Here are my Top 10 links from around the Internet at 10 past midday, brought to you in association with New Zealand Mint for your reading pleasure.
I welcome your additions and comments below, or please send suggestions for Thursday's Top 10 at 10 via email to bernard.hickey@interest.co.nz.
I'll pop any surplus suggestions I get into the comment stream.
1. 'He was simply focused on the idea that land prices would go up over the next year or two' - Former Westpac lending manager David Little has told the High Court in Auckland about Allan Crafar's attitude to expansion and borrowing more money against his cows to buy yet more land. BusinessDay's William Mace has the story.
This is all about the cows that were 'stolen' when the receivership was announced. Remember the cows that were transported down south in the dead of night?
It turned out Crafar had mortgaged the cows a few times to do a land deal at the end of the boom. He hadn't spoken to the bank with the first security...Sigh...And the banks lent this chump NZ$200 million to start with.
And farmers wonder why now they find it difficult to extract money from bankers...
Mr Little said he told Allan Crafar that he "thought [Crafar Farms] were becoming stretched and they should consolidate" at the May 2008 meeting.
Mr Crafar scratched his head and jokingly asked what the word meant. Mr Little said he felt Mr Crafar "did not have his ducks in a row" to complete all the transactions and therefore asked for consolidation.
He said the banks were concerned that Crafar Farms was selling cattle in order to buy more land, and that this could affect the group's control over stock which were the principal revenue generator for the companies. Instead Mr Crafar "was simply focused on his view that land prices were going to go up over the next year or two", he said.
2. 'He's onto it' - These comments from National Australian Bank's head of Business Banking Joseph Healy via Bloomberg about the Australian banks' preference for housing lending could easily be applied here. They're instructive.
Australia’s economic growth may be eroded by local banks’ preference toward household lending over business loans, a National Australia Bank Ltd. executive said.
“Any bias of one asset class over another has potentially long-term harmful consequences, particularly if that means there is less credit being made available to the business sector,” Joseph Healy, the bank’s business banking chief, told a finance conference in Sydney today.
Australia’s ability to tap foreign investors for funding may also weaken in coming years as economic growth recovers in other developed markets, Healy said. If local credit growth rebounds to an annual pace of 8.5 percent, new wholesale term debt issuance will need to rise A$320 billion ($313 billion) by 2014 from an estimated A$140 billion this year, UBS AG analysts said in April. “We should recognize that the Australian banks today are amongst the largest issuers” on international debt markets, Healy said.
“There is a risk that the appetite from the international investors for Australian bank paper could have a natural limit, notwithstanding our very strong credit ratings.”
3. The gall of them - The WSJ reports Wall St's bankers are back paying themselves record bonuses with government-guaranteed profits while the rest of America labours through a new depression. Why aren't there riots in America? Maybe one day the masses will understand.
I get the feeling they're beginning to get a bit of a sniff. The big banks are about to pay employees US$144 billion.
Pay on Wall Street is on pace to break a record high for a second consecutive year, according to a study conducted by The Wall Street Journal. About three dozen of the top publicly held securities and investment-services firms—which include banks, investment banks, hedge funds, money-management firms and securities exchanges—are set to pay $144 billion in compensation and benefits this year, a 4% increase from the $139 billion paid out in 2009, according to the survey.
Compensation was expected to rise at 26 of the 35 firms. The data showed that revenue was expected to rise at 29 of the 35 firms surveyed, but at a slower pace than pay. Wall Street revenue is expected to rise 3%, to $448 billion from $433 billion, despite a slowdown in some high-profile activities like stock and bond trading.
4. Something ugly is brewing in Ireland - The FT.com points out (via ZH) that Ireland may be about to do the unthinkable: forcing the senior debt holders of its bankrupt banks to take a loss. This has been verboten until now. Hang on to your hats if this is confirmed or gets a run on.
"Ireland has opened the door to a renegotiation with senior bondholders of its two nationalised banks despite previously opposing any such move for fear of drawing the wrath of creditors around the world."
This would be a huge change in strategy, and if effectuated, would mean that Ireland (for lack of an alternative) would be forced to do what the US was terrified of doing when Citi, Fannie and all the other still-bankrupt companies were on the brink. While the US never impaired the senior debt, for fear of enraging creditors (mostly China) who would have experienced their first capital loss on US-debt, it seems the dominoes are about to topple for Ireland as Irish eyes are about to stop smiling and take their bitter medicine, which our own Uncle Sam will avoid until well past the bitter end.
Alternatively, this would also mean the end of the strong EUR regime once again, as the ping-ponging burden of proof of solvency shifts once again to Europe.
5. Why Australia's house prices are a bubble - Leith van Onselen, an investment banker in Australia, writes a great blog on house prices.
This missive is packed full of juicy charts and detail. Read it and you'll at least question the BIS Shrapnel forecast today of 9%-20% rise in Australian house prices over the next three years. Check out the chart below showing New Zealand's household debt to disposable income being higher than the US, Canada and Germany. Our household debt is actually higher than Japan's was before it went into its couple of lost decades.
The bottom line is that the downside risks to Australian house prices far outweigh the potential upside.
Housing is simply the wrong asset, at the wrong price, at the wrong time.
6. Currency wars bulletin board - Thailand is set to impose a Brazilian style tax on foreign investments in local bonds as the Currency Wars continue to cause nervous reactions on global currency markets, except for New Zealand, of course. Reuters has the report.
The G20 meeting in Seoul next month looks crucial.
Asian authorities anxious about currency appreciation moved to stem foreign capital inflows on Monday while a European official stepped up rhetoric about a strong euro after IMF meetings failed to defuse tensions about exchange rates.
With interest rates in the developed world at record lows, investors have poured money into higher-yielding emerging market assets, driving up local currencies in the process. Governments, afraid that rising exchange rates will hurt exports and stunt economic growth, have tried to limit currency appreciation, sparking fears of a "race to the bottom" that may trigger trade tariffs and a sharp decline in global growth.
"If each country insists on its own interest during the recovery phase, it will bring about trade protectionism and will cause the world economy very big problems," South Korean President Lee Myung-bak told foreign journalists during a lunch meeting at his residence. World finance leaders made no headway on currency disputes at a weekend International Monetary Fund meeting, and Lee urged an agreement before his country hosts a G20 summit next month.
7. Corn prices surging - This is worth watching. The last time food and oil prices jumped like this it triggered a global recession. This time they're jumping as investors hunt for anything that's not made of paper.
The last time this happened milk prices rose as dairy farmers in America struggled with higher feed costs. Seems a bit of a roller coaster. Here's the New York Times report.
Corn futures surged on Monday, hitting two-year peaks and leading other agricultural commodities higher on the second session of strong gains after the government slashed its crop outlook, initiating worries of higher prices for food and biofuels. Copper and gold prices rose as well, lifting the 19-commodity Reuters-Jefferies CRB index, which extended Friday’s two-year high even though crude oil fell.
Corn rose 5 percent in Chicago futures trading after soaring 9 percent on Friday. Soybeans, sugar and coffee also had sharp gains in the two sessions on worries that agricultural supplies would tighten from smaller harvests forecast for this year. Corn is the main feedstock for ethanol production.
The biggest two-day run-up for corn since 1988, it brought back memories of early 2008, when record high grains prices led to sharply higher food prices. “For sure, with higher feed grain prices there is potential for upward price pressure particularly on pork, poultry and beef,” said Luke Mathews, commodity strategist at Commonwealth Bank of Australia.
Check out the last line. "This could be the beginning of the second leg of the credit crunch."
What does this mean for the banks?
In the first place, the slowdown in foreclosure sales might hit the revenues of the banks. The defaulted loans aren’t spinning off revenue and now the foreclosures aren’t producing revenue either. If the foreclosure freezes last long enough, this could it the bottom lines of the banks. At the very least, banks should be adjusting the estimates on the likelihood of short-term recovery values for their mortgage portfolios.
The fact that banks securitized loans but did not get proper assignments of the mortgage notes may find themselves liable to lawsuits from investors. A typical mortgage bond issuance includes representations and warranties that all the proper documentation has been obtained. Banks could find themselves liable for a breach of these warranties. This could also turn into a fight between investors of junior and senior tranches of mortgage bonds.
What does this mean for the housing market and the economy?
Get ready to hear the phrase “pig through the python” a lot. For example, “We need to get the pig through the python very quickly so that the market can be free of uncertainty.” This is the favorite metaphor of bankers discussing the foreclosure crisis. The idea is that anything that slows down foreclosures will unsteady the housing market. There’s a lot of truth to this. Buyers will hesitate to bid on foreclosure sales if they are not confident the foreclosure is legitimate. Other buyers may worry that the lack of foreclosure sales in an area is a false indicator of the health of the local housing market.
Banks concerned about the recovery values of their mortgage portfolios and higher capital requirements, may pull back lending even further than they already have.
In short, this could be the beginning of the second leg of the credit crunch.
9. Martin Wolf and Gillian Tett talk at YahooFinance about financial reform. Joseph Stiglitz and George Soros also chimed in at a recent FT conference that the financial system remains broken.
"I would've thought letting banks make their own risk models would have been a non-starter" after the bursting of the credit bubble, Stiglitz added.
Repeating a familiar critique of the "perverse incentives" on Wall Street, the Columbia professor and Nobel-prize winner said the "widespread misunderstanding of risk...creates an opportunity for Wall Street to exploit [regulatory loopholes] and dump risk on the taxpayer."
Piling on further, Soros and Stiglitz warned of the risk of firms being not only too big to fail, but too interconnected. "Things have gotten out of control, have not been brought under control by what has been done" on the regulatory front, Soros said.
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