Alexander Solzhenitsyn
An icon of his age
The death of Alexander Solzhenitsyn gives Russia a chance to reflect on authoritarianism
PROPHETS are without honour in their own country—at least until they die. For most of his adult life in the Soviet Union, Alexander Solzhenitsyn was persecuted. In exile in the West from 1974, his gloomy philippics and increasingly turgid prose aroused more bafflement than appreciation. After he returned to Russia in 1994, he was welcomed but then ignored.
His death is a chance to make amends, although whether a Russia that is increasingly nostalgic for its totalitarian past will chose to take it is another matter. In an online poll (admittedly wildly unscientific) taken in recent weeks, the totalitarian leader Joseph Stalin is a front-runner for the title of greatest Russian. It was criticism of Stalin, expressed privately in a letter to a friend, that landed Mr Solzhenitsyn with an eight-year sentence in the camps. It counted for little that he was a twice-decorated artillery officer, on the front-line of the Red Army’s triumph over Nazi Germany.
Having experienced the crimes of Stalinism at first hand, he exposed them in both fiction and factual form. “One Day in the Life of Ivan Denisovich”, published in 1962, gave Soviet citizens their first opportunity to read about the brutality, squalor, humiliation and fear of daily life in a prison camp, all told in the matter-of-fact style of a Russian folk tale. “The Gulag Archipelago” described the system, its tortures, rules and subculture, in relentless, gruesome, encyclopedic form. Modern scholars, able to research the subject with a freedom that Mr Solzhenitsyn could never have dreamed of, say it is astonishingly accurate.
His other books are more patchy. Although he detested the ravages of communist rule on Russian language and culture, the clunky techniques of Socialist Realism are all too visible in works such as “The Cancer Ward”. His later works are mostly panoramic histories of Russia in the past century that most readers found impenetrable. His latest work, a lengthy series of reflections on Jewish-Russian relations, prompted charges of anti-semitism that he furiously denied.
Mr Solzhenitsyn was a loyal communist in his youth. As a young man, he dreamed of writing a history of the Russian revolution, oblivious to the Stalinist terror going on around him. As a bright, young maths student, he once said he could easily have ended up being recruited by the NKVD, the secret police, to perpetrate terror. Instead he became its most potent critic. His political awakening came from long talks in prison with Arnold Susi, an Estonian lawyer jailed for being a minister in a non-communist government. That friendship survived for many years after both men were released.
As well as the gulag, Mr Solzhenitsyn’s titanic willpower triumphed over other adversaries: cancer, censorship and Soviet bureaucratic intimidation. In 1970 he won the Nobel prize for literature, but declined to accept it in person for fear that he would not be allowed to return to the Soviet Union. But by 1974, the Soviet authorities had had enough: he was bundled onto a plane to West Germany, to spend two decades abroad. Those in the West who had championed his cause were disconcerted to find that he saw the capitalist system as little better than communism. He denounced materialism and moral emptiness, and lived in increasing seclusion in a remote corner of New England.
As communism collapsed, his books, once read only in flimsy, blurred carbon copies, could all be published legally inside the Soviet Union. But he detested the man who brought that about: Boris Yeltsin, the first freely-elected leader in Russia’s history, spurning his offer of a state decoration. He could not, he said accept honours from a man who had brought misery on his people.
To the consternation of some of his supporters, he did accept an award from the ex-KGB officer who became Mr Yeltsin’s successor, Vladimir Putin. He even seemed to downplay Mr Putin’s role in the KGB, saying that every country needed an intelligence service. Yet, although he praised the self-respect and stability that Russia had regained under Mr Putin, he remained deeply critical of its politics and the corruption and greed that capitalism had exposed and fuelled.
That message, often delivered in sententious, near messianic tones, had little appeal. A television programme consisting largely of all but unwatchable monologues lingered painfully on the airwaves and then died, unlamented. Few read his books.
But his death is a chance for Russia’s rulers to say what they think about totalitarianism. Was the collapse of the Soviet Union the “geopolitical catastrophe” of the last century? Or is the real disaster the failure of an independent Russia to cast off the chains of authoritarianism and empire? If Russia’s new president, Dmitry Medvedev, goes beyond simply offering condolences to the Solzhenitsyn family, his thoughts on that would be eagerly awaited.
Aug. 4 (Bloomberg) -- When Barack Obama or John McCain takes over the presidency in January, he will inherit a stable U.S.-China relationship. Part of the credit will belong to someone who gets few kudos for his foreign-policy initiatives: George W. Bush.
The president, who travels to China for the fourth and last time of his presidency this week to attend the Olympic Games in Beijing, ``leaves a relationship that is basically in good shape,'' says Kenneth Lieberthal, who was director for Asia on the White House National Security Council during Bill Clinton's presidency.
Since taking office 7 1/2 years ago, Bush has personally eased tensions over Taiwan. Henry Paulson, his Treasury secretary, stopped Congress from escalating trade disputes; Robert Zoellick, his former No. 2 diplomat, invited China to play a bigger role internationally. Meanwhile, the administration enlisted China's support to fight terrorism and persuade North Korea to begin dismantling its nuclear program.
China's leaders ``will miss him after he steps down,'' says Shen Dingli, director of the Center for American Studies at Fudan University in Shanghai.
Bush will bequeath his successor a base to work from in dealing with a country that owns more than $500 billion in Treasuries, is the top source of U.S. imports and is on track to become the world's second-biggest economy in a decade.
Explosive Issues
To be sure, Bush, 62, will hand some potentially explosive issues to the new president as well. Both Democrats and Republicans have criticized him for not putting enough pressure on China to improve its human-rights record. The U.S. trade deficit with China -- a record $256 billion last year -- may increase calls in Congress to impose tariffs. And the U.S. will have to goad China into doing more to combat global warming.
When he took office in 2001, Bush signaled he was ready to take a hard line, labeling China a ``strategic competitor'' in contrast to the Clinton presidency's description of a ``strategic partnership.'' He also vowed to defend Taiwan if it were threatened. In April that year, China held the crew of a U.S. spy plane for 11 days on its southern Hainan island after a midair collision with a Chinese fighter jet forced the aircraft to make an emergency landing.
The Sept. 11 terrorist attacks forced Bush to engage China more closely. The U.S. needed Chinese influence with Pakistan to help push that country to cooperate in rooting out al-Qaeda from Afghanistan and overthrowing the Taliban government there. In 2002 the U.S. declared a separatist group in China's Xinjiang region to be terrorists, a move China supported.
Minimizing Tensions
Once engaged in Afghanistan and then Iraq, the administration worked to minimize tensions elsewhere, including in the Taiwan Strait and North Korea.
Sept. 11 was ``a turning point,'' says Yan Xuetong, director of the Institute of International Studies at Tsinghua University in Beijing. Bush learned ``to deal with China.''
Bush brought then-Chinese President Jiang Zemin to his Texas ranch in October 2002, where they discussed Iraq and North Korea. He later called Jiang to request help in defusing the Korean crisis.
By April 2003, the U.S. and China were holding discussions with North Korea in Beijing, and China helped persuade Pyongyang to participate in the so-called six-party talks, also including Japan, Russia and South Korea. When Kim Jong Il's regime conducted a nuclear test in October 2006, China stepped up the pressure.
Personal Diplomacy
In December 2003 Bush altered U.S. policy toward Taiwan, telling Chinese Premier Wen Jiabao at an Oval Office meeting the U.S. was opposed to Taiwan's planned referendum on its independence and to ``any unilateral decision by either China or Taiwan to change the status quo.''
A president doesn't normally announce changes in Taiwan policy personally, ``and certainly doesn't articulate it with the Chinese premier sitting next to him in the Oval Office,'' Lieberthal says.
The policy change came over the opposition of some in the Bush administration. It was ``a policy based on fear,'' says John Bolton, who headed the State Department's arms-control efforts and later served as ambassador to the United Nations. ``It is a fear that if we upset China it will do bad things with respect to the six-party talks.''
Taiwan Arms Sales
The closer ties with China are coinciding with a slowdown in arms sales to Taiwan. In May, Deputy Secretary of State John Negroponte said the U.S. wouldn't sell new F-16 fighter jets to Taiwan, rejecting a request by newly elected President Ma Ying- jeou. Admiral Timothy Keating, head of the U.S. Pacific Command, told a forum in Taiwan last month there's ``no pressing, compelling need'' for arms sales to Taiwan.
That remark prompted speculation that the U.S. has frozen arms sales, something the Bush administration denies.
``I don't think the government has come out and said it is a freeze, but if it looks like a duck and walks like a duck,'' it may be one, says Taylor Fravel, a political science professor at the Massachusetts Institute of Technology.
The administration's engagement with China has had reverberations beyond Asia. In a September 2005 speech in New York, Zoellick urged China to be a ``responsible stakeholder'' globally. That challenged China and flattered its sense of stepping into the role of world power.
Zoellick's speech suggested that ``China is an insider now,'' says Huang Jing, a senior research fellow at the National University of Singapore's East Asian Institute.
Zoellick, who left the administration in 2006 and now heads the World Bank, and Treasury's Paulson expanded communication between the governments through initiatives such as the Strategic Economic Dialogue.
Damage Control
That can help limit the damage of gaffes, such as when a Falun Gong activist disrupted a welcoming ceremony during President Hu Jintao's April 2006 visit to Washington. At that ceremony, an announcer said the band would play the anthem of the Republic of China -- the official name of Taiwan.
The communication can also smooth over more serious incidents.
Bush invoked the increased exchanges and ``good personal relations'' with Chinese leaders as one of his main legacies, in a July 30 interview with Asian journalists in Washington. Regular talks have helped create mutual trust, in contrast to the tense standoff over the spy plane in 2001, Bush says.
``Frankly, it took a while to get phone calls returned and we were just trying to get information,'' Bush says of the incident. If ``that happened now, there would be a much more immediate response because there's more trust.''
Fending Off Tariffs
Paulson, who logged four trips a year to China as head of Goldman Sachs Group Inc., fended off congressional calls for punitive legislation against Chinese exports.
The Treasury also declined to label China a currency manipulator amid anger in Washington over Chinese reluctance to let the yuan rise faster. The currency has gained 21 percent against the dollar in three years.
Those actions leave some lawmakers arguing that Bush's policy is a failure.
``His corporate backers and interests, time and time again, trump our communities' interests, trump our workers' interests, trump our small manufacturers' interests,'' says Senator Sherrod Brown, an Ohio Democrat. ``Except for the Iraq War, there's no bigger failure of the Bush administration than his China policy.''
Dissidents
Senator Sam Brownback, a Kansas Republican, says Bush hasn't pressed China hard enough to improve its treatment of political dissidents and expand religious freedom.
``I don't think the president ought to go to the opening of the Olympics,'' Brownback says. ``I think we should push them more aggressively.''
Dennis Wilder, the senior director for Asian affairs on the White House National Security Council, says attending the Olympics will build goodwill and increase U.S. leverage.
``People want us to have influence on the Chinese government,'' Wilder told reporters at the White House. ``If you don't have a good working relationship with the Chinese government, how do you do that?''
Aug. 4 (Bloomberg) -- U.S. stocks fell for a third day, led by financial shares, after the government reported the fastest jump in consumer prices since 1981 and Europe's biggest bank said bad loans are increasing in North America.
Citigroup Inc., Bank of America Corp. and JPMorgan Chase & Co. led the retreat after HSBC Holdings Plc said U.S. bad loan charges and other provisions rose 85 percent and the Commerce Department reported consumer inflation climbed 0.8 percent in June. Freeport-McMoRan Copper & Gold Inc. and Barrick Gold Corp. led mining shares lower as metal prices retreated.
The Standard & Poor's 500 Index lost 6.86 points, or 0.5 percent, to 1,253.45 at 9:56 a.m. in New York. The Dow Jones Industrial Average fell 51.46, or 0.5 percent, to 11,274.86. The Nasdaq Composite Index retreated 13.69, or 0.6 percent, to 2,297.27. Almost three stocks declined for each that rose on the New York Stock Exchange.
``The consumer is pretty stretched right now,'' said Matthew DiFilippo, director of research at Stewart Capital Advisors in Indiana, Pennsylvania, which manages $1 billion. Americans are facing ``a weaker employment market, higher prices and financing that's less readily available.''
The S&P 500 has slumped 14 percent this year as banks' credit losses and asset writedowns topped $480 billion worldwide and the U.S. economic slowdown prompted analysts to cut earnings estimates. Second-quarter profits at the 355 companies in the S&P 500 that reported results so far dropped 20 percent on average, dragged down by losses at financial and consumer companies including Merrill Lynch & Co. and General Motors Corp.
Bad Loans
Citigroup, the biggest U.S. bank by assets, slumped 2.5 percent to $18.39. Bank of America, the second-largest, retreated 2.1 percent to $32.62. JPMorgan, the No. 3, slid 1.7 percent to $40.05.
HSBC Holdings Plc said its first-half pretax loss in North America was $2.9 billion, compared with profit of $2.4 billion in the year-earlier period. U.S. consumer bad loan charges and other provisions rose 85 percent to $6.8 billion as the bank reduced its number of branches by 10 percent to 900 and said it would ``run off'' its $13 billion vehicle finance operation. The shares dropped 2 percent in London.
The Federal Reserve is projected to hold interest rates unchanged tomorrow as the risks of both faster inflation and slower growth mount. The Fed's preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent, more than forecast, after a 0.2 percent gain the previous month.
``It's just a question of whether people have any disposable income left after they've finished spending their money on gasoline and other cost-inflation goods,'' said Bernard Horn, president of Polaris Capital Management in Boston, which manages $4 billion.
Mining Shares Retreat
Freeport-McMoRan lost 4.3 percent to $87.38. AK Steel Holding Corp. retreated 3.3 percent to $58.07.
Copper prices plunged the most in almost a month as rising inventories spurred concern demand is declining, while gold and silver retreated as a drop in energy costs reduced their appeal as a hedge against inflation.
All of the 23 developed nations in the MSCI World Index except for Canada have experienced bear-market plunges of 20 percent or more since September. Among the 25 developing countries in the MSCI Emerging Markets Index, only Jordan and Morocco avoided such slumps.
`Dance With the Bear'
``We're all learning to dance with the bear and trying not to get mauled,'' Scott Richter, portfolio manager at Fifth Third Asset Management in Cleveland, said on Bloomberg Television. FTAM oversees $21 billion. ``There's no doubt that the economy is in a very fragile state. It's grinding ahead at a very below-par type of pace.''
The Commerce Department may say at 10 a.m. that factory orders rose 0.7 percent in June compared with a 0.6 percent advance the previous month, economists forecast.
The S&P 500 last week posted its second weekly advance since May, led by energy companies and banks, as oil advanced and investors speculated the worst of the subprime crisis is over.
Financial stocks rallied 4 percent, the most among 10 industry groups in the S&P 500 last week, after the Federal Reserve extended an emergency lending program and the Securities and Exchange Commission prolonged a ban on a type of short sale. Banks, brokerages and insurance companies have rebounded 25 percent since July 15.
Aug. 4 (Bloomberg) -- The biggest increase in prices in almost three decades eroded consumers' buying power in June, diminishing the boost from the government's tax rebates.
Consumer inflation climbed 0.8 percent, the most since February 1981, the Commerce Department said today in Washington. Spending increased 0.6 percent after a 0.8 percent gain in May.
The tax rebates from the government's stimulus plan will provide only a temporary boost for Americans in the face of $4- a-gallon gasoline, tumbling home prices and mounting job losses. The Federal Reserve is projected to hold interest rates unchanged tomorrow as the risks of both faster inflation and slower growth mount.
``There is a bit more inflation pressure than many people anticipated,'' said Kevin Logan, a senior market economist at Dresdner Kleinwort in New York, who correctly forecast the gain in spending. ``Inflation pressure is more widespread and that has to be some concern for the Fed. The tax cuts have helped maintain spending, but it's likely to drop off pretty dramatically in the fourth quarter.''
Treasuries fell, pushing yields higher. The benchmark 10- year note yielded 3.97 percent as of 8:57 a.m. in New York, up 3 basis points.
Economists had forecast spending would rise 0.4 percent, after an originally reported 0.8 percent increase in May, according to the median of 67 estimates in a Bloomberg News survey. Projections ranged from a 0.5 percent decline to a 0.9 percent gain.
Incomes Increase
Incomes increased 0.1 percent after jumping 1.8 percent the prior month, today's report showed. The median forecast was a decline of 0.2 percent. About $28 billion in rebates went out in June, compared with about $50 billion in late April and May, according to Treasury Department figures.
The Fed's preferred gauge of prices, which excludes food and fuel, climbed 0.3 percent, more than forecast, after a 0.2 percent gain the previous month. That compared with a 0.2 percent median estimate in the Bloomberg survey.
The price measure was up 2.3 percent from June 2007, the biggest year-over-year increase since December.
Fed's Meeting
Investors are betting the Fed will hold the benchmark rate unchanged at 2 percent tomorrow, according to federal funds futures contracts. Fed Chairman Ben S. Bernanke on July 15 told lawmakers that the economy faced threats to both growth and inflation.
Adjusted for inflation, spending decreased 0.2 percent after rising 0.3 percent in May.
Most economists are forecasting the lift from the rebates will fade in the second half of the year. Retail sales rose 0.1 percent in June, less than forecast, indicating consumers may already have started to hunker down. Purchases of autos and light trucks dropped in July to the lowest level since 1993, industry figures last week showed.
Economists surveyed by Bloomberg in the first week of July forecast economic growth to slow to 1.4 percent in the third quarter and to 0.5 percent in the fourth quarter.
The economy shrank at a 0.2 percent race in the last three months of 2007 and grew at about an average 1.5 percent annual pace in the first six months of 2008, government data last week showed.
With the economy teetering on the brink of a recession, consumers are focusing their purchases on staples while cutting back on luxuries like $4 lattes, causing sales to slump at Starbucks Corp. the world's largest chain of coffee shops.
Starbucks last week said it will close more U.S. stores than it will open next year after it posted its first loss in 16 years as a public company.
``Until the economy significantly improves, we're just trying to do what we can to get through this storm,'' Starbucks Chairman Howard Schultz said on a conference call.
Sunday, August 3, 2008
The big freeze: A year that shook faith in finance
By Gillian Tett
Just over a year ago, Hiroshi Nakaso, a senior official at the Bank of Japan, started to fear that the global financial system was heading for a jolt. Back then, most American policymakers assumed that the western banking system was extraordinarily strong. Thus while US mortgage defaults were rising, western officials were convinced that such losses would be easily “contained”.
But as Mr Nakaso watched western markets in July 2007, he had a sense of déjà vu. “I see striking similarities in what I see today with the early stages of our own financial crisis [in Japan] more than a decade ago,” he privately warned international contacts shortly after IKB, a German lender, imploded as a result of subprime losses. “Probably we will have to be prepared for more events to come ... the crisis management skills of central banks and financial authorities will be truly tested.”
His fears proved well-founded. On August 9 2007, the European Central Bank sent shock waves around world financial capitals when it injected €95bn ($150bn, £75bn) worth of funds into the money markets to prevent borrowing costs from spiralling sharply. The US Federal Reserve soon followed suit. But while the central banks had billed these moves as “pre-emptive” actions to quell incipient market tensions, they did not bring the panic to an end.
On the contrary, as markets that were crucial for raising funds started to dry up last August, a network of financial vehicles slid into crisis, causing the price of many debt securities to collapse. That started a chain reaction that created liquidity and solvency crises at US and European banks – on a scale last seen in Japan almost exactly a decade ago.
A year later, there is still no sign of an end to these problems. Instead, the sense of pressure on western banks has risen so high that by some measures this is now the worst financial crisis seen in the west for 70 years.
What has made this upheaval so shocking is not simply its scale and duration but the fact that almost all western policymakers and bankers were caught unawares. “If you had said a year ago that America could suffer a banking crisis on the scale of Japan, people would have laughed,” one former senior US regulator admits.
Or as the Bank for International Settlements, which groups central banks, observes in its latest annual report: “The duration of the turmoil, its scope and the growing evidence of effects on the real economy have come as a great surprise to most commentators, private as well as public.”
Adding that it “is essential we understand what is going on”, the BIS points out that the crucial question is: “How could problems with subprime mortgages, being such a small sector of global financial markets, provoke such dislocation?”
The answer to this seeming mystery lies in the slippery concept of financial “faith”. Over the past decade, western banking has experienced an extraordinary burst of innovation, as financiers have discovered ways to slice and dice their loans – such as the now controversial subprime mortgages – and then turn these into securities that can be sold to investors all over the world.
Tracking the scale of this activity with any precision has always been hard, since much of it occurs in private deals. However, industry data suggest that between 2000 and 2006, nominal global issuance of credit instruments rose twelvefold, to $3,000bn (£1,519bn, €1,929bn) a year from $250bn. This activity appears to have become particularly intense from 2004, partly because investors were searching for ways to boost returns after a long period in which central banks had kept interest rates low.
To be sure, ahead of last summer’s crisis some policymakers and investors were uneasy about the scale of this explosion. In particular, there was growing concern that “slicing and dicing” was fuelling a credit bubble, leading to artificially low borrowing costs, spiralling leverage and a collapse in lending standards. When world leaders gathered in Davos for the annual economic forum in January 2007, Jean-Claude Trichet, governor of the ECB, complained about the opacity of some financial innovation and warned that there could soon be some “repricing of credit risk”.
From 2005 onwards, Timothy Geithner, president of the New York Federal Reserve, called on banks to prepare for so-called “fat tails” – a statistical term for extremely negative events which occur more commonly than usual banking models suggest. Behind the scenes, a few bankers and investors also prepared for a crash. Deutsche Bank, for example, started betting on subprime defaults as early as 2006, while JPMorgan Chase placed trades to protect itself from a crash in spring 2007 and asset managers such as Pimco and BlackRock stopped purchasing many debt instruments in early 2007. Yet most investors, bankers and even regulators did not change their behaviour to any significant degree, owing to a widespread adherence to three big assumptions – or articles of faith – that have steathily underpinned 21st century finance in recent years.
The first of these was a belief that modern capital markets had become so much more advanced than their predecessors that banks would always be able to trade debt securities. This encouraged banks to keep lowering lending standards, since they assumed they could sell the risk on. “Abundant market liquidity led some firms to overestimate the market’s capacity to absorb risk,” says the Institute of International Finance, a Washington-based lobby group, in a recent report. “The same buoyant environment resulted in market pressure for high returns ... and high levels of competition among financial firms.”
Second, many investors assumed that the credit rating agencies offered an easy and cost-effective compass with which to navigate this ever more complex world. Thus many continued to purchase complex securities throughout the first half of 2007 – even though most investors barely understood these products.
But third, and perhaps most crucially, there was a widespread assumption that the process of “slicing and dicing” debt had made the financial system more stable. Policymakers thought that because the pain of any potential credit defaults was spread among millions of investors, rather than concentrated in particular banks, it would be much easier for the system to absorb shocks than in the past. “People had looked at what had happened to the Japanese banks and said, ‘this simply cannot happen here’, because the banks were no longer holding all the credit risk,” one senior European policymaker recalls.
In private, some central bank officials harboured doubts about this new creed. From 2003, senior officials at the BIS in Basel, for example, repeatedly warned that risk dispersion might not always be benign. However, such warnings were largely kept out of public view, partly because the US Federal Reserve was convinced that financial innovation had changed the system in a fundamentally beneficial way.
Consequently, no attempt was made to force banks to boost their capital reserves to offset exploding debt issuance; instead, regulatory rules permitted banks to cut their capital levels sharply, which they duly did. “People really believed that the world was different,” recalls Larry Fink, head of BlackRock investment group. “There was this huge trust in the intellectual capital of Wall Street – and that appeared to be supported by the fact that banks were making so much money.”
As a result, when high rates of subprime default emerged in late 2006, there was initially a widespread assumption that the system would absorb the pain relatively smoothly. After all, the system had easily weathered shocks earlier in the decade, such as the attacks of September 11 2001 or the collapse of the Amaranth hedge fund in 2006. Moreover, the US government initially estimated that subprime losses would be just $50bn-$100bn – a tiny fraction of the total capital of western banks or assets held by global investment funds.
In fact, the subprime losses started to hit the financial system in the early summer of 2007 in unexpected ways, triggering unforeseen events such as the implosion of IKB. And as the surprise spread, the three pillars of faith that had supported the credit boom started to crumble.
First, it became clear to investors that it was dangerous to use the ratings agencies as a guide for complex debt securities. In the summer of 2007, the agencies started downgrading billions of dollars of supposedly “ultra-safe” debt – causing prices to crumble. Last week, for example, Merrill Lynch sold a portfolio of complex debt at 22 per cent of its face value, even though this had carried the top-notch triple-A rating.
Then, as bewildered investors lost faith in ratings, many stopped buying complex instruments altogether. That created an immediate funding crisis at many investment vehicles, since most had funded themselves by issuing notes in the asset-backed commercial paper market. It also meant that banks were no longer able to turn assets such as mortgages into subprime bonds and sell these on. That in turn meant the second key assumption that had underpinned 21st-century finance – that the capitalmarkets would always stay liquid – was overturned. Worse still, the third pillar of faith – that banks would be better protected from a crisis because of risk dispersion – also cracked. As investment vehicles lost their ability to raise finance, they turned to their banks for help. That squeezed the banks’ balance sheets at the very moment that they were facing their own losses on debt securities and finding it impossible to sell on loans.
As a result, western banks found themselves running out of capital in a way that no regulator or banker had ever foreseen. Peter Fisher, a managing director of BlackRock and former US Treasury undersecretary, wrote in a recent paper: “It seems clear that risk dispersion did not work as expected. Major financial institutions did not succeed in shedding risks so much as transferring them among their own business lines.”
Banks started hoarding cash and stopped lending to each other as financiers lost faith in their ability to judge the health of other institutions – or even their own. “Firms became reluctant to participate in money markets ... as a result subprime credit problems turned into a systemic liquidity crunch,” says the IIF.
Then a vicious deleveraging spiral got under way. As banks scurried to improve their balance sheets, they began selling assets and cutting loans to hedge funds. But that hit asset prices, hurting those balance sheets once again. What made this “feedback loop” doubly intense was that the introduction of mark-to-market accounting earlier this decade forced banks to readjust their books after every panicky price drop – in contrast to the pattern seen in the 1990s Japanese banking crisis, or the Latin American debt debacle of the 1980s.
At several points over the past year, policymakers have hoped that this vicious cycle might be coming to an end. Last autumn, for example, conditions briefly improved; early this year brought another respite when central banks pumped more liquidity into the system. Similarly, when the Fed stepped in to prevent the implosion of Bear Stearns in March, sentiment stabilised for a period.
However, in practical terms, the real challenge for financiers and policymakers now – as in Japan a decade ago – is how to build a new sense of trust in finance. In the medium term, regulators are preparing reforms that aim to make the system look credible, even in a world where the benefits of risk dispersion are no longer taken as a creed. These would force banks to hold more capital and ensure that the securitisation process is more transparent. Separately, groups such as the IIF are trying to introduce measures that could rebuild confidence in complex financial instruments.
More immediately, the banks are trying to rekindle investor trust by replenishing their capital bases. The IIF calculates that in the year to June, banks made $476bn in credit writedowns, as debt prices plunged in the panic (although tangible credit losses are hitherto just $50bn). However, they have also raised $354bn in capital. Financiers are also trying to restart trading in frozen debt markets. Experience from earlier financial crises suggests that this will only occur when investors are convinced that they have seen true “clearing prices”. Events such as Merrill Lynch’s recent fire sale of its CDO portfolio may be a step in this direction.
But while confidence is returning in some areas, it continues to be undermined in others. A decade ago in Japan, the banking woes started with a property slump but later spread when banks were forced to cut their lending – which unexpectedly created more bad loans. Thus far, banks have not yet encountered this “second round” effect on a significant scale.
Though defaults are rising on consumer loans, for example, losses on corporate debt remain modest. However, most bankers and policymakers fear that a second wave is simply a matter of time. That makes it hard to predict when the credit crunch will end, how big the total losses may eventually be or even whether the banks are adequately capitalised yet.
“What we learnt in Japan is that banks have a tendency to underestimate how their assets could deteriorate due to the feedback problems,” Mr Nakaso recalls.
A year into the credit crisis, in other words, trust remains a rare commodity in the banking world. It will take years, not months, to restore that crucial ingredient – particularly given that so many of the assumptions underlying 21st-century finance have turned out to be so dangerously wrong.
Aug. 4 (Bloomberg) -- Indonesia's central bank may raise its benchmark interest rate for a fourth straight meeting after inflation jumped to a 22-month high in July.
Governor Boediono and his seven colleagues will increase the policy rate by a quarter point to 9 percent, according to 20 of 22 economists in a Bloomberg News survey. The board of governors will meet tomorrow in Jakarta.
Central banks across Asia are raising borrowing costs to contain prices of food and fuel. Bank Indonesia will raise the rate to manage inflation expectations as the nation with the world's largest Muslim population prepares to celebrate Id-ul-Fitr following the fasting month of Ramadan that begins in September, said economist Lana Soelistianingsih. Inflation accelerated 11.9 percent in July, exceeding estimates.
``People will need more money for celebrations,'' said Soelistianingsih from PT Samuel Sekuritas in Jakarta. ``Bank Indonesia should minimize the inflation impact from these demand- side pressures by increasing rates.''
President Susilo Bambang Yudhoyono's government raised fuel prices by about 30 percent in May to reduce its burden of capping pump costs. That made it more expensive to transport food, steel and cement across the 18,000 islands that make Indonesia the world's largest archipelago.
Consumer prices in Indonesia jumped 11.9 percent in July, beating estimates for an 11.2 percent gain, the Central Statistics Bureau reported last week. Prices rose 1.37 percent from a month earlier.
`Remain High'
``We hope that month-on-month inflation will peak in the next one or two months, then it will slow toward the year-end, though year-on-year inflation will remain high,'' central bank Senior Deputy Governor Miranda Goeltom said Aug. 1.
Bank Indonesia in May was the first central bank in Southeast Asia after Vietnam to raise borrowing costs this year. Vietnam increased its benchmark rate in January. India on July 29 raised its policy rate by a more-than-expected half point as inflation accelerated to the fastest pace since 1995.
PT International Nickel Indonesia, the local unit of Cia. Vale do Rio Doce, the world's largest iron-ore producer and Indonesia's biggest producer of nickel, will announce its second- quarter earnings on Aug. 7.
PT Aneka Tambang, Indonesia's second-largest producer of nickel by market value, said sales in the second quarter of the year fell 4.6 percent as the company produced less nickel and prices declined.
Indonesia's benchmark stock index rose 0.2 percent to 2,248.75 last week, a second week of gains. PT United Tractors, Indonesia's biggest heavy-equipment seller, gained 8.4 percent after first-half profit more than doubled from a year earlier as orders for coal-extraction and construction machinery increased.
The rupiah had its seventh weekly gain on speculation the central bank will raise interest rates. The rupiah increased 0.3 percent, making it the best performer among Asia's 10 most-traded currencies outside Japan. The currency fell 0.1 percent to 9,102 at 10:22 a.m. in Jakarta.
The following are key events for this week and a table of economists' estimates for the BI rate.
Perusahaan Gas Negara stock split Aug. 4
BI rate decision Aug. 5
Medco Energi extraordinary shareholders meet Aug. 7
PT Timah stock split Aug. 8
Indonesia BI Rate Estimates
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Aug. End End
Firm 5 3Q 4Q
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Median 9.00% 9.25% 9.50%
% Estimates at Median 91% 56% 25%
Average 9.00% 9.17% 9.45%
High 9.25% 9.50% 10.00%
Low 8.75% 9.00% 9.00%
Number of Estimates 22 16 16
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Action Economics 9.00% 9.25% 10.00%
ANZ Banking Group 9.00% 9.00% 9.25%
ATR-Kim Eng Capital 9.00% 9.00% 9.00%
Bank Central Asia 9.00% 9.00% 9.00%
Bank Danamon 9.00% 9.25% 9.50%
Bank Intl Indonesia 9.00% 9.25% 9.50%
BNI Securities 8.75% -- --
Credit Suisse 9.00% -- --
Danareksa Securities 9.00% 9.00% 9.00%
Forecast Ltd. 9.00% -- --
HSBC 9.00% 9.25% 9.75%
Ideaglobal 9.00% 9.00% 9.00%
ING Groep NV 9.00% -- --
Lehman Brothers 9.00% -- --
Mandiri Securities 9.00% 9.25% 9.50%
Moody's Economy.com 9.00% 9.25% 9.75%
Morgan Stanley 9.00% -- --
PT. Mega Capital 9.00% 9.25% 9.75%
Samuel Sekuritas Indonesia 9.00% 9.25% 9.75%
Standard Chartered 9.00% 9.25% 9.50%
Thomson IFR 9.25% 9.50% 10.00%
UOB Group 9.00% 9.00% 9.00%
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Aug. 4 (Bloomberg) -- China already has won most of the medals in the financial Olympics by avoiding the toxic debt investments that devastated banks in the U.S. and Europe.
Chinese banks hold three of top six spots among the world's largest financial companies based on market value, even though their shares fell more than 20 percent in Hong Kong trading since October. London-based HSBC Holdings Plc, the biggest non-Chinese bank, is No. 3, trailing Beijing-based Industrial & Commercial Bank of China Ltd. and China Construction Bank Corp.
The Chinese banks owe their rankings in part to having avoided almost all of the $480 billion in writedowns and credit- market losses that have sent bank stocks tumbling worldwide, data compiled by Bloomberg show. Only two years ago, the world's biggest banks were led by Citigroup Inc. and Bank of America Corp. of the U.S. and UBS AG in Europe.
``Compared with the continuing writedowns at Citigroup and Merrill Lynch, Chinese banks are definitely winning the financial medals,'' said Shao Chingxiao, managing partner of SMC China Fund in Shanghai, which owns shares of China Construction Bank and Bank of China Ltd., the world's fifth-largest bank.
ICBC's unaudited figures released July 3 show first-half profit rose more than 50 percent. Three days later, Beijing-based China Citic Bank Co. said earnings jumped more than 150 percent in the same period. China Construction Bank followed, saying net income may have advanced more than 50 percent.
ICBC and China Construction Bank are the most expensive among the 15 largest global banks by market value, trading at 3.2 times and 3.4 times book value, respectively, according to data compiled by Bloomberg. That compares with New York-based Citigroup, which trades at less than 1 times book value. Bank of America in Charlotte, North Carolina, the world's fourth-biggest bank by market value, is at 1.07 times book value.
Morgan Stanley
China's success in growing its state-owned domestic banks hasn't been matched by its investments in overseas financial firms. Chinese funds and companies spent $19.3 billion buying stakes in Blackstone Group LP, Morgan Stanley, Barclays Plc, Fortis and Johannesburg-based Standard Bank Group Ltd. since May 2007 that are now worth $7 billion less on paper.
The sprint into overseas financial stocks culminated Dec. 19 with Beijing-based China Investment Corp.'s $5 billion purchase of a 9 percent stake in New York-based Morgan Stanley, the second-biggest U.S. securities firm.
Morgan Stanley has declined 18 percent in New York trading since then. The $200 billion sovereign wealth fund also invested $3 billion in shares of New York-based Blackstone, manager of the world's largest buyout fund, only to see their value decline 41 percent since the firm's initial public offering in June 2007.
Paper Profits
The losses may have deterred China from making further investments in overseas banks rocked by credit-market turmoil, said Howard Wang, who oversees $10 billion at JF Asset Management in Hong Kong.
``The whole world is so uncertain right now,'' Wang said. ``And the Chinese government is so afraid of a misstep that will draw criticism that it doesn't want to play.''
By contrast, foreign banks' investments in Chinese financial firms have fared much better, showing $50 billion of paper profits, according to Bloomberg data.
The biggest winner is HSBC, which traces its origins to 1865, when it was incorporated in Hong Kong as Hong Kong & Shanghai Banking Co. It bought 19.9 percent of Shanghai-based Bank of Communications Co. in 2004, the country's fifth-largest lender, and 10 percent of Shenzhen-based Ping An Insurance (Group) Co., China's second-largest insurer, in 2002, later increasing that stake to 17 percent. HSBC is sitting on a $16 billion gain from those investments.
`A Marathon'
Bank of America, which bought 9 percent of China Construction Bank for $3 billion in 2005, has a $14 billion paper profit, Bloomberg data show.
For both China and non-Chinese banks, the value of their investments isn't measured only by stock price. Foreign banks are positioning themselves to sell services into the world's most populous country, where economic growth is above 10 percent.
Chinese banks and sovereign wealth funds, flush with cash, are eager to build their portfolios overseas and prove that China can compete on a global stage, said Richard Gibb, Asia head of financial-service investment banking at Merrill Lynch & Co. in Hong Kong.
``This is a marathon, not a 20-yard dash,'' Gibb said. ``The trend of Chinese institutions investing overseas will continue.''
Charles-Everard de T'Serclaes, who heads New York-based JPMorgan Chase & Co.'s insurance business in Asia, also said China has a long investment horizon.
Merrill's Slump
``They are now significant strategic investors in global financial institutions,'' de T'Serclaes said. ``This is a major shift from four to five years ago, when they were mostly recipients of international capital.''
While the Hang Seng China Enterprise Index, comprising 42 Chinese companies traded in Hong Kong, fell 23 percent this year, bank stocks outperformed. Of the four companies on the index that gained since Dec. 31, three are banks. ICBC climbed 4.5 percent, China Construction Bank rose 4.8 percent and China Citic Bank advanced 2.04 percent today.
By contrast, Merrill Lynch, the third-biggest U.S. securities firm by market value, has slumped 50 percent in 2008 in New York Stock Exchange composite trading. Merrill raised $8.5 billion on July 29 by selling shares to investors including Temasek Holdings Pte, following almost $19 billion of losses in the past 12 months.
Temasek, Singapore's sovereign wealth fund, agreed to buy an additional $3.4 billion of Merrill shares, cementing its status as the firm's biggest stockholder. It also received a $2.5 billion payment from New York-based Merrill to offset losses on an earlier investment.
Slowdown in Investing
China, unlike Singapore, has slowed its investments in overseas financial companies. China Development Bank's and Ping An's purchases of additional shares in London-based Barclays and Fortis, Belgium's biggest financial-services company, were the only such investments this year.
The government blocked plans by Beijing-based China Development Bank to invest in Citigroup because of the U.S. bank's mortgage-related losses, a person with knowledge of the decision said in January. At almost $103 billion, Citigroup's market value is less than half of China Construction Bank's.
``They, like anyone else, are scared,'' said Glenn Henricksen, chief financial officer of Vestasia Ltd., a financial advisory firm in Shenzhen, China. ``Look at what's going on with financial institutions around the globe.''
Olympic Moves
Chinese banks may not be as well off as they seem, according to Henricksen. A drop in real estate prices in Shenzhen and other cities, along with the government's decision to raise reserve ratios, don't bode well, he said.
``I expect the credit quality of the banks' portfolios to deteriorate significantly,'' he said. ``They're going to find they have a lot of questionable assets on the balance sheet.''
Henricksen said he doesn't expect Chinese banks to announce any bad news until after the Olympics.
Bank of China, the only lender that's an official sponsor of the Summer Games, which begin Aug. 8, has set up five temporary outlets in Beijing, four in Qingdao and one in Hong Kong. It installed 2,500 point-of-sales terminals in Olympic venues, hotels and athletes' residential areas, and its outlets can now handle conversions for 14 foreign currencies, compared with the usual eight.
ICBC, which has a market value of almost $250 billion, has 4,613 automatic teller machines in the six co-host cities and has set up a task force of 60 managers to handle calls from customers in six foreign languages.
The Olympics aren't ``just a strict test to the quality of Chinese banks' internationalized services,'' ICBC said in a July 28 statement, ``but a stage to project their brand images.''
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