[Translated from Le Monde diplomatique (Paris)]
By Ignacio Ramonet
Le Monde diplomatique (Paris)
Will the announcement by the Federal Reserve (Fed) of a significant cut in interest rates succeed in avoiding a recession in the United States and banishing the specter of a global crash? Many experts think so. At most, they fear a reduction in the rate of growth.
But other analysts, albeit enthusiastic about capitalism, are expressing concern. Thus in France, for example, Mr. Jacques Attali is prophesying that "soon . . . the New York Stock Exchange, the guarantor of the debt pyramid, will collapse"; Mr. Michel Rocard goes even further: "I'm convinced that it will all soon explode" [Note 1: Respectively, L'Express (Paris), Dec. 13, 2007, and Le Nouvel Observateur (Paris), Dec. 13, 2007].
There's no denying that signs of a loss of confidence are multiplying. One testimony at present is the "rush to gold." The yellow metal -- whose price increased by 32% in 2007! -- is once again assuming its role as safe haven. All the large economic organizations, including the International Monetary Fund (IMF) and the Organization for Economic Cooperation and Development (OECD), are predicting a decline in global growth.
Almost everything started in 2001 with the bursting of the Internet bubble. To save investors, Fed Chairman Alan Greenspan then decided to shift investment toward real estate [Note 2: Cf. "Crises financières à répétition : quelles explications ? quelles réponses ?" ('Repeated Financial Crises: What Explanations? What Answers?') (Paris: Fondation Res Publica, 2008)]. Through a politics of very low interest rates and lowering of financial costs, he encouraged financial and real estate intermediaries to spur more and more people to invest in land. In this way was perfected the subprime system: risky variable-rate mortgage credit granted to the most fragile households [Note 3: Cf. André-Jean Locussol-Mascardi, Krach 2007: La Vague scélérate des 'subprimes' ('2007 Crash: The Criminal 'Subprime' Wave') (Paris: Le Manuscrit, 2007)]. But when in 2005 the Fed raised its prime rates (the same ones it has just lowered), it threw a monkey wrench into the machine and set off a domino effect that, beginning in August 2007, is rocking the international banking system.
The threat of the insolvency of some three million households with debt amounting to 200bn euros [$300bn] is precipitating the bankruptcy of large credit institutions. To protect against this risk, they had sold part of their doubtful loans to other banks, which had sold them to speculative investment funds that also resold them. The result: like a spiraling epidemic, the crisis is reaching the entire banking system.
Several large financial institutions -- Citigroup and Merrill Lynch in the United States, Northern Rock in the United Kingdom, Swiss Re and UBS in Switzerland, Société Générale in France -- have ended up declaring colossal losses. To limit the damage, several of them have had to accept capital coming from state funds controlled by powers in the South and petromonarchies.
No one yet knows the full extent of the damage. Since August 2007, the American, European, British, Swiss, and Japanese central banks have injected hundred of billions of euros into the economy without restoring confidence.
From the financial economy the crisis has spread to the real economy. And a combination of factors -- the accelerated fall of real estate values in the United States (and also in the United Kingdom, Ireland, and Spain), the bursting of the stock market bubble, the fall of the dollar, the restriction of credit -- is leading many to fear that global growth will indeed decline. To this are added other phenomena, like the rise in the prices of oil, raw materials, and foodstuffs. In other words, the makings of a long-lasting crisis [Note 4: See Frédéric Lordon, "Quand la finance prend le monde en otage" ('When Finance Takes the World Hostage'), Le Monde diplomatique (September 2007)]. This is the greatest crisis since globalization established itself as world economy's structural framework.
Its outcome now depends on the ability of the Asian economies to pick up American engine's slack. It thus appears to involve a new sign of the West's decline, a harbinger of the coming displacement of the world economy's center from the United States to China. In this respect, the crisis seems to indicate the end of a model.
Translated by Mark K. Jensen
Associate Professor of French
Department of Languages and Literatures
Pacific Lutheran University
Tacoma, WA 98447-0003
Web page: http://www.plu.edu/~jensenmk/
BUFFETT OFFERS AID ON BONDS, BUT AT A PRICE
By Vikas Bajaj
New York Times
February 13, 2008
Warren E. Buffett volunteered on Tuesday to rescue Wall Street from its latest looming crisis.
But Mr. Buffett, the billionaire investor known as the Oracle of Omaha, made clear that his offer would not come cheap. And even then, jittery investors were unsure that his plan would work.
Capitalizing on the turmoil in the financial markets, Mr. Buffett offered to shoulder some of the financial burdens of three insurance companies whose plunging fortunes have become a threat to the financial system.
The companies -- MBIA, the Ambac Financial Group, and the Financial Guaranty Insurance Company -- guarantee interest and principal payments on hundreds of billions of dollars of bonds sold by states and municipalities, as well as complex mortgage investments. Investors fear that the deepening problems of the bond insurers could unleash a chain reaction of losses across financial industries.
Mr. Buffett said he would stand behind, or reinsure, policies that the three companies had written on $800 billion of municipal bonds, a move analysts called a shrewd attempt to take advantage of the companies’ problems. His holding company, Berkshire Hathaway, is willing to commit $5 billion to the task but wants the insurers to pay it a steep premium. Berkshire will refuse to take any risks associated with mortgage-related securities, the riskiest debt that the companies insure. Mr. Buffett made his offer public on CNBC, the financial news network.
The insurers were considered unlikely to agree to Mr. Buffett’s stringent terms. Ambac, in a statement, said the offer would not benefit the company.
The offer initially heartened investors, who have grown increasingly alarmed by the drumbeat of grim news from the bond guarantors. Financial shares led the stock market higher for much of the day before the rally faded in the afternoon.
But the insurers’ share prices fell as traders considered the implications of Mr. Buffett’s statements on the companies’ business. The offer would do little to alleviate the problems the insurers are facing on securities backed by mortgages, consumer loans, and other assets. In fact, reinsuring municipal bonds with Mr. Buffett could make the companies more vulnerable because they would be left with only the riskiest insurance contracts.
“Essentially, if any of the companies were to take him up on this offer, it would be almost them waving a white flag saying that they are done,” said Rob Haines, an analyst at the research firm CreditSights. “It does not make sense to give up what is the good part of your business.”
In trading Tuesday, MBIA’s stock closed down 15.3 percent, at $11.50. Shares of Ambac were down 15.1 percent, closing at $8.90. F.G.I.C. is privately held.
Mr. Buffett’s offer, along with news that mortgage companies would give delinquent borrowers more time to restructure their loans, helped buoy stocks most of the day, but prices fell back toward the end of trading. The Standard & Poor’s 500-stock index closed up 0.73 percent and the Dow Jones industrial average was up 133.40 points, or 1.09 percent. The technology-weighted Nasdaq composite index was essentially flat.
Shares of financial companies, which might benefit from a strong company like Berkshire Hathaway’s backing municipal bonds, rose 1.4 percent.
In a letter dated Feb. 6 to Lazard, the investment bank that is advising MBIA, Ajit B. Jain, president of reinsurance for Berkshire Hathaway, proposed that MBIA pay Mr. Buffett’s company 150 percent of the premium it earns for insuring its municipal bond portfolio. Typically, insurers cede a share of their premiums, not more than they earn.
“I would submit that our proposal at the pricing levels we require is actually a cheap way for MBIA to raise capital as compared to other alternatives and is therefore a great benefit to MBIA’s owners and their municipal bond policy holders,” Mr. Jain wrote. He noted that in recent months, Berkshire had been able to set premiums at twice as much as MBIA used to charge, or more. Mr. Jain estimated that the reinsurance premiums paid by MBIA and Ambac would total about $9 billion.
Neither he nor Mr. Buffett returned telephone calls Tuesday.
Berkshire Hathaway’s offer was prompted by a call from the New York State insurance superintendent, Eric R. Dinallo, who late last year asked the company to enter the bond insurance business directly and quickly gave it approval to do business in the state. The company has since had similarly warm receptions in other states.
In the last couple of months, investors and regulators have focused on the bond guarantors. For state regulators, the main concern has been protecting the $2.6 trillion municipal bond market, about half of which is insured. For some states, cities and other public entities, the cost of borrowing is up noticeably recently because investors are concerned that the guarantors’ backing will turn out worthless.
Mr. Dinallo, who regulates MBIA and F.G.I.C., has asked large banks like Citigroup, Merrill Lynch, and UBS, many of which hold insurance policies from the guarantors, to devise a plan to shore up the insurers. The officials are discussing investing in the insurers or providing them with lines of credit to cover future losses and restore confidence in them. (Ambac is regulated by Wisconsin regulators.)
While the banks and the guarantors continue to meet daily with each other and with Joseph R. Perella, an investment banker who is advising Mr. Dinallo, the Berkshire Hathaway reinsurance plan is seen as a backup solution if those talks are unsuccessful, said a person familiar with the discussions but who was not authorized to speak about them.
One analyst said that Mr. Dinallo could be using the Berkshire offer to put pressure on the banks to come up with a plan that addresses both the municipal debt obligations and the mortgage-related securities insured by the bond guarantors.
“It may be an effort to get the banks to come to the table and probably do it on better terms than” what Mr. Buffett is offering, said Douglas A. Dachille, chief executive of First Principles Capital Management, a bond firm based in New York.
The guarantors -- who maintain that while they have made mistakes, they remain in good financial shape -- are unlikely to find the reinsurance plan appealing. They would much prefer reinsuring the part of their business that is at greater risk for future losses, and they would like to pay a smaller premium than what Berkshire has suggested.
On Tuesday, all three companies declined to comment.
In an interview in December, Mr. Buffett said he did not want to enter the business of insuring mortgage-related bonds because those securities were too complex and risky -- a view he reiterated Tuesday on CNBC.
“The insurance in the market is not doing bondholders any good and is in some cases penalizing bond investors,” Mr. Buffett said. “Our proposal puts the municipals at the front of the line.”