Wall Street in turmoil

Wall Street in turmoil

By Francesco Guerrera in London, Krishna Guha in Washington and Greg Farrell in New York

Published: September 14 2008 23:48 | Last updated: September 15 2008 10:24

Wall Street was in turmoil on Monday after Lehman Brothers said it would file for bankruptcy protection and Merrill Lynch agreed a $50bn takeover by Bank of America.

BofA’s bold bid for Merrill came as the world’s top banks abandoned efforts to save Lehman and set out to build a firewall against further financial chaos with a $70bn liquidity pool to support other vulnerable institutions.

The moves capped a weekend of high drama that could lead to one of the most radical reshapings in Wall Street history and set the scene for a volatile day on world stock markets.

The Federal Reserve said it was making it easier for financial institutions to access Fed liquidity by easing terms on its borrowing facilities and accepting a much wider range of assets as collateral. The Fed meets to decide on interest rates on Tuesday.

It widened the set of assets eligible as collateral for loans of Treasuries to include all investment grade paper, and raised the size of these Treasury loans to $200bn.

The Fed also suspended rules that prohibit banks from using deposits to fund their investment banking subsidiaries.

The weekend’s dramatic events undermined confidence in financial stocks across Europe. Banks and insurance companies were the heaviest fallers while gold prices jumped higher as investors sought the safety of the precious metal.

Monday’s market reaction will be closely watched by regulators and banking executives to gauge investor sentiment towards the credit crunch that has wreaked havoc on the financial sector for more than a year.

BofA’s rapid U-turn, which saw it abandon talks to buy Lehman and move to Merrill in the space of a few hours, will throw the spotlight on Morgan Stanley and Goldman Sachs. The two could soon become the only independent investment banks in the US.

Merrill’s board voted on Sunday night to approve BofA’s takeover all-stock bid, which was pitched at $29 a share. That is a premium of 70 per cent on Friday’s closing price of $17.05. Merrill’s shares have fallen nearly 70 per cent this year.

The sudden and dramatic turn of events came at the end of a weekend which saw top Wall Street executives locked in increasingly desperate talks over the future of Lehman and the state of the financial sector with Hank Paulson, US Treasury secretary, and Tim Geithner, president of the New York Federal Reserve.

However, bankers familiar with the talks said a rescue plan for Lehman had been seriously undermined after suitors Barclays of the UK and BofA, had walked away. Barclays pulled out in the afternoon after the US government refused to provide a guarantee to enable Lehman to continue trading until a deal had been completed.

Lehman, a 158-year-old firm that is one of the biggest names on Wall Street, said during the New York night that it would file for bankruptcy.

The filing is likely to cause thousands of job losses among Lehman’s 25,000-strong staff. On Sunday night a number of employees were seen leaving Lehman’s Manhattan headquarters with boxes stacked with their possessions, stationery and even some paintings.

In a separate move, regulators had prepared the ground for a Lehman bankruptcy by asking its derivatives counterparties to settle trades between themselves in a special trading session in the afternoon.

Merrill’s decision to enter talks with BofA, which has long coveted its rival’s large retail brokerage business, came after it became apparent that Lehman’s woes could spread to the rest of the investment banking sector in the coming weeks.

John Thain, Merrill's chief executive, who was attending the Lehman crisis talks, approached some rivals asking them whether they would be interested in bidding for his firm, according to people close to the situation.

Morgan Stanley, BofA and some foreign banks were contacted but many of them declined to pursue the talks because they had insufficient time to pore over Merrill’s complex trading books, they added. Merrill, Morgan Stanley and BofA declined to comment.

A takeover of Merrill would be a victory for Ken Lewis, BofA’s chief executive, who has long wanted to combine the lender’s commercial banking operations with Merrill’s army of retail brokers.

However, a deal could saddle BofA with more troubled assets. The bank bought the stricken mortgage-lender Countrywide and a purchase of Merrill would force it to clean up the bank’s trading books, which have already cost Merrill some $52bn in writedowns and credit losses.

Mr Thain, the former Goldman Sachs executive and former head of the New York Stock Exchange who joined Merrill last year after the departure of Stan O’Neal, is almost certain to leave the firm if the BofA takeover goes through.

He is a fervent supporter of John McCain, the Republican presidential candidate, and some experts expect him to seek a political career.

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The ‘Japanification’ of Wall Street

Some old Tokyo hands have that creeping feeling of déjà vu when they look across the Pacific at events in the US.

The unfolding crises at Lehman Brothers, Washington Mutual – and before, , at Bear Stearns — have some eerily familiar patterns that evoke those days when Japan’s banks seemed physically incapable of calling a bad loan a “bad loan”, when absurd schemes were hatched in the belief they would reassure investors; and when the dead hand of Japanese bureaucracy seemed to be move silently, ninja-like, behind every financial crisis.

Of course there are always dangers in drawing parallels, not least because ultimately, no two situations are identical and the assumption that one can apply a solution from one problem to another – especially in the world of finance - can lead to both the wrong conclusions and the wrong remedy.

But at this point, some similarities are too striking to ignore, on how officials and executives in the west are approaching problems in today’s investment banking world – everywhere, from Germany to the US - compared with the attitude in Japan around the time of the bubble-era implosion and subsequent bank failures of the early 1990s.

In brief, first, you get denial – banks that were foundering insisting they were in a fine state of health. It’s a common - and, we suppose, understandable - syndrome: Why let your share price tank if you can support it with soothing words?

Then there is obfuscation, the stage at which weasel words, born of great creativity with the truth, are wheeled out – (a la “things are not necessarily going in our favour”). Think, Nippon Credit Bank, Long Term Credit Bank of Japan and – well, here’s a neat list to refresh the memory.

In the US, we’ve seen all kinds of staggeringly optimistic comments from institutions such as from WaMu on Thursday, declaring itself to be “well-capitalised” in virtually the same breath that it forecast a Q3 loan-loss provision of $4.5bn.

Then there were ingenious plots and plans. In Japan, it was always new and marvellous sounding schemes and names for all kinds of vehicles and methods that would remove toxic waste from balance sheets and transform a “bad” bank into a “good” one – though ultimately, as investors found out, there was no way to dodge extreme pain.

This time around, in America, the prize so far for both creative labelling and optimistic plans must go to Lehman and its “key strategic initiatives” – touted earlier this week like some miracle cure that would be unveiled with its dismal Q3 results this week.

Lehman also deserves a Japan bubble prize for its “good bank/bad bank” plan to divvy up onerous property assets between Spin Co and Clean Co, an alluringly simple idea which possibly outdoes the Japanese even in their most financially creative moments.

Then finally, the (sometimes well-hidden) official ‘helping hand‘, as we saw with the Fed over its instrumental role in the sale of Bear Stearns to JPMorgan, and more spectacularly with the bail-out of Fannie Mae and Freddie Mac - and now, if the Washington Post’s report on Friday is to be believed, (and many do believe it), with Lehman.

The Fed and the Treasury Department are “actively helping Lehman Brothers put itself up for sale, and officials are hoping a deal will be in place this weekend before the Asian markets open on Monday,” said the Post.

The parallels (and the lessons) have been apparent for some time. Note this column from the FT’s Gillian Tett’s back in January, where she quoted economist Tadashi Nakamae, who was fretting about a credit crunch 10 years ago: a property bubble had burst in Japan, leaving local banks engulfed in bad loans and prompting a financial crisis.A decade later, guess what, Nakamae “feels an unexpected sense of déjà vu”, she notes.

For as 2008 gets under way, bad loans are yet again undermining major banks, partly due to falling property prices. But this time, the epicentre of the shock is on the other side of the Pacific, in America. “Japan’s banking crisis in the 1990s might prove an important lesson for America’s subprime woes,” Nakamae concludes.


The parallel might have seemed almost unthinkable just a few months ago. After all, Japan’s 1990s banking crisis has gone down as one of the worst in history, generating a staggering $700bn of credit losses. And since then, Wall Street financiers have generally assumed that their own financial system was greatly superior to that in Japan (or almost anywhere else in the world). Indeed, confidence in American finance was so high that in recent years Washington officials have regularly travelled to Tokyo to “tell the Japanese what to do with their banks,” admits one former US Treasury official.

Another economic commentator, Andrew Smithers of Smithers & Co, drew a broader bow, pointing to scarier, macro-economic parallels as well as those in banking and finance in a 2007 paper (”Zaitec and the Convoy System: Unfortunately Japan Leads the Way - Again):

In the late 1980s, when Japan’s bubble was reaching its peak, the excesses where plain to see, credit was too easy, asset prices were too high and profits were being boosted by financial transactions. Despite general agreement on the nature of the problems and their threat to the economy, neither industrial companies nor banks modified their behaviour. Japan’s companies was the object of international scorn for the financial follies of “zaitec” and its banks for the “convoy system”, which assumed that no individual bank could be blamed for what all did and that banks as a whole could not be allowed to fail.

Today it is clear that Japan was, once again, merely leading the way. Both the convoy system and zaitec have become the international rule rather than an example of one country’s exceptionality.

The world has therefore been following the path that Japan pioneered in the late 1980s. The big question is therefore whether the next stage will also be similar to Japan’s subsequent experience. As the credit problems of America and Europe unfold, will their economies fall into torpor even if central banks bring interest rates down to zero, and governments run huge fiscal deficits?

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UK recession has started, says CBI

By Chris Giles, Economics Editor

Published: September 15 2008 00:02 | Last updated: September 15 2008 00:02

Britain is “almost certainly” in the early stages of a recession, the head of the country’s top business body said on Monday, with growth likely to be “feeble at best” next year.

The CBI employers’ organisation says the economy has started shrinking this quarter, and will do so for the rest of the year. If its relatively gloomy prognosis is right, the country faces two consecutive quarters of contraction – meeting the common definition of a recession.

But Richard Lambert, CBI director-general, says the downturn is likely to be much milder than the two previous recessions, of the early 1990s and early 1980s.

The CBI’s assessment comes days after the Organisation for Economic Co-operation and Development predicted that Britain would be the only big world economy to enter recession this year.

Mr Lambert says the Bank of England should be able to cut interest rates because “we are almost certainly in a recessionary phase”, which was likely to bring inflation down sharply. A contracting economy raises spare capacity in an economy and creates insecurity among households and companies, restricting their ability to push through price and wage rises. This usually pushes down inflation by reducing demand.

On Monday, the CBI cut its prediction for economic growth next year to only 0.3 per cent. This compares with a forecast of 1.3 per cent three months ago. For 2008 as a whole, it expects growth of only 1.1 per cent – down from its previous forecast of 1.7 per cent. But the CBI stresses that, at the moment at least, the outlook appeared better than in the last two big recessions.

It is forecasting a cumulative loss of output, from peak to trough, of 0.5 per cent, compared with 2.5 per cent in the recession of the early 1990s and 5 per cent in the early 1980s.

“The R-word is a big deal for politicians, but out there in the real world a quarter point more or less of growth doesn’t make much difference, it just feels very tough,” says Mr Lambert.

“This is not a return to the 1990s when job cuts and a slump in demand were far more prolonged.”

But Mr Lambert says the CBI is hearing its first reports from members that small and medium-size companies are facing credit restrictions by banks.

The CBI is relatively optimistic about unemployment, predicting it will rise from 1.7m now to above 2m in the second half of next year.

Mr Lambert argues that unemployment will increase only gradually because companies expect the downturn to be mild and relatively short. “The strong feeling is, provided companies think recession will be shallow and short, they will be prepared to hoard labour for that period,” he says.

The CBI’s new, more gloomy predictions make it more pessimistic than the Bank, which has forecast stagnation over the coming year followed by a gradual recovery in the second half of 2009. Because of its new stance, the CBI thinks “there is a significant risk that inflation will undershoot the Bank’s target”, particularly if the Bank does not cut interest rates soon.

Assuming the Bank abruptly cuts rates by half a percentage point in November after publishing its next quarterly inflation report, and then make two quarter point cuts next spring, the CBI says inflation will come back down close to the Bank’s 2 per cent target by the end of 2009.

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Journey into conflict: Why Tata is caught in land dispute

By Joe Leahy

Published: September 14 2008 19:16 | Last updated: September 14 2008 19:16

You know immediately when you have reached Khejuri. The roads in the communist part of Nandigram, a remote rural area in India’s West Bengal state, are lined with crude bamboo flagpoles bearing the communist hammer and sickle. At the entrance to the area, paramilitary police check all visitors.

The region about 150km from Calcutta erupted last year into a mini-civil war after the state’s communist government tried to acquire land in Nandigram for a special economic zone being set up by Indonesia’s Salim group. The villagers in Khejuri wanted the zone, arguing it would bring jobs. But their neighbours elsewhere in Nandigram did not want to surrender their farms and started protesting against the project.

The communist cadres in Khejuri took up arms against the protesters, leading to as many as 14 deaths by some reports and creating divisions that persist to this day. “We can’t look them in the eye – we can’t go over there and they can’t come here,” Satarajan Das, a villager in Khejuri, says of his former neighbours in other parts of Nandigram.

The area has come to symbolise one of the central difficulties facing India in its attempt to become an industrial power – how to build big projects without disenfranchising the nation’s farmers, who still comprise 70 per cent of the population, many of them peasants who follow centuries-old farming practices.

The latest high-profile victim of this conflict between industry and agriculture is Tata, one of India’s largest conglomerates. The group is being confronted with farmers’ protests against its plan to build a factory to make the world’s cheapest car, the Nano, also in West Bengal and on prime agricultural land.

India

Vedanta Resources, a UK-listed metals company, is locked in a conflict with tribal people in Orissa, also in India’s east, over a plan to mine hills regarded as sacred. Plans by Posco, the South Korean steelmaker, to build a $12bn (€8.5bn, £6.7bn) plant in Orissa have stalled after opposition from farmers.

No one disputes that India needs more manufacturing industries to create jobs. Agriculture employs nearly 60 per cent of the workforce but generates only one-fifth of gross domestic product. With India’s population, currently 1.1bn, set to grow by half again in less than 30 years, more employment is urgently needed in labour intensive industry outside of agriculture. “No substantial country has ever crossed the barrier of poverty without very substantial industrialisation,” Amartya Sen, the Nobel prize winning economist, noted recently in a column for a local paper.

The problems arise, however, when it comes to acquiring land for industry. Indian industrialists accuse political parties of blowing up conflicts with farmers for their own narrow interests. But analysts say there are fundamental issues of justice that need to be solved in the way that land is acquired. “The industrialists in this country and the developers have got used to the government expropriating land on their behalf at ridiculous prices and giving it to these guys practically free,” says Mohan Guruswamy from the New Dehli-based Centre for Policy Alternatives, a think-tank.

The problem has become particularly acute in West Bengal, where the chief minister, the former hardline communist Buddhadeb Bhattaracharjee, has become a born-again champion of industry, in the model of China.

His government was particularly eager to attract the Tata’s Nano factory because of the project’s high profile in India and overseas. Ratan Tata, group chairman, has captured the imagination of the world with his promise that the Nano will have a starting price tag of Rs100,000 ($2,190, £1,220, €1,545), turning the project into a showcase of India’s expertise in low-cost engineering.

In 2006, West Bengal offered Tata an incentive package few industrialists could resist, including a 1,000 acre plot of land virtually for free, a Rs2bn loan, cheap electricity and an exemption from 12.5 per cent value added tax for 10 years. The deal done, officials showed the Tata group several sites for the plant before settling on Singur, a open patch of lush rice fields near Calcutta on the main highway to Delhi.

But trouble dogged the Nano project from the beginning. In May 2006, a Tata team visiting the area was temporarily detained by protesters and had to be rescued by police. In September that year, police attacked protesters against the plant, one of whom later died of the injuries sustained. In December, when work began to fence off the plant site, police fired shots to clear the area.

The latest strife at the Nano plant came last month when the opposition Trinamool Congress, led by prominent activist Mamata Banerjee, started mass protests calling for 40 per cent of the site to be returned to farmers still opposed to giving up their land for the project. Mr Tata, distressed that the group might miss the October commercial launch date for the Nano, ratcheted up the pressure on the state government to solve the impasse by bluntly warning that he would relocate the plant if the protests continued. The threats drove Ms Banerjee and Mr Bhattacharjee, both of whom have no interest in seeing the Tata group leave the state, back to the negotiating table.

A visit to the villages around Singur shows that this is an area where poor farmers eking out a subsistence living rub shoulders with middle-class agriculturalists.

In Gopalnagar, one of the villages near the Nano site, an old woman scoops up cow dung with her hands and slaps it on to the mud walls of her house. It will stick there while it dries for use as fuel. Nearby are the concrete houses of the richer farmers, who have invested in extensive systems of ponds and wells for irrigation and make a decent profit off their land.

The government’s mistake was not to first try to build a consensus among these people, particularly the more prosperous farmers, over the need for the plant, analysts say. “The government of West Bengal has adopted a ‘my way or the highway’ attitude,” noted Mritiunjoy Mohanty, assistant professor at the Indian Institute of Management Calcutta, in a study.

Many farmers were enraged when the government gave notice that it was planning compulsory purchase of their land. “The government has offered Rs1m per acre but I will not take it. I have not collected my cheque,” says Sarat Das, one of the better-off farmers in Gopalnagar.

A senior official with the state government admits the government did not anticipate the kind of problems it might face in Singur. Dialogue should have started much earlier, he says. “Singur has taught us many lessons,” says the official.

Others blame politicking by Ms Banerjee and the communist government. But analysts say at that underlying the issue is a flaw in India’s legal system that allows governments to compulsorily acquire land for private enterprise even when this serves a convoluted public interest at best.

The West Bengal government argues that acquiring land for private industry is legal because it serves the public purpose of creating jobs and generating taxes. It adds that farmland is typically divided into hundreds of small plots – there are 12,000 title holders at the Nano site alone – making it difficult for industrialists to assemble large chunks of land themselves.

Realising the importance of this issue, India’s central government has drafted an amendment to the 1894 land acquisition law, explicitly prohibiting the compulsory acquisition of land for private interests in most circumstances. But the amendment, currently before parliament, has come too late to solve disputes such as over the Nano project.

The Tata group, which continues to urge the warring parties to sort out their differences, has been portrayed as the hapless victim of politicking, winning it the sympathy of the country’s urban middle classes. But the reality in the villages surrounding the Nano site is more complex. Mr Das of Gopalnagar says Tata had offered the villagers jobs as security guards at the factory but the salaries would not have been enough to live on. “We can earn more with our land. With farming I made this place, got my girls married, three of them. This land is our mother,” he says.

But while the two sides may be poles apart in Singur, at least there is still hope of a peaceful solution, with Ms Banerjee and the government trying to hammer out a deal that will further compensate those who unwillingly gave up their land.

In Nandigram, no happy ending is in sight. In Sonachura, a village near Khejuri that protested against the special economic zone in Nandigram and bore the brunt of last year’s violence, the young men are vigilant. They claim that every night, Communist cadres from Khejuri creep into the area and throw bombs at villagers.

“How do we know how many people have lost their lives?” asks Bansi Mandal, a young farmer. “Ask [chief minister] Buddadeb Bhattacharya. Only he knows everything.”

Additional reporting by Arush Chopra and James Fontanella-Khan

‘WE ARE NOT SERVICING CAPITALIST INTERESTS’

West Bengal state is an unlikely hotspot for agrarian protest in India, given that it is also home to the world’s longest-serving democratically elected communist government. The Left Front ruling coalition, led by the Communist Party of India (Marxist), came to power in 1978 with an aggressive land reform agenda that gave tenancy rights to landless cultivators, creating in the process one of India’s most prosperous rural sectors.

But at the same time it drove away industry with practices such as “gheraoing”, whereby union activists encircle a factory manager in his office, detaining him until he accedes to their demands.

The communist government became so anti-business that it even severely restricted the use of computers, claiming they took away jobs, until about a decade ago when it became aware it was missing out on India’s software boom.

Buddhadeb Bhattacharjee, the present chief minister, changed that to a pro-business stance. He is seen as close to Ratan Tata, the Tata group chairman who delivered him a coup by agreeing to make the Nano in West Bengal in exchange for subsidies such as cheap land.

CPI (M) leaders thump the table when they are accused of being pro-capitalist in their new industrial policy.

“We are not servicing the interests of capitalists,” argues Biman Basu, chairman of the Left Front, the state ruling coalition led by CPI (M). “We want to create jobs for our young people.”

The CPI (M)’s hegemony in the state has been challenged by the Trinamool Congress, a breakaway of the federal Congress party led by Mamata Banerjee.

The TMC has won local elections in Singur, enabling it to mobilise mass support against the Nano project. In addition, there are some who believe the ruling coalition, led by the Congress party in Delhi, is supporting her effort.

The Congress party is miffed with the CPI (M) for opposing in the national parliament the ruling coalition’s efforts to secure a deal on nuclear energy with the US.

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Putin fails to dispel doubts over Medvedev

By Stefan Wagstyl in Moscow

Published: September 14 2008 17:00 | Last updated: September 15 2008 07:59

Vladimir Putin relishes an earthy turn of phrase. When talking of Russia’s response to Georgia’s attack on South Ossetia, the Russian prime minister asks: “Should we have wiped the bloody snot off and bowed our heads again this time?”

Dmitry Medvedev, an ex-lawyer, is more refined. The Russian president is happy to be called a liberal and says that he enjoyed his time last year at the World Economic Forum in Davos.

Mr Putin, a former KGB officer, speaks of his 42-year-old protégé as “a modern man, liberal and democratic”, whereas he is “a conservative – although not in the communist sense”.

Few world leaders put themselves up for three hours of cross-examination by foreign visitors. But last week, the two men did just that.

Taking time off from the Georgian crisis, they hosted elegant lunches for the Valdai Club, a group of journalists and academics, and provided glimpses of how they see Russia, the world and each other.

Mr Putin went first, holding court in a luxury spa in the Black Sea resort of Sochi. Looking tanned and younger than his 55 years, he seemed more relaxed than at last year’s Valdai meeting when the succession question was still open.

He cracked jokes, remarking, for example, how much he respected George W. Bush, before adding: “I treat him even better than many Americans would.”

Otherwise, it was a combative performance, peppered with robust language that he perhaps learnt during his impoverished St Petersburg upbringing. He allowed emotions to show, not least his injured sense that the west had taken advantage of Russia in the 1990s.

Touches of sarcasm abounded, including oblique references to the US behaving like “the Roman empire”. But he could also be generous – ending the proceedings with a minute’s silence to mark the anniversary of the September 11 attacks. Mr Medvedev invited the group to a banqueting hall in the Central Department Store, overlooking Red Square. Convenient, he said, for shopping and for the Kremlin. After just four months in office, he was less at ease than Mr Putin. But he was fluent and convincing and as tough on Georgia as Mr Putin. He was perhaps a bit too earnest, with the robe of office resting heavily on his shoulders, as one visitor remarked.

But it could hardly be otherwise, given the momentous decision to go to war so soon after taking office. Mr Medvedev had been holidaying on a boat on the River Volga when the fateful news of the Georgian attack had come. “Taking this decision was not easy, especially on day 95 in office,” he said. “But we did it right and I have no qualms about it.”

Mr Medvedev insisted he wanted to focus on Russia’s economic and social development at the same time as bolstering Russia’s influence in the world. “I don’t want a militarised country sheltering behind an iron curtain. I lived in such a country and it was uninteresting and tedious. . . Russia has quite different values from the Soviet Union.”

The key question for many Valdai guests was who really runs Russia. Mr Medvedev emphasised that, as commander-in-chief, he had called the shots in the Georgian crisis and Mr Putin said the same, commenting that “the buck stops with him”.

However, the visitors were left with the same impression as most Russians, that Mr Putin takes the big decisions. In a telling remark, Mr Putin referred to Mr Medvedev as “a good guy”, using a Russian phrase that sounded more like a condescending term of endearment rather than a fitting label for the country’s president. In contrast, Mr Medvedev hardly mentioned Mr Putin, perhaps to avoid detracting from himself.

On Georgia’s pro-west president, Mr Medvedev was even harsher, describing Mikheil Saakashvili as “somebody utterly unpredictable, a person totally burdened by pathological traits, a totally unbalanced person who takes narcotics”. Mr Putin, who contented himself with calling the Georgian leader “criminal”, would have been proud.

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Russians face $45bn debt backlog

By Rachel Morarjee and David Oakley in London

Published: September 14 2008 18:27 | Last updated: September 14 2008 18:27

A backlog of $45bn in foreign debt held by Russian companies and banks needs to be refinanced by the end of the year amid increasingly difficult conditions as western investors reprice the risk of doing business in the country.

Many Russian companies held off raising debt this summer in the hope that the cost of money would decrease but there is now a backlog of $45bn in debt, according to Standard and Poor’s, the rating agency.

The debt market has already shut to third-tier borrowers and the cost of borrowing money in Russia has jumped 2-3 per cent even for blue-chip names, said Kingsmill Bond, strategist at Troika Dialog.

Smaller highly leveraged banks and companies in particular will face problems refinancing debt, with some facing potential defaults on bonds and loans.

Russian Standard Bank is seeking to raise $200m in international loans but its attempts could be hampered because it is junk rated, according to bankers.

Home Credit & Finance Bank, another junk-rated Russian bank with high credit risk, could also face difficulties in raising debt. The lender issued a statement this week that it does not plan to tap capital markets until July next year. This was a bank that managed to raise $450m in debt at the end of July before Russian tanks rolled into Georgia.

In contrast, Russia’s two biggest banks, Sberbank and VTB Group, which are state-owned and have government reserves on which to fall back, should weather the storm, bankers said.

Christopher Green, senior economist at VTB, said: “Smaller companies will clearly face problems.”

There are over 1,000 banks in Russia and the sector was ripe for consolidation even before the market deteriorated, he noted.

Political risk has added to borrowing costs. The bruising battle for control of the TNK-BP joint venture, Russia’s invasion of Georgia and a growing fear of government interference in business have left western investors wondering whether debt payment could be used as a political lever, bankers and analysts said.

“There are concerns that the authorities may manipulate business contracts and potentially the terms of loan repayments to achieve political or economic objectives,” said Elizabeth Stephens, head of credit and political risk analysis at Jardine Lloyd Thompson.

“Western banks and insurers are not just looking at Russia’s ability to pay, but its willingness to pay.”

Russia’s balance sheet is among the strongest in the world, with $581bn of foreign reserves and foreign debt at a much lower percentage of foreign reserves or GDP than its peers, said Frank Gill, head of European sovereign risk at Standard and Poor’s.

“However, if you look at it from the perspective of the global banks, their lending to Russian corporates and banks is very high in absolute dollar terms so banks are reassessing the risk of lending to Russia when they can lend to Asia or Latin America instead,” he added.Additional reporting by Catherine Belton in Moscow

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Porsche family feud hits VW

By Daniel Schäfer in Frankfurt

Published: September 14 2008 17:42 | Last updated: September 14 2008 17:42

The power struggle at Volkswagen turned into a family feud at the weekend, as it emerged that Wolfgang Porsche, chairman of the eponymous sports carmaker, plans to oust his cousin, Ferdinand Piëch, as chairman of VW.

People close to the matter said Mr Porsche closed family ranks against the strong-minded chairman of Europe’s largest carmaker. “The family is deeply disgruntled. Mr Piëch made them look like a fool and he is isolated now,” said one.

Mr Piëch, who would not comment, failed to attend a VW supervisory board meeting on Friday – a move that undermined his position in the eyes of Porsche shareholders. Mr Piëch’s non-attendance helped the labour union outvote shareholders on a motion restricting Porsche’s freedom to co-operate with VW’s premium car unit Audi.

The motion is not strategically important for Porsche. But, by abstaining Mr Piëch broke ranks with three Porsche representatives on Volkswagen’s supervisory board. Mr Porsche said he was “appalled by the voting behaviour of the supervisory board chairman”.

Mr Porsche’s power to force his cousin out is limited as Mr Piëch has the backing of VW’s labour representatives on the supervisory board. A showdown is expected in coming weeks when family members meet.

The family feud has broken out amid growing nervousness among VW’s workforce about Porsche’s tightening grip on Volkswagen. The sports carmaker owns almost 31 per cent of Volkswagen’s shares and intends to raise its stake to more than 50 per cent by November. “The roadmap for the takeover of VW remains unchanged,” said a Porsche official.

Mr Piëch, a former VW chief executive, is, alongside Mr Porsche, seen as a driving force behind the takeover of Volkswagen. Mr Piëch was respected as the only family member to have had a long career in the car industry.

But after failing to attend important meetings – of the family as well as Porsche’s and VW’s supervisory boards – the grandson of VW Beetle inventor Ferdinand Porsche seems to have put his legacy under threat.

It was not the first time that Mr Piëch has sided with the works council at VW, a company that gives the labour unions power over corporate decisions.

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露鵬、白露山がロ大使館へ １６日に弁護士とともに

　尿検査で大麻に陽性反応を示し、日本相撲協会を解雇されたロシア出身の元力士、露鵬と白露山の代理人を務める塩谷安男弁護士は１５日、２人が同弁護士とともに１６日に東京都港区のロシア大使館を訪れることを明らかにした。

　これまでの経過と今後の見通しを説明することが主な目的で、塩谷弁護士は「ビザの問題など支援を期待している。政治問題にするつもりはない」と話した。同弁護士は検査方法や解雇処分を不服とし、相撲協会に２度質問状を提出。法的措置も視野に入れている。

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日本相撲協会、外部理事を最大３人に改定

　日本相撲協会は１５日、理事会、評議員会を開き、外部役員の登用と寄付行為の改定を承認した。

　理事の定員については、「７人以上１０人以内」を「９人以上１３人以内」に改め、外部理事は最大３人となる。監事も「３人以内」とし、親方が就任している現監事は「副理事」と改める。

　武蔵川理事長は人選に着手し、今月中に再度、理事会、評議員会を開き、正式決定すると同時に、文部科学省に報告する。

　また、上限５０００万円、金利２％前後で制度化を目指した超低金利の貸付金制度は、顧問弁護士、公認会計士らと相談した結果、「公益法人として、認められる制度ではない」として創設を断念したことも報告された。

　解雇された元若ノ鵬のガグロエフ・ソスラン氏が相撲協会を提訴していることについては、相撲協会も法的に対応していくことを確認した。

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相撲協会、外部役員導入へ 非常勤で２、３人

　日本相撲協会は１５日、東京・両国国技館で臨時の理事会と評議員会を開き、理事と監事に年寄（親方）以外の外部役員を迎えることを承認した。いずれも非常勤で、理事と監事を合わせて２人または３人。外部役員については一連の不祥事を受け、組織の透明性を高めるために監督官庁の文部科学省から今月中の導入を求められていた。

　今後は人選を進め、再度、理事会と評議員会を開催して決める。

　これに伴い、一般企業の定款に当たる「寄付行為」で、役員の定数を記した第１９条を改定することも了承。現在７人以上１０人以内となっている理事を９人以上１３人以内に、２または３人となっている監事を３人以内と改めることが決まった。現在の監事３人は、監事とは別の「副理事」になる予定。

　寄付行為の施行細則では、理事と監事の選挙に立候補できるのは年寄に限るとあるが、この項も改定を検討するという。

　また大麻所持容疑で逮捕された元若ノ鵬が、解雇の不当を主張して協会を提訴した件について、対抗措置を取ることを決定。