Bharat Rakshak

NEW YORK -- Adrienne Radtke plans to keep riding her bike to work even if gas prices drop. Steve Pizzini got rid of his Cadillac Escalade in favor of a 16-year-old Acura and doesn't expect to have another gas-guzzler.

"I had a paradigm shift," said Pizzini, a financial analyst. "I spent the money on a nice car. But to me, it's not worth it. I don't think I will go that route again."

Every economic downturn changes shoppers in some way. But this time, experts say the new behavior — fueled by higher gas and food prices, tightening credit and a slumping housing market — are the most dramatic and widespread that they have seen since the mid-1970s.

So retailers, marketers and investors are all trying to figure out which habits shoppers will keep and which will they drop when the economy recovers. Will the people who switched to store-brand ice cream go back to Breyers or Edy's? Will shoppers return to department stores or keep looking for labels at T.J. Maxx?

"We are looking at stuff that reminds me of the 1970s," said Patricia Edwards of investment manager Wentworth Hauser and Violich. "Americans have seen a huge amount of their balance sheet evaporate. The effects will be more lingering."

Wendy Liebmann, president of WSL Strategic Retail, says people's new spending patterns are forcing companies to change the kinds of products they sell and tweak their marketing to appeal to cost-conscious shoppers. She points to the last big recession of the early 1990s that helped trigger a fundamental shift in retailing as affluent shoppers started buying at discounters as well as upscale stores.

Radtke, 31, who holds down two jobs — at a veterinarian's office and at a flower shop — recently picked up shoe glue to fix the soles of her worn sneakers. She's buying store-label soups and crackers and bought a bike for her commute after not having ridden one for five years.

"We weren't big spenders, but now we are watching our money more," said Radtke, of Manitowoc, Wis., whose husband works in construction. "Even if I fell into a pile of money, I still wouldn't be spending a lot."

According to a survey released Thursday by market research company Nielsen Co., which tracks consumer habits, about two-thirds, or 63 percent, of consumers are cutting spending due to rising gas prices, up 18 percentage points from a year ago.

According to the study, which queried nearly 50,000 consumers by e-mail during the first week of June, 78 percent of them are combining shopping trips and 52 percent are eating out less often. Consumers are also cutting more coupons, doing more of their shopping at supercenters and buying less expensive brands, the survey found.

A rebounding economy may let some consumers revert to their old ways — like people who switched to smaller cars when times were hard in the 1970s but flocked to sport utility vehicles when gas got cheap again. But with more economists believing that the current woes will last well into next year, many think the underlying frugality will linger. Some Americans say their parents or grandparents affected by the Great Depression are still hoarding buttons and squeezing out several soup meals from ham bones.

"I shop cautiously," said Edna Sott, an 88-year-old resident from Berkeley Heights, N.J. "I would say that is a hangover" from the Depression.

Marian Salzman, chief marketing officer for public relations agency Porter Novelli, cites a "Depression mentality" that's making people "rethink their optimism in the economy."

The widening gap between discounters and mall-based apparel sellers was evident in monthly retail sales figures released last week. The International Council of Shopping Centers-UBS tally of 38 stores found that same-store sales at discounters rose 5.1 percent in June and 9 percent at wholesale clubs. Discount giant Wal-Mart Stores Inc. posted a robust 5.8 percent, its best June performance since 2002.

At department stores, though, same-store sales — or those at stores opened at least a year — dropped 4.1 percent.

"People are spending money on food and the products they need to sustain life," said Todd Hale, senior vice president at Nielsen.

He noted sharp declines in visits to clothing, office supply and hardware stores. He also pointed out that sales of store-brand products in grocery items are up 9.1 percent for the year ended April 19, while sales of branded products rose a more modest 3.9 percent. More than half the sales growth from store label grocery items is now from dairy like milk and cheese, an area that has seen soaring inflation.

Liebmann says Americans are trying to take "control of the little things" like mending socks or buying more store-brand food because they can't control the big things like gas and food prices.

Their little changes, though, are forcing some companies to respond in big ways.

Auto executives predict that consumers' newfound appreciation for smaller cars will be permanent, causing major pain at auto plants. Toyota Motor Corp. was among the latest to announce a product overhaul, saying it will shut down truck and SUV production to meet the changing consumer needs.

Pizzini, 29, of Eagleville, Pa., says his elderly Acura gets almost three times as many miles per gallon as the Escalade, whose lease he got out of through a company called LeaseTrader.com. Since last October, LeaseTrader.com has seen a 24 percent increase in the number of people who want to downsize to a smaller car, spokesman John Sternal said.

Fred Clements, executive director of the National Bicycle Dealers' Association, said consumers stung by $4-per-gallon gas are shifting toward utility bikes and away from recreational versions. That's forcing bike shops to change their inventories and offer more training for consumers who may not have ridden a bike in years, he said.

Plenty of stores that have benefited from shoppers' woes are hoping to retain them when the economy rebounds.

Andrea Thomas, executive vice president of private brands at Wal-Mart, thinks that many shoppers will stick with store labels since the quality has improved so much. Overall, Wal-Mart expects to retain the affluent customers when the economy recovers because it has made improvements in its stores and customer service.

Edwards, of Wentworth Hauser and Violich, agrees that new fans of discounters will keep buying at discounters as long the products measure up. And she sees lower-income shoppers switching back to meat from beans and rice before going back to name-brand food.

At the Alexandria Shoe Repair and Leather Service in Virginia, sales have increased 18 percent since February.

"I am seeing a younger crowd who lives in the disposable world," said owner Barbara Steube. "They are learning an economics lesson. They will see the benefit of the savings and how much money they walk away with when they fix their shoes."

Emerging market financial crises in the 1990s followed a fairly consistent pattern.

The country lost access to external financing.
The sector of the economy that had a large need for financing – firms in Asia, the government elsewhere – had to dramatically reduce its need for financing. Asian investment collapsed. Argentina swung from a fiscal deficit to a fiscal surplus (helped along by its default on its external debt). Turkey began to run large primary surpluses.

Financial balance sheets shrank; credit dried up.

The country’s currency fell sharply. And its current account swung into balance, if not a surplus.

That process was incredibly painful. Falls in GDP of 5% or more were not unknown. It also meant that after a year or so, most emerging markets had reached bottom. Their economies had adjusted, as had their currencies.

A year – almost – after its crisis, the US economy hasn’t endured a similar period of adjustment. Economic activity has slumped, but not fallen off a cliff. US households are pinched (and unhappy), but spending hasn’t collapsed. The US current account deficit has fallen, but not by much – the rise in the oil deficit has offset the fall in the non-oil deficit. Banks have depleted their capital, but I don’t think that they have – in aggregate – shrank their balance sheets. Then again some of the expansion of their balance sheets may not have been entirely voluntary, as off-balance sheet assets and liabilities moved on to the formal balance sheet.

Residential investment has fallen significantly as a share of GDP.

But in other ways, the US hasn’t adjusted.


Or rather, US policy adjusted so that the economy didn’t have to adjust as much. And other key countries – notably the countries that finance the US – didn’t adjust the policies (notably dollar pegs) that effectively compel them to finance the US. Many key countries — notably China — have exchange rate regimes that seem to require that they provide more financing to the US when the dollar is under pressure.
The US went into its crisis with a large current account deficit. And – as the Levy Institute (see Figure 2 here, and more here) and others, including Martin Wolf, have documented – the external deficit corresponded with a large deficit among America’s households. Households didn’t save. They also invested in new homes. As a result, US households were net borrowers from the financial system — and ultimately from the rest of the world.

US firms weren’t all that exuberant in the run-up to the crisis. They weren’t investing all that much. PE firms were more exuberant, but their business strategy was based on gearing up existing cash flows to increase equity returns, not new investment. That is likely why the rise in business borrowing (see figure 3) late in the last cycle didn’t prompt a strong rise in business investment or overall growth.
The government was running a structural fiscal deficit. However, that doesn’t explain the persistence of the US current account deficit after 2004. From 2004 to 2006 the fiscal deficit shrank. In 2005 and 2006, the growing deficit of the household sector drove the expansion in the overall deficit.
The resulting overall external deficit was financed, at least in part, by the buildup of dollar reserves by the world’s central banks – not by a buildup of dollar-denominated financial assets among private investors abroad. Someone in London was buying US corporate bonds — a category that includes a wide range of asset-backed securities. But the crisis has revealed (I think) that much of that demand came from vehicles sponsored by US and European financial institutions that funded themselves by borrowing dollars. They took on credit risk, not currency risk.

A year or so later, and not all that much has changed.

The US household sector still runs a deficit. Household savings isn’t falling anymore, but it also hasn’t really increased. Rising oil bills have eaten into spending on other items, but overall spending is holding up. Residential investment is down. But the household sector as a whole still runs a deficit — though a somewhat smaller deficit than before.

However, the fiscal deficit has expanded. The government is borrowing, in a sense, to provide funds to cash-strapped households to support demand.
Mortgage lending hasn’t even collapsed. Demand for “private” mortgage-backed securities has disappeared. But the Agencies stepped in and bought mortgages both for their own book and for the mortgage-backed securities that they guaranteed. The Economist wrote last week:

“With the credit crunch, Fannie and Freddie have become more important than ever, financing some 80% of mortgages in January. So they will need to keep lending. Nor is their scope to offload their portfolio of mortgage-backed securities, given there are scarcely any buyers of such debt. And if the Fed has to worry about safeguarind Fannie and Freddie, can it afford to raise interest rates to combat inflation?”

The Economists thinks the Agencies’ financial weakness is a constraint on US monetary policy. The same might be said of the financial weakness of many private financial institutions. Even if US monetary policy isn’t constrained, there is little doubt that the Fed has stepped in to help the banks and broker dealers meet liquidity pressures without dumping their existing assets. A lack of confidence in “private” collateral that increased demand for treasuries in the US financial sector has been met by allowing a number of institutions to borrow the Fed’s Treasuries.

These steps avoided a super-sharp emerging-market style adjustment.

But a country that runs a large external deficit doesn’t need to just keep credit flowing inside its own economy so that existing “deficit” sectors can continue to run deficits – it also needs an ongoing flow of funds from the rest of the world. The US has gotten that, too.

Not thanks to private investors. Private demand for US debt has almost certainly dried up, though the limits of the TIC data make it hard to demonstrate this conclusively. The last survey concluded that all “private” demand for US Treasuries and Agencies came from financial intermediaries who sold their Treasuries and Agencies to central banks (there wasn’t an increase in private holdings from mid-2006 to mid-2007). If that is still true, central banks total purchases of US financial assets over the last 12 months are now running at close to $680 billion ($330 billion in recorded official inflows — counting short-term flows — and $350 billion in “private” purchases of Treasuries and Agencies). Private demand for US corporate bonds and equities, by contrast, has fallen sharply. Corporate bond purchases over the last 12ms were only $170 billion or so — down from an annual pace of over $500 billion a year before the crisis. Demand for US equities is also down ($65 billion in the most recent 12ms v $175 billion in the preceding 12ms)
And remember, some “private demand” comes from funds that are investing for sovereign wealth funds. Why has so much credit been available to the US during its crisis, when similar credit wasn’t available to emerging markets facing trouble? My answer is simple: other countries didn’t adjust their macroeconomic policies even as the US adjusted its policies – lowering rates, loosening limits on the Agencies so that they could expand their books and adopting a counter-cyclical stimulus – and the interaction between the shift in US policy and limited policy changes abroad produced the flows the US needed.

Europe kept its rates up. It even raised them recently. That pushed the euro up – and helped the US export sector. It also put pressure on countries maintaining dollar pegs, whose currencies were depreciating against the euro and whose central banks faced pressure to lower rates.
The PBoC didn’t exactly follow the Fed, and the RMB didn’t exactly follow the dollar. But the RMB generally fell v the euro. And while China didn’t follow the Fed’s rate cuts, it kept rates more less unchanged as inflation rose, pushing real rates down. That supported investment in China even as higher rates than in the US led to a surge in capital inflows and reserves growth. The RMB’s depreciation against Europe — and the boom in resource exporting economies — kept China’s export growth up. Net exports contributed positively to China’s growth in q3 07, q4 07 and q1 08 (we still don’t know for q2 08).
No adjustment there.

The Gulf kept its peg to the dollar (or in Kuwait’s case, a dollar heavy –basket); Russia kept its euro-dollar peg. Both increased spending and government-sponsored investment as well. The combination of wildly negative real interest rates, a nominal depreciation and fiscal expansion generated an enormous boom. But with oil prices rising faster than spending and speculative pressure on dollar pegs, it also required a huge increase in the foreign assets of the oil-exporting economies government. The oil-exporters basic macro policy stance – dollar pegs, fiscal expansion when oil is high (and contraction when it is low), and monetary policy imported from the US – didn’t change.
The overall result was an increase in official asset growth — which has been running at close to $400 billion a quarter recently, or over two times the size of the US deficit. A tiny bit of that went into US and European financial institutions during the early stages of the crisis – at considerable cost to the sovereign funds that made the investment. But most has gone into safe US Treasuries and into Agencies.

Kevin Drum – rifting off Dr. Duy’s Magnus Opus – argues that the system will be stable so long as foreign investors continue to have “faith …. in America as a good place to invest their money.”
I don’t think that is right. The US hasn’t been a good place for foreign investors for some time, now: US rates haven’t compensated for the risk of dollar depreciation, and US equity markets generally have underperformed. That hasn’t kept foreign governments from buying. Their demand for dollars reflects their decision to manage their currencies against the dollar — not their assessment of the dollar’s attractiveness as a store of value. The worse the dollar does, the more foreign central banks tend to buy …
Foreign governments have been willing to take on the currency risk associated with financing the US. But foreign governments didn’t want the credit risk associated with lending to US households. The US government – and its intermediaries, notably the public-private Agencies – stepped in, helping the market to clear and avoiding a sharp contraction in global demand.
That, at least to me, explains in broad strokes how we got where we are.

The policy response to the subprime crisis has avoided the sharp adjustment that many feared. But it also meant that many of the underlying imbalances haven’t really corrected. The composition of the US current account deficit has changed – the oil deficit is bigger, the non-oil deficit is smaller; the fiscal deficit is bigger and aggregate deficit of households is smaller -,but the aggregate deficit remains large.
And the rest of the world’s imbalances haven’t corrected either. China’s economy remains unbalanced. The oil surplus has gotten bigger.
Hence it is possible to argue — see Yves Smith — that risks are still increasing.

Or it is possible to argue that the existing system has demonstrated its resilience under stress, and there isn’t good reason to think it will break now if it survived the stresses of the last year.

So far, the US has been both “too big to fail” and “too big for the emerging world to save” without incurring real costs.

The costs of dollar pegs are more and more apparent. But the costs of letting go now – before private demand for US assets has materialized or the US deficit has shrunk to a level that could plausibly be financed by a modest pickup in private demand for US assets – are also high.
I have no clue how long an equilibrium based on not letting go can last. Policy makers have succeeded — even the absence of overt coordination — at avoiding the worst. That is a good thing. But I would still be a more comfortable if a bit more adjustment had happened over the past year.

Indian Minister Frustrates West At Trade Talks

Kamal Nath Invokes 'Millions of Poor' In Criticizing U.S.
By JOHN W. MILLER
July 25, 2008; Page A6

GENEVA -- This week's summit talks at the World Trade Organization aimed at securing a new global trade deal are turning into a bad-tempered marathon, with one man emerging as the pivotal figure: India's commerce and industry minister, Kamal Nath.
Indian trade minister Kamal Nath (right), speaking with World Trade Organization head Pascal Lamy in Geneva this week, has raised hackles with his stance that poor countries need tariffs to protect nascent industries.

In negotiations that broke up at 9:30 p.m. Thursday, after running to 3:30 a.m. that morning, and that will resume Friday, Mr. Nath has come to speak for all the world's developing countries, from the tiger economies of Asia to the poorest in Africa. His role as the key to closing a deal in the so-called Doha Round of trade talks reflects the changing balance of power at the WTO, and in the global economy as a whole, trade officials say.

In an interview with a small group of reporters Thursday, Mr. Nath said poorer countries need to keep the right to use tariffs to protect nascent industries, like India's fledgling car sector, and key food products. At the same time, he is demanding more cuts in U.S. farm subsidies.

U.S. President George W. Bush asked Indian Prime Minister Manmohan Singh to compromise on trade in a phone call Thursday, another sign of the Asian nation's growing importance, U.S. officials said.

In an attempt to resolve the standoff, WTO chief Pascal Lamy is holding meetings for only seven negotiators from the 30-some attendees at the summit -- the U.S., the European Union, China, Brazil, Australia, Japan and India. The EU's 27 nations negotiate trade as one.

The result on Wednesday was a 12-hour session that EU Trade Commissioner Peter Mandelson called "some of the most difficult and confrontational negotiations" of his four-year term. The reason, according to European, U.S. and Brazilian officials: Mr. Nath. "He just sat there and said 'No' for 12 straight hours," a trade official said.
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"Success or failure of the Doha Round may very well lie in the hands of Kamal Nath alone," said Christopher Wenk, a director of policy at the U.S. Chamber of Commerce who is in Geneva. The talks were close to collapsing Thursday night, but still could last into next week.

Much of the 61-year-old veteran Indian politician's influence at the WTO lies in the promise of his country's economy. India's total imports have grown to $217 billion from $57 billion since the Doha Round began in 2001. The EU and U.S. business community says that in a slowing global economy, it needs access to India's growing market of a billion consumers.

The other reason for Mr. Nath's prominence is diplomatic. India recently joined the informal quartet of countries, with the U.S., the EU and Brazil, that lead trade negotiations. Previously, the U.S., the EU, Japan and Canada led discussions.

The world's biggest exporter, China, chooses to keep a low profile in trade talks.

Mr. Nath is the only member of the four leading trade powers who belongs to both key groupings of developing countries: the so-called G-20 group of emerging economies, like South Africa, Argentina and Brazil, and the G-33, made up of developing nations seeking to protect their agricultural markets, including South Korea and Senegal.

On Monday, the EU improved its offer on agriculture tariff cuts to 60% from 54%. The next day, the U.S. said it would cap trade-distorting farm subsidies at $15 billion instead of $16.4 billion. Mr. Nath and Brazil's foreign minister, Celso Amorim, however, said the U.S. and Europe need to do more to fulfill the promise of alleviating global poverty that they made when they opened the Doha Round after the Sept. 11 terrorist attacks on the U.S.

Doha "was meant to decrease poverty, not enhance prosperity," Mr. Nath said in the interview Thursday.

"In 2001, there was more idealism," said Adolfo Urso, Italy's top trade official at the WTO, who was at the round's inception. "Now, there are clear winners and losers, and that has fueled protectionism."

EU and U.S. diplomats say they must exact concessions from emerging economies to defuse domestic worries about trade.

That won't work for Mr. Nath. "I'm not willing to negotiate the livelihood of millions of poor people for the benefit of noncompetitive European industries," he said. "The future of automobiles is not in Detroit or Stuttgart, it's in Asia."

Mr. Nath denied he wants Doha to fail. "I'm very keen on the success of the round," he said. "The global economic outlook demands it. But not at the expense of millions of poor people."

Write to John W. Miller at [email protected]

Economic shocks may throw 16 mn people into poverty: UN

New York (PTI): Top United Nations experts on Latin America and the Caribbean have warned that global economic shocks could throw some 16 million people of the Americas into extreme poverty, threatening important gains toward achieving the Millennium Development Goals (MDGs) in the region.

Concluding a two-day meeting at the Pan American Health Organization (PAHO), the regional directors of 13 UN agencies promised joint action to ensure continued progress on the MDGs in the Americas over the next two years.

MDGs aim at sharply reducing or eliminating several social and economic ills by 2015. They were set by the world leaders at the Millennium summit at the United Nations.

"Latin America and the Caribbean have made real advances toward fulfilling the MDGs, particularly in areas like infant mortality, hunger and poverty reduction," said PAHO Director Mirta Roses Periago.

"But not all groups have benefited equally, and the new global developments are a real threat to our progress. We need to mobilize and coordinate development action among UN agencies and the region's governments to continue to fight poverty and promote sustainable and equitable development," Periago said.

Krishna Iyer writes to Manmohan

Staff Reporter

KOCHI: Former Supreme Court judge V.R. Krishna Iyer on Saturday wrote a letter to Prime Minister Manmohan Singh following reports of U.S. pressure on India to retract from its firm stand in Geneva against American business interests.

“I received an unhappy information from the weekly called Sunday Indian that President Bush had called you thrice to press you to withdraw from India’s firm stand in Geneva against the big business interest of U.S. and certain foreign countries,” Mr. Krishna Iyer said in his letter.

“I beseech you with the development of India in mind, not to bend under pressure from President Bush but to stand strong in Geneva to defend our people’s interests. My conviction is that you will,” Mr. Krishna Iyer said.

Nath gets a $ from Paulson for $1 comment
28 Jul 2008, 0051 hrs IST,PTI

GENEVA: A subsidy cut of $1 was all that Commerce and Industry Minister Kamal Nath wanted for India to come on board a world trade deal and he literally received $1 from his friend US Secretary of the Treasury Henry Paulson.

US Trade Representative Susan Schwab gave Nath a "fancy envelope of the US Treasury" containing a $1 for him signed by Paulson.

Won't be pushed on Doha, PM tells Bush
27 Jul 2008, 0141 hrs IST,TNN

NEW DELHI: Just when the Doha round of WTO talks teeters on the brink of collapse, India has fended off what may appear to be suggestions from the US and UK to relax its negotiating stance on the contentious issues of farm subsidies and tariff reductions.

Prime Minister Manmohan Singh conveyed India's resolve not to make concessions to the developed countries to US President George Bush and British Prime Minister Gordon Brown in the past two days.

Details of what transpired between Singh and President Bush and Prime Minister Brown - specifically whether the two tried to nudge him to soften the stance that India has taken at the ongoing mini-ministerial meeting at Geneva - were not known.

Sources, however, said that the two leaders had urged the prime minister to help "ensure conclusion of the Doha round" of global free-trade talks.

The conversations coincided with what the observers have called make-or-break round to end the stalemate over reductions in subsidies and import tariffs.

For his part, the prime minister is learnt to have repeated India’s stand that for the talks to succeed, the developed countries must reduce their agricultural subsidies and tariffs.

Singh said India was committed to the success of the multi-lateral trade system as free trade benefits all. But he made it plain that India's priority was to protect the livelihood of millions of its small farmers, implying that there was vast room for flexibility on the part of the developed countries.

"In the developed countries it is only a miniscule section of their population - 2% to 3% - that is dependent on agriculture. As against this, more than 60% of India's population is dependent on agriculture, and our priority is to ensure livelihood, security for our small farmers," Singh is learnt to have told President Bush and PM Brown.

The assertive stance coincided with suspicions in certain quarters that India might give in to the pressure from the developed world, and may help quash the fears on that score.

The Prime Minister said that while India had been committed to trade liberalisation over the past 18 years and had been bringing down tariffs and opening up its economy, the country alone had the prerogative to determine both the pace and quantum of scale of reductions.

Singh argued that while opening up has benefited the Indian economy allowing it to grow at a faster rate, "India will continue to pursue trade liberalization at its own pace and in consonance with its development priorities".

Doubts that India was finding it difficult to cope with the demands from the developed countries for concessions have been expressed by activists as well as political parties. In a letter to the PM, BJP leader Murli Manohar Joshi referred to the apprehensions on that score, and urged him to instruct the Indian delegation at Geneva not to succumb to any pressure.

"I believe that at this juncture, India has to put up a strong argument to protect national economy," the BJP leader known for his strong anti-WTO views said.

Farmers' organisations too came out with strong reservations against the reported "easing" of India's stand at WTO. Bhaskar Goswami of the Forum for Biotechnology and Food Security, said: "The present proposal is grossly inadequate. Safety nets to developing countries' farmers in the form of Special Products and Special Safeguards Mechanisms(SSM) have been diluted and made meaningless," he said.

"The US will be allowed to re-designate the base period for its subsidies which gives it the flexibility to reduce effective cuts. The Green Box, which is replete with trade distorting subsidies, will not be capped," the forum pointed out at a conference in Delhi.

India looks for support from developing nations
28 Jul 2008, 0058 hrs IST,PTI

GENEVA: Unhappy with the fresh proposal on agriculture at the World Trade Organization (WTO) meeting, India is looking up to over 100 developing countries for support to ensure that farmers remain protected after a global trade deal is signed for liberalising the farm and other sectors.

"India is trying to get the support of 100 developing countries, including Africa, LDCs and G-33-agriculture alliance of the developing countries-to change the special safeguard mechanism (SSM) provision," an Indian official saidon Sunday.

Lamy has circulated a new proposal on agriculture and non-agriculture market access on Saturday which was discussed by the all the ministers in the greenroom.

The proposal suggests, "SSM for above bound rate trigger is 140% of base imports[." "This is not 'acceptable' to India because under this proposal by the time India activates the safeguard trigger, the 40% surge in imports would have wreaked havoc with the livelihood of millions of small and poor farmers." the official said.

"India is looking to get the support and trying to work with them and get them on board to exert pressure to get this safeguard mechanism changed," he said.

"It is the concern for those countries also and whatever remedial action we get to protect our farm sector from import surges, they (Africa and LDCs) will also get," official added. US wants India to agree to the SSM instrument when imports surge on a sustained basis by 40% over the previous year, while India insisted that the mechanism can come into play if imports rise by about 10% over the previous year. Expressing serious concerns on numbers in new SSM proposed by Lamy India has earlier said bound rate trigger of 140% is simply not acceptable to it.

Nath asks US to offer "real" cuts in subsidy
23 Jul 2008, 1624 hrs IST,PTI

GENEVA: Commerce and Industry Minister Kamal Nath, who rejoined the WTO talks in Geneva on Wednesday, said the US must offer "real" cuts in subsidy to its farmers and its proposal to reduce the doles was not in line with the current food prices.

The US had on Tuesday made an offer to reduce its overall trade distorting subsidy to 15 billion dollars.

"It is hardly an offer when their applied duty subsidy is seven billion dollars," Nath told reporters.

India's Commerce and Industry Minister on Wednesday rejoined the crucial negotiations to break the Doha deadlock after his government won the trust vote in Parliament on Tuesday.

"If there was a vote here we would win it too," a happy Nath said.

He said the US offer is "not commensurate with current food prices". Developed countries have to put something on the table and not "look into the pockets of the developing countries", he said.

The US has been making a strong demand on the large and emerging economies like India, China, Brazil and South Africa to give their manufacturers market by reducing tariff in return for reduction in American farm subsidies.

Nath did not agree with the contention. "Tariffs are not distortions, subsidies are distortions. Tariffs protect trade and raise revenue," he said.

LONDON: Prime Minister Manmohan Singh and US President George W. Bush are responsible for creating the first breakthrough in the long-stalled world trade talks in Geneva, a British newspaper reported Sunday.

Bush made a private telephone call to Manmohan Singh late Thursday evening, when international attention was focused on presidential candidate Barack Obama’s visit to Europe.

Although the two leaders were meant to have discussed the India-US nuclear deal, the subject swiftly changed to the Doha Development Round, as the ongoing world trade talks are called, the Sunday Telegraph reported.

The call came a day after India's Commerce and Industry Minister Kamal Nath returned to Geneva amid the gloomy news that the talks had stalled once again.

A disappointed Kamal Nath, in his opening statement to other negotiators at the World Trade Organization (WTO), slammed what he called the “utterly self-righteous” position of rich nations in seeking to deny poor countries the right to safeguard the livelihoods of their farmers while enjoying similar protection for themselves.

“If it means no deal, so be it,” Kamal Nath added.

With the talks now facing collapse seven years after their launch in the Qatari capital, Manmohan Singh and Bush held two more telephone conversations over the next 48 hours, again limiting their subject to trade, the newspaper said.

“The situation seemed intractable. But, overnight, in the hours that followed that first phone call, something changed. India and Brazil started to negotiate. (WTO director general Pascal) Lamy seized the opportunity. He did what many regard as a ‘nuclear option’ for the talks and drafted a short one-page document setting out the key proposals. The deadline for the meetings was pushed back from yesterday (Saturday) to Wednesday,” the newspaper reported.

It speculated about the first telephone call: “Might it go down as the telephone call that helped to salvage George W. Bush's legacy as President of the United States?”

A senior Indian diplomat in Geneva had told IANS earlier in the week that the “legacy factor” - where the Bush administration could take most of the credit for a Doha deal that would help lift the world economy from its current downturn - could prove to be a crucial factor in the negotiations.

However, despite guarded optimism Sunday about what are reported to be fresh and interesting offers from the US, India, China and Brazil, many hurdles remain to overcome if a deal is to be struck that would make world trade beneficial for developing countries, diplomats warn.

Four big banks to kick-start covered bond market
By Greg Robb, MarketWatch
Last update: 3:50 p.m. EDT July 28, 2008
Comments: 157
WASHINGTON (MarketWatch) - Appearing alongside Treasury Secretary Henry Paulson, representatives of the four largest U.S. banks agreed Monday to kick-start a market for covered bonds - an alternative way to provide mortgage loans - in the United States.
Covered bonds were first created in Germany and are in widespread use in Europe.
Under the practice, a bank borrows funds to lend to homeowners and holds the mortgages on its books. It uses the proceeds of the mortgages to repay investors.
"Covered bonds are a promising financing vehicle and we believe this market can grow in the United States," Paulson said at a press conference pushing the covered bond idea.
"The key to the U.S. economy making a major improvement will be turning the corner on housing finance, the housing correction. We're not going to be able to do that unless we have availability of mortgage financing and this is an attractive new source," Paulson said at a press conference.
The theory is that these bonds may be able to quickly help the housing market get back on its feet. At the moment, the traditional way in the U.S. to generate liquidity in mortgage markets has ground to a virtual halt.
Under this practice, mortgage originators sell mortgages to financial institutions who package them into securities and then re-sell them.
Investors have been unwilling to buy almost anything mortgage related over the past year.
Covered bonds are considered more secure than mortgage-backed securities because the purchasers of the bonds have a direct claim on the issuer's balance sheet.
"The hope and the bet" of Paulson is that covered bonds will be attractive to investors and will be a better tool of getting liquidity into the system, said Michael Durrer, a lawyer at Sidley Austin in London and an expert on covered bonds.
"Covered bonds may be more attractive to investors, in the near future anyway," Durrer said.

The Economist magazine wrote that: ". . .public credit depends on public confidence. . .The financial crisis in America is really a moral crisis, caused by the series of proofs . . .that the leading financiers who control banks, trust companies and industrial corporations are often imprudent, and not seldom dishonest. They have mismanaged. . . funds and used them freely for speculative purposes. Hence the alarm of depositors and a general collapse of credit. . ."

The words appeared over 100 years ago on November 2, 1907 during the 1907 crash.

As expected, the Securities and Exchange Commission late Tuesday night extended an emergency order limiting short-selling in 19 big financial stocks for another 10 days. There will be no more extensions: This one will end two days short of the 30-day limit the SEC has for emergency rules.

At issue is naked short-selling, which the agency thinks threatens the stocks of the primary dealers, including all the big Wall Street firms, plus Fannie Mae (nyse: FNM - news - people ) and Freddie Mac (nyse: FRE - news - people ). This group of companies has been granted access to the Federal Reserve's emergency lending window, and thus are seen as particularly vulnerable to attack by short sellers as the credit crisis continues.

By attempting to sell oil in Euros and getting the Russians, Chinese, and Indians on their side, the Iranians are thinking 3 steps ahead.
The Iranians rightfully beleive the US wont attack them because that would put Chinese and Indian oil & natural gas interest at risk.
Even with a declining dollar, is America dumb enough to risk confrontaion with 2.3 billion people? With Bush as president for the next 5 months and the possibitly of McCain being president, you bet your ass they are.

http://www.businessweek.com/globalbiz/c ... 942925.htm

Why India Will Beat China
An entrenched and vibrant democracy will ultimately drive India to outperform China socially and economically

by William Nobrega

Authoritarian regimes often yield impressive short-term economic results, as seen in Germany in the 1930s, the Soviet Union in the 1950s, Brazil in the 1960s, and China in the 1990s. Unencumbered by such things as property rights, legal recourse, and public debate, the authoritarian regime can harness significant economic and political resources to create impressive industrial and economic feats.

Conversely, democratic regimes tend to be sloppy affairs with loud public discourse, a vocal press, stubborn land owners, and a myriad of civil liberties. Far from being able to harness economic resources, the government often must act more as a regulator. The result is that there are very few grandiose government-sponsored projects. Instead, there are countless private-sector initiatives driven by the invisible hand of the market. While the authoritarian regime is envied by some, the fact is that longer term, this type of socioeconomic model has typically led to economic and social distortions.

That is the dilemma that China faces today. Since the 1980s, the Chinese government has focused on developing an export-driven economy supported by an artificially undervalued currency. Foreign direct investment was encouraged while domestic consumption was limited. Massive infrastructure projects were initiated, fueled by a growing trade surplus, with cities sprouting up in the hinterlands like some mythical phoenix. For years, the Chinese economy benefited from these policies with double-digit gross domestic product growth, vast foreign currency reserves, and ever increasing capital inflows.
Inflation Could Spark Social Unrest

But now the economic and social distortions have begun to appear with rising inflation rates, numerous asset bubbles, looming overcapacity, and rampant institutionalized corruption. The Chinese government finds itself in a quandary. If the government allows its currency to rapidly appreciate to reduce inflation it will drive down exports and fuel unemployment. If it fails to quell inflation, social unrest will quickly unfold.

But even if the hare is running into obstacles of its own design, how will it give India the competitive edge? The advantage comes in the form of an entrenched and vibrant democracy that will ultimately drive India to outperform China socially and economically. Messy, frustrating, and more often than not agonizingly slow, India's democracy would seem to be chaotic at the surface. But if you look deeper you will quickly see why the tortoise will win this race. Let's take a look at two of the major advantages that India's democracy provides:

• Property Rights: As India becomes urbanized many families will choose to sell or borrow against their land so that they can start businesses, buy apartments, or provide education opportunities for their children. India is at the beginning of a gradual migration that is being driven by the development of high-end manufacturing and other sunrise industries that will require a vast pool of semiskilled and skilled labor. This migration will create an increasingly urban India that is expected to attract more than 200 million rural inhabitants to urban centers by 2025, primarily in what are known as secondary or "B & C" cities.

This transition will facilitate the sale of land holdings by an estimated 30 million farmers and 170 million other individuals indirectly tied to the agricultural sector. The sale of these holdings is expected to generate more than $1 trillion in capital by 2025. This capital will have a multiplier effect on the Indian economy that could exceed $3 trillion. The development of the mortgage-backed security and asset-backed security markets, driven by financial institutions like Citigroup (C), will create the liquidity required to free up this capital.

China, by contrast, has no rural property rights. China's 750 million rural residents who lease land are at the mercy of the local and regional government as to what compensation they will receive, if any, when they are forced from the land as a result of development, infrastructure improvements, etc. Additionally they have no right to borrow against their lease, and as such they have no assets. In fact, the Chinese government's official figures state that more than 200,000 hectares of rural land are taken from rural residents every year with little or no compensation. According to some estimates, between 1992 and 2005 20 million farmers were evicted from agriculture due to land acquisition, and between 1996 and 2005 more than 21% of arable land in China has been put to non-agriculture use.

The result is not unexpected, with over 87,000 mass incidents (or riots) reported in 2005, a 50% increase from 2003. Many provincial governments in China have begun to use plainclothes policemen to beat, intimidate, or otherwise subdue any peasant that dares to oppose these land grabs. And, as would be expected, the beneficiaries from these policies are developers and corrupt government officials.

• Rule of Law: The rule of law is a fundamental cornerstone of any modern society. India has a legal system that has been in place for well over 100 years. This legal system is internationally respected and includes laws that protect intellectual property as well as physical property. The rule of law creates predictability and stability that allows entrepreneurial behavior to flourish. This is clearly evident in India, with more than 6,000 companies listed in the stock exchanges, compared to approximately 2,000 in China. More telling is the fact that of the 6,000 listed companies in India only approximately 100 are state-owned. This stands in stark contrast to China, where more than 1,200 of the 2,000 companies listed on the exchanges are state-owned.

Can there be any doubt as to where the next Microsoft (MSFT) or Intel (INTC) will be created? Certainly not China!

More than 100 Indian companies that completed initial public offerings as midcap companies now have a market capitalization of over $1 billion. Companies such as Jet Airways (JET.BO), Bharti Tele-Ventures, Infosys Technologies (INFY), Reliance Communications (RLCM.BO), Tata Motors (TTM) (which just acquired Jaguar), Wipro Technologies (WIT), and Hindalco Industries (HALC.BO) are becoming multinational competitors with globally recognized brands. China also has numerous companies that have a market capitalization of over $1 billion, but the majority of these are state-owned behemoths recognized by their sheer size and not their nimbleness.

When the rule of law is recognized by investors and foreign companies as something that is beyond question it serves to facilitate additional investments in research and development. For instance, 150 of the top global multinationals now have research and development bases in India. Additionally the U.S. Food & Drug Administration has certified more companies in India then in any other country outside the U.S., a testament to the innovation that free markets and the rule of law foster.
Little Protection for IP in China

China has a legal system that does little to protect intellectual and physical property rights, a fact highlighted in the 2007 edition of the International Property Rights Index, which ranks China with Nigeria in protecting intellectual property rights. In fact, China's illegal copying of movies, music, and software cost companies $2.2 billion in 2006 sales, according to an estimate by lobby groups representing Microsoft, Walt Disney (DIS), and Vivendi (VIV.PA). This figure may in fact be understated as it does not include pirated products that have been shipped to overseas markets by government-controlled Chinese companies.

The rule of law when applied evenly and justly in a democratic society also helps to ensure that wealth accumulation does not favor those individuals in political office or individuals connected to those in political office.

Democracy is a messy thing, especially when you have an electorate that exceeds 600 million people who are motivated to vote. However, democracy also helps to ensure that individual liberties are respected and that the government is responsive and beholden to the will of the people, rich or poor. A democracy also ensures accountability through impartial courts that help enforce and protect such things as property rights, environmental rights, human rights, and good governance.

India's democracy is far from perfect, but it is also quite young, and as incomes rise and the populace becomes more informed we can expect that India's government institutions will become more responsive and transparent.

And what about the hare? Consider this fact: A recent survey found that of the 20,000 richest men in China, more than 95% were directly related to Communist party officials. Where would you place your bet?

William Nobrega is president and founder of the Conrad Group, an emerging-market strategic planning and M&A facilitation firm based in Miami. He has more than 10 years experience in this field and is widely credited for initiating global business models in emerging geographies including Brazil, India, and China. He is co-author of the recently published book, Riding the Indian Tiger: Understanding India, the World's Fastest Growing Market.

Leaving Wall Street for a Job Overseas


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By LOUISE STORY
Published: August 11, 2008

Moving boxes have become a common sight at Wall Street firms, where tens of thousands of bankers and traders have been laid off as the credit squeeze drags on. But a few of the people packing up and saying goodbye are holding passports rather than pink slips. And some are being told to move abroad — or else.

As Wall Street’s troubles deepen, big investment banks are moving some key employees to increasingly influential hubs of finance in Asia, the Middle East, Europe and Latin America, regions where the banks had already been building up business to tap rising growth potential.

This trend is happening alongside another that is funneling jobs from traditional financial centers like New York and London. Because of price pressure, jobs lower down the corporate ladder are moving overseas, especially India.

For many bankers, moving abroad is an experience they had always wanted. For the banks, the relocations are a way to retain skilled workers who might otherwise be caught in waves of layoffs that have already claimed 80,000 finance jobs globally.

“Banks like Morgan Stanley and Merrill Lynch are playing musical chairs,” said Gustavo G. Dolfino, president of the WhiteRock Group, a finance hiring firm. “Why are they doing this? They want to keep the talent.”

Relocating workers, while expensive, makes sense as record revenues are flowing in from places other than Wall Street. For a number of bankers, though, the moves are less voluntary.

“Some are being told, ‘I don’t care if your wife has to stay here, this is what you have to do,’ ” Mr. Dolfino said.

Banks release only global redundancy figures, so it is difficult to quantify how many Wall Street positions have moved elsewhere, and New York City figures on finance employment lag behind the companies’ announcements.

Yet as options narrow, even some laid-off workers who were not offered a transfer are beginning to take calls from financial companies with operations abroad, recruiters say. “I’ve spoken to people who three or four years ago literally refused to relocate. Now they’re open to moving,” said Jeanne Branthover, head of the global financial services practice at Boyden Worldwide, a recruiting firm. “They do not see growth or change in this market in the near future.”

Recent activity at Ms. Branthover’s company is telling. Boyden’s revenue from placing people in finance jobs was about flat, globally, in the first quarter. But its placement revenue in Russia was up 73 percent, and in China and Dubai, they were each up more than 300 percent. In New York, where the market is nearly frozen, revenue from finance job placements was down 24 percent.

JPMorgan Chase, which acquired Bear Stearns when it nearly collapsed in March, is continuing to hire overseas even as it whittles its New York base. For example, the commodities trading group has hired 126 people in the last year, of which 85 are based abroad in markets like Singapore and Hong Kong.

“In the past everything was done out of New York, and that was the place to be,” said Nicolas Aguzin, head of investment banking for JPMorgan in Latin America, which has added bankers in Brazil, Mexico and Colombia over the last year. “But now everyone has decided to go local and to go quite aggressively.”

The acceleration can be seen among senior employees at Morgan Stanley. In the first six months of 2007, only 10 of Morgan Stanley’s managing directors were transferred to countries other than the United States.

That figure has more than tripled — to 33 — this year, as executives like Stephen Roach relocated to Hong Kong to become chairman of the bank’s Asia operations, along with Owen Thomas, who moved there from New York as chief executive. In addition, five senior Morgan executives were sent to Dubai from London.

“People understand that this is important. It’s clear that growing our franchises in key emerging markets is an important strategic priority,” said Charlie Stewart, who moved to São Paulo this summer to run investment banking for Morgan Stanley in Latin America. “It’s not like you’re being shipped off.”

On top of the foreign transfers, banks are also hiring locally. In the last six months, Merrill Lynch recruited a team of bankers from Brazil for that office. JPMorgan Chase has hired in the Middle East and Asia.

Credit Suisse plans to double its investment banking and private banking staff in India over the next year and moved its global head of financial institutions to Hong Kong from New York this summer.

And the longer foreign markets outperform developed economies, managers say, the more permanent the shift in power may become.

“Pools of capital will move to where the industry sees an expansion of opportunities,” said Edith Cooper, head of human management at Goldman Sachs.

Ms. Cooper travels regularly to Goldman’s foreign offices, and she says the anxiety felt by international employees matches the fear in New York. But she says she reassures them that Goldman is committed to its global growth strategy. In the last few months, dozens of Goldman bankers have been offered the option to move abroad, under varying degrees of pressure.

Recent high-profile transfers at Goldman include Ravi Sinha, an investment banker who moved to Hong Kong from New York to become the co-head of investment banking for much of Asia; Alasdair Warren, a banker who moved to Dubai from London as the head of financing for the Middle East and Africa; and Valentino Carlotti, who moved to São Paulo from New York to become president of Goldman Sachs’s bank in Brazil.

“I don’t know whether it’s as much, ‘There’s not enough to do here, so we’ll go somewhere else,’ ” Ms. Cooper said. “Rather it’s more of a reflection of our clients and the growing businesses in China, India and Middle East.”

The shift is also changing the concept of being an expatriate employee from a temporary jaunt to one that might be more permanent, Ms. Cooper said.

Sheila Patel, Goldman’s head of equities for Southeast Asia, moved to Singapore from New York in May, even though her division was not stagnating.

“Is there a set time that I expect to be in Asia?” Ms. Patel said. “Not really. I could see spending my whole career here.”

Ms. Patel’s move around the world in a sense reverses a decision her father made in the 1960s to move from India to the United States, where he married an Irish-American.

“Every generation searches out its opportunity set and looks for growth,” Ms. Patel said. “Nobody thinks of somebody moving to New York as an expatriate. Somehow in other global cities, there’s been this concept.”

NEW YORK - Jessica Walter didn't go to Harvard University to study cupcakes, but they're what she does since losing her job as a vice president in credit strategy at Bear Stearns Cos.

"I want to teach kids to cook," said Walter, 27, who founded Cupcake Kids in New York to provide birthday parties and cooking classes for children. "The goal is to have this be my full-time job and make enough to live."

Wall Street professionals are trying new careers, and fetching smaller salaries, amid the elimination of 76,670 investment jobs in the Americas following the global credit crunch.

Bankers are "buying businesses for themselves, moving west or to Europe, including Russia, or to Dubai," said Jeanne Branthover, managing director of Boyden Global Executive Search in New York. "They're also moving totally outside what they do, buying a retail store or a ranch."

About 33,300 finance jobs in New York City, or 7.1 percent of the 2007 peak, will be cut by June 2009, the Independent Budget Office, a nonpartisan monitor of city finances, estimated in a May report.

"The job market is in the worst, most chaotic state I've ever seen it in fixed income," said Michael Maloney, who recruits finance professionals for Maloney Inc. in New York. "I've been doing this for over 30 years, and I've never seen anything like this."

Half the people working in debt sales, trading, or research in New York at the beginning of 2007 will have been fired by the end of this year or won't get a bonus, Maloney estimated.

Jeff Salmon said job jitters prompted him to swap investing in asset-backed securities at Bank of New York Mellon Corp. for keeping the books at a hair salon. He and his wife, Olga, opened a Great Clips franchise in Mercerville, N.J., that offers $12 haircuts for men and women.

"The structured finance market is so bleak right now, it makes sense for us to focus our energies on this," said Salmon, 49. "It's refreshing to not have to worry about whether I am going to have a job next week." The couple plans to open another Great Clips in October.

Traders and bankers who leave finance can expect to earn a fraction of what they used to. Compensation for employees on Wall Street averaged $399,360 in 2007, compared with $62,390 for New York City jobs outside the securities industry, according to the state comptroller's office.

Goldman Sachs Group Inc., which has cut 1,500 jobs, paid its employees an average of $661,490 last year, company filings show.

Walter, who studied economics at Harvard, is among those welcoming the opportunity to try something radically different.

"The biggest thing that I enjoy is being the jack-of-all trades of having my own business," she said. "It's a challenge."

Bear Stearns, where Walter worked, was facing bankruptcy before being acquired in May by JPMorgan Chase & Co., which fired 55 percent of Bear's 14,000 employees. Lehman Brothers Holdings Inc. has eliminated 6,390 employees and Citigroup Inc. has cut 14,100, according to data compiled by Bloomberg.

Gary Witt left as a managing director in structured finance at Moody's Investors Service to teach finance and statistics at Temple University in Philadelphia.

"It's hard to say if things were going well would I have left," said Witt, 49. "It didn't look like the industry would be any fun for the next few years."

Moody's, the oldest credit-ratings company, eliminated 275 jobs, or 7.5 percent of its workforce, to cope with a plunge in bond sales that sliced revenue from the credit ratings unit.

Bond salesmen and traders are trying everything from bartending to real-estate sales to make insurance and tuition payments for their families, Maloney said.

"I know a few guys that started gambling, playing poker to pay the bills," he said. Joshua Perksy took to the streets after being laid off as an investment banker at Los Angeles-based Houlihan Lokey. He strolled New York's Park Avenue in June wearing a sandwich board reading "Experienced MIT Grad For Hire."

"It's been slow and frustrating," said Persky, 48. "The only places to turn are hedge funds and boutique banks. I've never been unemployed this long."

While his gambit generated some job leads, none has panned out so far, Persky said. He's considering a move to Omaha.
© Copyright 2008 Globe Newspaper Company.

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August 21, 2008
Lehman Outlook Dims on Failed Sale Report
By REUTERS

Filed at 8:42 a.m. ET

LONDON (Reuters) - The outlook for Lehman Brothers Holdings Inc <LEH.N> darkened further on Thursday as a newspaper reported that an intended asset sale had collapsed and a Citigroup analyst forecast big losses for the group.

The fourth-largest U.S. investment bank has taken a $7 billion hit from credit-related writedowns and losses since the start of the global crisis and is forecast to write down more.

Lehman is concerned its capital cushion is not enough to absorb losses, and people close to the matter said this week it is considering selling at least a part of its asset management business.

The Financial Times said Lehman's talks with China's biggest brokerage, CITIC Securities <600030.SS> and state-owned Korea Development Bank (KDB) <KDB.UL> on a sale of up to half its shares had failed, fuelling speculation about the U.S. bank's efforts to raise more capital.

CITIC told Reuters it had held no formal talks about buying a stake in Lehman, while Lehman and KDB spokespeople declined to comment.

A KDB official, who declined to be identified, said the South Korean bank was scaling back its overseas assets and staff to reduce exposure to volatile foreign markets.

The note by Citi analyst Prashant Bhatia added weight to a forecast by JPMorgan Securities on Tuesday that Lehman will take a further $4 billion in writedowns tied to losses from mortgage-related investments.

Bhatia cut his third-quarter outlook for Lehman, Goldman Sachs <GS.N> and Morgan Stanley <MS.N> and said the U.S. investment banks might incur further writedowns, mainly on their mortgage assets, with Lehman forecast to suffer the biggest hit at $2.9 billion.

The analyst widened his third-quarter loss estimate for Lehman to $3.25 a share from 41 cents a share.

However, Bhatia said he saw a "lower probability" Lehman would sell its Neuberger Berman asset management business or raise capital in the near term.

"Even under the potentially more stringent rating-agency guidelines related to the amount of preferred securities in the capital mix, we anticipate that Lehman can absorb over $3 billion of after-tax losses without adding more common equity," he said.

At 8:22 a.m. EDT in Frankfurt, Lehman shares were trading down 0.1 percent at 8.95 euros. The stock closed Wednesday in New York at $13.73, valuing the bank around $9 billion.

The shares have plunged more than 80 percent since early 2007.

The Wall Street Journal said the U.S. Federal Reserve acted on rumors last month and called Credit Suisse Group <CSGN.VX> to see whether it had pulled a credit line from the bank.

Credit Suisse told Federal Reserve officials that it had no intention of pulling the line of credit, the paper cited people familiar with the matter as saying.

Fed officials contacted Credit Suisse last month, but it is unclear whether the move occurred before or after the U.S. Securities and Exchange Commission subpoenaed dozens of hedge funds and financial firms about four Lehman-related rumors, the paper said.

Lehman Brothers and Credit Suisse spokespeople in London declined to comment.

(Reporting by Olesya Dmitracova; editing by Karen Foster)

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August 22, 2008
Some Fear Commercial Property Loans Will Be Next Stage in Downturn
By LOUISE STORY

As the value of home mortgages crumbles by the day, Wall Street has hoped that commercial real estate loans would stay clear of the storm.

But bankers believe the headwinds may be shifting after a large apartment complex in Harlem warned last week that it might not be able to make good on a $225 million mortgage payment by September.

A default by the complex, the rent-regulated Riverton Apartments, a 12-building residential development constructed after World War II, would be New York’s largest in the current housing crisis. For Wall Street banks, which hold about $100 billion of commercial mortgage-backed securities, the prospect has fanned new worries that a deterioration of the overall commercial property market could prompt more write-downs in the coming quarter, on top of losses already expected from their distressed mortgage securities holdings.

“The fear is the next shoe to drop may be commercial real estate,” said Jeffrey Harte, a banking analyst at Sandler O’Neil. “When consumer credit goes south, commercial will follow.”

At the end of the second quarter, Deutsche Bank held $25.1 billion worth of commercial loans. Morgan Stanley held $22.1 billion and Citigroup had $19.1 billion.

Lehman Brothers, which has the largest exposure to this type of security, is shopping about $40 billion worth of commercial real estate assets, as well as its entire commercial real estate business. A large part of its portfolio is a high-risk loan known as bridge equity made with Archstone, a metropolitan apartment developer, and most of the rest are floating-rate loans, which are riskier, according to a person who reviewed the offering.

Banks are scrambling to dispose of these loans, typically made to hotels, office developers and retail strips, before problems arrive.

Broader real estate indexes are already showing signs of trouble. Moody’s/REAL Commercial Property Price Index has dropped nearly 12 percent since its peak last October. A more conservative index by the National Council of Real Estate Investment Fiduciaries shows growth slowing to one-half of a percent in the second quarter, from upward of 4 percent a quarter.

Loans made for commercial real estate are typically among the safest, because a building can be used as collateral and big property developers generate income from the investment, raising the likelihood they will repay their loans.

But cracks began to emerge late last year, when Morgan Stanley reported write-downs of $400 million in commercial mortgage losses. In the first quarter, Wachovia, which had transformed itself into a leading lender in the nation’s commercial real estate market, said it would take write-downs of more than $1 billion for commercial loans for the second half of 2007. Investors had already begun balking at buying securities backed by these bonds, so banks like Wachovia were stuck with loans of diminished value.

Around the same time, the New York developer Harry Macklowe was forced to sell seven office buildings he had bought in Midtown Manhattan, as well as the General Motors Building, after he was unable to refinance the loan with his lender, Deutsche Bank.

Now, the prospect of an immense default on a commercial residential property in New York — which has not suffered as much as troubled markets like Florida — has lent new momentum to concerns over the stability of commercial real estate loans.

As Harlem grew into an increasingly attractive neighborhood at the height of the housing market, bankers assumed that Riverton’s owners could quickly convert many of its roughly 1,230 units from lower-priced rentals to apartments priced closer to the higher market average. That would generate a richer income stream, allowing the companies to pay off high mortgage bills.

It was the kind of optimistic assumption that ran rampant in the residential housing market, but one that remained less common for commercial real estate loans.

On Monday, Fitch Ratings issued a negative watch on part of the Riverton Apartments trust, saying developers had made only scant progress toward their goal. Rockpoint Group and Stellar Management — the developers that own Riverton — did not comment.

Before the credit squeeze, financial companies bundled commercial mortgages into securities in much the same way they packaged home loans and private equity debt. Riverton’s mortgage was one of the last ones to be wrapped into a commercial mortgage-backed security in the spring of 2007; it was then cut up and sold as bonds.

A recent report by Lehman Brothers showed that aggressive underwriting is what probably has brought Riverton to the brink of default, not a fundamental deterioration in the overall market. But that report noted that there are other commercial properties that received similar optimistic underwriting, known as a pro forma loan.

Ratings agencies have only downgraded a few commercial real estate securities. At Moody’s, the list includes loans given to the Ritz-Carlton in New Orleans, a casino in Atlantic City and a land development deal in Miami.

Still, many analysts say a lengthy downturn in the economy would probably lead many commercial property owners to struggle with their mortgage bills. And pricing in commercial real estate is starting to reflect a tightening in commercial lending, they said.

“The risk here in commercial real estate is, What happens when those loans mature in two, three, four, five years?” said Nick Levidy, a managing director at Moody’s Investors Service. “When these loans come up for refinancing, unless the credit markets improve significantly, the terms will be quite different.”

Citigroup and Deutsche Bank created the commercial mortgage trust that included Riverton’s mortgage in March 2007. Riverton’s loan is the seventh-largest in the $6.6 billion trust, according to Fitch Ratings. After the deal closed, only three other commercial mortgage trusts of comparable size were created before the market collapsed, according to Dealogic, a financial information service.

Losses are rising in this sort of trust. Fitch reported last week that delinquencies rose at the end of July to 0.43 percent, from 0.41 percent at the start of the month, a pace of deterioration that has been steady since the winter. Since February, delinquencies on commercial mortgage-backed securities have increased 43 percent.

At the same time, investors are also expecting further trouble in commercial real estate bonds. The top-rated part of the index that includes the Riverton Apartments, for instance, indicates that the risk of those securities has increased by 44 percent in the past month, according to Markit, a financial services company.

“The housing market’s weak, so market perception is that commercial real estate fundamentals will follow,” said Steve Gordon, managing director of MKP Capital Management, a hedge fund that manages $4 billion.