China’s Rules to Curb Property ‘Madness’ Will Take Effect Now

         By Bloomberg News

April 17 (Bloomberg) -- China’s central bank pledged to immediately implement new lending rules to cool real-estate speculation and one of its policy advisers said the market is having its “last madness.”

The central bank commented in a statement on its Web site last night. Li Daokui, a newly appointed academic adviser to the monetary policy committee, spoke in an interview broadcast by state television on April 15.

Asset-price bubbles inflated by a credit boom could derail the recovery of the world’s fastest-growing major economy, which expanded 11.9 percent in the first quarter from a year earlier. China’s cabinet, the State Council, announced higher mortgage rates and down-payment ratios for second homes on April 15 after property prices jumped by a record in March.

Investors “don’t realize how strong and resolute the political will is among top leaders to curb price gains,” Li said on Central Television. The market is having its “last madness” and speculation may dissipate in a year or 18 months on extra action by local authorities and an increased supply of low-price, so-called policy homes, Li said.

Cheung Kong (Holdings) Ltd., the Hong Kong developer controlled by billionaire Li Ka-shing, said yesterday that efforts to cool the Chinese property market are “timely.”

“You want to take action before the market gets too hot,” Justin Chiu, executive director of Cheung Kong, said in a Bloomberg Television interview. “Prices have gone up really quite a lot; people buying for their own use should do it within their means. If they invest, they need to be cautious about interest rates.”

 

Stocks Fall

Under the new rules, down payments for second homes must be at least 50 percent, up from 40 percent, and mortgage rates can’t be lower than 110 percent of benchmark rates, the State Council said. Banks should also raise down payment ratios and rates for third homes “by a broad margin,” it said.

The Shanghai Composite Index fell 1.1 percent yesterday on concern that measures to cool the real-estate market may hurt economic growth and companies’ profits.

“We don’t think that’s the end of the policy crackdown on the property market and some shoes have yet to drop,” said Larry Wan, deputy chief investment officer at KBC-Goldstate Fund Management Co., which oversees about $583 million. “Property accounts for a big proportion of fixed-asset investment and if the property industry is down, the whole economy will get hurt. So will related industries such as banking and resources.”

Surging Prices

Property prices in 70 major cities surged 11.7 percent in March from a year earlier, the most since records began in 2005, government data showed last week.

In an April 15 statement after the release of first-quarter numbers for gross domestic product, the State Council said that local governments have failed to control speculation. Besides limiting the risk of price bubbles, policy makers want to keep housing affordable.

The government has yet to take another step which could help to cool the property market: raising benchmark interest rates. Instead, officials are targeting a 22 percent reduction in new loans in 2010 from last year’s record of $1.4 trillion.

In an April 14 statement, the State Council said first- quarter growth was largely driven by stimulus policies and a comparison with a low level a year earlier, signaling that officials may be cautious in withdrawing stimulus.

China’s economy is showing signs of overheating and officials may face a “grim” and difficult task in holding full-year inflation to a targeted maximum of 3 percent, said Li, a professor at Tsinghua University in Beijing. He was appointed as one of three academic advisers to the People’s Bank of China last month.

--Li Yanping, Paul Panckhurst. Editor: Mike Millard.

.Obama: Rules needed to avoid new financial crisis

Business Finance

Darlene Superville, Associated Press Writer, On Saturday April 17, 2010, 7:13 am

WASHINGTON (AP)

President Barack Obama on Saturday challenged opponents of tougher financial regulations, saying the U.S. is doomed to repeat the economic crisis without new rules and that taxpayers would again be stuck with the bill.
The overhaul is the next major piece of legislation that Obama wants to sign into law this year.

"Every day we don't act, the same system that led to bailouts remains in place, with the exact same loopholes and the exact same liabilities," Obama said in his weekly radio and Internet address. "And if we don't change what led to the crisis, we'll doom ourselves to repeat it.

"Opposing reform will leave taxpayers on the hook if a crisis like this ever happens again," the president said.

A proposal that Senate Democrats are readying for debate creates a mechanism for liquidating large firms to avoid a meltdown. The bill also would regulate the derivatives market for the first time, create a council to detect threats to the system and establish a new consumer protection agency to police people's dealings with financial institutions.
 
On Friday, Obama promised to veto the bill if it doesn't regulate the market for derivatives, instruments such as mortgage-backed securities that contributed to the nation's economic problems after their value plummeted during the housing crisis.

But Democrats have yet to agree on how far such regulation should go, and all Senate Republicans are solidly against the bill. That opposition complicates Democratic efforts to get the 60 votes necessary to overcome likely GOP procedural roadblocks.

Republicans contend that a provision creating a $50 billion fund for dismantling banks considered "too big to fail" would continue government bailouts of Wall Street. Obama administration officials say such a fund is unnecessary and they want Senate Democrats to remove it.

Obama criticized financial industry interests for opposing the proposed regulations and for waging a "relentless campaign to thwart even basic, commonsense rules." He repeated his call for Republicans and Democrats to work together to overhaul the system but made it clear that Democrats are prepared to go it alone.

"One way or another, we will move forward," he said. "This issue is too important."

In the weekly Republican address, House Minority Whip Eric Cantor of Virginia took note of the week's April 15 income tax filing deadline and criticized government spending and climbing deficits that he said are driving taxes higher.


Cantor said Obama has enacted 25 tax increases passed by the Democratic-controlled Congress that will cost families and small businesses more than $670 billion over the next decade and create a "bleak future for our kids and grandkids."

He urged a vote for the GOP in the November congressional elections.

"You have to take action so that we can begin to erase our deficits and free our children from our debt," Cantor said. "And rather than putting the squeeze on our nation's job creators and entrepreneurs, we believe in a pro-growth strategy to create jobs and empower the American entrepreneur and small business people to thrive."
Obama address: http://www.whitehouse.gov

Republican address: http://tinyurl.com/y3tv5m4

Lehman Channeled Risks Through ‘Alter Ego’ Firm (The New York Times)

Lehman Channeled Risks Through ‘Alter Ego’ Firm

It was like a hidden passage on Wall Street, a secret channel that enabled billions of dollars to flow through Lehman Brothers, Louise Story and Eric Dash write in The New York Times.
In the years before its collapse, Lehman used a small company — its “alter ego,” in the words of a former Lehman trader — to shift investments off its books.
The firm, called Hudson Castle, played a crucial, behind-the-scenes role at Lehman, according to an internal Lehman document and interviews with former employees. The relationship raises new questions about the extent to which Lehman obscured its financial condition before it plunged into bankruptcy.
While Hudson Castle appeared to be an independent business, it was deeply entwined with Lehman. For years, its board was controlled by Lehman, which owned a quarter of the firm. It was also stocked with former Lehman employees.
None of this was disclosed by Lehman, however.
Entities like Hudson Castle are part of a vast financial system that operates in the shadows of Wall Street, largely beyond the reach of banking regulators. These entities enable banks to exchange investments for cash to finance their operations and, at times, make their finances look stronger than they are.
Critics say that such deals helped Lehman and other banks temporarily transfer their exposure to the risky investments tied to sub-prime mortgages and commercial real estate. Even now, a year and a half after Lehman’s collapse, major banks still undertake such transactions with businesses whose names, like Hudson Castle’s, are rarely mentioned outside of footnotes in financial statements, if at all.
The Securities and Exchange Commission is examining various creative borrowing tactics used by some 20 financial companies. A Congressional panel investigating the financial crisis also plans to examine such deals at a hearing in May to focus on Lehman and Bear Stearns, according to two people knowledgeable about the panel’s plans.
Most of these deals are legal. But certain Lehman transactions crossed the line, according to the account of the bank’s demise prepared by an examiner of the bank. Hudson Castle was not mentioned in that report, released last month, which concluded that some of Lehman’s bookkeeping was “materially misleading.” The report did not say that Hudson was involved in the misleading accounting.
At several points, Lehman did transactions greater than $1 billion with Hudson vehicles, but it is unclear how much money was involved since 2001.
Still, accounting experts say the shadow financial system needs some sunlight.
“How can anyone — regulators, investors or anyone — understand what’s in these financial statements if they have to dig 15 layers deep to find these kinds of interlocking relationships and these kinds of transactions?” said Francine McKenna, an accounting consultant who has examined the financial crisis on her blog, re: The Auditors. “Everybody’s talking about preventing the next crisis, but they can’t prevent the next crisis if they don’t understand all these incestuous relationships.”
The story of Lehman and Hudson Castle begins in 2001, when the housing bubble was just starting to inflate. That year, Lehman spent $7 million to buy into a small financial company, IBEX Capital Markets, which later became Hudson Castle.
From the start, Hudson Castle lived in Lehman’s shadow. According to a 2001 memorandum given to The New York Times, as well as interviews with seven former employees at Lehman and Hudson Castle, Lehman exerted an unusual level of control over the firm. Lehman, the memorandum said, would serve “as the internal and external ‘gatekeeper’ for all business activities conducted by the firm.”
The deal was proposed by Kyle Miller, who worked at Lehman. In the memorandum, Mr. Miller wrote that Lehman’s investment in Hudson Castle would give the bank and its clients access to financing while preventing “headline risk” if any of its deals went south. It would also reduce Lehman’s “moral obligation” to support its off-balance sheet vehicles, he wrote. The arrangement would maximize Lehman’s control over Hudson Castle “without jeopardizing the off-balance sheet accounting treatment.”
Mr. Miller became president of Hudson Castle and brought several Lehman employees with him. Through a Hudson Castle spokesman, Mr. Miller declined a request for an interview.
The spokesman did not dispute the 2001 memorandum but said the relationship with Lehman had evolved. After 2004, “all funding decisions at Hudson Castle were solely made by the management team and neither the board of directors nor Lehman Brothers participated in or influenced those decisions in any way,” he said, adding that Lehman was only a tenth of Hudson’s revenue.
Still, Lehman never told its shareholders about the arrangement. Nor did Moody’s choose to mention it in its credit ratings reports on Hudson Castle’s vehicles. Former Lehman workers, who spoke on the condition that they not be named because of confidentiality agreements with the bank, offered conflicting accounts of the bank’s relationship with Hudson Castle.
One said Lehman bought into Hudson Castle to compete with the big commercial banks like Citigroup, which had a greater ability to lend to corporate clients. “There were no bad intentions around any of this stuff,” this person said.
But another former employee said he was leery of the arrangement from the start. “Lehman wanted to have a company it controlled, but to the outside world be able to act like it was arm’s length,” this person said.
Typically, companies are required to disclose only material investments or purchases of public companies. Hudson Castle was neither.
Nonetheless, Hudson Castle was central to some Lehman deals up until the bank collapsed.
“This should have been disclosed, given how critical this relationship was,” said Elizabeth Nowicki, a professor at Boston University and a former lawyer at the S.E.C. “Part of the problems with all these bank failures is there were a lot of secondary actors — there were lawyers, accountants, and here you have a secondary company that was helping conceal the true state of Lehman.”
Until 2004, Hudson had an agreement with Lehman that blocked it from working with the investment bank’s competitors, but in 2004, that deal ended, and Lehman reduced its number of board seats to one, from five, according to two people with direct knowledge of the situation and an internal Hudson Castle document. Lehman remained Hudson’s largest shareholder, and its management remained close to important Lehman officials.
Hudson Castle created at least four separate legal entities to borrow money in the markets by issuing short-term i.o.u.’s to investors. It then used that money to make loans to Lehman and other financial companies, often via repurchase agreements, or repos. In repos, banks typically sell assets and promise to buy them back at a set price in the future.
One of the vehicles that Hudson Castle created was called Fenway, which was often used to lend to Lehman, including in the summer of 2008, as the investment bank foundered. Because of that relationship, Hudson Castle is now the second-largest creditor in the Lehman Estate, after JPMorgan Chase. Hudson Castle, which is still in business, doing similar work for other banks, bought out Lehman’s stake last year. The firm’s spokesman said Hudson operated independently in the Fenway deal in the summer of 2008.
Hudson Castle might have walked away earlier if not for Fenway’s ties to Lehman. Lehman itself bought $3 billion of Fenway notes just before its bankruptcy that, in turn, were used to back a loan from Fenway to a Lehman subsidiary. The loan was secured by part of Lehman’s investment in a California property developer, SunCal, which also collapsed. At the time, other lenders were already growing uneasy about dealing with Lehman.
Further complicating the arrangement, Lehman later pledged those Fenway notes to JPMorgan as collateral for still other loans as Lehman began to founder. When JPMorgan realized the circular relationship, “JPMorgan concluded that Fenway was worth practically nothing,” according the report prepared by the court examiner of Lehman.