China, India rising, but face bumpy ride: forecast

(China Daily) WASHINGTON -- A new US intelligence forecast identifies China and India as rising heavyweights in a coming multi-polar world but says both face a potentially bumpy ride to the top.

Construction under way in Hong Kong. A new US intelligence forecast identifies China and India as rising heavyweights in a coming multi-polar world but says both face a potentially bumpy ride to the top. [Agencies]

"Although we believe chances are good that China and India will continue to rise, their ascent is not guaranteed and will require overcoming high economic and social hurdles," the report by the US National Intelligence Council said.

Titled "Global Trends 2025 -- A World Transformed," the 121-page report was released Thursday to stimulate debate and thinking as a new US administration prepares to take power.

It warned that US security and economic interests could face new challenges if China becomes a peer competitor with a strong military and a dynamic, energy-hungry economy.

"Few countries are poised to have more impact on the world over the next 15-20 years than China," the report said.

"If current trends persist, by 2025 China will have the world's second largest economy and will be a leading military power," it added.

"It could also be the largest importer of natural resources and an even greater polluter than it is now."

But it said China's economic growth will certainly slow, or even recede.

Mounting social pressures arising from growing income disparities, a fraying social safety net, poor business regulation, hunger for foreign energy, enduring corruption, and environmental devastation also lie in its future.

"Any of these problems might be soluble in isolation, but the country could be hit by a 'perfect storm' if many of them demand attention at the same time," the report said.

The report said India will probably continue to enjoy relatively rapid economic growth, but the growing gap between rich and poor will become a more acute political issue.

"Indian leaders do not see Washington as a military or economic patron and now believe the international situation has made such a benefactor unnecessary," the report said.

"New Delhi will, however, pursue the benefits of favorable US ties, partly, too, as a hedge against any development of hostile ties with China," it said.

In a discussion about Japan, the report said its policies in the future will be shaped by those of China and the United States.

It said Tokyo would stay close to Washington whether it developed closer economic ties with Beijing or faced a hostile China.

But if the US security commitment to Japan weakened or if Washington moved significantly closer to Beijing, Tokyo would move closer to China.

The report also identified three potential up and coming powers, all from the Muslim world but not from its Arab core. They are Indonesia, Turkey and Iran.

Political and economic reform in Iran, along with a stable investment climate, "could fundamentally redraw both the way the world perceives the country and also the way in which Iranians view themselves."

"Under those circumstances, economic resurgence could take place quickly in Iran and embolden a latent cosmopolitan, educated, at times secular Iranian middle class," it said.

Read more...

Obama outlines rebuilding plans to create jobs

(China Daily) WASHINGTON -- President-elect Barack Obama on Saturday outlined his plan to create 2.5 million jobs in coming years to rebuild roads and bridges and modernize schools while developing alternative energy sources and more efficient cars.

President-elect Barack Obama and his adviser Valerie Jarrett decide on lunch during a stop at Manny's Coffee Shop and Deli in Chicago, Friday, Nov. 21, 2008. [Agencies]

"These aren't just steps to pull ourselves out of this immediate crisis; these are the long-term investments in our economic future that have been ignored for far too long," Obama said in the weekly Democratic radio address. The economic recovery plan being developed by his staff aims to create 2.5 million jobs by January 2011, and he wants to get it through Congress quickly and sign it soon after taking office.

He called the plan "big enough to meet the challenges we face" and said that it will jump-start job creation but also "lay the foundation for a strong and growing economy."

Aides said the economic plan outlined Saturday went further that the president-elect has gone before.

A trio of crises - housing, credit and financial - have badly damaged the economy, and financial analysts have projected the country's economic hardships will continue through much of 2009.

Obama acknowledged Saturday that evidence is growing the country is "facing an economic crisis of historic proportions." He noted turmoil on Wall Street, a decrease in new home purchases, growing jobless claims and the menacing problem of deflation.

He said he was pleased Congress passed an extension of unemployment benefits this week, but added, "We must do more to put people back to work and get our economy moving again."

Figures out this week showed new claims for jobless aid had reached a 16-year high. "If we don't act swiftly and boldly, most experts now believe that we could lose millions of jobs next year," Obama said.

He cautioned, "There are no quick or easy fixes to this crisis, which has been many years in the making, and it's likely to get worse before it gets better." But Obama said Inauguration Day, Jan. 20, "is our chance to begin anew."

Obama said getting congressional approval for his broad economic plan will not be easy.

"I will need and seek support from Republicans and Democrats, and I'll be welcome to ideas and suggestions from both sides of the aisle," he said. "But what is not negotiable is the need for immediate action."
Across the country, Americans "are lying awake at night wondering if next week's paycheck will cover next month's bills," people are showing up at work to clear out their desks and retirees are watching their life savings disappear, Obama said.

On Thursday, the Labor Department reported that claims for unemployment benefits jumped last week to 542,000. That marked the highest level since July 1992 and provided fresh evidence of a rapidly weakening job market that is expected to get even worse next year.

In this country's darkest hours, the American people have risen above their divisions to solve their problems, he said.

"We have acted boldly, bravely, and above all, together," Obama said. "That is the chance our new beginning now offers us, and that is the challenge we must rise to in the days to come. It is time to act. As the next president of the United States, I will."

Read more...

AIG to Sell ILFC to Management Group Next Year, Udvar-Hazy Says

By Thomas Black

Nov. 22 (Bloomberg) -- American International Group Inc., the insurer bailed out by the U.S., will sell its plane-leasing arm International Lease Finance Corp. to a group of investors and the unit’s management by early next year, an executive said.

“We’re in the process of selling ILFC to a group of investors including management that will take back the company from AIG,” Steven Udvar-Hazy, the unit’s founder and chief executive officer, said yesteray at an aviation conference in Cancun, Mexico. He suggested the unit had a value of about $10 billion and didn’t identify the investors.

“Early next year, we will consummate the closing,” he said in a subsequent interview. “One thing is to reach a deal. It’s another to close the deal.”

Udvar-Hazy’s comments confirm his involvement in the purchase and the time frame for a sale of ILFC, one of the biggest buyers of commercial jets from both Boeing Co. and Airbus SAS. The U.S. government took a controlling stake in AIG as it rescued the insurer with an infusion of capital on Sept. 17, and authorities decided to sell all units that aren’t related to the insurance business.

ILFC will separate from AIG, which bought the airline- leasing company in 1990 for $1.3 billion, because of financial losses caused by a small AIG unit that engaged in “very high risk-profile business,” Udvar-Hazy said.

AIG rose 16 cents, or 11 percent, to $1.60 yesterday in New York Stock Exchange composite trading. The shares have dropped 97 percent this year. Nicholas Ashooh, an AIG spokesman, didn’t immediately respond to a telephone message left with him.

$10 Billion Value

Udvar-Hazy implied that ILFC has a value of about $10 billion. He said that AIG’s market capitalization, not counting the stake of almost 80 percent owned by the government, is less than $5 billion or “a little more than half of ILFC’s value.”

The pending sale is “extremely good news” for both AIG and ILFC, Richard Aboulafia, an analyst with aviation consulting firm Teal Group in Fairfax, Virginia, said in an interview.

For ILFC, “no matter how sound the fundamentals of their business were, they were being dragged down by AIG’s negatives,” Aboulafia said. “For AIG, it’s good news because they need the money.”

Aboulafia said Udvar-Hazy has track record of making a profit in aviation and that he’s probably the industry’s most powerful executive as a key customer for jets. “He created this, he can run it,” Aboulafia said.

ILFC, which Udvar-Hazy founded in 1973 and took public 10 years later, will have revenue this year of about $5 billion. Net income for the first nine months was $913 million, up 39 percent from the same period last year, he said.

Total assets have topped $50 billion for the first time, he said. The company had assets of $6 billion when bought by AIG. At the end of last year, total assets per employee were $262 million, up from $225 million in 2004. The goal for total assets per worker is $300 million for 2009, he said.

To contact the reporter on this story: Thomas Black in Monterrey, Mexico, at tblack@bloomberg.net.

Read more...

Downey Seized, Sold to U.S. Bancorp as Mortgage Fallout Spreads

By Ari Levy and Finbarr Flynn

Nov. 22 (Bloomberg) -- Seizure and sale of Downey Financial Corp. and two smaller lenders may cost the FDIC more than $2 billion as foreclosures rise and home prices extend declines in the worst housing slump since the Great Depression.

U.S. Bancorp acquired Downey and smaller PFF Bank & Trust, California thrifts crippled by bad mortgages, yesterday in a deal brokered by the Federal Deposit Insurance Corp. Community Bank of Loganville, Georgia, was also closed and its $611.4 million of deposits taken over by Bank of Essex in Tappahannock, Virginia.

Regulators this year have closed the most banks since 1993 as mortgage defaults and tightening credit froze markets. The collapse of IndyMac Bancorp Inc. was among the biggest in history, costing the FDIC $8.9 billion. The agency expects Downey’s demise to deplete its Deposit Insurance Fund by $1.4 billion, with PFF costing $700 million and Community $240 million.

“The restructuring or consolidation of the U.S. banking industry has probably just begun,” said Neil Katkov, senior vice president of Celent, a Boston-based financial research firm. “There’s a whole world of potential mergers and acquisitions that will continue to emerge like these one.”

Downey Financial, based in Newport Beach, California, lost about $680 million on mortgages in the past five quarters. The lender is the last of the five biggest sellers of option adjustable-rate mortgages to fail or be sold.

Those loans, which let borrowers defer part of the monthly payment and add it to the principal, leave banks vulnerable to defaults when housing prices fall because the size of the mortgage can rise beyond the value of the property.

‘More Trouble’

“We’ll probably see more regional and community banks get into trouble,” Katkov said.

Loans no longer collecting interest surged to 15.7 percent of assets from 2.9 percent a year ago, Downey said Oct. 22, in reporting an $81.1 million third-quarter loss. At the end of the previous period, Downey held $6.9 billion in option ARMs.

Housing prices in California declined by 41 percent in September, the 12th straight monthly fall, the California Association of Realtors said in October. In its annual housing forecast, the group said home prices in the state will drop another 6 percent next year.

“With the deterioration in the economy and especially the California economy, it suggests even more losses are coming” in Downey’s portfolio, James Barth, former chief economist at the Office of Thrift Supervision and professor of finance at Auburn University in Alabama, said in an interview before the takeover was announced.

California

For Minneapolis-based U.S. Bancorp, the takeovers add approximately $12.8 billion of assets and $11.3 billion of liabilities, the bank said in a statement. The lender’s share of deposits and network in southern California markets more than doubles, with 170 Downey branches in California and five in Arizona, along with 38 PFF Bank California outlets.

Bank of Essex will buy about $84.4 million of failed Community Bank’s $681 million in assets, with the FDIC retaining the rest for later disposition. It paid a premium of $3.2 million to assume the deposits, the FDIC said. Community Bank’s four offices will open Nov. 24 as Bank of Essex branches.

The FDIC oversees 8,451 institutions with $13.3 trillion in assets, and insures deposits of as much as $250,000 per depositor per bank and the same amount for retirement accounts. The agency has proposed doubling premiums charged to banks for coverage to replenish its reserves amid agency forecasts that bank failures through 2013 will cost almost $40 billion.

‘Problem’ Banks

The FDIC in August said 117 banks were classified as “problem” in the second quarter, a 30 percent jump from the first quarter. The agency, which doesn’t name “problem” lenders, will update its assessment on Nov. 25 while reporting on the industry’s third-quarter financial results.

“Earnings will again be substantially below the prior year,” FDIC Chairman Sheila Bair said yesterday in a Baltimore speech. “But despite the problems facing our economy, the vast majority of banks remain well-capitalized, profitable, and in sound condition.”

Washington Mutual, the biggest savings and loan, sold its assets to JPMorgan Chase & Co. Sept. 25 after customers drained $16.7 billion in deposits in less than two weeks. Wachovia Corp., the sixth-biggest bank, was pushed by regulators to sell itself to Wells Fargo & Co. for $11.7 billion or face collapse.

The Treasury bought preferred shares in nine banks: Wells Fargo, JPMorgan, Citigroup Inc., Bank of America Corp., Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc., Bank of New York Mellon Corp. and State Street Corp.

Option-ARMs

Separately, Hartford Financial Services Group Inc. and Genworth Financial Inc., two of the world’s biggest life insurers, are planning to acquire savings and loans. Lincoln National Corp. and Aegon NV, owner of Transamerica Corp., are seeking status as saving-and-loan holding companies. The insurers are taking the step to improve their chances of tapping the U.S. rescue package.

Downey was fourth biggest seller of option-ARMs, ahead of IndyMac and behind Wachovia, Washington Mutual and Countrywide Financial Corp., now part of Bank of America Corp.

Downey named Charles Rinehart chief executive officer on Sept. 22 to help orchestrate a rebound. Rinehart, 61, assumed the duties of Thomas Prince, who was interim CEO since July when Daniel Rosenthal stepped down.

Co-founder Maurice L. McAlister quit as chairman the same day Rosenthal -- his son-in-law -- lost his job. His daughter Cheryl E. Olson retired as vice chairman in December 2007. McAlister had helped run the bank for 50 years after establishing the business with Gerald H. McQuarrie, who died in 1992, according to the company.

Downey Savings and Loan opened its doors in 1957 with an office in Downey, California, in Los Angeles County.

To contact the reporter on this story: Ari Levy in San Francisco at alevy5@bloomberg.net; Finbarr Flynn in Tokyo at fflynn3@bloomberg.net

Read more...

Citigroup May End Up With U.S. Government Rescue

By Christine Harper and Bradley Keoun

Nov. 22 (Bloomberg) -- The U.S. government may step in to rescue Citigroup Inc. after a crisis in confidence erased half the bank’s stock-market value in three days, according to investors and analysts.

Citigroup’s $2 trillion of assets dwarfs companies such as American International Group Inc. that got support from the U.S. government this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September.

“Citi is in the category of ‘too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”

One option is for the Federal Reserve and U.S. Treasury to create a special vehicle to purchase bad assets from Citi. The Fed has already erected several such funds, such as the Commercial Paper Funding Facility, to provide liquidity to the financial system. Typically, the Treasury would provide some first-loss equity or insurance fee, such as $50 billion provided to the CPFF, to protect the central bank and give the fiscal authority a stake.

The arrangement allows the Fed to leverage the money provided by the Treasury with loans, enabling the purchase of assets worth a multiple of the money. Funding the purchases with loans makes them less onerous to the U.S. budget.

Working Relationship

“That is the working relationship they have settled into with the Fed providing $1 trillion of the funding and the Treasury providing the equity tranche,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

Citigroup management and some board members discussed “several options” for the company in a series of phone conversations with Paulson and New York Federal Reserve Bank President Timothy Geithner yesterday, the New York Times reported today, citing unidentified people involved in the talks.

Among those options were the possible replacement of Chief Executive Officer Vikram Pandit, a public endorsement of Citigroup by the government or a new financial lifeline, the Times said. No decisions had been taken as of late yesterday, it said.

‘Regulatory Intervention’

While Citigroup executives say the company has adequate capital and liquidity to ride out the crisis, its tumbling share price may shake the confidence of creditors, clients and rating companies. A similar scenario played out at Lehman, when Chief Executive Officer Richard Fuld declared the firm was “on the right track” five days before the firm went bankrupt.

“The market may be implying some sort of regulatory intervention,” Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients yesterday. “In situations where the government has stepped in, the equity holders have not fared well.”

Pandit told employees yesterday that he doesn’t plan to break up the company, aiming to reassure workers as the stock resumed its skid. Citigroup shares dropped 94 cents, or 20 percent, to $3.77 in New York trading, giving the company a market value of about $21 billion. The stock pared its loss after the close of official trading, fetching $4.07 as of 4:35 p.m.

Pandit, Crittenden

Pandit and Chief Financial Officer Gary Crittenden, speaking on a worldwide conference call yesterday, also said they don’t expect to sell the Smith Barney brokerage unit, according to two people who listened to the call and declined to be identified because it wasn’t open to the public.

The call came as Citigroup’s board, led by Chairman Win Bischoff and independent director Richard Parsons, prepared to meet yesterday at the bank’s headquarters in New York, said a person familiar with the company’s plans who declined to be identified because the deliberations are private. Bischoff, interviewed at a conference in Portugal yesterday, declined to comment on any potential changes to the board.

“Providing stability” and “securing the future” are the themes of a new print advertisement that Citigroup plans to start running tomorrow in major markets in the U.S. and overseas. “Now, more than ever, you can feel confident that Citi never sleeps,” the ad reads.

No. 5 By Value

Once the biggest U.S. bank, with a market value of $274 billion at the end of 2006, Citigroup has now slipped to No. 5 behind Minneapolis-based U.S. Bancorp. A plan by 51-year-old Pandit this week to cut costs by shedding 52,000 jobs and an endorsement by billionaire Saudi investor Prince Alwaleed bin Talal didn’t assuage shareholders’ concern that bad loans and securities writedowns may extend a yearlong run of net losses totaling $20 billion.

“To be consistent with the last few government interventions, I don’t think Citigroup’s going to be allowed to fail,” said William Fitzpatrick, an analyst at Optique Capital Management Inc. in Milwaukee, which oversees about $1 billion and doesn’t own Citigroup shares. “This company’s too intertwined with the rest of the financial system to allow any further deterioration.”

Citigroup spokesman Michael Hanretta declined to comment. On the call yesterday with employees, Pandit said the company’s capital and liquidity are strong.

Including a $25 billion capital injection from the U.S. Treasury under the $700 billion Troubled Asset Relief Program, the company has at least $50 billion of capital above the amount required by regulators to qualify as “well capitalized.” Capital is the cushion banks must keep to absorb losses and protect depositors.

‘Special Case’

Deutsche Bank AG analyst Mike Mayo wrote in a report yesterday that the bank’s $25 billion of reserves, when combined with other resources, “should be enough to cover estimated cumulative losses of $50 billion on loans.’” Mayo rates the stock “hold” and has a $9 price target.

“With Citi being as big as they are, the government will make a special case and step in and find another reason to dispose of more TARP funds,” said Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati, which manages about $2.9 billion and doesn’t own Citigroup stock or debt.

Pandit was appointed last December to succeed Charles O. “Chuck” Prince, who was ousted as mortgage-bond writedowns saddled the bank with a record fourth-quarter loss of almost $10 billion. Prince was the handpicked successor of former Chairman and CEO Sanford “Sandy” Weill, who built the company through a series of acquisitions over 17 years before stepping down in 2003.

Deposits Said Safe

Bischoff, 67, was Citigroup’s top executive in Europe until he was named chairman when Pandit became CEO.

Bank employees have been telling customers their deposits are safe, and so far corporate clients haven’t moved their money elsewhere, said three people familiar with the matter who declined to be identified because they weren’t authorized to speak publicly about the accounts.

Crittenden, 50, has told colleagues it would be unwise to make hasty decisions to dispose of good businesses to satisfy investor demands for a show of action, one person familiar with the matter said.

To contact the reporters on this story: Bradley Keoun in New York at bkeoun@bloomberg.net; Christine Harper in New York at charper@bloomberg.net.

Read more...

Geithner Is Said to Be Obama’s Pick for U.S. Treasury Secretary

By Rich Miller

Nov. 22 (Bloomberg) -- President-elect Barack Obama picked Timothy Geithner, head of the Federal Reserve Bank of New York, to be his Treasury secretary, with Lawrence Summers getting a senior White House role, a Democratic aide said.

Summers, former President Bill Clinton’s last Treasury chief, would be positioned to succeed Ben S. Bernanke as Fed chairman in 2010. Obama is likely to announce his economic team on Nov. 24, the aide said on condition of anonymity.

Geithner is a veteran who has helped lead the effort to end the deepest financial crisis in seven decades and at the same time has spent most of his career outside the public eye. The top task of the new team will be assembling Obama’s pledged stimulus package to buttress an economy that may be in its worst recession in a quarter century.

Obama is assembling “very strong people, very qualified people,” said Allen Sinai, chief economist at Decision Economics in New York. “But the reality of the problems of the economy, the financial markets, our banking system both domestically and globally, and the long list of problems we have to deal with as a society, that is very daunting.”

Geithner, 47, has helped oversee some of the biggest decisions so far in the crisis, as head of the U.S. central bank’s main liaison with Wall Street. Those include the government’s takeover of American International Group Inc., the Fed’s Bear Stearns Cos. rescue, and decision to let Lehman Brothers Holdings Inc. fail in September.

Top Spokesman

Both Geithner and Summers are veterans of managing financial turmoil, working together on the Asian financial crisis of 1997-98 and staving off a Mexican default earlier that decade. Even with that background, Geithner would be taking on an unfamiliar role: the government’s chief economic spokesman.

“He certainly has relevant experience,” said Alex Pollock, resident fellow at the American Enterprise Institute in Washington and former president of the Chicago Federal Home Loan Bank. “The whole public part of the job, the political part of Treasury secretary, will, I expect, be a challenge.”

Investors gave Obama’s pick a vote of confidence, sending the U.S. stock market’s benchmark index rallying from an 11-year low. The Standard & Poor’s 500 Index jumped 6.3 percent to 800.03 at the close in New York. The gauge is still heading for its biggest annual decline since 1931.

“Tim is held in high regard in financial circles and has been a thoughtful and effective leader throughout the recent financial turmoil,” said Robert Nichols, head of the Financial Services Forum in Washington and a former Treasury spokesman in the Bush administration.

Richardson for Commerce

Obama is also likely to nominate New Mexico Governor Bill Richardson as Commerce secretary, the Democratic aide said. Richardson was Clinton’s Energy secretary and former ambassador to the United Nations.

Geithner served as a Treasury undersecretary for international affairs under Summers, 53, and has been at the helm of the New York Fed since November 2003. Summers, who was Treasury chief from 1999 to 2001, and was once named top economist under 40, would be a contender to follow Bernanke, who was appointed by President George W. Bush and whose term ends in January 2010.

“He’s certainly on the short list, and perhaps on the top” for Fed chief, said Vincent Reinhart, former director of the Fed’s Division of Monetary Affairs who is now at the AEI in Washington.

Summers is now a professor at Harvard University, after previously serving as president of the Cambridge, Massachusetts institution. He spurred controversy while at Harvard over remarks about the number of women in scientific jobs.

Volcker Candidacy

Summers, along with former Fed Chairman Paul Volcker, were cited as candidates for the Treasury job by people close to the Obama camp earlier this month.

Kevin Warsh, a Fed Board governor, is a leading contender to succeed Geithner at the New York Fed, a U.S. official said on condition of anonymity.

Warsh, 38, previously worked at Morgan Stanley, later joining the Bush White House as an economic-policy adviser. He has been a link for the Fed board with securities firms during the crisis, drawing on his Wall Street contacts and experience.

Obama’s nominations would need to be confirmed by the Senate after he takes office on Jan. 20. Bush’s Treasury secretary, Henry Paulson, has pledged to work with his successor during the transition.

Auto Industry

Among the new team’s other top tasks may be devising a response to calls from General Motors Corp., Ford Motor Co. and Chrysler LLC for government aid to prevent their collapse, and overseeing an overhaul of U.S. financial regulations.

Jacob Lew, the White House budget director under Clinton from 1998 to 2001, will be named to the position of National Economic Council director, a person familiar with the transition team said. Lew, 53, served under Clinton from 1998 to 2001 and is currently chief operating officer at Citigroup Inc.’s alternative investments unit. The NEC, which was created by Clinton, is designed to coordinate economic policymaking.

Peter Orszag, the head of the Congressional Budget Office, has been offered Lew’s old job as head of the White House Office of Management and Budget, a congressional aide and a party official said earlier this week.

The decision to let Lehman fail in September has been faulted by observers including University of California at Berkeley professor Barry Eichengreen for triggering a renewed bout of turmoil that hammered credit markets.

Lehman Decision

Paulson, who led the decision to let Lehman go, and Bernanke have defended the move, saying the investment bank lacked sufficiently solid collateral to qualify for government aid, at a time when the $700 billion financial rescue plan had yet to be enacted.

Geithner is no stranger to Washington or the Treasury. Before taking over the New York Fed in 2003, he spent most of the previous 18 years working in the nation’s capital, first at Kissinger Associates, then at the Treasury and finally at the International Monetary Fund.

Over that time, Geithner earned what his one-time mentor Summers called a “doctorate in financial policy.” He also developed a skill-set his supporters say makes him well suited for his new job: calmness under pressure, an ability to see many sides of a problem and a sense of the politically possible.

“During the Mexico crisis, some of us would occasionally be emotional about something,” said Jeffrey Shafer, who served with Geithner at the Treasury from 1993 to 1997 and who is now Vice Chairman of Global Banking for Citigroup in New York. “Tim was the calm guy in the room who made sure we looked at all sides of the issue.”

Asian Experience

Geithner, who has studied Japanese and Chinese and has a Master of Arts in international economics from Johns Hopkins University, also played a key role in the Treasury’s dealings with the Finance Ministry in Tokyo. He was less inclined to intervene in currency markets than some other officials at the time, according to Shafer.

Born in New York, Geithner has lived in Africa, India, Thailand, China and Japan. He graduated from Dartmouth College in 1983 with a bachelor’s degree in government and Asian studies. He and his wife, Carole Sonnenfeld Geithner, have two children.

Dino Kos, a former New York Fed official, described Geithner as a “pragmatist, not an ideologue” who has a good sense of the political dynamics in Washington and the need to keep lawmakers in the loop about what’s going on. That’s been especially important in the current crisis as the Fed has taken extraordinary actions to limit the financial fallout, including its rescue of AIG in September.

Briefing Lawmakers

“If you’re going to push the envelope -- as the Fed has been doing -- you need to keep legislators informed about what you’re doing and why you’re doing it,” said Kos, who’s now a managing director at Portales Partners in New York.

Summers, an adviser to Obama during the campaign, earlier this week urged a fiscal stimulus package big enough to spur the economy for the next two to three years.

The U.S. economy shrank at an annual rate of 0.3 percent in the third quarter, and economists surveyed by Bloomberg News anticipate the longest contraction since 1974-75.

The next Treasury secretary will have unprecedented powers, in charge of overseeing a $700 billion rescue program that was enacted last month and designed to prevent a financial collapse. Paulson has allocated $250 billion to buying stakes in banks, and used another $40 billion for AIG.

Budget Deficit

Geithner would also inherit a record budget deficit. The bond dealers that advise the Treasury this month forecast a $988 billion shortfall for the financial year ending in September 2009. Paulson this week said the government will issue $1.5 trillion of debt.

Summers said Nov. 17 at a forum in Washington with Paulson and former Treasury Secretary Robert Rubin that ballooning debt isn’t a major issue for now because there’s “excess demand” for Treasuries rather than excess supply, as investors flock to government debt as a haven.

“The next secretary is going to have to be a crisis manager and plan for the future,” Rubin, who preceded Summers at the Treasury, said in an interview before yesterday’s news. “He’ll have to operate on two fronts at the same time.”

As president of the New York Fed, Geithner has enjoyed a special status at the central bank. He is vice chairman of the Federal Open Market Committee that convenes regularly to decide on interest rates. He votes at every FOMC meeting, unlike the presidents of the Fed’s other 11 member banks.

Gravitas Question

When Geithner was first tapped to take over the New York Fed five years ago, it was bit of a surprise. The boyish-looking technocrat lacked the stature of some of his predecessors -- including E. Gerald Corrigan, now with Goldman Sachs, and Volcker, who ran the New York Fed before becoming chairman of the Federal Reserve Board in 1979.

“He was very young and he speaks very softly,” said Blackstone Group LP co-founder Peter G. Peterson, who headed the search team that chose Geithner. “The question was, ‘Does he have the gravitas, the strength and the personality to make the tough decisions?’” The answer, he added, turned out to be yes.

Derivatives Market

Geithner spotted potential problems in the more than $47 trillion credit-derivatives market early on in his tenure at the New York Fed and began pressing banks in 2005 to reduce trading backlogs that could prove dangerous should a crisis hit.

He also warned that year that Fannie Mae and Freddie Mac needed more capital to offset the risks that they were taking in the mortgage market. They’ve since been taken over by the government after being ruled insolvent by their regulator. Paulson said yesterday it will be up to the Obama administration to decide the future of the two companies, which account for more than half of U.S. home-loan financing.

Some experts, including monetary economist Anna Schwartz, have condemned the Fed for putting $29 billion of its balance sheet on the line to back the takeover of Bear Stearns by JPMorgan Chase & Co. in March. Geithner in particular has been singled out, amid accusations that his time at the Treasury made him more prone to government interference in the economy.

In his new position as Obama’s Treasury secretary, it will be up to Geithner to spell out the administration’s financial and economic policies to the public. It’s not a role he is used to playing.

“Moving into that office would involve an adjustment to being more in the public eye, to being the guy on the firing line,” Kos said.

To contact the reporter on this story: Rich Miller in Washington at rmiller28@bloomberg.net

Read more...

Saudi Arabian Shares Drop to January 2004 Low; Sabic Falls

By Fiona MacDonald

Nov. 22 (Bloomberg) -- Saudi Arabian shares dropped to the lowest in almost five years as Saudi Basic Industries Corp. extended the shutdown of a plant in Europe and on concern the global economic slowdown will impact growth in the kingdom.

Saudi Basic, or Sabic, dropped to the lowest since June 2004. Al-Rajhi Bank, the country’s largest bank by market value, declined for a fourth day and Etihad Etislat Co. retreated the most since October. The shares of all three companies lost almost 10 percent.

The Tadawul All Share Index plunged 9.2 percent, the most since Oct. 6, to 4,431.57 at the close in Riyadh. The measure closed at its lowest since January 2004. Of the stocks in the index, 122 fell, one rose and two were unchanged.

“Investors are panicking due to the global crisis,” Abdulla al-Aqil, a trader at Samba Financial Group, said in a phone interview from Riyadh.

European stocks had their second-worst week this year as concern deepened that a worsening economy is stifling profits. Citigroup Inc. will probably get rescued by the U.S. government after a crisis in confidence erased half its stock-market value in three days, investors and analysts said. General Motors Corp. said it will idle production for an additional week at four plants, extend the closing of an engineering center and return some corporate jets, as the company seeks U.S. aid to avoid running out of cash.

Supply and Demand

“What’s happening with Citigroup and GM, all global news, is having a major impact on our local market,” al-Aqil said.

Sabic tumbled 9.9 percent to 44.6 riyals. The world’s biggest chemicals maker by market value said a naphtha cracker at its Geleen plant in the Netherlands will have an extended shutdown after a fault earlier this week.

“The cracker won’t be started up before the balance between supply and demand is better again,” Susan Haenraets, a Sabic spokeswoman, said Nov. 21.

Naphtha crackers are used in the production of ethylene and propylene, used in plastics including carrier bags and water bottles. Weak demand for naphtha-based products as consumers cut spending has led other chemicals makers to reduce output. BASF SE said Nov. 19 it was temporarily shutting 80 plants and cutting output at 100, while Ineos Group Holdings Plc said Nov. 17 it had reduced production by 20 to 25 percent at its plants.

Al-Rajhi Bank fell 9.9 percent to 50 riyals. Etihad Etisalat, the second-largest mobile-phone service provider in the kingdom, dropped 9.9 percent to 24.15 riyals. Kingdom Holding Co., which holds part of Prince Alwaleed bin Talal’s stake in Citigroup, dropped 9.7 to 4.2 riyals.

“Investors are awaiting new incentives to enhance market confidence and inject liquidity,” Bakheet Group wrote in its weekly report on Nov. 19. They are focusing on full-year earnings “to revaluate the global crisis’s impact on Saudi companies’ outlook.”

The Saudi bourse is the only Arab exchange monitored by Bloomberg that is open on Saturdays.

To contact the reporter on this story: Fiona MacDonald in Kuwait FmacDonald4@bloomberg.net

Read more...

Obama Targets 2.5 Million New Jobs in 2-Year Economic Stimulus

By Jason Gale

Nov. 22 (Bloomberg) -- President-elect Barack Obama said he aims to create 2.5 million new U.S. jobs in a two-year plan to simulate an economy facing a “crisis of historic proportions.”

Obama, in his weekly radio address, today said that “financial markets faced more turmoil,” potentially leading to a “deflationary spiral” that may plunge the nation further into debt and cost millions more jobs. New home purchases in October were the lowest in half a century and 540,000 more jobless claims were filed last week, the highest in 18 years, he said today.

Job losses in the U.S. have totaled 1.2 million this year as the economy entered a slowdown exacerbated by the worst credit crisis in seven decades. More firings will weigh on the economy and consumer spending, putting pressure on Obama and Congress to agree on legislation that will stimulate growth.

“I have already directed my economic team to come up with an economic recovery plan that will mean 2.5 million more jobs by January of 2011 -- a plan big enough to meet the challenges we face that I intend to sign soon after taking office” on Jan. 20, Obama said. “We have now lost 1.2 million jobs this year, and if we don’t act swiftly and boldly, most experts now believe that we could lose millions of jobs next year.”

Details of the plan will be worked out in coming weeks, and will include jobs rebuilding roads and bridges, upgrading schools and building wind farms and alternative energy technologies, he said.

To contact the reporter on this story: Jason Gale in Singapore at j.gale@bloomberg.net

Read more...

Nokia to Offer Mobile-Phone Services in Japan, Yomiuri Reports

By Finbarr Flynn

Nov. 22 (Bloomberg) -- Nokia Oyj, the world’s largest maker of mobile phones, plans to start offering luxury cell-phone services in Japan from March, the Yomiuri newspaper reported.

Espoo, Finland-based Nokia intends to start selling its high-end Vertu handsets in Japan from February, and may roll out its mobile-phone services from March, the newspaper reported, without saying where it got the information.

Nokia will rent telecommunication lines from NTT DoCoMo Inc., Japan’s largest mobile-phone operator, and may announce details of the service by the end of this month, Yomiuri said.

Nokia’s entry will be the first time an overseas phone maker has competed in Japan’s mobile-phone services market, the newspaper said. The Finnish company will target high-income customers by offering 24-hour concierge services that allow customers to contact customer services representatives to book plane and hotel reservations, the Yomiuri said.

To contact the reporter on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net.

Read more...

Nomura May Raise More Capital Before Expected Loss, Jiji Says

By Finbarr Flynn

Nov. 22 (Bloomberg) -- Nomura Holdings Inc., Japan’s largest securities firm, may raise several hundred billion yen of additional capital by March, Jiji Press reported, without saying where it obtained the information.

Nomura is seeking to boost its financial base before the company reports an expected loss for the full-year ending March 31, Jiji said.

The Tokyo-based company will probably sell subordinated debt to raise the capital and has already contacted insurance companies about the plan, Jiji said.

Nomura sent a statement to the Tokyo Stock Exchange today, which read in whole: “Nothing had been decided in relation to the news reports concerning our capital policy.”

To contact the reporter on this story: Finbarr Flynn in Tokyo at fflynn3@bloomberg.net

Read more...

Italian Banks Agree to Refinance Zaleski Debt, Corriere Says

By Adam L. Freeman

Nov. 22 (Bloomberg) -- Italian banks will sign an agreement next week to refinance debt held by financier Romain Zaleski’s holding company, Corriere della Sera reported, without saying where it got the information.

Intesa Sanpaolo SpA, UniCredit SpA, Banca Monte dei Paschi di Siena SA, Unione di Banche Italiane SCPA and Banca Popolare di Milano Scarl on Nov. 25 will sign the agreement to assume debts Zaleski’s Carlo Tassara SpA owes to Royal Bank of Scotland Group Plc and BNP Paribas SA, the report said.

To contact the reporter on this story: Adam L. Freeman in Rome at afreeman5@bloomberg.net

Read more...

India's Aviation Minister Patel Asks Carriers to Reduce Fares

By Pratik Parija

Nov. 22 (Bloomberg) -- India's airlines should cut fares as oil prices have dropped and the government has helped the industry by scrapping a levy on aviation fuel, Aviation Minister Praful Patel said in New Delhi.

Indian Oil Corp., the nation's largest refiner, cut jet fuel prices on Nov. 15 for the fifth time in less than three months amid a decline in crude oil. The government abolished a 5 percent tax on aviation fuel on Oct. 31.

``The government is trying to help airlines tide over difficult times,'' Patel said at the Hindustan Times Leadership Summit in New Delhi today. ``With fuel prices dropping, you must match it with the perception that fares are coming down, otherwise public sympathy, government sympathy'' will wane.

Jet Airways (India) Ltd., the nation's biggest domestic carrier, posted its biggest quarterly loss in more than three years on Oct. 25 after spending on fuel more than doubled. Carriers in India may incur a combined loss of $2 billion this year on rising costs and slowing demand for air travel, the Centre for Asia Pacific Aviation forecasts.

Naresh Goyal, chairman of Jet Airways, said he was open to doing what the government wanted as long the company was profitable. ``I certainly would not like to close the company,'' Goyal said at the same meeting.

Jet Airways and Kingfisher Airlines Ltd., the Indian carrier owned by the nation's largest brewer, announced an alliance on Oct. 15 aimed at saving as much as 15 billion rupees ($300 million) by sharing resources and cutting duplicate routes.

Support for Alliance

Patel backed the alliance today, citing similar agreements overseas. The government would take a different view if such an agreement ``amounts to monopoly, cartelization and doesn't serve the purpose,'' the minister said.

Goyal said last month's announcement of 1,900 layoffs at Jet Airways and the subsequent retraction of the decision was mishandled by the company. The original decision had been made after expansion plans were curbed.

The airline still has excess workers and company is seeking to tackle this by reducing overtime and other methods, he said. Jet was forced to cancel its decision on Oct. 17 after protests by the employees and government criticism.

Patel said wrong taxation policies have curbed aviation and that India will seek to bring about parity in levies on fuel.

Kingfisher Chairman Vijay Mallya reiterated the demand that state sales tax of as much as 30 percent needed to be brought down, speaking at the same meeting today.

Patel, who ruled out any bailout package for airlines, also said that the government would infuse 12 billion rupees into Air India, the state-owned carrier.

Goyal said that the airline industry is sick and may come under more pressure in the next one to two years, although he also referred to the current situation as a temporary setback.

The aviation minister said infrastructure was a key constraint for airlines and that he expects six hubs to develop in the future in New Delhi, Mumbai, Bangalore, Hyderabad, Kolkata and Chennai, allowing Indian carriers to start competing with their overseas rivals. More than one hub was needed for carrying international traffic through India, he said.

To contact the reporter on this story: Pratik Parija in New Delhi at pparija@bloomberg.net.

Read more...

India's Markets Will Be Among the First to Recover, Bhave Says

By Pratik Parija and Pooja Thakur

Nov. 22 (Bloomberg) -- India's markets will be among the first to recover from the stock rout caused by the financial crisis roiling the world's bourses, said C.B. Bhave, head of the nation's capital market regulator.

``This country will be among the first few that recover,'' said Bhave, chairman of the Securities & Exchange Board of India, at the Hindustan Times Leadership Summit in New Delhi today. ``When we do, our weight in the world will be more than what it was,'' putting more responsibility on India.

The benchmark Bombay Stock Exchange Sensitive Index, or Sensex, has dropped 56 percent this year as global financial companies' losses and writedowns from the collapse of the U.S. subprime-mortgage market neared $1 trillion, eventually toppling Lehman Brothers Holdings Inc.

Overseas funds have sold a record $13.3 billion in Indian equities this year as of Nov. 20, the regulator said, compared with a record purchase of $17.2 billion of equities in 2007.

The overseas investors exiting the market are those that are ``over-leveraged,'' Bhave said. Longer-term overseas investors are entering the Indian market, he said.

The regulator said there was no evidence so far of market- wide wrongdoing surrounding the decline in stocks.

India was caught by surprise when the global credit crisis led to a liquidity freeze in the country in September, Bhave said. It took 15 to 20 days for India to realize how closely it was connected to the credit markets.

Surprised by Linkage

``We didn't know how closely linked we were until the Lehman'' collapse, Bhave said. The shocks were felt in the credit markets rather than the stock markets.

``The reason something similar didn't happen in the Indian equity markets was because they are organized much better,'' with the well-capitalized clearing entities taking on the counterparty risks on stock-market trades, Bhave said.

India has built a stock-clearing infrastructure in the last 10 years with big enough settlement guarantee funds, creating ``a system that hasn't failed despite the market having dropped by more than 50 percent,'' Bhave said.

The crisis is an opportunity to learn and review whether India has the institutional capacity to withstand the kind of financial crisis that has hit the U.S. and other developed countries, Bhave said.

The regulator said exchange-based trades provide the transparency that allows investors to know the value of assets versus the opaque nature of over-the-counter trades.

Financial Products

He called for bringing as many financial products as possible onto exchange-based trading platforms and that a small beginning had been made with currency futures.

Bhave called on institutions to keep a check on credit and for regulators to watch levels of leverage. Institutions that are critical to the functioning of the system, those that can't be allowed to fail, should not be allowed to take on too much leverage and should be warned when they do so, Bhave said.

``Every crisis is an opportunity,'' Bhave said. ``We have learnt a lot in October -- when the chips are down, we must build for the future.''

The regulator announced an easing of rules on stock lending and borrowing to facilitate short sales last month, extending the tenure to 30 days from seven.

To contact the reporters on this story: Pratik Parija in New Delhi at pparija@bloomberg.net; Pooja Thakur in Mumbai at pthakur@bloomberg.net.

Read more...

Americans’ ’Hypocrisy’ in Auto Rescue Spurs Me-Too Trading Ire

By Jennifer M. Freedman

Nov. 22 (Bloomberg) -- A U.S.-triggered spate of global carmaker-bailout proposals may spark trade disputes over whether the Americans are unfairly trying to subsidize their industry or just making up for state aid that foreign rivals already enjoy.

As the U.S. considers a lifeline for its auto companies, officials in Europe, Canada and Asia are considering their own aid packages -- even as the European Union threatens to lodge a complaint against any U.S. bailout to protect manufacturers from Renault SA in France to Fiat SpA in Italy.

China also may complain, though the government is considering helping SAIC Motor Corp. and Guangzhou Automobile Group Co.

Any World Trade Organization complaints may open a Pandora’s Box, bringing to a head a long-simmering dispute over policies that U.S.-based General Motors Corp., Ford Motor Co. and Chrysler LLC say unfairly aid rivals, including state-financed health-care and retirement benefits, and currency policies.

“Frankly, it’s stones and glass houses,” said Garel Rhys, professor of automotive economics at Cardiff Business School in Wales. “Everybody has been at this game for their own interests; nobody is pure.”

Neelie Kroes, the European Union’s antitrust chief, weighed in on the debate yesterday, urging the bloc’s 27 nations to avoid the “costly trap of a subsidy race” that would give some countries unfair advantages.

Greater ‘Temptation’

“The temptation may be greater now for member states to give subsidies that can result in their economic problems being exported to their neighbors but that would only worsen the economic difficulties,” Kroes said at a conference in Brussels.

“The European economy and European taxpayers will be better off if politicians choose another, more effective, route,” Kroes added. She pointed to EU rules allowing limited aid that doesn’t distort competition, including grants for entrepreneurs, research, education and environmental projects.

The U.S. kicked off the bailout war. Congress is trying to reach a compromise on giving automakers $25 billion the companies say they need to survive the next year, either by speeding up the use of funds already approved to develop more fuel-saving technologies and models or by providing a new source of funds. President-elect Barack Obama, who complained during the campaign that South Korea created disadvantages for American carmakers, supports helping the industry.

A U.S. bailout would be “hypocrisy at the economic level and the political level,” said David Littmann, economist for the Mackinac Center for Public Policy in Michigan. “We tell others to open up their markets and reduce barriers, and we are doing the opposite.”

U.S. Grumbling

The U.S. long has grumbled about foreign governments, including China and Europe, subsidizing various industries.

“Since its creation 35 years ago, some Europeans have justified subsidies to Airbus as necessary to support an ‘infant’ industry,” then-U.S. Trade Representative Robert Zoellick said in 2004, announcing a WTO complaint against the Toulouse, France- based maker of commercial airplanes. “If that rationalization were ever valid, its time has long passed. Airbus now sells more large civil aircraft than Boeing.”

Now similar proposals are proliferating around the globe. “When one of the major powers grants subsidies to a high-profile industry, the other is inevitably led to react by defending its own interests,” said Pierre Kirch, a trade lawyer at Paul Hastings in Paris.

Lobbying for Loans

In Europe, where car sales fell almost 15 percent in October, the sixth consecutive monthly drop, auto companies are lobbying the EU for 40 billion euros ($50 billion) in loans. Society of Motor Manufacturers and Traders chief Paul Everitt responded to Kroes’s comments by calling for either “collective action” or individual country bailouts.

“If the U.S. gives aid to carmakers, it’s fair to have them in Europe as well,” said Gian Primo Quagliano, head of research at Bologna, Italy-based research firm Promotor.

EU officials are drafting a plan to provide loans through the European Investment Bank to promote clean-car technology. The bank plans to increase overall financing levels by as much as 15 billion euros next year, President Philippe Maystadt said Nov. 14; a portion would go to the auto industry.


German Chancellor Angela Merkel said her government will decide on an aid request from GM’s Opel unit by Christmas. Opel asked for “somewhat more than” 1 billion euros in credit guarantees, said Carl-Peter Forster, GM’s Europe chief. The state government in Hesse, where Opel employs 15,000 people, agreed to give the company and regional parts suppliers loan guarantees of as much as 500 million euros.

Tax Cuts, Funding

Carmakers in the U.K., where sales slid 23 percent in October, have asked for tax cuts and permission for their finance companies to access funding available to British banks. French Finance Minister Christine Lagarde called for national and European “actions” to “support” the industry on Nov. 17.

Canadian Prime Minister Stephen Harper said Nov. 15 that his government may follow any U.S. effort with an aid package for his country’s manufacturers and parts suppliers, including Magna International Inc. and Linamar Corp.

Chinese car companies also want aid. Slowing demand and rising competition have caused SAIC, the nation’s biggest domestic automaker, to tumble 78 percent this year in Shanghai trading.

Chen Jianguo, an official with China’s National Development and Reform Commission, has said the government is considering lowering sales taxes on alternative-energy vehicles. The government’s 4 trillion-yuan ($586 billion) stimulus package may also help, said Winfried Vahland, head of Chinese operations for German automaker Volkswagen AG.

‘Really Severe’

“The situation is really severe,” said Zeng Qinghong, general manager of Guangzhou, a partner of Japanese companies Toyota Motor Corp. and Honda Motor Co., on Nov. 18. “We hope the government can introduce policies to stimulate demand.”

Japanese Finance Minister Shoichi Nakagawa told Bloomberg Television his government probably won’t object to the U.S. helping GM because its collapse “would be huge, not just for America, but for Europe and Japan as well.”

That doesn’t mean Japanese carmakers won’t also put their hands out.

“If the money is given because bankruptcy would cause a lot of problems, this may be unfair,” said Takeshi Miyao, a Tokyo- based analyst at automotive consulting company CSM Worldwide. “The question of why the Japanese government isn’t helping the Japanese carmakers will definitely arise.”

Payments to Exporters

Any American package will be scrutinized by other countries to see if it runs afoul of WTO rules, which allow certain kinds of subsidies -- such as those that protect the environment -- but bar others, including payments to exporters.

The EU threatened to lodge a complaint against any U.S. auto package on Nov. 14, when European Commission President Jose Barroso said the bloc was examining the rescue proposal and would “certainly act at the WTO” if it contravenes trade rules.

Korean President Lee Myung-bak told CNN on Nov. 17 that he supports a U.S. bailout but warned that it must “give more serious consideration to the method” because it “could run counter to WTO rules and set a bad precedent. Then, other countries may follow the example of the U.S. to directly subsidize their automakers.”

China “quite possibly” may complain to the WTO if the U.S. bails out its industry, said Kirch, the trade lawyer. “It might also bring a case if Europe does.”

American automakers scoff at the notion that they may be accused of benefiting from unfair subsidies.

‘Strong Relationships’

“We’re the only country in the world that expects its auto industry to exist without some government support,” said Sean McAlinden, chief economist at the Center for Automotive Research, at a conference in Los Angeles. The Ann Arbor, Michigan-based group’s Web site says it “maintains strong relationships with industry” and others in the “international automotive community.”

One of the Americans’ biggest gripes involves Japan’s currency, which they claim is kept artificially cheap against the dollar. The Automotive Trade Policy Council, which represents GM, Ford and Chrysler, said in October 2007 that the weak yen at that time gave Japanese automakers a $4,000-a-car advantage on their imports to the U.S.

“This policy provides a subsidy to exporters, resulting in an unfair competitive advantage over American manufacturers,” said Senator Debbie Stabenow, a Michigan Democrat now helping lead the charge for a U.S. bailout, in a 2007 statement.

Quality, Value

Toyota dismisses that argument. “Our vehicles sell well and are profitable because our operations are efficient, because our vehicles represent quality and value, and because they represent the needs and wants of the public,” Toyota spokesman Bruce C. Ertmann wrote on a company blog in January. “Their profitability has nothing at all to do with some nefarious program of currency manipulation.”

GM Chief Executive Officer Rick Wagoner has repeatedly complained that his company is disadvantaged by pension and retiree-health costs -- benefits that are heavily subsidized in competitor countries including Italy, Germany and France. Italy also helps companies such as Fiat pay unemployment benefits, making temporary production cuts less expensive.

To be sure, taxes in those countries tend to be higher, offsetting the advantage.

Rhys, the automotive economics professor, notes that many European carmakers that were once state-controlled -- such as Renault, Volkswagen and Alfa Romeo -- got loans at preferential rates. Renault, which is still 15 percent-owned by the French government and has enjoyed the most state largesse, would have collapsed without it, Rhys said.

Many Rescues

“Just about every one of the European automakers, apart from Mercedes, have had a rescue of some sort or another,” Rhys said. And Toyota has benefited from Japan’s “incredible low cost of credit,” he added. “It wasn’t technically state aid, but it certainly wasn’t the sort of conditions companies in Europe or North America could borrow at.”

Any complaints that grow out of the current bailout-proposal war will be complicated by the industry’s web of cross-border subsidiaries, said Ed Kim, an analyst at consulting firm AutoPacific Inc. in Tustin, California.

If Ford gets U.S. help, that may indirectly benefit Hiroshima, Japan-based Mazda Motor Corp., because the American company owns 13 percent of it. GM controls GM Daewoo Auto & Technology Co. of Inchon, South Korea, and it acquired the bankrupt Daewoo Motor Co. in 2002. Chrysler is negotiating a partnership with China’s Chery Automobile Co. Chery already has agreed to provide a model for Chrysler to sell in South America.

Back in 1979, when the U.S. bailed out Chrysler, things were “remarkably straightforward” because the company lacked a significant international presence, said Maryann Keller, an independent automotive analyst and consultant in Greenwich, Connecticut.

“Chrysler today would be more complicated,” she said. “Do we subsidize Chrysler so they can work with Chery and create a stronger automotive competitor?”

To contact the reporter on this story: Jennifer M. Freedman in Geneva at jfreedman@bloomberg.net


Read more...

European Notes Post Nine-Week Gain as ECB Signals Lower Rates

By Gavin Finch

Nov. 22 (Bloomberg) -- European two-year government notes rose for a ninth week, the longest run on record, as stocks slumped and regional policy makers signaled further interest rates cuts to revive the recession-mired economy.

The gains pushed the yield on the note to the lowest level since July 2005 as the Dow Jones Stoxx 600 Index declined for a third week, stoking investor appetite for the safest assets. European Central Bank council member Axel Weber said yesterday the economic outlook is worsening ``rapidly,'' giving the bank room to lower rates further. Switzerland's central bank cut its target rate by one percentage point on Nov. 20 to spur growth.

``We're running out of superlatives to describe this market, but we live in unprecedented times,'' said Charles Diebel, head of European interest-rate strategy at Nomura International Plc in London. ``The recessionary deflation theme now looks to be accepted as the most likely outcome. There is still plenty of room to extend the bull move.''

The yield on the two-year note fell 14 basis points in the week to 2.08 percent by 3:30 p.m. in London yesterday. It slipped to 1.99 percent on Nov. 20, the lowest level since July 2005. The 4 percent security due September 2010 rose 0.20, or 2 euros per 1,000-euro ($1,261) face amount, to 103.32.

The yield on the 10-year bund, Europe's benchmark government security, declined 27 basis points to 3.40 percent this past week. Yields move inversely to bond prices.

Bonds rallied Nov. 20 after a government report showed German producer-price inflation slowed to 7.8 percent in October, from 8.3 percent in the prior month. Prices were unchanged, from an increase of 0.3 percent in September.

`Further Easing'

``Owing to a remarkable decline in inflationary pressures in the medium term and rapidly deteriorating economic prospects, euro-area monetary policy, in my view, has enough leeway for further easing if necessary,'' Weber said at a banking conference in Frankfurt yesterday.

Europe's manufacturing and service industries contracted in November at the fastest pace in at least a decade, according to an industry survey released yesterday.

The Frankfurt-based ECB lowered its key rate by half a percentage point to 3.25 percent on Nov. 6. The next rate-setting meeting is scheduled for Dec. 4.

Traders raised bets the central bank would cut rates again this year after the Swiss National Bank unexpectedly cut its target for the three-month Libor to 1 percent. The yield on the December interest-rate futures contract fell 24 basis points in the week to 3.36 percent yesterday.

Tumbling stocks worldwide and the prospect of the worst economic slump since the Great Depression is fueling demand for the safest assets. The German two-year note yield is within a quarter point of the lowest level since at least 1990, when Bloomberg began collecting the data. The yield on the two-year U.S. Treasury note fell to a record low on Nov. 20, while the three-month bill yield plunged to the weakest since 1945.

The MSCI World Index lost 11 percent in the week, while the Standard and Poor's 500 Index dropped from Nov. 14.

Returns on European bonds lagged behind those on Treasuries since September, handing investors a 4.2 percent gain, compared with 4.5 percent for their U.S. counterparts, according to Merrill Lynch & Co.'s EMU Direct and Treasury Master indexes.

To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net

Read more...