Doug --
Word around the NN AGM indicated the Del'Oro report was if not inaccurate then misleading and the IDC and Gartner reports far more accurate. I'm hoping they'll bring out a press release to balance the skewed reporting.
On the global telecommunications front, Swisscom's IPO and the response from large investors certainly seems positive:
bloomberg.com
Turning to global economics, the LA Times has an informative article on the LTCB
latimes.com
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Sunday, October 4, 1998
JAPAN
The Clogged Arteries of a Troubled Economy
By ROBERT E. LITAN
WASHINGTON--For weeks, the world has been waiting for the Japanese government to agree on an aggressive plan to clean up the country's worsening banking mess. The need could not be more urgent. More so than in the United States, banks act as the financial circulatory system of the Japanese economy, which continues to ail. The arteries of that system are so clogged with bad loans--more than $1 trillion, by some estimates--that even tax cuts and a looser monetary policy cannot be fully effective until the blockages are removed. Otherwise, Japanese consumers will not give their banks more money to lend, and the banks will lack the financial capability to extend new loans to credit-worthy borrowers.
The first signs of positive movement came last week, when the Japanese government let Japan Leasing, an $18-billion company, go bankrupt without taxpayer assistance. In addition, the government has decided to handle Japan Leasing's insolvent affiliate, the Long-Term Credit Bank, like the United States handled its hundreds of failed thrifts and banks earlier this decade. Long-Term Credit will be taken over by the government, its depositors protected, while its bad assets will be handed off to the Japanese equivalent of our Resolution Trust Corp. and sold off. Sale of the cleaned-up bank to the highest bidder will follow.
The question now is whether Japanese authorities will move with the same dispatch to attack the many other insolvent banks. Two huge hurdles stand in the way that make Japan's banking problem far worse (apart from its size) than the one the U.S. faced. In calling for Japan to "do something quick" about its banking mess, U.S. officials must be sensitive to these roadblocks.
First, Japanese consumers, already big savers, tend to save even more as they learn companies are going bankrupt, which occurs with increasing frequency as banks tighten credit. While saving is good for each individual or family, if too much is saved throughout the country, the economy will sink further. Any bank-rescue plan that forces more marginal borrowers into bankruptcy is likely, therefore, only to worsen Japan's economic slump.
Second, if the assets of Japanese banks were truly reckoned at their market values, it is conceivable that much, if not most, of the nation's banking system would be underwater. Furthermore, of those banks that are solvent, few if any have the wherewithal to buy the insolvent banks, even after they are stripped of bad loans. This means the only banks that may be healthy enough to buy the cleaned-up Japanese banks would be foreign institutions. A few such purchases would be politically palatable, but is Japan prepared to hand over most of its banking system to foreigners, especially at what may be fire-sale prices?
The "bridge bank" rescue plan proposed by the ruling Liberal Democratic Party over the summer was designed to get around these hurdles. The bridge banks would warehouse the husks of the insolvent institutions for up to five years. The LDP didn't say explicitly, but its purpose behind the delay in selling the bridge banks was obviously to buy time for the rest of Japan's banks to recover, so they would eventually be healthy enough to buy. Meanwhile, to address the bankruptcy problem, the original plan encouraged bridge banks to continue lending to marginal borrowers.
The LDP plan was a reasonable first draft, but it had obvious flaws. Leaving the bridge banks in business for as long as five years without profit-motivated individuals running them would make it more difficult for their privately run competitors to survive. Furthermore, giving more money to marginal borrowers would drive them deeper into debt and deprive more deserving borrowers.
So, what can Japan do? First, it should set up bridge banks as rapidly as possible, but send all their nonperforming loans, including those to marginal borrowers, to a Japanese version of the Reconstruction Trust Corp. That institution, in turn, should forgive some portion of the loans in return for equity in the borrowers, who might also be given options to buy the equity back within some period of time at a reasonable premium.
It will be said that giving this much power to a government agency will lead to sweetheart deals with politically favored borrowers, such as construction companies, that are strong LDP supporters. This is a danger, but one that can be addressed by announcing clear and objective criteria for the equity-for-debt swaps.
Why not let the bridge banks cut these deals? One impediment is Japanese banking law, which prohibits banks from owning more than 5% of any company's shares. This restriction would not apply to the government-run trust. More important, arranging these swaps will take some time. If the bridge banks were given the job, this would delay their cleanup and sale to healthy buyers.
This plan would avoid a rash of bankruptcies, while the government would get some portion of the upside as firms recovered. Equally important, bridge banks could be cleaned out in short order and readied for sale.
To whom? One answer is for the government to accept that the highest bidders may be foreign financial firms. But there is another option: Encourage cash-rich Japanese commercial firms, such as giant automobile or electronics firms, to enter the bidding for the cleaned-up banks. It will be said, of course, that allowing the resurrection of interlocking Japanese business conglomerates, known as zaibatsu, would lead to excessive concentration of economic power. That is a problem, but one that could be addressed by strict limitations on bank lending to owners similar to those we enforce for our banks and their financial affiliates and owners.
Japan now appears intent on a third option: having the government inject taxpayer funds into weak banks in return for preferred stock. This seems sensible, but there are grave risks involved. Because an honest accounting would reveal that most surviving Japanese banks need such public funds, the government would be setting up a major conflict of interest: attempting to regulate the many banks in which it will also be a major owner. Since "administrative guidance" of banks by the Finance Ministry helped land them in their current mess, government ownership hardly seems the answer.
In short, there is a way out for Japan and it need not involve the wave of bankruptcies the country's authorities rightly fear, nor the radical approach of a government takeover of banking.
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Robert E. Litan Is the Director of the Economic Studies Program at Brookings Institution and Author of "American Finance for the 21st Century."
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Also from the LATimes:
latimes.com;
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Sunday, October 4, 1998
G-7 Weighs U.S. Plan for Emergency IMF Credit
Economics: Proposal aimed at aiding fiscally beleaguered nations gains quick backing of key members. Group also seeks a bigger role for World Bank to resolve crises.
By JONATHAN PETERSON, Times Staff Writer
WASHINGTON--Finance officials of the world's most powerful economies Saturday began lining up behind a U.S. proposal to shelter emerging nations from the financial turmoil that has plunged much of the developing world into recession. At the conclusion of a daylong meeting, the world's seven largest industrial democracies, known as the Group of 7, issued a statement in which members "agreed to explore" the U.S. approach, which would provide credit for beleaguered emerging nations under financial attack.
Backed by Treasury Secretary Robert E. Rubin and Federal Reserve Chairman Alan Greenspan, the U.S. plan represents an attempt to assert leadership and gain some control over the financial wildfire that has leaped across national boundaries and threatened many currencies. The G-7 has been criticized for maintaining a global system that in the last year has functioned chaotically, with standards of living falling amid financial turmoil.
However, Rubin said Saturday that, during the sessions, the industrial powers displayed "a sense of energetic commitment to doing all that is sensible" to solve the financial crisis that started in Asia and has spread to different parts of the world. "I really have no doubt in my mind that the world can and will work its way out of this. But for that to happen, each of us has to work hard," he told reporters.
In their communique, the seven richest nations cited "weakening growth prospects" in much of the world, the need for "intensified cooperation" to promote growth in each of their countries and the importance of Japan's moving swiftly to revive its own economy.
But the problem of finding mutually acceptable strategies was clear from their own statement. "We also agreed that the challenges that face each of our economies differ," the G-7 said.
The group also said the International Monetary Fund, highly criticized throughout the ongoing financial debacle, remains central to reforms envisioned by the United States and its allies. "We reiterated our support for the central role of the IMF in enhancing crisis prevention," the G-7 communique said. In addition, the nations emphasized support for another pillar of the established order--the World Bank--to play a larger role in providing emergency aid and crisis prevention.
In part, the U.S. plan would provide credit through the International Monetary Fund for emerging nations that find their currencies under attack when investors shift massive amounts of money to other countries. "He [Rubin] asked me to support it, and I said I would," Japanese Finance Minister Kiichi Miyazawa told reporters.
President Clinton personally telephoned British Prime Minister Tony Blair and French President Jacques Chirac, and they responded favorably, as have officials from other countries, according to White House spokesman Joe Lockhart.
On a day that was bristling with high-level meetings here about the global financial crisis, the key parley was the G-7 session inside Blair House, across the street from the White House, hosted by Rubin and Greenspan.
In addition, the IMF and World Bank are holding annual meetings in which officials are struggling to reconsider policies that have been fiercely assailed in the ongoing financial crises.
"As we meet here in Washington, we are conscious that more than a quarter of the world is in recession, that the second-largest economy in the world, Japan, is in recession--and that the social casualties of the Asian crisis are rising in numbers," British Chancellor of the Exchequer Gordon Brown told reporters before the first of the G-7 meetings began.
While Rubin on Friday said the U.S. was essentially proposing that the IMF have the ability to provide "a line of credit" to beleaguered developing nations when they need it, Canadian Finance Minister Paul Martin on Saturday described the measure as a "crisis prevention fund."
Martin and Brown tentatively endorsed the U.S. approach, although Martin noted that other financial reforms would be useful, including improvements in the IMF's procedures. "There is a growing consensus on what needs to be done," he said. Mexico's finance minister, Jose Angel Gurria Trevino, said the U.S. plan is "sorely needed. . . . The contagion has affected Latin America very badly."
U.S. officials are proposing no new source for emergency IMF funding, other than the fund's budget, which has largely been exhausted because of emergency bailouts in the ongoing series of crises in Asia, Russia and Latin America. The House of Representatives has resisted White House pleas to approve $18 billion in funding.
In addition to the search for some global approach to bolstering economies, special attention was focused on Japan--whose recovery is seen as the most important element for global economic health--and on Brazil, potentially the next victim.
U.S. officials were lobbying the IMF and others to support a bailout for Brazil, perhaps in the $30-billion range, which could be announced soon after today's presidential election there. Japan's role in boosting its own economy and the economies of its battered neighbors also came under scrutiny.
U.S. and Asian officials endorsed a $30-billion Japanese plan to stimulate the region's financial health. It would be made up of loan guarantees and interest-rate subsidies targeted at some of the hardest-hit countries in Asia, including Indonesia, South Korea, Malaysia and Thailand.
Miyazawa also repeated support for the creation of a regional Asian fund. Such a proposal by Japan sparked sharp criticism last year on the grounds that it would fail to reform the sort of "crony capitalism" and entrenched local problems that have come to haunt the regional economies and would make recovery much more difficult. "It is important to help Asian nations by boosting Japanese imports from the region," Miyazawa said of a regional funding approach.
Unless the Asian economy recovers, Japan's economy will not recover either, he said. But the less-controversial $30 billion in aid was greeted with support by some who would be its beneficiaries. "It's exactly what we need," Thai Finance Minister Tarrin Nimmanahaeminda told reporters.
A group representing 128 developing nations also joined a worldwide chorus urging Japan to overhaul its own budget policy and banking system--changes that U.S. officials maintain are vital to the world's economic health.
The coalition--including Brazil and Mexico, which have been threatened by the spread of the financial crisis beyond Asia--seeks a stronger voice in the debate. Coalition members also suggested that advanced nations lower interest rates as a strategy for calming international investors and stabilizing the wild stampedes of capital. The varied prescriptions only made clear how daunting the policy challenges remain--and no one was predicting a quick fix for the world's ailing financial system.
"My guess is we won't find a silver bullet, but we will come out with a process," World Bank President James Wolfensohn said.
Times staff writer Chris Kraul contributed to this story. >>>>
The following is on hedge fund debacles --- more proof there's a mighty long walk between IQ and wisdom:
latimes.com;
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Sunday, October 4, 1998
Financial Follies
The collapse of Long-Term Capital Management illustrates the risk in combining stars and secrecy. But should hedge funds be heavily regulated?
By CHARLES R. MORRIS
NEW YORK--One consoling feature of most of the derivatives-related financial fiascoes of the past decade is that they were object lessons in what can happen when incompetents play with large amounts of other people's money. Robert L. Citron, the former treasurer of Orange County, who lost almost $2 billion of the public's money in 1994, could plausibly plead that he didn't know Merrill Lynch was stuffing his portfolio with all that high-risk paper. One can almost sympathize with Nicholas W. Leeson, the rogue trader who single-handedly brought down the British investment bank Baring Brothers in 1995. Picture Leeson, still just a kid, sweating bullets in front of his computer screen, as week after week all his positions turned sour, until he finally took off on a wild global flight that ended in a German prison.
The obvious response is to keep dangerous weapons out of the hands of children and incompetents. But what do you do when the smartest financial people in the world lose yet-uncounted billions and come close to causing a global financial thrombosis when their trading strategies go bad?
The scene of the latest financial debacle was a Greenwich, Conn., "hedge fund," Long-Term Capital Management, whose senior partners include John W. Meriwether, once a near-legendary trader at Salomon Bros., and Myron S. Scholes and Robert C. Merton, who shared the 1997 Nobel prize in economics for co-inventing the fundamental mathematical techniques of modern risk management. On any league table of the savviest financiers, they'd rank near the top.
Hedge funds are investment pools for the rich. As long as they have fewer than 100 investors, who must be either wealthy individuals or institutions, they are allowed to operate virtually without regulation. Long-Term Capital specialized in bonds, though it wandered far afield into takeover stocks and other risky instruments. Like most hedge funds, it earned big returns for its investors--in the range of 40% annually--by leveraging up its positions with borrowed money. Assume you have $1,000 and know how to make a 1% profit on an overnight bond trade. Instead of just investing your $1,000, borrow $19,000, so you'll make $200 on the trade. Pay back the $19,000 and book a 20% profit on your $1,000. That works both ways, of course. If you guess wrong and lose 1%, you still have to pay back the $19,000 and are left with a 20% loss.
The investors in Long-Term Capital put up about $5 billion in capital, which the fund managers leveraged into positions in the $100-billion to $150-billion range, and occasionally far higher, but not "$1.25 trillion," as many papers reported. When world markets had a collective heart attack in August, almost all of Long-Term Capital's investments went south at the same time, and lenders started calling in their loans. But the falling markets had eaten up all of Long-Term Capital's equity, so the securities it owned were worth less than outstanding loans, which is when the Federal Reserve stepped in.
Press reports to the contrary, there was no bailout.
A consortium of financial houses, all lenders or investors in the fund, took over its positions and put up the $3 billion in additional cash needed to finance an orderly unwinding of the portfolio. No public money was involved. In effect, the fund's creditors seized its assets, much as in bankruptcy, but without the legal delays. Fund investors will be lucky to recover 10 cents on the dollar, and several partners may be facing personal bankruptcy. Unlike what's been happening in Japan, there's no cover-up of the losses. All of Long-Term Capital's losses will be fully recognized on its own books and those of its investors and creditors.
At the end of the day, the story of Long-Term Capital is a fairly simple one. Some very smart investors used borrowed money to make a series of stock and bond bets, which, eyes wide open, they guessed had maybe a 90% chance to make a lot of money. They were probably right, but when all the 10%-probability outcomes came up at the same time, they were wiped out. The bigger question is: What are the implications for the stability of markets?
Superficially, the system worked. Wall Street got early warnings that Long-Term Capital was in trouble. The Fed was alerted, the big boys got together and divvied up the losses, the portfolio is being sold off in a way that will minimize any market impact. No fuss, no muss.
But there is a bigger question. None of the top financial firms that were investing in, and lending huge amounts of money to, Long-Term Capital had the slightest idea of how risky their positions were. These were stars, so nobody asked as long as the profits rolled in.
Star systems and secrecy are the essential ingredients of financial fiascoes. Citron and Leeson were each stars in their own little world, so nobody paid attention to what they were doing. The mortgage-backed crisis of 1994, which raised consumer mortgage costs by a full percentage point, was triggered by the collapse of Askin Capital, another black-magic fund run by a star; and Michael R. Milken's star power blew up the 1980s leveraged-buyout bubble beyond the bounds of economic common sense.
Asian politicians are accustomed to blaming hedge funds for their currency troubles, instead of cleaning up their own financial systems. But they're not entirely wrong. George Soros became famous, and made a $1-billion profit, by triggering a run on the British pound in 1992. The hedge funds that speculate in currencies are notable for their herd behavior and have been a big factor in the rapid spread of currency instability in the last few years. Volatile and easily spooked investors, secretly disposing of hundreds of billions in equity and trillions in leveraged positions, hold the potential for massive disruptions.
Bringing hedge funds under better regulatory control will be a subtle and difficult problem. The U.S. regulatory system is designed to protect the public from scams, and sensibly assumes that rich people and institutions can look after themselves. If the government tried to regulate hedge-fund investments, they would just domicile themselves overseas, as many, including Soros' flagship fund, the Quantum Group, already do.
An important first step would be to pierce the veil of hedge-fund secrecy. The government has no power to make hedge funds open their books, but it could forbid regulated financial institutions from investing in, or lending money to, funds, such as Long-Term Capital, that don't open their books to investors and lenders. If the big players putting money into Long-Term Capital had known what the partners were doing with it, they might have pulled the plug far sooner.
Hedge-fund managers will plead that even confidential information will leak and limit their trading strategies, but maybe that is all to the good.
Rich individuals should be allowed to lose their money however they like. But there's no reason why regulated institutions should be lending or investing without knowing what their customers are doing with the money.
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Charles R. Morris Is the Author of "The Cost of Good Intentions," an Analysis of the New York Fiscal Crisis. His New Book, "Money, Greed and Risk: an Analysis of Financial Crises," Will Be out Next Year
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These articles may be off-topic, but to focus on individual stocks without looking at global economics would be to debate wheat versus rye while ignoring the hurricane a mile away. I'm talking to myself, here.
I'm also pruning my orange trees, which is a lot more rewarding than the market recently.
Later --
Pat
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