Wednesday's Top 10 with NZ Mint: What Peak Oil and Peak Credit mean for the world; New complaint on Hubbard's Helicopters deal; China's property exodus; Dilbert

Here are my Top 10 links from around the Internet at 10 to 12 pm, 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. A complaint is lodged - David Hillary at Lost Soul has lodged an    official complaint with the SFO and the Securities Commission about Allan Hubbard's 'sale/equity injection' of Helicopters NZ into South Canterbury Finance.

Hubbard had a habit of selling assets at fairly optimistic values to South Canterbury to 'inject' equity.

It's often curious that South Canterbury often paid for these assets in cash to Hubbard's Southbury...

Here's the detail from David, who argues the deal wasn't as good as it looked at first blush.

The management of the company credited $152.5m in new equity from this transaction, however, my analysis reveals that a complete accounting for the transaction would be to credit just $11.8m in new equity plus transaction costs.

My analysis, in brief, is the $162.5m value attributed to the assets acquired, plus the $15.6m subordinated loan advanced to Southbury Corporation Limited as part of the transaction are almost entirely offset by losses, provisions or impairments that result from the immediate and ultimate parent companies no longer having their major assets to stand behind loans and other financial accommodations granted to them by South Canterbury Finance Limited, leaving only a very small amount of additional contributed equity.

2. Smell the fear - The Basel III rules on bank capital will make holders of new bank bonds share the pain of the collapse of any systemically important bank, Bloomberg reports.

Investors are getting nervous, which will simply drive up the cost of such debt, which will eventually filter through into higher interest rates generally.

Germany's Angela Merkel is feeding the fear with more talk of haircuts for bond holders. HT Gareth via email.

Regulators worldwide, seeking to protect taxpayers from having to foot the bill for future bank bailouts and to cushion big lenders in times of stress, will now turn their attention to preventing the collapse of systemically important financial firms. Among the tools they’re considering are capital instruments that would force investors in bank debt to bear the cost of a bailout by slashing the value of their bonds or converting them to equity in a crisis.

That doesn’t sit well with buyers of senior bank bonds who prize the certainty they’ll be repaid in full. The 201 members of Morgan Stanley Capital International’s World Banks Index need investors to help refinance $3 trillion of bonds coming due by the end of next year, according to data compiled by Bloomberg.

“The flexibility that regulators want and the predictability that my investors want seem irreconcilable,” said John Hale, investment affairs manager at the London-based Association of British Insurers.

“Basel III changes the rules of the game.” U.K. insurers manage about 1.5 trillion pounds ($2.4 trillion).

The debate over whether bondholders should suffer when lenders fail was ratcheted up in Seoul last week, when German Chancellor Angela Merkel said that creditors should bear more of the cost of bailing out banks and nations. “There may be a conflict here between the interests of the financial world and the interests of politicians,” Merkel said. “We can’t constantly explain to our voters that taxpayers have to be on the hook for certain risks, rather than those who make a lot of money taking those risks.”

 3. Another 10% fall  - Standard and Poor's is forecasting US house prices have another 7-10% to fall. This chart below is interesting, showing house price to income rates are down to around 1.1. That is closer to 4.7 in New Zealand, according to the RBNZ (Table 3.7)...

And here's a link to our own version of house price to median multiples https://www.interest.co.nz/property/house-price-income-multiples HT Hugh

"Low mortgage rates will likely continue to encourage refinancing, but their influence on home buying activities has been limited because of the weak housing market and a lack of demand," S&P analyst Erkan Erturk said.

4. It could take years - The US Federal Reserve could take years to exit from money printings, says a key member of the Fed HT Washington's Blog and Gertraud.

A Reserve official defended the Fed's controversial bond-buying program on Tuesday, saying it could be years before pulling back easy money policies is warranted.

"This exit could be years away," New York Federal Reserve President William Dudley said an interview on CNBC.

5. The European crisis could cost its banks 1.65 trillion euros - FTAlphaville has the report

Assuming then, that private sector leverage falls back to the level suggested by income in Spain, Portugal and Ireland (not Greece) — then these three countries would have to reduce their borrowings by €1,300bn, or 80 per cent of GDP. Again though, if you look at previous banking crises the deleveraging pain looks even worse. In Thailand, Korea, Sweden and Mexico, private sector debt fell by an average of about €1,000bn — or around 60 per cent of their GDP.

Given the above costs then, it’s no surprise that Credit Suisse reckons “some recourse” to the European Financial Stability Facility will probably be required by Ireland, Greece and Portugal. Intriguingly, they think Spain will be alright — at least until its 10-year bond yield goes above 6.5 per cent — at which point the interest burden becomes too high.

6. The Chinese are coming  - To a Real Estate market near you, Barry Ritholz points out.

“Well-heeled Chinese property buyers are making their mark on housing markets worldwide. Some 475,000 Chinese have assets of $1m or more, according to the wealth management strategy firm Scorpio Partnership. This means China has the fourth-largest number of high net-worth individuals (HNWIs) in the world. More good news for estate agents is the fact that China’s HNWIs keep one-fifth of their assets in property.

Beijing limits its citizens to taking $50,000 out of the country each year, but many thousands of Chinese quietly skirt round these capital controls. It is tough to pin down how many buyers there are and how much they spend, because their desire to stay under the radar means they can be secretive. Most money finding its way overseas is channelled through Hong Kong, a semi-autonomous special administrative region (SAR), where Chinese can invest freely.”

7. Sanctions inevitable - Marshall Auerback argues America is now likely to opt for trade sanctions against China.

After observing the latest G20 fiasco, it is conceivable that American government will feel that it has no choice but to move toward tariffs, especially as fiscal policy is likely to remain constrained by a hostile GOP-dominated Congress. The numerical targets on current account imbalances were the last warning shot to forestall the protectionist option. This has now failed. Domestic US political considerations for the President and his party might well mandate a more radical tack. Consider the recent midterm election results. The Democrats sustained huge losses in the rust belt. These states have been traditionally Democratic.

True, some went for Reagan in the 1980s, but Obama got them back in 2008 and thereby won the election. He needs this region. He can forget about the South: there, we have all kinds of constituencies that voted against him. He’ll never win over the Christian right, the plutocrats who narrowly vote their pocketbooks, and so forth. Obama needs to win back members of his disaffected base, especially younger voters who didn’t show up because they face a hopeless employment situation. But he won’t get this group back to the polls unless he focuses on jobs. The independents will also be hard to get back without this, because they too are disgusted by the government’s cronyism. But even if the President wins back a large number of disaffected independents and the youth vote, he still needs the rust belt. He therefore has to attack China, the outsourcing of jobs, and focus on Beijing’s currency (which he has recently called “undervalued”, potentially setting the stage to name China as a “currency manipulator” with the World Trade Organization).

If Obama doesn’t do this, the Democrats should just wave a white flag in the next election and not waste money campaigning. This is the US political reality as long as the unemployment rate is above seven percent and Corporate America is nuts about cutting costs by moving to low wage platforms abroad. A trade war, complete with tariffs, could well prove inevitable.

8. Peak credit and peak oil - Chris Martenson talks with Max Keiser about what peak oil and peak credit means for the global financial crisis.

9. It's a survival crisis - Even Europe's President says the Euro faces an existential crisis. IE It may not survive.

The European Union will not survive if it fails to overcome a debt crisis plaguing the euro single currency area, the bloc's president Herman Van Rompuy said on Tuesday. "We're in a survival crisis," Van Rompuy said in a speech in Brussels hours from an assembly of eurozone finance ministers with Ireland and Portugal each teetering on the brink.

"We all have to work together in order to survive with the eurozone, because if we don't survive with the eurozone we will not survive with the European Union," he said. "But I'm very confident we will overcome this," the EU leader told the European Policy Centre think tank.

10. Totally relevant video - This is a long and very academic discussion of American history and politics with Pulitzer Prize winning journalist and former priest Chris Hedges. I found it fascinating. Good luck. It may make you think differently about the world.