282 Moodys: US, UK, Germany, France & Spain debt costs require austerity that threatens social cohesion

Moodys: US, UK, Germany, France & Spain debt costs require austerity that threatens social cohesion

(1) Financial meltdown wasn't a mistake: it was a con - Will Hutton
(2) Moodys: US, UK, Germany, France & Spain debt costs require austerity that threatens social cohesion
(3) Gordon Brown calls for Goldman Sachs investigation
(4) Can America Still be the World's Greatest Power, as the World's Greatest Borrower?
(5) China's state-owned corporations the main beneficiaries of Globalization

(1) Financial meltdown wasn't a mistake: it was a con - Will Hutton

From: Paul de Burgh-Day <pdeburgh@harboursat.com.au>
Date: 21.04.2010 09:44 AM

Now we know the truth. The financial meltdown wasn't a mistake – it was a con

Hiding behind the complexities of our financial system, banks and other institutions are being accused of fraud and deception, with Goldman Sachs just the latest in the spotlight. This has become the most pressing election issue of all

Will Hutton

The Observer, Sunday 18 April 2010

http://www.guardian.co.uk/business/2010/apr/18/goldman-sachs-regulators-civil-charges

The global financial crisis, it is now clear, was caused not just by the bankers' colossal mismanagement. No, it was due also to the new financial complexity offering up the opportunity for widespread, systemic fraud. Friday's announcement that the world's most famous investment bank, Goldman Sachs, is to face civil charges for fraud brought by the American regulator is but the latest of a series of investigations that have been launched, arrests made and charges made against financial institutions around the world. Big Finance in the 21st century turns out to have been Big Fraud. Yet Britain, centre of the world financial system, has not yet levelled charges against any bank; all that we've seen is the allegation of a high-level insider dealing ring which, embarrassingly, involves a banker advising the government. We have to live with the fiction that our banks and bankers are whiter than white, and any attempt to investigate them and their institutions will lead to a mass exodus to the mountains of Switzerland. The politicians of the Labour and Tory party alike are Bambis amid the wolves.

Just consider the roll call beyond Goldman Sachs. In Ireland Sean FitzPatrick, the ex-chair of the Anglo Irish bank was arrested last month and questioned over alleged fraud. In Iceland last week a dossier assembled by its parliament on the Icelandic banks – huge lenders in Britain – was handed to its public prosecution service. A court-appointed examiner found that collapsed investment bank Lehman knowingly manipulated its balance sheet to make it look stronger than it was – accounts originally audited by the British firm Ernst and Young and given the legal green light by the British firm Linklaters. In Switzerland UBS has been defending itself from the US's Internal Revenue Service for allegedly running 17,000 offshore accounts to evade tax. Be sure there are more revelations to come – except in saintly Britain.

Beneath the complexity, the charges are all rooted in the same phenomenon – deception. Somebody, somewhere, was knowingly fooled by banks and bankers – sometimes governments over tax, sometimes regulators and investors over the probity of balance sheets and profits and sometimes, as the Securities and Exchange Commission (SEC) says in Goldman's case, by creating a scheme to enrich one favoured investor at the expense of others – including, via RBS, the British taxpayer. Along the way there is a long list of so-called "entrepreneurs" and "innovators" who were offered loans that should never have been made. Lloyd Blankfein, Goldman's CEO, remarked only semi-ironically that his bank was doing God's work. He must wake up every day bitterly regretting the words ever emerged from his mouth.

For the Goldmans case is in some ways the most damaging. The Icelandic banks, Anglo Irish bank and Lehman were all involved in opaque deals and rank bad lending decisions – but Goldman allegedly went one step further, according to the SEC actively creating a financial instrument that transferred wealth to one favoured client from others less favoured. If the Securities and Exchange Commission's case is proved – and it is aggressively rebutted by Goldman – the charge is that Goldman's vice-president Fabrice Tourre created a dud financial instrument packed with valueless sub- prime mortgages at the instruction of hedge fund client Paulson, sold it to investors knowing it was valueless, and then allowed Paulson to profit from the dud financial instrument. Goldman says the buyers were "among the most sophisticated mortgage investors" in the world. But this is a used car salesman flogging a broken car he's got from some wide-boy pal to some driver who can't get access to the log-book. Except it was lionised as financial innovation.

The investors who bought the collateralised debt obligation (CDO) were not complete innocents. They had asked for the bond to be validated by an independent expert into residential mortgage-backed securities – a company called ACA management. ACA gave the bond the thumbs-up on the understanding from Fabrice Tourre that the hedge fund Paulson were investing in it. But the SEC says Tourre misled them, a pivotal claim that Goldman denies. The reality was that Paulson was frantically buying credit default swaps in the CDO that would go up in price the more valueless it became – a trade that would make more than $1 billion. Worse, Paulson had identified some of the dud sub-prime mortgages that he wanted Tourre to put into the CDO. If the SEC case is true, this was a scam – nothing more, nothing less.

Tourre could see what was coming. In one email in January 2007 he wrote: "More and more leverage in the system. The whole building is about to collapse anytime now… only potential survivor, the fabulous Fab[rice Tourre] .. standing in the middle of all these complex highly leveraged exotic trades he created without necessarily understanding all of the implications of those monstrosities". Fabulous Fab, like his boss, will not be feeling very fab today.

The cases not only have a lot in common – using financial complexity allegedly to deceive and then using so-called independent experts to validate the deception (lawyers, accountants, credit rating agencies, "portfolio selection agents," etc etc ) – but they also show how interconnected the financial system is. In Iceland Citigroup and Deutsche Bank covered the margin calls of distressed Icelandic business borrowers, deepening the crisis. Lehman uses the lightly regulated London markets and two independent British experts to validate that their "Repo 105s" were "genuine" trades and not their own in-house liability. The American authorities pursued a Swiss bank over aiding and abetting US nationals to evade tax.

Bankers will complain these cases all involve one or two misguided individuals, but that most banking is above board and was just the victim of irrational exuberance, misguided belief in free market economics and faulty risk management techniques. Obviously that is true – but, sadly, there is much more to the crisis. Andrew Haldane, executive director of the Bank of England, highlights the remarkable reduction in the risk weighting of bank assets between 1997 and 2007. Put simply, Europe's and the US's large banks exploited the weak international agreement on bank capital requirements in the so-called Basel agreement in 2004 to reclassify the risk of their loans and trading instruments. They did not just reduce the risk by 5 or 10%. Breathtakingly, they claimed their new risk management techniques were so wonderful that the riskiness of their assets was up to half of what it had been – despite property and share prices cresting to new all-time highs.

Brutally, the banks knowingly gamed the system to grow their balance sheets ever faster and with even less capital underpinning them in the full knowledge that everything rested on the bogus claim that their lending was now much less risky. That was not all they were doing. As Michael Lewis describes in The Big Short, credit default swaps had been deliberately created as an asset class by the big investment banks to allow hedge funds to speculate against collateralised debt obligations. The banks were gaming the regulators and investors alike – and they knew full well what they were doing. Simon Johnson's 13 Bankers shows how the major American banks deployed vast political lobbying power and money to create the relaxed regulatory environment in which all this could take place. In Britain no money changed hands. Gordon Brown offered light-touch regulation for free – egged on by the Tories, who wanted to go further.

This was the context in which Goldman's Fabulous Fab created the disputed CDOs, Sean FitzPatrick allegedly moved loans between banks and Lehman created its Repo 105s along with the entire "debt mule" structure revealed this weekend of inter-related companies to shuffle debt around its empire. London and New York had become the centre of an international financial system in which the purpose of banking became making money from money – and where the complexity of the "innovations" allowed extensive fraud and deception.

Now it has all collapsed, to be bailed out by western taxpayers. The banks are resisting reform – and want to cling on to the business practices and business model that has so appallingly failed. It is obvious why: it makes them very rich. The politicians tread carefully, only proposing what the bankers say is congruent with their definition of what banking should be. Labour and Tories alike are united in opposing improved EU regulation of hedge funds, buying the propaganda those operations had nothing to do with the crisis. Perhaps Paulson's trades at Goldman, and the hedge funds' appetite for speculating in credit default swaps, may disabuse them.

It is time to reframe the question. Banks and financial institutions should do what economy and society want them to do – support enterprise, direct credit to where it is needed and be part of the system that generates investment and innovation. Andrew Haldane – and the governor of the Bank of England – are right. We need to break up our banks, limit their capacity to speculate and bring them back to earth. Britain should also launch an official investigation into what went wrong – and hand the findings to the Serious Fraud Office. This needs to become this election campaign's number one issue – not one which either a compromised Labour party or a temporising Conservative party will relish. The Lib Dems, the fiercest critics of the banks, have begun to get very lucky.

Crisis timetable

September 2007 Funding problems at Northern Rock triggers the first run on a British bank. It is nationalised in February 2008.

April 2008 Bear Stern faces bankruptcy after a run on the company wipes out cash reserves in less than two days. Backed by the Federal Reserve, JPMorgan buys up shares at far below market value.

September 2008 Lehman Brothers files for bankruptcy protection, becoming the first major bank to collapse since the start of the credit crisis.

December 2008 Bernard Madoff arrested for operating the largest Ponzi scheme in history.

January 2009 The Bank of England launches £200bn quantitative easing.

March 2010 Former chairman of Anglo Irish bank Sean Fitzpatrick is arrested in Dublin after failing to disclose details of loans worth millions from the bank.

April 2010 Northern Rock former directors, David Baker and Richard Barclay, are fined £504,000 and £140,000 for deliberately misleading analysts prior to nationalisation.

April 2010 The US Securities and Exchange Commission accuses Goldman Sachs of "defrauding investors by misstating and omitting key facts".

Joanna Aniel Bidar

• This article was amended on Monday 19 April and Tuesday 20 April. A reference to Anglo Irish looking after the Post Office's financial services was removed. Bank of Ireland is the Post Office's financial services provider. The original also referred to the US Inland Revenue Service. This has been corrected.

(2) Moodys: US, UK, Germany, France & Spain debt costs require austerity that threatens social cohesion

{but during World War II, money was found easily and cheaply}

From: IHR News <news@ihr.org> Date: 19.04.2010 03:00 PM

Rating Agency Warning Raises Fears of Social Unrest in US and Other Countries

Moody's fears social unrest as AAA states implement austerity plans

The world's five biggest AAA-rated states are all at risk of soaring debt costs and will have to implement austerity plans that threaten "social cohnesion", according to a report on sovereign debt by Moody's.

By Ambrose Evans-Pritchard

Published: 6:48PM GMT 15 Mar 2010

http://www.telegraph.co.uk/finance/economics/7450468/Moodys-fears-social-unrest-as-AAA-states-implement-austerity-plans.html

{caption} Protesters clash with riot police outside the Labour Ministry in Athens.  Photo: EPA {end}

The US rating agency said the US, the UK, Germany, France, and Spain are walking a tightrope as they try to bring public finances under control without nipping recovery in the bud. It warned of "substantial execution risk" in withdrawal of stimulus.

"Growth alone will not resolve an increasingly complicated debt equation. Preserving debt affordability at levels consistent with AAA ratings will invariably require fiscal adjustments of a magnitude that, in some cases, will test social cohesion," said Pierre Cailleteau, the chief author.

"We are not talking about revolution, but the severity of the crisis will force governments to make painful choices that expose weaknesses in society," he said.

If countries tighten too soon, they risk stifling recovery and making maters worse by eroding tax revenues: yet waiting too is "no less risky" as it would test market patience. "At the current elevated debt levels, a rise in the government's cost of funding can very quickly render debt much less affordable."

Moody's said Britain has been slower than Spain to "rise to the challenge" and may be at greater risk of smashing through buffers of AAA creditiblity if rates suddenly rise. Spain made errors at the outset of the crisis but has since become a model pupil, pledging to cut the budget deficit from 11.4pc of GDP to 3pc by 2013.

Britain is moving much more slowly, cutting its deficit to around 5.5pc of GDP over four years – though written into law, unlike Spain's pledge. At best, debt is likely to stabilise at 90pc of GDP. It could reach 100pc by 2013 if growth falters.

The Treasury said the assessment is unduly gloomy given that the maturity of UK debt is over 14 years, double the AAA average. This greatly reduces roll-over risk, giving Britain time to steady the ship.

The concern is what will happen as the Bank of England stops purchasing bonds. An IMF study said quantitative easing had lopped 40 to 100 basis points off debt costs. "The discontinuation of these purchases creates upside risk to yields," said Moody's.

Moody's said the saving grace for both Britain and the UK is a good a track record of belt-tightening when necessary, and a tax and spending structure that makes it easier to whittle away the debt once recovery starts. Concerns about a hung Parliament in Britain appear overblown given the broad political consensus on the need for austerity.

(3) Gordon Brown calls for Goldman Sachs investigation

Goldman Sachs faces the prospect of investigations in the UK and Germany after Gordon Brown said he was "shocked" at the "moral bankruptcy" alleged against the bank.

By Amy Wilson and Graham Ruddick
Published: 10:21PM BST 18 Apr 2010

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7605009/Gordon-Brown-calls-for-Goldman-Sachs-investigation.html

The Prime Minister called for a "special investigation" into Goldman's activities. It came as the bank prepares to pay out £3.5bn in bonuses and announce first-quarter profits of almost $4bn (£2.6bn) this week, in the face of a US investigation by the Securities and Exchange Commission (SEC) over securities fraud.

"This is probably one of the worst cases that we have seen," Mr Brown said. "There have been hundreds of millions of pounds that have been traded here and it looks as if people were misled about what happened. I want the Financial Services Authority [FSA] to investigate it immediately."

Mr Brown's comments are the latest twist to a drama which is likely to see Goldman come under ferocious political and regulatory scrutiny when it announces first-quarter results. Stock markets will also be braced for further falls this week as investors consider the repercussions of an investigation into the world's most profitable bank. Shares in Goldman – which denies the accusations, saying they have no basis in fact or in law – fell 13pc on Friday.

The FSA would not comment yesterday on whether it is investigating Goldman, but the bank is thought to have contacted the regulator on Friday after it was charged. Sources close to the situation say the FSA is assisting with the US investigation but stress the charges relate to activities that took place in America.

The FSA is under pressure to investigate Goldman because Royal Bank of Scotland, (RBS) the taxpayer-backed bank, was the biggest victim of the alleged fraud, losing $841m.

RBS is understood to be considering its options. The bank declined to comment.

German bank IKB, also bailed out by the taxpayer, lost $150m on the collateralised debt obligation (CDO). A German government spokesman said it will "make a request for information to the SEC" before considering "legal actions".

The SEC charges are also against a bond trader based in London, Fabrice Tourre. Goldman and Mr Tourre are accused of misleading investors by creating a subprime mortgage-backed CDO without informing investors that hedge fund Paulson & Co would be betting on its failure.

The FSA itself will also come under scrutiny this week as to why Mr Tourre was granted clearance to work in the UK in November 2008, following a transfer from Goldman's New York office, despite the SEC approaching Goldman months earlier about a potential probe into a CDO fraud. Sources close to the situation say Goldman did not tell the FSA about the investigation because the SEC had not said at that time it was specifically investigating Mr Tourre or the CDO in question, known as Abacus.

A Goldman spokesman, who would not comment on Mr Brown's criticism, said Mr Tourre had not been suspended and was free to come to work today because the bank believes he has done nothing wrong. However, it is not clear whether he will do so.

(4) Can America Still be the World's Greatest Power, as the World's Greatest Borrower?
From: IHR News <news@ihr.org> Date: 19.04.2010 03:00 PM

Lara Logan CBS News

WASHINGTON, April 8, 2010

http://www.cbsnews.com/stories/2010/04/08/eveningnews/main6377088.shtml

From the surface of the moon, to the factory floor - America's prosperity and power dominated much of the 20th century. But, as CBS News Chief Foreign Affairs correspondent Lara Logan reports, the world has changed.

"The mystique of American power I think is gone," said Aaron David Miller of the Woodrow Wilson International Center for Scholars.

The United States is no longer the sole power towering over the post-Cold War era.

"It's not so much we're declining, other countries are coming up," said James Baker, Former U.S. treasury secretary, and U.S. secretary of state.

The report card shows America's foundation is in peril. Most alarming? Deficits are projected to average over $900 billion a year through 2020. The average? $976 billion.

The nation's debt is the largest in history: $12 trillion and counting. That's over $80,000 for every American worker.

China is now the largest holder of U.S. debt. It's also the largest exporter and within the next five to seven years, it's expected to surpass the U.S. as the largest manufacturer in the world.

The Problem:

The problem for America is that its greatness has always been rooted in its economic dominance.

"We're in a real pickle," said Baker. "We will not be as important on the world scene if we continue to be a tremendously large debtor nation."

That debt has forced the U.S. to keep borrowing from foreign countries.

"Can the world's greatest power remain the world's greatest power and also be the world's greatest borrower?" Miller asked. "I don't think so."

Aaron David Miller served as an advisor to six secretaries of state and has witnessed a decline in American diplomatic power.

"We can't morally preach anymore about the virtues of American-style capitalism when we can't fix our own dysfunctional broken house."

And seemingly can't win two wars, Miller says, that have already cost over $1 trillion.

"We can't fix these places and yet we can't walk away from them," Miller said. "For a great power, that's the worst place to be."

Solutions:

The solution is to accept that many nations now have a seat at the table and can influence world outcomes.

Atlantic Magazine's James Fallows just returned after living in China for three years. "It was easier long ago to say well you have a couple big powers. Now you have a lot of big powers."

"China has a very, very long way to go before they have the dimensions of a national power that the U.S. does - maybe never," Fallows said.

Is American power on the decline?

"Not really, things are changing," Fallows replied. "Other countries are getting relatively stronger but it doesn't necessarily mean that the U.S. will decline in any way that really matters."

Fallows believes the changing world order will be a catalyst for an American comeback - much as fear of Soviet domination in the Sputnik era galvanized American education.

"The fact that the U.S. success will eventually end doesn't mean it has to end now - or 10 years from now - or 100 years from now if we do the right things," Fallow said.

What about that Chinese owned debt?

"If the U.S. dollar plummets in value - we suffer and so do the Chinese," Fallow said.

"Their debt is worth nothing then?" Logan asked.

"Yes, exactly," Fallows said.

Baker believes America's absolute power is still intact, for now.

"When I was treasury secretary everybody was writing that Japan Inc. was going to take over the world," Baker said. "America was in permanent decline."

We're in the same situation now with people talking about America's decline.

"I don't think it's going to happen provided - one big proviso - that we deal with this debt bomb," Baker said.

If we don't, Baker said, "Then it might happen."

The U.S. still remains the most important single power in the world. But in the time it took to watch this report, the national debt grew by nearly $18 million.

(5) China's state-owned corporations the main beneficiaries of Globalization

Time on China's side in power stakes

Rowan Callick, Asia Pacific editor    The Australian    April 16, 2010  12:00AM   

http://www.theaustralian.com.au/news/opinion/time-on-chinas-side-in-power-stakes/story-e6frg6zo-1225854250696

CONSENSUS is growing among Australian opinion-makers that China is already global top dog, so we must do whatever it takes to secure a cosy spot in the kennel.

Business commentator Bob Gottliebsen, for instance, wrote on Wednesday: "If America tries to regain superpower status by taking economic measures against China, the Americans will be the main sufferers, and the world will be a much less prosperous place It's important for Australia that the transfer of power be smooth."

And yesterday: "Australia has become a massive China play."

Gottliebsen gets much right, but it's easy to misread the nature of China's undoubted global power and Beijing's intentions.

The decision by China's President Hu Jintao to attend the nuclear summit hosted by US President Barack Obama this week underlined Beijing's growing awareness that its economic weight requires a leadership role.

In the past it has been reluctant to expose its leaders to events that are not cut and dried.

It was Premier Wen Jiabao - not Hu - who attended the Copenhagen summit on climate change, because the outcome remained open. Hu had no capacity to shift China's policy on the run, without referring it back to the party forums from which it had emerged.

But the weight of expectation on China to make or break that world summit on such a major issue marked a key transition. Only six months earlier, China had been placed among the "Plus Five" second-ranked participants at the G8 summit in Italy. Now the G20, in which China is a core player, has eclipsed the old G8.

However, China cannot be expected to exercise a leadership role in a way we have seen before. Deborah Seligsohn, China program director of the World Resources Institute, says: "It should not be surprising if China is cautious and often defensive as it explores a new role," because this is how it has traditionally viewed international relations.

The key global institutions of the mid to late 20th century were established without input from the People's Republic of China. It "generally assumed the role of an outsider", says Seligsohn. "Now China is expected to quickly transition to the ultimate insider."

The conventional character of diplomatic negotiations fits neatly into the way China's ruling Communist Party works these days: through soundings, long drafting processes, the building of a consensus between factions that are more fluid than clear-cut.

Hu is the ultimate committee-man, expert on picking up the sense of such discussions and summarising them. Such leaders have emerged from within the party's bureaucratic structure, not from the public electoral politics of the West or from the other big developing countries such as India or Brazil. The Chinese leaders cannot move from predetermined positions during negotiations.

This leads to lowest-common-denominator progress - for example, the time it is taking the Hu-Wen leadership team to realise its rhetoric of the past eight years about refocusing from pace and size of growth to quality of growth.

It is the state-owned corporations that have been the outstanding beneficiaries of growth, while wages have languished. China is already the world's second economy in size, but it remains a poor country, with its average income just $317 per month. It is a party-state whose institutions are markedly different from those of other countries that have taken leadership roles in the modern post-industrial world - except, to a degree, the USSR.

But the Soviet Union's economy ran parallel to the rest of the world's, and was not globally integrated as China's is.

The inclination of the Chinese leaders is to postpone awkward decisions at home. They would like to do the same in the international arena - for instance, over Iran's acquisition of nuclear weapons, just as they did over North Korea's. China favours committee-type processes such as the six-party talks to keep everyone negotiating for as long as possible, avoiding imperatives for action that might alienate one side or the other.

Beijing would like to do the same with its currency, postponing any significant adjustment. But here, as over Iran, China's new status is exposing it to pressure from which it is increasingly hard to hide in a committee.

Resisting US pressure is one thing, but as leading economist Arvind Subramanian points out, the poorer parts of the world are suffering a resulting loss in trade and growth from this protectionist trade policy which is arousing misgivings about a China too big and powerful for them to take on.

China's leaders worry that because the country's development remains a work in progress, and because its legitimacy is fragile, becoming a global model leaves it awkwardly exposed. Wen has thus explicitly ruled out exporting the China model.

Other vulnerabilities are emerging. Jerome Cohen, a top expert on China's legal system, wrote in the South China Morning Post: "The Chinese government wants the world to admire a `rising China' not only for its phenomenal economic accomplishments and growing military prowess but for the quality of its civilisation.

"Yet no matter how many Confucius institutes the government establishes abroad, the People's Republic will not win international respect for its political and social progress until it ceases locking up political dissidents and treats those currently detained in a more humane manner."

That's surely what Confucius himself would have advised.