Business and Finance

The cost of borrowing overnight dollars on global money markets soared on Tuesday despite central banks pumping billions into the banking system to prevent it seizing up further after U.S. lawmakers’ rejection of a $700 billion financial rescue bill panicked markets.

The scramble for cash as banks sought to square their books over the end of the quarter saw the European Central Bank lend $30 billion dollars overnight at a huge rate of 11 percent — more than five times the Federal Reserve’s 2 percent target rate — and call for bids for an additional $50 billion.

Meanwhile, the London interbank offered rate (Libor) for overnight dollars jumped by a record 430 basis points to 6.87 percent, the highest in at least 7-1/2 years.

After the U.S. House of Representatives late on Monday rejected the $700 billion rescue package and sent Wall Street shares plunging, fears of further meltdown in Europe grew.

But in part buoyed by the Irish government’s decision to guarantee all bank deposits and speculation central banks could cut interest rates in concert soon, a collapse of European equities failed to materialize.

European shares erased initial losses to trade largely flat on the day and U.S payday loan low fee. stock futures pointed to a higher opening on Wall Street.

“Money markets are more of a problem than stock markets. Perceived counterparty credit risk … probably won’t go away for a while,” said Everett Brown, strategist at IDEAGlobal.

He said interbank rates and premia over government borrowing costs and expected policy rates — key gauges of financial market stress and investor risk aversion — should come down from historically high levels in the coming sessions. 

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By Monday, it appears, the U.S. Congress will have approved the biggest corporate bailout in history, amounting to $700 billion (U.S.), to rescue America’s stricken financial sector.

The bailout’s sponsor, irony of ironies, is free-market champion George W. Bush, who used the word "panic" in justifying a massive government intervention in the private sector, using language more alarming than any president since Franklin Roosevelt in the earliest days of the Great Depression.

The fear and urgency is justified. Total losses from the low-grade residential mortgages accumulated during the U.S.’s biggest-ever housing boom are now estimated at about $2 trillion (U.S.). Only a quarter of that financial toxic waste has been written off by the world’s leading banks and brokerages, leaving the potential for utter global collapse very real without a government rescue mission of drastic proportions.

And given the complexity of the work to come, getting on with the task can’t begin soon enough. What comes next is more difficult than prising the bailout funds out of a reluctant Congress, and entrusting the U.S. Treasury Department with the task of buying from lenders their most toxic "assets" – that is, failed or delinquent loans for which there usually are no other buyers, and which are inhibiting lenders from providing the liquidity on which capitalism runs.

No one, least of all the managers of the crippled institutions, knows the true value of these dismal loans and other soured investments that Treasury will buy. "The reality is that we are not going to know what the right price is for years," Boston bond manager Andrew Feltus of Pioneer Investments told the New York Times on Wednesday. "It might be 20 cents on the dollar or 60 cents on the dollar, but we won’t know for years. No two pieces of paper are the same."

And there is a lot of paper, about 1.1 million troubled residential mortgages of a total of 51 million U.S. home mortgages. The soured assets, as you’ve heard repeatedly during this crisis entering its 13th month, are monstrously complicated.

Mortgages were bought by Wall Street banks and brokerages from mortgage brokers in the field, then repackaged, or "bundled," into as many as three dozen different types of bonds. These were flipped, for lucrative upfront fees, to other banks, brokerages, pension funds, hedge funds, insurance companies and credulous buyers worldwide, until the diaspora found its way into university endowments funds, the portfolio of the Caisse de dépôt et placements du Québec and UBS AG, Europe’s largest bank, which has already taken a staggering $36 billion in losses on its U.S. securities.

Some of those bundled bonds were re-bundled as "collateralized debt obligations" (CDOs), a type of derivative now trading at pennies on the dollar, since placing an accurate value on these black boxes is impossible. Citigroup Inc. carries its CDOs on its books at 61 cents on the dollar, claiming they are of relatively high quality. But Merrill Lynch & Co., forcibly merged into Bank of America Corp online payday advance. this month, firesaled $31 billion worth of CDOs earlier this year at just 22 cents on the dollar in a desperate bid to shore up its eroding reserves.

In a process increasingly referred to as the Great Unwind, Treasury minions will spend years cracking open the black boxes and tracing the ultimate assets on which the Wall Street-invented paper is based – a split-level in Lansing, Mich.; a tract-home development in suburban Phoenix; a luxury condo in overbuilt Miami. Treasury will then have to decide whether to take an immediate loss on a hopeless asset, or hold the property to maturity in hopes of an eventual rebound in the local real estate market.

The quandary for the Treasury is that if Uncle Sam pays a San Diego bank the undoubtedly inflated value at which the bank is carrying a troubled loan on its books, the bank is being rewarded for its fecklessness by U.S. taxpayers.

Conversely, if Treasury officials drive a hard bargain, paying less than the bank’s claimed value for its impaired assets, the bank will have to take a writedown on the difference. That would eat into the bank’s reserves, and make the bank even more gun-shy about lending to creditworthy customers – the very condition the massive bailout is intended to reverse.

There is arguably a silver lining to this catastrophe, which is that capital diverted for most of this decade to housing and consumer consumption, dating from the buying panic that began after the terrorist attacks of Sept. 11, 2001, when Bush exhorted Americans to keep shopping "or the terrorists win," can now be deployed more usefully.

Housing and shopping sprees at Target and Home Depot contribute little to the nation’s productivity. Economic activities that strengthen America’s competitive advantage have been starved of capital for years. These heavy investments in infrastructure, education, R&D, energy saving retrofits of buildings, and more efficient – and efficacious – delivery of health care.

"This crisis could become a chance to re-evaluate our priorities as a country," Business Week economist Michael Mandel argued this week. "Rather than stressing home ownership and consumption, we should focus on investment and innovation, which have a bigger long-term payoff."

Certainly there are more productive uses of capital than the eye-popping salaries and bonuses Wall Street managers accumulated in the fat years from knowingly peddling shoddy goods.

The new government controls on executive pay that are part of the extraordinary bailout plan under negotiation are a dagger planted in the free-market doctrine of the current Republican administration.

But without them, the rescue package urgently sought by Bush would have been politically impossible.

David Olive writes on business and political issues. He can be reached at dolive@thestar.ca.

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Income trust investors are not ready to take their Liberal election promise to the bank.

Trust units fell in price along with the rest of the stock market yesterday despite the Liberals releasing their 68-page election platform, including the plan to reverse a tax on income trust distributions that is to apply starting in 2011.

The document lends greater formality to the promise Markham MP John McCallum announced a year ago to reverse Finance Minister Jim Flaherty’s much bemoaned Halloween trick of 2006 – at least for the remaining income trusts that have not already converted back to conventional corporations or been taken over by pension plans and private-equity concerns.

But it’s small wonder the market did not respond excitedly after the broken political promises and switched gears of the past. The muted response could also be a commentary on the party’s election prospects.

The Liberals have committed to replace the Tories’ "punitive 31.5 per cent tax" on fund distributions with a "10 per cent tax that is refundable for Canadian investors."

So, in effect, trust distributions would only be reduced by 10 per cent for foreign investors, who would also continue to pay a 15 per cent withholding tax, resulting in a combined tax hit of 23.5 per cent.

But despite the importance of the issue to an embittered group of mainly elderly investors, the platform includes only a single, long sentence on page 18. There the promise is ranked fourth in priority, behind three relatively small promises regarding extra funding for research and development.

McCallum said yesterday he could not explain why the promise was not given more prominence, except that the details can seem rather technical to the average voter and "those hit already know who they are."

It’s estimated that the market value of a couple of hundred business and energy income trusts fell by nearly $35 billion in the couple of weeks after Flaherty moved to prevent more large public companies from converting to the income trust structure.

Flaherty won the applause of some economists, who argued that tax policy favouring the income trust model over conventional tax-paying corporations was not sound public policy cash advances. But his claims that the Treasury was losing hundreds of millions in revenues were derided as a gross exaggeration.

It’s possible, said McCallum, that his party will mention the income trust issue in advertising with various other broken Tory promises, including the fixed election date and the sharing of resource royalties with Atlantic provinces.

In the last election, Tory leader Stephen Harper attacked former finance minister Ralph Goodale for even considering a tax on income trusts, and said a Conservative government would never let the Liberals get away with "raiding seniors’ hard-earned assets."

McCallum admits he is not getting questions from Markham voters on the issue.

But it’s the first topic raised by Brent Fullard, the wealthy, retired Bay Street executive who became a voluntary attack dog for income trust investors before winning the Liberal nomination in Oshawa-Whitby.

Fullard says he doesn’t hide the fact he heads the Canadian Association for Income Trust Investors (CAITI), but is quick to raise other topics like nuclear and food safety that he argues have suffered under the Tories.

He says he has received campaign donations from across the country because of the income trust issue, and he will have the same maximum spending allowance permitted by law as Flaherty.

James Daw, CFP, can be reached at 416-945-8633; or jdaw@thestar.ca

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The grid is beginning to get some love.

In the past month or two, it has become fashionable to highlight the shortfalls of our electrical grid, with high-profile names like Al Gore, Barack Obama and T. Boone Pickens calling for increased investment in our power-carrying highways.

Last week, two big Gs – Google and General Electric – announced a plan to collaborate on new technologies and policy initiatives that would expand transmission capacity and push development of the “smart grid.

"The current regulatory and economic model is failing to drive the innovation and investment we need in today’s electric grid," the companies said in a joint statement.

Without dramatic improvements in grid infrastructure, they said we won’t be able to tap the full potential of renewable energy and electric transportation.

Here in Ontario a similar message is being heard and promoted. The Independent Electricity System Operator has already created a smart grid forum, composed of industry executives and experts who plan to come out with a white paper this fall, recommending ways to move forward on smart-grid development.

Last Thursday, Energy and Infrastructure Minister George Smitherman directed Ontario’s power authority to review and "fine tune" its 20-year power system plan through attempts to add more renewables – wind, solar, biomass, geothermal – to the mix. Part of this review will look at "improvement of transmission capacity" in parts of Ontario where grid infrastructure is holding back development of renewable-energy projects.

Smitherman, speaking to a crowd of energy-industry officials in Niagara Falls, Ont., made it clear that we have to do things differently to tap the full benefits of green power. "Make no mistake. We are in the midst of an energy renaissance," he said. "We aren’t just overhauling the infrastructure of our energy system, but the very philosophy of how we will power our homes, our businesses, our communities, indeed our cars, for decades to come."

The energy minister emphasized: "We want to get it right."

This is potentially good news for inventors like Jovan Bebic, an expert in FACTs, or Flexible AC Transmission Systems. Without going into too much detail, FACTs are power electronics devices connected to the transmission system as a way to better control the flow of electricity through the grid.

Some FACTs devices are used on the grid today, but they are either limited in what they can do or come at considerable cost and size. Bebic saw a problem that needed solving, so from 1999 to 2003 he earned his PhD at the University of Toronto trying to design a better, cheaper device for controlling power flows on the grid.

He ended up inventing the Hybrid Power Flow Controller, which has the capabilities of a high-end FACTs device but can be added to the transmission system as a retrofit – making existing, more common devices with names like “switched shunt capacitors” or “static VAR compensators” behave like FACTs devices, but at far less cost.

It’s not sexy like solar or wind generation, but eye-glazing descriptions aside, this is important stuff easy payday loan. Bebic’s device gives utilities more control over how power flows on their transmission systems, but as an affordable retrofit rather than an expensive add-on.

"You can tap into more renewables, and you can tap into more distant generation with it,” he says. “If you put a substantial quantity of wind on the system, you will have flows you’ve never seen before (so) … you want to see higher controllability of that power."

The bottom line "is that it provides muscle for the smart grid."

Problem is, like any small venture trying to do business with the big boys – especially ultra-conservative transmission utilities – it’s tough to find someone to test out such devices. "Utilities are fast followers but they’re not very good at doing things first," Bebic says.

This contrasts with power generators, which in an environment of mandates and incentives – and likely carbon pricing – have more aggressively pursued new generation technologies, such as solar.

But that could soon change with the realization that we’ve massively underinvested in our transmission infrastructure. What needs to happen now, says Bebic, is to come up with a market model for valuing "controllability" much like we place a value on generation in the electricity bidding marketplace.

For example, it’s 4 p.m. and energy consumption is reaching its peak. What usually happens is the market operator – who buys and sells electricity so that supply and demand is balanced – will pay a premium to fire up a natural gas "super peaker" plant.

Bebic says a potentially cheaper option is to pay for better controllability by using power flow devices on an otherwise crowded transmission line to direct more wind and hydroelectric power from, say, Northern Ontario to Toronto.

It’s not unlike how the Internet can choose an alternative path to deliver data if one path is too congested. If those who owned "control" and those who owned "generation" bid into the market equally, "you could create an entire market for these power electronics devices, and it would let us run the system more efficiently."

It might also defer the need to spend billions of dollars on new transmission lines, which as we move toward renewables and more distributed generation will need a lot more muscle, flexibility and smarts.

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Goldman Sachs and Morgan Stanley gave up their cherished investment banking status in return for cover under the Fed’s wing to survive a financial storm that U.S. authorities aim to tackle with a $700 billion bailout plan.

The Federal Reserve approved the two bank’s transformation into bank holding companies regulated by the central bank, effectively ending Wall Street’s investment banking model and subjecting the two to much tighter regulation.

In return it gives Goldman Sachs and Morgan Stanley greater access to central bank funds and makes it easier for them to buy retail banks.

“It creates a perception of greater safety and supervision. It really rationalizes the regulatory system. It should be good for both Goldman Sachs and Morgan Stanley,” said Chip MacDonald, mergers partner at law firm Jones Day.

The move is the latest effort by the U.S. authorities to restore calm to chaotic financial markets follows frantic weekend talks between the Bush administration and the Congress on the bailout scheme to prevent further financial market turmoil from hurtling the economy into a severe recession.

The largest-ever bank rescue would give sweeping powers to the U.S http://fcrwizard.com. Treasury to buy up toxic mortgage-related debt from financial firms, including U.S. subsidiaries of foreign banks.

The bailout plan follows a wrenching week that transformed Wall Street with Lehman Brothers’ failure, the agreed sale of Merrill Lynch & Co and a government takeover of ailing insurer AIG. It was also possible that within days, Morgan Stanley would accept a partner.

Asia stocks rose on Monday as details of the plan emerged, but the U.S. dollar eased and U.S. Treasury debt prices edged up as investors played it safe before the mechanics of the plan are worked out. 

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OTTAWA–A controversial plan to rescue about $32 billion of frozen asset-backed commercial paper cleared a significant legal hurdle yesterday after the Supreme Court said it would not hear a challenge to the restructuring.

The Pan-Canadian Investors Committee overseeing the restructuring said it now expects to start implementing the restructuring plan by the end of September.

Committee chair Purdy Crawford was hopeful the issuance of new notes would re-establish market stability and liquidity over time.

"Today’s decision clears the last significant hurdle to completing our work," he said in a statement.

A group including Jean Coutu Group wanted to block the plan because it will all but remove their ability to sue those involved with the sale of the debt securities – except in cases of fraud.

Montreal lawyer James Woods, who represented the group including Jean Coutu, paper producer Domtar Inc. and French bank Société Générale in Quebec, said he regretted the court’s decision.

"At this stage, we can only hope that a thorough investigation of all participants in the ABCP market is carried out and that the regulator and governmental authorities will intervene to prevent the innocent victims of this scheme from bearing a wholly disproportionate share of the harm which its promoters have wrought on the Canadian financial community," he wrote in an email.

Lawyer Howard Shapray, who represented Ivanhoe Mines, which holds about $70.7 million locked up in the frozen commercial paper, said the rescue plan will be good for the small retail investors who have been waiting for their money, but disagreed with the court’s decision.

"It appears that expediency, at least in this instance, trumped the application of entrenched legal principles," Shapray said from Vancouver.

Asset-backed commercial paper, or ABCP, was supposed to be a low-risk, short-term investment that would mature within a year free credit report.com. But investors have been unable to redeem notes since the demand for new ABCP suddenly dried up in August 2007 because of problems in the U.S. subprime mortgage industry.

Much of the $32 billion in unredeemable ABCP is held by Canadian pension plans. Companies and individuals hold smaller amounts.

Had the Supreme Court decided to hear the case it would have meant yet another delay to the restructuring plan that’s been in the works for more than a year.

The rescue was hatched by the investors committee – representing very large investment groups, including pension plans – late last summer to clean up the problems.

However, the committee’s work required approvals from the Ontario Superior court as well as sufficient support from creditors, who got to vote on the plan.

Supporters of the restructuring plan, which has been approved by a majority of noteholders, argue it’s the best way for investors to preserve some of the money they put into ABCP. They’d receive new notes that will mature in six or seven years and, in the case of some individual investors, they’d be able to sell the new notes quickly without a significant financial penalty.

But the plan would prevent ABCP holders from suing brokerages, financial services companies, the banks and bond rating agencies – except in the case of fraud.

That restriction has been opposed by those caught in the middle – investors too big to qualify for some of the side deals that are protecting individuals who have less than $1 million in ABCP notes, yet without the pensions’ large pools of capital and long investment horizons.

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MOSCOW–Russia is considering renewed ties with OPEC, a minister said on Friday, a move that could rattle nerves among energy consuming nations.

Energy Minister Sergei Shmatko said Moscow will send a high-level delegation to the Organization of the Petroleum Exporting Countries' next meeting in Algeria on Dec. 17.

"We are planning again to take part in the meeting by sending a high-level delegation. The prospects of cooperation in a new format between OPEC and the Russian Federation are very interesting," Shmatko told reporters.

Russia wants to hold a regular dialogue with the group and has invited OPEC representatives to Moscow for a meeting in October.

The biggest non-OPEC oil exporter, Russia has long attended OPEC meetings as an observer, but made the West sit up and take notice by sending its highest level delegation, headed by influential Deputy Prime Minister Igor Sechin, to the September conference.

Russia is not expected to join OPEC, but has seized an opportunity to pursue its policy of closer ties with fellow producer countries, as well as to irritate the West, analysts said.

Tension has risen between Russia and Western consumer nations, heavily reliant on Russian as well as OPEC energy, following Moscow's conflict with Georgia in August.

"I don't think they want to be bound by anyone else's rules," said Jonathan Stern of the Oxford Institute for Energy Studies http://pay-day-home.com. "But…anything that makes the West irritated and nervous is no bad thing (for Russia)."

Russia, which in the past has signed up to an agreement to cut its output in line with OPEC restrictions, also has a need to keep revenues rising to make up for underinvestment in its oil sector.

"Production in Russia is in bad shape," said Antoine Halff of Newedge brokerage. "They are in no position to see prices and oil revenue falling further. I see this as a defensive rather than an offensive position."

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Every time consumers buy a local Ontario wine, they contribute $8.48 per bottle to the local economy, a new study done for the Wine Council of Ontario says.

In comparison, buying imported wine contributes just 67 cents to local labour, business and government incomes, the study conducted by accounting firm KPMG LLP found.

The report was released today during the first week of a month-long promotion of local wines at LCBO stores.

The figures include the contribution of grape growers, wineries and wine retail stores.

The industry employed 7,000 people last year and generated $529 million in value, most of it in labour.

Not surprisingly, local VQA wines, which must use 100 per cent local grapes, provide more value per bottle than CIC wines, which may use up to 70 per cent imported grapes.

Over the last decade, the value of the local wine industry has grown 161 per cent, in terms of labour, business and government incomes, the study also found.

The wine council commissioned the study to demonstrate the return on value the province is getting from investing in the local wine industry, president Hillary Dawson said.

The provincial government invests just over $5 million a year in the industry, helping it market and promote its brands, including the current “Go Local” promotion in LCBO stores.

The event highlights local wines through free tastings and other events at selected outlets no fax payday advances.

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LONDON–British unemployment jumped by its biggest amount in 16 years in August, factory orders fell at their sharpest rate in more than two years this month, and the country’s biggest mortgage lender might soon be taken over.

Bad news on the British economy flowed thick and fast yesterday.

Many experts say recession is now inevitable, with hundreds of thousands more likely to lose their jobs as a year-old global credit crunch tightens its grip.

Minutes of a Bank of England policymakers’ meeting this month shows one, David Blanchflower, wanted to cut interest rates by 50 basis points even though inflation was more than double the central bank’s target, so worried was he about the economic outlook.

The rest, however, voted to keep rates steady at 5 per cent for a fifth month because the pound’s sharp fall risked keeping inflation – already at more than twice the Bank’s 2 per cent target – high for longer.

The number of Britons claiming unemployment benefit rose by 32,500 in August, the biggest jump since 1992 and far more than the 22,300 predicted by analysts http://payday-badcredit.com. The International Labour Organization’s measure of joblessness rose by 81,000 in the three months to July, taking the total to 1.724 million, the highest in nearly a decade.

A year after Northern Rock bank became Britain’s most high-profile credit-crunch victim, shares in HBOS, the U.K.’s biggest mortgage lender, have been pummelled on concerns it may fall short of funds.

It is now in talks with Lloyds TSB bank to create a £28 billion ($54.5 billion Canadian) mortgage giant, a source said yesterday, amid speculation the government is helping facilitate the deal.

Reuters News Agency

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Sales by Canadian manufacturers rose 2.7 per cent in July to post a fourth consecutive monthly increase, Statistics Canada reported Tuesday.

The agency added that most of the sales gain to $54.1 billion was due to higher volumes, "in contrast to the price-induced increases observed in recent months."

It was the first four-month winning streak for factory sales since the first half of 2002, and sales adjusted for inflation were the highest since last November.

Seventeen of the 21 factory manufacturing sectors tracked by Statistics Canada showed seasonally adjusted increases during July.

Durable goods industries accounted for three-quarters of the total gain with a rise of four per cent, propelled by a 10.1 per cent increase for primary metal producers.

Statistics Canada said the transportation equipment industry continued to recover with a 2.3 per cent gain in July as motor vehicle manufacturers' sales increased 3.1 per cent from June faxless payday loans. However motor vehicle factory sales of $4.3 billion remained well below last year's monthly average of $5 billion.

Machinery manufacturers reported a four per cent sales improvement for the month, powered by agricultural, construction and mining equipment.

Regionally, manufacturing sales showed some weakness on the East and West coasts, while sales in Central Canada and the Prairies improved compared with June.

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