WASHINGTON – IT IS D-Day for the world’s big banks as they finalise last year’s results and try to account for the full scale of the credit upheaval spawned by the United States sub-prime crisis that threatens to stall the global economy.

Over the next two weeks, most major US banks will file annual reports with the US Securities and Exchange Commission (SEC).

Several of Europe’s biggest financial firms will also release 2007 earnings statements.

For some, it will be the first audited reckoning of how badly they were burned by the market turmoil that began with defaulting US sub-prime mortgage loans.

Those reports should go a long way towards clarifying banks’ financial positions as at the end of last year.

Figuring out how far the credit crisis will spread is much harder and may determine whether the world economy is heading for a recession.

Banks buried in bad debts have less leeway to lend to consumers and companies that drive the economy.

They have also grown wary of lending to each other because of uncertainty about which firms face heavy losses.

To date, major banks have disclosed more than US$140 billion (S$198 billion) in losses tied to mortgages, complex debts and other bad credits.

German Finance Minister Peer Steinbrueck said total write-offs could reach US$400 billion, suggesting that the barrage of bad banking sector news was likely to continue.

Mr Torsten Slok, an economist at Deutsche Bank, said bank write-downs of US$400 billion would no doubt be painful, but the impact on lending – and, therefore, the economy – would depend on how widely the losses were spread.

‘How much is $400 billion? If it is spread throughout the financial system, it’s peanuts. If it’s concentrated among only a few banks, it’s serious,’ he said.

The deadline for most publicly traded US banks to file annual reports with the SEC is Feb 29.

Although many, like Merrill Lynch and Citigroup, already revealed heavy losses when they issued fourthquarter results in recent weeks, these final year-end reports face closer scrutiny from accountants and could contain some new shocks.

European banks slated to report earnings this week include Barclays, BNP Paribas and Societe Generale.

Last week, Swiss bank UBS reported a net fourth-quarter loss of US$11.3 billion.

It also revealed that it had tens of billions of dollars in exposure to US mortgage loans, leveraged finance and other potentially risky categories.

Mr Kenneth Rogoff, an economics professor at Harvard University and former chief economist of the International Monetary Fund, said sub-prime-related write-offs were just the beginning.

With losses from commercial real estate defaults, unpaid credit card bills, auto loans, corporate debt and other items added in, the grand total may top US$1 trillion, he said.

‘We haven’t, by any means, seen everything,’ Mr Rogoff said. ‘If it were just the sub-prime debt, it wouldn’t be so bad. We’re just entering the US recession, so the defaults are just beginning.’

Source: REUTERS (The Straits Times 19 Feb 08)

(NEW YORK) Citigroup Inc has barred investors in one of its hedge funds from withdrawing their money, and a new leveraged fund lost 52 per cent in its first three months, the Wall Street Journal reported yesterday.

The largest US bank suspended redemptions in CSO Partners, a fund specialising in corporate debt, after investors tried to pull more than 30 per cent of its roughly US$500 million of assets, the newspaper said.

Citigroup injected US$100 million to stabilise the fund, which lost 10.9 per cent last year, the newspaper said.

The fund’s manager, John Pickett, left following a dispute with Citigroup executives and complaints from investors after he tried to back out from committing more than half the fund’s assets to buy leveraged loans tied to a German media company, the newspaper said.

That matter was settled when CSO agreed to buy US$746 million of the loans at face value, though they were trading at 86 per cent to 93 per cent of face value, it said.

Meanwhile, Falcon Plus Strategies, launched Sept 30, lost 52 per cent in the fourth quarter, after betting on mortgage-backed and preferred securities and making trades based on the relative values of municipal bonds and US Treasuries.

Some collateralised debt obligations in the fund traded at 25 per cent of their original worth, the newspaper said.

Both funds are run in Citigroup’s alternative investments unit. That unit was briefly headed last year by Vikram Pandit, who in December replaced Charles Prince as Citigroup’s chief executive.

Old Lane Partners, a hedge fund that Mr Pandit founded and sold to Citigroup last year, has also had weak performance, falling 1.8 per cent in January, the newspaper said.

Since June, Citigroup has disclosed some US$30 billion of writedowns and losses tied to sub-prime mortgages, complex debt and deteriorating credit.

The problems contributed to a record US$9.83 billion fourth-quarter loss. Profit that quarter in the alternative investments unit fell 89 per cent to US$61 million.

Citigroup was not immediately available for comment.

A spokesman told the newspaper that CSO and similar hedge funds are subject to comprehensive risk oversight, and that Falcon Plus’s returns suffered from volatile fixed-income markets.

Shares of Citigroup closed on Thursday at US$25.74 on the New York Stock Exchange.

Source: Reuters (Business Times 16 Feb 08)

(LONDON) Oil and other commodities typically lag more mainstream assets, making them attractive as investment portfolio diversifiers, but since January, they have been swept up in the volatility gripping nervous equity markets.

The correlation between US crude and US equities has been 82 per cent, compared with 37 per cent the previous year and -63 per cent in 2006, according to figures from Standard Life covering the start of the year to last week.

For North Sea Brent crude and British equities, the link has been even tighter at 88 per cent, compared with 7 per cent last year and -37 per cent in 2006.

The new-found – and probably short-lived – closeness can be explained at least in part by liquidation and profittaking in energy markets to help to offset losses in equities and other assets that have headed lower in response to fears of recession.

‘At times oil and equities can briefly track each other for a variety of reasons . . . but there is nothing stable in that relationship,’ said Antoine Halff of Newedge brokerage.

The economic worries that have driven selling on stock markets are also bearish for oil markets as an economic slowdown would reduce demand, but traditionally oil markets react at a different pace from equities.

‘Equities discount growth fluctuations upfront. Commodities do it when it actually happens . . . Equities will fall first going into recession and recover first,’ said Tim Bond of Barclays Capital.

Negative correlation, or commodities and equities behaving differently, is useful for long-term investors, who want balanced portfolios.

But for some speculators on the oil markets, the stock market sell-off has provided much-needed direction.

‘The oil market has been in a relatively quiet period with no major winter threats, no major supply disruptions, and the higher volatility in equities has become a directional input for oil markets that were lacking a clear driver,’ said Olivier Jakob of Petromatrix.

He traced the link between oil and equities back to Jan 17, when the Dow Jones Industrial Average broke a major support line and he too predicted that the correlation would be temporary.

‘This will work as long as the two markets trade on the same fear factor, but will break down as soon as the core fundamentals start to price back in,’ Mr Jakob said.

Fundamentals of supply and demand for oil and other commodities remain strong and are likely to do so for as long as economic growth fears are focused on the United States and Europe.

These regions have accounted for a small proportion of incremental demand compared with the expanding Chinese market.

‘Chinese growth estimates have slipped a couple of points,’ said Mr Bond.

‘If they slip another couple of percentage points, we’d have a more convincing case for commodities coming off.’

The growth of consumption in China and elsewhere in Asia has tightened supplies to the extent that commodities in general look more resilient than they have during previous economic slowdowns.

‘Commodity prices are more inelastic to changes in growth than they were in the past,’ said Mr Bond.

Over time, they were still expected to perform the task of diversifying a portfolio, although in the event of ‘a severe downturn’, they would be expected to fall in line with general market weakness.

Fundamentals for oil can always be strengthened by producer group the Organisation of Petroleum Exporting Countries (Opec), which can cut supply in an effort to support prices.

‘Opec – specifically Saudi Arabia – has a record of acting as swing producer, reining in flows when demand drops,’ said Mr Halff.

He added, however, that Opec’s ability to manage supplies should not be overstated and the lengthy amounts of time needed to bring on new supplies is one of the reasons oil markets tend to lag other asset classes.

‘While the demand side of the oil market may broadly track the underlying economic cycle, the supply side doesn’t do so as closely because of the long lead time of oil development projects,’ said Mr Halff.

Oil prices can set the pace, as well as follow. A major oil supply shock, for instance, would have knock-on effects for equity markets, which include significant numbers of resource-holding companies sensitive to commodity price movements.

‘UK equities have a large oil component in them – 17.4 per cent – plus mining – 9.5 per cent – meaning that more than a quarter of the equity market is commodity price sensitive,’ said Richard Batty of Standard Life.

Source: Reuters (Business Times 11 Feb 08)

(WASHINGTON) The Securities and Exchange Commission (SEC) is investigating how banks, creditrating firms and lenders valued and disclosed complex mortgage-backed securities that ultimately led to the sub-prime crisis, a top agency enforcer said on Saturday.

‘The big question is, who knew what when, and what did they disclose to the marketplace?’ said Cheryl Scarboro, an associate director in the SEC’s enforcement division in charge of the sub-prime working group.

The SEC has opened about three dozen investigations into firms and individuals involved in the sub-prime mortgage market.

The investor protection agency has not named any names. But Morgan Stanley and Merrill Lynch are some of the firms in the financial services industry that have disclosed that government investigators are seeking information about their sub-prime activities.

Ms Scarboro said the cases can be broken down into three main areas: the securitisation process, the origination process and the retail area. Insider trading is also a key area.

‘Our investigations into potential misconduct is clearly a priority at the division,’ Ms Scarboro said at a Practising Law Institute conference in Washington.

Banks, due diligence firms and credit-rating agencies are being examined for their role in the securitisation process, or how mortgages were sold, repackaged and bundled into special financial products. The SEC is looking at the valuations and accounting treatments of mortgage-backed securities.

It is looking at whether the securities were valued correctly in the first place, what was the level of risk and if that was adequately disclosed to shareholders.

The methodology and models that companies used to value the complex financial products are being examined as well.

The agency also is looking at write-downs that financial firms have been forced to take and whether the assets should have been taken down and disclosed earlier.

Source: Reuters (Business Times 11 Feb 08)

(NEW YORK) One year after the first alarm bells of the sub-prime mortgage crisis rang in Wall Street, many of its victims are trading at half their value or less, while others have long been buried.

On Feb 8, 2007, HSBC said it would take a charge of about US$10.6 billion on sub-prime loans. The evening before, the No 2 US sub-prime lender, New Century Financial Corp, had unexpectedly warned it faced a quarterly loss and said it would restate previous earnings.

New Century shares lost more than a third of their value on Feb 8, but to look at the overall market, there was no telling how big a toll the crisis would take on the US stock market; the S&P 500 shed less than 2 points that day.

By spring, the stocks of sub-prime lenders were falling into a death spiral and dropped from the major exchanges in steady succession.

On April 2, New Century filed for bankruptcy protection.

American Home Mortgage Investment Corp followed in August.

Accredited Home Lenders Holding Co was bought out by a private equity firm in October.

Countrywide Financial Corp, the nation’s No 1 lender, hit a high of US$44.92 on Feb 7, 2007; the shares are now trading at US$6.58 as it awaits a takeover by Bank of America Corp.

But despite the bloodbath in the mortgage finance sector, investors last autumn were still confident enough that the sub-prime debacle was contained that they pushed both the Dow and S&P 500 to lifetime highs on Oct 11.

From its intraday high on Oct 11 to last Friday’s close, the S&P 500 index has fallen 15.5 per cent.

‘That’s been the history of the last year – denial, denial denial,’ said Gary Shilling, president of A Gary Shilling & Co, an investment research firm in Springfield, New Jersey. ‘That’s what held stocks up in October.’

That confidence was shaken shortly after, when Merrill Lynch warned it would have to write down billions of dollars more in sub-prime-related debt than it had previously said. Citigroup, Bear Stearns and others added to the writedown chorus.

In a year, Merrill Lynch has fallen nearly 45 per cent.

Citigroup stock has fallen more than 52 per cent and Bear Stearns has shed nearly 51 per cent. In addition to millions in market capitalisation, all three firms have lost their chief executives.

By New Year, consensus formed that the sub-prime crisis would indeed spread beyond the mortgage and financial market and into the broader economy, and potentially beyond US borders.

‘More recently, people realised the theory of decoupling was a fairytale, that the US really is the world’s economic leader,’ Mr Shilling said. ‘There’s still a lot of denial. The consensus is begrudgingly admitting we’re into or close to recession, but the consensus is now that it will be over in the first half of the year.’

Wall Street may have been late to recognise the impact of the sub-prime crisis, but the public caught on fast.

Less than a year after HSBC and New Century fired their warning flares, the television show Law and Order featured a plot about a con artist who scammed sub-prime mortgage holders facing foreclosure to sign over their homes.

Source: Reuters (Business Times 11 Feb 08)

Swiss bank may have inflated prices of securities despite drop in valuations

CHICAGO – UNITED States government prosecutors are investigating whether Swiss banking giant UBS misled investors by reporting inflated prices of mortgage-backed securities it held despite knowing those valuations had eroded, The Wall Street Journal reported last Saturday.

The Journal, quoting unnamed sources familiar with the probe, said the investigation by the US Attorney for the Eastern District of New York had not yet issued subpoenas.

But the sources noted that the New York prosecutors work closely with the US Securities and Exchange Commission (SEC).

The SEC recently expanded its own probes of both UBS and Merrill Lynch over the pricing of mortgage securities, a move which empowers the SEC to issue subpoenas, they said.

UBS was not immediately available for comment. A Merrill spokesman had no comment.

UBS, Europe’s hardest-hit bank from the credit crisis, last week raised its sub-prime write-downs to US$18.4 billion (S$26.1 billion).

Last Friday, the bank also urged its shareholders to dismiss a plan from some dissenting shareholders demanding an external probe into the bank’s sub-prime woes.

The US Justice Department last Wednesday said it was looking into whether fraud had occurred in the packaging and selling of complicated mortgage-related securities like collateralised debt obligations (CDOs), the Journal said.

The Federal Bureau of Investigation is looking at 14 unnamed companies in that probe, the agency said.

Last Friday, the top securities regulator in Massachusetts filed a civil complaint against Merrill, accusing the brokerage of selling unsuitable sub-prime mortgage-related securities to the city of Springfield.

Massachusetts Secretary of State William Galvin seeks to take away Merrill’s profits from a transaction in which it sold CDOs to the city. Merrill invested about US$14 million of the city’s money in CDOs last year, only to see most of the value erased.

Separately, the city of Springfield said last Thursday that Merrill had agreed to pay it US$13.9 million after determining that the city had not approved the purchase of the CDOs.

UBS remains under fire at home.

Shareholder advocacy group Ethos in December called for more clarity from UBS over its sub-prime losses, adding that there should be an independent probe.

But UBS has said there is no need for a separate investigation, as the country’s banking watchdog, EBK, is already probing the reasons behind its losses.

UBS last week stunned investors with its third round of sub- prime write-downs.

It reported heavy fourth- quarter losses and a 2007 net loss of 4.4 billion Swiss francs (S$5.8 billion).

Source: REUTERS (The Straits Times 4 Feb 08)

LONDON – THE financial services industry should expect ‘turbulent conditions for 2008 and beyond’ and may report an additional US$300 billion (S$429.8 billion) in losses related to the United States sub-prime crisis, according to a study by consulting firm Oliver Wyman.

‘We expect a stormy 2008,’ Oliver Wyman said in its State Of The Financial Services Industry report. ‘While governments, central banks and regulators scramble to address the aftermath of the sub-prime fallout, several other crises are mounting.’

A slowdown in European real estate, especially in Britain and Spain, potential weakening of the US dollar and a possible collapse in commodity prices may hurt the global economy, according to the report.

A drop in Chinese and Indian stocks may be a fourth ‘potential disruption’ this year, Oliver Wyman said.

Senior executives and investors are gathering at the World Economic Forum in Davos, Switzerland, amid concerns the world’s biggest economy is sliding into a recession.

The mood contrasted with the buoyancy of last year’s meeting, where guests celebrated a bumper year of corporate profits and bonuses and the strongest global economy in three decades.

The US Federal Reserve this week lowered the target rate for overnight bank loans in the first emergency cut since 2001, as it tried to prevent a recession.

US President George W. Bush and House lawmakers announced an agreement on an economic stimulus package that would distribute rebate cheques to 117 million families.

Economists at Goldman Sachs Group and Merrill Lynch are predicting the US economy will fall into its first recession in seven years this year.

Chief executive officers (CEOs) of financial services companies surveyed by Oliver Wyman said they expected share prices of financial services companies to increase between 5 per cent and 14 per cent this year.

The same prediction was made last year, according to Mr Alex Paidas, a spokesman for Oliver Wyman.

Instead, the industry contracted by 7 per cent. This year, 48 per cent of the CEOs surveyed cited deteriorating market conditions as a key threat.

Sixty-nine per cent of the CEOs polled in November and last month said they expected their companies to outperform the industry this year.

‘North American financial services firms will have a tough year,’ Oliver Wyman said. ‘Market uncertainty, combined with further write-downs and expected home price and loan volume declines, implies more squeezes on earnings. Banks most likely will have to increase loan-loss reserves.’

Growth in Western Europe is likely to suffer, while Latin America has a positive outlook and ‘growth opportunities exist’ in Singapore, Taiwan, Indonesia and Korea, according to the report.

Private equity is an industry that is likely to grow, the consulting firm said.

Source: BLOOMBERG NEWS (The Straits Times 26 Jan 08)

(NEW YORK) Merrill Lynch reported a second straight quarterly loss after writing down US$11.5 billion of subprime mortgages and bonds, ousting its chief executive officer and losing almost half of its market value in 2007.

New York-based Merrill said yesterday that it suffered a fourth-quarter net loss of US$9.83 billion, or US$12.01 a share, compared with earnings of US$2.35 billion, or US$2.41 a share, a year earlier. Analysts were estimating that the largest US brokerage would post a loss of US$4.82 a share, according to a survey by Bloomberg. The decline resulted in Merrill’s first full-year loss since 1989.

‘While the firm’s earnings performance for the year is clearly unacceptable, over the last few weeks we have substantially strengthened the firm’s liquidity and balance sheet,’ chief executive John Thain said in the statement.

Mr Thain joined Merrill last month, replacing Stan O’Neal, whose gamble on building the sub-prime mortgage business backfired as US homeowner defaults surged to a 20-year high.

Merrill is the third of the five biggest US securities firms to post a loss, capping the companies’ worst quarter ever.

Mr Thain, the former president of Goldman Sachs, Wall Street’s most profitable firm, has replaced senior executives and taken steps to replenish capital during the past month by raising US$12 billion from outside investors.

‘Mr Thain is repositioning the firm to start fresh with a strong balance sheet, once these couple of bad quarters get out of the way,’ said Matthew Albrecht, an analyst at Standard & Poor’s who rates Merrill shares ‘hold’.

The company’s full-year loss came to US$7.78 billion compared with record net income of US$11.6 billion at Goldman and earnings of US$3.2 billion posted by Morgan Stanley, the industry’s No 2 firm.

Morgan Stanley and Bear Stearns, like Merrill, reported their biggest losses in the fourth quarter. Goldman and Lehman Brothers had profits.

Mr Thain has reduced 2007 bonuses in some divisions and cut jobs in the fixed-income unit, where the writedowns originated.

Several executives tied to Mr O’Neal have left, including former US brokerage chief McIntyre Gardner. Mr Thain has also recruited executives from his most recent employer, NYSE Euronext, hiring Nelson Chai to replace Jeff Edwards as chief financial officer.

Merrill, whose market value was greater than Goldman’s as recently as 2006, is now worth half as much. Mr Thain, 52, worked at Goldman from 1979 to 2004, when he left to become chief executive of NYSE Euronext.

The writedowns by Merrill add to more than US$100 billion of sub-prime-related losses reported since May by the world’s largest banks and securities firms. Citigroup posted the biggest loss in its 196-year history earlier this week as the largest US bank’s sub-prime mortgage investments and related securities tumbled in value by US$18 billion.

With its capital depleted, Merrill said on Tuesday that it sold US$6.6 billion of preferred stock to a group of investors including the Korean Investment Corp, Kuwait Investment Authority and Mizuho Corporate Bank. The transaction followed the sale in December of as much as US$6.2 billion in stock.

Before his ouster in October, Mr O’Neal acknowledged that Merrill held onto many of the mortgage securities it created rather than selling them to customers. Mr O’Neal also bought sub-prime lender First Franklin Financial Corp for US$1.3 billion at the end of 2006 just as the market for housing-linked securities was beginning to wither.

Merrill held US$8.8 billion of sub-prime mortgages by June and US$32.1 billion of collateralised debt obligations or CDOs – securities packaged from mortgage bonds, loans and other debt.

Many CDOs were downgraded by ratings agencies S&P and Moody’s as an increasing number of borrowers fell behind on home loan payments, sending prices on some of the securities plunging to as little as 30 cents on the dollar.

Source: Bloomberg (Business Times 18 Jan 08)

(NEW YORK) First hard-pressed Wall Street banks turned to rich foreign governments for help. Now, they are seeking aid from the likes of New Jersey and big mutual funds to bolster their weakened finances.

Citigroup and Merrill Lynch said on Tuesday that they were raising a combined US$19.1 billion from parties that range from government- backed funds in Korea and Kuwait to New Jersey’s public pension fund and T.Rowe Price, the big mutual fund company.

Other investors include a large bank in Japan, a hedge fund in New York and private investors in the Middle East.

While so-called sovereign wealth funds are investing the most, the emergence of new investors like New Jersey underscores the rising aversion on the part of US banks to being seen as beholden to foreign governments. In recent months Citigroup, Merrill and several other banks have sold multibillion-dollar stakes to foreign government funds.

The latest sales came as Citigroup reported a US$9.83 billion loss for the fourth quarter, the biggest loss in its history, and Merrill prepared to disclose further huge charges yesterday. Banks worldwide have written down the value of mortgage-related investments by more than US$100 billion, and some analysts warn that figure could double as the mortgage crisis grinds on.

Citigroup’s new round of capital- raising was headlined by a US$6.8 billion investment by the Government of Singapore Investment Corp and a smaller investment by the Kuwait Investment Authority (KIA).

Capital Research, a big US investment firm, and Prince Alwaleed bin Talal of Saudi Arabia – both long-time Citigroup shareholders – are also investing, along with the New Jersey Division of Investment and Sanford Weill, Citi’s former chairman and chief executive.

Merrill, meantime, is raising US$6.6 billion, mostly from the Korean Investment Corp, the KIA and the Mizuho Financial Group of Japan. Merrill also attracted investment from T.Rowe Price, TPG-Axon, a New York-based hedge fund, and the Olayan Group, a private company based in Saudi Arabia.

‘There is still a lot of wealth out there,’ said Edward Yardeni, an independent investment strategist. ‘The financial institutions are scrambling to shore up their capital but they also want to make sure that they get it from diversified sources. It also gives them political cover and shows that they are not just dependent on the sovereign wealth funds.’

In the case of New Jersey, William Clark, the chief investment officer of the state’s US$81 billion pension fund, approached both Citigroup and Merrill and agreed to invest US$400 million in Citigroup and US$300 million in Merrill.

Even after these investments, the New Jersey fund has an underweight position in financial stocks.

‘This fits the strategy of our portfolio,’ said Susan Burrows Farber, the chief administrative officer of the fund, adding that New Jersey was open to making more of these types of investments.

For T.Rowe Price and Capital Research, which already own shares of Merrill and Citigroup, the decision to increase their stakes may represent less a statement of confidence than a willingness to take a new slug of stock and reduce the cost of their substantial positions.

TPG-Axon, a US$9 billion fund run by Dinakar Singh, a former Goldman Sachs executive, is responding to a capital call from a weakened investment bank for the first time.

Another new presence is the Olayan Group, a private investment company founded by the late Suliman Olayan, a Saudi billionaire who made his fortune by investing in areas like food distribution and infrastructure. According to a person with knowledge of the discussions, the investment was headed by Hutham Olayan, leader of the group’s activities in the Americas and a board member of Morgan Stanley.

Mizuho Financial is the second- largest financial institution in Japan. The Korea Investment Corp is an investment fund begun by the Korean government to make more aggressive investments with the country’s rapidly accumulating foreign exchange reserves.

What remains unclear is how long overseas investment entities will remain patient with US banks if the financial industry continues to suffer. Since Citic Securities in China invested US$1 billion in Bear Stearns last fall, sovereign funds have invested more than US$50 billion in weakened banks.

That is a small amount compared with the US$2 trillion in these funds, to say nothing of additional trillions in central banks and other related entities.

But no one likes to lose money, even funds that have very long investment thresholds.

‘At some point these investors will say no,’ said Mr Yardeni. ‘So far these investment have been value traps as opposed to good value.’

Yet with oil prices increasing, sovereign funds and other government- sponsored funds are likely to generate investment surpluses approaching US$8 trillion in the next five years, according to McKinsey & Co’s research arm.

‘What we find is that a lot of this liquidity is still in Treasury bills,’ said Diana Farrell, an analyst at McKinsey who has studied these funds. ‘This is really just the beginning.’

Source: NYT (Business Times 18 Jan 08)

NEW YORK – STUNG by billions of dollars in bad debts, banks in the United States are clamping down on loans, making borrowing costlier for the consumers and companies that are the best hope for keeping the US economy out of recession.

Economists are increasingly worried that reluctant banks plus skittish borrowers will create a recipe for economic disaster, and even aggressive interest rate cuts by the Federal Reserve may not be enough to prevent a downturn.

‘It’s a vicious cycle. As banks tighten lending standards, credit is harder to get, which is worse for the economy, and that makes banks tighten up more,’ said Mr Ray Soifer, the chairman of bank consulting firm Soifer Consulting.

‘Fed rate cuts will have some impact, but cutting rates by itself does not improve the availability of credit.’

The central bank’s Beige Book survey of economic conditions, released on Wednesday, showed that both business and consumer lending activity slowed from mid-November up till last month, with most regions reporting tighter credit conditions.

Banks have reason to be concerned about credit quality as US consumers struggle to stay current on a growing pile of debt.

American Express, which traditionally focuses on wealthier consumers less exposed to an economic slowdown, said that delinquencies suddenly ticked up last month.

Citigroup – which is raising at least US$14.5 billion (S$20.7 billion) of new capital, with US$6.88 billion of this coming from the Government of Singapore Investment Corporation – said fourth-quarter credit costs for US consumer loans jumped because of rising delinquencies in credit cards, mortgages and car and personal loans.

Borrowers with clean credit histories will still find lenders willing to push money their way, but the easy money that kept the economy rolling in recent years has dried up as banks, hobbled by the US sub-prime mortgage mess, scramble to shore up their balance sheets.

Deutsche Bank estimates that losses from sub-prime mortgage loans will reach US$300 billion to US$400 billion, of which one-quarter will probably fall on the banking sector.

‘We are more optimistic than some observers who have predicted a major credit crunch because of write-offs on sub-prime loans,’ the German bank’s analysts wrote in a note to clients.

They added: ‘But we expect the balance sheet repairing process to reduce banks’ inclination to extend new credit, resulting in higher lending rates and tighter lending standards.’

Credit card issuers are mailing out fewer solicitations, according to Credit Suisse. The credit card industry mailed out 595 million offers in November, 3 per cent lower than in October and 11 per cent below the figure a year ago.

Loans from car dealers have not kept pace with the Fed’s interest rate cuts. The average interest rate on new car loans was higher in November than it was in August, even though the Fed lowered benchmark overnight rates by three-quarters of a percentage point over that period.

On the corporate side, loan volume for companies with high credit ratings remains robust, in part because businesses are relying less on other funding avenues, such as commercial paper.

But junk-rated companies are expected to borrow less this year than they did last year, because banks and investors are much less interested in taking that risk.

Source: REUTERS (The Straits Times 18 Jan 08

Write-downs of $21b force world’s largest brokerage to declare worst-ever quarterly hit

NEW YORK – MERRILL Lynch, the world’s largest brokerage, lost nearly S$10 billion (S$14.3 billion) in the fourth quarter, its biggest quarterly loss since it was founded 94 years ago, after reporting US$14.6 billion (S$20.9 billion) in write-downs.

Of the five biggest Wall Street investment banks, Merrill is the third to suffer a loss for the quarter after taking massive write-offs related to securities backed by souring mortgages.

The Merrill report yesterday follows a similar report earlier this week from the nation’s largest bank, Citigroup, which showed that it had also lost almost US$10 billion for the fourth quarter, the largest loss in its 196-year history.

The reports come as weak economic data has intensified fears of a recession and raised pressure on Washington for an economic stimulus plan.

For the quarter, Merrill incurred a net loss after preferred dividends of US$9.91 billion, or US$12.01 per share, compared with a profit of US$2.3 billion, or $2.41 per share, a year earlier.

Wall Street had expected a loss of US$4.93 per share, according to Thomson Financial. However, analysts have not been able to make accurate projections since the summer, when investment banks began taking on large losses due to the collapse of the sub-prime mortgage market.

Merrill shares tumbled by US$2.22, or 4 per cent, to US$52.90 in pre-market electronic trading.

The New York-based brokerage marked down US$11.5 billion for mortgage-backed securities and an additional US$3.1 billion for adjustments to hedge positions on these securities.

‘While the firm’s earnings performance for the year is clearly unacceptable, over the last few weeks, we have substantially strengthened the firm’s liquidity and balance sheet,’ noted Mr John Thain, Merrill’s new chairman and chief executive, in a statement.

After joining Merrill last month, he pledged to clear the brokerage’s books and shore up its capital base to better position it in the midst of the credit market turmoil. He replaced Mr Stan O’Neal, who was ousted after big bets on sub-prime mortgages backfired as home owners began to default on loans at an alarming rate.

Mr Thain has begun addressing Merrill’s balance sheet woes by selling a commercial finance unit.

Merrill has also secured almost US$13 billion worth of capital investments, mostly from foreign wealth funds in Singapore, South Korea and Kuwait.

The firm needed the extra capital after steep losses in the second half of last year led to its first annual loss since 1989.

Last year, Merrill suffered a net loss of US$8.05 billion, or US$9.69 cents per share, compared with a profit of US$7.31 billion, or US$7.59 per share, in 2006.

As for the fourth quarter, Merrill noted that its fixed income, currencies and commodities business had experienced markedly reduced client flows and decreased trading opportunities.

The business had also significantly reduced its exposure to collateralised debt obligations, or CDOs, which have given Wall Street the biggest headache.

Source: ASSOCIATED PRESS (The Straits Times 18 Jan 08)

It steps up buying of foreign real estate assets as values plunge, growth slows

SAN FRANCISCO – THE Government of Singapore Investment Corporation (GIC) is investing in the United States property market, where values have fallen heavily in the past year.

GIC committed US$300 million (S$429.2 million) to hedge fund Rosen Real Estate Securities to invest in US real estate.

GIC also acquired a minority stake in the California-based firm run by Professor Kenneth Rosen, chairman of the University of California’s Fisher Centre for Real Estate and Urban Economics, he said in a statement.

Singapore is increasing investment in real estate companies in the US and other markets, where slowing growth and a contraction of global credit markets battered values. The Bloomberg Real Estate Investment Trust Index of 126 companies has dropped by 30 per cent in the past year.

‘US property had a huge fall last year and now would certainly be a better time to buy than last year,’ said Mr Shane Oliver, who helps manage the equivalent of US$113 billion at AMP Capital Investors in Sydney. ’Whether we have seen a bottom remains to be seen, but there’s certainly value to be had now.’

Dr Seek Ngee Huat, president of GIC’s real estate unit, said in a statement on Monday that his company chose to invest in the fund because he has known Prof Rosen and his team for ‘a very long time’.

Prof Rosen said in an interview: ‘GIC is not in a controlling position. It has a passive stake.’

The fund invests in US real estate investment trusts, homebuilders, mortgage companies and other securities, he said.

The transaction follows GIC’s 11 billion Swiss franc (S$14.4 billion) investment in UBS, which made it the single-largest shareholder of Europe’s largest bank with a 9 per cent stake.

GIC also owns a 3 per cent stake in British Land, Europe’s largest property trust.

The latest investment adds to the portfolio of GIC, one of the world’s 10 biggest real estate investors with properties in 30 countries.

The Singapore Government’s fund manager, set up in 1981 to run the nation’s foreign reserves, holds about a 10th of its more than US$100 billion of investments in real estate.

Source: BLOOMBERG NEWS (The Straits Times 16 Jan 08)

WASHINGTON – IN CHARLIE Wilson’s War, a new movie based on a true story and starring Tom Hanks, a Texan congressman convinces the United States administration to back a plan to oust the Soviets from Afghanistan.

It involves ‘greening’ Afghanistan – pumping a billion dollars a year to arm the Afghan mujahideen. The plan works, but in a questionable triumph for American diplomacy that eventually emboldens the Taleban.

Three decades later, the greenback has not gone places either.

Reflecting the weaknesses in the US economy, it has lost considerable value against major currencies and, for the first time in nearly a century, appears to have a rival in the euro.

Over the past five years, the dollar has tumbled by more than 25 per cent against currencies of America’s trading partners. Its decline has been especially sharp against the euro – a drop of 40 per cent in the same period.

At least three other facts point to its ebbing charm.

One, the value of euro notes in circulation has exceeded the value of dollar bills.

Two, the dollar has been eclipsed by the euro as the main denomination of international debt issues.

Three, the proportion of the world’s foreign currency reserves held in dollars has shrunk to 64 per cent, down from 70 per cent in 1999, when the euro was launched. In the same period, the portion held in euros rose from 18 per cent to 26 per cent. The falling dollar is reshaping the globe’s commerce, trade and economics.

One example is the twist in the high-profile rivalry between aircraft makers Boeing and Airbus.

The dive in the dollar gave US-based Boeing an advantage over France-based Airbus, which sells planes at prices denominated in dollars but has to pay about 50 per cent of its costs in euros. It loses a billion euros in profit every time the euro gains 10 cents against the dollar.

The situation is ‘life-threatening’, to quote Airbus chief executive Tom Enders. It convinced him of the need to take some assembly lines across the Atlantic, to Wichita, Kansas and Mobile, Alabama.

Luxury carmaker Rolls-Royce is transplanting some factory works from Liverpool in Britain to Ohio because of similar considerations.

Exporters across Europe, as well as in Asia, Australia and Africa, are hurting as they earn weaker dollars and foot production costs in dearer home currencies.

The dollar does not go the same distance in India any more. Visitors to the Taj Mahal find they cannot pull out the dollar to pay for tickets, while software companies have found their fortunes evaporating.

Even as their exports in dollar terms stayed the same, they shrank when converted into Indian rupees.

Oil exporters were another group of nations hit by the falling dollar. They reaped a bounty from spiking oil prices but were spooked by the inflation that followed. In a trail-blazing move, Kuwait ditched the dollar peg last May to contain inflation.

Iranian President Mahmoud Ahmadinejad, railing against the fact that oil prices are quoted in sliding US dollars, fumed: ‘They get our oil and give us a worthless piece of paper.’

But not everybody lost. Vietnam, which clung closely to dollar parity, found it gained investors at the expense of Thailand, where the rising baht made operations costlier.

Sovereign wealth funds, sitting on billions of dollars generated by trade surpluses and oil revenues, factored in the falling dollar when they made headline-grabbing investments last year, such as the Abu Dhabi fund buying a US$7.5 billion (S$ 10.7 billion) stake into Citibank, and Singapore’s GIC investing US$10 billion in UBS.

Mr Gary Hufbauer, of the influential Washington DC-based think-tank Petersen Institute for International Economics, explained the logic behind the moves: ‘They know very well that, over the next five years, the dollar is likely to decline against other currencies.

‘But a big move out of dollars is likely to precipitate the decline that will, in turn, undermine the value of their remaining dollar holdings.

‘They also know that, over a period of five or 10 years, dollar assets have had better returns than yen or euro assets. So they conclude that one sensible way to hedge is to put part of their dollar hoard into equities, corporate bonds, and other dollar assets.’

But while the rest of the world mostly fretted over the dollar’s fall, it could be just what the doctor ordered for Uncle Sam.

The world’s largest economy, bracing for a recession, is finding a salve in the sudden surge in exports – helped by the cheaper dollar, which has made American products competitive.

‘Businesses are getting behind exports, and we are becoming a major, major exporter,’ said US Commerce Secretary Carlos Gutierrez recently.

Exports grew at an annualised rate of 18.9 per cent in the third quarter of 2007, the fastest rate since 2003.

Exports now make up 11.5 per cent of the US economy’s total output. Five years ago, they made up 9.4 per cent of the gross domestic product.

Some analysts expect the gains from exports to offset the housing slump. The gains will also help the US hack away at its mammoth current account deficit – which measures its trade and financial dealings with the rest of the world and reflects the excess of imports over exports.

‘The re-balancing process has begun,’ says Ms Tu Packard of Moody’s economy.com. She feels the US dollar is ‘as weak as it can be’, and is likely to see a rebound next year.

And finally, the falling dollar could help head off protectionist sentiment in the US. Calls by some congressmen to levy penalties against exports from China are likely to fade as US exports there keep on growing.

Source: The Straits Times 9 Jan 08

ZURICH – SWISS bank UBS, Europe’s largest lender by assets, unveiled US$10 billion (S$14.4 billion) in astounding sub-prime write-downs yesterday.

The bank’s losses has already cost the jobs of chief executive officer (CEO) Peter Wuffli, his finance chief Clive Standish, investment-banking head Huw Jenkins and 1,500 people at the securities unit.

The US$10 billion charge was one of the largest writedowns by any global bank since the United States subprime crisis broke, and was the latest sign of the devastation wrought upon some of the world’s largest financial institutions from the crisis.

UBS said it will raise 13 billion Swiss francs (S$16.6 billion) by selling stakes to Government of Singapore Investment Corp and an unnamed Middle East investor.

The news sent UBS’ shares tumbling as investors took fright from the anticipated dilution of their share of earnings, but they managed to recover sightly later in the day.

‘The level of dilution is very significant,’ said ABN Amro analyst Omar Fall.

UBS expects a loss in the fourth quarter and possibly for this year, it said yesterday. Securities firms and banks had announced about US$66 billion of losses and markdowns linked to the collapse of the US sub-prime mortgage market this year.

UBS reported its first loss in almost five years in the third quarter after the subprime contagion led to about US $4.66 billion in markdowns on fixed-income securities and leveraged loans.

The announcement comes on the eve of an investor day in London today at which top managers like UBS CEO Marcel Rohner are due to address analysts and investors.

UBS also said it would approve the resale of 36.4 million treasury shares previously intended for cancellation, raising Tier 1 capital by about two billion Swiss francs.

‘In the last several quarters, continued speculation about the ultimate value of our sub-prime holdings – which remains unknowable – has been distracting,’ Mr Rohner said in the statement. ‘These write-downs will create maximum clarity on this issue and will have the effect of substantially eliminating speculation.’

Source: BLOOMBERG NEWS, REUTERS (The Straits Times 11 Dec 07)

NEW YORK – WALL Street finished a turbulent week with another huge drop on Friday after major banks warned of further losses on their debt portfolios.

That raised investor concerns that the credit market slump showed no sign of abating.

Record-high crude oil prices and a sagging dollar further undermined sentiment.

The Dow Jones Industrial Average tumbled 4.07 per cent in the week ended Friday to close at 13.042.74.

The broad market Standard & Poor’s 500 slid 3.7 per cent to 1,453.7 and the tech-heavy Nasdaq plunged 6.5 per cent to 2,627.94 amid a sharp shift in sentiment on technology companies like Google, which fell US $29.87 to US$663.97.

Apple Inc, maker of Macintosh computers and iPod music players, dropped US$10.10 to US$165.37.

Markets have been getting more bad news from the financial sector all week, starting with a shakeup at Citigroup as the US banking titan said it would have to write off up to US$11 billion in soured real-estate investments, far higher than anticipated.

Other banks, including Wachovia, Bank of America and JP Morgan Chase, also warned of write-downs.

‘The major hurdle for the market has been and will continue to be the fate of the financials,’ said Mr Larry Wachtel at Wachovia Securities.

He said the market feared ‘subprime contagion’ and was waiting to see the magnitude of write-downs against non-performing mortgage debt.

‘Something on the order of US$20 billion has been revealed and estimates for full damage range from as low as US$60 billion to as high as US$250 billion,’ he said.

The weak dollar and surging fuel prices have also added to the gloomy picture.

Bonds were mixed in the past week. The yield on the 10-year Treasury bond fell to 4.225 per cent from 4.291 per cent a week earlier, and that on the 30-year Treasury rose to 4.602 per cent from 4.595 per cent. Bond prices and yields move in opposite directions.

This week, the markets will see a snapshot of consumer health with a report on retail spending, as well as data on inflation and industrial production. Key earnings reports are due from Wal-Mart and other retailers.

Source: AFP, Bloomberg (The Sunday Times 11 Nov 07)

GLOBAL stock prices tumbled this week in North America and Europe as losses mounted at US banks. Meanwhile, oil and gold prices rose, indicating the jittery mood of international investors.

Of course, dips are not unusual: stock markets have suffered bigger single falls in the past. And yet, there is something highly unusual and potentially much more serious about the financial markets’ current behaviour.

The credit crunch is a good example. The turmoil hit two major US-based banks: Merrill Lynch and Citigroup.

Both fell victim to the so-called ‘sub-prime crisis’, initially limited to low-quality American mortgages advanced to people with bad credit records, but now assuming a more ominous dimension, overshadowing much of the global financial system.

The two banks admitted that their losses are much heavier than originally anticipated. Their top executives have resigned, and the provision for non-performing loans has been increased.

In theory, this should be the end of the story. Only that it isn’t, and for a simple reason: nobody knows how big the losses of other banks are, and, as regulators admitted this week, it may take a long time before the true picture emerges.

Adding to the air of uncertainty is the plight of the US dollar.

The currency has been pounded from all directions. It has dived to its lowest level against the euro. The last time the British pound stood at such a high level against the US dollar was more than a quarter of a century ago.

China, holder of no less than US$1.43 trillion (S$2.06 trillion) worth of foreign currency reserves, is already hinting that it may diversify its deposits away from the American currency.

So are other governments, particularly in the Middle East or Russia.

And it is hard to see what the US Federal Reserve can do to boost its currency. Raising interest rates could plunge America into an economic recession; not doing so, however, will keep the dollar weak.

Meanwhile, in order to defend the integrity of the banking system, the US central bank may have to pump extra dollars into the economy.

Some analysts have already rushed to the conclusion that the US dollar has finally been kicked off its perch as the world’s reserve currency, to be replaced by the euro or a basket of other currencies. This, after all, is what happened to the pound a century ago. And, once the process starts, it moves fast and is usually irreversible.

But this prediction is almost certainly off the mark. The pound’s global pre-eminence was destroyed by World War I, which shattered all European economies and led to the emergence of America as a superpower.

No such cataclysm is expected.

More importantly, the supposed alternative to the dollar – the euro – is still a young currency. It may be gaining in credibility but it has its own problems.

It is usually forgotten that the US dollar suffered from credibility problems in the early 1970s when America was hit by high inflation.

But its supremacy was quickly re-established, and there is no reason why this may not happen again.

Nevertheless, there is little doubt that the current market crisis is deep and troubling, mainly because it remains so unpredictable both in its extent and duration.

Source: The Straits Times 10 Nov 07

NEW YORK – UNITED States stocks dropped to the lowest in two months early yesterday, as financial institutions such as Wachovia, Fannie Mae and State Street reignited concern about the plummeting value of mortgage bonds.

Wachovia, the fourth-largest US bank, tumbled to the lowest since 2003 after some of its debt securities lost US$1.1 billion (S$1.6 billion) last month.

Fannie Mae, the top source of money for US home loans, slid to a two-year low after defaults spurred a thirdquarter loss.

A Standard & Poor’s report that a collateralised debt obligation managed by State Street began liquidating assets helped drag financial shares to the lowest since October 2005.

The Dow Jones Industrial Average lost 225.74 points, or 1.7 per cent, to 13,040.55, after one hour and 45 minutes of trading. About nine stocks fell for every two that rose on the New York Stock Exchange.

Benchmark indexes retreated in Europe and Asia yesterday amid speculation that Barclays and Mizuho Financial Group will report losses on sub-prime-related assets.

Earlier, it was announced that the US trade deficit unexpectedly narrowed in September, as the greenback’s slump helped push exports to a record high, giving the economy a lift even as the housing recession deepened.

The gap shrank 0.6 per cent to US$56.5 billion, the smallest since May 2005, from a revised US$56.8 billion in August, the Commerce Department said.

The report will probably prompt economists to boost their earlier estimates for growth in the third quarter.

Last quarter’s 3.9 per cent gross domestic product growth rate may be revised closer to 5 per cent, economists said prior to the report.

Faster growth overseas is also making up somewhat for slower demand at home.

But the trade deficit with China widened 5.5 per cent to US$23.8 billion. Imports from China were the second biggest on record. So far this year, China has shipped more goods to the US than Canada, America’s biggest trading partner.

Source: BLOOMBERG NEWS (The Straits Times 10 Nov 07)

Greenback also hit by fears of more loss disclosures by financial sector firms

LONDON – THE greenback hit a record low against the euro yesterday as fears grew that more United States financial firms will be hit by credit market turmoil, reinforcing expectations of further Federal Reserve interest rate cuts.

Such worries came to the fore again after ratings agency Standard & Poor’s said on Thursday that a collateralised debt obligation (CDO) managed by State Street Global Advisors may have started selling assets.

CDOs are products packaged from risky mortgages in the US.

A downbeat economic forecast from Fed chairman Ben Bernanke on Thursday cemented market views that the Fed will cut rates more, further eroding the greenback’s appeal.

This contrasts with continued hawkish rhetoric from the European Central Bank (ECB) – despite its warnings on ‘brutal’ foreign exchange moves – and the Bank of England’s (BOE’s) decision not to cut yet.

‘With the BOE on hold yesterday and…at the same time those downside warnings from Bernanke on growth, the market continue to anticipate additional Fed cuts, so those interest rate spreads continue to work against the dollar,’ said Mr Jeremy Stretch, a currency strategist at Rabobank.

The euro rose as high as US$1.4738, before trimming gains to reach US$1.4686 by 0807 GMT (4.07pm Singapore time). It is now up more than 11 per cent against the euro since the start of the year.

The pound hit a fresh 26-year high at US$2.1144 as the BOE’s on-hold decision on Thursday wrong-footed a minority of investors who had bet on a rate cut.

Mr Bernanke told US lawmakers that the Fed expected economic growth to slow noticeably in the fourth quarter of this year and the first half of next year, citing credit industry turmoil and the likelihood of the housing sector slump deepening.

That contrasted with ECB president Jean-Claude Trichet’s vow on Thursday to keep a grip on inflation, leaving a chance that the ECB may raise interest rates further from the current 4 per cent.

He also said that ‘brutal’ currency moves are not welcome.

Calyon said in a research note: ‘Dollar bashing in the media and market has raised the spectre that dollar weakness will discourage investors from holding US assets.

‘Talk of diversification out of the dollar has ranged from official foreign exchange holding to supermodels. Such coverage could…provide a further rationale for dollar weakness.’

The dollar eased to 112.46 yen, closing in on Thursday’s three-month low of 111.99.

Traders said the yen received a bit of a boost from the yuan, which jumped to record highs against the dollar in the spot market and posted its biggest gain in one-year non-deliverable forwards since its July 2005 revaluation.

Source: REUTERS (The Straits Times 10 Nov 07)

Common in the emerging markets, that this happened in the world’s richest and most developed economy in the era of sophisticated Basel II credit risk standards speaks volumes about the triumph of hubris in American ‘sell or die’ business practices.

Many professionals appear to have forgotten, or simply didn’t know, that these events happen somewhere in the world as regularly as a really decent British summer – that is, around once in five years. Indeed, they are regular enough to keep some people in almost permanent employment cleaning them up, myself included.

There is one difference this time around. In the good old days of the traditional bank crises, that is, reckless lending to those with no ability, or intention, to ever pay back, the bank suffered the consequences. Now that we have the fabulous invention of a structured market with a cool name to pass on such stupidity to even more foolish investors, it becomes a market crisis instead.

Of course, most of the world’s major hedge fund joined in, but as we all know most hedge funds don’t really know anything about anything. The surprise was that the very large, sophisticated banks with top-quality credit risk management one would have expected never to have written these risks themselves were only too happy to buy such poor-quality risk written by lenders with no standards.

As usual, Wall Street got paid handsomely for the privilege of selling garbage dressed up – tech stocks yesterday, CDOs today. Even worse, nobody ends up knowing quite who actually owns this junk or who the end-risk is. The ratings agencies went along for the ride and the regulators appeared asleep at the wheel.

I see no reason for undue pessimism on the broad economy outside the US. The US has been slowing for at least four quarters. While problems in the housing sector appear to be amplifying this trend and hurting the American consumer, the damage to the US$13 trillion US economy is containable. Corporate balance sheets, profits and debt levels remain in good shape.

Too much is made of the level of export dependency of Asia on the US, and some pain over the next six months will not derail the largest, consumer-based Asian countries – China, India and Indonesia. For the medium term, I maintain my long-held bullish view on both Asia broadly and the Asean economies as well as Asian currencies.

Given my focus on long-term fundamental trends with the background of the sorry tale of US sub-prime, this seems an appropriate time to revisit my favourite worry – the greenback. I have not voluntarily held a US dollar, other than as a short, for over four years. However, consistent dollar bears have often been in the wrong, particularly versus the yen. From March 2002, the yen did strengthen through to March 2005 with the recovery in the Japanese economy, but then turned negative again. Within a year the US dollar was back to 120 yen and has range-traded ever since until recent events. The yen remains the most undervalued major currency. The euro has followed the script better, although again from March 2005 it gave back some of its gains and only reverted to strength against the dollar from May last year.

The core of the bear argument has always been an economic fundamentalist view that goes like this: US debt levels are unsustainably high and continue to grow at an alarming rate; this debt has to be externally financed demanding high relative yields, US interest rates and the level of the dollar are supported by dollar demand via external financing, principally by Asian nations retaining dollars in trade and purchasing dollar debt; and that in doing so, these nations maintain lower yields and weaker currencies than their economic fundamentals would otherwise suggest.

A decade ago Asian nations held one third of global reserves. Now they hold two thirds, mostly in dollars.

The core of the argument for the dollar bears, such as myself, has always been that such a cosy arrangement eventually would have to slow and revert to norm, and that with the purchase of dollars on this magnitude even a slowdown of buying would depress the currency in the process.

For dollar bulls, their argument has been that if Asian and other nations continue to believe in the perpetual cycle of US economic strength and dollar dominance, the attractiveness of US assets, and the exporting advantages of maintaining relatively weaker currencies; then there is no reason at all why the party should ever end.

Asia will continue to export to the US consumer, and simply recycle the dollars back by building dollar reserves and buying US debt.

For a long while it seemed as if dollar bulls were right and a sort of perpetual motion had been built up with the understanding of all parties that this was the game. Capital saving countries, read Asia, have continued until recently to buy and hold US dollars at an unprecedented rate. But all parties eventually come to an end.

I believe that we may be finally seeing the beginning of the end of a long-awaited, slow decline of an aged warhorse, just as the sterling gracefully declined a generation ago.

Of course, the dollar has some uses, which I am sure will continue. I do admit that a wad of dollars has no equivalent for bellboys, and visas-on-arrival in Asian airports. For buying oil, and weapons, dollar remains the currency of choice, as I hear it is for the drug trade and other interesting segments of the cash economy. But even that may change over time.

But as economic fundamentalists we do not believe in currency speculation, despite the modern trend to call it an asset class. What an investor in real assets needs is a currency that provides all of the upside potential of the Asian economic growth story, with stability and smart management against extreme volatility.

The ideal would be a balanced currency basket of a weighted proportion of the best of those currencies, continually managed and adjusted relative to macro economic movements. There is such a basket. Even better, it is managed by some very bright folks who charge nothing for the service. It is called the Singapore dollar, and it remains our investment holding currency of choice.

The author is managing director of the Calamander Group and the economic spokesman of the British Chamber of Commerce in Singapore.

Source: Business Times 1 Nov 07