Financial life in a big town

The worldwide credit crunch has sideswiped the blockbuster corporate partnership between the companies of auto-parts tycoon Frank Stronach and Russian billionaire Oleg Deripaska.

Russian Machines, which Deripaska controls, revealed yesterday it had relinquished its big stake and accompanying boardroom clout in Magna to lenders who financed his $1.54 billion (U.S.) investment last year.

Basic Element, Deripaska’s investment company, said in a statement it had decided to "terminate the participation of Russian Machines as a shareholder in Magna International due to the current global financial crisis."

Industry and financial sources say many Russian companies that have spent heavily abroad in recent years now face serious squeezes because refinancing debt has become much more expensive in view of credit woes rocking the world’s financial systems.

"It’s clear he (Deripaska) was forced to sell," said one analyst who requested anonymity.

Basic Element didn’t identify any creditors. But in filings at the time of the purchase of the 20 million Magna A shares, it named BNP Paribas SA, a major bank in France, as a top lender.

Speculation swirled yesterday that institutional investors would snap up many shares because they consider Magna undervalued at current prices.

Magna’s A shares plunged $8.23 or 16 per cent at one point in trading on the Toronto Exchange after the early morning announcement, but they recovered later and closed the day at $46.32, down $2.92, or about 6 per cent. The company, which is feeling the impact of the turmoil in the North American auto industry, has lost more than half of its market value in the past year.

In disclosing the exit of Russian Machines, Magna added that the Deripaska firm will no longer be an indirect shareholder in Stronach’s lucrative European consulting company. In a side deal last year, Russian Machines invested $150 million for a 50 per cent stake in Stronach & Co. which entitled it to millions of dollars in annual consulting fees from Magna (quick payday loans).

Magna co-chief executive officer Siegfried Wolf said the company still has a good working relationship with Deripaska, Russian Machines and subsidiary GAZ Group, Russia’s second biggest auto company.

"We believe that the Russian market still holds significant opportunities for us and intend to continue to pursue joint opportunities …," Wolf said in a statement.

Tracy Fuerst, Magna’s director of corporate communications and media relations, also noted that the decision did not reflect any disagreement between Magna and the Russian interests.

"It had nothing to do with the relationships we have with Oleg, Basic Element or Russian Machines," Fuerst said.

She also said Magna’s ownership will revert to previous percentages, whereby a Stronach family trust will indirectly control the holding company that has two-thirds of the parts maker’s voting shares.

In May 2007, Magna announced that Russian Machines would buy the big stake in exchange for six of 14 seats and 42 per cent of the holding company that would control Magna.

It also meant that the Stronach trust would reduce its level of control in the new venture.

A small group of senior managers would hold the remaining interest plus two seats.

The new company would control 68 per cent of Magna although it held only 16 per cent of the equity.

Magna’s senior managers said the arrangement would bolster the company’s fortunes in Russia and other nearby countries, where emerging middle classes are increasing demand for autos.

Shareholders approved the deal a few months later although there was significant opposition.

Some minority investors, including the Ontario Teachers’ Pension Plan Board, argued there was little consideration for shareholders who held most of Magna’s equity.

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General Electric Co (GE.N: Quote, Profile, Research, Stock Buzz) shares fell as much as 10 percent on Thursday, touching a new 5-1/2-year low, as its sale of $15 billion in new stock to investors including Warren Buffett failed to soothe Wall Street worries.

GE shares have tumbled about 40 percent this year as the global credit crunch has taken a heavy toll on its hefty finance arm and the company warned that 2008 profit could drop 12 percent.

The U.S. conglomerate sold $3 billion in preferred stock at $22.25 per share to Buffett’s Berkshire Hathaway Inc (BRKa.N: Quote, Profile, Research, Stock Buzz)(BRKb.N: Quote, Profile, Research, Stock Buzz) on Wednesday, and another 548 million common shares at the same price to other investors on Thursday.

GE said the new capital will help improve its liquidity and provide the option to make acquisitions at a time of market turmoil.

The U.S. Senate approved a $700 billion financial bailout package on Wednesday, and the U.S no checking account payday advance. House of Representatives is scheduled to vote on the plan on Friday.

The rescue plan is intended to reinvigorate credit markets and frozen interbank lending, stabilize battered risky assets, including stocks, and ease corporate lending.

Because of the breadth and depth of its operations, which stretch around the world and include jet engines to electricity-generating turbines to lending to the NBC television network, GE is regarded as an economic bellwether.

“The fact that GE needs to go out and sell shares at $22.25 is not particularly good news,” said Michael Church, financial analyst and portfolio manager at Church Capital Management, a Pennsylvania-based company that oversees $2 billion in investments and holds GE shares. 

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NEW YORK–A closely watched index released yesterday showed home prices tumbling by the sharpest annual rate ever in July, and though the monthly rate of decline is slowing, there is no turnaround in sight.

The Standard & Poor’s/Case-Shiller 20-city housing index fell a record 16.3 per cent in July from the year-ago month, the largest drop since its inception in 2000. The 10-city index plunged 17.5 per cent, its biggest decline in its 21 year history.

Prices in the 20-city index have plummeted nearly 20 per cent since peaking in July 2006. The 10-city index has fallen more than 21 per cent since its peak in June 2006.

No city in the 20-city index saw annual price gains in July – for the fourth straight month.

However, the pace of monthly declines is slowing. Between May and July, for example, home prices fell at a cumulative rate of 2.2 per cent – less than half the cumulative rate experienced between February and April.

But there’s "no evidence of a bottom," said David M. Blitzer, chair of the index committee at S&P.

Las Vegas prices plunged the most at nearly 30 per cent, with Phoenix diving 29 per cent and Miami off 28 per cent faxless cash advance. Prices in the seven cities in the Sunbelt all fell between 20 per cent and 30 per cent from a year ago.

Only seven cities showed positive or flat returns from June to July, down from nine that showed month-over-month gains in June.

Atlanta, Boston, Dallas, Denver and Minneapolis all posted positive returns for three months or more.

Last week, the National Association of Realtors said the median sales price of an existing home fell 9.5 per cent to $203,100 (U.S.) last month, the largest annual price decline on records dating to 1999. The median price of a new home fell 5.5 per cent to $221,900 in August, the commerce department also said last week.

The Case-Shiller numbers have yet to reflect the effects of the recent turmoil in the financial industry.

Mortgage rates have been on a roller-coaster and analysts said the confidence of homebuyers has been eroded by market losses and the government’s stalled Wall Street bailout.

Associated Press

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For some who toil in the murky world of financial derivatives, Satyajit Das is nothing more than a turncoat.

A former industry whiz, the Australian author and risk consultant could be considered the financial world’s Dr. Frankenstein.

After making a handsome sum engineering exotic credit derivatives during his 25-year career, Das has spent the better part of the past decade preaching on their dangers.

Those convoluted debt instruments, particularly toxic credit default swaps, helped trigger the demise some of America’s most storied financial institutions.

With the financial crisis tightening its chokehold on global banks, Das’ forewarnings – outlined in his 2006 book Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives – are looking rather timely. Still, some in the industry initially scoffed at his warnings.

"They thought that I had somehow found religion in my old age," Das said in an interview at a downtown hotel. "There were two views. I was a crackpot now … The second was a deep sense of betrayal. Some people felt deeply betrayed. How could one of their own do this?"

Now the industry is paying for his advice. Toronto’s investment community is no exception. Working as a consultant for Jory Capital Inc., Das is bending the ears of all who will listen. "I haven’t had much sleep in 10 days. I’ve been trying to work out for several people what exactly is their exposure," he said.

Much more work lies ahead. Das estimates there is US$600 trillion of derivatives outstanding in the world. It is a whopping sum that reflects the total amount of leverage in the global financial system.

At its core, derivatives are about taking a bunch of risk, cutting up in smaller chunks and selling it off to investors. The idea is to spread the risks through the system.

The problem is that the theory was never tested – until now. "Financial markets are only sophisticated in upswings. In down swings, we get down to really basic things of human fear and fear of loss," Das said.

Global banks have already absorbed more than $500 billion in losses related to the collapse of America’s subprime residential real-estate market, the original catalyst for last week’s historic shake-up on Wall Street. With the International Monetary Fund predicting the final tally could top $1 trillion, the American government has announced its own $700 billion bailout to shore up confidence in the industry.

Das, however, questions the long-term consequences of that move. The clean-up could take years and have profound consequences for the economy.

"The U.S. government has now put its balance sheet at risk, which now means it is at the mercy of foreign creditors," Das said. "… They have $9.5 trillion in debt quick payday loan. Roughly about a third of that is owned by foreigners."

Average Canadians may feel removed from the crisis, but Das warns they are not immune. As Canadian banks deal with ongoing financial fallout, consumers can expect to pick up at least some of that tab.

Domestic banks have an estimated $823 billion of "notional exposure" to the world’s troubled credit default swap market. The notional amount is the face value of the assets underlying the derivatives. Actual losses would likely be smaller, unless their entire value went toward zero.

At the same time, banks around the world are grappling with higher funding costs as they try to shrink the amount of debt on their balance sheets. Banks have been tightening their lending standards for the past year, making cheap credit a thing of the past.

John Aiken, a financial services analyst with Dundee Capital Markets, reiterated some of those concerns yesterday in a note to clients.

"Although the U.S. government may have avoided the complete failure of the financial system, we believe that we are far from out of the woods," Aiken said. " Liquidity will still be hard to come by – although inter-bank lending spreads eased on the announcement, we believe that distrust will remain amongst various lending institutions, creating higher funding costs and lower levels of credit available to be lent out and ease the pressure on the U.S. economy."

Das’ advice to consumers? Brace for even higher fees in the months ahead: "They are going to put up fees. They are going to make your loans more expensive. Ask anybody who has a line of a credit with the bank to go and try to draw it down. It will be cause for some interesting reactions."

Adrian Mastracci, a portfolio manager at KCM Wealth Management Inc., has suggested that Canadian banks could even begin clamping down on unsecured lines of credit to help deal with those higher funding costs.

Meanwhile, that "curtailment of credit" has yet to make its way into the real economy, Das said. Ontario, already hard hit by a slump in the manufacturing sector, could face more tumult in its financial services sector at a time when the provincial government is banking on that key industry to help prop up the economy. The fortunes of Western Canada, meanwhile, will be pinched by the slowing Asian demand for energy exports.

For his part, Das makes no apologies for his role in helping to create complex credit derivatives, suggesting that hindsight is always twenty-twenty. He also believes he has taken more than his fair share of flack for the current crisis. Said Das: "Somebody actually blames me for all of this. I said, `I didn’t invent everything.’"

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Mining stocks took another beating today over concerns about falling demand combined with the financial woes on Wall Street, but the industry remained confident thoat a "long-term commodity bull market" will soon reassert itself.

"I think we can conclude that when everything goes up for sale, then nobody's immune to a market selloff, but the demand for commodities is still extremely robust," said Bradford Cooke, chairman and CEO of Vancouver-based Endeavour Silver Corp. (TSX: EDR).

"We're still firmly in a long-term commodity bull market, and the selloff of the commodities in general and the mining shares in particular is overdone," he added.

The diversified metals index on the Toronto Stock Exchange was down more than five per cent in trading today, after a retreat of more than seven per cent Monday.

Prices for commodities fell over investor concern that the financial crisis in the United States will spark a deep recession in that country and spill over to weaken European, Indian and Chinese economies.

India and China have been growing rapidly in recent years and have been at the heart of soaring demand for everything from oil, steel and coal to nickel, grain, chemicals and other commodities.

As well, traders worry that global market liquidation prompted by the ongoing financial crisis on Wall Street, is also prompting the selloff since many financial companies invested in soaring commodities contracts to cash in on rising prices.

Wall Street was rocked Monday by announcements that Lehman Brothers Holdings Inc., the fourth-largest investment bank in the U.S., had filed for bankruptcy protection.

Further jitters were caused by the US$50-billion takeover of struggling Merril Lynch by Bank of America and news that insurer American International Group Inc. could need billions of dollars to strengthen its balance sheet.

But investors tend to see commodities – particularly precious metals like gold and silver – as a safe bet in times of financial crisis, said Cooke.

"Gold and silver in particular having a historic role as hedges against financial crisis and monetary inflation, they lose that role only temporarily in a market selloff and they certainly should resume that role once the peak selloff is past," he said.

Haytham Hodaly, an analyst with Salman Partners Inc., added that the financial crisis will likely result in a weaker U.S free credit report.com. dollar, which will push investors to the "safe haven" of precious metals.

"I think what's going to happen is the issues that we're seeing in the United States will end up resulting in a weaker U.S. dollar, at least in the near term, which will shed some positive light on owning precious metals, particularly gold and silver as basically a safe haven in this time of economic turmoil," said Hodaly.

Monday's gold and silver prices seemed to confirm this. Gold for December delivery rose $22.50 to settle at $787 an ounce on the New York Mercantile Exchange, after earlier rising as high as $791.40, while December silver rose 34 cents to settle at $11.135 an ounce.

Commodity prices "took off" when the U.S. credit crisis began a year ago, but equities didn't follow, said Cooke.

"I've never seen commodity prices move so high so fast in my life … but the equities did not confirm that upward move," he said.

"So the equities, which never joined the commodity price party, have been nailed on the downside."

But Cooke said he's confident that "the bottom is near" and commodity stocks will respond favourably when it hits.

"I feel that if you look at both the fundamentals and the technical charts on these things, this selloff is way overdone. Gold and silver in particular do have a traditional role to play and they're going to resume it, soon," he said.

"It's not a time to panic, it's a time to reflect."

13:31ET 16-09-08

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Virgin America Inc. has signed a deal with the largest online travel-booking site in a bid to give the airline's fares wider exposure.

Virgin America's deal allows Expedia Inc. to list all of the low-fare carrier's flights and schedules on its consumer site, Expedia.com, and on its business travel arm, Egencia LLC.

The agreement also calls for discount travel site Hotwire.com, another Expedia business, to offer Virgin America fares.

Terms of the deal were not released.

Virgin America, which began service August 2007, flies to San Francisco, Los Angeles, San Diego, Seattle, Las Vegas, New York and Washington, D.C no fax payday advance. An application to begin service to Chicago is pending.

Burlingame-based Virgin America also has deals with other online travel booking sites including Travelocity, Orbitz and Priceline. The privately held airline is owned partly by British billionaire Richard Branson.

Expedia, based in Bellevue, Wash., allows travellers to buy airline tickets, hotel reservations, car rentals and vacation packages. It also has a luxury travel division called Classic Vacations.

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UK gas producer BG Group admitted defeat in its hostile bid for Australian coal-bed methane producer Origin Energy, but analysts said BG may shift its focus to another target or become a target itself.

BG said in a statement on Tuesday it would not increase or extend its A$15.50/share offer, which closes on September 26, and said it expected the offer to lapse, after Origin formed an $8 billion joint venture with U.S. oil major ConocoPhillips.

“The price implied by this newly announced joint venture is higher than BG Group is able to justify,” BG Chief Executive Frank Chapman said. “We wish Origin and ConocoPhillips every success with their joint venture.”

Origin said on Monday it had agreed to spin off its massive coal-seam gas assets in Queensland into a joint venture in which ConocoPhillips would inject up to $8 billion.

BG had hoped to use the reserves to expand a liquefied natural gas export terminal it plans to build with Queensland Gas Co.

Some analysts had predicted BG would abandon its bid after the Origin-Conoco tie-up, prompting BG’s shares to rally 6 percent on Monday.

The shares traded up 1.5 percent at pence at 4:02 a.m no fax payday loan. EDT, outperforming a 0.2 percent rise in the DJ Stoxx European oil and gas index.

Origin shares closed down 1.42 percent at A$17.40 before the announcement. 

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United Airlines travelers across the Atlantic can leave their money in their pockets when the food cart comes down the aisle.

The nation’s second-largest carrier on Tuesday backed off from a plan to begin charging for coach-class meals on its flights to Europe after some customer backlash. The carrier’s letter to customers on Tuesday began "Thank you for your direct, candid feedback."

"We heard loud and clear from our corporate and our Elite frequent fliers that they value our hot meal service," United (UAUA, Fortune 500) spokeswoman Robin Urbanski said.

Although many carriers have stopped serving free food on coach domestic flights, customers on long-haul flights have been able to count on being fed.

The letter said that with fuel prices so volatile, United would "continue to be proactive in testing new ideas."

United said that it will still begin serving cold sandwiches or snack boxes instead of hot meals to business-class customers on about 16 domestic flights a day on Oct 1 fast cash online. United said it would "evaluate the results and determine next steps by the end of the year." 

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Despite Bill Clinton’s powerful endorsement of Barack Obama Wednesday night, there’s still plenty of resentment inside Team Hillary over the fact that she’s not on the ticket and her strategists aren’t on the campaign. But when it comes to economic policy, the Democrats are jelling into one big happy family.

Obama’s inner sanctum now includes Clinton Treasury Secretaries Lawrence Summers and Robert Rubin, former White House chief economist Laura Tyson, and - most recently - Gene Sperling, former White House adviser and chief economic policy wonk for Hillary Clinton during the primary season.

"Everyone who was with Hillary Clinton is now with us," Jason Furman, Obama’s economic policy director, tells Fortune. "The campaign has deepened and broadened its economic bench in the general election."

That bench also includes poverty expert Jared Bernstein of the Economic Policy Institute; Austan Goolsbee, the University of Chicago economist who has been at Obama’s side since the start of the race; and Georgetown University law professor Daniel Tarullo. Investor Warren Buffett and former Fed Chairman Paul Volcker top off the list of regular advisers. A larger circle also includes CEOs Jamie Dimon of JPMorgan Chase (JPM, Fortune 500), Indra Nooyi of PepsiCo (PEP, Fortune 500), and Eric Schmidt of Google (GOOG, Fortune 500).

Managing this team of large and accomplished egos is the 38-year-old Furman, a child of Greenwich Village (and liberal parents) who was so intellectually precocious he had to trek uptown to Columbia University for math and physics because his high school didn’t offer sufficiently advanced courses. He later obtained his PhD in economics from Harvard. Despite his relative youth, Furman so far seems adept at meshing the two campaign cultures. "These are good friends of mine," he says of the Clinton folks. (He could have substituted "former bosses of mine;" Furman once reported to Sperling, and later to Rubin.) After the primary campaign was over, he notes, "I reached out to them and they reached out to me."

Furman’s job is made easier by the fact that Clinton and Obama ran on virtually identical economic agendas. The biggest difference was that Clinton’s healthcare plan mandated that individuals be covered, and Obama’s didn’t cashadvance.com. Since the primary campaign ended, Obama has borrowed one Clinton idea - a healthcare tax credit for small business.

Furman runs the Obama economics shop through regular conference calls with advisers - coupled with ad hoc meetings to respond to news events. On July 13, after the plunge in Fannie Mae and Freddie Mac share prices prompted the Federal Reserve and Treasury Department to consider intervention, Furman’s first call was to Summers. A conference call to a broader group followed. Then Furman reported the results to Obama. Within hours, the campaign issued a statement saying any government plan should "maintain a steady flow of capital to the housing market" and should protect taxpayers rather than bail out shareholders.

The politics of economics is hardly new territory for Furman. He was Kerry’s economic policy director in 2004 and worked on the Gore campaign in 2000. Before joining Obama in June, Furman was running the Hamilton Project, a centrist think tank founded by Rubin and former deputy Treasury Secretary Roger C. Altman.

Furman’s own reputation is as a centrist. When Obama tapped him there was a mini-uproar from the left wing of the party over his defense of Wal-Mart (WMT, Fortune 500) and free trade agreements. Furman reminded his critics of his work opposing efforts to privatize Social Security, and the storm settled.

"When Barack hired me," Furman says, "he told me my job was to be an honest broker and incorporate different points of view."

Now that he’s integrated Team Clinton into the campaign, that job is done. If Obama wins, Furman’s toughest (and potentially most influential) task comes when it’s time to advise the president on how to dole out all those prime government jobs - from Treasury Secretary on down. Those Clinton folks are no dummies on the workings of Washington: Being loyal and visible soldiers now means being front and center for the big titles later. 

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An emergency move by U.S. securities regulators this week aimed at curbing manipulative short-selling in some major financial firms should be expanded to all publicly traded banks, or it could erode confidence in the banking industry, a top trade group said.

A letter from the American Bankers Association to the Securities and Exchange Commission this week stressed that banks could be vulnerable as they are suffering from the financial turmoil stemming from the downturn in the U.S housing market.

“The emergency order could further exacerbate a loss of confidence in the safety and soundness of this country’s banking industry,” ABA President Ed Yingling said in a Thursday letter to the SEC.

“As the commission is aware, it would be an understatement to say that short interest in financial services companies has greatly increased over the year,” Yingling said.

On Friday the SEC, the U.S. markets watchdog, amended its action from earlier in the week but limited the protection to 19 firms including U.S. housing finance giants Fannie Mae and Freddie Mac whose shares plunged on concerns they were undercapitalized.

The rule also applies to the stocks of 17 Wall Street firms, primary dealers that have access to the Federal Reserve’s discount window, such as Citigroup Inc (C.N: Quote, Profile, Research, Stock Buzz) and Lehman Brothers (LEH.N: Quote, Profile, Research, Stock Buzz).

Short selling is a legitimate strategy where the investor arranges to borrow shares they consider overvalued and sell them in hopes of profiting when the price drops payday loan low fee. A naked short occurs when an investor sells stock that has not yet been borrowed.

Wall Street, which was thrown off guard when the SEC announced the emergency rule on Tuesday, and U.S. stock exchanges applauded the rule modifications and guidance. But the ABA wanted the SEC protection expanded to all banks and their holding companies that are publicly traded. 

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