Billion-dollar hedge fund managers face hearing- FT

Billion-dollar hedge fund managers face hearing- FT
Wed Nov 12, 2008 12:43am EST

Nov 12 (Reuters) - Hedge fund managers who earned more than $1 billion last year, including George Soros and Philip Falcone, are being summoned to Capitol Hill on Thursday to testify under oath about potential risks their firms pose to the broader economy, the Financial Times said.

The hearing before the House oversight committee will be headed by Democrat Henry Waxman, the paper said.

Soros and Falcone will appear alongside John Paulson of Paulson & Co, James Simons of Renaissance Technologies Corp and Kenneth Griffin of Citadel Investment Group, the paper said.

The five hedge fund managers were chosen because they were the top earners, according to a rough calculation from Alpha magazine, the FT said, citing people familiar with the matter.

The fund managers could not be immediately reached for comment by Reuters.

Hedge fund executives expect the hearing will focus on questions including whether hedge funds have become so large that they threaten the stability of the financial system, either because of the impact of their trading or because of the impact of the failure of even one big hedge fund, the FT said.

A subsidiary question in this regard is whether hedge fund compensation practices encourage reckless risk taking, according to the paper.

Alpha publishes a list of the most highly compensated managers and executives ever year, the paper said adding that many dispute the accuracy of the figures.

Another issue expected to be discussed will be short selling, the paper said.

Hedge fund managers and consultants told the FT the hearings may be a prelude to stiffer regulations.

The paper said the committee said the managers had co-operated with a long list of requests for documents.

Documents requested included e-mails detailing the level of risk associated with each hedge fund, the value of their positions in mortgage-backed securities, the likelihood of the fund's collapse and the compensation and tax treatment of pay received by top managers, according to the paper.

The committee made clear it had not yet reached a decision on whether it would release all the data it had been given publicly, the paper said.

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Adelson Survives Like ‘Cockroach’ as Fortune Dwindles (Update1)

By Peter Robison
More Photos/Details

Nov. 12 (Bloomberg) -- No one climbed the list of American billionaires faster than Sheldon Adelson. And this year no one is falling any more quickly.

A year after calling critics of his expansion strategy for Las Vegas Sands Corp. wrong, Adelson on Nov. 10 was forced to slow or suspend new projects from Macau to Pennsylvania and invest $525 million of his family’s money in the company to avoid bankruptcy. That’s on top of $475 million he put up in September.

Even so, it’s too early to count the 75-year-old entrepreneur out, long-time associates say.

“If the world came to an end, there would be cockroaches and Sheldon,” said David Kaminer, 64, a former vice president at an Adelson operation that ran the Comdex computer trade show in Las Vegas. “And Sheldon would immediately be smart enough to open a pest-control company.”

Adelson, 75, a former bagel salesman who said in 2006 he would end up richer than Bill Gates, now faces dissension within the ranks of his senior managers, according to a regulatory filing that disclosed the formation of a committee to “resolve disagreements.” As the credit crunch and economic decline squeeze gambling’s growth, he risks the loss of some of his trophy properties, said John Staszak, an analyst with Argus Research Corp. in New York.

“He’s bought time” with the new capital infusion, said Staszak, who has a “sell” rating on the stock. “The future is not good, quite frankly.” Las Vegas Sands lost $32 million in the quarter ended Sept. 30.

50% More Common

Adelson’s company, best-known for the Venetian casino on the Las Vegas Strip, said yesterday it will raise $1.62 billion from sales of preferred stock, warrants and 181.8 million common shares at $5.50 each. That increases the outstanding common stock by more than 50 percent.

Las Vegas Sands shares fell 24 cents, or 4.5 percent, to $5.10 at 4:15 p.m., taking their one-year decline to 95 percent. The stock peaked at $144 in October 2007. The value of Adelson’s two-thirds stake fell to less than $2 billion after surpassing $32 billion last year.

Underlining what’s at risk for Adelson and his company, the government of Macau -- the Chinese gambling hub where Las Vegas Sands collects two-thirds of sales -- said yesterday that it would take over any casino that goes bankrupt. Macau Chief Executive Edmund Ho told reporters he wasn’t referring specifically to Las Vegas Sands.

Adelson declined to comment, said Ron Reese, a Las Vegas Sands spokesman.

Bagels in Boston

The son of a Lithuanian immigrant taxi driver, Adelson grew up in Boston where he shared a one-bedroom apartment with his parents, two brothers and a sister, Kaminer said. After selling newspapers and bagels as a teen, he worked as an advertising salesman, investment adviser and magazine publisher before founding Comdex in 1979. The $800 million sale of his trade-show company gave him the cash to build a casino empire.

He delighted in his run up the Forbes list of wealthiest Americans after he took Las Vegas Sands public in 2004. Ranked No. 60 in 2004, with a net worth of $3 billion, he reached No. 3 in 2006, with $20.5 billion. That year, he said he’d already figured out when he would pass Gates to top the list.

During this period, Adelson got rich faster than anyone in history, “making just under $1 million an hour,” said Peter W. Bernstein, co-author of “All the Money in the World,” a study of billionaires on the Forbes list out in paperback next month.

Losing $3.5 Million an Hour

Forbes recalculated its rich list for the Oct. 27 issue and found Adelson’s fortune dropped $4 billion from Aug. 29 to Oct. 1, the steepest decline for any American who lost at least $1 billion. At his present pace, the one-year loss may rank as the largest ever for a U.S. billionaire in percentage terms, according to Bernstein.

Since Las Vegas Sands stock peaked, Adelson lost about $3.5 million an hour, counting just the value of his stake.

Adelson expanded at “the worst possible time,” said Travis Sell, a consumer-industry analyst at Minneapolis-based Thrivent Asset Management, which doesn’t own shares in Las Vegas Sands.

Gaming revenue for Las Vegas Strip casinos fell for the eighth straight month in August from a year earlier, the longest streak of declines since records began in 1983, according to the Nevada Gaming Control Board in Carson City. Macau felt the contraction as the number of visitors was off 10 percent in September.

Big Bet on Macau

Adelson bet more heavily on Macau than any other U.S. casino, pledging $12 billion for new hotels, casinos and condominiums to create a mass-market tourist destination like Las Vegas. The Sands Macao was the first Vegas-style casino to open there in 2004, followed three years later by the Venetian Macao. Work has started on five other developments, among them a tower called the Shangri-La.

His decisions went against the grain of other casino operators, who were pulling back. As the subprime credit crisis worsened, Adelson was opening a 50-floor tower called the Palazzo adjacent to the Venetian in Las Vegas, making the 7,093- room complex the largest hotel and resort in the world.

Steve Wynn, chief executive of Wynn Resorts Ltd., delayed expansion of the Wynn Macau after the Chinese government began restricting visas in April 2007. Adelson called Wynn’s decision “wrong” in August 2007.

“If Steve Wynn is so smart, why isn’t he richer than I am?” Adelson said in a Bloomberg TV interview. “I’ve proven it over 50 times in my life: You change the status quo, then you’re going to win.”

Wynn Moves To Top

Wynn Resorts has withstood the dip in gambling revenue better than the Las Vegas Sands and replaced it as the largest casino operator by market value last month. Adelson’s hotel slipped to third place, behind Wynn and MGM Mirage.

Adelson’s company said Nov. 10 it would leave the Macau developments half-finished as it focuses on completing a new casino in Singapore. Executives said they hope to secure financing in three to six months to finish the work in Macau.

“The bottom line is there were two paths chosen in Macau -- one was the mass-market, leveraged growth strategy: ‘If you build it they will come,” said Joel Simkins, an analyst at Macquarie Capital (USA) Inc. in New York, referring to Adelson’s strategy. “Steve’s was, “Let’s go for the high end of the market. Let’s build what’s appropriate.” Simkins has a “sell” rating on Las Vegas Sands.

Along the way, Adelson’s go-for-broke attitude made him enemies. D. Taylor, secretary-treasurer of Culinary Workers Union Local 226 in Las Vegas, has fought unsuccessfully to unionize workers at the Venetian. The union is defending itself against a defamation lawsuit Adelson filed in the U.K., according to Taylor.

The casino owner also sued the union in 1997 for picketing on the sidewalk in front of the Venetian. He pursued the case to the U.S. Supreme Court, which declined to overturn an appellate court that ruled the sidewalk constituted a public forum.

“His arrogance came back to haunt him,” Taylor said.

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Komatsu May Get More Than Caterpillar From China Plan (Update3)

By Courtney Dentch
Enlarge Image/Details

Nov. 12 (Bloomberg) -- China's $586 billion stimulus package to build roads and railways may offer more of a sales boost to Tokyo-based Komatsu Ltd. than U.S. construction-machinery makers such as Caterpillar Inc. and Terex Corp.

Komatsu and Swedish truck manufacturer Volvo AB have a greater market share in China, making them more likely to get a lift from the two-year spending plan than their American competitors, said Brian Rayle, an analyst with FTN Midwest Research.

The 4 trillion yuan plan announced Nov. 9 is aimed at keeping the fourth-largest economy growing amid a global recession. Komatsu sold 17 percent of the excavators in China last year, compared with 10 percent from Peoria, Illinois-based Caterpillar, according to a Nov. 10 note from Morgan Stanley analyst Robert Wertheimer. Chinese companies that make small wheel loaders also are likely to benefit, Rayle said.

``Komatsu has always been better positioned in China than the North American guys,'' Rayle said in a phone interview from St. Louis. He rates Caterpillar ``neutral'' and Terex ``buy.''

China accounts for 5 percent of Caterpillar's projected sales of $50 billion this year. Chief Executive Officer Jim Owens, 62, is spending $100 million to triple excavator capacity at its Shandong SEM Machinery Co. unit in northern China as part of a $1 billion investment in emerging markets in the next three years.

``This kind of fairly concentrated spending plan gives us an opportunity to move ahead a bit more aggressively,'' said Rich Lavin, Caterpillar's group president overseeing the Asia region. ``Given time, we'll be a leader in China just like we are in other parts of the world.''

China Ventures

Caterpillar plans to quadruple sales in China to $4 billion in 2010 from more than $1 billion in 2006. In February, Caterpillar bought the 60 percent remaining stake in Shandong SEM, one of its 16 joint ventures in China. It was the company's second purchase of a majority stake in a local venture; it has held a controlling interest in Caterpillar Xuzhou Ltd. since 1994.

Komatsu's location in neighboring Japan won't give it a ``competitive advantage'' in winning projects, Lavin said in a telephone interview yesterday from Peoria. The strengthening yen may also make the Japanese products more expensive, he said.

Caterpillar fell $1.79, or 4.9 percent, to $35.08 at 4 p.m. in New York Stock Exchange composite trading. Komatsu fell 1.3 percent to 1,210 yen in Tokyo.

`Big Chance'

The Chinese government will invest funds in low-rent housing, projects in rural areas, as well as roads, railways and airports, the Beijing-based State Council said on its Web site.

``The recently announced stimulus package will most definitely be a big chance'' for us, Masahiro Yoneyama, Komatsu's Director of China Operations, said in an interview today. ``We have the biggest share of the Chinese market and we can turn this to our advantage better than our competitors.''

Komatsu on Oct. 29 said industry demand worldwide for machines used in construction and mining will drop 3 percent this year, the first decline in seven years, dragged down by the U.S., Europe and Japan. The company had forecast global market growth of as much as 10 percent.

It also slashed its annual profit forecast by 13 percent due to falling demand and because a strong yen will reduce the value of repatriated earnings. A gain of 1 yen to the dollar reduces Komatsu's operating profit by 3.6 billion yen ($36 million) a year and every 1 yen gain to the euro cuts earnings by as much as 600 million yen.

$7 Trillion

The China's spending isn't likely to help Caterpillar counter declines in construction sales in North America and Europe, Rayle and Wertheimer said. The world's largest maker of earthmoving equipment gets more than a third of revenue from construction machinery such as backhoes and excavators.

``Even the massive China stimulus would add only about 4 percent to the fast-weakening $7 trillion global construction market,'' Wertheimer wrote. ``Most other countries don't have the same capacity.''

Volvo, which bought Ingersoll-Rand Co.'s road-building unit in 2007, undertook plans this year to double wheel-loader production at its Shandong Lingong Construction Machinery Co. unit in China, from 17,000 vehicles in 2007. Wheel loaders are used to scoop and load material at quarries and construction sites. The Gothenburg, Sweden-based company, the world's second- biggest truck maker, got 15 percent of last year's sales of 285 billion kronor ($35.4 billion) from Asia.

Terex, based in Westport, Connecticut, may gain on the need for small road-building and construction machinery, Rayle said. CEO Ron DeFeo has been expanding in China and India in a bid to lift sales from emerging markets to $4 billion by 2010, from $2.2 billion in the 12-months period ended in June. Terex is the world's third-largest maker of construction machinery.

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02:38 GMT, Thursday, 13 November 2008
Iran tests new long-range missile

Iran says it has successfully tested a new long-range surface-to-surface missile that is capable of hitting targets in Europe.

Known as the Sajjil, it was described on state TV as a high-speed, solid-fuel missile with a high level of accuracy.

Defence Minister Mohammed Najjar said the missile was a defensive weapon.

Western nations and Israel suspect Iran is seeking to develop an atomic weapon and some have called for pre-emptive strikes against its facilities.

Speculation of a possible strike either by the US or by Israel rose earlier in the year, but has receded amid the lengthy US presidential election campaign.

However, US President-elect Barack Obama has refused to rule out the option of launching a military attack on Iran.

'Deterrent doctrine'

Speaking on state TV, Mr Najjar said the new two-stage missile had an "extraordinarily large capability", but gave few specific details other than its estimated range - of up to 1,200 miles (1,930km).

That would comfortably be enough to strike targets in Israel, as well as bringing into range a swathe of south-eastern Europe.

Iran's current solid-fuel missile, the Fateh, has a range of just 100 miles (170km). Solid-fuel missiles are reputedly more accurate than liquid-fuel missiles, which make up the majority of Iran's long-range arsenal.

"This missile test is in the framework of Iran's deterrent doctrine," the official Irna news agency quoted Mr Najjar as saying.

"It will only land on the heads of those enemies... who want to make an aggression and invade the Islamic republic," he added.

In Washington, the US state department said the launch was "of concern to the international community".

The Pentagon said the latest test demonstrated the need for the US to press ahead with its planned missile shield in Europe.

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13:01 GMT, Wednesday, 12 November 2008
Peres dines with Arab leaders
The Saudi King with Ban Ki-Moon in New York

Israeli President Shimon Peres and Arab leaders including King Abdullah of Saudi Arabia have attended the same dinner at the UN offices in New York.

The joint attendance is a first for the two leaders, whose countries lack diplomatic ties, but reports said there was no contact between the men.

They are attending a two-day UN meeting promoting dialogue on religion and culture, proposed by Saudi Arabia.

Public meetings that include Israeli and Saudi officials are extremely rare.

"It's quite unique when you expect President Peres of Israel...and many kings and leaders from the Arab world...[sitting] down together and having dinner," UN chief Ban Ki-moon said before Tuesday's banquet.

"I sincerely hope that through their participation in the meeting itself and through this kind of social, diplomatic gathering, they will be able to promote further understanding."

Expulsion call

Seventeen heads of state and government, including from Israel, the US, Britain, and several Arab countries, are expected to participate on Wednesday and Thursday in the interfaith conference.

Not all arrived in time for the dinner, but King Abdullah and Mr Peres attended, accompanied by Israeli Foreign Minister Tzipi Livni.

Saudi-owned Al Arabiya News Channel said King Abdullah was seated next to Mr Ban while the Israeli president was seated at a table some distance away.

US President George W. Bush will address the conference on Thursday.

The London-based pan-Arab newspaper al-Quds al-Arabi said that Saudi Arabia's mufti and other prominent religious scholars have boycotted it.

It added that Hassan Nasrallah, the head of the Lebanese Shia movement Hezbollah, has called for the expulsion of Mr Peres from the meeting.

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Bank predicts deep recession next year

By Vanessa Houlder and Norma Cohen

Published: November 12 2008 11:37 | Last updated: November 12 2008 16:42

The Bank of England on Wednesday unveiled the biggest single downward revision in its inflation outlook since it gained independence in 1997 and said it was “very likely” that Britain was already in a recession.

In its quarterly Inflation Report, the Bank forecast that national income could shrink by one to two percentage points over the next few quarters and growth would probably be flat by the end of next year. Consumer price inflation, which at its last reading registered an annualised rate of 5.2 per cent, will fall to its target rate of 2 per cent by the middle of 2009.

In remarks at a press briefing Mervyn King, Bank of England governor, said interest rates could fall much lower than their current 3 per cent and declined to rule out cutting rates to zero.

“We are certainly prepared to cut Bank rates again if that proves necessary,” Mr King said.

Chart: CPI inflation projection based on market interest rate expectations

The governor’s comments helped send the pound tumbling below $1.50 against the dollar for the first time in six years. It also hit a record low against the euro.

The FTSE 100 fell more than 100 points at one stage as worries about the outlook for corporate earnings weighed heavily on investors.

Mr King also declined to rule out the possibility of deflation. However, he said “there is a great likelihood” that RPI inflation – a rate which includes a measure of housing costs – will turn negative next year

Pressed repeatedly to state whether he believed the Bank’s monetary policy committee, which sets interest rates, could or should have acted differently in the months before the worst of the financial crisis hit, Mr King declined to say whether he believed that any mistakes had been made or whether the Bank had learned anything new about monetary policy.

Chart: GDP projection based on market interest rate expectation

Mr King also appeared to offer a green light to broad hints from the government that it is planning to offset the recession with fiscal stimulus.

“The world has changed”, Mr King said, noting that the MPC last week cut rates by 1.5 percentage points, a move completely unpredicted by markets. “In these extraordinary circumstances it is reasonable [to use fiscal stimulus],” Mr King said. “I believe we are seeing that around the world.”

Analysts seized on the Bank’s projections, released after labour data showing unemployment soaring above 1.8m, as evidence that further cuts in interest rates were likely. Jonathan Loynes, of Capital Economics, said they gave “a very strong indication that the MPC expects to cut interest rates much further over the coming months”.

Ross Walker, of RBS, said the report was much more dovish than expected, with an “enormous” projected undershoot in inflation.

But the Bank warned that the prospects for economic growth and inflation were unusually uncertain, reflecting the “exceptional” economic and financial factors affecting the outlook.

It added: “There are also marked uncertainties over the extent to which the slowdown in demand results in spare capacity despite slowing supply growth, and the degree to which it feeds through into easing price pressures; the prospects for world commodity prices; and the likely scale and pace of pass-through of a lower exchange rate.”

The Bank envisaged a decline in output in the short term, driven by a sharp tightening in the supply of money and credit, subdued growth in incomes and past falls in asset prices.

But it projected that gross domestic product would begin to recover in the second half of next year, rising somewhat above its historical average by 2011. Activity could be stimulated by assumed reductions in the bank rate, a gradual expansion in credit supply, lower world energy and food prices, the lower levels of sterling and a continued expansion in government spending.

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View of the Day: Russian rouble rousing

By Neil Shearing

Published: November 12 2008 15:31 | Last updated: November 12 2008 15:31

The decision by the Central Bank of Russia to raise interest rates is unlikely to prevent further falls in the rouble, says Neil Shearing, emerging Europe economist at Capital Economics.

He estimates that the CBR has spent some $30bn defending the rouble since the start of August as it came under pressure from weaker oil prices and an outflow of capital since the conflict in South Ossetia.

“While the rouble is key to national confidence in the economy, the authorities will not want to repeat the mistakes made in the 1990s, when Russia’s reserves were frittered away defending an unsustainable currency peg.”

Mr Shearing says it is no coincidence that the rate announcement came on the day the authorities allowed the rouble to drop by 1 per cent against its euro/dollar basket. “Taken together, it seems the CBR is attempting to set a floor under the currency.”

However, a combination of falling energy prices and fragile investor risk appetite could cause the rouble to drop by about 5 per cent in 2009, he warns. “What’s more, higher rates will exacerbate the downturn in the real economy.

“Already-scarce credit will become more expensive. This, combined with falling oil prices, weaker demand from overseas and slower growth in real incomes could mean that GDP growth slumps to 3 per cent in 2009. Compared with the 8 per cent-plus rates seen over the past two years, that will feel like a very hard landing.”

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US drops plan to buy toxic assets

By Krishna Guha in Washington and Michael Mackenzie in New York

Published: November 12 2008 19:29 | Last updated: November 13 2008 01:00

The US government on Tuesday abandoned its plan to buy toxic assets, feeding a gathering sense of gloom as investors fled from risk and US equity markets sank to levels approaching their October lows.

The decision to drop asset purchases marks a stunning reversal by Treasury Secretary Hank Paulson, who made the plan the centrepiece of his pitch for the $700bn troubled asset relief programme (Tarp), which passed only after a tumultuous battle in Congress.

“Our assessment at this time is that this is not the most effective way to use Tarp funds,” Mr Paulson said. He said the $410bn in uncommitted funds would be better spent on an expanded programme to recapitalise financial companies, support markets for securities backed by consumer debts and prevent foreclosures.

The Treasury Secretary said it was clear by the time Congress passed the Tarp legislation that the plan to buy assets would “take time to implement and would not be sufficient given the severity of the problem”. Capital injections offered a “more powerful” way to shore up the financial system and support lending.

“I will never apologise for changing an approach or strategy when the facts change,” Mr Paulson said.

The S&P 500 index, already weak before Mr Paulson spoke, closed 5.2 per cent lower at 852.30 points, near last month’s low of 848.92 points.

Citigroup shares fell more than 10 per cent to close below $10 for the first time since the 1998 merger between Travelers and Citicorp. The FTSE Eurofirst 300 index tumbled 3.4 per cent.

“For the Treasury to come out and now say they are not going to do what they originally planned, is a real credibility problem,” said Jim Sarni, portfolio manager at Payden & Rygel.

Measures of risk aversion flared, with the implied yield on four-week Treasury bills falling to 4 basis points. Meanwhile, oil dropped $3.17 a barrel to $56.16 in a sign of growing fears of a deep global economic slowdown.

Mr Paulson said the Treasury was evaluating a programme in which the government would provide funds to match those that financial institutions were able to raise from private investors and said such a scheme could be open to non-bank financial firms.

But Mr Paulson signalled that Treasury would wait until it had time to evaluate the first round of recapitalisations before embarking on a second, which looks increasingly unlikely to happen before the next administration takes office.

Mr Paulson said the Treasury was working with the Federal Reserve to develop a large-scale financing programme for asset-backed commercial paper.

Meanwhile, the Barack Obama transition team said he would send Madeleine Albright, a former Democratic secretary of state, and Jim Leach, a former Republican congressman, to represent him at the G20 summit of world leaders this weekend.

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King backs fiscal boost as pound sinks

By Chris Giles

Published: November 12 2008 22:13 | Last updated: November 12 2008 22:13

The pound plunged to new lows against the euro on Wednesday after the Bank of England issued its bleakest assessment of the economy in 15 years.

Mervyn King, the Bank’s governor, gave the green light for the government to use tax cuts or a rise in public spending to limit the recession, and official forecasts indicated interest rates still had further to fall.

The grim message on the economy came as it emerged unemployment rose by 140,000 in the three months to the end of September, to more than 1.8m, its highest level since 1997.

The pound sank on the gloomy outlook, dropping 2.9 per cent to a six-year low of $1.4939 against the dollar; it lost 2.5 per cent to a fresh record low of £0.8356 against the euro and fell 5.6 per cent to Y141.81 against the yen.

The Bank’s central growth forecast suggested the year-on-year drop in national income would hit 1.9 per cent in the second quarter of 2009 and, for 2009 as a whole, the economy would sink 1.3 per cent.

That puts its view of the UK outlook at the bottom of the league for most advanced economies. With such weakness, the Bank now thinks inflation will drop rapidly from its current rate of 5.2 per cent to well below its 2 per cent inflation target.

Saying it expects very low inflation, with a 20 per cent risk of deflation, is the Bank’s way of guiding markets to believe interest rates will be cut. Mr King is never explicit on the subject, but said: “We are certainly prepared to cut the bank rate if that proves to be necessary.”

Malcolm Barr, of JPMorgan Chase, said: “The implication could not be any clearer that last week’s 1.5 percentage point downward adjustment in rates was only part of what is needed.”

Reversing an earlier stance against using tax cuts and public spending to boost the economy, Mr King said that in the current “exceptional circumstances it would be perfectly reasonable to have some use of fiscal stimulus”. But he urged politicians to ensure any tax cuts were temporary.

UK public borrowing is among the highest in Europe at more than 3 per cent of gross domestic product, but it is expected to reach 6 per cent of GDP by 2010.

With unemployment rising from 5.4 per cent in the second quarter to 5.8 per cent in the third, Mr King accepted no responsibility for the bleak outlook. He argued that the coming pain was entirely because of the banking crisis and a sudden deterioration in the short-term economic indicators and, because these two forces were global, oil and commodity prices plunged.

“I am not sure that our behaviour will be very different. We’ve reacted because the world has changed. The way we go about setting interest rates hasn’t changed. I think it’s worked well and I think it will continue to work well,” Mr King insisted.

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German union moderates pay demand

By Chris Bryant in Berlin

Published: November 12 2008 08:52 | Last updated: November 12 2008 15:42

German industry is set to avoid damaging nationwide strike action after the country’s most powerful trade union agreed to moderate its pay demands in the face of a looming domestic recession.

After negotiating throughout the night IG Metall’s Baden Württemberg chapter accepted an 18-month pay package consisting of a 2.1 per cent pay rise from February, followed by another 2.1 per cent raise in May. Employees will also receive an initial one-off €510 payment, plus additional one-time payments next year.

The agreement represented a climbdown from the union’s original 8 per cent demand and it is now likely to be adopted by IG Metall's other chapters which together represent some 3.6m engineering workers.

Berthold Huber, IG Metall general secretary, said the result was “fair” given the “historically difficult situation”.

The deal is set to end weeks of strife during which almost 600,000 workers have carried out warning strikes in an attempt to secure their biggest pay rise in 16 years.

Hopes that German workers would overcome years of corporate wage restraint have been undermined by a succession of downbeat economic data and manufacturers’ warnings of slowing export orders.

The talks represented the first big test of how far companies could force their workers to share the cost of the impending economic slowdown.

Economists also keep a watchful eye on the IG Metall pay round. The result often serves as a barometer of European wage trends.

The union’s initial pay claim had sparked inflation concerns but as the financial crisis gathered steam the European Central Bank became more relaxed about rising prices amid a growing risk of a deep recession. This threat was underscored on Wednesday when a government panel of economic advisers predicted the economy would stall next year.

Union officials had argued that a bigger pay rise was justified because of record industry profits and the need to support domestic consumption.

However, problems at German car companies, which have laid off part-time staff and announced production stoppages, reinforced employers’ arguments that such a big pay increase would be irresponsible given the economic outlook.

The result is significantly less than the union secured during its last pay round. That time IG Metall sought a 6.5 per cent increase for its members and reached a two-stage settlement of an initial 4.1 per cent rise, followed by another 1.7 per cent, spread over 19 months. It was under particular pressure to win a better deal this time round after chemical and steel workers won bumper pay increases earlier this year.

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Regulators crack the whip on banks

By Francesco Guerrera and Joanna Chung in New York

Published: November 12 2008 19:22 | Last updated: November 12 2008 22:24

US financial regulators on Wednesday threatened action against banks that paid high dividends and warned them not to dole out large bonuses, in a stark reminder to Wall Street that government aid should be used to help the economy.

The call on banks to use taxpayer money for lending comes amid a public backlash over the government bail-out of financial groups.

Washington insiders said the move was driven by the regulators’ belief that previous calls to use the $250bn-plus in federal funds to thaw frozen credit markets and ease the economy’s plight had fallen on deaf ears.

In a rare joint statement, regulators said banks should not pay dividends “that could weaken the organisation’s overall financial health, or that could impair its ability to meet the needs of creditworthy borrowers”.

The regulators “will take action when dividend policies are found to be inconsistent with sound capital and lending policies”, said the statement by the Federal Reserve, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the Office of the Comptroller of the Currency.

The warning comes as most banks are poised to decide on the level of payouts for 2008. Some, like Citigroup, have already slashed their dividends but others have argued they would keep their pay-outs intact to reward shareholders for keeping faith in them through troubled times.

People close to the situation said the authorities wanted to present a united front after speculation they had clashed over aspects of the Wall Street bail-out and individual deals such as Wells Fargo’s decision to trump Citi’s bid for Wachovia.

The statement’s warning against “outsized” pay at a time of economic and financial distress will compound the pressure on banking executives to forego bonuses for this year and reduce compensation packages for employees.

“The agencies expect banking organisations to regularly review their management compensation policies to ensure they are consistent with the longer-run objectives of the organisation and sound lending and risk management practices,” it said.

The regulators also urged banks to take action to prevent foreclosures and help keep cash-strapped consumers in their homes. The call follows the decision by several institutions, including JPMorgan, Citi, Bank of America and Fannie Mae, to modify loans and, in some cases, freeze foreclosures.

Wall Street banks have publicly said they would use the federal funds to increase lending.

However, in private, banking executives say that lending markets remain tough and risky, adding that their companies’ first priority is to replenish their battered balance sheets.

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China increases troops on North Korea border

By Demetri Sevastopulo in Washington and Song Jung-a in Seoul

Published: November 13 2008 00:25 | Last updated: November 13 2008 00:25

The Chinese military has boosted troop numbers along the border with North Korea since September amid mounting concerns about the health of Kim Jong-il, the North Korean leader, according to US officials.

Beijing has declined to discuss contingency plans with Washington, but the US officials said the Peoples’ Liberation Army has stationed more soldiers on the border to prepare for any possible influx of refugees due to instability, or regime change, in North Korea.

US and South Korean intelligence agencies believe Mr Kim suffered a stroke in August that has left him paralysed on his left side, possibly severely enough to prevent him from walking. While the US believes Mr Kim remains in control for now, there are growing concerns about how long he can hold on to power if paralysed.

One official cautioned that the increase in Chinese troops was not “dramatic”, but he said China was also constructing more fences and installations at key border outposts. Wang Baodong, the Chinese embassy spokesman in Washington, said he was unaware of any increased deployments.

Speculation about the North Korean leader’s health has mounted since September when he failed to appear at a key military parade to commemorate the 60th anniversary of the repressive communist state. In an attempt to downplay concerns, state-run media released photos of Mr Kim visiting soldiers, but the CIA believes most of the images were either taken before the stroke, or have been altered with software.

US officials believe, however, that one recent photograph of Mr Kim – purportedly watching a football match from the stands of a stadium – appears authentic. But they say the fact that Mr Kim is sitting, with his left arm dangling, reinforces the conclusion that he is paralysed and having difficulty walking. The US believes North Korea would release video footage of Mr Kim to eliminate speculation about his health if that were possible.

The increased Chinese military presence and concerns about the health of the Stalinist leader come as international efforts to convince Pyongyang to abandon its nuclear programme run into obstacles that threaten to derail what President George W. Bush hoped would be a foreign-policy success.

In a ominous sign for the six-party talks, North Korea on Wednesday said international inspectors would not be allowed to take samples from its nuclear complex at Yongbyon. It added that it had slowed down the disablement of its nuclear reactor.

Mr Bush last month removed North Korea from the US terrorism list after Pyongyang agreed to allow inspectors into the country to verify a nuclear declaration it made earlier this year. Critics had previously warned that the vague language of the agreement would allow North Korea to escape from the commitment.

While the US previously insisted that North Korea had agreed to allow inspectors to take samples – to determine how much plutonium has been processed for nuclear weapons – Pyongyang on Wednesday rejected calls for sampling, saying the move would breach its sovereignty.

The dispute has complicated efforts by the six-party members – which include Japan, China, South Korea and China – from convening a meeting to finalise the details of the verification mechanism. One senior US official said North Korea was resisting efforts to have verification system formalised in a six-party document.

“The issue is not sampling, the issue is how to express it in a document that doesn’t involve their loss of face,” said a second senior official.

“The more serious problems going on in the six party talks have nothing to do with [sampling] but rather the continued bad North/South relations and the lack of a diplomatic process with the Japanese,” added the official. “Probably, there are also leadership problems in North Korea that are having an impact on decision making there.”

Japan opposed the US decision to remove North Korea from the terrorism list because it believed the move would reduce pressure on Pyongyang to resolve a dispute about Japanese citizens abducted over several decades by North Korean spies.

Washington has urged North Korea to fulfil a pledge to reopen an investigation into the abductees. But one Japanese source said there had been no progress on the issue, saying the “ball is in [Pyongyang’s] court”.

In another sign of deteriorating relations with North Korea, Pyongyang on Wednesday announced it would close its heavily fortified land border with South Korea from December. Tensions between the North and South have increased under President Lee Myung-bak, who pledged to take a tougher stance on North Korea than his predecessors and to link aid to progress in denuclearisation efforts.

One US official said North Korea was becoming increasingly bellicose towards South Korea because the decision by Seoul to cut off food aid was starting to impact the North Korean military, a key constituency for Mr Kim.

Two weeks ago, Pyongyang threatened to reduce the South to “debris” if Seoul did not stop anti-communist groups from launching pamphlets by balloon over the border. The leaflets contain statements about the health of Mr Kim, which North Korea cannot rebut because of the leader’s illness.

“The South Korean puppet authorities should never forget that the present inter-Korean relations are at the crucial crossroads of existence and total severance,” the North Korean news agency said in a statement.

Kim Ho-nyeon, spokesman for Seoul’s Unification Ministry, called the move “regrettable”, saying it would have a negative impact on efforts to improve inter-Korean relations. He urged the North to come back to the negotiating table to discuss implementing previous inter-Korean agreements from a “realistic” perspective.

A move by the South’s National Human Rights Commission this week to form a special committee on human rights in the North likely raised Pyongyang’s hackles after years of southern downplaying of reports of atrocities.

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World Bank in $100bn aid push

By Daniel Dombey in Washington and Michael MacKenzie in,New York

Published: November 12 2008 02:00 | Last updated: November 12 2008 02:00

The World Bank is set to provide up to $100bn in new aid to developing countries, amid fears that the spreading effects of the financial crisis could devastate poorer and middle-income states.

Ahead of an international summit on the crisis this weekend, Robert Zoellick, World Bank president, said it would be an "error of historic proportions" to ignore the interests of developing states whose projected growth rates have been slashed in the wake of the crisis.

As requests for aid continued to come in from around the world, he forecast the Bank would provide up to $100bn in loans over the next three years through its International Bank for Reconstruction and Development arm. He said the IBRD would increase loans available for developing countries to more than $35bn this year, up from about $16bn planned a few months ago. Last year, such aid totalled $13.5bn.

"You are seeing countries that had very good, sound macro-economic programmes - Mexico, Indonesia - that are in a position where . . . they are not at financial risk but they are worried about . . . getting financing," Mr Zoellick said. "These are the types of countries - Colombia, others - that we are offering as much support as we can."

Underlying his concern, Mr Zoellick said global trade was projected to contract next year for the first time since 1982, while developing countries' growth, which had been expected to reach 6.4 per cent in 2009, was now projected to be 4.5 per cent. Yesterday, the MSCI emerging markets index fell 5.2 per cent.

The World Bank estimates that each percentage point decline in developing country growth rates pushes an additional 20m people into poverty.

The problems facing the world economy and renewed risk aversion among investors were further highlighted yesterday when global stocks fell sharply and the yen gained appreciably against the euro.

Mr Zoellick added it was particularly important to ensure that countries maintained social safety nets, infrastructure investment for the future, and were able to capitalise troubled banks and finance trade.

He said the World Bank would seek to "front load" a separate $42bn in aid available to the world's poorest countries.

"Many of these lower and middle-income countries don't have much fiscal space: much of it has been used up in trying to buffer the effects of the food price crisis," said Eswar Prasad, an expert in the global economy at the Brookings Institution, a Washington DC-based think-tank. "It's a question of whether the financial crisis is going to make life desperate or just difficult."

He cited the Philippines, Vietnam and sub-Saharan countries as being on the brink, while noting that petrol producers such as Venezuela and Mexico were suffering from the fall in oil prices.

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BAE in negotiations with Oman over £1.4bn Eurofighter deal

By Sylvia Pfeifer, Defence Industries Correspondent

Published: November 13 2008 02:00 | Last updated: November 13 2008 02:00

BAE Systems is in talks to sell up to 24 Eurofighter Typhoon fighter aircraft to Oman in a deal worth at least £1.4bn, the Financial Times has learnt.

UK defence sources close to the negotiations said the Gulf state wanted to replace its 24 ageing Jaguar jets with Typhoons within the next four years.

The deal could also lead to billions of pounds' worth of maintenance and support work for BAE, Europe's largest defence -contractor.

The sources said that BAE had been talking directly to the Omani government about the sale without using external advisers. The group's use of middlemen formed part of an investigation into allegations - always denied by BAE - that bribery was used to secure a deal to sell arms and aircraft to Saudi Arabia in the 1980s.

Another export deal in the Middle East would be a feather in the cap of Ian King, the new BAE chief executive. In a sign of the company's commitment to the region, the board, led by Dick Olver, chairman, has decided to hold its first meeting in the Middle East in the coming weeks.

Any agreement would be structured as a government-to-government contract, similar to last year's deal to sell Typhoons to Saudi Arabia.

A successful deal would help ease budget concerns at the Ministry of Defence, which is committed to buying 88 new Typhoons as part of its membership of the Eurofighter consortium building the aircraft, which also includes Spain, Germany and Italy.

The export of some aircraft to Oman would help avoid the severe financial penalties incurred if the UK cancels any part of its Eurofighter order.

The Omani contract would also help secure crucial manufacturing jobs in the UK at a time of falling employment.

Oman has a close relationship with the UK, which has supplied the sultanate with defence equipment for decades. Its air force also operates American F-16 jets.

Last night, a source close to the MoD warned that the deal was not yet concluded. "The Omanis are looking at what capabilities are available in the market, but may decide this is not the right time for them," the source said.

BAE said: "Oman is a customer with whom we have a long and valued relationship . . . we will continue to support their requirements as and when they arise."

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Dubai property prices plummet

By Simeon Kerr in Dubai and Roula Khalaf in London

Published: November 12 2008 17:40 | Last updated: November 12 2008 17:40

Peter, a veteran businessman, took a punt on the rocketing Dubai property market a couple of years ago. He bought two flats in the low-cost International City development, a maze of anonymous buildings beside Dubai’s ring-road.

After selling and turning a tidy profit on both units, he banked one cheque but the other Dh300,000 ($81,700, €65,200, £53,800) bounced. “My [property] broker has disappeared to Bahrain. I don’t think he will be back in a hurry,” he says.

Given the state of market alarm, few are surprised that his broker has done a runner. Rising concerns over a much expected property price correction, crystalised by a Morgan Stanley report predicting a 10 per cent price decline by the end of 2009, grew over the quiet months of the summer and the holy month of Ramadan.

September’s global financial turmoil heightened nervousness in the country’s property and stock markets. HSBC on Wednesday said October prices fell 4 per cent in Dubai and 5 per cent in the UAE capital, Abu Dhabi.

Speculators are exiting their property investments, sending prices down for the first time since the boom started in 2002 when Dubai opened the property market to non-Gulf Arab buyers.

“A correction could be a blessing in disguise, we had an overheating market,” said Marios Maratheftis, an ­economist with Standard Chartered.

Mohammed Alabbar, the chairman of Emaar, the property group, this week said the government had set up an advisory committee to balance supply with demand, an indication that the government might be considering slowing future projects to provide the market with a soft landing.

“We could see a delay in projects but the market is still undersupplied and if the UAE economy manages positive growth it will probably continue to attract people,” he said.

The downturn in sales activity puts into reverse an 18-month surge in which some prices had more than doubled. Property agents say prices have plunged by as much as 50 per cent in locations where the highest rises had taken place, such as on Nakheel’s reclaimed Palm Islands and in Emaar’s developments around Burj Dubai, the tallest building in the world.

Sales of properties not yet built have been worst hit, explaining the HSBC’s steeper decline in Abu Dhabi prices, where most of the property for sale is “off plan”.

Most analysts remain upbeat on the UAE’s longer-term outlook, despite the market’s current woes.

“There is lots of negativity and that breeds panic, but the fundamentals are sound, you just have to look at the population growth to see there is going to be demand in the market,” says Matthew Green, research director at Cluttons UAE.

Sultan bin Sulayem, chairman of government-owned developer Nakheel, recently told bankers that some over-extended speculators were offloading their properties at a loss, but he expected the market to continue rising once confidence was restored. He said he welcomed the slowdown in sales activity because it showed speculators were being replaced by end-users.

Nevertheless, the banking crisis is hitting prospective homebuyers. Lloyds TSB has raised the minimum requirement for mortgages on villas to 50 per cent and stopped all lending for apartment purchases. Bankers say other lenders are preparing similar restrictions.

HSBC’s research revealed a month-on-month 19 per cent decline in villa prices in October, triggered by lower mortgage loan-to-value ratios.

Emaar has launched a scheme to relax repayment terms to stimulate demand. Gowealthy.com, an online agency, says it continues to see good sales on off-plan property with attractive ­payment terms.

Given the sharp increase in lending costs, UAE developers also face a huge problem financing the hundreds of billions of dollars of property planned over the next decade, bankers say.

Government officials say some of the more grandiose projects, which have yet to be launched to the public, could be shelved in the coming months, but none has been so far.

While government-linked developers have a financial cushion, private developers face a bleaker outlook. Damac, the region’s largest privately-owned developer, cut 200 staff, while Omniyat, another private developer, has also shed staff.

The city’s legions of young property brokers look set to lose their commission-based jobs in coming months unless there is sharp turnround in market sentiment.

Sector insiders say regulations drafted during the boom that are set to be introduced soon could help to stall a market revival. Dubai’s property regulator is mulling over the introduction of standardised contracts to make sure people know exactly how much space they are buying.

In the past, commercial developers would sometimes sell on a gross floor area basis, leaving some buyers feeling short changed. The new contracts could make property appear even more expensive.

“Regulations were introduced to calm the bull market, no one was planning for a situation where prices were going down,” said one developer.

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Algeria lifts presidential term limits

By Heba Saleh in Cairo

Published: November 12 2008 12:52 | Last updated: November 12 2008 12:52

The Algerian parliament on Wednesday voted in favour of changes to the constitution that would allow President Abdelaziz Bouteflika to seek a third term in office.

The move by a parliament controlled by pro-government parties drew immediate criticism, with opposition parties describing the constitutional amendments as an act of “political swindling”.

Although Mr Bouteflika has not said overtly that he will seek re-election, he is expected to be a candidate in next year’s race.

The president has long made it known that he wanted to abrogate the two term limit in the constitution, but analysts say he has had to surmount resistance from the powerful military establishment which brought him to office in 1999.

“This is the third coup d’etat in Algeria’s history,” charged Mohsene Belabbas, a member of parliament from the opposition Rally for Culture and Democracy, whose deputies voted against the amendment. “It is not good for democracy and it is not good for Algeria because Mr Bouteflika wants to become president for life.”

The amendments give Mr Bouteflika – who had the support of deputies from the three parties which make up the governing coalition as well as that of some smaller parties – greater presidential authority and reduce the power of the prime minister.

Algeria, a big hydrocarbons producer that supplies 20 per cent of Europe’s natural gas needs, spent most of the 1990s in the grip of a bloody conflict sparked by the army’s interruption of an election in 1992 that an Islamist party had been set to win.

Although violence still sputters on in Algeria after local Islamic militants reorganised themselves into a group loyal to al-Qaeda, Mr Bouteflika is widely credited with having ended the civil strife.

Over the years he has offered amnesties to Islamic militants who laid down their arms, helping to deplete the ranks of the rebels already weakened by army strikes.

During his 10 years as president, Mr Bouteflika has managed to expand his powers at the expense of his backers in the army and intelligence services. However, he has also protected them from scrutiny of their human rights records during the civil war, in which 150,000 people were killed in atrocities committed by both sides. A constitutional amendment a few years ago made it a punishable crime to make accusations against the military.

Critics of the president say that, despite Algeria’s vast wealth in recent years as a result of high oil prices, Mr Bouteflika has failed to raise living standards for the country’s 34m people.

The economy remains for the most part undiversified, unemployment is high and hundreds of young men die every year at sea as they try to make the perilous journey across the Mediterranean to the shores of Europe.

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Secular candidate elected Jerusalem mayor

By Tobias Buck in Jerusalem

Published: November 12 2008 09:52 | Last updated: November 12 2008 09:52

Jerusalem has elected a rightwing businessman as its mayor, after a hard-fought election that will usher in a period of secular rule in a city revered by millions of Jews, Christians and Muslims.

Nir Barkat, a former high-tech entrepreneur who retired from business and entered local politics five years ago, won a comfortable victory with 51 per cent of the vote. His closest rival, Meir Porush, a rabbi and veteran ultra-orthodox religious politician, won 42 per cent.

Mr Barkat’s victory marks an important reversal of recent political trends in Jerusalem. Israel’s largest city is widely seen as a stronghold of the country’s ultra-orthodox, or Haredi, community, which accounts for a third of Jerusalem’s non-Arab population. The incumbent mayor is a member of the ultra-orthodox community.

Mr Barkat was keen to spread a message of unity after his triumph. “I want to say clearly to the public that voted for my rivals, a public that is mostly Haredi, Jerusalem is yours too, as it is mine.” He suggested he would not seek to change rules governing the sanctity of the Sabbath and other provisions that were important to the community.

“I will maintain the religious status quo in Jerusalem and the dignity of all the city’s residents,” he said.

Secular and moderately religious voters, many of whom feel increasingly marginalised, overwhelming backed Mr Barkat. They will look to the new mayor not only to bolster the city’s non-Haredi identity but also to revive an economy in steep decline. Jerusalem is Israel’s poorest city and the lack of jobs has been a crucial factor behind the exodus of young professionals.

In order to kick-start the local economy, Mr Barkat wants to attract more tourists and make it easier for entrepreneurs to set up businesses.

He has promised to improve living conditions for the 250,000 Palestinians living in east Jerusalem, who are far poorer and receive fewer public services than their counterparts in the western sector.

In 1988, the former paratrooper co-founded a technology company that developed antivirus software. He also served as chairman of Checkpoint, one of Israel’s biggest technology companies, before retiring from business and joining Jerusalem’s city council in 2003.

Although some analysts have described him as a centrist, Mr Barkat voiced increasingly rightwing positions during the election campaign. He called for the creation of Jewish settlements in occupied east Jerusalem and argued in favour of pressing ahead with a particularly provocative settlement that has now been frozen due to strong international pressure.

Like the majority of Israelis, he is against handing east Jerusalem back to the Palestinians, who claim the occupied neighbourhoods as the capital of a future Palestinian state. Only 2 per cent of Palestinians in Jerusalem voted in Tuesday’s elections, part of a political boycott prompted by the annexation of the eastern sector after the 1967 war.

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Record EU cartel fine for glassmakers

By Nikki Tait in Brussels and Peggy Hollinger in Paris

Published: November 12 2008 14:02 | Last updated: November 12 2008 14:02

Europe’s largest cartel fine of €1.38bn was on Wednesday imposed on four leading glass manufacturers, after they illegally fixed the price of glass used in the automotive industry for five years.

France’s Saint-Gobain will have to pay €896m ($1.2bn), well in excess of a €560m reserve that it had set aside to cover an adverse finding in the case. The amount is a record fine by European regulators on a single company for price-fixing.

Pilkington faces a €370m penalty; Japan’s Asahi Glass must pay €113.5m; and Belgium’s Soliver faces a relatively modest fine of €4.4m.

“These companies cheated the car industry and car-buyers for five years in a market worth €2bn in the last year of the cartel,” said Neelie Kroes, EU competition commissioner.

“Management and shareholders of companies that damage consumers and European industry by running cartels must learn their lesson the hard way – if you cheat, you will get a heavy fine.”

The financial implications of the European Commission’s finding, which started with an anonymous tip-off and followed a three-year probe, may continue.

The decision could open the way for buyers of the glass – notably car manufacturers – to pursue private damages against the companies involved on the grounds that prices were illegally inflated.

Ms Kroes declined to quantify the impact of the cartel – which was developed in secret meetings at hotels and airports across Europe and controlled about 90 per cent of the European auto glass market – but suggested it was significant.

The penalty on Saint-Gobain was particularly high because of its history of previous cartel offences.

That led to the latest fine on the company being increased by 60 per cent.

By contrast, Asahi, and its European subsidiary AGC Flat Glass Europe, benefited from a 50 per cent reduction because of its co-operation with the commission’s investigation.

Saint-Gobain attacked the penalty, describing it as “excessive and disproportionate”, and said it would appeal to the top European courts.

It said that the penalty represented about 95 per cent of the annual sales of its activities in the European auto-glass market and many decades-worth of profits.

The company also said it had given obligatory training for thousands of managers in competition rules.

But lawyers in Brussels said the record penalties did not reflect a change in commission policy, and were the inevitable outcome of revised cartel fining guidelines that came into effect last year.

These aimed to tie fines more closely to the sales that companies derived from manipulated markets and the length of time that cartels lasted. In this case, the commission said, the cartel ran between early-1998 and early-2003, although not all the companies were involved for the whole of that period.

“The step-change has already happened,” said one lawyer.

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Danes ‘bearing the cost’ of being outside euro

By Robert Anderson in Copenhagen

Published: November 12 2008 01:41 | Last updated: November 12 2008 01:41

Denmark is paying the price for not adopting the euro, Nils Bernstein, governor of the country’s central bank, said on Tuesday, even though last month’s rise in interest rates has been successful in stopping pressure on the krone.

“It is first and foremost a political question whether to join [the euro],” the Nationalbank chief said in an interview, “but as we now see there is an economic cost to being outside the eurozone.”

Political debate over the euro has been revived after the central bank was forced last month to increase interest rates twice to defend the krone’s peg to the euro.

The government last week launched talks with the opposition on holding a referendum next year on joining the common currency.

The rate rises opened up a record 175-basis-point spread against eurozone rates – compared to 25bp in May – and threatened to push housing prices down further and depress an already stagnating economy.

The krone, like other smaller European currencies, has been affected by the drying up of liquidity in the global credit crunch and a shift away from riskier assets as prospects for the world economy darken.

“The pressure [on the currency] seems to be over but we can’t be sure,” Mr Bernstein said, noting that the central bank felt able to follow the 50bp cut by the European Central Bank last week, and hinting that the spreads could be narrowed further.

“There’s nothing ... that should make one expect the spread to continue.”

Several smaller Danish banks have collapsed this year but Mr Bernstein said the sector remained fundamentally sound and recent government initiatives had started to improve liquidity.

The government last month guaranteed all deposits and interbank loans and created a rescue fund financed by the banks.

It eased the rules covering pension funds and the state social pension fund to prop up the country’s big mortgage bond market as property prices continue to slide.

“We do expect some further drop in property prices but as long as the unemployment rate does not increase very strongly, we don’t expect the bottom to fall out of the market,” Mr Bernstein said.

He said he expected Denmark to avoid recession next year. “We will probably end up with a forecast close to zero on the positive side.”

Mr Bernstein said the mildly expansionary budget, agreed on Monday, was appropriate and warned against any temptation to loosen fiscal policy because the labour market remained tight.

“In order to take pressure off from the labour market, it is appropriate that we will see a moderate increase in unemployment and not try to counteract this with a more expansionary fiscal policy,” he said.

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Bank of Italy

Published: November 12 2008 09:35 | Last updated: November 12 2008 15:53

The Bank of Italy believes the country’s banks are adequately capitalised. So does the Treasury minister. Not all Italian banks agree. UniCredit is raising €6.6bn to bolster its capital base, Intesa Sanpaolo has cut its dividend and investors have given both plans a lukewarm reception. What a shame, then, that neither bank could instead cash in its central bank investment to boost its capital.

This anomalous Italian shareholding structure, under which commercial banks own the institution that regulates them, dates from the mists of banking time. Under law, it is supposed to end this year although talks have dragged on since 2004 over how much the institution is worth. Everyone ascribes wildly different valuations. Four years ago, the Treasury valued the central bank at €800m. Intesa, with a 43 per cent stake booked at €630m, implies it is worth €1.3bn although Monte dei Paschi di Siena thinks it is worth almost €14bn – close to the Bank of Italy’s €17bn equity value.

Such discrepancies are common in the curious market for central bank shares. The Greek central bank is quoted, and trades at five times earnings. But so is the Swiss, which trades at 78 times. Then there is the Belgian national bank, which still faces lawsuits from aggrieved minorities over how it values its gold holdings. Central bank stocks should be doing nicely: earnings are soaring as they step up repo operations on which they take a fee. Yet each of these three central bank stocks have fallen more than a fifth this year.

Fundamental valuation methods offer little help. The Bank of Italy, for example, has increased its annual dividend by an average 5.6 per cent in the past five years. Assume that its cost of equity is the same, and the usual dividend discount model crunches out an infinite value. Nonsense, of course, which is a pity because that would solve every bank’s capital shortage.

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UBS blow as US indicts wealth management head

By Haig Simonian in Zurich and Joanna Chung in New York

Published: November 12 2008 19:11 | Last updated: November 12 2008 19:11

UBS suffered its heaviest blow yet in the investigation into its offshore banking activities for rich American clients as US authorities said they had indicted Raoul Weil, the Swiss bank’s head of global wealth management.

The US Department of Justice indictment also says other senior unnamed UBS’s executives were involved as alleged “unindicted co-conspirators”.

“These executives occupied positions at the highest levels of management within the Swiss bank, including positions on the committees that oversaw legal, compliance tax, risk and regulatory issues related to the United States cross-border business.”

Separately, the indictment includes detailed allegations about how more junior managers sought to circumvent US tax rules over a period of years.

The DoJ claims Mr Weil used the expression “toxic waste” to refer to the US business because of its acute sensitivity.

In a statement on Tuesday night, UBS said Mr Weil had “determined that, in the interest of the firm and its clients, and in order to defend himself, he will relinquish his duties at this time pending the resolution of this matter”. The bank also said it was “fully committed to continuing its efforts to co-operate with the investigation”.

Mr Weil’s lawyer said the indictment was “totally unjustified and without any factual basis” and his “highly respected” client denied any suggestion that he was “aware of, engaged in or tolerated any illegal conduct in the operation of UBS’s US cross-border business”.

The DoJ‘s move marks a massive escalation in the year-long campaign to investigate allegations that UBS helped thousands of US clients evade tax.

The indictment alleges that Mr Weil, who has run the bank’s international wealth management business from 2002, “mandated that Swiss bankers grow the cross-border business despite knowing that this would cause bankers to violate US law”.

The authorities noted the indictment was merely an allegation and Mr Weil was presumed innocent until proved guilty. The indictment marks the latest twist in the inquiry after Bradley Birkenfeld, a former UBS private banker, pleaded guilty last June in the US to assisting clients to evade tax.

Testimony from Mr Birkenfeld, who worked as a middle-ranking banker in UBS’s Geneva office, led to the detention in Miami earlier this year, “as a material witness”, of Martin Liechti, the group’s head of private banking for North and South America.

Mr Liechti has since returned to Switzerland and, until Tuesday, the investigations appeared to have entered a quieter phase.

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Hedge funds pursue capital

By Henny Sender and Julie Macintosh in New York and Anousha Sakoui in London

Published: November 13 2008 00:29 | Last updated: November 13 2008 00:29

Blackstone’s GSO Capital Partners and GoldenTree Asset Management, two of the biggest hedge funds investing in debt, have turned to investors for more capital in the face of markdowns on their holdings and margin calls from their lenders.

GSO, which manages $24.6bn, solidified its role as a leading force in the lending markets in recent months when it bought loans with a face value of $12bn that had been used to finance private equity deals.

GSO paid about 80 cents on the dollar for the loans, but has since marked down its holdings, resulting in margin calls from its banks.

To avoid handing over collateral, GSO instead raised $100m from investors to meet the margin calls.

GSO’s quasi-rights offer could serve as a template for others. In return for helping the fund meet margin calls, investors are getting stakes in a new fund that will hold many of GSO’s leveraged loans at larger discounts.

The theory behind the new fund, said one investor in it, is that the loans are good and “if you love them at 85, you will love them more at 75”.

GoldenTree, which manages $11.5bn, created a “rescue share class” to raise $250m of new capital this month, it told investors. GoldenTree funds that relied on extensive use of borrowed money have been down almost 50 per cent in the year through October, people familiar with the company said.

“The month was really rough,” said the head of a fund that invests in hedge funds, including GoldenTree. “Anyone with leverage and illiquid positions got beaten up.”

GoldenTree suffered particularly large losses in Europe, where it bought debt in smaller leveraged buy-outs and in private placements, investors say.

Several weeks ago, the head of its European operations left. GoldenTree “paid the price for expansion”, said one of its investors, referring both to its overseas activities and its foray into private lending.

GoldenTree was also hurt by its appetite for leverage. Its agreements with banks include “triggers” that require it to put up more cash when the value of its holdings drops. GoldenTree’s unleveraged fund suffered half the losses of its leveraged fund, people familiar with the company said.

Monday is the deadline for investors to tell GoldenTree whether they will pull their money at year’s end.

Leon Wagner, the chairman of GoldTree’s, said it has raised about $500m in the past 60 days which “demonstrates the confidence of our clients.”

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Financial groups’ losses near $1,000bn

By Peter Thal Larsen in London and Francesco Guerrera and Julie MacIntosh in New York

Published: November 12 2008 23:31 | Last updated: November 12 2008 23:31

The financial sector’s total losses from the credit crisis are approaching $1,000bn after recent turmoil in the markets triggered a further drop in the value of mortgage-backed securities and other debt securities.

Writedowns by Fannie Mae, the US mortgage financier that was nationalised this year and AIG, the insurer that has twice been bailed out by the US government, have lifted total losses reported by financial institutions since the beginning of 2007 to $918bn, according to data compiled by Bloomberg.

While the mounting writedowns are evidence that financial institutions are grappling with the scale of their problems, they also suggest that losses have deepened as a result of the market turmoil that followed the collapse of Lehman Brothers, the Wall Street bank, in September. Last month the International Monetary Fund raised its estimate of the likely total losses in the financial sector to $1,400bn, from $945bn in April.

Banking analysts are predicting further pain in fourth-quarter results, which are expected to have suffered from further falls in the price of many of the residential and commercial mortgage-backed securities they hold on their balance sheets.

The losses will put further pressure on financial groups in the US and Europe to raise capital at a time when capital markets are largely frozen and the drop in the sector’s shares is deterring sovereign wealth funds and other institutional investors from increasing their stakes.

Rodgin Cohen, chairman of Sullivan & Cromwell, the Wall Street law firm, told an industry conference that completed and future capital raisings by financial institutions top $1,000bn.

Gary Parr, a vice-chairman of Lazard, told the same gathering that there were “trillions upon trillions of deleveraging that still has to take place”.

Last week, analysts at Morgan Stanley estimated that European financial institutions would need an additional €83bn ($104bn) of capital if the current economic downturn proved as severe as the early 1990s.

This week, Santander, the Spanish lender that has weathered the global financial crisis in better shape than many of its peers, surprised investors by raising €7bn.

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DoCoMo invests in Tata mobile network

By Robin Harding in Tokyo and Joe Leahy in Mumbai

Published: November 12 2008 15:59 | Last updated: November 12 2008 19:29

All smiles: Anil Sardana, managing director of Tata Teleservices, with Takamochi Yamada, NTT president

NTT DoCoMo, Japan’s largest mobile phone company by market share, is to pay Rs130.7bn ($2.7bn) for 26 per cent of Tata Teleservices in a deal that highlights the high prices foreign operators are willing to pay to enter the booming Indian market.

The investment in the world’s fastest growing mobile telephone market shows that DoCoMo is determined to compete head-to-head with rivals such as Vodafone and Telenor in emerging markets.

The UK company controls Vodafone Essar, India’s third largest operator, while two weeks ago Norway’s Telenor announced a $1.1bn deal to buy 60 per cent of Unitech Wireless, a new Indian network.

Operators from Europe and Japan are attracted by India’s low mobile phone penetration of about 25 per 100 people. That rate is expected to double over the next five years – resulting in several hundred million new subscribers.

Analysts said DoCoMo was paying a high price. “We’re very bearish on this. Tata has been on the block for years and nearly everyone has kicked the tyres and walked away,” said one, who asked not to be named.

He added that, at about $350 per subscriber before debt, DoCoMo was paying a substantial premium relative to Idea Cellular, a comparable Indian network. DoCoMo said that it expected to make a 15 per cent return on investment over the next five to 10 years.

Tata Teleservices was a late entrant to India’s mobile market and has grown from 1.6m subscribers in March 2004 to 29.3m today. Its uses the CDMA standard and needs heavy investment to build a GSM network.

For the Tata group, the deal will provide much-needed capital to its telecoms unit and to the increasingly cash-strapped parent conglomerate.

The deal fits the DoCoMo strategy of buying relatively large minority stakes in mobile networks around Asia. In June, it bought 30 per cent of TM International, the third-largest operator in Bangladesh, for $350m. It also owns 10 per cent of KT Freetel of South Korea and a stake in the Philippines.

These stakes, compared to the majority ownership taken by Vodafone and Telenor in their Indian subsidiaries, have brought criticism that DoCoMo is repeating the mistake it made 10 years ago, when it spent Y1,900bn on minority stakes in various foreign operators including AT&T Wireless, KPN Mobile, and Hutchison 3G. It had to write off much of this investment after the technology bubble burst.

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Grim down south

By FT Reporters

Published: November 13 2008 02:00 | Last updated: November 13 2008 02:00

David Frost, director general of the British Chambers of Commerce, recalls the particularly harsh toll that the worst recession of recent times took on the UK's manufacturing heartland. "When I was working in the West Midlands in 1981, there were closures in the region almost every week," he says. "It was 4,000 jobs here, 5,000 there."

Indeed, as industries such as shipbuilding and steelmaking closed plants there and to the north, the early 1980s saw more than 100,000 jobs disappear each month across Britain. In the 1991 recession, another 1m manufacturing jobs went - with central and northern England again taking the brunt. But now, with the country again confronting a severe downturn, the impact will be felt differently, Mr Frost adds. "This time, it's spread across the economy."

The UK will suffer most among the world's rich nations as the financial crisis spreads to the real economy, the International Monetary Fund has predicted - with the Bank of England adding yesterday that it was "very likely" Britain was already in recession.

What is unusual this time, however, is that the pain will be felt most in London and the south-east. What therefore are the likely black-spots and, conversely, where could investors look for local resilience in what is to be the first big recession of the post-industrial era?

London *3.8% The capital itself has the grimmest prospects of all, according to Oxford Economics. The consultancy expects gross value added, a measure of economic production, to fall as much as 3.8 per cent next year, compared with a national decline of 1 per cent.

That would reflect a heavy exposure to financial services - and to the troubled property market, with housebuilding falling to less than half last year's total and even almost finished commercial developments being shuttered. The City will lose 35,000 jobs over the next two years, Oxford Economics predicts - a decline of more than 10 per cent.

The recession is also having a visible effect on the area around east London's planned Olympic park, where developers were racing to finish residential building projects ahead of the 2012 Games. Now they have given up trying, says Wayland Pope, director of development at the London Thames Gateway Development Corporation. "They just won't be able to sell them," he says. "If it wasn't for the economic downturn, we would be saying, 'look at all the activity going on around here'."

The downturn has even hit projects that are an integral part of the Games, with doubts that the large media and broadcasting centre can be financed. The absence of legacy plans for the centre - a university campus role has been mooted - has made developers unwilling to commit on a speculative basis in the current market.

Wales 0.0%

The Oxford forecasts suggest the principality will narrowly avoid recession next year. Buoyed less than elsewhere by financial and business services in the good times, the principality has a long history of lagging behind the UK growth average. Still, Wales is on course to lose 20,000 jobs next year - a similar number to the north-east. Elsewhere, the north-west and West Midlands will shrink only 0.4 per cent over the same period. "What's different now is that such big companies employing 4,000-5,000 people are no longer around," Mr Frost points out.

During the first phase of the credit crunch, there was some glee among manufacturers in various centres over the travails of London bankers. That has evaporated as weakening demand has damaged their own order books. West Midlands *0.4%

Industrial regions are by no means escaping the shake-out, with car manufacturers particularly hard hit. Most in the automotive sector had enjoyed relatively buoyant demand until the late summer, when sales are described as having "gone off a cliff". They are all taking steps to reduce output, cutting working hours and extending holiday shutdowns following a 23 per cent fall in new car registrations in October.

The Midlands is home to carmakers as diverse as Toyota, Jaguar Land Rover and Aston Martin. Also in the region are many component manufacturers, such as GKN. Toyota at Burnaston in Derbyshire suspended its night shift to adjust to falling sales. Jaguar Land Rover, which manufactures at Castle Bromwich in Birmingham and Halewood on Merseyside, is seeking 400 redundancies on top of 200 already announced. GKN is cutting staff after forecasting a 15 per cent drop in sales in the current quarter.

As in many parts of the country, the impact of such cuts in activity feeds through to the professional services firms - already wrestling with a slump in mergers and acquisitions activity and property transactions. These generated healthy profits for accountants, lawyers and bankers for most of this decade. Wragge & Co, a large Birmingham law firm, has made 30 fee earners redundant, revealing last week that profits had fallen by about 6 per cent as a result of the slowdown. "It worries us that there is such a concentration of automotive component suppliers locally," says Ronnie Bowker, head of the Birmingham office of accountants Ernst & Young. "Any problems they have will feed through to the professional services sector ultimately."

North-west *0.4%

A decade of regeneration on the back of booming property prices saw great Victorian cities such as Manchester, Leeds and Liverpool return to prosperity. Many have built vibrant financial districts, complementary to the City and offering much lower costs for back-office work and local financial activity.

"Anybody could make money," says Lorne Entwistle, who founded a construction equipment hire business with his father and brother in Manchester in 1983. "Everybody was a property developer. You had people running companies and buying themselves a new Bentley every 18 months." Today, business developments and urban residential projects are being put on hold as credit dries up and prices plummet.

When Manchester's Beetham Tower was finished in 2006 at a cost of £150m, it was Europe's tallest residential building at 169 metres. Around one-quarter of its 219 apartments still stand empty, as do many others across Manchester. In some areas around trendy Canal Street, revived by a gay bar and nightclub scene in the early 1990s, apartment prices are down by up to 40 per cent on a year ago. Thousands who bought flats to let out as an investment are either having to sell or cut rents to stave off repossession.

Leeds' grandiose plans to steal the title with the Lumiere twin towers, one of which is two metres taller, have been scuppered by the credit crunch, with work halted almost as soon as it began this year. Yorkshire's financial capital has also seen work halted on several other inner-city apartment developments, after thousands of flats were built earlier in the decade. Work has also been suspended on a new £1bn business district and a £700m retail scheme in the city, which has seen £3.2bn of investment in the last decade.

Urban Splash, the property developer that became a byword for city centre renaissance, has suffered too. The company and its staff, founded in 1993, have won 265 awards by converting old industrial buildings into offices and flats. Three years ago, people camped overnight in Birmingham to buy apartments in The Rotunda, a circular tower converted from drab offices.

But this month it shed 60 of its 280-strong workforce. While Tom Bloxham, its chairman and founder, says he saw a slowdown coming, "what surprised us and everybody else was the speed with which it happened". Mortgage finance seized up in August, he says, though the rental market was still strong. Regeneration has stalled but needs kick-starting, he adds: "The job is not finished." Scotland *0.3%

The city outside London hit hardest by the financial crisis is Edinburgh. The Scottish capital has seen the partnationalisation of its two biggest employers - Royal Bank of Scotland and HBOS. Bank of ScotlandThousands of banking workers fear for their jobs - particularly the employees of HBOS, which is the subject of a controversial rescue by Lloyds TSB.

There are 17,600 HBOS employees in Scotland and Lloyds TSB has 7,000 Scottish employees. Rationalisation is inevitable, given that more than half of the £1.5bn of annual savings from the proposed merger will come from the retail banking operations.

Edinburgh has just witnessed its first year-on-year fall in house prices since the Edinburgh Solicitors Property Centre started collecting figures in 1971. It is not just prices that are falling: the number of houses sold in the three months to September was 58 per cent down on the same period last year.

Malcolm Fraser is one of Scotland's most successful architects, but the Edinburgh practice he founded has recently cut staff from 29 to 12 architects because of lack of contracts. "I cried for a week, making people redundant - it was just awful," he says.

Peter Hughes of Scottish Engineering, an industry grouping, says smaller operators are tightening their belts. "Companies are also finding, quite frankly, that the banks are screwing them," he says. "One profitable company was told its overdraft would now be 7 percentage points over base rate - that's highway robbery. Anything to do with the banks, such as arrangement fees, is costing a lot more. There's a lot of anger that industry is now having to carry the can for the stupidity and greed of the banks over the years."

Scottish shipyard workers would once have been the first to suffer from economic downturns. But shipbuilding on the Clyde is now mainly defencerelated - this summer's signing of a £3bn contract to build the UK's biggest aircraft carriers will support more than 3,000 jobs at BAE Systems' Govan and Scotstoun yards in Glasgow. It will also sustain 1,600 jobs at Babcock Marine's naval dockyard on the Firth of Forth, where the ships will be assembled.

North-east 0.0%

Shipbuilding, engineering and steel were given a thumping by the recession of the early 1980s. They accounted for 28 per cent of men in work in 1971, or 181,000 jobs. By 2006, that number had fallen to 58,000 - just 11 per cent of the male workforce. The workforce has changed in other ways, with just 49 per cent being men now, compared with 64 per cent in 1971.

Sandy Sanderson, who is in charge of banking for large northern companies at Lloyds TSB, says there are big differences from the past, when massive industrial businesses operated in very specific sectors. "If one went down, it took a town out, even a sub-region."

While shipbuilding has ended, it helped spawn a subsea sector, an important component of the region's thriving oil and gas-related activity. With around 50 businesses employing 5,000 people and contributing an estimated £500m to the economy, subsea grew by 30 per cent last year.

Among other strengths are process industries, which account for 30 per cent of the north-east's industrial base and employ 40,000 people. The Wilton International site in Teesside, once owned by ICI, is now the UK base to petrochemical and other businesses from around the world.

Mike Mullaney, a Newcastle-based director of Lloyds TSB, says the region's economy is stronger than before thanks to the oil and gas sector, process industries and Nissan, the carmaker whose factory at Sunderland is Europe's most productive car plant. "One of the strengths of the north-east is that our highs don't go as high and our lows hopefully don't go as low as other parts of the country," he says. One reason for that is the greater reliance of the region on the public sector, which is less recession-prone.

Northern Ireland *0.3%

The same is true of a province where the public sector accounts for 30 per cent of employment and two-thirds of economic output - a direct legacy of the political troubles. Newry, on the border and at the heart of what used to be known as IRA bandit country, suffered one of the highest rates of unemployment in the UK in the 1980s at about 26 per cent. Its main private sector employer is Norbrook, a locally owned manufacturer of veterinary pharmaceuticals.

Largely because of the perceived security risks, there are no big foreign investors. Feargal McCormick, a local accountant, says this means the local economy is probably less exposed than otherwise to a slowdown. More positive is that Newry and Mourne district has one of best rates of business start-ups in the UK, one of which is First Derivatives, a specialist financial services software company set up by Brian Conlon in his mother's spare bedroom in 1996, shortly after the IRA ceasefire.

Today, as one of only three publicly listed companies based in Northern Ireland, it employs 120, with a range of risk management products that allow it to exploit the current financial turbulence. "It is in this sort of environment that people start to realise they need these sorts of software tools," says Graham Ferguson, chief financial officer.

Newry is far from the only town that could prove relatively immune to the recession, according to Oxford Economics. Others include Merthyr Tydfil in the Welsh valleys, Stafford in the Potteries and the former pit town of Easington in the north-east.

"What these places have in common is high levels of public sector employment, which gives them a degree of insulation from the turmoil," says Alan Wilson, senior economist at the consultancy. "That protection may, however, be short-term, as pressure on public spending grows."

Until then, it is still the well-heeled south of England that is exposed the most. At the Thames Gateway corporation, Mr Pope warns that residential developers around the Olympics site will have to ride out the downturn and bring their projects to the market in 2014-15, thus missing the Games. "It would be madness to build now."