Greece faces severe restrictions on its sovereignty and must privatize state assets on a scale similar to the sell off of East German firms in the 1990s after communism fell, Eurogroup chairman Jean-Claude Juncker said.
"The sovereignty of Greece will be massively limited," he told Germany’s Focus magazine in the interview released on Sunday, adding that teams of experts from around the euro zone would heading to Greece.
"One cannot be allowed to insult the Greeks. But one has to help them. They have said they are ready to accept expertise from the euro zone," Juncker said.
Massive Loss of Sovereignty is an Insult
If I was Greek, I would take a statement regarding massive loss of sovereignty as an insult, not help. Thus, true to form, in aggregate, Juncker’s statements are a collective lie.
European policy makers lashed out at rating companies after Moody’s Investors Service cut Portugal’s debt to junk, reviving calls to curtail their clout.
German Finance Minister Wolfgang Schaeuble said the grip of the big three rating companies had to be broken when asked about Moody’s downgrade. “I have said before that we have to curb the influence of the rating agencies,” Schaeuble told reporters in Berlin today. There’s a need to “break up” the companies’ dominance, he said.
European Commission President Jose Barroso said he “deeply” regrets the timing and magnitude of Portugal’s downgrade by Moody’s and said proposals for increasing regulation of the rating companies in Europe would come out this year. The moves by Moody’s “do not provide for more clarity. They rather add another speculative element to the situation,” Barroso told reporters in Strasbourg today.
The commission, the European Union’s executive arm, “is looking into the regulation of rating agencies to determine whether there are some measures that need to be taken with regard to the prevention of possible conflicts of interest and other matters,” he said. “Developments since the sovereign- debt crisis show we need to take a further look at reinforcing our rules.”
Truth Not Appreciated
I agree with Schaeuble regarding the need to “break…
Moody’s is out with a surprisingly frank appraisal of the Chinese banking system’s precarious capitalization trend, by looking at the recent RMB 54 billion capital raise in the interbank market by the domestic arm of the Chinese Sovereign Wealth fund (CIC), which was "the first part of an RMB 187.5 billion overall fund-raising program mainly to provide additional capital to the three largest state-owned banks, a policy lender, and a policy insurance company."
As Moody’s oh so correctly concludes: "Recapitalizing banks with bond proceeds from banks is credit negative because it increases the effective leverage of the banking system. The transaction’s impact on the system is limited in this case because the increased leverage is not significant, but it would be problematic if effective leverage continues to increase and China’s economic growth stalls." Moody’s stops one step short of calling this transaction what it is: using debt purchased by other banks to recapitalize deteriorating loans on the banks’ asset side: "the increases in assets and equity are artificial and without real economic substance: the increase in reported equity on banks’ balance sheets enables the banks to lend more and effectively leverages up the system. Assuming banks fully deploy the capital raised, the resulting increase in the risk-weighted assets would be RMB 187.5 billion divided by 11.5% (the minimum capital requirement)." What is also not said, but is glaringly obvious, is that the Chinese sovereign wealth fund is likely in a major need of recapitalization, courtesy of its extensive US financial sector equity holdings.
Last week, Huijin, the domestic arm of China Investment Corp (China’s sovereign wealth fund), raised RMB 54 billion in the domestic interbank market. It was the first part of an RMB 187.5 billion overall fund-raising program mainly to provide additional capital to the three largest state-owned banks, a policy lender, and a policy insurance company.
Recapitalizing banks with bond proceeds from banks is credit negative because it increases the effective leverage of the banking system. The transaction’s impact on the system is limited in this case because the increased leverage is not significant, but it would be problematic if effective leverage continues to increase and China’s economic growth stalls. Even without an official breakdown of the bonds’
Chinese banks may struggle to recoup about 23 percent of the 7.7 trillion yuan ($1.1 trillion) they’ve lent to finance local government infrastructure projects, according to a person with knowledge of data collected by the nation’s regulator.
About half of all loans need to be serviced by secondary sources including guarantors because the ventures can’t generate sufficient revenue, the person said, declining to be identified because the information is confidential. The China Banking Regulatory Commission has told banks to write off non-performing project loans by the end of this year, the person said.
The nation’s five-largest banks, including Agricultural Bank of China Ltd., plan to raise as much as $53.5 billion to replenish capital after the sector extended a record $1.4 trillion in credit last year.
“In China now, it is the same as the people getting loans in Phoenix here in the U.S. three years ago,” said Vikas Pershad, chief executive officer of Chicago-based Veda Investments LLC. “People who want money get money, and then they all lose track of it.”
Local governments set up the financing vehicles to fund projects such as highways and airports due to limits on their ability to directly borrow money. The central government this year restricted borrowing on concern money isn’t being used for viable projects.
“The issue is symptomatic of the way the stimulus package was rolled out in 2008,” said Nicholas Consonery, Asia specialist at the Eurasia Group. “It is difficult for local governments to finance these projects. It is written under the Chinese constitution that local governments cannot offer their own debt.”
Chinese Rating Agency Criticizes Moody’s, Fitch, S&P
The head of China’s largest credit rating agency has slammed his western counterparts for causing the global financial crisis and said that as the world’s largest creditor nation China should have a bigger say in how governments and their debt are rated.
“The western rating agencies are politicised and highly ideological and they
Bloomberg TV caught up with ND20 contributor Josh Rosner at yesterday’s FCIC hearing on ratings agencies. His take: If Washington really wants to “dive deep” into the causes of the financial crisis, including the role these agencies played, Rosner “cannot imagine that there would not be criminal charges.” The real issue for him is not whether there is a conflict of interest inherent in Moody’s business model, but the compensation structure that “creates a misalignment of interests” by not keeping the agencies tied to the products they rate for the long-haul. Watch here:
While David Einhorn’s short position in Moody’s (MCO) is by no means new information, we did recently learn that his hedge fund Greenlight Capital is now also short McGraw Hill (MHP), the parent company of fellow ratings agency Standard & Poor’s. He initiated the position after a U.S. judge refused to dismiss a case against the ratings agencies. Those agencies were seeking refuge from such litigation under the notion that their opinions on ratings are protected by free-speech rights. This U.S. District Judge’s refusal to throw out the case could be a landmark ruling, Einhorn says. While this could potentially be a chink in the armor, it is also prudent to point out that 10 of the 11 claims were dismissed; a fact that Moody’s representatives have been quick to point out.
Einhorn presented his short position in Moody’s back at the Ira Sohn Conference where numerous hedge fund managers shared investment ideas. While we can’t track their short positions via SEC filings, we have covered Greenlight’s long portfolio here. Greenlight was up 16.3% for the second quarter and year to date for 2009 is up 21.5%. For more of Einhorn’s tirades shorting companies, we highly recommend reading his book Fooling Some of the People All of the Time: A Long Short Story. In it, you’ll learn how Greenlight constructs and researches investment theses. Not to mention, it’s just an interesting read and story in general.
Instead of summarizing Einhorn’s thoughts regarding why he is short the ratings agencies, we figured we’d just let him tell you himself. Embedded below is his presentation from the Ira Sohn investment conference entitled ‘The Curse of the Triple A.’ You can download the .pdf here or read on below:
So, while he presented that argument back in late May of this year, he appeared on television a few days ago to further elaborate on his argument. Below is the video where he presents his case to CNBC anchors:
And lastly, for posterity’s sake, we would also like to highlight Einhorn’s thoughts…
The downward spiral in commercial real estate market fundamentals has accelerated as the recession persists, Moody’s Investors Service says in its latest Red-Yellow-Green study.
For the first time in six years, none of the seven property types tracked by Moody’s has a "green" or strong score, while four of the property types are at levels of weakness unmatched in the almost 10-year history of the study. The two hotel sectors--full service and limited service--continued to post lowest possible scores of 0 during the first quarter, while the industrial sector recorded its all-time worst score as it fell into red territory.
Multifamily deteriorated enough to fall from green into yellow, where it joins the retail and the central business district office sectors. Moody’s says that while supply pipelines do continue to dry up across all property types, forecasted demand has similarly dropped, so that demand projections for six of the seven property types worsened during the quarter. In addition, vacancy rates have maintained a steadily increasing trend among all property types (except hotels where they are not measured), and the poor absorption expectations do little to assuage the tide of availability.
Among hotels, year-over-year RevPAR fell below the record lows reached the previous quarter and now lag the baseline measure by levels never seen before. Moody’s Red-Yellow-Green report scores markets on a scale of 0 (weak) to 100 (strong) and describes them in traffic light colors, with scores of 0-33 identified as red, 34-66 as yellow, and 67 — 100 as green. The new second quarter study reflects data from the first quarter of 2009.
Does anyone even remember the potty theories that the mortgage crisis would be limited to subprime and how commercial real estate was going to be the savior when residential real estate sank?
Tom Lindmark discusses the lawsuits resulting from losses due in part to rating agencies’ seemingly negligent advice. I don’t fully agree with his conclusion, though do in part – there’s plenty of responsibility to spread around, and a "day in court" is one way to divide it up. – Ilene
Just the first of many lawsuits of this type that will be coming down the pike but this one has some rich irony to it.
Calpers, the California retirement system manager, has filed suit against Moody’s, Standard & Poors and Fitch claiming that they are responsible for over $1 billion of losses it incurred in investments in structured investment vehicles which owned exotic financial assets.
The suit from the California Public Employees Retirement System, or Calpers, a public fund known for its shareholder activism, is the latest sign of renewed scrutiny over the role that credit ratings agencies played in providing positive reports about risky securities issued during the subprime boom that have lost nearly all of their value.
The lawsuit, filed late last week in California Superior Court in San Francisco, is focused on a form of debt called structured investment vehicles, highly complex packages of securities made up of a variety of assets, including subprime mortgages. Calpers bought $1.3 billion of them in 2006; they collapsed in 2007 and 2008.
Calpers maintains that in giving these packages of securities the agencies’ highest credit rating, the three top ratings agencies — Moody’s Investors Service, Standard & Poor’s and Fitch — “made negligent misrepresentation” to the pension fund, which provides retirement benefits to 1.6 million public employees in California.
The AAA ratings given by the agencies “proved to be wildly inaccurate and unreasonably high,” according to the suit, which also said that the methods used by the rating agencies to assess these packages of securities “were seriously flawed in conception and incompetently applied.”
OK, that’s standard stuff and we will see a lot more of it. Who prevails is an open question, however, I think that if the tide does turn against the rating agencies then the legal actions are most likely money down a dry hole. There’s no way that the agencies have the funds to cover a wave of negative judgements. But here’s the most intriguing…
Every once in a while I write about topics that seemingly have nothing to do with investing, but for those that are able to connect the dots, they will actually find great value in these seemingly unrelated topics to wealth building and preservation strategies. As it is the weekend, I'm releasing an article that we originally posted on our website about the topic of meditation and investing on 19 August 2016. Again, to first read our articles when we release them, subscribe to our article fee...
The love affair was no surprise. Nor was the fact that the IMF had taken part in the immolation of Greece. No, the surprise was that the IMF would publicly disclose the extent of incompetence and massive rule breaking that had taken place.
The Ambrose Evans-Pritchard byline told me this would be a good story. Here’s his lead:
The International Monetary Fund’s top staff misled their own board, made a series of calamitous misjudgments in Greece, became euphoric cheerleade...
This morning's Second Estimate of Q2 GDP at 1.1% was a ho-hum event in advance of Fed Chair Yellen speech at Jackson Hole. And indeed the intraday range volatility of today's session was at the 70th percentile of the 165 market days of 2016 and the widest in 37 sessions. The S&P 500 opened higher, rallied with the opening of her speech, and then sold off sharply during with Vice Chairman Stanley Fischer's suggestion that a couple of rate hikes this year were possible. The index bounced back later in the afternoon to its -0.16% Friday close. The index is down 0.68% for the week.
The yield on the 10-year note closed at at 1.62%, up four basis points from the previous close.
Here is a snapshot of past five sessions in the S&P 500.
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Epizyme was founded in 2007, and trying to create drugs to treat patient's cancer by focusing on genetically-linked differences between normal and cancer cells. Cancer areas of focus include leukemia, Non-Hodgkin's lymphoma and breast cancer. One of the Epizme cofounders, H. Robert Horvitz, won the Nobel Prize in Medicine in 2002 for "discoveries concerning genetic regulation of organ development and programmed cell death."
Before discussing the drug targets of Epizyme, understanding epigenetics is crucial to comprehend the company's goals.
Genetic components are the DNA sequences that are 'inherited.' Some of these genes are stronger than others in their expression (e.g., eye color). Yet, some genes turn on or off due to external factors (environmental), and it is und...
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Last fall there was some discussion on the PSW board regarding setting up a YouCaring donation page for a PSW member, Shadowfax. Since then, we have been looking into ways to help get him additional medical services and to pay down his medical debts. After following those leads, we are ready to move ahead with the YouCaring site. (Link is posted below.) Any help you can give will be greatly appreciated; not only to help aid in his medical bill debt, but to also show what a great community this group is.
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