Top 10 at 10: ACT's Moratorium move; Westpac's Blue Chip exposure; Roubini on gold; Porsche's Cayenne debt debacle
18th May 09, 8:50am
Here's my Top 10 links at 10am. I welcome your suggestions in the comments below. Friday's version got a fantastic response. Many thanks. I'm sprinkling Dilbert through again because Scott Adams has got a great run on. 1. Here's some graphic proof that house prices are overvalued in my NZHerald blog. 2. ACT MP John Boscawen is proposing a private member's bill that would force any finance company wanting to vary its moratorium to go to court to appoint an independent expert for a review, the Sunday Star Times' Rob Stock reports.
"What I was saying was that there are a number of moratoriums that were passed last year, where companies put a lot of effort presenting their case to investors, even hiring PR firms to present them in the best light to get as much support as possible," Boscawen said of a speech he made in parliament last week. "Already we are hearing that the property market is going downhill and some firms are struggling to make their projections and may need to go back to their bondholders to seek to vary their moratoriums," he said. "What I am saying is I believe parliament should pass a law that requires those companies to go first to the court." He told parliament he believed some of the projections made to persuade investors were "overly optimistic and unrealistic". That belief is based on his private investigations into finance firms, investigations that have led to talks with many former finance company insiders, large borrowers, investors, lawyers, and consumer advocates.3. Greg Ninness at the Sunday Times reports that more than NZ$500 million of bank loans and finance company loans are exposed in 5 projects linked to Blue Chip deals. Westpac is the most exposed, he reported.
The developments have now been completed, but many of the investors who signed contracts to purchase the apartments are refusing to settle. Investors in four of the projects are currently taking action through the High Court, seeking to have their contracts voided, while a fifth development, which is not part of that court action, has also been affected by buyers refusing to settle. That has left the bank and finance company loans over the projects in limbo, until such time as the original investors settle their deals or the apartments are sold to new buyers. The problems are unlikely to be resolved quickly. The complexity of the current court action by Blue Chip investors means a decision may not be handed down until October and the possibility of appeals means it could be next year before there is a final outcome. The biggest funder involved is Westpac, which provided the bulk of the funding on all five projects. It holds first mortgage securities for up to $351m over the five developments, although it is not known how much of that may actually be owed to the bank. The balance of the finance was provided by finance companies Babcock & Brown, Bridgecorp, Lombard, Boston and Hanover, all of which have since struck serious financial difficulties. Westpac was one of the biggest providers of development finance during the property boom, providing first mortgage loans on a wide variety of developments, often in conjunction with second-tier financiers such as Babcock & Brown.4. The Dominion Post BusinessDay led its business section on Saturday with a very large and ugly cat to illustrate its story about bank profits (Fat Cats...geddit...). The headline screamed "Creaming it", but the article itself from Roeland van den Bergh was more balanced and interesting. This looked to me like an editor's question at the beginning of the week that was turned into a design concept. By the end of the week the story didn't quite match the design, but they pushed ahead anyway. Fair enough. It happens. But it reinforces again that it's worth reading the full article and knowing that the headline writer and the reporter on a newspaper are often not the same person and may not have actually spoken to each other. Curiously, the headline in Stuff was a bit fairer. "Are Banks Creaming it?" 5. Ambrose Evans-Pritchard at The Daily Telegraph cites one adviser to the US government's toxic bond campaign saying the plan is hopeless and will enrich speculators at the US taxpayers's expense. A little postscript. Patterson is now denying he said these things. But I'd trust Evans-Pritchard to get it right.
"The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside," said Mark Patterson, chairman of MatlinPatterson Advisers. The comments are likely to infuriate Tim Geithner, the US Treasury Secretary, because MatlinPatterson took advantage of the TARP's matching funds to buy Flagstar Bancorp in Michigan. His confession appears to validate concerns that the bail-out strategy is geared towards Wall Street. Under the convoluted deal agreed earlier this year, MatlinPatterson has come to own 80pc of the shares while the US government has ended up with under 10pc. Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable. "It's a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they're doing this for the greater good of society," he said, speaking at the Qatar Global Investment Forum. Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. "At least the British are not hiding the bail-out," he said. Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression. "The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed's balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road," he said6. Just to show you what happens when a banking system is frozen, here's a report from the Irish Times showing more than 60% of requests for loans by small businesses were rejected in the last 3 months. New Zealand's banking system is not doing so badly. HT Credit Writedowns. 7. Nouriel Roubini opines in the New York Times that eventually the Chinese Renminbi will challenge the US dollar for supremacy. Here's a taste.
Traditionally, empires that hold the global reserve currency are also net foreign creditors and net lenders. The British Empire declined "” and the pound lost its status as the main global reserve currency "” when Britain became a net debtor and a net borrower in World War II. Today, the United States is in a similar position. It is running huge budget and trade deficits, and is relying on the kindness of restless foreign creditors who are starting to feel uneasy about accumulating even more dollar assets. The resulting downfall of the dollar may be only a matter of time. But what could replace it? The British pound, the Japanese yen and the Swiss franc remain minor reserve currencies, as those countries are not major powers. Gold is still a barbaric relic whose value rises only when inflation is high. The euro is hobbled by concerns about the long-term viability of the European Monetary Union. That leaves the renminbi. China is a creditor country with large current account surpluses, a small budget deficit, much lower public debt as a share of G.D.P. than the United States, and solid growth. And it is already taking steps toward challenging the supremacy of the dollar. Beijing has called for a new international reserve currency in the form of the International Monetary Fund's special drawing rights (a basket of dollars, euros, pounds and yen). China will soon want to see its own currency included in the basket, as well as the renminbi used as a means of payment in bilateral trade.8. Singapore's government owned investment fund Temasek has crystallised a US$4.8 billion loss by selling its 3.8% stake in Bank of America, apparently before the shares rebounded somewhat, Bloomberg reports. Temasek is run by Ho Ching, who is married to Singapore's Prime Minister Lee Hsien Loong, who is the son of the funder founder of Singapore Lee Kuan Yew and the brother of former SingTel CEO Lee Hsien Yang, who has just been appointed to the ANZ board. The Lee family is very talented. 9. A fascinating little history lesson from renowned popular historian Simon Schama at the FT.com on America's Phobia with the banks. He looks at length at the debate over the gold standard and the level of distrust in the past about banks and money. 10. Here's some more fallout from the Credit Crunch. Porsche took on too much debt in an attempt to buy control of Volkswagon. Now that debt is a problem for Porsche and the warring Piech and Porsche families are having to make peace to avoid disaster. The trouble is they hate each other's guts (that's kiwi for not liking each other). Here's the Bloomberg report of the latest break-down in merger talks. There troubles all started with the Porsche Cayenne, one of the most wasteful and pointless vehicles ever built. Porsche believed it needed control of VW because VW produced many of the parts etc for this 'car', which is co-produced with the VW Touareg. The usual debt-funded empire building disaster story with a twist. A niche sports car maker is being punished for believing it could extend its brand to a truck and take advantage of rich, fat Americans' desire to drive something flash they could fit into. Just stupid.