Quote:Trains, water and power may be next in line for a bail-out

* Gaby Hinsliff, political editor
* The Observer,
* Sunday October 12 2008



The chancellor must take emergency steps to prevent rail, water and power companies going bust in the global economic storm, former cabinet minister Peter Hain has warned.

Hain, the former work and pensions secretary, urged the government to draw up reserve powers that could be used in the event of a major utility collapsing and taking vital services with it. His words follow jitters in the City about the damage a freeze in bank lending could do to some companies that have borrowed heavily to invest in infrastructure.

'We need to have a plan B in advance rather than playing catch-up. This is such a serious situation globally that having led the way, as the Prime Minister did worldwide in the rescue package for finance, we now need to put in place measures which could rescue vital infrastructure which can't be allowed to fail,' Hain told The Observer

'We may be in an area where simply for survival and resolution of this crisis there has to be much closer government intervention, way beyond the banks.'

He said it was 'moonshine' to think that the railways or private utilities could be re-nationalised but the government needed a contingency plan to re-capitalise critical services if necessary, just as it did last week by offering to buy shares in banks.

Currently, if a train operator goes bust, the government is required to step in and run services until a replacement can be found.

Jim Steer, a transport analyst and former director of the Strategic Rail Authority, has warned that if passenger numbers fall sharply a number of train operators are running on such tight margins that they might need to be bailed out.

Louise Ellman, chair of the Commons transport select committee, said the franchises as now worded left the government too exposed to picking up the pieces if an operator did go bust.

'That is one of the weaknesses of the current system, that it does depend on the operator continuing. The government would have to step into the breach if [one went bust]. You couldn't have a collapse of the public transport system.'

The Department for Transport said it had powers under the Railways Act to intervene.

Quote:Section 3: What will happen even though the "Hanktator Act" was enacted

Now that the Hanktator Act has been officially passed, I am modifying my predictions for what will happen going forward--even though at this point it's anybody's guess as to what the heck will take place next in this insane economic environment.

To wit:


1. As of October 12th, I am no longer sure that bank runs won't be coming soon to a neighborhood near you. Especially since the U.K., Germany and France are this weekend set to announce the effective nationalization of their banking systems and the U.S. expressed similar intentions this weekend. These governments would not be making these unprecdented moves in unison if they were not concerned that the banks were about to experience a panic run on them, in my opinion.

2. I am also no longer sure that the Federal Reserve will be the first one lined up at Treasury's window to start trading in the now-almost-one trillion or so fiatscos worth of totally dead assets it took on its balance sheet from failed financial institutions around the world. This is because the entire U.S. banking system is on the brink of failure and Hank Paulson is now stating that he will use the TRILLIONS of fiatscos authorized by Congress to try to stave off collapse and a run on the banks. So, the Fed may have to wait--perhaps forever--to ever deal off these dead "assets".


3. One thing is for certain: The U.S. government has made it a top priority that house prices will not fall any further. Instituting everything from outright foreclosure forebearance to the authorizing of Fannie and Freddie to start purchasing dead, toxic MBS, the feds are desperately trying to keep the housing collapse from continuing unabated. Whether or not they will be successful remains to be seen. However, if these latest actions fail, you be absolutely assured they WILL resort to even more radical measures--even including the federal government literally buying empty houses outright and moving sheeple into them at no cost.

4. Clearly the U.S. automobile industry has failed and will be nationalized in one form or another. Whether GM absorbs Ford and Chryslyer first and then is absorbed by the federal government or whether they are all nationalized individually (with perhaps one of them allowed to be dissolved), it is absolutely guaranteed that there will be a government bailout of the U.S. auto industry.

5. Sorry to have to report this, but I still see tens of millions of people thrown out of work and/or losing their business. Especially in the bloated, useless "F.I.R.E" (Financial, Insurance and Real Estate) sector.

6. I am now fairly confident that that the sheeple's 401(k)/IRA mutual funds are going to be destroyed one way or another. Either through the continued stock collapse (as of this writing the DJIA, S&P and NASDAQ have all crashed apprroximately 40%) or through confiscation/taxation of their funds/gains. There are already discussions going on in Washinton D.C. as to how the feds might start tapping into the trillions of fiatscos currently trapped in the 401(k)/IRA system.

7. I still can't decide whether the U.S. bond market crashes or skies. If our Asian and OPEC debt-enablers keep buying up the multiple-trillions-more fiatscos of Treasury debt we will be issuing to fund all the bailouts, then perhaps interest rates stay low.

However, if our debt-enablers demand higher interest rates to compenasate them for the risk, or the Federal Reserve have to step up and fling some fresh fiatscos to buy the debt, then all bets are off and we could see a full-blown bond crash.

8. While the U.S. fiatsco has been on an upward rocket shot these last few weeks as other currencies collapse, I cannot make a confident prediction that this trend will continue. I just don't know how the debt funding will play out and this will be a large determinate as to the relative value of the U.S. fiatsco going forward.

Quote:Germany has vetoed French and Italian ideas for an EU lifeboat fund. The former knows exactly where that leads. It is a Trojan horse that will be used one day to co-opt German taxpayers into rescues for less Teutonic EMU kin. One can sympathise with Berlin. But sharing debts with Italy and Spain was implicit when they agreed to launch the euro. A shared currency entails obligations. We have reached the watershed moment when Germany has to decide whether to put its full sovereign weight behind the EMU project or reveal that it is not prepared to do so in a crisis.

This is a very dangerous set of circumstances for monetary union. Will we still have a 15-member euro by Christmas?

Quote:Do not rejoice in his defeat, you men. For though the world has stood up and stopped the bastard, the bitch that bore him is in heat again.

Quote:Top Wall Street bankers to receive $70bn pay deals
Pay and bonus deals equivalent to 10% of US government bail-out package

Financial workers at Wall Street's top banks are to receive pay deals worth more than $70bn (£40.4bn), a substantial proportion of which is expected to be paid in bonuses, for their work so far this year - despite plunging the global financial system into its worst crisis since the 1929 stock market crash, the Guardian has learned.

Staff at six banks including Goldman Sachs and Citigroup will pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted widespread criticism. The government cash has been poured in on the condition that excessive executive pay will be curbed.

Pay plans for bankers have been disclosed in recent corporate statements. Pressure on the US firms to review preparations for annual bonuses increased today when Germany's Deutsche Bank said many of its leading traders would join chief executive Josef Ackermann in waiving millions of euro in annual payouts.

The sums that continue to be spent by Wall Street firms on payroll, payoffs and - most controversially - bonuses appear to bear no relation to the heavy losses incurred by investors in the banks. Shares in Citigroup and Goldman Sachs have declined by more than 45% since the start of the year; Merrill Lynch and Morgan Stanley have fallen by more than 60%. JP MorganChase fell 6.4% and Lehman Brothers has collapsed.

At one point last week Morgan Stanley's $10.7bn pay pot for the year to date was greater than the entire stock market value of the business. In effect, staff, on receiving their remuneration, could club together and buy the bank.

In the first nine months of the year Citigroup, which employs thousands of staff in the UK, accrued $25.9bn for salaries and bonuses, an increase on the previous year of 4%. Earlier this week the bank accepted a $25bn investment by the US government as part of its bail-out plan.

At Goldman Sachs the figure was $11.4bn, Morgan Stanley $10.73bn, JP MorganChase $6.53bn and Merrill Lynch $11.7bn. At Merrill, which was on the point of going bust last month before being taken over by Bank of America, the amount accrued in the last quarter grew 76% to $3.49bn. At Morgan Stanley, the amount put aside for staff compensation also grew in the last quarter to the end of September by 3% to $3.7bn.

Days before it collapsed into bankruptcy protection a month ago Lehman Brothers revealed $6.12bn of staff pay plans in its corporate filings. These payouts, the bank insisted, were justified despite net revenue collapsing from $14.9bn to a net outgoing of $64m. None of the banks the Guardian contacted wished to comment on the record about their pay plans.

Behind the scenes, one source said: "For a normal person the salaries are very high and the bonuses seem even higher. But in this world you get a top bonus for top performance, a medium bonus for mediocre performance and a much smaller bonus if you don't do so well."

Many critics of the investment banking model have questioned why firms continues to siphon off billions of dollars of bank earnings into annual bonus pools rather than using the funds to shore up the capital position of the crisis-stricken institutions. One banking source said: "That's a fair enough question - and it may well be that by the end of the year the banks start review the situation."

Much of the anger about investment banking bonuses has focused on boardroom executives such as former Lehman boss Dick Fuld, who was paid $485m in salary, bonuses and options between 2000 and 2007. Last year Merrill Lynch chairman Stan O'Neal retired after announcing losses of $8bn, taking a final pay deal worth $161m. Citigroup boss Chuck Prince left last year with a $38m in bonuses, shares and options after multibillion-dollar write-downs.

In Britain, Bob Diamond, Barclays president, is one of the few investment bankers whose pay is made public. Last year he received a salary of £250,000, but his total pay, including bonuses, reached £36m.

One London-based banking source, who worked for a US bank, said many in the City were expecting star traders to see little reduction in their bonuses.

"The real 'rain-makers' will not notice an impact. It will be the more middle-ranking people who will be really hit."

Quote:Bankers' £16bn bonus bonanza

City bankers have not lost a penny of their multimillion-pound bonus packages so far, despite the credit crunch which has caused the worst financial crisis in 80 years, new figures show.

Official statistics reveal that, in the financial year to April, City workers took home £16bn, almost exactly the same as in 2007. The period covers the Northern Rock nationalisation and the UK employees hit by the Bear Stearns implosion. During the period, banks across the world were forced to make huge writedowns on investments linked to US subprime mortgages.

Bonus payments in the UK financial sector have more than trebled in just over five years, from £5bn in 2003, according to the Office for National Statistics (ONS). This is shared among just over one million employees in the sector, but that is heavily skewed towards the high-powered executives, who are routinely handed seven-figure packages.

Last year, Bob Diamond, the president and head of investment banking at Barclays whose base salary was £250,000, was paid £18m after bonuses and options were taken into account.

The remuneration figures were released only days after Gordon Brown vowed to wage war on the "irresponsible" bonus culture that had helped cause the financial crisis gripping Britain. Financial sector payments made up about two-thirds of the bonuses across the entire British economy. Total bonus payments last year hit £28bn, which has doubled over the past eight years.

Last night politicians and union officials said it was deeply concerning that such large bonuses were still being paid even when the financial markets were clearly deteriorating.

Vince Cable, the Liberal Democrat Treasury spokesman, said: "It is deeply alarming that, after what has happened in financial markets, no lessons have been learnt. The bonus culture was deeply destabilising and contributed to the crisis."

Derek Simpson, the joint general secretary for the Unite trade union, added: "This is evidence that the City bonus system is rotten to the core. These bankers are being rewarded for failures which have had devastating consequences for our economy." He called on the authorities to tackle the problem head on, saying: "It is time for the Government and the Financial Services Authority to get really tough and stamp out the bonus culture in the City."

Yesterday provided some slight relief for the battered UK markets. The week had seen staggering losses across the globe, with London's blue chip index slumping to its lowest point in five years as fears of a worldwide recession intensified. Yesterday the FTSE 100 rose 2 per cent with investor confidence returning in the banks as well as the oil companies, after the oil price bounced back to more than $70 a barrel.

The mining companies continued to suffer as metal prices fell further on fears of slowing demand from China. It was further hit by hedge funds forced into selling to cover losses elsewhere. There was bad news for the French bank Caisse d'Epargne, however, which admitted shock losses of €600m (£470m) from derivatives trading.

The inflation-busting bonus numbers emerged on the day that Josef Ackermann, chief executive of Germany's biggest financial services group, Deutsche Bank, pledged to relinquish his bonus, which would have run into "millions of euros".

He told the German newspaper Bild am Sonntag: "I told the Deutsche Bank supervisory board that I am renouncing my bonus in this difficult year in favour of hard-working staff that need the money more than I do." The three other senior board members agreed, who received a combined payment of £4.3m.

Mr Cable welcomed the move and called on the financial services sector in the UK to take a page out of Mr Ackermann's book. He said that, as banks' remuneration committees prepare to decide next year's bonuses, "until regulation is put in place it would be good to see some self-restraint from those who work in the financial services".

The Government's official bonus numbers are compiled from those paid during bonus season – the period from December 2007 to April 2008. The latest figures show no decline in rewards, despite the City being at least six months into the credit crunch when the payments started.

The issue of bonuses has become a huge political issue this year, with investors furious over bankers taking rewards in a year that many banks have declined or even collapsed.

Following the Government's £37bn rescue package for Royal Bank of Scotland, HBOS and Lloyds TSB this month, the Prime Minister said he wanted to "bring an end to rewards for failure". He said: "The guiding idea is fair reward for hard work, effort and enterprise, not incentives for irresponsibility or excessive risk-taking for which the rest of us have paid."

A critical problem of the bonuses, as highlighted by Mr Brown and Mr Cable, was their promotion of huge risks for a short-term gain. Bonuses should be paid in shares, which could not be sold for several years to track the performance of a company over the long term, Mr Cable added.

The FSA, the City watchdog, has begun to scrutinise the issue of bonuses, and sent a letter to bank chief executives, calling for bonuses to be aligned with "sound risk-management practices and controls". So far the FSA is yet to impose regulations, but said it would demand more regulatory capital for those that do not heed its warning on risk.

Quote:If Warren Buffett is buying shares, should you?

The answer, unequivocally, is yes. That is, if you can get Warren's terms. And even if you can get those sweet deals, be careful.
Those are the warnings investors should heed after Buffett's now infamous commentary was published in the New York Times on Friday, "Buy American. I Am." Judging by the market's response -- the Dow Jones Industrial Average was up nearly 3% in afternoon trading -- investors are following America's most famous investor. See Buffett commentary.
But those same investors should be careful. It's not that Buffett isn't smart, he is. But at this stage of the game, Warren Buffett doesn't buy stocks on the open market by calling his broker, he buys them in bulk.
For instance, he didn't just go out and buy battered shares of General Electric Co.
on the open market Oct. 1. He also received $3 billion in special, preferred stock. Those shares will pay a 10% dividend for at least three years and if, after that, GE wants to buy it back they will have to pay him 10%. Buffett also got warrants to buy GE stock that at the time was worth a 13% discount to existing shares.
The same principle applied with his investment in Goldman Sachs Group Inc.
just a week earlier. Buffett again bought $5 billion in preferred stock. He'll get the same 10% dividend and $5 billion in warrants at $115.
The problem for Buffett is that his warrants were becoming worthless as GE and Goldman stock fell. One cheap, easy way for Buffett to reverse his losses is by penning an editorial using his huge sway, folksy style, and hints of patriotism to stir up some buying.
Buffett made the point that he's using his personal account to buy stocks. That may be true and his heart may be in the right place, but it's also true that Buffett's fame, success and fortune ride with his investment company Berkshire Hathaway , not his personal account.
Investors should, in the end, be mindful of Buffett's advice, "Be fearful when others are greedy, and be greedy when others are fearful."
And when the "others" are investors driving very greedy sweetheart deals?
Wait until you can get your own.
-- David Weidner