The Last Adventure
Will Israel and / or the U.S. Attack Iran?
By URI AVNERY
IF YOU want to understand the policy of a country, look at the map - as Napoleon recommended.
Anyone who wants to guess whether Israel and/or the United States are going to attack Iran should look at the map of the Strait of Hormuz between Iran and the Arabian Peninsula.
Through this narrow waterway, only 34 km wide, pass the ships that carry between a fifth and a third of the world's oil, including that from Iran, Iraq, Saudi Arabia, Kuwait, Qatar and Bahrain.
* * *
MOST OF the commentators who talk about the inevitable American and Israeli attack on Iran do not take account of this map.
There is talk about a "sterile", a "surgical" air strike. The mighty air fleet of the United States will take off from the aircraft carriers already stationed in the Persian Gulf and the American air bases dispersed throughout the region and bomb all the nuclear sites of Iran - and on this happy occasion also bomb government institutions, army installations, industrial centers and anything else they might fancy. They will use bombs that can penetrate deep into the ground.
Simple, quick and elegant - one blow and bye-bye Iran, bye-bye ayatollahs, bye-bye Ahmadinejad.
If Israel attacks alone, the blow will be more modest. The most the attackers can hope for is the destruction of the main nuclear sites and a safe return.
I have a modest request: before you start, please look at the map once more, at the Strait named (probably) after the god of Zarathustra.
* * *
THE INEVITABLE reaction to the bombing of Iran will be the blocking of this Strait. That should have been self-evident even without the explicit declaration by one of Iran's highest ranking generals a few days ago.
Iran dominates the whole length of the Strait. They can seal it hermetically with their missiles and artillery, both land based and naval.
If that happens, the price of oil will skyrocket - far beyond the 200 dollars-per-barrel that pessimists dread now. That will cause a chain reaction: a world-wide depression, the collapse of whole industries and a catastrophic rise in unemployment in America, Europe and Japan.
In order to avert this danger, the Americans would need to conquer parts of Iran - perhaps the whole of this large country. The US does not have at its disposal even a small part of the forces they would need. Practically all their land forces are tied down in Iraq and Afghanistan.
The mighty American navy is menacing Iran - but the moment the Strait is closed, it will itself resemble those model ships in bottles. Perhaps it is this danger that made the navy chiefs extricate the nuclear-powered aircraft carrier Abraham Lincoln from the Persian Gulf this week, ostensibly because of the situation in Pakistan.
This leaves the possibility that the US will act by proxy. Israel will attack, and this will not officially involve the US, which will deny any responsibility.
Indeed? Iran has already announced that it would consider an Israeli attack as an American operation, and act as if it had been directly attacked by the US. That is logical.
* * *
NO ISRAELI government would ever consider the possibility of starting such an operation without the explicit and unreserved agreement of the US. Such a confirmation will not be forthcoming.
So what are all these exercises, which generate such dramatic headlines in the international media?
The Israeli Air Force has held exercises at a distance of 1500 km from our shores. The Iranians have responded with test firings of their Shihab missiles, which have a similar range. Once, such activities were called "saber rattling", nowadays the preferred term is "psychological warfare". They are good for failed politicians with domestic needs, to divert attention, to scare citizens. They also make excellent television. But simple common sense tells us that whoever plans a surprise strike does not proclaim this from the rooftops. Menachem Begin did not stage public exercises before sending the bombers to destroy the Iraqi reactor, and even Ehud Olmert did not make a speech about his intention to bomb a mysterious building in Syria.
* * *
SINCE KING Cyrus the Great, the founder of the Persian Empire some 2500 years ago, who allowed the Israelite exiles in Babylon to return to Jerusalem and build a temple there, Israeli-Persian relations have their ups and downs.
Until the Khomeini revolution, there was a close alliance between them. Israel trained the Shah's dreaded secret police ("Savak"). The Shah was a partner in the Eilat-Ashkelon oil pipeline which was designed to bypass the Suez Canal. (Iran is still trying to enforce payment for the oil it supplied then.)
The Shah helped to infiltrate Israeli army officers into the Kurdish part of Iraq, where they assisted Mustafa Barzani's revolt against Saddam Hussein. That operation came to an end when the Shah betrayed the Iraqi Kurds and made a deal with Saddam. But Israeli-Iranian cooperation was almost restored after Saddam attacked Iran. In the course of that long and cruel war (1980-1988), Israel secretly supported the Iran of the ayatollahs. The Irangate affair was only a small part of that story.
That did not prevent Ariel Sharon from planning to conquer Iran, as I have already disclosed in the past. When I was writing an in-depth article about him in 1981, after his appointment as Minister of Defense, he told me in confidence about this daring idea: after the death of Khomeini, Israel would forestall the Soviet Union in the race to Iran. The Israeli army would occupy Iran in a few days and turn the country over to the much slower Americans, who would have supplied Israel well in advance with large quantities of sophisticated arms for this express purpose.
He also showed me the maps he intended to take with him to the annual strategic consultations in Washington. They looked very impressive. It seems, however, that the Americans were not so impressed.
All this indicates that by itself, the idea of an Israeli military intervention in Iran is not so revolutionary. But a prior condition is close cooperation with the US. This will not be forthcoming, because the US would be the primary victim of the consequences.
* * *
IRAN IS now a regional power. It makes no sense to deny that.
The irony of the matter is that for this they must thank their foremost benefactor in recent times: George W. Bush. If they had even a modicum of gratitude, they would erect a statue to him in Tehran's central square.
For many generations, Iraq was the gatekeeper of the Arab region. It was the wall of the Arab world against the Persian Shiites. It should be remembered that during the Iraqi-Iranian war, Arab Shiite Iraqis fought with great enthusiasm against Persian Shiite Iranians.
When President Bush invaded Iraq and destroyed it, he opened the whole region to the growing might of Iran. In future generations, historians will wonder about this action, which deserves a chapter to itself in "The March of Folly".
Today it is already clear that the real American aim (as I have asserted in this column right from the beginning) was to take possession of the Caspian Sea/Persian Gulf oil region and station a permanent American garrison at its center. This aim was indeed achieved - the Americans are now talking about their forces remaining in Iraq "for a hundred years", and they are now busily engaged in dividing Iraq's huge oil reserves among the four or five giant American oil companies.
But this war was started without wider strategic thinking and without looking at the geopolitical map. It was not decided who is the main enemy of the US in the region, neither was it clear where the main effort should be. The advantage of dominating Iraq may well be outweighed by the rise of Iran as a nuclear, military and political power that will overshadow America's allies in the Arab world.
* * *
WHERE DO we Israelis stand in this game?
For years now, we have been bombarded by a propaganda campaign that depicts the Iranian nuclear effort as an existential threat to Israel. Forget the Palestinians, forget Hamas and Hizbullah, forget Syria - the sole danger that threatens the very existence of the State of Israel is the Iranian nuclear bomb.
I repeat what I have said before: I am not prey to this existential Angst. True, life is more pleasant without an Iranian nuclear bomb, and Ahmadinejad is not very nice either. But if the worst comes to the worst, we will have a "balance of terror" between the two nations, much like the American-Soviet balance of terror that saved mankind from World War III, or the Indian-Pakistani balance of terror that provides a framework for a rapprochement between those two countries that hate each other's guts.
* * *
ON THE basis of all these considerations, I dare to predict that there will be no military attack on Iran this year - not by the Americans, not by the Israelis.
As I write these lines, a little red light turns on in my head. It is related to a memory: in my youth I was an avid reader of Vladimir Jabotinsky's weekly articles, which impressed me with their cold logic and clear style. In August 1939, Jabotinsky wrote an article in which he asserted categorically that no war would break out, in spite of all the rumors to the contrary. His reasoning: modern weapons are so terrible, that no country would dare to start a war.
A few days later Germany invaded Poland, starting the most terrible war in human history (until now), which ended with the Americans dropping atom bombs on Hiroshima and Nagasaki. Since then, for 63 years, nobody has used nuclear weapons in a war.
President Bush is about to end his career in disgrace. The same fate is waiting impatiently for Ehud Olmert. For politicians of this kind, it is easy to be tempted by a last adventure, a last chance for a decent place in history after all.
All the same, I stick to my prognosis: it will not happen.
Uri Avnery is an Israeli journalist, member of Gush Shalom and contributor to The Politics of Anti-Semitism (AK / CounterPunch).
Yahoo must call time on Jerry Yang
By John Gapper
There has not been a lot of consensus in the bizarre, prolonged battle for control of Yahoo but all the participants are united in one belief: do not trust the other guy.
Carl Icahn, the activist investor, wants to kick out Jerry Yang, Yahoo’s co-founder and chief executive, and Yahoo’s board. Steve Ballmer, Microsoft’s chief executive, has no interest in Yahoo unless Mr Yang is no longer around to cause trouble. For his part, Mr Yang told The Wall Street Journal this week that: “To trust Mr Icahn and his board is a really bad choice.”
The shareholders will decide on the matter at the annual meeting on August 1, when they vote on whether to take Mr Icahn’s Yahoo board slate or stay loyal to Mr Yang. My advice is to go with Mr Icahn and Microsoft, if it will renew its full bid, rather than trust Mr Yang to fix Yahoo.
Mr Yang co-founded Yahoo in 1994 as a web directory and was “Chief Yahoo” – an intentionally mysterious role – while Terry Semel was chief executive. He has run it since last year, when Mr Semel was eased out. So he bears ultimate and proximate responsibility for the fact that Yahoo is, frankly, a bit of a mess.
From the start, Yahoo has been more of a Gestalt, or a shape, than a company. When pledging loyalty, executives talk of “bleeding purple”, its signature colour. Microsoft makes software, Google does search, Facebook is a social network. Yahoo is purple and has an exclamation mark.
When asked at a Journal conference last month what Yahoo was, Mr Yang replied: “We want you to start your day at Yahoo.” You could equally say that of a shower, a café or a train. The thing that Yahoo most reminds me of, however, is a newspaper.
Like a newspaper, it has all sorts of bits and pieces combined into one package. A paper has news, financial information, sports results, personal ads, puzzles etc. Yahoo has all these as well as search, e-mail, photo storage and a bunch of other services.
This brings Yahoo plenty of traffic – it has 500m users – and, in the years when internet companies were valued on “eyeballs” rather than revenue, it also brought an extremely high valuation. Its market capitalisation hit $149bn at the end of 1999.
It has since fallen to about $33bn (€21bn, £16.7bn), while Microsoft’s February bid valued it at $44.6bn. Google, although its value has fallen from its peak, is worth six Yahoos. That is because Yahoo meandered and grew bureaucratic under Mr Semel, lagging behind Google in search and Facebook in social networking.
Mr Yang and Susan Decker, Yahoo’s president, therefore face a host of management challenges.
Their biggest problem is Yahoo’s comparative weakness in search, which led Microsoft first to bid for the entire company and then to suggest taking over its search division alone. In response, Yahoo struck a deal with Google that allows it instead to keep working on its search arm.
Then there is Yahoo’s complex and disorganised technology. Many Yahoo services run on incompatible software, which is highly inefficient. The technology confusion is mirrored in Yahoo’s decentralised management structure, which has discouraged its business units from co-operating.
It also has to remain ahead of rivals in its biggest area of strength: display advertising. Some 87 per cent of its revenues come from advertising, much of it from putting ads on its own sites and those of “affiliates” such as WebMD, Ebay and 600 newspaper sites. Its revenues from affiliates fell last year because so many sites now compete for advertising.
Mr Yang and Ms Decker have put forward plausible plans to address all of these issues. They have already restructured management and want to keep expanding traffic on Yahoo sites, unify its technology and place more ads across the internet.
The difficulty comes back to trust. Mr Yang has a point that Mr Ballmer acted erratically after making his bid for Yahoo, which he finally withdrew in May. It is also fair to say Mr Icahn’s slate is a bit crazy: nobody thinks oldsters such as Frank Biondi, a former Viacom executive, are a perfect fit to run Yahoo.
But then, Mr Yang’s laid-back obstinacy can drive people, including some of his largest shareholders, mad. Like many young entrepreneurs from Silicon Valley, he appears to have an imperturbable belief in his abilities and the irrelevance of others’ views.
In fact, there are good reasons for shareholders to doubt whether he can do what he promises.
Mr Yang is not a pioneer of technology, like Sergey Brin and Larry Page at Google. Yahoo was an early exploiter of the internet but its skills were in media not technology. Indeed, one of his Chief Yahoo roles was to guide technology, so he is partly responsible for the confusion.
Nor does he have a record of managing such a big and complex company: Tim Koogle was chief executive of Yahoo from 1995 to 2001, when Mr Semel took over. Mr Yang, who by all accounts is pleasant and unassuming in private, has always left management blocking and tackling to others, preferring to be a cultural and technological guardian.
I agree with Mr Yang that Microsoft ought not to be allowed to grab hold of Yahoo’s search assets, leaving the rest of the company even more inchoate. If Yahoo is to be sold, let it be sold whole to any company that will take on the risk.
But simply giving Mr Yang yet more time to work on Yahoo does not strike me as an appealing outcome for shareholders. He has, after all, had 14 years on the job so far. That should have been time enough.
Falling over a cliff in slow motion
By Martin Wolf
What might happen to the British housing market? After a week of dire news from specialised mortgage lenders and housebuilders, this is an obvious question. It also plays directly into the darkest obsessions of the British, for whom nothing is more important than that houses become ever more ludicrously expensive.
Certainly, houses became impressively costly between the middle of 1996 and the turn of this year. Over that period, real house prices rose by close to 190 per cent, according to the Financial Times index. A trend fitted to a series on real house prices that goes back to January 1971 was 30 per cent below the peak reached at the end of last year. In the third quarter of 2007, the ratio of average earnings to house prices peaked at just under six. This was almost double the ratio at the trough of 1995 and well above the previous peak of five reached in 1989.
After the biggest house-price boom in the UK’s history, can the country avoid the biggest ever bust? Fathom Consulting began a bulletin released this week by remarking sardonically that “as the UK housing market downturn gathers pace, it is common for analysts and commentators to argue that this downturn will not be as bad as the early 1990s ... They are probably right. It looks [as though] it will be worse, perhaps far worse.” Fathom goes on to argue that nominal house prices are now falling considerably faster than in the late 1980s: the Halifax price index is down by 9.6 per cent since August. This is almost as big a fall as the 13 per cent decline in the early 1990s, when inflation contributed more to the decline in real prices.
As the saying goes, if one laid all the world’s economists in a row, they would still not reach a conclusion. In this case, too, economists differ on how far house prices have overshot justifiable levels. While it is possible to produce demographic and economic arguments for today’s prices, it is hard to believe that they did not substantially overshoot sustainable levels. A 30 per cent decline in real prices would hardly be surprising. It could well be considerably more.
If economists differ on whether house prices are now reasonable, they differ still more on whether a house-price collapse must spell ruin for the economy. A decline in prices brought about by a big boost to supply ought to be beneficial. Even a correction in a bubble should not bring pain: for owner-occupiers, the lower value of their houses is offset by the lower implicit cost of renting them from themselves. Moreover, the losses of those cashing out of the market are offset by the gains of those buying into it. This is why it is mad to applaud ever-rising prices.
Yet things are not so simple. What matters is why house prices are falling. It is no good having cheaper houses if the reason they are cheaper is that fewer people can afford to buy them because credit is so expensive. Spreads over the Bank of England’s policy rate are now higher than the 1997-2003 average, just as they were well below that average until the current crisis began. Moreover, many borrowers are being rationed out of the market altogether.
The tightening of credit to the housing market has wider knock-on effects on the economy. It makes it more difficult for households to extract the equity in their houses. it also brings down housing-related economic activity – construction, improvement, purchase of durables and the activity of selling. In the last big downturn, residential investment declined by just over 2 per cent of gross domestic product, though over 10 years. It fell by only 0.4 per cent of GDP between the fourth quarter of 2006 and the first quarter of this year: it could decline a great deal further. Moreover, between August 2007 and February 2008 the number of housing transactions fell by 40 per cent.
The biggest issue, then, is not the fall in house prices itself but the transformation in credit conditions that lies behind it. Yet even here the evidence is mixed. Between August 2007 and May 2008, both the number of housing loans and their total value did shrink by close to 50 per cent, according to the council of mortgage lenders. Yet so-called “M4 lending” – the counterpart of the broad measure of money – rose by as much as 12.4 per cent in the year to May. This does not look like a general credit squeeze, as yet.
Even so, spreads in the interbank market on three-month and six-month loans remain at exceptional levels. This suggests enduring mistrust by banks of one another. Moreover, a number of institutions that specialise in mortgage lending have suffered huge reductions in share values: Bradford & Bingley’s have fallen by 90 per cent since early August.
What is the bottom line? It is, quite simply, that a big fall in house prices is likely, partly because prices became extraordinarily high and partly because credit to the market has dried up. Yet whether that will itself drive the economy into a deep recession is not clear. In any case, as long as inflationary pressures remain strong, the Bank of England can do nothing about it. Those of you who hope for a soft economic landing need also to wait for a halt in the rise in commodity prices and a quick recovery in the health of global credit markets. I would not suggest holding your breath while you do so.
Wall Street falls on fears over financials
By Jeremy Lemer
US stocks fell on Monday as equity investors were unimpressed by a series of extraordinary measures to shore up confidence in Fannie Mae and Freddie Mac from the US government.
The two government-sponsored entities, which buy or finance almost half of the $12,000bn US mortgage market and have long been seen to have an implicit guarantee from the US government, have been a constant drag on equity markets in recent days.
Speculation that the pair would be unable to raise much needed capital had sent their share prices tumbling and raised the spectre of systemic financial collapse yet again.
On Monday the pattern repeated. Barclays Capital analysts said: “While we believe that this removal of short-term systemic risk is likely to improve sentiment and support GSE credit and equity in the short term, in the longer term we believe that GSE capital requirements will likely increase as credit losses are likely to be sizeable.”
Meanwhile a Goldman Sachs analyst said the GSEs shares could drop another 35 per cent and slashed his share-price estimate to $7 for Fannie Mae and to $5 for Freddie Mac.
The stock reaction was poor. Fannie shares fell 2.2 per cent to $10.02 while Freddie shares slipped 5.9 per cent to $7.29.
By lunchtime in New York, the benchmark S&P 500 had given up early gains and was down 0.7 per cent at 1,230.99. The Dow Jones Industrial Average slid 0.4 per cent to 11,053.81 while the Nasdaq Composite dipped 0.9 per cent lower at 2,218.77.
US stock markets ended last week definitively in bear market territory. The S&P 500 posted its sixth straight weekly decline as investors rushed to sell Fannie and Freddie on speculation that a government bail-out could wipe out shareholders while oil prices spiked above $147, pummelling consumer-facing stocks.
With that threat off the table, financial stocks were expected to rally strongly. But the reverse happened as regional banks came under heavy selling pressure following the collapse of IndyMac Bancorp last week.
Goldman Sachs added Zions Bancorp to its “Conviction Sell” list and predicted that a number of other regional banks might cut their dividends.
Meanwhile, M&T Bank said its second-quarter profit fell 25 per cent due to credit losses related to residential real estate.
Zions fell 19.1 per cent to $20.79, M&T Bank dropped 15.9 per cent to $58.62 while National City shares was halted after they plunged 27.4 per cent to $3.21.
Washington Mutual was the leading faller, slumping 29.3 per cent to $3.50 but the larger banks and brokerages also came under fire. Citigroup shares fell 3.6 per cent to $15.61, JP Morgan shares lost 2.3 per cent to $32.41 while Bank of America shares dropped 3.5 per cent to $20.92.
Lehman Brothers, the perennial whipping boy of the current round of the credit crisis, came under renewed attack in spite of a cautiously positive report from Bernstein Research analysts.
Analysts led by Brad Hintz said: “The strengthening of Lehman’s funding base and balance sheet combined with the continued support of the Federal Reserve, means that firm should be able to survive any confidence crisis ahead.” Investors were less sure and the stock fell 6.4 per cent to $13.51.
The sector as a whole lost 4.1 per cent while the KBW banking index hit its lowest level since 1996.
There were some bright spots, however. InBev said it would buy Anheuser-Busch, the maker of Budweiser beer, for $52bn. Anheuser-Busch shares rose 0.8 per cent to $67.05, just below the $70 a share offer level.
Waste Management, the largest US waste disposal company, said it would bid $34 a share to buy Republic Services in a deal valued at $6.19bn. Waste Management lost 6.3 per cent to $34.29 while Republic jumped 12.1 per cent to $31.27.
Meanwhile positive earnings forecasts helped boost a handful of stocks. Allegheny Technologies surged 6.7 per cent to $53.73 after the specialty metals producer said second-quarter profit would be higher than previously forecast.
Energy and consumer staples stocks were among the few gainers, boosted by rising oil prices and some analysts upgrades respectively.
Schlumberger and National Oilwell Varco rose 2 per cent to $101.11 and 3 per cent to $85.59 respectively. Dean Foods climbed 4.1 per cent to $18.73 while Molson Coors added 2.2 per cent to $55.45.
Freddie Mac and Fannie Mae
The muddle-through approach
America’s government tries a quick fix for the intractable problems of Fannie Mae and Freddie Mac
FANNIE MAE and Freddie Mac, the two government-supported mortgage giants at the centre of America’s housing market, pose a particularly acute problem for the Bush administration. Not only are they too big to fail. They are almost too big to rescue.
They hold or guarantee some $5.2 trillion of the nation’s $12 trillion of mortgages, backed by the thinnest wafer of capital, meaning their collapse would imperil the already paralysed American housing market. Yet as Joshua Rosner, an analyst at Graham Fisher, a research firm, points out, nationalising them, a stark choice for the government since their shares tumbled last week, would “result in a doubling of the federal deficit, a further collapse of the dollar and unthinkable implications for the Treasury’s cost of funding in the debt markets.”
Those two unpalatable options—failure or rescue—led the Treasury on Sunday July 13th to announce several stopgap measures aimed at restoring confidence in the two institutions, although it fell short of fundamentally reshaping them. The measures may buy a bit of time, but they are unlikely to put to rest highly sensitive questions about the future of Fannie and Freddie, leaving a large cloud looming over global financial markets.
The Treasury’s three-part plan, announced by Hank Paulson, the Treasury secretary, is to increase its line of credit to the government-sponsored entities (GSEs), which currently stands at a paltry $2.25 billion each. The Treasury also seeks authority to buy stakes in each company if necessary, and wants to give the Federal Reserve a greater role in oversight of the GSEs. Separately, the Fed's governors said that they had granted the New York Fed licence to lend to Fannie and Freddie if necessary, against suitable collateral.
Mr Paulson’s announcement, made overnight on the steps of the Treasury just before Asian financial markets opened, gave some support to the dollar, which had wobbled last week as the share prices of Fannie and Freddie halved. As Mr Paulson made clear, part of the problem with the two institutions is that their debt is held by investors around the world. That includes many central banks. The fear is that a sudden collapse of either institution might pose a threat to the dollar and the global economy.
The Paulson plan is aimed at ensuring that both institutions have enough liquidity to conduct their day-to-day businesses of buying mortgages. It came on the eve of a $3 billion debt-auction by Freddie Mac on Monday, which the government will be eager to succeed, to show that the GSEs are still able to raise money in the capital markets. The drying up of liquidity has bought down firms such as Bear Stearns, an American investment bank, and Northern Rock, a British mortgage lender, with devastating speed in the past year. Last week regulators took over IndyMac Bancorp, a mortgage lender, in one of the biggest bank failures in American history. Even though Fannie and Freddie have always been considered, because of their size, to have implicit government support, the Treasury will not have wished to put confidence in that to the test at an auction.
Less clear is the status of shareholders in Fannie and Freddie. The two firms are considered “the odd couple” in American finance because they are owned by shareholders, yet investors have always believed in that implicit government backing. Now that support has become explicit, shareholders must be worried about the price they will have to pay. They may have to provide more capital to Fannie or Freddie, or risk losing their stakes to the government. As double-or-quits bets go, there cannot be many worse than that—not least because a system that provides privatised profits with socialised losses cannot be allowed to persist.
InBev and Anheuser-Busch
Bringing home the beer
InBev succeeds in its $52 billion bid for Anheuser-Busch
AS IN an old-fashioned Western bar brawl, Anheuser-Busch tried to hit InBev with anything that came to hand. The American brewer was attempting to rebuff an assault by its Belgian-Brazilian rival, which had offered $46 billion in an unsolicited bid on June 11th. Anheuser-Busch tried to use the business equivalent of a bar stool over the head—a lawsuit claiming that InBev had misled investors. The American firm even dealt the low blow of citing InBev’s Cuban businesses as a reason to reject the bid.
These tactics came to nothing, however, after InBev opened its wallet and upped the offer to $52 billion, which Anheuser-Busch gratefully accepted on Sunday July 13th. In fact InBev had been prepared to fight sneaky too. In an effort to outflank the founding Busch family (which owns only 4% of the company’s shares) it used family disagreement. The bidders proposed a new board of directors that would include Aldolphus Busch, the uncle of August Busch, the existing chief executive of the American firm who was dead against the merger. Adolphus promptly urged Anheuser-Busch to accept InBev’s offer.
Anheuser-Busch had come up with its own cost-cutting plan to counter the offer from InBev. But that was no match for Inbev’s hard cash, particularly after it agreed to raise its offer to $70 a share. Agreeing to the deal at this price is probably a better outcome than dealing with a long and distracting hostile bid. The deal is a good one for many reasons.
Big brewing mergers of late have been driven by two differing goals. The recent acquisition of Britain’s Scottish & Newcastle by Carlsberg and Heineken niftily encapsulated both. Heineken got its hands on S&N’s operations in Britain and elsewhere. As in America and other countries where the beer market has matured, growth is slow or non-existent. Here brewers can crunch together operations such as management and distribution, so cutting costs and boosting profits. The merging of the American operations of SABMiller and Molson Coors last year was driven by the same motives.
The other way to grow bigger profits is by acquiring businesses in emerging markets where beer drinking has boomed. Carlsberg’s side of the deal saw the Danish brewer get its hands on BBH, a joint venture with a Russian brewer.
A sensible brewer keeps a foot in both camps. Mature market brewers such as Anheuser-Busch, can be fantastically profitable, even if growth is negligible and handy targets are in ever shorter supply. In emerging markets demand is volatile and margins are slim. Growth in beer drinking in these new markets has suffered as food prices have spiralled. The rising prices of beer’s main ingredients (barley for the drink, aluminium for cans) have cut margins slimmer.
InBev, by buying Anheuser-Busch, will insulate itself against the volatility of emerging markets—over a half of its profits come form its Latin American operations. Although there is little overlap with operations in America (unlike Molson Coors and SABMiller) Anheuser is generally reckoned to be ripe for some cost cutting. Although InBev pledged that no brewery closures would take place, it wants to make savings of $1.5 billion by 2011, which suggests some workers will go. InBev reputation for ruthless efficiency could also mean that Anheuser-Busch’s famous Clydesdale horses are put out to pasture.
The merger of the world’s number two and number three brewers by volume will create a combined company with more than $36 billion in annual revenues and a better negotiating position with suppliers of expensive ingredients. The two will also gain extra traction in China with their combined operations. The beer market there is enticing because of rapid growth, but it is also highly fragmented and hard for big western brewers to crack.
July 14 (Bloomberg) -- A Barack Obama presidency would bode well for Google Inc. A John McCain victory would be good for AT&T Inc.
That's because the two senators approach regulation in the information age from fundamentally different perspectives.
Obama, who clinched the Democratic nomination with an Internet-savvy campaign, wants the government to take an active role in wielding the Web as a weapon against poverty and rural isolation, an approach that could benefit Google.
McCain sees the Internet mainly as a business and trusts market forces to foster innovation for society's benefit. It's the same tack he has taken in Congress, advocating a hands-off approach to telephone-industry mergers that created the new AT&T.
``McCain is a traditional, market-oriented conservative, and Obama is more comfortable with government intervention in the marketplace to promote competition,'' says Andrew Jay Schwartzman, president of the Media Access Project, a public- interest law firm in Washington.
That same philosophical divide -- Obama favoring rules aimed at curing society's ills, McCain seeing government as more hindrance than help -- is borne out on other Information Age fronts, ranging from media mergers to the digitization of medical records.
Their differences also are reflected in their personal use of technology: Obama, 46, is often seen pecking away at his Blackberry. McCain, 71, jokingly describes himself as computer ``illiterate.''
Blacks, Hispanics
Obama last year criticized the Federal Communications Commission for smoothing the process for media companies to combine. He said the FCC's ruling would make it harder for blacks and Hispanics to become owners and co-sponsored Senate legislation seeking to block the decision.
McCain often has complained that the commission slows down proposed mergers. In 2003, he voted against a similar bill that would have tightened media-ownership rules. He also introduced a measure to limit the commission's authority to review telecommunications takeovers.
Before he was a presidential candidate, Obama co-sponsored legislation that would bar cable and telephone companies, including San Antonio-based AT&T, from using ownership of Internet connections to sell owners of sites such as Yahoo! Inc. premium service on their network.
Without such ``network-neutrality rules'' -- which ensure that networks can't be used to give preferential treatment to one company over another -- Obama says the free flow of information on the Internet is threatened.
Micromanagement
The companies argue that they should be able to charge different customers differently to justify their investments to build and maintain their networks. McCain has criticized government intervention as premature and potential micromanagement.
Obama has proposed a new position of chief technology officer for the federal government. The Illinois Democrat outlined other items on what he called his ``Innovation Agenda'' during a talk with Google employees in November.
They include a plan to use about $5 billion in subsidies to provide rural and low-income households with high-speed Internet access. He says the money would come from a decades-old program that now pays for regular voice service for those same homes.
Every American should have broadband access, ``no matter where you live or how much money you have,'' Obama said at Google's Mountain View, California, headquarters.
Such a shift in subsidies would directly boost Google and other Internet-service companies by increasing their potential pool of customers.
`Grossly Inefficient'
McCain is a longtime critic of the telephone subsidy, which he has called a ``breeding ground for waste, corruption and grossly inefficient spending.'' The Arizona Republican told a Kentucky audience in April that the government should identify areas where ``the market truly is not working'' and provide companies with incentives such as tax breaks to serve them.
The candidates' different views are a reflection of the people who surround them.
McCain's campaign manager, Rick Davis, is a former lobbyist whose clients included BellSouth Corp. and SBC Communications Inc. before they became part of AT&T, as well as Verizon Communications Inc. Charlie Black, a senior McCain adviser, is another former lobbyist and had AT&T as a client.
McCain also is being counseled on policy issues by Michael Powell, a former FCC chairman who led the agency's efforts to deregulate local telephone companies.
Philosophically Opposed
Powell says that even though McCain is philosophically opposed to government intervention in the market, he has often taken stands against corporate interests.
``He is by no means easily labeled pro-corporate, having taken strong positions in favor of protecting consumers,'' Powell says. He points to McCain's support of the ``Do Not Call'' registry, which allows consumers to block telemarketing calls, and tax incentives that help minorities and women buy TV and radio stations.
One of Obama's advisers is Andrew McLaughlin, Google's director of public policy and government affairs. In 2007, McLaughlin was a registered lobbyist for Google. Obama also gets advice from two former FCC chairmen, Reed Hundt and William Kennard, who served during President Bill Clinton's administration.
Kennard is now a managing director of the Carlyle Group and works on the Washington-based private-equity company's telecom and media-buyout fund. He says Obama's technology policy picks up on the Clinton administration's goal of using the Internet to expand educational and economic opportunities.
`Vexing' Problems
Obama ``fundamentally believes that you can't craft a policy about technology and innovation without linking it to how we are going to solve other vexing social problems,'' Kennard said last month at a forum in Washington on media and technology issues facing the next president.
He points to Obama's proposal that the federal government digitize hundreds of millions of individual medical records. Kennard says the project ultimately would save taxpayers billions of dollars in health-care costs by reducing paperwork and increasing safety.
McCain wants private industry, not the federal government, to cover the cost of converting medical records to digital form. John Kneuer, a former Bush administration official who now advises McCain on technology issues, says the senator wants the government to leave private industry alone so the marketplace can solve problems.
`Disincentives'
``Be careful where you tread, so you don't do anything that is going to create disincentives or barriers to the kind of investment and innovation and expansion of these technologies,'' Kneuer said at the same forum.
Kennard says there may be some short-term pain for large telecommunications companies under an Obama administration. In the long term, they'll benefit because unfettered consolidation ``is probably not good for anyone.''
After almost eight years of a generally favorable regulatory environment, the telecom industry would face significant change with an Obama administration, says the Media Access Project's Schwartzman.
``They are right to be anxious,'' he says.
July 14 (Bloomberg) -- European industrial production fell the most in almost 16 years in May, as the euro's gain against the dollar, soaring energy costs and cooling global growth weighed on the region's largest economies.
Output in the 15 nations that share the currency dropped 1.9 percent from the previous month, the biggest decline since December 1992, the European Union's statistics office in Luxembourg said today. From a year earlier, production decreased 0.6 percent, the first annual drop in three years.
The euro-area economy probably contracted in the second quarter for the first time since the single currency was set up almost a decade ago, according to economists at Citigroup Inc., JPMorgan Chase & Co. and Barclays Capital. Exports from Germany and France fell in May, while Europe's manufacturing and services industries contracted in June, according to the latest purchasing-managers indexes.
``All the reliable leading indicators for industrial output, like the PMIs, for example, point to continued weakness,'' said Kenneth Wattret, an economist at BNP Paribas in London. There is a ``very real threat of a recession in the sector - and perhaps the euro-zone economy as a whole.''
The euro fell 0.5 percent to $1.5860 against the dollar at 11:50 a.m. in London today, having earlier traded as high as $1.5971. The dollar was boosted after U.S. Treasury Secretary Henry Paulson asked Congress for authority to buy stakes in Freddie Mac and Fannie Mae, which buy or finance almost half of U.S. mortgages, to restore confidence in financial markets.
Euro-Area Production
Economists had forecast a 2.3 percent decline in euro-area production in May, according to the median of 37 estimates in a Bloomberg News survey. From the year-earlier month, they expected output to rise 0.3 percent.
Companies are grappling with oil prices that have risen 94 percent in the last 12 months as well as the euro's 15 percent advance against the dollar in that time.
The currency's increase makes exports less competitive. The dollar's drop is of ``deep concern,'' aerospace executives including European Aeronautic, Defence & Space Co. Chief Executive Officer Louis Gallois told European Central Bank President Jean-Claude Trichet at a July 10 meeting.
Output in both Germany and France, the region's largest economies, fell 2.6 percent in May from April, while Italian production dropped 1.4 percent, according to today's report. PSA Peugeot Citroen SA, France's biggest carmaker, on July 8 said west European sales will fall 4 percent this year. Fiat SpA plans to temporarily close four of its six Italian plants later this year because of slumping sales.
``It is crystal clear that the manufacturing sector is struggling,'' said Martin van Vliet, an economist at ING Group in Amsterdam. ``With inventories of finished goods at elevated levels, manufacturing activity seems set to lose further momentum.''
July 14 (Bloomberg) -- Treasury Secretary Henry Paulson put the weight of the federal government behind Fannie Mae and Freddie Mac, the beleaguered companies that buy or finance almost half of the $12 trillion of U.S. mortgages.
Paulson, speaking yesterday on Treasury steps facing the White House, asked Congress for authority to buy unlimited stakes in the companies and lend to them, aiming to stem a collapse in confidence. The Federal Reserve separately authorized the firms to borrow directly from the central bank. A gauge of bondholders' demand increased at an auction of Freddie debt today.
The steps would bring the U.S. closer to giving an explicit guarantee for the debt sold by the shareholder-owned, federally chartered companies. That reflects a need for the government to bail out an economy that's been rocked by the worst housing recession in 25 years, the credit crisis, and soaring energy costs.
``They appear to be crossing the Rubicon,'' Sean Egan, president of Egan-Jones Ratings Co., a credit-rating company based in Haverford, Pennsylvania, said, referring to Caesar's invasion of Rome to set up a dictatorship.
The announcements yesterday in Washington followed weekend talks between the firms, government officials, lawmakers and regulators, after Fannie Mae and Freddie Mac lost about half their value last week.
`Explicit' Guarantee
Paulson's proposal, which the Treasury anticipates will be incorporated into an existing congressional bill and approved this week, signals a shift toward an explicit guarantee of Fannie Mae and Freddie Mac debt. The shareholder-owned companies are government-sponsored enterprises, giving investors the indication of an implicit federal backing.
Fannie Mae and Freddie Mac shares were little changed in New York composite trading after rallying in Europe before U.S. markets opened. Fannie Mae was up 1.9 percent at $10.44 at 10:10 a.m. in New York, and Freddie Mac advanced 2.7 percent to $7.96. Fannie fell 45 percent last week and Freddie Mac lost 47 percent.
``It is time to recognize that the GSEs were always dependent upon government support and now we must make the implicit explicit,'' said Christopher Whalen, co-founder of independent research firm Institutional Risk Analytics in Torrance, California.
Lines of Credit
Paulson proposed that Congress give the Treasury temporary authority to buy equity in the firms ``if needed,'' and to increase their lines of credit with the department from $2.25 billion each. The temporary authority may be for 18 months, a Treasury official told reporters on a conference call on condition of anonymity.
As lenders retreated from the housing market, Washington- based Fannie Mae and McLean, Virginia-based Freddie Mac grew to account for more than 80 percent of the home loans packaged into securities.
``Fannie Mae and Freddie Mac provide an enormous amount of liquidity to the mortgage market'' and ``without them, mortgage rates would be significantly higher,'' Mark Vitner, senior economist at Wachovia Corp. in Charlotte, North Carolina, wrote in a note to clients. ``The bailout is for the housing market and the broader U.S. economy.''
The Treasury and Fed acted yesterday evening in Washington before Asian financial markets opened, and ahead of Freddie Mac's $3 billion auction of short-term notes today. The timing indicated officials were concerned about a collapse in private investors' willingness to fund the firms. The companies issue debt to raise money for their purchases of mortgage securities.
Bill Auction
Freddie Mac sold $2 billion of three-month bills at a yield of 2.309 percent and $1 billion of six-month reference bills at 2.496 percent. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was more than 50 percent above the average of the past three months, according to Stone & McCarthy Research Associates.
Paulson also proposed that the Fed get a ``consultative role'' overseeing the companies' capital requirements. The central bank's role has already grown during the credit crisis to include sharing supervision of investment banks with the Securities and Exchange Commission.
Yesterday's announcements came two days before Fed Chairman Ben S. Bernanke's semiannual testimony on the economy to Congress, where he will likely face questions from lawmakers on the implications of the Fannie Mae and Freddie Mac turmoil.
While the Fed last month signaled that inflation was starting to pose a larger threat than economic growth, the chance of an interest-rate increase this year is fading, analysts said.
Rate Outlook
``It is hard to see them tightening anytime this year,'' said Brian Sack, senior economist at Macroeconomic Advisers LLC in Washington, who used to work at the Fed. Growth in the second half of the year ``looks weaker than we thought'' as the housing downturn continues, he said.
Paulson said use of the Treasury's credit line or any stock investment ``would carry terms and conditions necessary to protect the taxpayer.'' The Treasury official said he didn't recall any time in the past when the government has taken an equity stake in either company.
Some analysts were skeptical about protecting taxpayers.
``These companies were going to go bankrupt if they hadn't stepped in to do something, and they should go bankrupt,'' Jim Rogers, chairman of Singapore-based Rogers Holdings, said in an interview with Bloomberg Television. The Paulson plan is an ``unmitigated disaster,'' said Rogers, who in 2006 correctly forecast oil would reach $100 a barrel.
Home Loan Banks
The Treasury also proposed temporary access to a bigger credit line for the Federal Home Loan Banks, the dozen regional lenders that extend credit to customers including commercial banks, thrifts, insurance companies and credit unions.
Congressional reaction wasn't uniform. While Senator Charles Schumer, a New York Democrat who chairs the congressional Joint Economic Committee, expressed support, the head of the Senate Banking Committee refrained from any specific endorsement.
Christopher Dodd, the Connecticut Democrat who chairs the banking panel, said he planned to call over ``coming days'' a hearing with Paulson, Bernanke and Securities and Exchange Commission Chairman Christopher Cox.
Dodd said in an interview with CNBC that the it's a ``matter of debate'' whether Paulson's plan would be considered as separate legislation or be added to the existing housing bill, which would provide for up to $300 billion to insure refinanced mortgages.
President George W. Bush in a statement called on Congress to enact the legislation.
Access to Funds
The heads of the companies indicated the steps would help them keep access to private capital.
``Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market,'' Fannie Mae Chief Executive Officer Daniel Mudd said in a statement. ``We continue to hold more than adequate capital reserves.''
Freddie Mac CEO Richard Syron said ``We are heartened by yesterday's announcement,'' which should ``go a long way toward reassuring world markets that Freddie Mac and Fannie Mae will continue to support America's homebuyers and renters.''
The last Treasury secretary to make an emergency statement from the steps of the department's main building was Robert Rubin, who sought to calm investors after the Dow Jones Industrial Average fell 554 points on Oct. 27, 1997.
Jump in Trading
The slump in Fannie Mae and Freddie Mac last week forced Paulson on July 11 to issue a statement of support for the companies in their ``current form.'' Trading of Fannie Mae that day amounted to 41 percent of its shares outstanding, with a 61 percent figure for Freddie Mac.
Preferred securities tumbled last week as investors questioned if Freddie and Fannie will be able to continue to pay dividends. Freddie Mac's 5.57 percent preferred lost 39 percent this year and Fannie Mae's 5.5 percent preferred dropped 31 percent.
Yesterday's announcement may not offer much help for shareholders, said Andrew Parmentier, a senior policy analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia.
``Any capital infusion of any nature is going to be dilutive to shareholders,'' Parmentier said.
Capital Raised
The companies have already raised $20 billion to cover losses amid the highest delinquency rates in at least 29 years. Freddie Mac said earlier this month it planned to sell $5.5 billion of equity after it reports earnings next month.
The cost to protect against a default on the companies' subordinated debt jumped last week. Credit-default swaps linked to Freddie's bonds rose to 251 basis points, while contracts on Fannie's increased to 246 basis points, according to CMA Datavision. On July 4, both were at 177 basis points and they started the year at 77. A basis point is 0.01 percentage point.
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt.
Senior debt of both companies trades as if they were rated A3 instead of Aaa by Moody's Investors Service, according to data from the rankings firm's credit strategy group.
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