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Top 10 at 10: Italy warns Britain on debt; Lehman's Repo 105 scandal; Dilberts

Top 10 at 10: Italy warns Britain on debt; Lehman's Repo 105 scandal; Dilberts

Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below or please send suggestions for Tuesday’s Top 10 at 10 to bernard.hickey@interest.co.nz Dilbert.com 1. Brace for it - Ambrose Evans Pritchard at The Telegraph does his patriotic duty and points out a warning about British debt from an Italian bank. Mama Mia! What has the world come to. HT Andrew Wilson via email.

UniCredit has alerted investors in a client note that Britain is at serious risk of a bond market and sterling debacle and faces even more intractable budget woes than Greece. "I am becoming convinced that Great Britain is the next country that is going to be pummelled by investors," said Kornelius Purps, Unicredit 's fixed income director and a leading analyst in Germany. Mr Purps said the UK had been cushioned at first by low debt levels but the pace of deterioration has been so extreme that the country can no longer count on market tolerance. "Britain's AAA-rating is highly at risk. The budget deficit is huge at 13pc of GDP and investors are not happy. The outgoing government is inactive due to the election. There will have to be absolute cuts in public salaries or pay, but nobody is talking about that," he told The Daily Telegraph. "Sterling is going to fall further over coming months. I am not expecting a crash of the gilts market but we may see a further rise in spreads of 30 to 50 basis points."
2. It's all coming out now - Details about how Lehman misled investors in the final few months before the collapse are now coming out. It's all about a tool called a 'Repo 105.' NPR has a useful explanation of how Lehman used the Repo 105. Essentially Lehman covered up US$50 billion of debt from investors, regulators and counterparties. How many other US investment banks did this? HT Gertraud via email. Ernst and Young are in the firing line on this one. Will it turn into E&Y's version of Anderson and Enron? Here's the full Lehman Brother Chapter 11 Examiner's report, which has plenty of of juicy details.
Lehman accounted for Repo 105 transactions as “sales” as opposed to financing transactions based upon the overcollateralization or higher than normal haircut in a Repo 105 transaction. By recharacterizing the Repo 105 transaction as a “sale,” Lehman removed the inventory from its balance sheet. Lehman regularly increased its use of Repo 105 transactions in the days prior to reporting periods to reduce its publicly reported net leverage and balance sheet. The Examiner described to Secretary Geithner how Lehman used Repo 105 transactions to remove approximately $50 billion of liquid assets from the balance sheet at quarter-end in 2008 and explained that this practice reduced Lehman’s net leverage.
3. Here's a Dylan Ratigan video from MSNBC on the Lehman Repo 105 issue. HT Troy

Visit msnbc.com for breaking news, world news, and news about the economy

4. The Chinese boom - Charles Hugh Smith from DailyFinance.com has a useful overview of the real estate boom in China that is being driven by local governments targeting growth figures. HT Hugh
The key difference between China's current real estate bubble and the U.S. bubble that popped in 2007 is this: In the U.S., it was individuals and lenders who made overleveraged, speculative bets via subprime mortgages. In China, explained Northwestern University researcher Victor Shih to NPR, the leveraged debt fueling the speculation comes from local governments, which have borrowed trillions of dollars worth of funds from China's banking system to develop real estate projects in their jurisdictions. Shih has found that almost 50% of the Shanghai government's revenues come from land sales, and local governments have come to rely on this income. "Local governments now are forming their own real estate developers and would actually buy land from themselves. As this becomes more common -- and it is becoming very, very common -- then local governments have a high stake in maintaining and increasing the value of real estate in their own jurisdiction," Shih observed.
5. Tracking the toxicity - NPR's Planet Money is an excellent example of public service journalism funded by the public. I think it's a great model for Radio New Zealand (hint there is sponsorship involved) Here NPR have done something very clever. Their journos bought a toxic mortgage security to watch up close and personal what was happening inside it. There's a great interactive chart to go with it. HT Troy Barsten via email. Dilbert.com 6. Ominous noises - The noise in the propaganda war between America and China over China's peg to the US dollar is getting a little ominous. Some are beginning to worry about it turning into the sort of trade war that deepened the Depression during the 1930s. A trade war between America and China would be the last thing the world (particularly Australia and NZ) would want. The FT reports on the growing tension. The key moment will be whether the US labels China a 'currency manipulator'. The deadline for this is mid-April.
Wen Jiabao, Chinese premier, has warned other countries that pressing China on currency policy amounts to protectionism and insists that the renminbi was not undervalued. Mr Wen said on Sunday that China would continue to reform its currency system. But he pushed back strongly against international pressure on the level of the exchange rate, which is becoming a flashpoint in relations with the US. Mr Wen said he understood that countries wanted to increase exports but said they should not resort to what he described as protectionism. “What I don’t understand is depreciating one’s own currency, and attempting to pressure others to appreciate, for the purpose of increasing exports. In my view, that is protectionism,” Mr Wen said. China’s currency has been in effect pegged to the US dollar since mid-2008, which Beijing argues brought stability to the international economy during the financial crisis. However, international pressure on China to strengthen the renminbi is rising, especially from the US where the Treasury department must decide by mid-April whether to label China a “currency manipulator”.
7. Trojan Horse of Debt - This New York Times piece on the debt problems of Greek mobile phone company Wind Hellas is an interesting insight into the world of private equity. As the tide goes out many of those crazy debt-fueled deals done from 2005 to 2007 are now starting to unravel and the recriminations are starting. There's a few of these doing that here in NZ. Mediaworks and Yellow Pages (see below) are just two.
A once-healthy company that is Greece’s third-largest mobile phone operator, Wind Hellas was taken over in a 2005 buyout by two global private equity giants: Apax Partners out of London and the Texas Pacific Group, led by David Bonderman. The two firms larded Wind Hellas with debt before selling it off just two years after they bought it. Wind Hellas filed for the British equivalent of bankruptcy protection last fall, and now some investors are trying to figure how such a promising enterprise went aground. Bertrand des Pallières, the chief executive of SPQR Capital, a London investment firm, was one of the larger bondholders in Wind Hellas. He says the decision by Apax and T.P.G. to heap debt onto the company while simultaneously extracting so much cash from it ultimately contributed mightily to its woes. “The private equity industry always pitches how constructive it is as an investor force to create jobs and growth,” says Mr. des Pallières. “But there are private equity funds that get rich by breaking companies and making others poor — whether they are creditors, states or employees.” The company had little debt — 166 million euros — before the buyout and boasted shareholder’s equity of almost 500 million euros. Then Apax and T.P.G. came calling. Major banks, including JPMorgan Chase, Deutsche Bank, Lehman Brothers and Merrill Lynch, financed Project Troy. Apax and T.P.G. put approximately 450 million euros into TIM Hellas as equity, but this money was returned to the firms less than a year later after the phone company issued a round of debt. The private equity firms also received consulting fees worth 2 million euros per year, company filings show. In addition, Apax and T.P.G. received 15 million euros for “business advisory services rendered in connection with debt placement and preparation of business and strategic plans,” according to the company’s 2005 annual report.
8. Lo and behold - Along the same theme, Tim Hunter at the Sunday Star Times reports that New Zealand's own Yellow Pages is essentially in the hands of its bankers after the private equity guys that bought it off Telecom overpaid and loaded it up with too much debt. Thank goodness the retail bond issue that Yellow Pages tried to get away didn't get off the starters block. Telecom's decision to flick it looks to have been Theresa Gattung's best decision.
"It's clear the value's been so buggered they can't really recapitalise the business," said one source. A potential outcome involves the banks taking control of the business by appointing a receiver, who would try to recover money through a sale of YPG. Losers in that scenario could be the private equity investors led by CCMP Capital Asia (now known as Unitas Capital) who include a pension fund for teachers in Ontario, and holders of about $307m of subordinated debt. The failed (retail) bond offer left about $300m of subordinated debt in the hands of corporate financiers – a silver lining in the cloud, said one commentator. "The big positive is they got stuck with it and not the retail market."
Dilbert.com 9. Yay for the Aussies - It seems one of the few regulators not to be fooled by Lehman's Repo 105 was the Reserve Bank of Australia, according to Tyler Durden at Zerohedge, citing the Examiner's report.
One central bank, half way around the world, knew all too well what was going on at Lehman - the Reserve Bank of Australia. Which is why we nominate the RBA's chair, Glenn Stevens, to be direct supervisor of the entire ungodly and corrupt mess that is Wall Street (and to make Ben Bernanke his butler)
10. Totally irrelevant video - This is a version of the infamous Hitler rant/speech video that talks about the Wellywood. I've seen this video done so many times that I thought I wouldn't laugh. But I did. Hilarious for those who have gone through Wellington Airport.

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