East Asia Feels Crisis

The World Bank says that challenges facing East Asian economies in 2008 have multiplied,which will result in hard times for 2009.From an April forecast of 7.4% 2009 growth in the region,the World Bank now thinks East Asia is likely to grow 5.3% in 2009 and 6.5% in 2010.The region's exports are down on slowing demand from the West.The World Bank produces a semiannual forecast for East Asia and the Pacific,excluding Japan,Australia and New Zealand.It is a U.N. agency that provides loans for industrial development and the encouragement of international commerce.Founded in 1945,its official name is the International Bank for Reconstruction and Development.

The Shape of Recovery

Carlos Mendez,of ICP Capital Markets,says we're headed for an L-shaped economic recovery.We'll see higher unemployment for years.We'll have lower consumption for years.By lowering interest rates,the government is basically punishing people for not taking risks.Look for some bargains in the muni bonds sector,Mr.Mendez recommends.

SEC Criticized For Failures

The Securities and Exchange Commission has been criticized for not doing anything to prevent the financial crisis from developing,or seriously looking into the Ponzi scheme of Bernard Madoff that has ruined several investors.Ms.Schapiro says that, clearly,our regulatory system failed to compensate for the failures of market discipline.It failed to appreciate the interdependencies of financial institutions and the risks they shared.It did not allow regulators to stay ahead of this crisis and prevent it from ever occurring.Mary L. Schapiro is 53.Most observers have expressed confidence in her ability to head the SEC,which will be reformed over the next few years in consequence of its recent failures.

Who Is Mary Schapiro?

If Timothy Geithner,the Treasury Secretary-designate, is Mr.Experience,Mary Schapiro,whom President-elect Obama has chosen to head the Securities and Exchange Commission,the financial industry regulator,is Ms.Experience.Appointed by President Ronald Reagan,she served on the commission for six years,rising to the post of Acting Chairman before President Bill Clinton named her to the top job at the Commodity Futures Trading Commission.Currently,she leads the Financial Industry Regulatory Authority,or FINRA,a self-policing organization for the industry.She has worked for them since 1996.

Shop Talk

A special greeting to Idaho,where I advertised this week.You are home to the gray wolf and vast wilderness areas.Beyond that and ski resorts,little is heard about a state which seems so remote back east.No doubt many of you prefer it that way.But the Internet at least makes mass communication a lot more possible than it once was for those who are interested.The Internet is quiet communication.The sound of the keyboard isn't louder than a light breeze in the aspens.It seems suitable for a backcountry environment or a small town.The low rattle of the keys is the breath of untold numbers of meditative individuals in sparsely populated areas.Have a restorative weekend.

Holiday Greetings

A blessed winter holiday season to all my readers,and a special thank you to our military men and women for serving at this special time.It's a true sacrifice.

Automakers Critical To Canada

The Canadian government,on both the national and provincial level,has been watching the U.S. automakers with great concern.The automotive industry is Canada's largest manufacturing segment,directly employing more than 150,000.The industry contributes more than 14% of Canada's manufacturing output,sustaining 12 Ontario communities.In consequence,the Canadian authorities are providing 3.29 billion dollars U.S. in loans to Canadian subsidiaries of General Motors and Chrysler.The federal government will give 2.09 billion,while Ontario will provide another 1.2 billion,said Prime Minister Stephen Harper and Ontario Premier Dalton McGuinty.President Bush is authorizing 17.4 billion in aid to the struggling automakers.Ford Motor Company is not included in the loan packages,as it only needs a back-up line of credit at this time.

Major Institutions Now Secure

Citigroup has a relatively new management team that has had a lot thrown on its plate to deal with,and is dealing with it well,Hank Paulson remarked.We are not expecting another major financial institution to fail.We have what we need to manage the financial crisis.We're doing everything we know how to work with the transition team.The President-elect made a great decision on Tim Geithner.I take great comfort that this is someone who's got great judgement and knowledge which is there,Mr.Paulson said of the Treasury Secretary-designate,with whom he has worked closely throughout the financial crisis.

Banks Should Open Up

It's critical to have our major banks lending,Mr.Paulson stated.They can't be hoarding capital.Were it not for the actions by the Federal Reserve and Federal Deposit Insurance Corporation taken to date,lending would be even less than it is today.Most people say the banks aren't lending enough.Although we don't want to nationalize our banking system,you're gonna continue to see us do more to encourage banks to lend more.Regardless of what you do,banks are not gonna lend as much as you would like.That's what banks do in such conditions,Mr.Paulson admitted.

Paulson Reacts To Cut

We're all very fortunate that we have a Federal Reserve that's willing to do what is necessary,Treasury Secretary Hank Paulson feels.To date,we've stemmed a cycle of financial failures.The president's made a decision that the failure of automakers would not be a good thing,but no single action is gonna be a silver bullet.A lot of consumer finance takes place outside the banking system.I'm worried consumer credit will be cut off.Much of consumer lending is based on the capital markets.The Federal Reserve can rescue banks,but we didn't have the tools to rescue non-financial firms,Mr.Paulson reflected.

IMF Official Examines Cut

John Lipsky,First Deputy Director of the International Monetary Fund,has been taking stock of the Federal Reserve's recent interest rate cut to 0-0.25%.By itself,Mr.Lipsky said,the Fed cut will not do everything necessary to help this economy.In order to restore credit growth,there are three elements that are always necessary:1.liquidity;2.recapitalization;and 3.transparency.Unfortunately,it looks like there's worse ahead of us in the next few quarters.There is a need for aggressive action to put money back into the financial system,but that alone is not enough to restore functionality to it,Mr.Lipsky explained.All the advanced economies are in recession now.They need to take the action necessary to lead the world out of the recession.The U.S. Treasury needs to recapitalize and cleanse the financial system,the IMF official advised.

Shop Talk

Hello,German pilots.I reached out to you recently.I am thinking about flight this week,as the space shuttle is to be retired in 2010,but there is some talk of President-elect Obama extending its lifespan.He should,because it is unfortunate to have a gap between American spaceflight programs.We would have to rely on the Russians alone for some years to supply the International Space Station-at a time when it is just coming into its own.It is impossible to tell for sure when the follow-on to the shuttle will be ready.All kinds of delays can occur in this complex endeavor.The culture of spaceflight will be lost to some extent because one of its major participants will be partially idled for a period of years.It would be something of a setback for everyone,a loss of momentum.The public needs to be involved in space,but that is difficult without ongoing launches.

Rate Decision Today

Today the Federal Reserve issues its interest rate decision at about 2:15 PM Eastern.This could move the markets.The Dow Jones Industrial Average is down 3% month to date, while the S and P 500 Index is down 3.09% month to date.

Bankers Blame Accounting Rule

Mark to market accounting has made the financial crisis worse than it had to be,said Ed Yingling,CEO of the American Banking Association,an industry trade group.Around the world,there's a growing feeling that mark to market is pro-cyclical.We need to look at how collateralized debt obligations are valued.Mark to market doesn't represent the true value of assets.It is incompatible with a banking system that makes long term loans and investments,Mr.Yingling argued.The markets are completely dysfunctional.That accounting rule should not be wiping out billions of dollars worth of capital,Mr.Yingling bitterly complained.

Cubs Sale Goes Ahead

The sale schedule of the Chicago Cubs will stay as announced,owner Sam Zell stated.We've gotten three bids.I do not think the Cubs sale will be impeded by The Tribune Company bankruptcy.As for the rest of the business world,our system is based on debt and equity,and one of those elements-debt-is missing.The business community is suffering from the financial crisis.I think the Troubled Asset Recovery Program will succeed after the first of the year.Should I have bought Tribune? My head only functions looking forward.This crisis too shall pass,the magnate Sam Zell philosophized.

Commercial Real Estate's Health

With a 2006 or 2007,we would not have had any issue at Tribune,Sam Zell maintained.It was a tsunami.Business eroded much faster than we had expected.The biggest problem everyone has right now is a lack of visibility.It's very hard to see how the economy will be next year.When you look at commercial real estate,everything has to come down to supply and demand.Because we haven't built since 2007,that will cushion the blow to commercial real estate.I don't think there will be any diminution of cash flow.There is less excess inventory in office space than in previous crises,said Sam Zell,who is Chairman of Equity Group Investments.

Zell Assesses Tribune Bankruptcy

The Tribune Company recently filed for Chapter 11 bankruptcy.It holds The Los Angeles Times,The Chicago Tribune,The Baltimore Sun,several T.V. stations and the Chicago Cubs baseball team.The team wasn't included in the filing.The firm has suffered a 20% reduction in gross revenue,owner Sam Zell revealed.In the end,my responsibility is to preserve the value of the company and ensure it goes on into the future,Mr.Zell said.The company has significant positive cash flow as long as it's not making debt payments.Going forward,we now have the time to focus on consolidation,Mr.Zell asserted.

Shop Talk Update

It now looks as though Congress will adjourn without reaching agreement on an auto industry rescue.It will be up to the White House to provide aid through the Treasury Department's Troubled Asset Recovery Program,the 700 billion dollars already appropriated for the financial industry.If need be,Congress will reconvene before January 20 to deal with emergencies.Have an informative weekend.

Shop Talk Early Edition

Please note that,because of an appointment,I may not be in on Friday,so I have decided to post today.Congress would like to adjourn for the year,but they have yet to complete a rescue for the automakers.The Democrats have reached agreement with the White House,but the Republicans aren't there to this point.It has been said that they gave plenty of money to the financial industry,so why won't they give a bit to manufacturing?That says something about the standing of manufacturing in America today.The nation was built on factories,but the service sector is predominant in our day.Nonetheless,we should not dismiss the factory workers.Ultimately,we still need the things they make.A little support for manufacturing is in order if we don't want to vaporize into the cybernetic realm.And we don't want a hole in the heartland where the factories are still a daily concern.

Ford Presents Plan

Ford Motor Company has presented its recovery plan to Congress,along with its peers Chrysler and General Motors.Ford intends to return to profitability by 2011,speeding development of fuel-efficient vehicles such as an electric van and an electric car by 2010.The old line firm will devote 14 billion dollars to advanced technology research,while management will forgo bonuses and CEO Alan Mulally works for one dollar a year.Ford will close two plants by the end of the year and plans to sell its Volvo unit.Although Mr.Mulally says Ford has the near term liquidity it needs,it would like nine billion in bridge financing,in case the financial crisis is protracted.One Nobel laureate,Paul Krugman,thinks the crisis may run until 2011.Before the financial crisis,the U.S. auto industry was gaining strength.Now all automakers worldwide are in difficult straits.

When Normalcy Returns

Ben Bernanke,wearing a black suit,white shirt,and a black tie,promised that once financial conditions have become more normal,the Federal Reserve's extraordinary measures will no longer be necessary,and private counterparties will be looked to again for financing.The economy remains under considerable stress,and activity has downshifted further since September.The Fed sees the economy slowing even after financial markets improve.When they do,the Fed's Open Market Committee will ensure that the Fed's balance sheet is normalized in a timely way,Mr.Bernanke reassured.

Gauging the Fed's Deeds

Government intervention is necessary to protect the public interest,Mr.Bernanke asserted,but the offset of financial turmoil has been incomplete.The Fed has taken a number of extraordinary steps,such as the Term Auction Facility,resulting in large increases in the amount of credit available to the banking system.There were also the foreign currency swap line agreements with 14 other central banks,but judging the effectiveness of the Fed's liquidity programs is difficult.Certainly the credit markets would have been much worse without Fed intervention,the Chairman maintained.

Special Access:With the Fed Chairman

Throughout the financial crisis,Ben Bernanke,Chairman of the Federal Reserve,has exhibited quiet leadership.Mr.Bernanke recently shared his reflections on the course of the crisis and what might be done about it.Our nation is being tested by economic challenges,the central banker said,but there are more tools the Federal Reserve could use.The Fed could purchase long term Treasury bonds or agency debt.It could backstop liquidity in financial markets beyond banks.Further rate cuts are certainly feasible,but obviously the scope is limited:the Fed funds rate has already been cut to 0.5%.The rate cuts were rapid and proactive.Nonetheless,the Fed's liquidity programs have failed to return private credit markets to normal,although they have been helpful in lowering some spreads.The market itself must ultimately address financial problems.

Shop Talk

Hello to the Czech Republic,where I advertised this week.You are an ally and have a picturesque capital,Prague.It's good to have you reading today.It's been noted that the price of gas is so low,the economy should be bouncing back already.If your income is in jeopardy,though,and the value of your home keeps declining,the price of gas doesn't matter enough to make you spend more.It helps to have cheap gas,but it just does not save the recessionary day,as much as we might wish for such a simple solution.There is nothing simple about the financial crisis.Hence the public's angry mood.Yet it is the weekend.It's time to think about old cities like Prague or Kiev,perhaps the home of your ancestors.Think about those European days so many of you came from-or at least admire.

Ford In Best Shape

Of the three U.S. automakers,Ford Motor Company is in the best financial shape.According to CEO Alan Mulally,Ford has enough money to make it through next year without government assistance,and may never need it at all.Nonetheless,the old line firm would like some aid to fully ensure it survives,and is appealing to Congress along with General Motors and Chrysler today.Ford introduced six new models at the recent Los Angeles auto show,including a hybrid version of the Fusion.Ford is staking its future on small,fuel-efficient models,rather than the trucks of its past.

A Big Investor's View

Prince Alwaleed bin Talal of Saudi Arabia,a Citigroup investor since 1991,described Citi as a core investment for him.The fact that CEO Vikram Pandit was left in office proves that the government doesn't want to run the company.I expect to see Citi's dividend raised in three years,the prince said.Until then,we are prepared to accept the dividend cut.We need to give Mr.Pandit some time.He's a man of a mission,of strong vision.Citi is still far from being a nationalized entity,Prince Alwaleed insisted.The deal allows a bounce-back if the markets improve.Frankly,the recent share price destruction is the fault of Citi's previous management,His Royal Highness observed.

Customers Protect Citi

Citigroup's deposit base and loan book are growing,Gary Crittenden pointed out.There will be continuous re-engineering of the company,and that's healthy for it.The deal could be a template for other banks.We brought our assets down by 300 billion dollars.Our legacy assets are exposed to the consumer,but our ex-U.S. customers are mostly in the Citigold category,which should mute the impact of the financial crisis,Gary Crittenden maintained.

CFO on the Rescue

Citigroup's Chief Financial Officer,Gary Crittenden,says the rescue package is not a nationalization.Citi's Tier One ratio is among the highest in the industry.The rescue package does not require Citi to increase lending or change strategy.We haven't won or lost,Mr.Crittenden said,just increased confidence that Citi can do what it has to do in this environment.The talks with the government were highly collaborative.We got to a place that was good for the government,the taxpayer and Citigroup.Today we have the strongest capital ratio of any large bank in the financial services industry.We worked hard to get a package that should have some success,the CFO noted.

Focus on Citigroup:Inside the Rescue Package

Citigroup is a firm that is so large and complex,it's difficult to ascertain just how large it is.There are various rankings of it,depending on what factors are considered.Some say it is the largest bank;some say it is second-largest;it has even been described as fifth largest.In any event,it has around two trillion dollars in assets.It's off-balance sheet entities amount to about 1.23 billion dollars.Those are the troubled ones.Citi's Smith Barney brokerage alone has over 15,000 advisors.When Citi's announced job cuts are completed,it will have about 300,000 employees in 106 countries.The U.S. government has fully committed itself to Citi's survival,believing its loss would be devastating to the world economy.The U.S. is injecting a further 20 billion in cash into Citi;is acquiring 27 billion of Citi preferred stock with an interest rate of 8%;and is guaranteeing 306 billion of Citi securities,loans and commitments.No management changes are required of Citi;executive compensation must be submitted to the government for approval;the quarterly dividend must be reduced to one cent a share for the next three years;and job cuts will be global,across Citi's multiple businesses.The government will acquire a 7.8% stake in Citigroup.