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Archive for April, 2008

Forget about NYC ever recapturing London’s financial crown. What sane hedge fund manager would de-privatize all his information, and submit to “surveillance” by the very Praetorians who have exacerbated every shock of the last 20 years?

Treasury eyes stronger powers for Fed

By Gillian Tett in London and Krishna Guha in Washington

Published: April 29 2008 23:23 | Last updated: April 29 2008 23:23

Meanwhile, data showed accelerating US house price declines and further declines in consumer confidence.

The Federal Reserve could use proposed new regulatory powers to try to stop credit and asset market excesses from reaching the point where they threaten economic stability, the US Treasury said on Tuesday.

David Nason, assistant secretary for financial institutions, said the Fed could even use its proposed “macro-prudential” authority to order banks, hedge funds and other entities to curtail strategies that put financial stability at risk.

By “leaning against the wind” in this way, the US central bank could “attempt to prevent broad economic dislocations caused by potential excesses”, he said.

His comments come amid debate inside the Fed as to whether it should try to do more to contain asset price bubbles, following the housing and dotcom busts. Some see enhanced regulatory powers as a better tool for this than interest rates.

The proposed new powers – outlined in a Treasury blueprint published last month – require legislation and may never be authorised. But policymakers see the plan as offering a template for future regulation.

The blueprint envisages giving the Fed roving authority to collect, analyse and publish market data from a wide range of institutions, from banks to hedge funds.

“The market stability regulator must have access to detailed information about all types of financial institutions,” said Mr Nason.

Hedge funds are uneasy about this proposal. However, many European central bankers are eager to acquire the kind of macro-prudential powers the Treasury would like to give to the Fed.

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The Bank of England has imposed a permanent news blackout on its £50bn-plus plan to ease the credit crunch.

Ferocious and unprecedented secrecy means taxpayers will never know the names of the banks that have been supported through the special liquidity scheme, which was unveiled by Bank Governor Mervyn King last week.

Requests under the Freedom of Information Act are to be denied. Details will be kept secret even after 30 years – the period after which all but the most sensitive state documents are released.

Any Bank of England employee leaking the names of institutions involved will face court action for breach of contract.

Even a figure for the overall amount advanced will not be published until October. Meanwhile the Bank is expected to issue at least £50bn of Treasury bills to banks in exchange for their mortgages – entirely in secret.

This hypersensitive official stance is thought to be a response to the events of last year when a huge stigma was attached to any lender suspected of going to the Bank for cash help.

The scheme is intended to steady the markets, but it is feared that reports of banks making widespread use of the facility could trigger further instability.

Barclays and HBoS have both confirmed they will use the Bank of England scheme. ‘We welcome the Bank facility and we will participate in it,’ confirmed Andy Hornby, chief executive of HBoS.

Other banks declined to comment, but it is expected that this week all of the leading banks, with the exception of Lloyds TSB, will tender some of their mortgages to the Bank of England.

HBoS confirmed last week it had packaged up £9bn of mortgages ready either for securitisation – in effect, selling them on in the wholesale financial markets – or to be offered to the Bank in return for Treasury bills.

The scheme, drawn up by King and approved by Chancellor Alistair Darling, aims to improve banks’ liquidity by temporarily swapping bundles of mortgages and credit card debt for Treasury bills, which are short-dated Government debt that matures within nine months.

The scheme will run for three years so these bills will be replaced by new ones when required.

Under the plan, bills will be exchanged only for securities rated triple-A – the highest possible grade of security – by at least two of the three big ratings agencies, Fitch, Moody’s and Standard & Poor’s.

It would not normally be considered acceptable for big companies to arrange billions of pounds of financial support without telling their shareholders.

But one source close to major institutional investors said: ‘I can see why there may be a case for secrecy.

‘It may be the lesser of two evils.’

The £50bn or more of Treasury bills involved will dwarf the £17.6bn currently in issue, but the authorities are adamant this will not destabilise the Government debt market.

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Turkish tremors

Not much new here, but a good summary nonetheless.

April 28 (Bloomberg) — For proof that Turkey’s economy and the government of Prime Minister Recep Tayyip Erdogan may be unraveling, look no further than the lira.

The ruling Justice and Development Party touts the lira’s growing “prestige” on its Web site following the currency’s record 21 percent rally in 2007. Those gains are evaporating as inflation and political instability grip the Muslim nation of 72 million seeking membership of the European Union. The lira has fallen 8.4 percent against the dollar this year, to 1.2785.

Once-bullish traders lured by a benchmark interest rate of 15.25 percent are dumping the currency as the Constitutional Court weighs an attempt to remove Erdogan and his government from office. The decline is undermining the central bank’s efforts to curb inflation, which rose at a 9.2 percent rate in March, more than any member of the EU. Merrill Lynch & Co. and JPMorgan Chase & Co. recommend investors either avoid or reduce their holdings of Turkish assets.

“It’s not going to be a good year for the lira because of deepening political uncertainty and global risk aversion, which primarily hurts countries with big current-account deficits,” said Yarkin Cebeci, an economist in Istanbul at JPMorgan.

The lira’s decline since January is more than all emerging- market currencies except the Icelandic krona, which is down 12 percent, and the South African rand. Trading in options shows the lira, a bellwether for emerging markets, will be the second- riskiest currency to own over the next 12 months after the rand.

Secular System

A law that would allow university students to wear Islamic- style headscarves, backed by the party this year, has triggered charges by Chief Prosecutor Abdurrahman Yalcinkaya that Justice’s Islamist roots threaten Turkey’s secular system.

Closing the ruling party and banning Erdogan and President Abdullah Gul from public life for at least five years may mean a return to fractious coalition governments that helped spark a financial crisis in 2001, Jean-Dominique Butikofer, who helps manage about $725 million as head of emerging-market debt at Union Bancaire Privee in Zurich, said in an interview with Bloomberg Television this month. Justice won last year’s elections with 47 percent of the vote, more than twice that of its nearest rival.

The risk is that political conflict will distract the government from containing inflation and reducing the budget deficit as called for under its $10 billion loan agreement with the International Monetary Fund, according to Ilker Domac, an economist in Istanbul at Citigroup Inc. The accord, which helped Turkey achieve annual growth of about 7 percent, expires next month.

EU Bid

“The recent political developments are likely to complicate policy-making and the investment climate,” Domac said. “The deteriorating political backdrop will in turn undermine the prospects for restoring fiscal discipline and reviving the reform agenda.”

The lawsuit may jeopardize Turkey’s EU bid, which has underpinned investment and economic expansion. Justice, which is contesting the ban, has presided over 24 consecutive quarters of growth, attracting a record $58 billion of foreign capital.

The EU’s foreign policy chief, Javier Solana, said on April 8 the lawsuit was a “grave” risk to the membership and overturning a legitimate election result would be a violation of European norms.

The lira fell 2.5 percent on March 17, the biggest decline in seven months, after the lawsuit was presented March 14. A day later, Merrill Lynch reduced the amount of 10-year Turkish bonds in a model emerging-markets debt portfolio to 7.4 percent from 9.9 percent.

The `Pay-Off’

Closure of political parties is nothing new to Turkey. The court shut down two predecessors of Erdogan’s party in 1998 and 2001 on similar charges.

“Turkey has always been a risky place, but high returns are the pay-off for those who take the risk,” said Michael Ganske, a strategist in London at Commerzbank AG, Germany’s second-biggest lender. While investors are inclined to bet against the lira, “we expect Justice eventually to stay in place” and foreign direct investment “to underpin the currency,” he said.

The lira may advance to 1.25 per dollar by year-end, he predicted. JPMorgan’s Cebeci said it may weaken to 1.40 before rebounding to 1.32 by the end of the year.

JPMorgan on March 28 cut Turkish bonds to “underweight,” meaning it recommends investors hold a smaller percentage of the securities than contained in benchmark indexes, from “market weight.” Standard & Poor’s changed its outlook on the nation’s BB- credit rating to “negative” from “stable” on April 4, indicating a downgrade is the most likely next step.

`Global Crisis’

“No one knows how the political situation will evolve, how much time it will take the court to decide or what the verdict will be,” said Turker Hamzaoglu, an economist in London at Merrill Lynch. “The political tension coincides with a global crisis in financial markets, and this all weighs on the Turkish currency and assets.”

Investors’ aversion toward the lira has caused the price of imports to rise. That’s created a conundrum for policy makers, who are stuck between a slowing economy and faster inflation.

The Central Bank of the Republic of Turkey said March 31 it would avoid “tough” measures for fear of damaging the economy, which grew 3.4 percent in the fourth quarter, the slowest in more than five years.

Policy makers have cut their benchmark rate by 2.25 percentage points since September, dimming the allure of the nation’s interest-bearing assets and damping demand for the lira. A weaker currency may make it more difficult to finance the current-account deficit, which the central bank said widened to a record $37.4 billion in 2007.

Foreign investors have withdrawn $6 billion in “the past few months,” Sabah newspaper said on April 3, citing a report by the Banking Regulation and Supervision Agency. The stock market’s capitalization has fallen to $197 billion, from $282 billion in December, Bloomberg data show.

Still waiting on Eastern Europe …

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Harsh

“Greenspan came onto my radar screen in the late sixties as a seller
of economic and financial advice to the investment industry. To be
brutally honest, he was considered run of the mill by anyone I knew
then or have met later who knew his service then. His high point in
most memories, was a famous call in January 1973 that, “it is rare
that you can be as unqualifiedly bullish as you now can,” a few days
before a market decline of over 60% in real terms, second only to the
Great Crash in a century, accompanied also by a bitter recession.
This was one of the first of a long line of terrible prognostications
for which he has remarkably not been remembered, except by a handful
of us amateur historians. “

–Jeremy Grantham, on Alan Greenspan

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via

… In Washington, nuclear experts were puzzled by the timing and quality of the evidence released by the Bush administration. Democrats suggested hardliners around Dick Cheney, the vice-president, had forced the issue to try to wreck the talks with Kim.

However, there is a more persuasive argument. Analysts in Seoul see the American disclosures as a sly way to keep the negotiations alive. Kim had refused to make a “full declaration” of his nuclear programme by a December 31 deadline; now, in effect, the CIA has done it for him. “The revelation was a highly orchestrated one,” commented The Korea Herald, adding that it “enabled” Pyongyang to “make its declaration without losing face”.

One indication is that Christopher Hill, the US State Department negotiator, flew to Singapore for an unusual session with his North Korean counterparts shortly before the United States went public. “There must have been some sort of secret agreement or deal,” said Taewoo Kim, of the Korea Institute for Defence Analyses in Seoul.

Last year Hill persuaded the White House that the talks offered a realistic chance to accomplish a peace treaty formally ending the 1950-3 Korean war, in which more than 50,000 Americans died. His critics, such as John Bolton, the former United Nations ambassador, say North Korea has a long recidivist history of selling missiles and unconventional weapons to unstable Middle Eastern regimes such as Syria, Iran and Libya.

Whatever the truth, even by the standards of North Korean politics the atomic intrigue half a world away – with its multinational cast of spies, scientists, diplomats and airmen – makes an exotic story.

The alliance between the two clan dictatorships in Damascus and Pyongyang is more than 35 years old. In another tunnel, this one under Mount Myohang, the North Koreans have kept as a museum piece the Kalashnikov assault rifle and pistols sent as gifts from President Hafez al-Assad of Syria to Kim Il-sung in the early years of their friendship.

Today North Korea and Syria are ruled by the sons of their 20th-century dictators – Bashar al-Assad succeeded his father in 2000 and Kim Jong-il took over in 1994. They inherited a hatred of America and a fondness for authoritarian family rule.

Syria possesses the biggest missile arsenal and the largest stockpile of chemical weapons in the Middle East, built up over the past two decades with arms bought from North Korea.

North Korea, which detonated a nuclear device in October 2006, has become pivotal to Syria’s plans to enhance and upgrade its weapons.

Syria’s liquid-fuelled Scud-C missiles depend on “essential foreign aid and assistance, primarily from North Korean entities”, said the CIA in a report to the US Congress in 2004.

Diplomats based in Pyongyang have said they now believe reports that about a dozen Syrian technicians were killed in an explosion and train crash at Ryongchon, North Korea, on April 22, 2004. North Korea blamed a technical mishap, but there were rumours of an assassination attempt on Kim, whose special train had passed through the station en route to China some hours earlier.

No independently verified cause of the disaster was made known. However, teams of military personnel wearing protective suits were seen removing debris from the section of the train in which the Syrians were travelling, according to a detailed report quoting military sources which appeared on May 7, 2004, in the Sankei Shimbun, a Japanese newspaper.

The technicians were said to be from Syria’s Centre D’Etudes et de Recherche Scientifique, a body known to be engaged in military technology.

Their bodies were flown home by a Syrian military cargo aircraft which was spotted on May 1, 2004 at Pyongyang. There was speculation among military attachés that the Syrians were transporting unconventional weapons, the paper said at the time. Diplomats said the Sankei Shimbun report was now believed to be accurate.

Last year Jane’s Defence Weekly reported that dozens of Iranian engineers and Syrians were killed on July 23 attempting to load a chemical warhead containing the nerve gases VX and sarin onto a Scud missile at a plant in Syria.

The Scuds and warheads are of North Korean design and possibly manufacture. Some analysts think North Korean scientists were helping the Syrians to attach air-burst chemical warheads to the missiles.

Syria possesses more than 100 Scud-C and ScudD missiles which it bought from North Korea in the past 15 years. In the 1990s it added cluster warheads to the Scud-Cs that experts believe are intended for chemical weapons.

Like North Korea, Syria has an extensive chemical weapons programme including sarin, VX and mustard gas, according to researchers at the Center for Nonproliferation Studies at the Monterey Institute in California.

The Scud-C is strategically worrying to Israel because Syria has deployed it with one launcher for every two missiles. The normal ratio is one to 10. The conclusion: Syria’s missiles are set up for a devastating first strike.

Since 2004 there have been a series of leaks designed to suggest that Syria has renewed its interest in atomic weapons, a claim denied by Damascus.

In December 2006 the Kuwaiti newspaper, Al-Siyasa, quoted European intelligence sources in Brussels as saying that Syria was engaged in an advanced nuclear programme in its northeastern Hasakah province.

It also quoted British security sources as identifying the man heading the programme as Major Maher Assad, brother of the president and commander of the Republican Guard.

Early last year foreign diplomats had noticed an increase in political and military visits between Syria and North Korea. They received reports of Syrian passengers on flights from Beijing to Pyongyang, almost the only air route into the country. They also spotted Middle Eastern businessmen using trains between North Korea and the industrial cities of northeast China.

Then there were clues in the official media. On August 14 Rim Kyongman, the North Korean minister of foreign trade, was in Syria to sign a protocol on “cooperation in trade and science and technology”. His delegation held the fifth meeting of a “joint economic committee” with its Syrian counterpart. No details were disclosed.

Initially, the conclusion of diplomats was that the deal involved North Korean ballistic missiles, maintenance for the existing Syrian arsenal and engineering expertise for building silos and bunkers against air attack. Now it is known that Israeli intelligence interpreted the meeting as the last piece in a nuclear jigsaw; a conclusion that Israel shared with President George W Bush.

For years the United States and Israel saw North Korean weapons sales to the Middle East as purely a source of revenue – apart from seafood, minerals and timber, North Korea is impoverished and has little else to sell. The nuclear threat in Syria was also believed to be dormant, as Damascus appeared to rely on a chemical first-strike as an unconventional deterrent.

In a period of detente, the United States and its allies concurred when China sold a 30kw nuclear reactor to Syria in 1998 under international controls.

Then, in 2003, American intelligence officials believe that Syria recruited Iraqi scientists who had fled after the fall of Saddam Hussein. Like other countries in the region, Syria renewed its pursuit of nuclear research.

The calculus changed for good after North Korea tested a nuclear bomb in 2006 and admitted to a plutonium stockpile sufficient for 10 more.

The danger to Israel is multiplied by the triangular relationship between North Korea, Syria and Iran. Syria has served as a conduit for the transport to Iran of an estimated £50m of missile components and technology sent by sea from North Korea to the Syrian port of Tartous, diplomats said.

They say Damascus and Tehran have set up a £125m joint venture to build missiles in Syria with North Korean and Chinese technical help. North Korean military engineers have worked on hardened silos and tunnels for the project near the cities of Hama and Aleppo.

Israel also noted reports from Pyongyang that Syrian and Iranian observers were present at missile test firings by the North Korean military last summer and were given valuable experimental data. Israeli sources said last week that Iran was informed “in every detail” about the nuclear reactor and had sent technicians to the site.

Such was the background against which Israel took its decision to strike. Two signals from the North Koreans in the aftermath showed that the bombs hit home.

On September 10, four days after the raid, Kim sent a personal message of congratulations to Assad on the Syrian dictator’s 42nd birthday.

“The excellent friendly and cooperative relations between the two countries are steadily growing stronger even under the complicated international situation,” Kim said.

The next day, in a message that went largely unnoticed, the North Koreans condemned the Israeli action as “illegal” and “a very dangerous provocation”.

Just days later a top Syrian official, Saeed Elias Daoud, director of the ruling Syrian Arab Ba’ath party, boarded a Russian-made vintage jet belonging to the North Korean airline, Air Koryo, for the short flight from Beijing.

Daoud brought counsel and sympathy from Assad, whose father Hafez was famed as a strategic gambler with a talent for brinkmanship.

Now Kim is waiting to see if his own gamble has paid off.

Additional reporting: Sarah Baxter in Washington

Interesting ….

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What would happen when non-government T-bill chumps figure out that they’re getting between negative 5 percent and negative 9 percent real interest on a 2-year Treasury note?

… In March, consumer prices rose 0.34 percent, for an annualized rate of more than 4 percent, according to the U.S. Department of Labor. That’s only slightly lower than the 2007 annual rate of 4.1 percent – which was the highest inflation rate this decade.

On the other hand, so-called core inflation – which excludes energy and food prices because they are considered volatile – rose only 0.15 percent, or 2.4 percent over the past year, which is close to the Federal Reserve’s 2 percent comfort zone.

For the Federal Reserve, the core inflation rate amounts to a green light to continue its policy of lowering interest rates in order to keep the economy from falling into a deep recession. A higher inflation rate could conceivably make the central bank freeze or raise interest rates.

But many economists say the core rate does not show how inflation is affecting the typical consumer. Because salary raises for most people are not keeping pace with the rising cost of living, people are using a greater percentage of their wages to buy a smaller amount of goods.

“Food prices and the price of gas are really eroding the purchasing power not just of the working class, but people in the middle class, who are already beginning to have a hard time making ends meet,” said business-trend consultant Joel Kotkin.

John Williams, who spent more than two decades as an economic consultant to Fortune 500 companies, said the government figures understate the true rate of inflation. …

I am getting a little tired of hearing about food inflation, by the way. I bet that a hedge fund got about 100 people to buy massive amounts of food at bulk wholesalers around the country, loaded them on a container for China, and sold the rice for a gigantic profit. The food inflation meme is getting deafening.

Having said that, there’s no doubt that the Fed’s inflation statistics are dripping with phoniness. “Core inflation” is a joke and everyone knows it.

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April 25, 2008 1511 GMT
At least one shot has been fired at an Iranian vessel from a ship contracted by the U.S Military Sealift Command, Reuters reported April 25, citing a U.S. military official. No other details were immediately available.
Additionally, Debkafile (yes yes, I know) reports that Hamas’s number two has been killed in Damascus by a hit and run. The Saudis seem to be the ones with the most ins into Syria, in which case this would show them doing their fair share of the heavy lifting.
These “confrontations,” by the way, happen a lot. What’s revealing is which ones get played up, and why.

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