, talking about the future of the country and its children and how people have to rise up for change.

But as comptroller general of the United States, head of the Government Accountability Office, Walker doesn't want or need a vote. What he's looking for is attention for his message that the country is on the road to financial ruin.

There are serious problems and no easy solutions - and the hard solutions include raising taxes and cutting benefits, the kind of talk that can doom a politician's career.

The backbone of Walker's campaign has been the Fiscal Wake-up Tour, a travelling road show of economists and budget analysts who share his concerns. Walker has committed to touring the country through the 2008 elections, talking to anybody who will listen about the fiscal hole Washington has dug itself and the recklessness of borrowing money from foreign lenders to pay for the operation of the U.S. government.

"You can't solve a problem until the majority of the people believe you have a problem that needs to be solved," Walker says.

Polls suggest that Americans have only a vague sense of their government's long-term fiscal prospects, that they are more likely to identify the war in Iraq, terrorism, jobs and the economy as major problems facing the country. The deficit doesn't even crack the top 10 unless the respondents are directly asked about it, and then a majority says it's a serious problem.

The looming fiscal crisis is not a partisan issue, says Walker, who is accompanied on his tour by experts from across the political spectrum.

Their basic message is this: the U.S. national debt is currently US$8.5 trillion and it could reach $46 trillion or more over the next few decades, adjusted for inflation, if the status quo doesn't change. That's almost as much as the total net worth of every person in the U.S. - Bill Gates, Warren Buffett and those Google guys included.

And every year that nothing is done about it, Walker says, the problem grows by $2 trillion to $3 trillion.

And though the federal debt has grown in dollar terms since 2001, it hasn't grown dramatically relative to the size of the economy.

But that's about to change, thanks to the country's three big entitlement programs - Social Security, Medicaid and especially Medicare.

With the first baby boomers becoming eligible for Social Security in 2008 and for Medicare in 2011, the expenses of those two programs are about to increase dramatically.

Economists Jagadeesh Gokhale of the American Enterprise Institute and Kent Smetters of the University of Pennsylvania calculate that Medicare's fiscal shortfall - the annual difference between its dedicated revenues and costs - will have risen to $25 trillion by 2080.

Social Security is a much less serious problem. The program currently pays for itself with a 12.4 per cent payroll tax, and even produces a surplus that the government raids every year to pay other bills. But Social Security will begin to run deficits during the next century, and ultimately would need an infusion of $8 trillion if the government planned to keep its promises to every beneficiary.

Like many of its citizens, the United States has spent the last few years racking up debt instead of saving for the future. Foreign lenders - primarily the central banks of China, Japan and other big U.S. trading partners - have been eager to lend the government money at low interest rates, making the current $8.5-trillion deficit about as painful as a big balance on a zero-per cent credit card.

But Walker isn't optimistic that the government will be able to tackle its fiscal challenges so soon.

"Realistically what we hope to accomplish through the fiscal wake-up tour is ensure that any serious candidate for the presidency in 2008 will be forced to deal with the issue," he says. "The best we're going to get in the next couple of years is to slow the bleeding."

U.S. economy's growth rate slows
The slumping housing market dragged the U.S. economy into its weakest growth rate in more than three years in the third quarter, the government reported Friday in its final reading of overall economic health before the Nov. 7 congressional elections.

Inflation moderated, even without the effect of falling oil prices, but it remained higher than the Federal Reserve's "comfort zone" — keeping alive the possibility of future interest rate hikes by the central bank.

Many analysts said the relatively weak 1.6% growth in the July-to-September period represented the storm before the calm. Almost all forecast an upswing in the final three months of the year....

On economic stewardship, Bush's approval rating in a recent Associated Press-Ipsos poll was 40%, near the low for his six years in office, and more respondents said they trusted the Democrats more than the Republicans with the economy.

Republicans put the best face on the latest economic news. House Majority Whip Roy Blunt of Missouri, who ranks third in the House GOP leadership, said the economy had grown every quarter for five consecutive years. "The economic fundamentals are strong," Commerce Secretary Carlos M. Gutierrez said.

The nation's growing trade deficit also acted as a drag on economic growth. That the economy grew at all was due in large measure to a 3.1% upswing in spending by the indefatigable American consumer.

After-tax income rose slightly faster than personal spending, resulting in an improvement in the saving rate from a negative 0.6% in the second quarter to a negative 0.5% in the third. Americans have spent more than they have earned for about two years, thanks in large part to borrowing at low interest rates against the value of their homes.

But home values are dropping as interest rates are rising....

Homeowners with adjustable-rate mortgages worry about rising interest rates, but many believe they will be able to refinance their loans if necessary, according to a study released Monday.
An [sic] survey of homeowners conducted for Wells Fargo & Co., the San Francisco-based bank, found that about one in seven respondents had an adjustable-rate mortgage, or ARM.

The study found that nearly 80 percent of homeowners with ARMs said they were "somewhat" concerned, "very" concerned or "extremely" concerned about rate increases. (See, How to gain from their pain.)

But more than half said they believed they could refinance their loans. And about 20 percent said they were prepared for rate adjustments and didn't plan any changes.

Wells Fargo's third annual homeowners study also found that homeowners expect their properties to appreciate, although they apparently are aware that price increases are slowing.

Some 10 percent said they expected their home values to increase a lot, 53 percent said they'd increase "a little," and 27 percent said they'd stay the same. The rest expected a decline or weren't sure.

Overall, 72 percent of those surveyed said that the equity in their home was their most important investment, she said.

"That's a shift," Woo Ho said. "A home is now considered a major part of homeowners' financial portfolios."

The survey of more than 1,300 homeowners was conducted by the ICR of Media, Pa., and the margin of error was about 3 percent.

Wal-Mart reports weakest monthly sales in years
Despite an upbeat forecast for October, Wal-Mart Stores Inc. notched the slowest gain in same-store sales in years, the retail giant reported Saturday.

Wal-Mart (WMT)) said sales at established U.S. stores rose an estimated 0.5%, far off the 2-to-4% gain the company originally forecast for October.

The 0.5% same-store sales figure for October is the weakest since the 0.3% rise posted in December 2000, according to the Wall Street Journal.

Righting some copywrongs

A think-tank has called for outdated copyright laws to be rewritten to take account of new ways people listen to music, watch films and read books.
The Institute for Public Policy Research (IPPR) is calling for a "private right to copy".

It would decriminalise millions of Britons who break the law each year by copying their CDs onto music players.

Making copies of CDs and DVDs for personal use would have little impact on copyright holders, the IPPR argues.

Copyright issues have, in the past, been steered too much by the music industry, the report said.

IPPR deputy director Dr Ian Kearns said: [It] is not the music industry's job to decide what rights consumers have; that is the job of government."

Its key recommendation is that any policy regarding Intellectual Property policy should recognise that knowledge is a public resource first and a private asset second.

"The internet offers unprecedented opportunities to share ideas and content," the report says.

"Knowledge must, therefore, perform the roles of both commodity and social glue, both private property and public domain," it adds.

The report looks at how Digital Rights Management (DRM) technologies - which restrict the sharing of music or other intellectual property - are affecting attempts to preserve electronic content.

It argues that the British Library should be given a DRM-free copy of any new digital work and that libraries should be able to take more than one copy of digital work.

Ms Withers said: "We charge the British Library as being the collective memory of the nation and increasingly it has to archive digital content.

"More and more academic journals are delivered digitally but copyright laws aren't designed to deal with digital content."

She said there was often a conflict between DRM and accessibility technologies which needs to be addressed.

"Someone with poor sight may use a screen reader technology and may have to change the format of the content to use it but some DRM technology isn't sophisticated enought to take this kind of thing into account," she said.

The report also calls for the government to reject calls from the UK music industry to extend the copyright term for sound recording beyond the current 50 years.

Call to exempt iPod 'rippers' from prosecution
A majority of Britons admit to "ripping" CDs on to their computers for playback on other devices such as iPods and other MP3 players; and a National Consumer Council survey recently found that three-fifths of adults believe it to be perfectly legal to do so.

The IPPR said a upcoming review of intellectual property, set up by Chancellor Gordon Brown and chaired by Andrew Gowers, should update the copyright laws to take account of the changes in the way people listen to music and watch films. Its report, Public Innovation: Intellectual Property in a Digital Age, said the new right would have no significant impact on copyright holders.
Not at all like the approach the weak-kneed and limp-wristed Howard Government approach to the copyright rape the US recording industry did to Australia under the guise of the so-called Free Trade Agreement. We wish the Brits well with this one.

Some people are taking the matter into their own hands.

Geek breaks the iPod code
GROWING UP in a small town in southern Norway, Jon Lech Johansen loved to take things apart to figure out how they worked.

“I was fed up with not being able to play a movie the way I wanted to play it” — that is, on a PC that ran Linux.

To fix the problem, he and two hackers he met online wrote a program called DeCSS, which removed the encryption that controls what devices can play the discs. That meant the movies could be played on any machine, but also that they could be copied. After the program was posted online, Johansen received an award from the Electronic Frontier Foundation — and a visit from Norwegian police.

Johansen, now 22 and widely known as “DVD Jon” for his exploits, has also figured out how Apple’s iPod-iTunes system works. And he is using that knowledge to start a business that is going to drive Apple boss Steve Jobs crazy.

To be specific, Johansen has reverse-engineered Fair Play, the encryption technology Apple uses to make the iPod a closed system.

Right now, thanks to Fair Play, the songs that Apple sells at its iTunes store cannot easily be played on other devices, and copy-protected songs purchased from other sites will not play on the iPod. (The iPod will play MP3 files, which do not have any copy protection, but major labels don’t sell music in that format.) Johansen has written programs that get around those restrictions — one that would let other companies sell copy-protected songs that play on the iPod, and another that would let other devices play iTunes songs.

For his role in writing DeCSS, Johansen was charged with breaking the Norwegian law that prohibits gaining unauthorised access to data, but he was acquitted twice when courts ruled the data were his own. The movie studios didn’t like that decision, which almost certainly would have been different in America, where the 1998 Digital Millennium Copyright Act (DMCA) prohibits circumventing digital-rights- management technology (DRM) for any reason. The movie studios used that law to sue a hacker magazine called 2600 that linked to DeCSS on its website.

Fair Play is not patented, most likely because the encryption algorithms it uses are in the public domain. And Johansen said he is abiding by the letter of the law — if not, perhaps, its spirit.

To let other sites sell music that plays on the iPod, his program will “wrap” songs with code that functions much like Fair Play. “So we’ll actually add copy protection,” he said.

Helping other devices play iTunes songs could be harder to justify legally, but he cites the DMCA clause that permits users, in some circumstances, to reverse-engineer programs to ensure “inter-operability”. “The law protects copyrights,” he said, “but it doesn’t keep you locked into the iPod.”

Johansen isn’t the only one who feels that way. In 2004, Real Networks released a program called Harmony that would allow songs from its Real Player Music Store to play on the iPod.

Jobs memorably accused the company of using “the ethics and tactics of a hacker” and threatened to sue. Instead, Apple released a software update that made Harmony ineffective — although Real subsequently fixed that.

In America the courts have traditionally allowed inventors to reverse-engineer products to determine how they function. But the DMCA allows programmers to do that only in certain cases.

“What [Johansen] is working on is in the spirit of the reverse-engineering the courts have been most friendly toward,” said Gartner Group’s McGuire, who has informally given Johansen advice. “But the law is untested, and the case is complicated.”

“On the surface, Apple would have a good case, especially when it comes to making iTunes songs play on other devices,” said Robert Becker, a lawyer at Manatt Phelps & Phillips. “Apple would say you’re buying music under certain restrictions.”

Johansen’s legal arguments involve the rights of consumers, but opening the iPod could also be good for the music business.

The big labels worry that compatibility concerns will slow the digital-music market, especially when Microsoft comes out with its own closed system this Christmas. They would love to see more retailers enter the market.

EMI Music CEO says the CD is 'dead'
EMI Music Chairman and Chief Executive Alain Levy Friday told an audience at the London Business School that the CD is dead, saying music companies will no longer be able to sell CDs without offering "value-added" material.

"The CD as it is right now is dead," Levy said, adding that 60% of consumers put CDs into home computers in order to transfer material to digital music players.
EMI Music is part of EMI Group PLC (EMI.LN).

But there remains a place for physical media, Levy said. "You're not going to offer your mother-in-law iTunes downloads for Christmas," he said. "But we have to be much more innovative in the way we sell physical content."

CD sales accounted for more than 70% of total music sales in the first half of 2006, while digital music sales were around 11% of the total, according to music industry trade body the International Federation of the Phonographic Industry.
CD sales were worth $6.45 billion and digital sales $945 million, the IFPI said.

Johnny H. as Charley Chaplain

Howard, the Prime Minister who brought us an Archbishop to be the Governor General of Australia, wants to bring Christ to the schools, with his choice of Imams and, who knows, Rabbis, too, as chaplains. He insists on playing the Crusader Rabbit role.

Shake off Hilali, PM urges Muslims (And while you're at it, ditch Jensen)
Arguing that as Prime Minister it was not his role to appoint imams any more than it was to appoint cardinals or archbishops, Mr Howard said "the responsibility to resolve this matter sensibly rests with the Islamic community". If the matter was not "properly handled" by the Islamic community, he was concerned "that their failure to do so will do lasting damage to perceptions of that community within the Australian community".

Meanwhile, he is continuing to insinuate the church's teachings into the local school curriculum.

THOUSANDS of religious counsellors will be appointed to schools that join a new $90 million federal program to fill a significant "spiritual and pastoral" gap in services to Australian students.
But while church leaders welcomed the program, announced by John Howard yesterday, teachers' groups attacked it as part of the Prime Minister's "fundamentalist approach to education and values.

They rejected the need for counsellors to have a religious affiliation and questioned where suitable candidates would be found. Mr Howard emphasised that the three-year scheme, due to begin next year, would be voluntary and that it would be up to the whole school community to select their counsellor, who would then be vetted by the Government.

Jewish or Muslim schools, for example, could choose a chaplain from their own faith.

"It will, I believe, fill a very significant gap in the services available to school students," Mr Howard said.

"And my assessment of the Australian community is that, whatever its view about formal religious adherence may be, it does hunger for additional ways of looking at the spiritual and pastoral side of life."

Uniting Church in Australia president Gregor Henderson said where there had been experience of school chaplains, students, parents and teachers had been positive. "It is a good initiative for the young people of Australia," Reverend Henderson said.

But Australian Secondary Principals Association president Andrew Blair said his members would have "favoured a much more open funding arrangement on a per capita basis for every school in the country, to allow them to engage the right kind of support that they might need, whether it be a social worker, a psychologist or a chaplain".

Mr Blair condemned tying such support to a religious base.

"This kind of new fundamentalist zeal that seems to be coming out of Canberra is frankly out of step with what the education community really needs."

Saturday, October 28, 2006

Inside running

Guambat's Stew has included previous bites of information suggesting that those in the know are frequently the first in the go in the credit default swap market (see here and here and, more generally, here).

Here's yet more informed information from Bloomberg on the uber-informed swap-monsters. Big kudos to Bloomberg for digging up the story and staying with it.

Credit-Default Swap Traders Anticipated Announcements of LBOs
Derivatives traders may be profiting from inside information on leveraged buyouts and other takeovers, a study by Credit Derivatives Research LLC suggests.

Credit-default swaps based on the bonds of 30 takeover targets, including four of the five biggest LBOs of 2006, rose before deals were announced or news reports said transactions were likely, according to the New York-based independent research firm.

The fluctuations in credit-default swaps based on the bonds of Austin, Texas-based Freescale Semiconductor Inc., Sara Lee Corp. of Chicago and San Jose, California-based Knight Ridder Inc. were highlighted by the report. The U.K.'s Financial Services Authority said in June it would monitor unusual trading on concern inside information is leaking from banks or securities firms privy to details about takeover talks.

"The evidence keeps building that there is a problem here," said Michael Greenberger, former director of trading at the Commodity Futures Trading Commission and now a professor at the University of Maryland School of Law in Baltimore.

"Evidence shows that CDS prices are widening before public rumor or news," said Tim Backshall, a strategist at Credit Derivatives Research in Walnut Creek, California, who conducted the study. "Whether it's insider trading or more informed selling is unclear. That could simply be a reflection of smart players in the market buying protection."

Credit-default swaps are financial instruments based on about $350 billion of bonds and loans that are used to speculate on a company's ability to repay debt. They were conceived to protect bondholders against default, and pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements.

The total face amount of contracts outstanding worldwide more than doubled in the past year to $26 trillion, outpacing the growth of all other derivatives markets since their creation less than a decade ago, according to the International Swaps and Derivatives Association, or ISDA.

There are contracts on more than 3,000 companies in the U.S., Europe and Asia as well as indexes that seek to replicate the risk of investing in everything from emerging markets to mortgage-backed securities.

For investors seeking to speculate on the creditworthiness of companies, the market is gradually replacing corporate bonds because the derivatives are less expensive and easier to buy and sell [and, thus, make it easier to buy more and thereby skew the systemic risk of the whole system]. They are created by banks such as JPMorgan Chase & Co. and Deutsche Bank AG [who then get another inside look at who is doing what in this unregulated "market"], and do not depend on companies to be issued.

The SEC says it has no direct supervision of trading, while the CFTC says it isn't responsible. ISDA, a New York-based trade group whose members include the largest credit derivatives dealers, said this month that they aren't aware of any instances of investors using the market to exploit inside information.

The U.K.'s Financial Services Authority said in a June newsletter that the credit derivatives market "is very difficult to police" in part because participants are less likely "to report suspicious behavior."

A London Business School study last year of 79 North American companies from 2001 to 2004 found "significant" evidence that contracts were moving ahead of news that could affect credit quality.

ISDA this month issued a statement saying the industry [that is, ISDA's own constituents] has done an effective job policing itself, and that their "understanding is that the regulators have been quite happy with the way things are."

[And, the Big Sticks in "the industry" are doing an equally good job to make sure they whack any government hack who tries to get too close to their honey pots; see this and this, for instance.]

Credit-default swaps have become so useful in predicting takeovers that will hurt bondholders that a growing number of debt analysts are now monitoring derivatives prices as a way to watch for potential deals. [And, of course, to speculate on those deals, and this is one way the systemic risk gets skewed, as commented above.]

Private-equity firms this year have raised a record $300 billion of acquisition funds, meaning the credit-default swap market is on "a hair trigger now with LBO rumors,'' said Backshall. Almost any report of a company being a target of private-equity firms causes prices to "blow out," he said.

Thursday, October 26, 2006

Outrageous and condemnable, stupid and illogical, but free speech nonetheless

“When it comes to adultery, it’s 90 percent the woman’s responsibility. Why? Because a woman owns the weapon of seduction. It’s she who takes off her clothes, shortens them, flirts, puts on make-up and powder and takes to the streets, God protect us, dallying. It’s she who shortens, raises and lowers. Then, it’s a look, a smile, a conversation, a greeting, a talk, a date, a meeting, a crime, then Long Bay jail. Then you get a judge, who has no mercy, and he gives you 65 years.”

“But when it comes to this disaster, who started it? In his literature, writer al-Rafee says, if I came across a rape crime, I would discipline the man and order that the woman be jailed for life. Why would you do this, Rafee? He said because if she had not left the meat uncovered, the cat wouldn’t have snatched it.”

“If you get a kilo of meat, and you don’t put it in the fridge or in the pot or in the kitchen but you leave it on a plate in the backyard, and then you have a fight with the neighbour because his cats eat the meat, you’re crazy. Isn’t this true?”

“If you take uncovered meat and put it on the street, on the pavement, in a garden, in a park, or in the backyard, without a cover and the cats eat it, then whose fault will it be, the cats, or the uncovered meat’s? The uncovered meat is the disaster. If the meat was covered the cats wouldn’t roam around it. If the meat is inside the fridge, they won’t get it.”

“If the woman is in her boudoir, in her house and if she’s wearing the veil and if she shows modesty, disasters don’t happen.”

“Satan sees women as half his soldiers. You’re my messenger in necessity, Satan tells women you‘re my weapon to bring down any stubborn man. There are men that I fail with. But you’re the best of my weapons.”

“…The woman was behind Satan playing a role when she disobeyed God and went out all dolled up and unveiled and made of herself palatable food that rakes and perverts would race for. She was the reason behind this sin taking place.”

These, according to the Australian SBS news service, are the moral teachings of Sheik Taj Din Al Hilaly. It is stunning in its sexism, patrimony, denial of responsibility and graphic inhumanity. If mere speech should ever constitute a crime, this would be it.

But speech alone must never be made a crime, else we all be potential criminals. It is enough in this instance that the man shows himself to be the thoroughly uncivilized beast that his words bear out, and that we shun him for his gross misunderstanding of this age of reason. It just leaves poor old Guambat flabbergasted.

He may have apologised to women*, but not to Guambat. What he said is so beyond Guambat's worldview that the Sheik cannot ever undo the disgust that Guambat will forever feel for him. Unless he foresakes his ways, and not just his words, entirely, unconditionally and unswervingly.

*Sheik says sorry
"I unreservedly apologise to any woman who is offended by my comments," he said in a statement today. I had only intended to protect women's honour, something lost in The Australian presentation of my talk."

But Al Hilaly would not back away from his comments and said he was shocked by the way his sermon was interpreted.

"I would like to unequivocally confirm that the presentation related to religious teachings on modesty and not to go to extremes in enticements, this does not condone rape, I condemn rape and reiterate that this is a capital crime.

"Women in our Australian society have the freedom and right to dress as they choose, the duty of man is to avert his glance or walk away.

"If a man falls from grace and commits fornication then if this was consensual, they would be both guilty, but if it was forced, then the man has committed a capital crime.

"Whether a man endorses or not, a particular form of dress, any form of harassment of women is unacceptable."

A spokesman for Al Hilaly said the backlash and criticism had badly affected him and he had been depressed and confined to bed all day, breathing with the assistance of an oxygen tank.

The Arabic reports:
Hilali is the top cleric at Sydney's largest mosque, and is considered the most senior Islamic leader by many Muslims in Australia and New Zealand.

He said, "I would like to unequivocally confirm that the presentation related to religious teachings on modesty and not to go to extremes in enticements, this does not condone rape, I condemn rape.

He added, "Women in our Australian society have the freedom and right to dress as they choose, the duty of man is to avert his glance or walk away."

Australian Sex Discrimination Commissioner Pru Goward said Hilali's comment was an incitement to rape and added that Australia's Muslims should force him to stand down.

She said, "This is inciting young men to a violent crime because it is the woman's fault. It is time the Islamic community did more than say they were horrified. I think it is time he left."

Prime Minister John Howard condemned the comments. He said, "They are appalling and reprehensible comments. The idea that women are to blame for rapes is preposterous."

The demise of the oldest profession

Well, okay, not THE oldest profession, but one of them. Still, the headline did get your attention, neh?

Bond Traders Lose $1 Million Incomes on Transparency
By Mark Pittman and Caroline Salas

[T]ransparency has hastened the demise of one of Wall Street's oldest professions and a moneymaker since bonds financed the expansion of railroads into the American West 140 years ago.

Oct. 24 (Bloomberg) -- Richard Seifer's corporate bond traders each made as much as $1 million just three years ago, working from their office in a skyscraper 150 yards from the New York Stock Exchange.

Today his company is defunct, along with a generation of traders who were casualties of automation. Bond salesmen are becoming relics of a time when the debentures of American companies traded by appointment over the telephone.

"I used to make a good living, and then we were breaking even one month, losing money another," said Seifer, 61, whose offices in the old U.S. Express Building at 2 Rector Street are now occupied by companies that trade equities and derivatives.

Since July 2002, traders that buy and sell the $5.2 trillion of bonds issued by companies from automaker General Motors Corp. to computer company International Business Machines Corp. have been required to report sales to an NASD computer system that disseminates prices to anyone with Internet access. "Technology took a lot of the margin out of the business," said Richard duBusc, a Credit Suisse banker who started working on Wall Street 40 years ago when the NYSE closed on Wednesday afternoons to catch up on its paperwork. "Is that good or bad? It's bad if you're losing your job. It's good if you're paying a tighter bid-ask spread."

The U.S. Securities and Exchange Commission began to break down the secrecy of the market in 1992 because of concern high- yield, high-risk bonds were being sold based on inside information about future takeovers. Former SEC Chairman Richard Breeden's probe into junk-bond trading led to the creation of the Fixed Income Pricing Service.

President Bill Clinton's choice to succeed Breeden at the SEC, Arthur Levitt, wanted a database to collect the prices of trades on all registered corporate bonds. That system, now operated by the NASD, posts prices 15 minutes after trades occur. The system, called the Trade Reporting and Compliance Engine, is known by its acronym, Trace.

Breeden didn't return phone calls for comment. Levitt, who's a member of the board of directors of Bloomberg LP, parent of Bloomberg News, said the corporate bond market used to work like an "Oriental bazaar." "Transparency was at the core of all of its problems," said Levitt. "Our intent was to make the market fairer. The result was that it was also less expensive."

Now that fixed-income prices are available on the NASD's Web site, bond salesmen have lost their advantage.

"You're lifting the veil of ignorance," said Peter Campfield, head of taxable fixed-income trading at San Francisco- based Charles Schwab Corp., the biggest discount brokerage by assets, which trades an average of 500 corporate bonds a day. "Pre-Trace? It wasn't pretty. Price discovery was a challenge. You had to hunt and peck and dial numerous dealers to ascertain what a real market looked like."

UBS AG, Europe's biggest bank, fired between five and 10 bond traders in the U.S. to cut costs in its fixed-income unit, a person with knowledge of the decision said today. UBS combined some sales and trading functions, making the jobs redundant, said the person, who declined to be identified because the firings haven't been disclosed.

One-fourth of all corporate-bond traders, analysts, brokers and salesmen have lost their jobs in the past two years, according to Michael Karp, head of New York-based executive search and consulting firm Options Group. David Hendler, an analyst who covers financial firms for CreditSights Inc., estimates as many as 500 people work in corporate bonds at the five biggest firms.

Securities firms are jettisoning corporate bond staff because they're not generating as much money. Bond traders lost $1 billion in fees from mid-2002 to mid-2003, or about $2,000 a trade, according to a study to be published in the Journal of Financial Economics.

Since then margins have dropped even farther. Last month the average spread ranged from 55 cents per $1,000 in bonds for General Electric Co.'s 5 percent note maturing in 2007 to $2.10 for Johnson & Johnson's 3.8 percent note due in 2013, according to Trace.

"You have a market that was completely dark for 200 years and instead of letting a little bit of transparency in there, they just opened the windows completely and all the shades and everything, and it was complete sunshine," said Jeff Stambovski, a senior high-yield bond salesman at Miller Tabak Roberts Securities LLC in New York until he quit in 2004 with the advent of Trace.

Seifer's firm, housed in a neo-Renaissance building, had a 5,000-square-foot office that featured a putting green and a kitchen. After work, the traders often went to Harry's at Hanover Square for drinks with rival bond salesmen from such places as Paine Webber and Dean Witter, two firms that have been taken over.

"Maybe it was excessive, maybe we earned more than we should have," said Seifer, who now trades bonds at Aegis Capital Corp. in New York. "Some of us would walk away with upwards of $1 million, but we provided a service that large firms can't provide for accounts. What gives the NASD the right to say it's wrong to make $1 million trading bonds?"

The Trace system wasn't intended to drive anyone out of business or reduce the amount of money anyone makes, said Douglas Shulman, vice chairman of the NASD, formerly known as the National Association of Securities Dealers.

"Our goal was to improve the overall quality of the bond market, and we think we have achieved that," Shulman said. "Changing from an opaque market to a transparent market makes markets more efficient, and better for all players in the long run. But it's inevitable that some players are going to make less money than they did before Trace."

"There have been reduced transaction costs, but the question is, `Has it gone too far?"' said Randy Snook, executive vice president of the BMA and former co-head of debt syndicate at Goldman Sachs Group Inc. in New York.

The outlook is so gloomy that some banks don't even call it the corporate bond department anymore. Frankfurt-based Deutsche Bank AG and other firms renamed the business "credit," a nod toward faster growing derivatives markets.

The hot markets today carry higher margins, such as derivatives, or financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.

One type of derivative, credit-default swaps, allows investors to bet on the ability of companies to repay their debt without buying bonds. The market for credit-default swaps has more than doubled in the past year to cover $26 trillion of securities, according to the International Swaps and Derivatives Association.

"The more experienced corporate bond traders are being moved into the credit derivatives and structured credit space to handle increased demand for those products," Option Group's Karp said.

One of Seifer's former employees, Bill Fecci, who turned in his carpenter's union card 10 years ago to become a corporate bond salesman, is back to hanging sheetrock on weekends to make ends meet.

The 40-year-old broker at Seidel & Shaw LLC in New York says his job on Wall Street will be eliminated by year's end.

It's all just a small part of that great productivity drive the Greenspan so dearly loved. It also shows how much money people can make screwing other people simply because they can keep certain information secret or proprietary, like copyrights and patents, and thereby monopolise it.

Wednesday, October 25, 2006

Aboot time

It is actually terribly indecent of Guambat to make fun of the Canadian accent when it is, finally, a Canadian court that has expressed the same conclusion Guambat came to express a year ago. Guambat's sincerest apologies to all maple tree huggers.

Guambat first mentioned the redundancy of terrorism laws in "As I see it, John Howard is a terrorist", and then specifically spoke of his "spew... about the tendency of this government to make new laws where the old ones out to work" in "Dastards" in April 2006.

Now the Canadian courts are carrying the theme:

Rulings question obsession with terrorism
Crime is crime, courts are saying

Carefully, gradually, the courts are nibbling away at Canada's anti-terror laws. They did it last week when an Ontario Superior Court justice ruled that secrecy provisions of these laws contradict freedom of the press. They did it again yesterday when another Ontario judge declared the very definition of terrorist activity is unconstitutional.

They also call into question the current obsession with terrorism as a unique, world-defining evil.

Under the 2001 law, a terrorist activity is defined as an act of violent intimidation that is motivated by religion, politics or ideology. Yet, as Rutherford noted, the government has never been able to satisfactorily explain why mass murder carried out in the name of religion or ideology is somehow worse than mass murder carried out for reasons of profit or personal pathology.

At the time the law was passed, the then-Liberal government's only defence for this motive provision was that, without it, terrorist crimes would be no different from ordinary crimes.

Which, as Rutherford said, is precisely the point.

"The average person would be hard-pressed, I daresay, to recount much about the motives of some if not all of these notorious crimes (such as the 9/11 attacks)," he wrote. "Just what political, religious or ideological objectives or causes the perpetrators felt they were supporting with their actions is largely lost on the populations affected. And for good reason. It doesn't really matter."

What's more, he wrote, the decision to focus on religious or ideological motive will inevitably lead to a chilling effect on the right of Canadians to think and believe what they wish.
Ottawa must redefine 'terror'
[T]he judge did not throw out seven terrorism-related charges against Ottawa resident Mohammed Momin Khawaja, who has been implicated in a London bomb plot.

Instead, the judge severed the troublesome part - the motive clause - from the definition in the act, and would allow Khawaja’s trial, scheduled for January, to go ahead.

Judge Rutherford said “an inevitable impact” of the clause “will be to focus investigative and prosecutorial scrutiny on the political, religious and ideological beliefs, opinions and expressions of persons and groups both in Canada and abroad.”

Motive, used as an essential element for a crime, is foreign to criminal law, humanitarian law, and the law regarding crimes against humanity.

"While the hate motive may be an aggravating factor at sentencing, in the traditional criminal law, motive - the reasons `why’ someone commits a criminal act - neither establishes nor excuses a crime.”

Judging Canada's anti-terror laws
In much the same vein, Justice Lynn Ratushny ruled last week that the Security of Information Act — used by the Royal Canadian Mounted Police to harass Ottawa Citizen journalist Juliet O'Neill who wrote on the Maher Arar case — was so vague, sweeping and open to abuse that it violated the Charter's press freedom guarantee.

The courts are being vigilant in other ways, too. A judge recently barred Ottawa from trying to deport a terror suspect to a country where he might face torture. And other judges have ordered non-Canadian terror suspects who have been held for long periods without being charged or deported to be released into the community under strict supervision.

This judicial vigilance should alert Parliament in general and the Liberal leadership aspirants in particular to the need to bring sharper focus to national security and secrecy laws drafted or amended in haste, and to humanize procedures that flow from them. Courts are properly insistent that Ottawa preserve security without abandoning rights. Michael Ignatieff, Bob Rae, Stéphane Dion and Gerard Kennedy must discuss this because not everyone shares the courts' concern to get the balance right.

Just this week a Commons subcommittee reviewing the Anti-Terrorism Act five years after its adoption in 2001 issued a shallow and complacent interim report that urged Parliament to grant another five-year extension to its most contentious provisions, which have never even been used.

The panel urged that preventive arrest and investigative hearings be kept in force because Parliament has not had enough time to "fully assess their necessity and effectiveness." Conservatives and Liberals who dominate the panel agreed; NDP and Bloc Québécois members dissented.

This is nonsense. Since 9/11 police have successfully investigated and charged terror suspects without relying on these draconian measures. Rather than get another five-year lease on life, they should be retired.

Preventive arrest is particularly offensive. It empowers the police and the courts to arrest even Canadian citizens and hold them in jail for up to a year, without charging them, on mere suspicion that their detention might prevent a terror attack.

Investigative hearings are problematic as well. They force people to give evidence about imminent terror threats or past terror crimes, whether or not it incriminates them. On this point, the subcommittee conceded that the ordinary criminal law is adequate in dealing with old crimes. They urged that investigative hearings be used only when there's reason to fear a terrorist attack. But even here, the law's usefulness is suspect. Can terrorists be expected to tip judges off to attacks? That strains belief.

Rather than rubber-stamp this panel's breezy acceptance of draconian laws, extending them through 2011, Canada's MPs should be no less vigilant than our judges and retire these laws. They have not been needed to safeguard our society. Rather, they pose a threat to civil rights.

Tuesday, October 24, 2006

Ar-r-r-r-b, Matey

Aye, the Pirates, they be at it again. This story comes via Minyanville by Jeff Saut of Raymond James with an assist and inspiration from Dr. Robert McHugh. And with the begats done, on with the show:
[W]e still can’t shake the “eerie” feeling that something’s unnatural about the stock market’s action. Yeah, I know that when anyone gets “wrong footed” in the markets there is the tendency to make excuses and my firm has clearly been too cautious.... It’s also worth noting that we’re not conspiracy theorists....

Yet, there remains an eerie “bid” in the equity markets since those July lows.

For example, markets typically rally, then correct by about one-quarter to one-third of that rally’s point gain, before beginning another rally phase. After that phase, they again correct by one-quarter to one-third before re-rallying. This, however, has not been the case recently.

Indeed, every time it looked like the indices were about to correct, mysterious buyers materialized in the futures markets. Those “buyers” tend to widen the futures premiums so far above the cash markets that it attracts arbitrageurs. The arbs, in turn, short the futures and buy the appropriate baskets of stocks.

That operation allows the arbs to “lock in” the spread between the futures price and what they paid for the basket of stocks, assuring them a risk-less profit and, in the process, driving stocks higher.

Evidentially, we are not the only ones that have noticed this “eerie situation” for savvy seer Dr. Robert McHugh ( recently wrote, as paraphrased by me:
The rally since July has been almost entirely short-covering. We get one big move, about once a week, on buying panic, then no follow-up. . . . Get this: all of the progress of this three-month summer/autumn rally, all of it, occurred in only nine days of trading, and all but one of the nine was a short-covering rally. . . . Other than those nine trading days out of 63 since July 14th, the other 54 days of trading produced only 4% of the upside progress, and zero since July 19th. ZERO . . .!

While my firm can’t tell if those nine sessions were all “short covering,” we did take the time to check Dr. McHugh’s keen insights and found them to be right on point as can be seen in the chart below. Amazingly, those nine sessions [7-19 (+212); 7-24 (+182); 7-28 (+119); 8-15 (+132); 8-16 (+97); 9-12 (+101); 9-26 (+93); 10-4 (+123); 10-12 (96)] accounted for 1155 of the Dow’s 1200-point gain from the July lows.

Even more amazing is that on ALL of those nine trading days, according to our notes, showed that the aforementioned “mysterious” futures buyers were at work with the attendant arbs’ action.

When we combine this “mysterious” equity action with the “mysterious” re-balancing of Goldman Sach’s (GS) much institutionally indexed commodity index (GSCI), from a 7.3% gasoline weighting to 2.5% into the November elections, we find ourselves “mysteriously cautious.”

While we don’t trust it, nor understand it, in this business what you see is what you get!

Again this morning those “mysterious buyers” have shown up, lifting the S&P 500 pre-opening futures from down about three points early this morning to nearly even as of this writing. [The Dow busted up just over 100 points early in the session, and then just went sideways the rest of the session, just like the other 9 times.]

So, what seems to be happening is that some seriously big money is setting up some funds for an arbitration play.

The classic arbitration play is considered nearly riskless and, consequently, it doesn't generate a big profit margin, so you have to do it often and in mighty big licks to make any money out of it. For a tutorial and overview of the arbitrage game,
see this explanation from, and be sure to follow the links to the subtopics.

Arbitrage started out when traders began to perceive mispricing opportunities. But that is so yesterday. Now, the big funds create their own mispricing opportunities.

The thing to note about this surmised strategy is that it is directionally agnostic, in a sense. That is, to the extent that the arbitrage profit is locked in at a significant enough margin to matter, the arbitrageurs don't care which direction the market came from or is going. But the set-up for these (supposed) arbitrage plays does require a rapidly moving market to manufacture the arb-atunity. For "the boys" to push the market, they will try the path of least resistance. Since the move began off noteworthy lows, that path was up.

Their cause was aided by the large portion of the trading crowd that felt the markets were becoming overbought and "due" for a correction. Their short positioning was the fuel that kept the set-up going.

But at some point, the market will get high enough that profit takers and other sellers will step in, and the buyers that get sucked along by the buying strategy will thin out. Then the path of least resistance will be down.

And this is the interesting part. The set-up and arbitrage strategy will make money for the arbs even in a falling market, if it falls fast enough to set up the mispricing.

Therefore, if this really is big money setting up arbitrage opportunities, they can push the market back down just as far and just as fast, and with the same incentive and arbitrage opportunites, as happened on the upside.

There's just nothing that big money can't or won't try to do.

Where the rubber meets the road: The DJIA is tired

Guambat often finds the top performer page from MarketWatch to be an eye-opener. Somehow, it often seems to have a disconnect to the perceptions Guambat has about what is or isn't moving the market. (See, e.g., Lump It)

For instance, the top performing industry in the DJIA for the last 3 months has been "tires".
10 Best Performing Industries
Industry Name Percent Change (over time selected - 3 months)
DJ US Tires Index 33.45%
DJ US Toys Index 30.55%
DJ US Software Index 27.62%
DJ US Clothing & Accessories Index 25.32%
DJ US Computer Hardware Index 25.05%
DJ US Telecommunications Equipment... 24.80%
DJ US Automobiles Index 24.10%
DJ US Investment Services Index 22.52%
DJ US Apparel Retailers Index 22.35%
DJ US Technology Hardware & Equipme... 22.21%

10 Worst Performing Industries
Industry Name Percent Change (over time selected - 3 months)
DJ US Coal Index -21.99%
DJ US Gold Mining Index -20.19%
DJ US Platinum & Precious Metals In... -18.30%
DJ US Mining Index -17.70%
DJ US Oil Equipment & Services Inde... -12.95%
DJ US Oil Equipment, Services & Dis... -11.53%
DJ US Aluminum Index -11.45%
DJ US Exploration & Production Inde... -6.15%
DJ US Oil & Gas Index -4.55%
DJ US Trucking Index -4.13%

Now who wudda thunkit, particularly since one of the worst performing industrieswas trucking.

Also fascinating, particularly given the recent strength in the Aussie market, is the disappointing permormance of the metals, mining and energy industries, which round out the rest of the 10 worst industries. Just exactly how the Aussie market has managed to stealthily disconnect from the CRB commodities complex is a mystery to Guambat.

How to gain from their pain

The American Dream for many folks is turning into a nightmare as the home they tried to buy buries them in debt. But for the professional fund-slingers who trade on that debt, it's their wetdream.

There's no point repeating the stories that the US housing market is taking a caning, and that the ones taking the most severe beating are the ones who were late to the party and only just managed to get in at the top. The questions being asked are, is this the worst it will get? Is the housing market bottoming? Or is there more misery to come?

A Bloomberg report by Darrell Hassler and Hamish Risk suggests, based on an analysis of the price of risk in the subprime mortgage market, the housing crunch has more slump ahead of it. Following are bits and pieces from the report, rearranged and excerpted so that Guambat can follow the story:
The housing boom spawned new types of mortgages that allowed consumers to buy homes they may not have been able to afford otherwise.

About 18 percent of all mortgages issued in the first half of the year were to borrowers considered most likely to default, such as those with high credit-card balances, up from 2.4 percent in 1998, based on data from the Mortgage Bankers Association.

The ABX index, created by London-based Markit Group Ltd., measures prices of credit-default swaps based on the $565 billion of bonds secured by so-called subprime mortgages and home-equity loans.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on the ability of borrowers to repay debt. An increase in price indicates deterioration in the perception of credit quality; a decline suggests improvement.

Based on the index, it costs an investor $267,000 to protect $10 million of bonds against default for five years, up from $205,000 in August.

The increase in the index shows traders expect mortgage delinquencies and foreclosures to increase at a time when the number of homes for sale as measured by the National Association of Realtors is at a 13-year high. The percentage of home-loan payments more than 60 days delinquent rose to 7.23 percent in July from 5.9 percent a year earlier, the fastest rate of increase since 1998, Moody's Investors Service said Oct. 17.

"Delinquency trends and home prices" show a weakening real estate market, said Scott Eichel, head of credit trading for New York-based Bear Stearns & Co., the biggest underwriter of bonds backed by mortgages. "A lot of investors that have concerns about the housing market" are using the ABX index to speculate on a continued drop, he said.

"The unequivocally bad housing data we've seen" is prompting investors to seek to profit from potential declines in mortgage-backed securities, said Greg Lippmann, the head of asset-backed trading at Deutsche Bank AG in New York who helped create the ABX indexes in January. Contracts covering $5 billion of home-loan debt change hands daily, he said.

A Merrill Lynch & Co. index of debt securities derived from home-equity loans rated AA to BBB is having its worst month this year, falling 0.01 percent. They have returned 4.54 percent since the end of December. Banks and lenders such as Countrywide Financial Corp. in Calabasas, California, and Washington Mutual Inc. of Seattle typically take mortgages and package them into bonds for sale to investors. The bonds are then divided into pieces of varying risk.

Most credit-default swap trading is in securities rated BBB or BBB- because they are the most volatile and have the greatest chance to be profitable, said Jack McCleary, head of asset-backed trading for UBS AG in New York.

Subprime mortgages with those credit ratings historically have had losses of about 5 percent of the loan value, McCleary said. Some investors are betting that losses may increase to 12 to 14 percent in the next three years, which could exponentially increase value of credit-default swaps, he said.
Housing in U.S. Poised to Worsen, Derivatives Show

See An arm and a leg

AFTER THOUGHTS: It may be that focusing on the subprime market will lead to a wrong conclusion about the state of health of the housing market as a whole. In the overall cycle, it is intuitive that the subprime sector not react in absolute synch tith the rest of the market; neither is it the most significant part of the housing market. But it is important at the margin and, while it is not tremendously large compared to the whole market, neither is it insignificant in absolute terms. Perhaps it is just the "grain of salt" that Economonitor consumes along with his "consensus".

Saturday, October 21, 2006

Mon dieu! How Totally AWB and BHP!

Total backs chief on Iraqi oil money
The French oil company Total on Friday rallied to the defense of its designated chief executive, Christophe de Margerie, after he was taken into custody and questioned about possible illegal payments for Iraqi oil.

"The judge has to prove that he is or is not guilty, and we think he's not guilty," said a Total spokeswoman, Catherine Enck. "Regarding the succession procedure, nothing will change."

She said that Total remained scheduled to elevate Margerie, who is head of exploration and production, to the top job in February.

Margerie, 55, and a former Total executive, Bernard de Combret, 63, were released Thursday on bail after being held for 48 hours. The two men also underwent questioning by Judge Philippe Courroye, who is investigating possible kickbacks linked to the oil-for-food program in Iraq that was supervised by the United Nations.

n France, a former interior minister, Charles Pasqua, is among those already under formal investigation.

Enck said Total had negotiated with Saddam to develop the oil-rich Majnoon and Nahr Umar fields in southern Iraq, the site of the world's third- largest oil reserves after Saudi Arabia and Iran.

She insisted, however, that the company had never signed contracts with Saddam's regime.

"Before the embargo, when Elf and Total were separate, each had a long history of cooperation with Iraq and good knowledge of resources," Enck said, adding that development of the fields could only have gone ahead once the sanctions were lifted.

"The group has never purchased, either directly or indirectly, oil that has been smuggled illegally from Iraq," Total said in a statement on its Web site.

A Citigroup analyst, Jonathan Wright, brushed off the seriousness of the development to Total, writing in a research note that he expected business as usual at the company.

But anti-corruption campaigners said the move against Margerie could be a sign of determination among the authorities in some countries to clean up the way business is done in the developing world - and in particular extractive industries like oil, gas and mining.

"What has happened clearly shows that some countries are working on these issues regarding oil sales, perhaps a bit silently, and in the shadows," said Patrick Moulette, the head of the anti- corruption division of the Organization for Economic Cooperation and Development in Paris. "But the work continues."

Sarah Wykes, an official at Global Witness, a group based in London that seeks to uncover corruption in the natural resource trade, said the sale of resources like oil was often a way for intermediaries and corrupt officials to make money.

"This same kind of architecture of corruption is being replicated," said Wykes, referring to similar problems in parts of Africa. "We are very interested in finding out whether Judge Courroye will be successful because then I would hope that there will be some more deterrents to the way these deals are done."

Total traces its roots to the creation in 1924 of the Compagnie Française des Pétroles, one of the original shareholders in the Iraq Petroleum Co., which discovered an oil producing field near Kirkuk, Iraq, in 1927.

A string of French governments also have had a long history of close ties with Iraq, and French companies have sold Iraqis military equipment, pharmaceuticals and automobiles.

Enck, the Total spokeswoman, said conditions in Iraq were currently not safe enough to do business there. But she said the company "would like to have partnership and cooperation when the security situation [and the US overlords] allows."

Alertnet via Al-Jazeerah has its own particular view of Iraq oil.
Bush's Petro-Cartel Almost Has Iraq's Oil, Part II
With 140,000 U.S. troops on the ground, the largest U.S. embassy in the world sequestered in Baghdad's fortified "Green Zone" and an economy designed by a consulting firm in McLean, Va., post-invasion Iraq was well on its way to becoming a bonanza for foreign investors.But Big Oil had its sights set on a specific arrangement -- the lucrative production sharing agreements that lock in multinationals' control for long terms and are virtually unheard of in countries as rich in easily accessible oil as Iraq.
The occupation authorities would have to steer an ostensibly sovereign government to the outcome they desired, and they'd have to overcome any resistance that they encountered from the fiercely independent and understandably wary Iraqis along the way. Finally, they'd have to make sure that the Anglo-American firms were well-positioned to win the lion's share of the choicest contracts.

... In this case, massive, crushing debt run up by a dictator who treated himself and his cronies to palaces and other luxuries, spent lavishly on weapons for Iraq's war with Iran -- fought in part on behalf of the United States -- and owed Kuwait billions of dollars in reparations for the 1990 invasion.

To put Iraq's foreign debt in perspective, if the country's economy were the size of the United States', then its obligations in 2004, proportionally, would have equaled around $55 trillion, according to IMF figures (and that doesn't include reparations from the first Gulf War).

The largest chunk of debt, $120 billion, was owed to the Paris Club, a group of 19 industrialized nations. Baker negotiated a deal whereby the Paris Club would forgive 80 percent of Iraq's debt, but the catch -- and it was a big one -- was that Iraq had to agree to an economic "reform" package administered by the International Monetary Fund, an institution dominated by the wealthiest countries and infamous across the developing world for its painful and unpopular Structural Adjustment Protocols.

The debt would be written off in stages; 30 percent would be cancelled outright, another 30 percent when an elected Iraqi government accepted an IMF structural reform agreement and a final 20 percent after the IMF had monitored its implementation for three years. This gave the IMF the role of watchdog over the country's new economy, despite the fact that its share of the country's debt burden was less than 1 percent of the total.

Among a number of provisions in the IMF agreement, along with privatizing state-run companies (which resulted in the layoffs of an estimated 145,000 Iraqis), slashing government pensions and phasing out the subsidies on food and fuel that many Iraqis depended on, was a commitment to develop Iraq's oil in partnership with the private sector.

In an investigation for the Nation, Naomi Klein discovered that Baker had pursued his mission with an eye-popping conflict of interest. Klein discovered that a consortium that included the Carlyle Group, of which Baker is believed to have a $180 million stake, had contracted with Kuwait to make sure that the money it was owed by Iraq would be excluded from any debt-relief package. When Baker met with the Kuwaiti emir to beg forgiveness for Iraq's odious debt, he had a direct interest in making sure he didn't get it.

Another major creditor was Saudi Arabia. The Carlyle Group has extensive business dealings with the kingdom and Baker's law firm, Baker Botts, was representing the monarchy in a suit brought by the families of the victims of 9/11.

Phillip Carroll, a former chief executive with Royal Dutch/Shell and a 15-member "board of advisors" were appointed to oversee Iraq's oil industry during the transition period. According to the Guardian, the group "would represent Iraq at meetings of OPEC." Carroll had been working with the Pentagon for months before the invasion -- even while the administration was still insisting that it sought a peaceful resolution to the Iraq crisis -- "developing contingency plans for Iraq's oil sector in the event of war." According to the Houston Chronicle, "He assumed his work was completed, he said, until Defense Secretary Donald Rumsfeld called him shortly after the U.S.-led invasion began and offered him the oil adviser's job." Carroll, in addition to running Shell Oil in the United States, was a former CEO of the Fluor Corp., a well-connected oil services firm with extensive projects in Saudi Arabia and Kuwait, and at least $1.6 billion in contracts for Iraq's reconstruction. He was joined by Gary Vogler, a former executive with ExxonMobile, in Iraq's Office of Reconstruction and Humanitarian Assistance.

After spending six months in the post, Carroll was replaced by Robert E. McKee III, a former ConocoPhillips executive. According to the Houston Chronicle, "His selection as the Bush administration's energy czar in Iraq" drew fire from congressional Democrats "because of his ties to the prime contractor in the Iraqi oil fields, Houston-based Halliburton Co. He's the chairman of a venture partitioned by the … firm."

The administration selected Chevron Vice President Norm Szydlowski to serve as a liaison between the Coalition Provisional Authority and the Iraqi Oil Ministry. Now the CEO of the appropriately named Colonial Pipeline Co., he continues to work with the Iraq Energy Roundtable, a project of the U.S. Trade and Development Agency, which recently sponsored a meeting to "bring together oil and gas sector leaders in the U.S. with key decision makers from the Iraq Ministry of Oil."

Terry Adams and Bob Morgan of BP, and Mike Stinson of ConocoPhillips would also serve as advisors during the transition.

After the CPA handed over the reigns to Iraq's interim government, the embassy's "shadow" oil ministry continued to work closely with the Iraqis to shape future oil policy. Platform's Greg Muttit wrote that "senior oil advisers -- now based within the Iraq Reconstruction Management Office (IRMO) in the U.S. Embassy ... included executives from ChevronTexaco and Unocal." After the handover, a senior U.S. official said: "We're still here. We'll be paying a lot of attention, and we'll have a lot of influence. We're going to have the world's largest diplomatic mission with a significant amount of political weight."

The majors have also engaged in good, old-fashioned lobbying. In 2004, Shell advertised for an Iraqi lobbyist with good contacts among Iraq's emerging elites. The firm sought "a person of Iraqi extraction with strong family connections and an insight into the network of families of significance within Iraq." According to Platform, just weeks after the invasion, in a meeting with oil company execs and Australian Foreign Minister Alexander Downer in London, former British Foreign Secretary Sir Malcolm Rifkind promised to personally lobby Dick Cheney for contracts on behalf of several firms, including Shell.

Meanwhile, major oil firms were positioning themselves so that they'd have the best contacts in the new government. According to the Associated Press, "The world's three biggest integrated oil companies" -- BP, ExxonMobil and Royal Dutch/Shell -- "struck cooperation or training deals with Iraq" in 2005. "It's a way to maintain contact and get the oil officials to know about them," former Iraqi Oil Minister Issam Chalabi told the AP. And it seems to have worked; in May, Iraq's current oil minister, Husayn al-Shahristani, said that one of his top priorities would be to finalize an oil law and sign contracts with "the largest companies."

Washington has its hands all over the drafting of that law. Early on, in 2003, USAID commissioned BearingPoint, Inc. -- the new name for the scandal-plagued Arthur Anderson Consulting -- to submit recommendations for the development of Iraq's oil sector. BearingPoint was the firm that designed the country's economic transformation under a previous USAID contract, so it was no surprise that its report reinforced the preference for PSAs that "everybody [kept] kept coming back to" during meetings of the State Department's "Future of Iraq Project."

In February, just months after the Iraqis elected their first constitutional government, USAID sent a BearingPoint adviser to provide the Iraqi Oil Ministry "legal and regulatory advice in drafting the framework of petroleum and other energy-related legislation, including foreign investment." According to Muttit, the Iraqi Parliament had not yet seen a draft of the oil law as of July, but by that time it had already been reviewed and commented on by U.S. Energy Secretary Sam Bodman, who also "arranged for Dr. Al-Shahristani to meet with nine major oil companies -- including Shell, BP, ExxonMobil, ChevronTexaco and ConocoPhillips -- for them to comment on the draft."

All of these points of pressure are only what we can see in the light of day.

Tracback BHP's oil interests in Iraq and AWB's involvment in the Oil for food program in these Guambat posts.

House of mirrors

When Guambat was only little, he quite amused himself in the House of Mirrors at the local fun park. Guambat isn't sure they have those anymore - fun parks or houses of mirrors. But is was funny looking into those mirrors that tended to reflect light in a different way than simply front-on and see how "distorted" a Guambat can look from the various angles. Same Guambat, just different perceptions.

Watching America is something like that. It's a news aggragater that (probably unscientifically and with a bias of one kind or other -- who cares) captures news items from around the world that perceive America in ways Americans probably do not perceive themselves.

It can be embarrassingly accurate, like looking over your shoulder at yourself in the mirror and seeing toilet paper trailing out of your knickers, or wonderfully flattering, like the one that makes you taller and thinner, or amusingly wide of the mark.

From the last category, take a moment to watch this video clip from the Middle East Media Reseach Institute, which discusses the huge excess balance of females over males in America (??) and suggests what America needs is a dose of polygamy: "Indian Imam Dr. Zakir Naik: Polygamy Is the Solution to Homosexuals and the Surplus of Women in New York and around the World".

It's all very useful and instructive as we try to make ourselves understood in the world, and find our place in the global social network. Globablization is, after all, more than a simple marketing exercise by big merchants and bankers, and we cannot let them hijack the stage. It is more importantly a socializing event that results from building roads to the encircling villages.