Randomly Noted

It’s hard to imagine how the European credit crisis that hit hard many of the banks there could have an effect on bondholders of a housing agency in the U.S. whose reason for being is to provide affordable loans for first time home buyers. But that’s what could play out for investors – likely Mom and Pop types – who hold some $3 billion of mortgage revenue bonds issued by the Ohio Housing Finance Agency.

The housing agency, and apparently many other municipalities, have invested some of their funds in guaranteed investment contracts issued by a company called Pallas Capital Corp. The Ohio agency has some $106 million tied up with the Pallas GICs.  Some investors look to GICs as a means to extract a little extra yield. It’s not known what these particular securities were yielding.

Pallas sold GICs and then invested those proceeds in reverser repurchase agreements that were collateralized by a pool of structured finance and corporate assets, according to Moody’s Investors Service Inc. Moody’s recently downgraded the Pallas GICs because “the GICs are a direct pass-through rating of the reverser repo counterparty, DEPFA Bank. You know what’s coming next – DEPFA was recently downgraded on its ability to pay back short term loans.

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Maybe the Group of 20 nations can only find unity of action in the face of true crisis. Maybe that’s okay.

It’s just the beginning of a weekend of multinational and bilateral meetings, with various protests and other side shows thrown in, that will constitute the G20 session here in Toronto.

But it’s likely to end up a meeting of no new big agreements. There will be a big tent erected to incorporate all nations on the continue-the-stimulus/rein-in-the-deficits spectrum. Countries will be told to impose bank levies if they feel the need, but no worries if you do not.

There will be a lot of statements of the obvious. For example: fiscal deficits are a real problem that must eventually be dealt with, but not at the expense of cutting the underpinnings from the still questionable global economic recovery.

The bigger issue about that uneven global recovery is one not fully in control of the political powers gathered here. That’s how to get the private sectors to take over and start hiring in real numbers. Solve that and the rest pretty much falls into place.

Behind the non-agreements likely to emerge here is this reality: we are in a place that can afford non-agreement. For all of the remaining problems, the global economy is far enough out of the woods for that.

Of course, it’s not so simple as the U.S. is for stimulus, Germany and the United Kingdom are for cutting deficits. Even in the U.S. the unease, including in Congress, is growing along with the swollen federal debts. Meanwhile, the more deficit-reduction-focused nations are carving out long-term plans for cuts and higher taxes and they’ll have a difficult enough time making them work. No one is just saying halt.

The G20 might be judged too harshly if this turns into a weekend of non-agreements. That’s because it will be seen against the backdrop of seemingly heroic unity of proper actions taken at the height of the credit crisis.

That recent heritage was summed up nicely by the finance minister of host country Canada, Jim Flaherty. “The fact that we’re in the midst of a recovery, however fragile that recovery may be, is due to the efforts of the G20.”

There’s value in these high-level get-togethers, even when they produce only lots of words and few new or different actions by the sovereign participants. They keep the gears well greased for when actual unified action is essential to avert financial disaster.

If we think about the financial crisis as coming in two distinct waves, this second and current wave highlighted by sovereign debt issues finds politicians around the world much less concerned about upsetting markets.

When the credit crisis settled into the scariest part of its first phase (financial sector distress) in late 2008, you’ll recall the U.S. Congress first saw fit not to pass the so-called TARP legislation that set aside vast sums of money to save banks and other financial institutions.

The U.S. stock market promptly swooned and the politicians collectively rethought their position. TARP passed and despite significant criticism the aid did the trick of keeping  a credit squeeze and deep recession from turning into something worse.

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Much has been written about the Euro zone efforts (especially Germany and France) to help Greece deal with its budget deficits and heavy debt load.  Concerns about Greece have roiled world financia markets. Now, the German publication Spiegel Online has an article that indicates Greece’s problems could be worse than expected because of some complicated derivatives it was playing around with. The foreign exchange swaps through Goldman Sachs, the article says, had the effect of loaning more money to Greece, which means its debt and deficit are larger than originally thought. Click here to see the article.

Enjoy this guest blog from colleague Mike Reid, deputy managing editor of the Dow Jones News Service:

Here’s some fresh evidence from Europe and the U.K. that governments, when confronted with a significant structural problem in their economy, will simply kick the can down the road. The Conservative Party in the U.K. is talking of disbanding the FSA, the financial industry’s super-regulator; in Europe, Germany is talking about a bailout for Greece. Worse, at least with the Greek situation, the markets actually applauded this short-termism.

This isn’t just about moral hazard, it’s about policies which weaken a trading bloc. Allowing Greece off the hook from its needed fiscal austerity discourages others – Portugal, Spain etc – from taking politically unpalatable decisions to get their economies in order. Allowing your fiscal discipline to be dictated by the weakest links won’t create a stronger trading bloc and currency. Forcing citizens of more productive E.U. countries to subsidize the laggards isn’t smart economics.

In the U.K., the Tories want to give more of the FSA’s power to the Bank of England (probably further politicizing an already put-upon central bank) – and a new consumer agency (which sounds vaguely populist). The FSA’s rationale was to better regulate risk than the nine self-regulating bodies previously overseeing the City. Britain’s pension mis-selling scandal partly prompted its creation though the poor grasp of risk revealed by excessive lending practices of recent years showed its limitations. Still, the FSA alone wasn’t to blame for the U.K.’s problems. Redistributing regulatory powers to new agencies solves nothing…it just moves the problem to another entity some time in the future. Again, it’s short-termist and negligent.

If anyone should feel aggrieved by the latest twist in the General Motors-Opel-Germany spat it’s the labor unions. Only a month or so ago, they were the darlings of Germany’s political establishment. Scrambling to prevail in September federal elections, politicians from Chancellor Angela Merkel on down were labor’s best friends.

Their spiel generally went like this: Opel should be sold to the bidder who would protect the maximum number of jobs; Germany taxpayer money would be forthcoming; and only one purchaser had the workers’ interest at heart – the Magna+Sberbank combination linking a Russian bank with a Canadian-Austrian auto parts maker. Also integral to the pols’ mantra: Another potential buyer, private equity firm RHJ International, would pillage Opel’s German factories in the manner of those “vulture” funds so despised by the German chattering classes.

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… on General Motors, Opel and Germany’s Angela Merkel; Fiat and Chrysler; the future of luxury cars in China; and the generally sorry state of the global automotive market, circa 2009.  He also engages in some self-criticism about his time at Chrysler. Here are some tidbits from our interview with Daimler CEO Dieter Zetsche today in NY; the full text is on the Dow Jones Newswires. Also, here’s a video of a shorter chat with Zetsche.

INVENTORIES: Daimler’s inventories have never been as “cleared out” as they are now. He plans to maintain or even reduce the days of supply Daimler is carrying, even though he acknowledged that low stocks of Mercedes-Benz cars have had “some negative impact on sales” at certain dealerships.

THE EURO: The German company is planning for a year in which the euro, which accounts for a huge chunk of its overhead costs, remains as strong as it was this year, “which would be a major burden,” the CEO said.

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GM’s board has decided that a great, global auto maker really ought to be, er, global. It will keep its Opel and Vauxhall auto-making businesses in Europe. The board switcheroo is a poke in the eye to Germany’s political and labor leaders, who advocated selling Opel to a consortium led by auto supplier Magna International; jobs were the issue, and the German establishment believed Magna would save more of them. And of course it’s a blow to Magna’s ambitions to become an auto manufacturer (not to mention the murky aspirations of its Russian partners.) GM’s board was always conflicted about its original decision to sell 55% of Opel to Magna; directors knew that exiting Europe would effectively narrow GM’s opportunities for many years to come. Yet in the first go-round, the board couldn’t unite around the concept of spending billions of dollars fixing an enfeebled Opel. GM had only recently emerged from bankruptcy protection and was still part-owned by the U.S. government. What changed? Well, Germany’s problematic subsidy pledges to the Magna group spurred the European Union’s antitrust regulator, Neelie Kroes, to take a hard look at the deal – and it ultimately landed back with GM for reconsideration. The passage of time allowed GM board members to take stock – they saw a gradually strengthening auto maker, they regained some confidence in GM’s prospects – and – voila! – Opel (and U.K.’s Vauxhall) will remain in the GM family. Continue reading…

Someone very wise and Detroit-savvy once told me that when things seem to be going well at General Motors, just wait a few moments and things will turn sour. Well, yet again GM’s best-laid plans have gone awry: The European Commission’s antitrust boss is challenging Germany’s scheme to subsidize a consortium’s purchase of Opel. Frankly, GM’s not to blame for this snafu, which places Opel’s future in limbo. It’s the fault of Germany’s political and labor pooh-bahs (not to mention Russia’s political bosses) who pressured GM to sell Opel to auto supplier Magna International and its Russian partners.

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That’s Russian for “Goodbye Opel!”

Germany’s premier Angela Merkel is just now announcing General Motors’ Opel European business will be sold to a group consisting of Russian business interests allied with auto supplier Magna International.  Have a look at last night’s blog predicting this would happen; it’ll gratify my ego and also tell you why GM’s board made the decision. Is it the right move? Pragmatically speaking, yes, the GM chose appropriately. But it’s not good for Opel or Germany:  I’m opposed to transactions that require billions of government financial aid, which Magna-Opel does, and are greased by promises to protect jobs, keep factories open and generally appease the short-termism of union and political leaders, which Magna-Opel does as well. I’m also inherently skeptical of the Russian side of the equation, given that country’s relatively lawless business environment. We’re told that Magna’s principal Russian partner is a big bank named Sberbank, but who is Sberbank standing in for? Will the oligarchs ogling Opel emerge from the shadows now they’ve clinched the deal? Also furrowing my brows: the nature of the German-Russian political-financial liaison, which Magna-Opel only strengthens and which was previously represented by former chancellor Gerhard Schroeder and former foreign minister Joschka Fischer’s Russian business dalliances.