there is a war of words between developed and developing countries/regions during this supposedly consensus building summit on carbon emission caps.
when it comes to national interest, there is no letting off from the developed world that penalty [suspension of financial aid] should be imposed on developing countries if carbon emissions are over the agreed limits, what penalty do they impose on themselves!!! they [developed countries] are already drafting the final agreement accord even before consensus can be reached, how hypocritical!!!
check below for simple ways to cap carbon emissions, but even green associations do not recommend such solutions, wonder why???
bottled water
if we stop buying bottled water and carry our own plastic bottle of water, refill them at home, office or the parks, then the shipment of bottled water from countries to countries, city to city, then to stores can all be eliminated thus saving a whole lot of fuel. the manufacturing of such will come to a standstill which also saves energy, but not jobs. eliminating bottled water will reduce carbon emissions by 1-2% immediately.
cruise
this type of leisure travel is using the lowest grade of fuel, creating a lot of waste that add to carbon emissions, skipping such leisure will eliminate 3-5% emissions.
liquid soap and shampoo
liquid soap is heavy that requires more fuel to get them to stores before we buy it, the packaging also is polluting as it requires plastic bottles. solid soap is paper wrapped and much lighter, occupies less space at stores which use up less fuel to transport them and also less electricity to light up at stores. if we stop using liquid soap, then we save a lot of energy too and also reduce carbon emissions.
12 December 2009
KKR
Those of you who know about KKR and Berkshire should read this article from wsj, lbo is down and out.
Can KKR Make Like Berkshire Hathaway?
Henry Kravis and George Roberts built their private equity giant on swashbuckling deals. Now they want a more diversified firm that can finance its own—the way Warren Buffett does
By Emily Thornton
It's difficult to believe that Henry Kravis could suffer from portfolio envy. The private equity titan and co-founder of Kohlberg Kravis Roberts (KFN) is famous for his ability to buy and sell companies for profit. It's a skill that has made him enormously wealthy over his 33 years at KKR's helm: Kravis, 65, is worth an estimated $3.8 billion, according to Forbes. His firm owns or holds stakes in 51 companies with combined annual revenues of $218 billion—more than double that of private equity rivals Blackstone (BX) and the Carlyle Group. Among KKR's big-name holdings: retailer Toys "R" Us, research firm Nielsen, and hospital giant HCA.
Yet as he sits in his sparsely decorated office overlooking the south end of New York's Central Park, Kravis' thoughts drift west, to Omaha, the home of financial conglomerate Berkshire Hathaway (BRK.A). "He can make any kind of investment he wants," Kravis says of Berkshire CEO Warren Buffett, the object of his admiration. "And he never has to raise money." Kravis thinks Berkshire, with its piles of cash and trove of publicly traded shares with which to make acquisitions, is nothing less than "the perfect private equity model."
What Kravis and co-founder George Roberts, 66, covet most is Buffett's ability to pounce on deals of all sizes in any economic environment. "He has certain advantages over us," says Kravis. "I would like to see us create those advantages for ourselves."
That the storied dealmakers at KKR are acknowledging their shortcomings says much about the state of the leveraged buyout business. There was a time when private equity firms could easily collect money from investors, borrow more from banks, use the cash to buy companies, rejigger their finances, and then sell or take them public for a quick profit. When banks stopped lending in 2007 the dealmaking ground to a halt, and firms were left holding a slew of overleveraged companies they couldn't unload. All told, 543 private-equity-owned companies in the U.S. have gone bankrupt in the past two years, according to Capital IQ (MHP)—including two of KKR's: real estate lender Capmark Financial Group and doormaker Masonite. As a result, KKR's returns have suffered.
Kravis and Roberts could try to wait out the rough patch, nursing their wounds and promising investors they'll do better once the deal environment improves. Instead they're reshaping KKR's three-decade-old playbook. The financial crisis has taught the granddaddies of private equity many things. They must be nimbler and quicker. They must move beyond the audacious leveraged buyouts that have come to define private equity in the popular imagination—most famously, their 1989 acquisition of RJR Nabisco. They can't rely solely on debt to pay for their deals. They need, as Kravis puts it, "more control over our destiny."
The two have cooked up a four-part plan to make it happen. First, they're building an in-house investment bank to serve KKR's portfolio companies. Second, they're taking KKR public, with shares expected to be on the New York Stock Exchange (NYX) in early 2010, in hopes of one day using the newly minted stock to make acquisitions and invest in the firm. (It listed 30% of KKR in Amsterdam in October.) Third, while Kravis and Roberts certainly aren't abandoning buyouts, they're placing more emphasis on minority stakes and joint ventures with companies in a broader array of sectors. Finally, they're adopting new management techniques to preserve KKR's tight-knit culture as the company expands.
Other private equity firms see the value in KKR's emulating Buffett. "This makes sense for them," says John Canning, chairman of buyout shop Madison Dearborn Partners. "A firm that big can't rely [solely] on historical methods of capital raising anymore. Things change." If Kravis and Roberts get this experiment right, their strategy could point the way for other buyout firms. Even bankers acknowledge the need for firms to move beyond leveraged deals. "Private equity will become broader and broader," predicts Morgan Stanley CEO John J. Mack. "Instead of buying companies and restructuring them, they will have a whole panoply of investments."
Of course, KKR isn't alone among buyout shops in wanting to tap the public markets. Blackstone and Fortress Investment Group (FIG) got a head start, selling shares in 2007. But the financial crisis was cruel to their stocks: Even after a recent rally, they're down 57% and 79%, respectively, since their debuts.
KKR, in contrast, is going public at a time when the markets are on the mend. Call it patience or dumb luck, either way it could pay off. Since bottoming in March, Blackstone shares are up 245%, while Fortress' stock has jumped 272%. "These stocks were decidedly out of favor," says Michael Holland, chairman of Holland & Co., a New York investment firm. "But smart money that went in over the last several months has done very well."
ANSWERING TO MANY
Kravis is the first to say KKR will never become Berkshire East. After all, Berkshire's source of strength is its 32-year-old insurance business, which boasts an estimated $110 billion in assets, something KKR can't easily whip up for itself. What's more, Buffett built Berkshire over many decades using equity, not just debt, to buy companies. Kravis is just now venturing down that path.
There are more immediate challenges. Once KKR goes public, it will face intense scrutiny from many quarters. "Going public makes the firm accountable to many groups—the SEC, stockholders, and the exchanges," warns Edwin Burton, a trustee for the Virginia Retirement System. Adds Charles R. Schwab, founder and chairman of Charles Schwab Corp. and a longtime friend of Roberts: "I told George to think long and hard about jumping into the fish bowl."
As KKR polishes its investor-relations skills it must be careful not to alienate the pension funds, university endowments, and other wealthy investors who put money directly into KKR's buyout funds and are increasingly sensitive to fees. They pay KKR a hefty management fee of 1.5% or more of their assets and 20% of the profits. For that they expect the firm to concentrate on selling companies—not on branching out into new businesses. "We're trying to take a long, hard look at fees across the board and make sure they're justified," says Jay Fewel, a senior investment officer at the Oregon State Treasury, one of KKR's investors.
There's also a danger that, as KKR expands, Kravis and Roberts could lose focus on its main business. "The more you scale an organization, the less impact key individuals have on investment decisions," says Jeff Ennis, chief investment officer at Wilshire Associates. Already there's reason for concern. Fitch Ratings issued a report in October warning that six companies in which KKR has invested—Energy Future Holdings, HCA, First Data, Toys "R" Us, Nielsen, and Sungard Data Systems—could soon face trouble repaying their debt, though Kravis says the worries are overblown.
LBO VETS
On a dreary Wednesday in October at KKR headquarters in New York, Kravis, in a crisp white shirt and blue tie, is leading a meeting of KKR's portfolio management committee, with Roberts joining by videoconference from KKR's Menlo Park (Calif.) office. Their close relationship has been a key to KKR's success over the years. The cousins played together as kids and studied at the same college, Claremont McKenna in Southern California. After going their separate ways for graduate school they reconnected at Bear Stearns, where they worked on some of Wall Street's first leveraged buyouts. In 1976 both left Bear to form KKR with colleague Jerome Kohlberg. (He quit KKR in 1987 at age 61.) Decades of mind-melding have left Kravis and Roberts able to finish each other's sentences, a feat they perform often. When Roberts visits KKR's New York headquarters, he dips into the stash of Toblerone chocolate, jelly beans, and caramel Nips in the top drawer of Kravis' desk. Kravis says the last time the two disagreed with each other was when they fought over a bicycle—in 1951.
But Kravis and Roberts don't dominate KKR's internal operations as they once did. While the two say they have no intention of retiring soon, they're handing more authority to the firm's other senior executives. During the portfolio committee meeting, the people with the most questions aren't Kravis or Roberts but members of KKR's senior adviser group—21 current and former corporate executives whom KKR pays to dispense wisdom on matters of strategy, investing, and management. Among them: former CEOs George M. C. Fisher of Eastman Kodak (EK), Lee Raymond of ExxonMobil (XOM), and Joe Forehand of Accenture.
Even the look of the place has changed. A few years ago, Kravis and Roberts ditched KKR's collection of classic 19th century English paintings and early 20th century American art and replaced them with abstract modern pieces. Huge, black tribal masks now dominate the New York headquarters, while bold fluorescent light fixtures stand out in Menlo Park. "At first, a lot of people hated it," Roberts says.
Kravis and Roberts say they hoped the visual stimulation would inspire their staff to think creatively. Rivals like Blackstone and Carlyle were racing ahead in building out new businesses such as hedge funds and venture funds, and were planting flags around the globe. KKR wanted its troops to dream up ways it could diversify.
KKR's makeover began in 2006 when Kravis, Roberts, and partner Scott C. Nuttall decided to act on one of those new ideas: to create an in-house financial services operation. Wall Street investment banks were beginning to launch private equity funds, but no big buyout firm had tried to provide its own financing. KKR recruited Craig J. Farr, a managing director in the capital markets at Citigroup (C), to build the group. Farr's job was to establish a business from scratch that could secure financing for buyouts, refinance companies while they were in KKR's possession, and then help take those companies public when KKR was ready to sell. He didn't seek to have it join Goldman Sachs (GS) and Morgan Stanley among the world's full-fledged investment banks. Instead, his goal was merely to serve the companies KKR controlled so it could get better terms on loans and keep some of the fees it was paying to bankers.
The idea wasn't an easy sell among KKR's dealmakers, who had strong relationships with big banks. Farr says he would get calls from Goldman about KKR deals he wasn't aware of. He had to convince his colleagues that his group wouldn't interfere with their projects, and told them they could still reach out to outside bankers; he just wanted to be part of the process. The ice thawed only after Kravis and Roberts mandated that everyone start using the group extensively.
With the disappearance of major players like Merrill Lynch (MER), Bear Stearns, and Lehman Brothers in 2008, KKR suddenly had an opportunity to pounce. As rivals were wriggling out of loan commitments, "the downturn helped us," says Farr.
STREET CRED ON THE LINE
In November, Farr's team reached a milestone when it served as lead underwriter of an IPO for the first time. The process wasn't as smooth as Farr would have hoped. Back in August, Farr and two members of his 15-person group pitched Dollar General (DG), one of KKR's holdings, to be one of the lead underwriters in its upcoming IPO. Farr promised the white-glove treatment of a boutique firm, and suggested the big banks would view Dollar General as just another transaction. It didn't hurt that KKR owned the company. Dollar General signed on, and Farr's team got to work on the deal. Among other things, Farr's team arranged for Fidelity and Sanford C. Bernstein to distribute the shares to their customers.
But by October the deal was in trouble. The stock market began to slump, and IPOs were performing poorly. KKR insiders feared the Dollar General deal would flop, too. Kravis and Roberts started e-mailing and calling Farr daily to emphasize what he already knew: The offering had to succeed. KKR's Street cred was on the line. "There was a lot of pressure," says Farr.
As the Nov. 12 IPO approached, Farr scrambled. He put two senior members of KKR's deal team on the phone with investors to answer any questions they might have and sussed out which potential investors were likely to hold the stock for a long time and which weren't. The last-minute push worked: General's stock priced within the range KKR had promised and rose 8.2% during its first day in trading. Dollar General raised $716 million. KKR pocketed $10 million as one of three lead underwriters, alongside Goldman and Citigroup.
Farr's team has served KKR's buyout funds in other ways recently. In July, when outside banks weren't lending, it arranged the loans and debt for KKR to buy the South Korean unit of Anheuscher Busch InBev for $1.8 billion. And it rounded up investors for a significant portion of the debt needed to pull off KKR's Nov. 8 purchase of a Northrop Grumman consulting division for $1.65 billion, with partner General Atlantic. One of the investors was KKR's $13 billion debt fund.
WHAT WILL THE PROS SAY?
Buffett, who declined to comment for this article, has little affection for private equity. He blasted the industry in his annual shareholders' letter in March, accusing it of piling debt on companies and burdening them with enormous fees. Whereas Berkshire has just $38 billion of debt spread across 76 companies, according to data compiled by Bloomberg, KKR's 51 companies carry at least $170 billion.
One of the reasons Kravis wants to take KKR public is so that he, like Buffett, can use his stock as a tool to buy companies, or slivers of them. Shareholders give Buffett so much lattitude to buy companies in part because he has delivered strong results for them for decades. Kravis wants that kind of freedom, too. "We're not just a private equity firm," says Kravis. "We're an asset management firm....If all you're going to do is say you'll buy 100% of companies, you're passing up a lot of opportunities where you can make a lot of money."
Perhaps, but some of the professional investors who put money into KKR funds expecting it to buy and sell companies aren't keen on KKR's taking too many minority investments in public companies, like an ordinary mutual fund. "I'm not opposed" to those deals, says Mario Giannini, CEO of KKR investor Hamilton Lane. "But if there are a lot of them, you have to question if you're paying private equity fees for public equity investing." In that sense, Buffett's "perfect private equity model," in Kravis' words, doesn't fully translate to KKR.
One transaction from September illustrates how KKR can play an active role in managing companies even when it doesn't take full control of them. Early in the year two members of KKR's tech group, Herald Y. Chen and Adam H. Clammer, pitched their bosses on an investment in Eastman Kodak. The two had examined taking Kodak private on numerous occasions over the last decade, but for one reason or another it never came to pass. This time both parties were willing to explore all options. Kodak needed cash to expand its ink-jet printer business for retail consumers as well as its commercial printing and scanning businesses. But with the debt markets frozen at the start of 2009, Kodak couldn't raise money cheaply by issuing bonds or taking out loans. It began kicking around the idea of selling a stake instead. For KKR, this presented an opportunity for a new kind of dealmaking: Instead of taking over Kodak outright, it could become a partner.
Chen and Clammer performed due diligence for six months, talking extensively with Farr's capital markets group about how to structure a deal amid such volatile markets. They also reached out to KKR's in-house team of operational executives who parachute into companies to turn them around. And they talked with Fisher, the former Kodak CEO who now works for KKR, about how Kodak's operations could be improved.
As the two sides examined the numbers, Kodak's current CEO, Antonio M. Perez, visited Kravis in New York and Roberts in California. He wanted to know whether they shared his view that Kodak's stock was undervalued and whether they intended to be long-term shareholders. Kravis and Roberts convinced him of both. "That was the key," Perez says. "They believed in the value-creation opportunity we thought we had."
KKR also sold Perez on the potential for Kodak to tap its 51 companies as customers and suppliers. The two sides agreed that KKR would take two seats on Kodak's board and that KKR would deploy its in-house managers to work on new growth opportunities. An hour after the deal closed on Sept. 16, Kodak formed the "K Squared" team, which consists of seven Kodak executives and six KKR operational executives. The group, which meets monthly, aims to find ways Kodak can sell more to KKR's companies, ramp up its sales force, and make acquisitions. Since the deal closed, at least six KKR-owned companies have gotten involved in dialogues with Kodak about how they can work together.
K-Squared hasn't been around long enough to affect Kodak's quarterly profit results. Investors, though, don't seem optimistic. Kodak's long-suffering share price has fallen by 36% since the deal closed. "It's a long-term investment," says Kravis. "We got involved in this because we knew it was a turnaround."
CORE VALUES AND LONGEVITY
For Kravis and Roberts, the biggest challenges in remaking their company may be internal. They'll have to figure out on the fly how to grow quickly without falling prey to Big Company syndrome. With headcount having tripled since 2004, from 204 people to 637, Kravis and Roberts fear KKR could become siloed and bureaucratic. The two now consult regularly with senior adviser Rajat K. Gupta, a former global managing director at McKinsey & Co., for thoughts on the best way to manage the expansion. Gupta saw similar growth at McKinsey: The firm's professional staff grew from 500 to 9,000 during his 35-year tenure there. "The vision," says Gupta, "is to develop a premier global institution for alternative investments."
More than anything, Kravis and Roberts want to create a mature, meritocratic company that will long outlast them. To drive that point home, the two have begun tying part of KKR compensation to how much an executive takes advantage of all the firm's new capabilities.
But Gupta has pressed them to do more, sometimes veering into touchy-feely territory. In May, at Gupta's urging, KKR partners and managing directors from around the world gathered in New York to talk about how they were adhering to the firm's "core values" (integrity, respect, teamwork, excellence, innovation, accountability, fortitude, and sharing). There were no "trust falls" during the four-hour meeting at the New York Sheraton Hotel and Towers, but between bites of deli sandwiches the team discussed how they could improve the way KKR is carrying out its new mission and improve its internal and external communication. Another Gupta idea: As part of the annual 360-degree performance-review process, 12 partners now must conduct in-depth interviews of 72 executives at the firm.
These sorts of things don't seem like the province of buyout barons. Then again, what choice do Kravis and Roberts have when the rules of the game have changed? Loading mounds of debt on a company in hopes of selling it later for a big profit is a technique befitting a "cave man," says Kravis. "The days are long gone when you just buy a company and hope that financial engineering will work. Our job today is to create value. Private equity, to me, is acting and thinking like an industrialist."
Can KKR Make Like Berkshire Hathaway?
Henry Kravis and George Roberts built their private equity giant on swashbuckling deals. Now they want a more diversified firm that can finance its own—the way Warren Buffett does
By Emily Thornton
It's difficult to believe that Henry Kravis could suffer from portfolio envy. The private equity titan and co-founder of Kohlberg Kravis Roberts (KFN) is famous for his ability to buy and sell companies for profit. It's a skill that has made him enormously wealthy over his 33 years at KKR's helm: Kravis, 65, is worth an estimated $3.8 billion, according to Forbes. His firm owns or holds stakes in 51 companies with combined annual revenues of $218 billion—more than double that of private equity rivals Blackstone (BX) and the Carlyle Group. Among KKR's big-name holdings: retailer Toys "R" Us, research firm Nielsen, and hospital giant HCA.
Yet as he sits in his sparsely decorated office overlooking the south end of New York's Central Park, Kravis' thoughts drift west, to Omaha, the home of financial conglomerate Berkshire Hathaway (BRK.A). "He can make any kind of investment he wants," Kravis says of Berkshire CEO Warren Buffett, the object of his admiration. "And he never has to raise money." Kravis thinks Berkshire, with its piles of cash and trove of publicly traded shares with which to make acquisitions, is nothing less than "the perfect private equity model."
What Kravis and co-founder George Roberts, 66, covet most is Buffett's ability to pounce on deals of all sizes in any economic environment. "He has certain advantages over us," says Kravis. "I would like to see us create those advantages for ourselves."
That the storied dealmakers at KKR are acknowledging their shortcomings says much about the state of the leveraged buyout business. There was a time when private equity firms could easily collect money from investors, borrow more from banks, use the cash to buy companies, rejigger their finances, and then sell or take them public for a quick profit. When banks stopped lending in 2007 the dealmaking ground to a halt, and firms were left holding a slew of overleveraged companies they couldn't unload. All told, 543 private-equity-owned companies in the U.S. have gone bankrupt in the past two years, according to Capital IQ (MHP)—including two of KKR's: real estate lender Capmark Financial Group and doormaker Masonite. As a result, KKR's returns have suffered.
Kravis and Roberts could try to wait out the rough patch, nursing their wounds and promising investors they'll do better once the deal environment improves. Instead they're reshaping KKR's three-decade-old playbook. The financial crisis has taught the granddaddies of private equity many things. They must be nimbler and quicker. They must move beyond the audacious leveraged buyouts that have come to define private equity in the popular imagination—most famously, their 1989 acquisition of RJR Nabisco. They can't rely solely on debt to pay for their deals. They need, as Kravis puts it, "more control over our destiny."
The two have cooked up a four-part plan to make it happen. First, they're building an in-house investment bank to serve KKR's portfolio companies. Second, they're taking KKR public, with shares expected to be on the New York Stock Exchange (NYX) in early 2010, in hopes of one day using the newly minted stock to make acquisitions and invest in the firm. (It listed 30% of KKR in Amsterdam in October.) Third, while Kravis and Roberts certainly aren't abandoning buyouts, they're placing more emphasis on minority stakes and joint ventures with companies in a broader array of sectors. Finally, they're adopting new management techniques to preserve KKR's tight-knit culture as the company expands.
Other private equity firms see the value in KKR's emulating Buffett. "This makes sense for them," says John Canning, chairman of buyout shop Madison Dearborn Partners. "A firm that big can't rely [solely] on historical methods of capital raising anymore. Things change." If Kravis and Roberts get this experiment right, their strategy could point the way for other buyout firms. Even bankers acknowledge the need for firms to move beyond leveraged deals. "Private equity will become broader and broader," predicts Morgan Stanley CEO John J. Mack. "Instead of buying companies and restructuring them, they will have a whole panoply of investments."
Of course, KKR isn't alone among buyout shops in wanting to tap the public markets. Blackstone and Fortress Investment Group (FIG) got a head start, selling shares in 2007. But the financial crisis was cruel to their stocks: Even after a recent rally, they're down 57% and 79%, respectively, since their debuts.
KKR, in contrast, is going public at a time when the markets are on the mend. Call it patience or dumb luck, either way it could pay off. Since bottoming in March, Blackstone shares are up 245%, while Fortress' stock has jumped 272%. "These stocks were decidedly out of favor," says Michael Holland, chairman of Holland & Co., a New York investment firm. "But smart money that went in over the last several months has done very well."
ANSWERING TO MANY
Kravis is the first to say KKR will never become Berkshire East. After all, Berkshire's source of strength is its 32-year-old insurance business, which boasts an estimated $110 billion in assets, something KKR can't easily whip up for itself. What's more, Buffett built Berkshire over many decades using equity, not just debt, to buy companies. Kravis is just now venturing down that path.
There are more immediate challenges. Once KKR goes public, it will face intense scrutiny from many quarters. "Going public makes the firm accountable to many groups—the SEC, stockholders, and the exchanges," warns Edwin Burton, a trustee for the Virginia Retirement System. Adds Charles R. Schwab, founder and chairman of Charles Schwab Corp. and a longtime friend of Roberts: "I told George to think long and hard about jumping into the fish bowl."
As KKR polishes its investor-relations skills it must be careful not to alienate the pension funds, university endowments, and other wealthy investors who put money directly into KKR's buyout funds and are increasingly sensitive to fees. They pay KKR a hefty management fee of 1.5% or more of their assets and 20% of the profits. For that they expect the firm to concentrate on selling companies—not on branching out into new businesses. "We're trying to take a long, hard look at fees across the board and make sure they're justified," says Jay Fewel, a senior investment officer at the Oregon State Treasury, one of KKR's investors.
There's also a danger that, as KKR expands, Kravis and Roberts could lose focus on its main business. "The more you scale an organization, the less impact key individuals have on investment decisions," says Jeff Ennis, chief investment officer at Wilshire Associates. Already there's reason for concern. Fitch Ratings issued a report in October warning that six companies in which KKR has invested—Energy Future Holdings, HCA, First Data, Toys "R" Us, Nielsen, and Sungard Data Systems—could soon face trouble repaying their debt, though Kravis says the worries are overblown.
LBO VETS
On a dreary Wednesday in October at KKR headquarters in New York, Kravis, in a crisp white shirt and blue tie, is leading a meeting of KKR's portfolio management committee, with Roberts joining by videoconference from KKR's Menlo Park (Calif.) office. Their close relationship has been a key to KKR's success over the years. The cousins played together as kids and studied at the same college, Claremont McKenna in Southern California. After going their separate ways for graduate school they reconnected at Bear Stearns, where they worked on some of Wall Street's first leveraged buyouts. In 1976 both left Bear to form KKR with colleague Jerome Kohlberg. (He quit KKR in 1987 at age 61.) Decades of mind-melding have left Kravis and Roberts able to finish each other's sentences, a feat they perform often. When Roberts visits KKR's New York headquarters, he dips into the stash of Toblerone chocolate, jelly beans, and caramel Nips in the top drawer of Kravis' desk. Kravis says the last time the two disagreed with each other was when they fought over a bicycle—in 1951.
But Kravis and Roberts don't dominate KKR's internal operations as they once did. While the two say they have no intention of retiring soon, they're handing more authority to the firm's other senior executives. During the portfolio committee meeting, the people with the most questions aren't Kravis or Roberts but members of KKR's senior adviser group—21 current and former corporate executives whom KKR pays to dispense wisdom on matters of strategy, investing, and management. Among them: former CEOs George M. C. Fisher of Eastman Kodak (EK), Lee Raymond of ExxonMobil (XOM), and Joe Forehand of Accenture.
Even the look of the place has changed. A few years ago, Kravis and Roberts ditched KKR's collection of classic 19th century English paintings and early 20th century American art and replaced them with abstract modern pieces. Huge, black tribal masks now dominate the New York headquarters, while bold fluorescent light fixtures stand out in Menlo Park. "At first, a lot of people hated it," Roberts says.
Kravis and Roberts say they hoped the visual stimulation would inspire their staff to think creatively. Rivals like Blackstone and Carlyle were racing ahead in building out new businesses such as hedge funds and venture funds, and were planting flags around the globe. KKR wanted its troops to dream up ways it could diversify.
KKR's makeover began in 2006 when Kravis, Roberts, and partner Scott C. Nuttall decided to act on one of those new ideas: to create an in-house financial services operation. Wall Street investment banks were beginning to launch private equity funds, but no big buyout firm had tried to provide its own financing. KKR recruited Craig J. Farr, a managing director in the capital markets at Citigroup (C), to build the group. Farr's job was to establish a business from scratch that could secure financing for buyouts, refinance companies while they were in KKR's possession, and then help take those companies public when KKR was ready to sell. He didn't seek to have it join Goldman Sachs (GS) and Morgan Stanley among the world's full-fledged investment banks. Instead, his goal was merely to serve the companies KKR controlled so it could get better terms on loans and keep some of the fees it was paying to bankers.
The idea wasn't an easy sell among KKR's dealmakers, who had strong relationships with big banks. Farr says he would get calls from Goldman about KKR deals he wasn't aware of. He had to convince his colleagues that his group wouldn't interfere with their projects, and told them they could still reach out to outside bankers; he just wanted to be part of the process. The ice thawed only after Kravis and Roberts mandated that everyone start using the group extensively.
With the disappearance of major players like Merrill Lynch (MER), Bear Stearns, and Lehman Brothers in 2008, KKR suddenly had an opportunity to pounce. As rivals were wriggling out of loan commitments, "the downturn helped us," says Farr.
STREET CRED ON THE LINE
In November, Farr's team reached a milestone when it served as lead underwriter of an IPO for the first time. The process wasn't as smooth as Farr would have hoped. Back in August, Farr and two members of his 15-person group pitched Dollar General (DG), one of KKR's holdings, to be one of the lead underwriters in its upcoming IPO. Farr promised the white-glove treatment of a boutique firm, and suggested the big banks would view Dollar General as just another transaction. It didn't hurt that KKR owned the company. Dollar General signed on, and Farr's team got to work on the deal. Among other things, Farr's team arranged for Fidelity and Sanford C. Bernstein to distribute the shares to their customers.
But by October the deal was in trouble. The stock market began to slump, and IPOs were performing poorly. KKR insiders feared the Dollar General deal would flop, too. Kravis and Roberts started e-mailing and calling Farr daily to emphasize what he already knew: The offering had to succeed. KKR's Street cred was on the line. "There was a lot of pressure," says Farr.
As the Nov. 12 IPO approached, Farr scrambled. He put two senior members of KKR's deal team on the phone with investors to answer any questions they might have and sussed out which potential investors were likely to hold the stock for a long time and which weren't. The last-minute push worked: General's stock priced within the range KKR had promised and rose 8.2% during its first day in trading. Dollar General raised $716 million. KKR pocketed $10 million as one of three lead underwriters, alongside Goldman and Citigroup.
Farr's team has served KKR's buyout funds in other ways recently. In July, when outside banks weren't lending, it arranged the loans and debt for KKR to buy the South Korean unit of Anheuscher Busch InBev for $1.8 billion. And it rounded up investors for a significant portion of the debt needed to pull off KKR's Nov. 8 purchase of a Northrop Grumman consulting division for $1.65 billion, with partner General Atlantic. One of the investors was KKR's $13 billion debt fund.
WHAT WILL THE PROS SAY?
Buffett, who declined to comment for this article, has little affection for private equity. He blasted the industry in his annual shareholders' letter in March, accusing it of piling debt on companies and burdening them with enormous fees. Whereas Berkshire has just $38 billion of debt spread across 76 companies, according to data compiled by Bloomberg, KKR's 51 companies carry at least $170 billion.
One of the reasons Kravis wants to take KKR public is so that he, like Buffett, can use his stock as a tool to buy companies, or slivers of them. Shareholders give Buffett so much lattitude to buy companies in part because he has delivered strong results for them for decades. Kravis wants that kind of freedom, too. "We're not just a private equity firm," says Kravis. "We're an asset management firm....If all you're going to do is say you'll buy 100% of companies, you're passing up a lot of opportunities where you can make a lot of money."
Perhaps, but some of the professional investors who put money into KKR funds expecting it to buy and sell companies aren't keen on KKR's taking too many minority investments in public companies, like an ordinary mutual fund. "I'm not opposed" to those deals, says Mario Giannini, CEO of KKR investor Hamilton Lane. "But if there are a lot of them, you have to question if you're paying private equity fees for public equity investing." In that sense, Buffett's "perfect private equity model," in Kravis' words, doesn't fully translate to KKR.
One transaction from September illustrates how KKR can play an active role in managing companies even when it doesn't take full control of them. Early in the year two members of KKR's tech group, Herald Y. Chen and Adam H. Clammer, pitched their bosses on an investment in Eastman Kodak. The two had examined taking Kodak private on numerous occasions over the last decade, but for one reason or another it never came to pass. This time both parties were willing to explore all options. Kodak needed cash to expand its ink-jet printer business for retail consumers as well as its commercial printing and scanning businesses. But with the debt markets frozen at the start of 2009, Kodak couldn't raise money cheaply by issuing bonds or taking out loans. It began kicking around the idea of selling a stake instead. For KKR, this presented an opportunity for a new kind of dealmaking: Instead of taking over Kodak outright, it could become a partner.
Chen and Clammer performed due diligence for six months, talking extensively with Farr's capital markets group about how to structure a deal amid such volatile markets. They also reached out to KKR's in-house team of operational executives who parachute into companies to turn them around. And they talked with Fisher, the former Kodak CEO who now works for KKR, about how Kodak's operations could be improved.
As the two sides examined the numbers, Kodak's current CEO, Antonio M. Perez, visited Kravis in New York and Roberts in California. He wanted to know whether they shared his view that Kodak's stock was undervalued and whether they intended to be long-term shareholders. Kravis and Roberts convinced him of both. "That was the key," Perez says. "They believed in the value-creation opportunity we thought we had."
KKR also sold Perez on the potential for Kodak to tap its 51 companies as customers and suppliers. The two sides agreed that KKR would take two seats on Kodak's board and that KKR would deploy its in-house managers to work on new growth opportunities. An hour after the deal closed on Sept. 16, Kodak formed the "K Squared" team, which consists of seven Kodak executives and six KKR operational executives. The group, which meets monthly, aims to find ways Kodak can sell more to KKR's companies, ramp up its sales force, and make acquisitions. Since the deal closed, at least six KKR-owned companies have gotten involved in dialogues with Kodak about how they can work together.
K-Squared hasn't been around long enough to affect Kodak's quarterly profit results. Investors, though, don't seem optimistic. Kodak's long-suffering share price has fallen by 36% since the deal closed. "It's a long-term investment," says Kravis. "We got involved in this because we knew it was a turnaround."
CORE VALUES AND LONGEVITY
For Kravis and Roberts, the biggest challenges in remaking their company may be internal. They'll have to figure out on the fly how to grow quickly without falling prey to Big Company syndrome. With headcount having tripled since 2004, from 204 people to 637, Kravis and Roberts fear KKR could become siloed and bureaucratic. The two now consult regularly with senior adviser Rajat K. Gupta, a former global managing director at McKinsey & Co., for thoughts on the best way to manage the expansion. Gupta saw similar growth at McKinsey: The firm's professional staff grew from 500 to 9,000 during his 35-year tenure there. "The vision," says Gupta, "is to develop a premier global institution for alternative investments."
More than anything, Kravis and Roberts want to create a mature, meritocratic company that will long outlast them. To drive that point home, the two have begun tying part of KKR compensation to how much an executive takes advantage of all the firm's new capabilities.
But Gupta has pressed them to do more, sometimes veering into touchy-feely territory. In May, at Gupta's urging, KKR partners and managing directors from around the world gathered in New York to talk about how they were adhering to the firm's "core values" (integrity, respect, teamwork, excellence, innovation, accountability, fortitude, and sharing). There were no "trust falls" during the four-hour meeting at the New York Sheraton Hotel and Towers, but between bites of deli sandwiches the team discussed how they could improve the way KKR is carrying out its new mission and improve its internal and external communication. Another Gupta idea: As part of the annual 360-degree performance-review process, 12 partners now must conduct in-depth interviews of 72 executives at the firm.
These sorts of things don't seem like the province of buyout barons. Then again, what choice do Kravis and Roberts have when the rules of the game have changed? Loading mounds of debt on a company in hopes of selling it later for a big profit is a technique befitting a "cave man," says Kravis. "The days are long gone when you just buy a company and hope that financial engineering will work. Our job today is to create value. Private equity, to me, is acting and thinking like an industrialist."
03 December 2009
China Mobile 941
avoid this stock at all costs, the chart shows it will test new lows very soon, likely to the extent of 57.
the chart is a typical mutli top with neckline at 74 and already has fallen below it, it may still struggles around the neckline but not for long as the chart is a six month old chart and it is now in the pullback phase after breaking out to the south.
28 November 2009
JIM
some update from bw on jim.
Jim Rogers on Why Gold Is Glittering So Brightly
Maria Bartiromo talks to Jim Rogers, creator of the Rogers International Commodities Index
By Maria Bartiromo
I was on assignment in Singapore on Nov. 24 when gold hit an all-time high of $1,174 an ounce. That was fortuitous because Singapore is the home base of commodities guru Jim Rogers, creator of the Rogers International Commodities Index. Meantime, back in the U.S., reports were surfacing about growing discontent in the halls of Congress over the performance of Treasury Secretary Tim Geithner and the possibility he might be replaced by JPMorgan Chase (JPM) CEO Jamie Dimon. When I rang up Rogers, he was his usual low-key self, with quiet opinions about the future of gold prices, commodities to watch, and why Obama should dump Geithner.
MARIA BARTIROMO
Gold, as you know, hit an all-time high today, with the Russian central bank buying bullion. How high can gold go?
JIM ROGERS
Well, I own gold and I have for a while. How high can it go? I fully expect it to be over a couple thousand dollars an ounce sometime in the next decade—I didn't say the next month, I didn't say the next year, I said the next decade—because paper money around the world is very suspect. But right now everybody's bullish on it, so I don't like to buy things when that's happening. But I'm not selling under any circumstances.
What's behind the runup? Has buying by the central banks changed the equation here? Or is this still a demand story?
Certainly a demand story because, as I said, everybody's printing so much money and people around the world are worried about that. But you also have central banks, which five years ago were selling gold, now buying. So that's a huge shift in the marketplace. Central banks are like lots of other people—they just follow the crowd. There are probably better commodities to buy than gold, but you can't tell that to central banks because they've got gold on the brain.
How much of the runup is being driven by U.S. deficits and the weakening dollar?
A huge amount is about not just U.S. deficits, but all deficits. Deficits are going berserk nearly everywhere. Throughout history, printing money has led to weaker currencies and higher prices for real assets. And there are many, many pessimists about the dollar, including me. So many pessimists that I suspect there's a rally coming. I have no idea why there should be, but things do usually rally when you have this many bears at the same time. I've actually accumulated a few more dollars. I mean, it's not a significant position, but I do own more dollars than I did a month ago. And we'll probably also have a gold correction because there's so many bulls on gold.
So you're looking at other commodities you think are better opportunities?
If you want to buy precious metal, I'd rather buy silver or palladium. Both are very depressed. I continue to be more optimistic about agriculture than some other commodities.
As BusinessWeek reports this week, global investors are snapping up thousands of acres of farmland in Africa. Money from everywhere—from Saudi Arabia to Wall Street-backed funds—is pouring in. Why the sudden focus on Africa?
The gigantic acreage in Africa has been underfarmed because there is not much infrastructure, not much machinery, not much expertise, not much fertilizer. I think the world is going to have huge food problems in the next few years. Other people seem to see that, too, so they're buying up farmland. You can either buy it or lease it. It's very, very cheap, it's incredibly fertile, and it hasn't been overexploited. And if you take in some expertise and some machinery and some fertilizer, you should make a lot of money. The labor's cheap, everything's cheap.
So you think Africa is a good investment opportunity?
I think it's a fantastic investor opportunity. Now there are over 50 countries in Africa, so we can't make too gross a generalization. But I mean, in the Congo, you don't even have to plant anything. You just sit by the road long enough, something will grow. Yes, I am very, very optimistic.
What's your outlook for commodities in 2010?
I'm not smart enough to know. But I will say that if the world economy gets better, then commodities will be one of the best places to be because of the shortages that are developing. If the world economy does not get better, commodities will still be the place to be because governments are printing all this money.
Tim Geithner has been under attack lately. How's he doing?
Listen, I have been a critic for years. Geithner should never have been appointed to anything. He's been wrong about just about everything for 15 years.
Do you think he'll lose his job?
Of course he's going to lose his job, because as Mr. Obama realizes that Geithner doesn't know what he's doing, he's going to look for somebody else because he doesn't want to take the heat himself. So he's going to look to blame somebody, and the obvious person is Geithner.
Jim Rogers on Why Gold Is Glittering So Brightly
Maria Bartiromo talks to Jim Rogers, creator of the Rogers International Commodities Index
By Maria Bartiromo
I was on assignment in Singapore on Nov. 24 when gold hit an all-time high of $1,174 an ounce. That was fortuitous because Singapore is the home base of commodities guru Jim Rogers, creator of the Rogers International Commodities Index. Meantime, back in the U.S., reports were surfacing about growing discontent in the halls of Congress over the performance of Treasury Secretary Tim Geithner and the possibility he might be replaced by JPMorgan Chase (JPM) CEO Jamie Dimon. When I rang up Rogers, he was his usual low-key self, with quiet opinions about the future of gold prices, commodities to watch, and why Obama should dump Geithner.
MARIA BARTIROMO
Gold, as you know, hit an all-time high today, with the Russian central bank buying bullion. How high can gold go?
JIM ROGERS
Well, I own gold and I have for a while. How high can it go? I fully expect it to be over a couple thousand dollars an ounce sometime in the next decade—I didn't say the next month, I didn't say the next year, I said the next decade—because paper money around the world is very suspect. But right now everybody's bullish on it, so I don't like to buy things when that's happening. But I'm not selling under any circumstances.
What's behind the runup? Has buying by the central banks changed the equation here? Or is this still a demand story?
Certainly a demand story because, as I said, everybody's printing so much money and people around the world are worried about that. But you also have central banks, which five years ago were selling gold, now buying. So that's a huge shift in the marketplace. Central banks are like lots of other people—they just follow the crowd. There are probably better commodities to buy than gold, but you can't tell that to central banks because they've got gold on the brain.
How much of the runup is being driven by U.S. deficits and the weakening dollar?
A huge amount is about not just U.S. deficits, but all deficits. Deficits are going berserk nearly everywhere. Throughout history, printing money has led to weaker currencies and higher prices for real assets. And there are many, many pessimists about the dollar, including me. So many pessimists that I suspect there's a rally coming. I have no idea why there should be, but things do usually rally when you have this many bears at the same time. I've actually accumulated a few more dollars. I mean, it's not a significant position, but I do own more dollars than I did a month ago. And we'll probably also have a gold correction because there's so many bulls on gold.
So you're looking at other commodities you think are better opportunities?
If you want to buy precious metal, I'd rather buy silver or palladium. Both are very depressed. I continue to be more optimistic about agriculture than some other commodities.
As BusinessWeek reports this week, global investors are snapping up thousands of acres of farmland in Africa. Money from everywhere—from Saudi Arabia to Wall Street-backed funds—is pouring in. Why the sudden focus on Africa?
The gigantic acreage in Africa has been underfarmed because there is not much infrastructure, not much machinery, not much expertise, not much fertilizer. I think the world is going to have huge food problems in the next few years. Other people seem to see that, too, so they're buying up farmland. You can either buy it or lease it. It's very, very cheap, it's incredibly fertile, and it hasn't been overexploited. And if you take in some expertise and some machinery and some fertilizer, you should make a lot of money. The labor's cheap, everything's cheap.
So you think Africa is a good investment opportunity?
I think it's a fantastic investor opportunity. Now there are over 50 countries in Africa, so we can't make too gross a generalization. But I mean, in the Congo, you don't even have to plant anything. You just sit by the road long enough, something will grow. Yes, I am very, very optimistic.
What's your outlook for commodities in 2010?
I'm not smart enough to know. But I will say that if the world economy gets better, then commodities will be one of the best places to be because of the shortages that are developing. If the world economy does not get better, commodities will still be the place to be because governments are printing all this money.
Tim Geithner has been under attack lately. How's he doing?
Listen, I have been a critic for years. Geithner should never have been appointed to anything. He's been wrong about just about everything for 15 years.
Do you think he'll lose his job?
Of course he's going to lose his job, because as Mr. Obama realizes that Geithner doesn't know what he's doing, he's going to look for somebody else because he doesn't want to take the heat himself. So he's going to look to blame somebody, and the obvious person is Geithner.
26 November 2009
CLIMATE FORECASTS
first time ever you should read the counter opinion on climate change. this revealing article from wsj is the one we all should read.
QUOTE
Global Warming With the Lid Off
The emails that reveal an effort to hide the truth about climate science.
The two MMs have been after the CRU station data for years. If they ever hear there is a Freedom of Information Act now in the U.K., I think I'll delete the file rather than send to anyone. . . . We also have a data protection act, which I will hide behind."
So apparently wrote Phil Jones, director of the University of East Anglia's Climate Research Unit (CRU) and one of the world's leading climate scientists, in a 2005 email to "Mike." Judging by the email thread, this refers to Michael Mann, director of the Pennsylvania State University's Earth System Science Center. We found this nugget among the more than 3,000 emails and documents released last week after CRU's servers were hacked and messages among some of the world's most influential climatologists were published on the Internet.
The "two MMs" are almost certainly Stephen McIntyre and Ross McKitrick, two Canadians who have devoted years to seeking the raw data and codes used in climate graphs and models, then fact-checking the published conclusions—a painstaking task that strikes us as a public and scientific service. Mr. Jones did not return requests for comment and the university said it could not confirm that all the emails were authentic, though it acknowledged its servers were hacked.
Yet even a partial review of the emails is highly illuminating. In them, scientists appear to urge each other to present a "unified" view on the theory of man-made climate change while discussing the importance of the "common cause"; to advise each other on how to smooth over data so as not to compromise the favored hypothesis; to discuss ways to keep opposing views out of leading journals; and to give tips on how to "hide the decline" of temperature in certain inconvenient data.
View Full Image
climate
Associated Press
A satellite image of Tropical Storm Ida. Some climate researchers claim that an increase in tropical storms is proof of anthropogenic climate change.
climate
climate
Some of those mentioned in the emails have responded to our requests for comment by saying they must first chat with their lawyers. Others have offered legal threats and personal invective. Still others have said nothing at all. Those who have responded have insisted that the emails reveal nothing more than trivial data discrepancies and procedural debates.
Yet all of these nonresponses manage to underscore what may be the most revealing truth: That these scientists feel the public doesn't have a right to know the basis for their climate-change predictions, even as their governments prepare staggeringly expensive legislation in response to them.
Consider the following note that appears to have been sent by Mr. Jones to Mr. Mann in May 2008: "Mike, Can you delete any emails you may have had with Keith re AR4? Keith will do likewise. . . . Can you also email Gene and get him to do the same?" AR4 is shorthand for the U.N.'s Intergovernmental Panel of Climate Change's (IPCC) Fourth Assessment Report, presented in 2007 as the consensus view on how bad man-made climate change has supposedly become.
Read a Selection of the Emails
Climate Science and Candor
In another email that seems to have been sent in September 2007 to Eugene Wahl of the National Oceanic and Atmospheric Administration's Paleoclimatology Program and to Caspar Ammann of the National Center for Atmospheric Research's Climate and Global Dynamics Division, Mr. Jones writes: "[T]ry and change the Received date! Don't give those skeptics something to amuse themselves with."
When deleting, doctoring or withholding information didn't work, Mr. Jones suggested an alternative in an August 2008 email to Gavin Schmidt of NASA's Goddard Institute for Space Studies, copied to Mr. Mann. "The FOI [Freedom of Information] line we're all using is this," he wrote. "IPCC is exempt from any countries FOI—the skeptics have been told this. Even though we . . . possibly hold relevant info the IPCC is not part of our remit (mission statement, aims etc) therefore we don't have an obligation to pass it on."
It also seems Mr. Mann and his friends weren't averse to blacklisting scientists who disputed some of their contentions, or journals that published their work. "I think we have to stop considering 'Climate Research' as a legitimate peer-reviewed journal," goes one email, apparently written by Mr. Mann to several recipients in March 2003. "Perhaps we should encourage our colleagues in the climate research community to no longer submit to, or cite papers in, this journal."
Mr. Mann's main beef was that the journal had published several articles challenging aspects of the anthropogenic theory of global warming.
For the record, when we've asked Mr. Mann in the past about the charge that he and his colleagues suppress opposing views, he has said he "won't dignify that question with a response." Regarding our most recent queries about the hacked emails, he says he "did not manipulate any data in any conceivable way," but he otherwise refuses to answer specific questions. For the record, too, our purpose isn't to gainsay the probity of Mr. Mann's work, much less his right to remain silent.
However, we do now have hundreds of emails that give every appearance of testifying to concerted and coordinated efforts by leading climatologists to fit the data to their conclusions while attempting to silence and discredit their critics. In the department of inconvenient truths, this one surely deserves a closer look by the media, the U.S. Congress and other investigative bodies.
UNQUOTE
QUOTE
Global Warming With the Lid Off
The emails that reveal an effort to hide the truth about climate science.
The two MMs have been after the CRU station data for years. If they ever hear there is a Freedom of Information Act now in the U.K., I think I'll delete the file rather than send to anyone. . . . We also have a data protection act, which I will hide behind."
So apparently wrote Phil Jones, director of the University of East Anglia's Climate Research Unit (CRU) and one of the world's leading climate scientists, in a 2005 email to "Mike." Judging by the email thread, this refers to Michael Mann, director of the Pennsylvania State University's Earth System Science Center. We found this nugget among the more than 3,000 emails and documents released last week after CRU's servers were hacked and messages among some of the world's most influential climatologists were published on the Internet.
The "two MMs" are almost certainly Stephen McIntyre and Ross McKitrick, two Canadians who have devoted years to seeking the raw data and codes used in climate graphs and models, then fact-checking the published conclusions—a painstaking task that strikes us as a public and scientific service. Mr. Jones did not return requests for comment and the university said it could not confirm that all the emails were authentic, though it acknowledged its servers were hacked.
Yet even a partial review of the emails is highly illuminating. In them, scientists appear to urge each other to present a "unified" view on the theory of man-made climate change while discussing the importance of the "common cause"; to advise each other on how to smooth over data so as not to compromise the favored hypothesis; to discuss ways to keep opposing views out of leading journals; and to give tips on how to "hide the decline" of temperature in certain inconvenient data.
View Full Image
climate
Associated Press
A satellite image of Tropical Storm Ida. Some climate researchers claim that an increase in tropical storms is proof of anthropogenic climate change.
climate
climate
Some of those mentioned in the emails have responded to our requests for comment by saying they must first chat with their lawyers. Others have offered legal threats and personal invective. Still others have said nothing at all. Those who have responded have insisted that the emails reveal nothing more than trivial data discrepancies and procedural debates.
Yet all of these nonresponses manage to underscore what may be the most revealing truth: That these scientists feel the public doesn't have a right to know the basis for their climate-change predictions, even as their governments prepare staggeringly expensive legislation in response to them.
Consider the following note that appears to have been sent by Mr. Jones to Mr. Mann in May 2008: "Mike, Can you delete any emails you may have had with Keith re AR4? Keith will do likewise. . . . Can you also email Gene and get him to do the same?" AR4 is shorthand for the U.N.'s Intergovernmental Panel of Climate Change's (IPCC) Fourth Assessment Report, presented in 2007 as the consensus view on how bad man-made climate change has supposedly become.
Read a Selection of the Emails
Climate Science and Candor
In another email that seems to have been sent in September 2007 to Eugene Wahl of the National Oceanic and Atmospheric Administration's Paleoclimatology Program and to Caspar Ammann of the National Center for Atmospheric Research's Climate and Global Dynamics Division, Mr. Jones writes: "[T]ry and change the Received date! Don't give those skeptics something to amuse themselves with."
When deleting, doctoring or withholding information didn't work, Mr. Jones suggested an alternative in an August 2008 email to Gavin Schmidt of NASA's Goddard Institute for Space Studies, copied to Mr. Mann. "The FOI [Freedom of Information] line we're all using is this," he wrote. "IPCC is exempt from any countries FOI—the skeptics have been told this. Even though we . . . possibly hold relevant info the IPCC is not part of our remit (mission statement, aims etc) therefore we don't have an obligation to pass it on."
It also seems Mr. Mann and his friends weren't averse to blacklisting scientists who disputed some of their contentions, or journals that published their work. "I think we have to stop considering 'Climate Research' as a legitimate peer-reviewed journal," goes one email, apparently written by Mr. Mann to several recipients in March 2003. "Perhaps we should encourage our colleagues in the climate research community to no longer submit to, or cite papers in, this journal."
Mr. Mann's main beef was that the journal had published several articles challenging aspects of the anthropogenic theory of global warming.
For the record, when we've asked Mr. Mann in the past about the charge that he and his colleagues suppress opposing views, he has said he "won't dignify that question with a response." Regarding our most recent queries about the hacked emails, he says he "did not manipulate any data in any conceivable way," but he otherwise refuses to answer specific questions. For the record, too, our purpose isn't to gainsay the probity of Mr. Mann's work, much less his right to remain silent.
However, we do now have hundreds of emails that give every appearance of testifying to concerted and coordinated efforts by leading climatologists to fit the data to their conclusions while attempting to silence and discredit their critics. In the department of inconvenient truths, this one surely deserves a closer look by the media, the U.S. Congress and other investigative bodies.
UNQUOTE
20 November 2009
Green, Japan and Dow
Many people these days are trying to go green.
But how green is green?
Green cars
All governments and car companies these days are vying for electric cars to cut carbon emissions. However manufacturing the batteries, setting up the infrastructures, replacing the batteries during lifetime of the car require a lot of power from power plants plus the power [ie carbon emission] required for mining of the necessary minerals which make up the components of the batteries and infrastructure.
We all seem blindfolded and never asked questions like HOW MUCH WE SAVE ON CARBON EMISSIONS when comparing electric cars with conventional fuel cars.
We also have not yet handled the question of recycling the batteries which would mean even more carbon emissions and pollution.
Wind power
We also heard that wind power is infinite and is green as it does not emit CO2. Do people know how much steel is required to erect a wind turbine tower? The lowest height is at least 50m [15 storeys] and could go as high as 100m [30 storeys], the higher it goes, the larger the diameter of the tower to sustain higher wind speed. That would mean a lot of steel is required. For every wind tower, it means the steel required is enough to build a building, the height of which depends on how high the wind tower is.
Wind power has to be stored too which means another round of infrastructure is required [like power cables] to support its use.
Wind power will push up prices of steel when used on a large scale by many countries.
Again here we have never heard or seen any valuation of the savings in carbon emissions estimated by Green Peace or Friends of the Earth. Simply no cost/benefit analysis had been made available to the public.
Solar Power
This option is even worse, it took up a lot of space and the cells are composed of toxic materials when disposed of at the end of their useful life.
Again we do not hear from Green associations giving a rational model to support such wide use of this alternative power source.
JAPAN
This country has always pursued a homogeneous society which means minimum immigration, thus becoming the earliest advanced country to have an aging problem. Population growth due to aging would not support organic growth in internal demand, this will cause severe stress in Japan's economy and it may again fall into a deflation spiral.
The bureaucrats also have engineered a high savings society to benefit the corporate world so they can borrow cheaply to expand their productions. Now that, after the financial crisis, these corps are challenged at the low end by China/Taiwan producers of electronic gadgets [mobile phones, pcs] and electrical appliances with also the high end challenged by Korean producers, they have nowhere to hide but to report heavy losses ever since the financial markets hit their peaks in 2007. Major power houses in the past like HITACHI, TOSHIBA, PANASONIC, FUJITSU, SONY had better spin off their subs and concentrate on a smaller core of products/markets, otherwise they may go bankrupt very soon. Like I said earlier in this blog, yen can go as high as 65 because of more layoffs down the road thus causing even more contraction in money supply.
Dow
Earlier I said Dow will hit 11000, more likely in 2010 than 2009.
Now that Dow is only 600 points from it, highly likely that it may hit around end 2009 or early 2010.
Another forecast is that we might see another mini crisis [of Dow] very soon but no drastic fall like that of 2008, after which Dow will resume its climb. Recent currency swings to the upside [dollar falling] and starting to either fall off a trendline [like NZD just did and AUD likely to follow suit] or the formation of an inverted head and shoulder [USDCAD] suggest the mini crisis will not be too far off.
Two scenarios
1. Mini crisis happening before Dow reaches 11000 or
2. Dow reached 11,000 and then fall off the peak fast.
My call is option 2 more likely than 1 bearing no major incidents like the failing of a major bank as we are coming close to year end with most banks already made their fortunes from trading and will not trade aggressively before Xmas ie the year ends. Low volume will make any major unloading of stocks by funds etc triggering heavy selloff ruining the bonus party, thus the upside is easier to achieve on low volume given the lack of interest in selling.
But how green is green?
Green cars
All governments and car companies these days are vying for electric cars to cut carbon emissions. However manufacturing the batteries, setting up the infrastructures, replacing the batteries during lifetime of the car require a lot of power from power plants plus the power [ie carbon emission] required for mining of the necessary minerals which make up the components of the batteries and infrastructure.
We all seem blindfolded and never asked questions like HOW MUCH WE SAVE ON CARBON EMISSIONS when comparing electric cars with conventional fuel cars.
We also have not yet handled the question of recycling the batteries which would mean even more carbon emissions and pollution.
Wind power
We also heard that wind power is infinite and is green as it does not emit CO2. Do people know how much steel is required to erect a wind turbine tower? The lowest height is at least 50m [15 storeys] and could go as high as 100m [30 storeys], the higher it goes, the larger the diameter of the tower to sustain higher wind speed. That would mean a lot of steel is required. For every wind tower, it means the steel required is enough to build a building, the height of which depends on how high the wind tower is.
Wind power has to be stored too which means another round of infrastructure is required [like power cables] to support its use.
Wind power will push up prices of steel when used on a large scale by many countries.
Again here we have never heard or seen any valuation of the savings in carbon emissions estimated by Green Peace or Friends of the Earth. Simply no cost/benefit analysis had been made available to the public.
Solar Power
This option is even worse, it took up a lot of space and the cells are composed of toxic materials when disposed of at the end of their useful life.
Again we do not hear from Green associations giving a rational model to support such wide use of this alternative power source.
JAPAN
This country has always pursued a homogeneous society which means minimum immigration, thus becoming the earliest advanced country to have an aging problem. Population growth due to aging would not support organic growth in internal demand, this will cause severe stress in Japan's economy and it may again fall into a deflation spiral.
The bureaucrats also have engineered a high savings society to benefit the corporate world so they can borrow cheaply to expand their productions. Now that, after the financial crisis, these corps are challenged at the low end by China/Taiwan producers of electronic gadgets [mobile phones, pcs] and electrical appliances with also the high end challenged by Korean producers, they have nowhere to hide but to report heavy losses ever since the financial markets hit their peaks in 2007. Major power houses in the past like HITACHI, TOSHIBA, PANASONIC, FUJITSU, SONY had better spin off their subs and concentrate on a smaller core of products/markets, otherwise they may go bankrupt very soon. Like I said earlier in this blog, yen can go as high as 65 because of more layoffs down the road thus causing even more contraction in money supply.
Dow
Earlier I said Dow will hit 11000, more likely in 2010 than 2009.
Now that Dow is only 600 points from it, highly likely that it may hit around end 2009 or early 2010.
Another forecast is that we might see another mini crisis [of Dow] very soon but no drastic fall like that of 2008, after which Dow will resume its climb. Recent currency swings to the upside [dollar falling] and starting to either fall off a trendline [like NZD just did and AUD likely to follow suit] or the formation of an inverted head and shoulder [USDCAD] suggest the mini crisis will not be too far off.
Two scenarios
1. Mini crisis happening before Dow reaches 11000 or
2. Dow reached 11,000 and then fall off the peak fast.
My call is option 2 more likely than 1 bearing no major incidents like the failing of a major bank as we are coming close to year end with most banks already made their fortunes from trading and will not trade aggressively before Xmas ie the year ends. Low volume will make any major unloading of stocks by funds etc triggering heavy selloff ruining the bonus party, thus the upside is easier to achieve on low volume given the lack of interest in selling.
31 October 2009
Is the U.S. Economy Turning Japanese?
another interesting article from wsj 26 oct.
By CHRISTOPHER WOOD
Happy days are here again in world stock markets. Yesterday's profit-taking notwithstanding, the Dow Jones Industrial Average is flirting with 10000 and the S&P 500 is up 60% from its March low. Still, if risk-seeking behavior has returned to financial markets, much of it is funded by borrowing increasingly cheap U.S. dollars. There is also very little evidence, if any, that consumption and employment are really recovering in America.
With the U.S. government stepping in to keep markets from clearing, today's U.S. economy in many ways resembles the post-bubble Japanese economy of the 1990s. Ultra-loose monetary policy and low demand for credit, combined with high unemployment and consumer deleveraging, could lead to a prolonged slump.
Consumption, which still accounts for 71% of total nominal GDP in America, is still weak, and there remains little reason to expect it to pick up in a healthy fashion. Aside from the well-known and related issues of high household debt and negative equity in houses, the latest U.S. employment data have highlighted the still dismal state of the job market. Average weekly earnings of production workers rose by only 0.7% year on year in September as the average number of weekly hours worked fell to a record low of 33 hours. This marks the lowest annualized weekly earnings growth since the data series began in 1964.
Meanwhile, there's an unhealthy reliance on government for growth in America's increasingly command-driven economy. This is clear from the severe slump in car sales post "cash for clunkers." U.S. auto sales declined by 35% month on month in September to an annualized 9.2 million. It's also clear from the enormous role now played by government in the residential mortgage market. Government-guaranteed mortgages accounted for 98% of total mortgage-backed security issuance in the third quarter.
The reality of an increasingly command-driven economy in America means that government policy is likely to become the key determinant of where investors should place their money. For example, the near-term prospects for the housing market in the U.S. will be strongly influenced by whether the federal government extends its first-time home-buyer tax credit when it expires in November. Like cash for clunkers with autos, the risk is that such a program is simply buying demand from the future.
The other risk is the same as subprime mortgages—encouraging people to buy houses who may be better off renting. This is suggested from the growing delinquency rates on Federal Housing Administration (FHA) approved loans since the FHA has taken over from Fannie Mae and Freddie Mac as the prime way of increasing U.S. taxpayer exposure to future residential mortgage defaults. The default rate on FHA-insured mortgages was already running at 8.1% in August, up from 5.7% a year ago.
Then there's the government involvement in the U.S. financial sector. Over the past two years the federal government is estimated to have lent, spent or guaranteed around $11 trillion to the financial sector, broadly defined. This is due to Washington's slavish adherence to the absurd notion that financial institutions can be "too big to fail," be they called Fannie Mae, AIG or Citicorp.
All of the above behavior invites legitimate comparisons with post-bubble Japan, where banks took years to be cleaned up as a result of regulatory forbearance. The same kind of forbearance is preventing America's increasingly distressed commercial real-estate market from clearing. Similarly, as was the case with Japan, monetary-base growth has exploded in the U.S. over the past year courtesy of the Fed, while bank lending is declining. This is why there is every reason to fear that America is already in a Japanese-style liquidity trap.
True, Japan's bubble economy was much more about corporate-debt excesses, most of it borrowed against land or property collateral, rather than personal debt, as is the case in the U.S. But if the comparisons between the two countries are far from precise, the Japanese example shows how investment behavior changes if a deleveraging deflationary trend becomes entrenched.
This can be seen in the dramatic change in Japanese institutional investor asset allocation between government bonds and equities. Japanese insurance company and pension fund share of assets in domestic stocks peaked at 37.2% in fiscal 1988 (which ended March 1989, near the height of the bubble) and has since collapsed to 6.4% at the end of fiscal 2008, while their share of assets in Japanese government bonds surged to 36% in fiscal 2008 from 3.2% in fiscal 1990.
By contrast, in America institutional investors remain overweight equities and underweight government bonds. This will change radically if the U.S. truly is in a deleveraging cycle. Still, the process will take time. It was not until 1998 that Japanese insurance companies and pension funds had a greater percentage of their assets in government bonds than equities.
This is why Wall Street should make the most of the rally in U.S. stocks while it lasts. The next bubble in asset markets will not be in the West but in emerging Asia, led by China. The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed's easy money policy.
By CHRISTOPHER WOOD
Happy days are here again in world stock markets. Yesterday's profit-taking notwithstanding, the Dow Jones Industrial Average is flirting with 10000 and the S&P 500 is up 60% from its March low. Still, if risk-seeking behavior has returned to financial markets, much of it is funded by borrowing increasingly cheap U.S. dollars. There is also very little evidence, if any, that consumption and employment are really recovering in America.
With the U.S. government stepping in to keep markets from clearing, today's U.S. economy in many ways resembles the post-bubble Japanese economy of the 1990s. Ultra-loose monetary policy and low demand for credit, combined with high unemployment and consumer deleveraging, could lead to a prolonged slump.
Consumption, which still accounts for 71% of total nominal GDP in America, is still weak, and there remains little reason to expect it to pick up in a healthy fashion. Aside from the well-known and related issues of high household debt and negative equity in houses, the latest U.S. employment data have highlighted the still dismal state of the job market. Average weekly earnings of production workers rose by only 0.7% year on year in September as the average number of weekly hours worked fell to a record low of 33 hours. This marks the lowest annualized weekly earnings growth since the data series began in 1964.
Meanwhile, there's an unhealthy reliance on government for growth in America's increasingly command-driven economy. This is clear from the severe slump in car sales post "cash for clunkers." U.S. auto sales declined by 35% month on month in September to an annualized 9.2 million. It's also clear from the enormous role now played by government in the residential mortgage market. Government-guaranteed mortgages accounted for 98% of total mortgage-backed security issuance in the third quarter.
The reality of an increasingly command-driven economy in America means that government policy is likely to become the key determinant of where investors should place their money. For example, the near-term prospects for the housing market in the U.S. will be strongly influenced by whether the federal government extends its first-time home-buyer tax credit when it expires in November. Like cash for clunkers with autos, the risk is that such a program is simply buying demand from the future.
The other risk is the same as subprime mortgages—encouraging people to buy houses who may be better off renting. This is suggested from the growing delinquency rates on Federal Housing Administration (FHA) approved loans since the FHA has taken over from Fannie Mae and Freddie Mac as the prime way of increasing U.S. taxpayer exposure to future residential mortgage defaults. The default rate on FHA-insured mortgages was already running at 8.1% in August, up from 5.7% a year ago.
Then there's the government involvement in the U.S. financial sector. Over the past two years the federal government is estimated to have lent, spent or guaranteed around $11 trillion to the financial sector, broadly defined. This is due to Washington's slavish adherence to the absurd notion that financial institutions can be "too big to fail," be they called Fannie Mae, AIG or Citicorp.
All of the above behavior invites legitimate comparisons with post-bubble Japan, where banks took years to be cleaned up as a result of regulatory forbearance. The same kind of forbearance is preventing America's increasingly distressed commercial real-estate market from clearing. Similarly, as was the case with Japan, monetary-base growth has exploded in the U.S. over the past year courtesy of the Fed, while bank lending is declining. This is why there is every reason to fear that America is already in a Japanese-style liquidity trap.
True, Japan's bubble economy was much more about corporate-debt excesses, most of it borrowed against land or property collateral, rather than personal debt, as is the case in the U.S. But if the comparisons between the two countries are far from precise, the Japanese example shows how investment behavior changes if a deleveraging deflationary trend becomes entrenched.
This can be seen in the dramatic change in Japanese institutional investor asset allocation between government bonds and equities. Japanese insurance company and pension fund share of assets in domestic stocks peaked at 37.2% in fiscal 1988 (which ended March 1989, near the height of the bubble) and has since collapsed to 6.4% at the end of fiscal 2008, while their share of assets in Japanese government bonds surged to 36% in fiscal 2008 from 3.2% in fiscal 1990.
By contrast, in America institutional investors remain overweight equities and underweight government bonds. This will change radically if the U.S. truly is in a deleveraging cycle. Still, the process will take time. It was not until 1998 that Japanese insurance companies and pension funds had a greater percentage of their assets in government bonds than equities.
This is why Wall Street should make the most of the rally in U.S. stocks while it lasts. The next bubble in asset markets will not be in the West but in emerging Asia, led by China. The irony is that the more anaemic the Western recovery proves to be, the longer it will take for Western interest rates to normalize and the bigger the resulting asset bubble in Asia. Emerging Asia, not the U.S. consumer, will be the prime beneficiary of the Fed's easy money policy.
08 October 2009
cad, oil, gold and stocks
note - click the chart to have a clear view if too small.cad
cad chart indicates if it falls through the falling slope, the drop will be drastic, it already fell through the multitop formation and pierced the horizontal neckline of 1.08 thus it will achieve at least 0.86 but not without struggles.
oil and gold
since cad is associated with oil and partially gold, likely oil will really hit new high faster than we might think as gold has broken the 990 neckline not long ago.
usd
if usd is falling so fast, it is not impossible to imagine oil may soon be based otherwise than usd as it is already heard on the street news that opec may be thinking of using gold, rmb, jpy and eur as the basis for pricing, how that can be done is anybody's guess. should this be true, then we may have too much usd in circulation and too little of jpy, eur and gold which means a huge appreciation in the pipeline.
stocks
us stocks that have very heavy overseas sales exposure will rise like a rocket. emerging markets will shoot up as well since investors will chase after promising non-usd assets.
$5,800 gold
here is some interesting ideas from a pro, mind you that you cannot extrapolate inflation with gold as gold has no yield and also costs to hold.
$5,800 gold? But stocks okay, too.
Commentary: After a good decade, Aden sisters gleeful about gold
By Peter Brimelow, MarketWatch
NEW YORK (MarketWatch) -- A skillful veteran letter is sanguine about stocks -- but positively gleeful about gold and other hard assets.
Mary Anne and Pamela Aden's Costa Rica-based Aden Forecast first came to fame in the last great gold bull market three decades ago. In the current post-2000 gold bull market, the letter has shown remarkable tactical versatility and a definite willingness to compromise its powerful long-run analysis if short term-trends dictate. ( See Aug. 10 column.)
It's worked. Over the year to date through September, the Aden Forecast is up 20.2% by Hulbert Financial Digest count, versus 21.3% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. That is, it's pretty well caught the rally.
And over the longer run, the Aden Forecast's superiority is striking. Over the past 12 months i.e. counting the Crash of 2008, it's up 13% versus negative 6.4%% for the total return Wilshire 5000. Over the past three years, the letter is up an annualized 5.6%, versus negative 4.8% annualized for the total return Wilshire 5000.
In fact, it's been a good decade for the Adens: Over the last ten years, the letter is up annualized 5%, versus just 0.9% annualized for the total return Wilshire.
Long-term, the Adens expect an inflationary collapse. But that doesn't stop them staying with stocks, although they do anticipate short-term weakness. They write:
"The stock market got through September without any trouble and it's still strong, again hitting a one-year bull market high this month. The same is true of the stronger world stock markets. As we've been pointing out, however, they're all temporarily overbought and downward corrections are now getting started. This is not unusual following the significant rises they've had and this will probably continue in the weeks ahead. But following these corrections, the U.S. and global stock markets remain poised to rise much further. Keep the common stocks you have."
The Adens' cynical conclusion:
"The stock market loves the liquidity the Fed is providing. Whether you agree with what's happening or not, Wall Street views the Fed's actions as positive. It's not looking at the super long-term consequences."
If inflation is returning, nominal interest rates will rise. The Adens think we're near the low (in fact, they recommend mortgage refinancing). But it's not here yet. They write:
"The 30 year Treasury is near 4%. When will it be time to short the long bond or buy an inverse Treasury ETF? What will the trigger be?
"Here's what we're watching...a rise above 3.35% on the 10-year yield would be the first sign, ideally followed by a rise above 4.30% on the 30-year. The final signal that a mega upmove in interest rates is unfolding, which would totally confirm the big inflation scenario, would be a sustained rise above 4.65% on the 30-year yield.
"Currently, we're checking the best ways to take advantage of this should it play out. It's not time to buy yet, but the probable candidates when the time comes, are ones like ProFunds:Rs Rt Opp;Inv /quotes/comstock/10r!rrpix (RRPIX 13.30, -0.24, -1.77%) and ProShares UltraShort 20+ Year Treasury ETF /quotes/comstock/13*!tbt/quotes/nls/tbt (TBT 43.09, -1.06, -2.40%) .
About gold, the Adens note that "gold's peak in 1980 at $850 is the equivalent of about $2400 in current dollars. Gold has not even approached that level yet and the situation is far more serious now than it was then."
They conclude:
"The focus now is on the next phase of the current rise. If we continue to use proportions, the bull market's second rise from 1976 to 1980 gained 750%. Using the same growth and applying it to the current bull market, we could see gold eventually reach $4100 during the next run-up. And if you take the entire bull market gain in the 1970s at 2300% and extrapolate, then $5800 would be the equivalent upside target."
$5,800 gold? But stocks okay, too.
Commentary: After a good decade, Aden sisters gleeful about gold
By Peter Brimelow, MarketWatch
NEW YORK (MarketWatch) -- A skillful veteran letter is sanguine about stocks -- but positively gleeful about gold and other hard assets.
Mary Anne and Pamela Aden's Costa Rica-based Aden Forecast first came to fame in the last great gold bull market three decades ago. In the current post-2000 gold bull market, the letter has shown remarkable tactical versatility and a definite willingness to compromise its powerful long-run analysis if short term-trends dictate. ( See Aug. 10 column.)
It's worked. Over the year to date through September, the Aden Forecast is up 20.2% by Hulbert Financial Digest count, versus 21.3% for the dividend-reinvested Wilshire 5000 Total Stock Market Index. That is, it's pretty well caught the rally.
And over the longer run, the Aden Forecast's superiority is striking. Over the past 12 months i.e. counting the Crash of 2008, it's up 13% versus negative 6.4%% for the total return Wilshire 5000. Over the past three years, the letter is up an annualized 5.6%, versus negative 4.8% annualized for the total return Wilshire 5000.
In fact, it's been a good decade for the Adens: Over the last ten years, the letter is up annualized 5%, versus just 0.9% annualized for the total return Wilshire.
Long-term, the Adens expect an inflationary collapse. But that doesn't stop them staying with stocks, although they do anticipate short-term weakness. They write:
"The stock market got through September without any trouble and it's still strong, again hitting a one-year bull market high this month. The same is true of the stronger world stock markets. As we've been pointing out, however, they're all temporarily overbought and downward corrections are now getting started. This is not unusual following the significant rises they've had and this will probably continue in the weeks ahead. But following these corrections, the U.S. and global stock markets remain poised to rise much further. Keep the common stocks you have."
The Adens' cynical conclusion:
"The stock market loves the liquidity the Fed is providing. Whether you agree with what's happening or not, Wall Street views the Fed's actions as positive. It's not looking at the super long-term consequences."
If inflation is returning, nominal interest rates will rise. The Adens think we're near the low (in fact, they recommend mortgage refinancing). But it's not here yet. They write:
"The 30 year Treasury is near 4%. When will it be time to short the long bond or buy an inverse Treasury ETF? What will the trigger be?
"Here's what we're watching...a rise above 3.35% on the 10-year yield would be the first sign, ideally followed by a rise above 4.30% on the 30-year. The final signal that a mega upmove in interest rates is unfolding, which would totally confirm the big inflation scenario, would be a sustained rise above 4.65% on the 30-year yield.
"Currently, we're checking the best ways to take advantage of this should it play out. It's not time to buy yet, but the probable candidates when the time comes, are ones like ProFunds:Rs Rt Opp;Inv /quotes/comstock/10r!rrpix (RRPIX 13.30, -0.24, -1.77%) and ProShares UltraShort 20+ Year Treasury ETF /quotes/comstock/13*!tbt/quotes/nls/tbt (TBT 43.09, -1.06, -2.40%) .
About gold, the Adens note that "gold's peak in 1980 at $850 is the equivalent of about $2400 in current dollars. Gold has not even approached that level yet and the situation is far more serious now than it was then."
They conclude:
"The focus now is on the next phase of the current rise. If we continue to use proportions, the bull market's second rise from 1976 to 1980 gained 750%. Using the same growth and applying it to the current bull market, we could see gold eventually reach $4100 during the next run-up. And if you take the entire bull market gain in the 1970s at 2300% and extrapolate, then $5800 would be the equivalent upside target."
02 October 2009
US govt exiting markets
recently there are talks of the fed planning to exit markets when the time is right.
but that right time would be at least 18 months away. inflation might not be a factor for a long while, that does not mean raw mateirals etc would become cheap, prices of finished goods would ie margins of manufacturers are squeezed. why? us being the largest consumer market is hit from all sides:
but that right time would be at least 18 months away. inflation might not be a factor for a long while, that does not mean raw mateirals etc would become cheap, prices of finished goods would ie margins of manufacturers are squeezed. why? us being the largest consumer market is hit from all sides:
- weak house prices,
- markedly reduced govt revenue esp state government who should balance their books which means further cuts ahead,
- higher oil prices,
- jobless recovery that does not boost jobs
- banks curtailing lending
23 September 2009
Lessons from the Great Depression
This is a WSJ article which is relevant to our current crisis, good reading and observe telltale signs of US govt actions that might hit the depression button.
The 1930s has become the sole object lesson for today's monetary policy. Over the past 12 months, the Federal Reserve has increased the monetary base (bank reserves plus currency in circulation) by well over 100%. While currency in circulation has grown slightly, there's been an impressive 17-fold increase in bank reserves. The federal-funds target rate now stands at an all-time low range of zero to 25 basis points, with the 91-day Treasury bill yield equally low. All this has been done to avoid a liquidity crisis and a repeat of the mistakes that led to the Great Depression.
Even with this huge increase in the monetary base, Fed Chairman Ben Bernanke has reiterated his goal not to repeat the mistakes made back in the 1930s by tightening credit too soon, which he says would send the economy back into recession. The strong correlation between soaring unemployment and falling consumer prices in the early 1930s leads Mr. Bernanke to conclude that tight money caused both. To prevent a double dip, super easy monetary policy is the key.
While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy's relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.
In 1930-31, during the Hoover administration and in the midst of an economic collapse, there was a very slight increase in tax rates on personal income at both the lowest and highest brackets. The corporate tax rate was also slightly increased to 12% from 11%. But beginning in 1932 the lowest personal income tax rate was raised to 4% from less than one-half of 1% while the highest rate was raised to 63% from 25%. (That's not a misprint!) The corporate rate was raised to 13.75% from 12%. All sorts of Federal excise taxes too numerous to list were raised as well. The highest inheritance tax rate was also raised in 1932 to 45% from 20% and the gift tax was reinstituted with the highest rate set at 33.5%.
But the tax hikes didn't stop there. In 1934, during the Roosevelt administration, the highest estate tax rate was raised to 60% from 45% and raised again to 70% in 1935. The highest gift tax rate was raised to 45% in 1934 from 33.5% in 1933 and raised again to 52.5% in 1935. The highest corporate tax rate was raised to 15% in 1936 with a surtax on undistributed profits up to 27%. In 1936 the highest personal income tax rate was raised yet again to 79% from 63%—a stifling 216% increase in four years. Finally, in 1937 a 1% employer and a 1% employee tax was placed on all wages up to $3,000.
Because of the number of states and their diversity I'm going to aggregate all state and local taxes and express them as a percentage of GDP. This measure of state tax policy truly understates the state and local tax contribution to the tragedy we call the Great Depression, but I'm sure the reader will get the picture. In 1929, state and local taxes were 7.2% of GDP and then rose to 8.5%, 9.7% and 12.3% for the years 1930, '31 and '32 respectively.
The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.
In addition to all of these tax issues, the U.S. in the early 1930s was on a gold standard where paper currency was legally convertible into gold. Both circulated in the economy as money. At the outset of the Great Depression people distrusted banks but trusted paper currency and gold. They withdrew deposits from banks, which because of a fractional reserve system caused a drop in the money supply in spite of a rising monetary base. The Fed really had little power to control either bank reserves or interest rates.
The increase in the demand for paper currency and gold not only had a quantity effect on the money supply but it also put upward pressure on the price of gold, which meant that dollar prices of all goods and services had to fall for the relative price of gold to rise. The deflation of the early 1930s was not caused by tight money. It was the result of panic purchases of fixed-dollar priced gold. From the end of 1929 until early 1933 the Consumer Price Index fell by 27%.
By mid-1932 there were public fears of a change in the gold-dollar relationship. In their classic text, "A Monetary History of the United States," economists Milton Friedman and Anna Schwartz wrote, "Fears of devaluation were widespread and the public's preference for gold was unmistakable." Panic ensued and there was a rush to buy gold.
In early 1933, the federal government (not the Federal Reserve) declared a bank holiday prohibiting banks from paying out gold or dealing in foreign exchange. An executive order made it illegal for anyone to "hoard" gold and forced everyone to turn in their gold and gold certificates to the government at an exchange value of $20.67 per ounce of gold in return for paper currency and bank deposits. All gold clauses in contracts private and public were declared null and void and by the end of January 1934 the price of gold, most of which had been confiscated by the government, was raised to $35 per ounce. In other words, in less than one year the government confiscated as much gold as it could at $20.67 an ounce and then devalued the dollar in terms of gold by almost 60%. That's one helluva tax.
The 1933-34 devaluation of the dollar caused the money supply to grow by over 60% from April 1933 to March 1937, and over that same period the monetary base grew by over 35% and adjusted reserves grew by about 100%. Monetary policy was about as easy as it could get. The consumer price index from early 1933 through mid-1937 rose by about 15% in spite of double-digit unemployment. And that's the story.
The lessons here are pretty straightforward. Inflation can and did occur during a depression, and that inflation was strictly a monetary phenomenon.
My hope is that the people who are running our economy do look to the Great Depression as an object lesson. My fear is that they will misinterpret the evidence and attribute high unemployment and the initial decline in prices to tight money, while increasing taxes to combat budget deficits.
30 August 2009
if djia reaches 11,000
many readers ask if djia reaches 11,000 where will hsi be?
my estimtes are below:
---------- DJIA "HSI
low ----- 6,500 10,676
high ---- 9,623 21,196
rebound% 48% "99% 2.06 times
if new
high --- 11,000 25,835
rebound% 69% "142% 2.06 times
present -- 9,546 20,098 28-Aug
djia to
11000 -- 15% -- 26,308 30.90% maintains 2.06 times
------------------ 24,439 21.60% 70% of 2.06 times
------------------ 23,203 15.45% 50% of 2.06 times
as there are no chart patterns at present to make a forecast of hsi, i assume the rebound or rally of hsi may not be as strong as the earlier part, therefore expect a discount which is why there are 70% estimates above.
even if djia does reach 11,000 in late 2009 or 2010, it has to make corrections before going higher, so only buy on heavy dips. my hunch is it may not get that high in 2009.
it is also important that djia would not fall through the critical support of 8800 during it's corrections.
my estimtes are below:
---------- DJIA "HSI
low ----- 6,500 10,676
high ---- 9,623 21,196
rebound% 48% "99% 2.06 times
if new
high --- 11,000 25,835
rebound% 69% "142% 2.06 times
present -- 9,546 20,098 28-Aug
djia to
11000 -- 15% -- 26,308 30.90% maintains 2.06 times
------------------ 24,439 21.60% 70% of 2.06 times
------------------ 23,203 15.45% 50% of 2.06 times
as there are no chart patterns at present to make a forecast of hsi, i assume the rebound or rally of hsi may not be as strong as the earlier part, therefore expect a discount which is why there are 70% estimates above.
even if djia does reach 11,000 in late 2009 or 2010, it has to make corrections before going higher, so only buy on heavy dips. my hunch is it may not get that high in 2009.
it is also important that djia would not fall through the critical support of 8800 during it's corrections.
24 July 2009
PROFITS!!! JPY & DJIA
hsi reached 20000 today, did you make any profit?
many readers had been asking why the blog had not been updated for so long.
first of all, this is not a blog i make my living from, so if i am busy, i wont be writing. but if you had been following the advice in the 24 may blog [hsi close 17062 on 22 may], you should have profitted handsomely. still some readers are asking what stocks to buy. everyone has their own preference, readers are free to choose, yet if you cannot decide then buy ETF like 2800 tracker fund which tracks the hsi in tandem.
jpy
now look at this chart, it had multiple tops formed [neckline 101] over 10 something years, pointing to 66 in about 4-6 years if you can afford to wait this long.
djia
the other chart also has a head and should bottom formation pointing to almost 11100. if this really happens, where will hsi be? in the stratosphere!!! so beware and watch out where this index goes.
click onto the chart for a larger picture if it is too small for viewing.
24 May 2009
HSI & Others
many readers have been asking whether this is a new bull market or just a rebound. if it is just a rebound why is it so strong.
in fact, i have no clues. it is like asking why this fall [dow from 14000 to 6500, hsi from 32000 to 10600] is so drastic. because the fall is so drastic, the rebound has to be too couple with the fact that usa is printing money.
sometimes i tell from my hunch but most of the time i tell from charts.
my hunch this time is that even if this is a new bull run, it will encounter a major correction before a nice bull market can really starts.
HSI
earlier the chart indicates it would reach 16700. after breaking out of 16000, it formed another bottom indicating it would reach 20000. this is very much like when hsbc falls from the top, it formed many head and shoulder tops as it fell each indicating a further low while this time around, hsi has a similar situation forming many [inverted h&s] bottoms when it goes up.
China
it may be false dawn to conclude that china's stimulus can lead world commodities to rally, rather it is the usa who is now printing money fast enough to push money sitting on the sidelines to move back into commodities, stocks, corp bonds and real estate.
HK
real estate in hk is pretty precarious as it has shot up quite a bit. the fact is money in banks gets no interest, so people move into real estate to get some yields. but people who borrows heavily [70%] could be setting themselves up for trouble as interest rates for mortgage at present are about 2.5-3%, any hike in interest rates will cause mortgage instalments to balloon, if wage rate increase cannot catch up with the increase in mortgage amounts it would put extreme pressure on real estate.
while this worry is not imminent, it may still happen. even so, such incident may not come so soon and bubble can keep on going for a while without bursting as deflation may set in before the arrival of inflation since economy activity is still at a low point and may not turn around so fast. current events in the usa of contraction easing is because of inventory rebuilding not because of return of real consumer demand.
i posted two charts - dow in 1930s and nikkei from 1990s, in both periods the indexes encountered depression or severe recession. it took many years to recover part of the losses but not all. obviously the printing of money helps, but when us govt has to exit their positions, the interest rate increases could be tremendous and could block any recovery to its fullest.
to view the charts more clearly, do one of the following:
- double click the picture, it should enlarge or
- place curosr on the image, right click to copy and paste it onto a blank word doc or paint, then enlarge for easy viewing.
06 April 2009
HSI, AUD CAD
HANG SENG
The above is a 3 month chart indicating a classic head and shoulders with neckline at 14000 finally being broken and heading towards 16700.
AUD CAD
The earlier forecasts did not materialize as the necklines stated had not been broken. Also both currencies got support when Fed chairman said shortly after my forecast Fed will buy long bonds to maintain even long yields at low levels to support refinancing of mortgages which means effective money printing - Treasury issue bonds to public to finance govt operations, TARP, TALF etc but Fed will buy such bonds in open market to lower their yields effectively printing money for all these operations.
Recent AUD CAD charts indicate bottom formations that if necklines of 0.72 and 1.22 are broken will head towards 0.84 and 1.13.
09 March 2009
cad aud
look at both charts [weekly], you will see that there looks like a tendency for both currencies to fall further against their previous lows.
cad - if it breaks out of the 130 mark, which has strong resistance as it was tested 3 times recently, and go north, it will hit 142 then 146 eventually
aud - if it breaks out to the south of the 60 mark, it will hit an eventual low of 42.
you can copy and paste the charts onto a word doc, then enlarge it for a clearer picture.
if the above forecasts are right, does the trend of these two currencies foretell something more drastic in the direction of the global economy?
we will soon know.
06 March 2009
DOW, Banking and HSBC
dow
dow jones hit new low just last nite around 6600 which is now closer to my predicted short term low of 6000 earlier [read earlier blogs]
dow had recently fallen two 250+ points sessions, a third one would mean almost 12% decline in a matter of a few days which is surely too much, expect a rebound very soon.
banking
plain vanilla banking in hk and overseas will be very different after this once in a life time credit crunch is over. there are just too many such banks and assets valuation would be much lower then, therefore dont expect a huge rebound in profits of this sector as aging factor will also kick in after 3-5 years in the slumps.
hsbc
given the above, there is no need to subscribe to the rights issue although the i-banks involved undoubtedly will try to maintain some order in hsbc trading prior to book close of the rights.
dow jones hit new low just last nite around 6600 which is now closer to my predicted short term low of 6000 earlier [read earlier blogs]
dow had recently fallen two 250+ points sessions, a third one would mean almost 12% decline in a matter of a few days which is surely too much, expect a rebound very soon.
banking
plain vanilla banking in hk and overseas will be very different after this once in a life time credit crunch is over. there are just too many such banks and assets valuation would be much lower then, therefore dont expect a huge rebound in profits of this sector as aging factor will also kick in after 3-5 years in the slumps.
hsbc
given the above, there is no need to subscribe to the rights issue although the i-banks involved undoubtedly will try to maintain some order in hsbc trading prior to book close of the rights.
27 February 2009
UPDATE
many people, including asset managers appearing on cnbc/bloomberg, in the us and those in hk do not realize how bad the situation is in the usa.
the reason is very simple, they focus on historic statistics, like pe; length of recession; peak to trough of markets etc, which first of all do not really apply in the current mess. the problem for this long and severe downturn is because there is a basic change in the lifestyle of americans. they, in aggregate, started to save [for survival purpose] due to massive unemployment in a very short while.
there is an american saying - it is recession when your neighbour is unemployed, it is depression when you are unemployed. the fact now is both are unemployed.
in past recessions, people can fall back to low salary jobs in the retail sector. because people started to save, no one is shopping anymore. this also causes further unemployment in the retail sector and vacancy to rise in malls. when malls become 10, 20, 30, 40% vacant, shoppers start to desert them for more crowded ones. this in turn causes rent to fall and investors or reit unable to service their debt and further drop in prices of these mortgage backed securities [mbs] if the loans have been securitized.
the reason for such low salary in the retail sector is because it does not need a lot of skills and a lot of labor supply. imagine the us has 70% of the economy based on its internal demand. the retail sector is a much bigger sector than most thought in terms of employment. contraction and more stringent conditions in consumer credit is also one reason that people are forced to save. simply look at the drop in exports of japan and hk to the magnitude of 40+ and 20+% respectively, you can tell how hard people in the us started to save or at another angle, they do not have money to spend which draws a similar conclusion.
the us is now in a vicious circle of credit contraction, unemployment leading to further credit contraction, foreclosures, defaults in every kind of debt [consumer, commercial, property related etc], price destruction in mbs.
when will this cycle be broken? only history can tell, but there are telltale signs when this happens. look for long dated treasury yields to rise above 4-5%, share price of apple above 100, oil price closing up to 60/70s, us govt loans to finanicals are partially repaid.
the reason is very simple, they focus on historic statistics, like pe; length of recession; peak to trough of markets etc, which first of all do not really apply in the current mess. the problem for this long and severe downturn is because there is a basic change in the lifestyle of americans. they, in aggregate, started to save [for survival purpose] due to massive unemployment in a very short while.
there is an american saying - it is recession when your neighbour is unemployed, it is depression when you are unemployed. the fact now is both are unemployed.
in past recessions, people can fall back to low salary jobs in the retail sector. because people started to save, no one is shopping anymore. this also causes further unemployment in the retail sector and vacancy to rise in malls. when malls become 10, 20, 30, 40% vacant, shoppers start to desert them for more crowded ones. this in turn causes rent to fall and investors or reit unable to service their debt and further drop in prices of these mortgage backed securities [mbs] if the loans have been securitized.
the reason for such low salary in the retail sector is because it does not need a lot of skills and a lot of labor supply. imagine the us has 70% of the economy based on its internal demand. the retail sector is a much bigger sector than most thought in terms of employment. contraction and more stringent conditions in consumer credit is also one reason that people are forced to save. simply look at the drop in exports of japan and hk to the magnitude of 40+ and 20+% respectively, you can tell how hard people in the us started to save or at another angle, they do not have money to spend which draws a similar conclusion.
the us is now in a vicious circle of credit contraction, unemployment leading to further credit contraction, foreclosures, defaults in every kind of debt [consumer, commercial, property related etc], price destruction in mbs.
when will this cycle be broken? only history can tell, but there are telltale signs when this happens. look for long dated treasury yields to rise above 4-5%, share price of apple above 100, oil price closing up to 60/70s, us govt loans to finanicals are partially repaid.
07 February 2009
B of A, Merrill and US Government
If you want to know why 30 years tbond yield fell below 3% and reached 2.6%, read article below
In Merrill Deal, U.S. Played Hardball
Kenneth Lewis is getting a hard lesson in the new balance of power between Washington and Wall Street.
![[USA Inc.]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_tWp0yAtQP7qvZh4fF-3O419tCSrshXl17L4v6XObiYsojbPxZyGYedpESO3Yl1bJLAOwYFu5TW5-rpdm5YwVenC3ISGud9cn10SkdpLHbq9N-gUlJwxWuiqBLGj_sONe0e_8fIHAAqXFzvCxRtXXM=s0-d){kind=small}
The Bank of America Corp. chairman and chief executive had agreed to buy brokerage giant Merrill Lynch & Co. in September, possibly saving it from collapse. But by early December, Merrill's losses were spiraling out of control. Internal calculations showed Merrill had a horrifying pretax loss of $13.3 billion for the previous two months, and December was looking even worse.
Mr. Lewis had had enough. On Wednesday, Dec. 17, he flew to Washington, ready to declare that he was through with Merrill, people close to the executive say.
"I need you to know how bad the picture looks," Mr. Lewis told then-Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke, according to accounts of the conversation by people inside the government. Mr. Lewis said Bank of America had a legal basis to abandon the deal.
Messrs. Paulson and Bernanke forcefully urged Mr. Lewis not to walk away, praising the bank's earlier cooperation -- but warning that abandoning the deal would be a death sentence for Merrill. They said the move also could undercut confidence in Bank of America, both in the markets and among government officials. Despite the blunt talk, Bank of America executives interpreted the comments as a signal that the government was willing to work out a compromise.
Two days later, in a follow-up conference call, federal officials struck a harder tone. Mr. Bernanke said Bank of America had no justification for ditching Merrill, according to people who heard the remarks. A Federal Reserve official warned that if Mr. Lewis did so and needed more government money down the road, Bank of America could expect regulators to think hard about their confidence in management. Mr. Lewis was told that the government would consider ousting executives and directors, people close to the bank say.
The threats left no doubt: The federal government saw itself as firmly in charge of U.S. financial institutions propped up since October by infusions of taxpayer-funded capital.
During the four weeks that followed Mr. Lewis's conference call, federal officials and Bank of America hashed out a deal to salvage the Merrill takeover. The government agreed to provide $20 billion in additional aid for the Charlotte, N.C., bank, and to provide protection against losses on $118 billion in troubled assets.
![[Merrill Lynch]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_s4ug1AHHnbLsZo4JhOcmUkXaEC2RPC0bNjfeaPHcK5BuoHeUVdyGdKgp6ahTX4M1CmtWlFNe6hDa_oTSSFImcjqxeksEVg0jIzi_oj2akYE8GI2Edfgnlc38l_10fN2lzzVKdWqzx4nlLDfrmZjNQC=s0-d)
The money is coming at a price. Six months into the great bailout of U.S. finance, Washington's rescue attempt has helped shore up the system. But that emergency effort, planned on the fly, has taken the government on a risky journey deep into the heart of American capitalism.
Bureaucrats are calling the shots behind the scenes at some of the nation's largest enterprises. Critics of the bailout program say its rules are opaque and its execution ad hoc, leading to a lingering lack of confidence in the financial system. Some lawmakers are scrambling to steer funds to favored lenders.
Federal officials have said little publicly about their oversight of the institutions that received capital from the Troubled Asset Relief Program. Initially, the government seemed reluctant to use the ownership stakes it got in banks ranging from J.P. Morgan Chase & Co. to Saigon National Bank as leverage over bank executives.
But the tough negotiations with Bank of America, along with recent moves by federal officials related to executive compensation and other issues, suggest that the government's attitude toward the troubled banking industry has changed, as financial markets have deteriorated further and political ire has risen.
When Citigroup Inc. took $25 billion in TARP funds in October, the executive-pay section of its pact with Treasury was just two sentences long and vaguely worded. A second rescue, for $20 billion in December, limits Citigroup's executive bonus pool for 2008 and 2009, requiring that a majority of 2008 bonuses be paid on a deferred basis.
Tough talk by President Barack Obama and other officials about bonuses and perks is making bank executives uncomfortable. Last week, under pressure from Treasury officials, Citigroup canceled its order for a corporate jet. The bank recently has explored its options for modifying the terms of a nearly $400 million marketing deal with the New York Mets.
On Wednesday, Mr. Obama unveiled a series of executive pay curbs, including a strict limit on executive salaries for companies that receive an "exceptional" level of government assistance.
The story of Merrill Lynch's troubles and subsequent rescue negotiations, pieced together from interviews with people who participated in the process, suggests that the government's extension of control over the U.S. banking system is evolving on an makeshift basis. Despite agreeing to pump $25 billion into Bank of America and Merrill in October, the government had no idea the securities firm was hemorrhaging money until it was too late to avoid a second bailout.
By the end of November, two months into the fourth quarter, Merrill had accumulated $13.34 billion in pretax quarterly losses, according to an internal document reviewed by The Wall Street Journal. Some Bank of America executives expressed concern about proceeding with the takeover, people close to the bank say. On the advice of their lawyers, the bank decided to go ahead with Dec. 5 shareholder votes on the deal. Shareholders of both Merrill and Bank of America gave their approval.
![[chart]](https://lh3.googleusercontent.com/blogger_img_proxy/AEn0k_vZoGc1AlYNQpuHD7XdvBpdlhGCVR6B_iIy9An2TYag1FiyXP_OexITpo9i2aEtfO9qq_PfjAhegub5Lg12NgrZalUmtCCGoE1-aHCefVti-4sbgU3sLJZFigv9okCK4J3650Ce6bebm_4TBUpmyA=s0-d)
In September, when the deal was announced, it was viewed as a rare piece of good news during a week when much of Wall Street appeared to be teetering on the brink. On the same weekend that Lehman Brothers Holdings Inc. prepared to seek bankruptcy protection, the 61-year-old Mr. Lewis found a motivated seller in John Thain, Merrill's chairman and chief executive. Mr. Thain was worried that Merrill might follow Lehman down the drain.
After less than 48 hours of due diligence, Bank of America struck an agreement to buy the battered securities firm for $50 billion in stock, or $29 a share. (The value of the deal has since declined along with Bank of America's share price.) "I look forward to a great partnership with Merrill Lynch," Mr. Lewis said, toasting the deal with a glass of champagne.
A month later, Mr. Lewis was at the Treasury Department along with eight other chief executives of large U.S. financial institutions, summoned there by Mr. Paulson. The Treasury secretary wanted the executives to accept a round of government capital totaling $125 billion as a way of shoring up confidence in the banking system.
Mr. Paulson explained that saying no wasn't an option, according to a person who attended the meeting.
"We are going to do this," Mr. Lewis replied, urging the other CEOs to call their boards if they needed approval.
After persuading the nine financial institutions to take taxpayer money, the government, at first, refrained from flexing its muscles.
Bank of America executives remained confident about the deal. Doubts began to creep in shortly before Thanksgiving. With more than a month to go until the end of the fourth quarter, the pretax quarterly losses at Merrill were approaching $9 billion, according to people familiar with the figures. By month's end, the figure had exceeded $13 billion, or $9.29 billion after taxes.
Most of the losses were coming from the securities firm's sales and trading department. But business was even suffering in Merrill's lucrative wealth-management unit, which saw its revenue drop to $797 million in December, from $1.08 billion in October. Still, not all the losses, which included expected write-downs on assets such as Merrill's investment in rental-car company Hertz Global Holdings Inc., should have come as a surprise to Bank of America.
In meetings with Merrill managers, Mr. Thain acknowledged big losses, but said they weren't any worse than those of the firm's Wall Street rivals, noting that November had been a horrible month for everyone, say people who heard his remarks.
At Bank of America, executives debated whether Merrill's losses were so severe that the bank could walk away from the deal, citing the "material adverse effect" clause in its merger agreement. Merger agreements typically specify certain "adverse" conditions that give an acquirer the right to abandon a deal.
But lawyers from inside and outside the bank concluded that the losses likely were in line with other firms, and recommended that Bank of America move forward with the purchase, according to people familiar with the discussions.
The deliberations continued up until a few days before shareholders of Merrill and Bank of America were scheduled to vote, one of these people says. Senior Bank of America executives had "mixed emotions," this person says, but "everyone wanted to see the deal go through."
On Dec. 5, the deal was approved at separate shareholder meetings in Charlotte and New York. Nothing was said about Merrill's problems. "It puts us in a completely different league," Mr. Lewis said about the deal's completion.
On Dec. 8, Merrill's board gathered in Manhattan for its last meeting. Mr. Thain said the firm faced continuing losses, but they weren't unusual, given upheaval in the markets, directors recall.
The next day, Bank of America Chief Financial Officer Joe Price gave a detailed presentation to the bank's directors about its financial situation and Merrill's fourth-quarter woes, according to a person familiar with the meeting.
Within a few days, Merrill's quarterly net losses had swelled to about $14 billion. People close to Bank of America say the losses ticked higher due to trading losses, as well as further asset write-downs. The trading losses stem largely from legacy positions Merrill Lynch took in previous years.
Mr. Lewis told Bank of America directors in a conference call that the bank might abandon the acquisition, which was supposed to close in two weeks.
In mid-December, Edward Herlihy, a partner at law firm Wachtell, Lipton, Rosen & Katz who had helped set the merger talks in motion, reached out to Ken Wilson, a former Goldman Sachs Group banker and a top deputy of Mr. Paulson. By then, Merrill's losses had reached almost $21 billion on a pretax basis, roughly equivalent to about $15 billion in net losses, and some of Bank of America's lawyers felt there was sufficient grounds to invoke the legal clause to torpedo the deal.
Mr. Herlihy, a longtime adviser to Bank of America, expressed concern to Mr. Wilson about the size of the losses, according to people familiar with the matter. Mr. Wilson was stunned by the news. Get Mr. Lewis to call Mr. Paulson, Mr. Wilson said, according to people familiar with the conversation.
At the meeting the next day, Dec. 17, Messrs. Paulson and Bernanke asked Mr. Lewis to give government officials time to think through their options, according to people with knowledge of the discussions. Mr. Lewis agreed and returned to Charlotte.
People close to Mr. Thain say he was unaware of Bank of America's concerns. On Dec. 19, he hopped a plane to Vail, Colo., with his family, people familiar with the matter said.
That same day, about 20 people in Charlotte and Washington dialed into a conference call that included Mr. Lewis, other Bank of America executives, Messrs. Paulson and Bernanke, and other Treasury and Fed officials. Mr. Bernanke told Mr. Lewis that Fed staff members had concluded there was no way for the bank to invoke the material-adverse-change clause in the takeover agreement that would allow it to abandon the deal.
Government officials also warned Mr. Lewis that withdrawing from the deal would frazzle the markets, spark a flurry of lawsuits against Bank of America and tarnish the bank for years. A senior Fed official ratcheted up the pressure, telling Mr. Lewis that any future requests for government assistance would cause officials to consider taking a heavier hand in Bank of America's operations.
The government's tone wasn't hostile. But the implication was obvious, people close to Bank of America say. As the bank's primary regulator, the Fed can force out executives if the agency concludes they are behaving irresponsibly. Mr. Lewis responded matter-of-factly that that government should do what it had to do, and Bank of America would do the same.
Asked what he needed to move ahead with the deal, Mr. Lewis responded that Bank of America wanted additional capital and protection against future losses on Merrill's assets -- something akin to the protection J.P. Morgan Chase & Co. received from the government when it agreed to take over Bear Stearns Cos. last March. Messrs. Paulson and Bernanke agreed to keep talking.
Over the next several days, government officials sifted through the books at Bank of America and Merrill, wrangling over which toxic assets to guarantee and how to value them, people close to the bank say. It became increasingly clear that Bank of America's balance sheet also was packed with assets that faced bruising write-downs, these people say.
Later, talks slowed because bank executives were concerned about the 8% interest rate the government wanted on new preferred shares it would take in Bank of America, these people say. Executives also complained that executive-compensation restrictions were being forced on it, despite government assurances that officials didn't want to punish the bank. The bank wound up agreeing to limit total compensation, including bonuses, to a fraction of the amounts awarded in recent years.
On Jan. 16, Bank of America announced the new bailout. At the same time, it disclosed Merrill's fourth-quarter net loss of $15.31 billion. Shareholders were floored. Bank of America reported a net quarterly loss of $1.79 billion.
Asked by an analyst about his decision to go ahead with the Merrill deal, Mr. Lewis responded: "We did think we were doing the right thing for the country."
06 February 2009
HOW WALL STREET ENDED
The Weekend That Wall Street Died
Ties That Long United Strongest Firms Unraveled as Lehman Sank Toward Failure
With his investment bank facing a near-certain failure, Lehman Brothers Holdings Inc.'s chief executive officer, Richard Fuld Jr., placed yet another phone call to the man he thought could save him.
Implosion of an Industry
The titans of Wall Street faced the biggest gambles of their professional lives this year -- and blundered to varying degrees. Read how these executives misjudged dangers facing their institutions and financial markets.
Mr. Fuld was already effectively out of options by the afternoon of Sunday, Sept. 14. The U.S. government said it wouldn't fund a bailout for Lehman, the country's oldest investment bank. Britain's Barclays PLC had agreed in principle to buy the loss-wracked firm, but the deal fell apart. Bank of America Corp., initially seen as Lehman's most likely buyer, had said two days earlier that it couldn't do a deal without federal aid -- and by Sunday was deep in secret negotiations to take over Lehman rival Merrill Lynch & Co.
Desperate to avoid steering his 25,000-person company into bankruptcy proceedings, Mr. Fuld dialed the Charlotte, N.C., home of Bank of America Chairman Kenneth D. Lewis. His calls so far that weekend had gone unreturned. This time, Mr. Lewis's wife, Donna, again picked up, and told the boss of Lehman Brothers: If Mr. Lewis wanted to call back, he would call back.
Mr. Fuld paused, then apologized for bothering her. "I am so sorry," he said.
His lament could also have been for the investment-banking model that had come to embody the words "Wall Street." Within hours of his call, Lehman announced it would file for bankruptcy protection. Within a week, Wall Street as it was known -- loosely regulated, daringly risky and lavishly rewarded -- was dead.
As Mr. Fuld waged his increasingly desperate bid to save his firm that weekend, the bosses of Wall Street's other three giant investment banks were locked in their own battles as their firms came under mounting pressure. It was a weekend unlike anything Wall Street had ever seen: In past crises, its bosses had banded together to save their way of life. This time, the financial hole they had dug for themselves was too deep. It was every man for himself, and Mr. Fuld, who declined to comment for this article, was the odd man out.For the U.S. securities industry to unravel as spectacularly as it did in September, many parties had to pull on many threads. Mortgage bankers gave loans to Americans for homes they couldn't afford. Investment houses packaged these loans into complex instruments whose risk they didn't always understand. Ratings agencies often gave their seal of approval, investors borrowed heavily to buy, regulators missed the warning signs. But at the center of it all -- and paid hundreds of millions of dollars during the boom to manage their firms' risk -- were the four bosses of Wall Street.
Details of these CEOs' decisions and negotiations, many of them previously unreported, show how they sought to avert the death of America's giant investment banks. Their efforts culminated in a round-the-clock weekend of secret negotiations and personal struggles to keep their firms afloat. Accounts of these events are based on company and other documents, emails and interviews with Wall Street executives, traders, regulators, investors and others.
Summer Clouds
Lehman CEO Richard J. Fuld Jr. was beset by protesters after hearings in October about the failure of his firm in a fateful weekend for Wall Street.
Earlier this year, when the financial crisis claimed its first victim, Bear Stearns Cos., the surviving masters of Wall Street thought the eye of the storm had passed. Bear Stearns, the smallest of Wall Street's big five stand-alone investment banks, imploded just months after bad subprime bets sunk two internal hedge funds. In March 2008, the government brokered Bear Stearns's sale to J.P. Morgan Chase & Co.
After Bear Stearns's brush with death, the Federal Reserve for the first time allowed investment houses to borrow from the government on much the same terms as commercial banks. Many on Wall Street saw investment banks' access to an equivalent of the Fed "discount window" as a blank check should hard times return. But it would also be the first step in giving the government more say over an industry that had until then been lightly regulated.
In April, Morgan Stanley's CEO, John Mack, told shareholders the U.S. subprime crisis was in the eighth or ninth inning. The same month, Goldman Sachs Group Inc.'s chief executive, Lloyd Blankfein, said, "We're probably in the third or fourth quarter" of a four-quarter game.
Messrs. Mack and Blankfein had some reason to be confident. Mr. Mack had been late to steer Morgan into mortgage trading, and relatively early to sell assets and raise cash. Goldman, under Mr. Blankfein, had even less direct exposure to subprime investments. Mr. Blankfein also took comfort in a stockpile of government bonds and other securities his firm held in case it ran into deep funding problems. By the second quarter, Goldman had increased this store of funds more than 30% from earlier in the year, to $88 billion.
Problems were more acute at Merrill Lynch and Lehman.
John Thain, a former Goldman Sachs president and New York Stock Exchange head, had arrived at Merrill Lynch in December 2007. He moved quickly to cut costs, putting the corporate helicopter up for sale and replacing the fresh flowers on a Merrill floor used by nine or so executives -- an estimated annual expense of $200,000 -- with fakes
More monumentally, Mr. Thain faced $55 billion in soured mortgage assets that Merrill had acquired under his predecessor. Within weeks of his arrival, he had raised more than $12 billion in much-needed capital, including $5 billion from Singapore's state investment company, Temasek Holdings, at $48 a share.
Some of those early deals would end up being costly. With his would-be investors driving a hard bargain, Mr. Thain promised Temasek and others that if Merrill sold additional common stock at a lower price within a year, the firm would compensate them. Within months, after taking a big write-down on a portfolio of mortgage debts that Merrill sold for pennies on the dollar, the firm had to raise more cash at $25 a share. Merrill issued additional shares to pay off its earlier investors, diluting its common shares by 39%. The dilution essentially cost shareholders about $5 billion, well above the previously reported $2.5 billion cost of shares issued to Temasek.
Lehman, now the smallest of the major Wall Street firms, also faced billions of dollars in write-downs from bad mortgage-related investments. In June, Lehman reported the first quarterly loss in its 14 years as a public company. Under Mr. Fuld, Lehman raised capital. But critics say Mr. Fuld was slow to shed bad assets and profitable lines of business. He pushed for better terms with at least one investor that ended up driving it away.
Mr. Fuld had faced challenges to his firm before. Since taking Lehman's reins in 1994, he expanded the 158-year-old bond house into lucrative areas such as investment banking and stock trading. Over the years, he had tamped unfounded rumors about the firm's health and vowed to remain independent. "As long as I am alive this firm will never be sold," Mr. Fuld said in December 2007, according to a person who spoke with him then. "And if it is sold after I die, I will reach back from the grave and prevent it."
In the summer of 2008, Mr. Fuld remained confident, particularly given the security of the Fed's discount window. "We have access to Fed funds," Mr. Fuld told executives at the time. "We can't fail now."
Friday, Sept. 12
Over that week, confidence in Lehman plunged. The firm said its third-quarter losses could total almost $4 billion. Lehman's clearing bank, J.P. Morgan, wanted an extra $5 billion in collateral. Lehman's attempts to raise money from a Korean bank had stalled. Credit agencies were warning that if Lehman didn't raise more capital over the weekend, it could face a downgrade. That would likely force the firm to put up more collateral for its outstanding loans and increase its costs for new loans.
If Mr. Fuld couldn't find an investor for Lehman by Sunday night, the fiercely independent boss could be forced to steer his firm into bankruptcy proceedings.
Earlier that week, Mr. Fuld had approached Bank of America's Mr. Lewis about buying Lehman. A U.S. Treasury official, meanwhile, had contacted Barclays of Britain to suggest it consider taking a stake in Lehman. Mr. Fuld's top executives spent Friday shuttling between the two suitors' law firms.
Lehman was also exploring a third option: The night before, veteran bankruptcy lawyer Harvey Miller of Weil, Gotshal & Manges had secretly begun cobbling together a bare-bones bankruptcy filing for the firm.
Lehman's troubles were putting the rest of Wall Street on notice.
In a Merrill Lynch conference room in downtown Manhattan that morning, Mr. Thain was on a call with Merrill's board of directors, discussing how to address the chaos. "Lehman is going down, and the [short sellers] are coming after us next," warned Merrill director John Finnegan. "Tell me how this story is going to end differently."
Merrill would be fine, Mr. Thain said. "We are not Lehman," he responded, noting the firm held valuable assets, including its stake in BlackRock, a profitable asset-management firm.
But Merrill's clients, too, were beginning to pull out money. The firm's stock was sinking. Executives, including Merrill President Gregory Fleming, were nervous.
Mr. Fleming believed he'd identified the ideal partner for Merrill. Bank of America, with a strong balance sheet and retail operations, would mesh well with Merrill's securities franchise and 16,000-strong brokerage force. Mr. Fleming worried that Bank of America could buy Lehman instead.
Mr. Fleming called a long-time lawyer for Bank of America, Edward Herlihy of Wachtell, Lipton, Rosen & Katz. "You have to talk to us," Mr. Fleming said. He was told that Merrill's Mr. Thain would have to approach Bank of America's Mr. Lewis. "I know," Mr. Fleming responded. "I'm gonna try."
At 5 p.m. Friday, after a day of massive client withdrawals at Lehman, Mr. Thain's phone rang. It was the Treasury. "Be at the Fed at 6 p.m.," Mr. Thain was told.
Soon after, Mr. Thain gathered along with Morgan's Mr. Mack and Goldman's Mr. Blankfein at the New York Federal Reserve in downtown Manhattan, in a room once used to cash coupons on Treasury bills. The three men were greeted by the masters of the world's biggest economy -- Federal Reserve Chairman Ben Bernanke, Treasury Secretary Henry Paulson, New York Fed Chief Timothy Geithner and Securities and Exchange Commission chief Christopher Cox. It was a signal moment for the Wall Street firms, which after years of being monitored by the SEC would all soon come under the regulatory watch of a newly powerful Fed.
The federal officials told the Wall Street chiefs to return in the morning. If the mess at Lehman could be fixed, it would be the job of the Wall Street bosses. There would be no public bailout.
An industry-led solution wouldn't be without precedent. In the market panic of 1907, financier J.P. Morgan persuaded fellow bankers to help fund a bailout for failing rivals. Competitors united again in 1998, putting up money to insulate the financial system from the failure of hedge fund Long Term Capital Management.
But now, Mr. Fuld's problems at Lehman were possibly beyond repair.
By that night, Bank of America's team had concluded that Lehman's real-estate portfolio was worse than expected -- and as a result, the firm's liabilities likely exceeded its assets. "We need government assistance, and we are not getting it," the bank's top deal maker, Greg Curl, told his group. Some of the negotiators prepared to fly back early the next morning to headquarters in Charlotte.
Mr. Lewis hadn't come to New York for the Lehman talks. He called Mr. Fuld from Charlotte, telling him that Bank of America couldn't do a deal without federal help. "We will keep a team in New York in case things change," Mr. Lewis told him.
Saturday, Sept. 13
Mr. Fuld arrived at Lehman's office at 7 a.m. on Saturday, wearing a blue suit and tie. The talks with Barclays were still moving. If the government could be moved, there could also be hope for a Bank of America deal.
Merrill, meanwhile, was beginning its own pursuit of Bank of America.
At his home in Rye, N.Y., Mr. Thain was getting dressed for a day at the New York Fed when his phone rang. It was Merrill's president, Mr. Fleming.
"John, you really need to call Ken Lewis," Mr. Fleming said.
"Get me his number," said Mr. Thain, who added it to his papers for the day.
Mr. Thain's black SUV pulled up in front of the New York Fed just before 8 a.m. Top executives from all four investment banks -- minus Lehman's Mr. Fuld -- were there.
Lloyd Blankfein, chief executive of Goldman Sachs Group Inc., left, leaves the U.S. Treasury building in Washington on Monday, Oct. 13.
Federal officials broke Messrs. Thain, Mack and Blankfein and their top aides into groups. One studied the potential fallout from a Lehman failure. Another was charged with putting a value on Lehman's controversial real-estate investments. A third group, which included Mr. Thain and Morgan's Mr. Mack, was supposed to discuss an industry-led bailout for Lehman.
Lehman's president, Bart McDade, walked the group through the embattled firm's books. Mr. McDade did not respond to requests for comment for this article.
Mr. Mack questioned Wall Street's ability to repair markets. The firms could try to backstop Lehman, he argued, but there was no guarantee they wouldn't have to rescue another rival later. "If we're going to do this deal, where does it end?" he said.
As Mr. McDade discussed Lehman's position, Mr. Thain had an epiphany: "This could be me sitting here next Friday."
Mr. Thain pushed his chair back and left the group to caucus with top Merrill officers. "Lehman is not going to make it," he told them.
Mr. Thain stepped to a sidewalk behind the New York Fed and called the Bank of America chief at his home in Charlotte. "I can be there in a few hours," Mr. Lewis said.
Members of Bank of America's deal team, exhausted from scrutinizing Lehman's books, had just landed in Charlotte. Mr. Lewis ordered them back to New York.
Up in Lehman's midtown office, Mr. Fuld was also dialing Mr. Lewis's North Carolina home. His calls went unreturned. "I can't believe that son of a bitch won't return my calls," he told a top adviser.
Lehman's bankruptcy team, meanwhile, was rolling into action. Shortly before noon, Mr. Miller, the Weil Gotshal bankruptcy head, sent an email to several partners. Lehman's name didn't appear in the email. Its subject line read: "Urgent. Code name: Equinox. Have desperate need for help on an emergency situation."
Throughout the day, Mr. Miller's attorneys, working with Federal Reserve officials and their attorneys, began seeking information from Lehman. But with Lehman's top officials tied up at the Fed and in Barclays negotiations, the lawyers were hard-pressed to get the details they needed.
"We were a distraction to the Lehman people," said Lori Fife, a Weil partner. "It felt like it was just a fire drill."
Later that afternoon, Merrill's chief executive met Bank of America's CEO, Mr. Lewis, in the bank's corporate apartment in the Time Warner Center. In a one-on-one meeting overlooking Central Park, the two men agreed that it looked like Lehman would be forced into bankruptcy.
Mr. Thain made his opening offer. "How about buying a 9.9% stake" in Merrill, he proposed.
Mr. Lewis said the bank doesn't tend to buy minority stakes. He suggested Bank of America could buy the whole firm.
"I am not here to sell Merrill Lynch," Mr. Thain responded.
"Well, that is what I want," Mr. Lewis countered.
The two parted with an agreement to keep talking.
Lehman's talks with Barclays, meanwhile, were moving forward at the New York Fed, under the eye of government officials. "Shouldn't I be there?" Mr. Fuld said to Lehman President Mr. McDade and to attorney Rodgin Cohen of Sullivan & Cromwell LLP, a longtime adviser.
What Mr. Fuld appeared not to know was that some top government officials had instructed key Lehman representatives at the Fed building to keep Mr. Fuld away that weekend. The federal officials had explained that Mr. Fuld -- not only Wall Street's longest-serving boss, but a director of the New York Fed -- could be an unnecessary distraction and a lightning rod for criticism.
At the Fed meetings, much of the talk was on the sidelines. When Mr. Thain returned to the New York Fed from his discussions with Mr. Lewis, Merrill advisers told him they had been approached by top Goldman executives. The rival house was interested in taking a 9.9% stake in Merrill and offered to extend a $10 billion line of credit.
Mr. Thain was digesting the news when he was approached by Mr. Mack of Morgan Stanley. "We should talk," Mr. Mack said. The bosses of Merrill and Morgan agreed to meet that evening. Soon, Mr. Thain and two advisers were en route to the Upper East Side apartment of a Morgan co-president.
Mr. Thain drank a Diet Coke as the Morgan and Merrill executives talked. Both sides felt there were benefits to merging. Mr. Thain indicated he needed a deal quickly. The meeting ended without a firm plan. "We have a board meeting Tuesday and can get back to you soon," Mr. Mack said before the group broke up.
As Mr. Thain and his advisers left the apartment, the Merrill chief suggested he had faint hopes for a deal with Morgan Stanley. "I don't think they share our sense of urgency," he said.
Merrill's talks with Bank of America, however, were on track at the bank's law firm, Wachtell Lipton. Merrill's team was camped out on Wachtell's 34th floor. Bank of America's team was on the 33rd. Around midnight, Mr. Lewis left the law firm for his apartment in the Time Warner Center. Pizza arrived at Wachtell at 3 a.m.
At Lehman's offices that evening, Mr. Fuld still hadn't heard back from Mr. Lewis. Attorneys from Weil were poring through documents, drawing up what would be the largest bankruptcy in U.S. history.
But in a rare piece of good news for Lehman, Barclays had agreed to buy Lehman, as long as it didn't have to take on its soured real-estate assets. Lehman's asset-management division would also be spun off. The Fed indicated that a syndicate of banks and brokers had agreed in principle to put up enough capital to support a separate company that would hold Lehman's bad real-estate assets.
Sunday, Sept. 14
A few hours later, at 8 a.m., Mr. Thain arrived at the Time Warner Center for a second one-on-one meeting in Mr. Lewis's corporate apartment. Over coffee, Mr. Thain made his case for a strong price for Merrill despite its stock's recent fall.
At the same time, Merrill officials were huddled with Goldman bankers. Some members of Merrill's team doubted that Goldman could save their firm by taking a 9.9% stake. Pete Kelly, a top Merrill lawyer, also had his reservations about letting rival Goldman see his firm's books. Still, the sides set a late-morning meeting at Merrill's offices.
At 9 a.m., the chiefs of finance arrived again at the New York Fed for a second day of meetings. By the time Mr. Thain arrived, the Merrill chief had a number of options in his back pocket.
Rolling up to the meetings at around the same time was Goldman's chief, Mr. Blankfein. A Goldman aide, referring to days of meltdowns and meetings, carped to Mr. Blankfein: "I don't think I can take another day of this."
Mr. Blankfein retorted: "You're getting out of a Mercedes to go to the New York Federal Reserve -- you're not getting out of a Higgins boat on Omaha Beach," he said, referring to the World War II experience of a former Goldman head. "So keep things in perspective."
At Lehman that morning, Mr. Fuld told his board of directors to gather at the firm's offices. By noon, he expected, the board would be able to approve Lehman's sale to Barclays.
One hurdle remained: To ink a Lehman deal, Barclays needed a shareholder vote. There was no way to get one on a Sunday. Barclays would need the U.S. or British government to back Lehman's trading balances until a vote could be held.
Government approval never came, though there are diverging views on why. Some blame the U.S. government for refusing to commit resources. Others say the British government refused to entertain a deal they worried would expose England to unnecessary risk.
Lehman's president, Mr. McDade, and Mr. Cohen, the attorney, called Mr. Fuld from the New York Fed. Passing Mr. McDade's cellphone back and forth, they broke the Barclays news.
Mr. Fuld postponed his board meeting. He made one more call to Charlotte, answered by Mr. Lewis's wife.
By midafternoon, word emerged that Bank of America was in talks with Merrill Lynch. Mr. Cohen, the attorney, broke the news to Mr. Fuld. "I guess this confirms our worst fears," Mr. Fuld said.
At the Fed, the Lehman executives and their bankruptcy attorneys faced roughly 25 officials from the Fed, Treasury and SEC. The Lehman officials pleaded for federal aid to keep Lehman afloat. But with Barclays and Bank of America off the table, Federal officials wanted a plan in place to soothe markets before trading opened in Asia.
A senior Fed official asked Mr. Miller, the Weil veteran who'd been involved in bankruptcy filings of companies including Bethlehem Steel and Marvel Entertainment, if Lehman was ready to file.
"No," Mr. Miller answered.
"You need more of a plan to prepare to do this," Mr. Miller continued. Lehman had tens of billions of dollars in derivative positions with countless parties. Unless these trades were unwound in an orderly way, it could shock all corners of the financial market. "This will cause financial Armageddon," he said.
Now, Merrill's Mr. Thain needed his own deal more than ever. With a Morgan tie-up looking like a long shot, Merrill focused its attentions on Goldman and Bank of America.
Tempers at Merrill flared as two rival teams pored over the firm's records. Merrill's head of strategy Peter Kraus, a Goldman alumnus hired by Mr. Thain, wanted to pull some of the firm's due-diligence staff away from the Bank of America project to look at Goldman's offer. "We need some people down here," Mr. Kraus said.
"We have a great deal in hand, and need to finish doing this deal," retorted Mr. Fleming, Merrill's president. A few minutes later, Mr. Thain called Mr. Fleming, telling him to send some people to work on the Goldman offer.
Mr. Fleming and Bank of America's lead negotiator, Mr. Curl, hammered out a price. Bank of America would buy Merrill for $29 a share.
Mr. Fleming informed Mr. Thain. At 6 p.m., Merrill's top managers and directors gathered in person and by phone.
"When I took this job this was not the outcome I intended," Mr. Thain told directors. After the board meeting broke up after 8 p.m., Mr. Thain called the chief of Bank of America. "The decision was unanimous," Mr. Thain told Mr. Lewis. "You have a deal."
A more somber scene was playing out at Lehman. Directors, who had been camped at the Midtown offices all day, gathered at around 8 p.m. in the firm's board room. Weil lawyers and Lehman executives summarized the Fed meeting to the frustrated board.
"They bailed out Bear," said Roland Hernandez, the former CEO of Spanish-language TV network Telemundo and a longtime Lehman board member. "Why not us?"
One of Mr. Fuld's assistants broke in to hand him a note: The SEC chairman wanted to address Lehman's board by speakerphone.
Mr. Cox, criticized for his allegedly minor role in the government's bailout of Bear Stearns, had been reluctant to call Lehman. The SEC chief finally called from the New York Fed, surrounded by several staffers, at the urging of Mr. Paulson, the Treasury secretary.
"This is serious," said Mr. Cox. "The board has a grave matter before it," he said.
John D. McComber, a former president of the Export-Import Bank and a Lehman director for 14 years, asked: "Are you directing us to authorize" a bankruptcy filing?
The SEC chief muted his phone. A minute later, he came back on the line. "You have a grave responsibility and you need to act accordingly," he replied.
As the meeting wrapped up around 10 p.m., Mr. Fuld, his suit jacket now off, leaned back in his chair. "I guess this is goodbye," he said. Lehman would file about four hours later.
Just a few blocks away, Merrill and Bank of America executives met to toast their deal. "I look forward to a great partnership with Merrill Lynch," Mr. Lewis said around midnight, a glass of champagne in hand.
The End
Rather than soothing markets, Lehman's bankruptcy filing roiled them -- slamming trading partners that had direct exposure to the firm and sowing fears that Wall Street's remaining giants weren't safe from failure. Shares of Morgan and Goldman plunged. In the credit-default swap market, the price of insurance against defaults of Morgan and Goldman soared.
Hedge funds sought to withdraw more than $100 billion in assets from Morgan Stanley. The firm's clearing bank, Bank of New York Mellon, wanted an extra $4 billion in collateral.
Morgan's chief, Mr. Mack, negotiated a cash infusion from Japan's Mitsubishi UFJ Financial Group. Fed and Treasury officials, concerned that a deal could be derailed by a declining Morgan share price, asked if Mr. Mack had other options. One regulator suggested Morgan Stanley consider selling itself to J.P. Morgan -- from which it had been famously split, 73 years earlier, amid post-Depression banking reform laws.
"We're going to get Mitsubishi done. There is no Plan B," Mr. Mack told one regulator.
Morgan did the deal. But investor fears remained. By Thursday, Fed officials were urging Morgan to become a commercial bank. Such a move would require Morgan to scale back its bets with borrowed money, run the risk of selling lucrative business lines and accept new onsite regulation from the Fed.
Mr. Mack consented, and the following weekend, Morgan Stanley formally ceased to be a securities firm.
The same weekend, Mr. Blankfein convened top lieutenants on his 30th-floor office. After 139 years as a securities firm, he said, Goldman, too, would also reshape itself as a commercial bank. Within hours, the era of Wall Street's giants was over.
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