‘Sand’ really hits the fan because liquidity is drying up

Province

TORONTO — The U.S. banking sector is headed for a credit downturn that will be “the worst in generations,” featuring widespread defaults on a range of debts and a national housing-price slide not seen since the Great Depression, says one of Wall Street’s most influential analysts.

The banks face massive loan losses — “far more dramatic” than most bank executives and ratings agencies have forecast — as the next chapter in financial-sector turmoil unfolds, said Meredith Whitney, an analyst with Oppenheimer &Co. Inc.

“We believe loss rates will exceed the highest levels since 1990 by a significant margin,” she said. “Bank losses will be the highest in the past 20-plus years as a result of greater numbers of individual defaulting on mortgages and/or other loans and from [loan balances that] are far higher than they were in the last housing cycle.”

Whitney — who is also a panelist for Fox News and the No. 2-ranked analyst on a Forbes list of top stock pickers for 2007 — shot to global infamy last year after her gloomy, but accurate, predictions about the scale of subprime problems facing Citigroup Inc. led to a worldwide sell-off of banking stocks.

Now the Oppenheimer analyst has slashed her already-depressed forecasts of what large U.S. banks will earn in 2008 by 29 per cent and by 13 per cent for 2009, citing concerns about mortgages, credit-card balances and other loans.

In contrast to Whitney’s view, there was some good news for big U.S. banks reeling from $92 billion US in collective writedowns tied to investments in the subprime-mortgage market. The U.S. financial sector was buoyed by an announcement from rating agency Standard & Poor’s that it is unlikely to downgrade bond insurer MBIA Inc. any time soon.

S&P and other rating agencies have been reviewing MBIA and its peers after U.S. monolines posted record losses on collateralized debt obligations (CDOs) they guaranteed.

Banks stood to lose as much as $70 billion US if the CDOs they owned no longer carried an automatic AAA rating because of the insurance.

Canadian banks have been praised for avoiding the worst lending excesses of their U.S. counterparts. But their first-quarter profit reports — released over the next two weeks, starting with Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and National Bank, all due out tomorrow — will be scrutinized for signs of a serious spillover from deteriorating U.S. markets.

The big banks have tens of billions of dollars in indirect exposure to a wide variety of U.S. loans through various complex investments, such as CDOs and structured investment vehicles. Also, Toronto-Dominion, Royal Bank and Bank of Montreal all have extensive retail-banking operations in the U.S.

According to Whitney, consumer loans are now the main area of concern for the U.S banking sector. “As far as consumer credit is concerned, we are in uncharted territory,” said the outspoken analyst.

“Housing prices, now down six per cent across the United States, have begun to decline on a national level, a phenomenon not seen since the Great Depression. We are of the belief that over the next 24 months, national home prices will decline by a factor of three times such levels.”

The “sand” really hits the fan because liquidity is drying up as banks stay away from the sort of securitized structured investments that have burned them in recent months, Whitney noted. Highly leveraged loan commitments are another source of earnings pressure in early 2008, she said.

© The Vancouver Province 2008

Jeannine Aversa
USA Today

Federal Reserve Chairman Ben Bernanke told Congress that the central bank is prepared to take action if growth is threatened, despite heightened concerns about inflation.

WASHINGTON — Federal Reserve Chairman Ben Bernanke warned Congress Wednesday of a period of sluggish business growth, sending a fresh signal of another cut in interest rates.

“The economic situation has become distinctly less favorable” since the summer, Bernanke testified. Since his previous such assessment last summer, the housing slump has worsened, credit problems have intensified and the job market has deteriorated. Bernanke said the confluence of these factors has turned people and businesses alike toward a more cautious attitude toward spending and investment. This, he said, has further weakened the economy.

Incoming barometers continue to “suggest sluggish economic activity in the near term,” Bernanke said in an appearance before the House Financial Services Committee. At the same time, he added, the Fed must keep a close eye on inflation given the recent run-up in energy and other prices paid by consumers and businesses.

Before he spoke, the Commerce Department released its January report on durable goods orders, which showed a 5.3% drop. At the start of his testimony, the Commerce Department reported that new-home sales fell nearly 3% last month to a seasonally adjusted annual rate of 588,000 units, the slowest pace since February 1991.

For now though, the No. 1 battle is shoring up the economy.

The Fed “will act in a timely manner as needed to support growth and to provide adequate insurance against downside risks,” Bernanke said, hewing closely to assurances he offered earlier this month.

The central bank, which started lowering a key interest rate in September, has recently turned much more aggressive. Over the span of just eight days in January, it slashed rates by 1.25 percentage points — the biggest one-month reduction in a quarter century. Economists and Wall Street investors predict the Fed will cut rates again at its next meeting on March 18.

There are dangers that the economy will weaken even further. “The risks include the possibilities that the housing market or labor market may deteriorate more than is currently anticipated and that credit conditions may tighten substantially further,” Bernanke cautioned.

The Fed chief was hopeful that previous rate reductions along with a $168 billion stimulus package of tax rebates for people and tax breaks for business will energize the economy in the second half of this year.

Even as the Fed tries to shore up the economy, it must remain mindful of inflation pressures, Bernanke said.

Record high oil prices — topping $100 a barrel — are pushing consumer prices upward. That’s shrinking paychecks, and with people feeling less well off because the values of their homes have dropped, consumer spending “slowed significantly” toward the end of the year, the Fed chief said.

The Fed forecasts that inflation will moderate this year compared with last year. But the Fed’s recently revised inflation projection of an increase of 2.1% to 2.4% is higher than its old forecast from the fall.

Bernanke said there are “slightly greater upside risks” that inflation could turn out to be higher than the Fed currently anticipates, given the recent run-up in energy and food prices.

“Should high rates of overall inflation persist, the possibility also exists that inflation expectations could become less well anchored,” Bernanke warned. If people, companies and investors think inflation will move higher, they will act in ways that could turn inflation even worse, a sort of self-fulfilling prophecy. And Bernanke said that could complicate the Fed’s job of trying to nurture economic growth while also keeping inflation under control.

With the economy slowing and prices rising, fears are growing that the country could be headed for a bout of stagflation, a dangerous economic brew not seen since the 1970s.

The Fed for now is focused on bolstering the economy through interest rate reductions. To combat inflation, the Fed would raise rates.

At some point over the course of this year, the Fed will need to “assess whether the stance of monetary policy is properly calibrated” to foster the Fed’s objectives of price stability “in an environment of downside risks to growth,” Bernanke said.

Banks face massive loan losses because of defaults on debts and housing-price slide

Duncan Mavin
Sun

TORONTO — The U.S. banking sector is headed for a credit downturn that will be “the worst in generations,” featuring widespread defaults on a range of debts and a national housing price slide not seen since the Great Depression, one of the most influential analysts on Wall Street says.

The banks face massive loan losses — “far more dramatic” than most bank executives and ratings agencies have forecast — as the next chapter in financial-sector turmoil unfolds, said Meredith Whitney, an analyst with Oppenheimer &Co. Inc.

“We believe loss rates will exceed the highest levels since 1990 by a significant margin,” she said in a note Monday.

“Bank losses will be the highest in the past 20-plus years as a result of greater numbers of individual defaulting on mortgages and/or other loans and from [loan balances that] are far higher than they were in the last housing cycle.”

Whitney — who is also a panellist for Fox News and the No. 2-ranked analyst on a Forbes list of top stock pickers for 2007 — shot to global infamy last year after her gloomy, but accurate, predictions about the scale of subprime problems facing Citigroup Inc. led to a worldwide sell-off of banking stocks.

In Monday’s note, the Oppenheimer analyst slashed her already-depressed forecasts of what large U.S. banks will earn in 2008 by 29 per cent and by 13 per cent for 2009, citing concerns about mortgages, credit-card balances and other loans.

In contrast to Whitney’s view, there was some good news Monday for big U.S. banks reeling from $92 billion US in collective writedowns tied to investments in the sub-prime-mortgage market.

The U.S. financial sector was buoyed by an announcement from rating agency Standard & Poor’s that it is unlikely to downgrade bond insurer MBIA Inc. any time soon. S&P and other rating agencies have been reviewing MBIA and its peers after U.S. monolines posted record losses on collateralized debt obligations (CDOs) they guaranteed. Banks stood to lose as much as $70 billion US if the CDOs they owned no longer carried an automatic AAA rating because of the insurance.

Canadian banks have been praised for avoiding the worst lending excesses of their U.S. counterparts. But their first-quarter profit reports — released over the next two weeks, starting with Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and National Bank, all due out on Thursday — will be scrutinized for signs of a serious spillover from deteriorating U.S. markets.

The Canadian banks have tens of billions of dollars in indirect exposure to a wide-variety of U.S. loans through various complex investments, such as CDOs and structured investment vehicles. Also, Toronto-Dominion Bank, Royal Bank of Canada and Bank of Montreal all have extensive retail-banking operations in the United States.

According to Whitney, consumer loans are now the main area of concern for the U.S banking sector.

“As far as consumer credit is concerned, we are in unchartered territory,” the outspoken analyst said. “Housing prices, now down six per cent across the United States, have begun to decline on a national level, a phenomenon not seen since the Great Depression. We are of the belief that over the next 24 months, national home prices will decline by a factor of three times such levels.”

The “sand” really hits the fan because liquidity is drying up as banks stay away from the sort of securitized structured investments that have burned them in recent months, Whitney noted. Highly leveraged loan commitments are another source of earnings pressure in early 2008, she said.

Whitney said the stock prices of big U.S. bank could fall by another 40 per cent.

In a separate note, she also predicted more woes for Citigroup. The world’s largest bank must sell $100 billion US of assets to shore up its balance sheet, but in doing so risks losing profitable operations.

“Under duress, Citigroup will likely be forced to sell what it can and not what it should,” she said. The Oppenheimer analyst slashed her forecast for Citigroup’s earnings from $2.70 US to 75 cents — the revised estimate “could still prove optimistic,” she said — and predicted the bank’s stock price could fall as low as $16 US, compared with a 52-week high of $55.55 US.

© The Vancouver Sun 2008

EXPORTS: Domestic problems driving up cost of doing business

Province

Employment-seekers crowd a job fair in Beijing last week amid fears that China’s worst winter weather in 50 years will fuel inflation and investment problems in the Asian giant’s runaway economy.

SHANGHAI — As China’s factory floors feel the pressure from spiralling costs, there is growing nervousness in the rest of the world that the Asian giant’s next big export could be inflation.

Shoppers worldwide have become accustomed to the vast array of ultra-cheap Chinese goods on offer as China’s trade surplus last year reached $262.2 billion US, a more than 10-fold rise from 2003.

But now a confluence of factors, led by soaring domestic inflation that hit an 11-year high of 7.1 per cent in January, is ramping up the costs of doing business in China, with potential effects for the rest of the world.

As China’s currency has strengthened sharply against the U.S. dollar, the government has scrapped export-tax rebates, while more stringent labour laws and even the ice and snow storms in southern and central China have further driven up costs.

“China’s inflation is having a domino effect on worldwide inflation, especially in the United States,” Li Huiyong, an analyst from Shanghai-based SYWG Research and Consulting, said.

“In the past, [outside] inflation pressures in the U.S. mainly came from oil prices because the U.S. economy is highly dependent on crude oil. Cheap products from China and other developing countries helped to alleviate that pressure. Now Chinese goods are no longer as cheap it adds to the inflation pressure in the U.S.”

Nevertheless, while it is clear that doing business in China is getting more expensive, there is no consensus among economists about how much that will translate into higher price tags for Chinese-made products overseas.

Wang Qing, chief China economist at Morgan Stanley, stressed that Chinese competitiveness was not about to disappear and goods from Asia’s most populous nation would remain cheap for years.

Mongolia offered half the profits for the right

DALE CROFTS and ROB DELANEY
Sun

CHICAGO — Rio Tinto and Ivanhoe Mines have offered Mongolia more than half of the profits from the Oyu Tolgoi copper project in return for the right to develop the deposit, Rio Chief Executive Officer Tom Albanese said.

Under a 2007 draft agreement, the Asian nation would have the right to a 34 per cent equity stake in the project and related taxes equivalent to 55 per cent of the profits, Albanese said in a Feb. 22 interview in Chicago. The companies are in “ dialog ue and debate” with the government over the agreement, he said.

“ That’s a very fair transaction as measured by any mining jurisdiction in the world that would be one that attracts international c a p i t a l ,” Al b a n e s e s a i d . He declined to comment on whether the country was seeking a greater share of profit.

Companies planning mines in Mongolia are facing opposition f r o m p o p u l i s t l a w m a k e r s demanding that more of the country’s mineral wealth be used to benefit the public. Ivanhoe, based in Vancouver, has been trying for more than four years to reach an agreement with Mongolia for the Oyu Tolgoi project to gain from copper prices that have more than doubled in that period.

In most jurisdictions, the government “ typically” wouldn’t take an equity interest in the project, Albanese said.

The cabinet of Mongolian Prime Minister Sanjaa Bayar is reviewing a draft agreement Ivanhoe reached last year with former Prime Minister Miyeegombo Enkbold, said Nyamaa Tumenbayar, first secretary of trade and economic affairs at Mongolia’s U. S. embassy.

“ The Mining Law of Mongolia allows the government to hold up to 51 percent of stake of strategically important deposits,” Tumenbayar said in a Jan. 14 response to questions, without providing the terms the government was seeking. “ This might be now under the consideration.”

Ivanhoe said Sept. 11 that it may suspend development if it doesn’t win “ timely” approval. Rio, based in London, said in October that it would consider other options if the agreement wasn’t approved by the end of 2007. The two companies already have invested “ hundreds of millions of dollars” i n d e v e l o p i n g t h e p r o j e c t , Albanese said.

Bayar told Mongolia’s parliament in an inaugural address Dec. 13 that his government wants to complete the accord as soon as possible. He also proposed in the address that an independent, international organization be hired to assist the government in reaching a final agreement.

Rio called Oyu Tolgoi “ the world’s largest undeveloped coppergold resource” when it agreed to buy 10 per cent of Ivanhoe in October 2006. The site, about 80 kilometres north of Mongolia’s border with China, contains about 32 million metric tonnes of copper and 31.3 million ounces of gold.