U.S. Economic/Financial News
Lazard's Kornblum Touts Globalization, Cartel Model
Former U.S. Ambassador to Germany (1997-2001) and current chairman of Lazard & Co. GmbH in Germany John C. Kornblum made the following comments on globalization. and the need to look at it from the standpoint of the winners, rather than the losers:
"Corporations must assume a growing responsibility for managing change in this new world. Dispersion of governmental power will place burdens on non-governmental players. There will be opportunities, but also dangers. Note the ideological fervor against so-called globalization. These critics reflect the same sorts of arguments that motivated Marx and Engels. They will focus on the losers rather than on the winners. They will paint change as the product of an evil ideology. Capitalism will return as a specter, and global corporations will be the villains."
The comments were in the transcript of a speech (venue unidentified) posted recently on the website of the American Institute for Contemporary German Studies, where Kornblum is on the board of trustees. Kornblum was Clinton's U.S. Ambassador to Germany at the same time that Felix Rohatyn was U.S. Ambassador to France; he moved to Lazard when Bush took office.
Barron's: Hedge Funds Pose Imminent Risk to System
In an editorial commentary in Barron's June 5, Christopher Whalen, co-founder of Institutional Risk Analytics, warned that "there are excesses now visible in the over-the-counter derivatives markets that bear remarkable similarity to the speculative manias fueled by private investment pools in the U.S. a century agomanias that led to financial crashes and the eventual imposition of market regulation by a shocked and outraged Congress."
Whalen says that the various proposals for semi-regulation, such as those of former New York Fed chief Gerald Corrigan, "do nothing to reduce the real deficiencies that continue to make derivatives inefficient, opaque and therefore dangerous to investors," adding his spin that a "public marketplace would eliminate" such problems.
The problem, says Whalen, is that "since highly leveraged hedge funds are the predominant sellers of CDS [credit default swap] contracts to banks, a growing portion of the aggregate credit risk of the U.S. banking system is held by unregulated, undercapitalized players who have little incentive to limit risk."
Meanwhile, the Bank of New York and Amber Partners, a risk certification firm to the hedge-fund industry, issued a warning to investors on June 6 to use "stringent due diligence [and] focus on operational risk processes when choosing hedge fund managers." I.e., choose your seat on the Titanic very carefully.
Fitch Cuts Ford's Credit Ratings Deeper into Junk
Fitch Ratings downgraded its issuer default ratings on Ford Motor and its finance unit further, citing an expectation of "accelerated negative cash flows" through at least 2006, Reuters reported June 8. Fitch lowered Ford's issuer default rating by two notches to B+, four levels below investment grade, and its senior unsecured debt one level. Ford Motor Credit's issuer default rating was cut two notches as well, though its debt was unchanged. In the credit derivatives market, meanwhile, the cost to insure against default rose by 12 basis points.
U.S. Airlines Flight Capacity Now at Level of 1946
U.S. airlines are expected to lose $3 billion in 2006, but this good news, because it is slightly less than last year, according to media accounts June 5. The airlines have now taken the approach that each flight must be profitable, or it will be cancelled. As a result, the fleet size of the top six airlines has been cut by 21% in the last five years, going from 3,469 to 2,747 planes. American Airlines has just grounded 27 (older) MD-80 craft, while Delta and Northwest have gotten bankruptcy court approval to "return dozens of their aircraft to the leaseholders."
With this decrease in national air transport capability, goes an increase of "pricing power," in Wall Street parlance. Pricing power has risen 9% this year, from an all time low last year. Accordingly, flight capacity is now at a record 77.6%, the highest level its been since the end of World War II, in 1946.
Paulson's Role in China's Economic Development Draws Fire
Treasury Secretary nominee Henry Paulson's involvement with China's economic policies is drawing fire from Republican China-bashers, the Washington Post reported June 6. For those who blame China for bringing down the world financial system by being a "currency manipulator," such as the U.S. Business and Industry Council, Paulson has a conflict of interest and should be opposed in the Senate.
Paulson was central to Goldman Sachs' role in managing several major IPOs of Chinese industries, including PetroChina in 2000 and the Bank of China last weeka $9.7 billion deal, the largest IPO in the past six years.
A source in New York, who is close to Paulson, said that the Treasury Secretary to-be will not push the Chinese to revalue, but will push the Fed to continue raising rates to "strengthen" the dollar.
Interestingly, Sen. Charles Schumer (N.Y.), the leading critic of China on the Democratic side, has not attacked Paulson on this account, but said that Paulson "will understand the need to get results, and have a good chance of getting it done."