2012年9月29日 星期六
In the Pipeline
These are 24/7 days for oil production in the U.S. North Dakota now pumps more than Alaska (and Ecuador), and geologists estimate Oklahoma still has 80 percent of its reserves in the ground. All that crude has to be stored somewhere—and a good portion of it makes its way to tanks in the small Oklahoma town of Cushing through a vast network of pipelines.
Graphic by Bloomberg BusinessweekDeep Thoughts With the Homeless Billionaire
Twelve years ago, Nicolas Berggruen sold his apartment, which was filled with French antiques, on the 31st floor of the Pierre Hotel in Manhattan. He said he no longer wanted to be weighed down by physical possessions. He did the same with his Art Deco house on a private island near Miami. From that point on he would be homeless.
Now he keeps what little he owns in storage and travels light, carrying just his iPhone, a few pairs of jeans, a fancy suit or two, and some white monogrammed shirts he wears until they are threadbare. At 51, the diminutive Berggruen is weathered, but still youthful, with unkempt brown hair and stubble. There’s something else he hung on to: his Gulfstream IV. It takes him to cities where he stays in five-star hotels. In London, he checks into Claridge’s. In New York, he’s at the Carlyle Hotel. In Los Angeles, he takes a suite at the Peninsula Beverly Hills.
His social calendar tends to be full no matter where he is. A dual citizen of Germany and the U.S. who speaks three languages, Berggruen makes a point of having lunch and dinner each day with someone intriguing. It could be an author, a famous artist, or a world leader. He prefers to meet them at restaurants near his hotel. He makes reservations for three even when he only plans to dine with one. That way he doesn’t get stuck at a small table. He leaves room for dessert. He adores chocolate.
In the evening, Berggruen is frequently photographed at parties with attractive women such as British actress Gabriella Wright. “You could easily look at his life and say, ‘Oh, my gosh, he’s always got a pretty girl on his arm. He’s at every party around the world. Is he just a giant playboy?’?” says his friend Vicky Ward, a contributing editor to Vanity Fair. Maybe. Every year, Berggruen throws a party at the Chateau Marmont in Hollywood during Oscar week and invites all his friends. They rub shoulders with Hollywood types such as Paris Hilton, Woody Harrelson, and Leonardo DiCaprio.
Berggruen can afford to live like this because he’s chairman of Berggruen Holdings, a New York-based private equity firm that buys troubled companies and fixes them up. Currently it owns more than 30, including an Australian farming operation, a British life insurer, a Portuguese book publisher, a German department store chain, and real estate development projects in Turkey, Israel, India, and Newark, N.J. According to its website, the privately held holding company’s annual revenue is $5 billion. It throws off $250 million in earnings each year. Berggruen’s personal worth is estimated by Bloomberg Markets to be $2.5 billion.
But Berggruen isn’t satisfied with mere wealth and glamour. He also wants to be taken seriously as an intellectual. As the financial crisis unfolded, he became convinced some political systems were failing in America and Europe. He thought he could help rescue them by using his disposable income to advance wonky reforms. By his own admission, he didn’t know much about such matters, but that didn’t stop him.
In 2009 he started the Nicolas Berggruen Institute, a think tank whose stated mission is to improve global governance, and promised to spend more than $100 million to further its goals. In California he’s pushing to overhaul the fiscally troubled state’s tax code, education system, and problematic initiative and referendum system. He would like to see greater political integration in crisis-plagued Europe, preferably under a single leader. He thinks it would be great if the Group of 20 nations become more of a permanent global policymaker.
That’s a large agenda for a balance sheet repairman who only recently began examining such matters. Nevertheless, he got prominent Californians and former world leaders to lend their names to his efforts.
Berggruen will need more than money, charm, and the right names for his think tanks to save the world. His transformation from pleasure seeker to policy guy is a work in progress. Some of his ideas are not exactly made for prime time. For instance, he argues there’s much that Western democracies can learn from autocracies such as Singapore. As he puts it admiringly, the political leaders there really know how to get things done.
“Can I do something really rude?” Berggruen asks in an accent that’s more French than anything else. “I cannot resist. Can I steal a French fry?”
It’s a Saturday afternoon in July. He’s at the Mark Restaurant by Jean-Georges, a block from the Carlyle. He’s finished his pea soup and a plate of artichokes. He becomes animated when he discovers there are French cream puffs on the dessert menu. “This is very unhealthy, but I love dessert,” he says. “Will you join me? Oh, my God, they have lots of bad stuff!” He asks for extra chocolate sauce, too.
For many years, Berggruen avoided the media. When a Dutch magazine profiled him in the 1990s, he bought up every copy of the issue to protect his privacy. Now, as a would-be policymaker, he frequently dines with reporters. Berggruen insists he isn’t interested in publicity for himself. He says he just wants support and attention for his think tank, which has a 12-person staff. “I will do anything to further the institute,” he says solemnly.
Photograph by Mark Peckmezian for Bloomberg Businessweek“I’m not that interested in material things,” says Berggruen. “As long as I find a good bed that I can sleep in, that’s enough”
Some of his appetites and ambitions are surely inherited from his father, the late Heinz Berggruen, a celebrated art dealer and collector who left Germany in 1936 to avoid persecution for being Jewish. After World War II, Berggruen moved to Paris, where he became one of Pablo Picasso’s dealers. He amassed an extensive collection of the artist’s work. Eleven years before his death in 2007, he sold much of it to the German state for a nominal fee. Today it’s housed in the Berggruen Museum in Berlin.
Nicolas Berggruen grew up in Paris. At a young age he immersed himself in French politics, history, and philosophy. Still, he didn’t care much for school. He attended the Institute Le Rosey in Switzerland, known as the “School of Kings” because so many alumni are members of royal families. Berggruen wasn’t destined to join them. He became a Marxist and refused to learn English, calling it the language of imperialism. The school asked him to leave. He ended up getting his high school diploma from the French government.
Unexpectedly, Heinz Berggruen thought his rebellious son had a future in business. He arranged a summer internship for him with his friend Max Rayne, a British real estate developer and member of the House of Lords. His father was right: It turned out that Nicolas liked capitalism after all. Berggruen learned English and got his undergraduate degree from New York University in 1981. After graduating, he spent almost two years working for the Bass brothers in Philadelphia. As soon as he could, he returned to New York. “He was out every night,” says his friend Jonathan Bren, another veteran of the Swiss boarding school circuit. “A lot of people just thought he was a rich European party guy.”
In 1988, Berggruen created Alpha Investment Management, a fund of hedge funds, with the late Julio Santo Domingo Jr., the scion of one of Colombia’s richest families. The firm handled more than $2 billion, but Berggruen wasn’t content with managing other people’s money. He sat in his office and chased his own deals with his own cash. After the savings and loan crisis, he bought discounted commercial real estate debt for himself from Resolution Trust Corp. and profited as the market recovered. He acquired a troubled Spanish soft-drink company, turned it around, and sold it to Schweppes.
Along the way, Berggruen assembled a collection of works by Andy Warhol and bought his private island hideout in Florida and a bachelor pad in the Pierre in New York. He never married. “He’s had some very nice girlfriends in the past,” says his brother Olivier. “We were somehow hoping that he would create a family.” The family didn’t know what to make of his decision to sell his homes in 2000, either. Berggruen says he simply got tired of his fancy digs. “I’m not that interested in material things,” he says. “As long as I find a good bed that I can sleep in, that’s enough.”
Berggruen began spending more time in Los Angeles, at the Peninsula Beverly Hills. There were plenty of deals to do in the mid-Aughts. He spent a decade assembling Portugal’s largest media company and sold it to Spain’s Prisa in 2006. He bought Foster Grant, the American sunglasses company, in 2003. He sold it in 2009 to a French eyewear manufacturer, making $400 million.
Such triumphs, however, no longer seemed to thrill him. He also sounds jaded about his Oscar parties, calling them “frivolous” and “stupid.” It became a chore for him to manage the guest list. “There are the people who don’t get invited and are mad,” he sighs. Berggruen found something to fill the void. He returned to the subjects that fascinated him as a youngster: philosophy and politics. “Frankly, I think I am a fool,” he says. “I never should have stopped.”
Berggruen concedes he had a lot of catching up to do. He turned his suite at the Peninsula into an intellectual salon. He drafted two professors from the University of California at Los Angeles to instruct him in Eastern and Western philosophy. “Broadly, I think Nicolas is interested in moral philosophy, having to do with questions of right and wrong, good and evil, purpose, agency, action, topics like that,” says Brian Copenhaver, a UCLA specialist in Renaissance philosophy who was one of the mentors.
On other afternoons, Berggruen sat with four local political science professors who tutored him in the fine points of Eastern and Western governments. As he digested Confucius and Plato and reread Sartre, he came up with his think tank’s mission. He believes developed countries are in crisis because their leaders are too focused on getting reelected. The result is political gridlock in such places as Washington, D.C., and California.
Berggruen believes at least part of the solution to Western political paralysis is the Asian equivalent of the smoke-filled room. “If you can do this behind closed doors, you can force or push decisions, which happens in autocracies like Singapore and China,” he says. “The disadvantage is that it’s not very transparent. The advantage is that the people in the room, even if they have ideological views that are not along the same lines, can come up with compromises and solutions.” With Nathan Gardels, one of the institute’s senior advisers, he’s co-written a book in which he explains this unorthodox notion. It’s called Intelligent Governance for the 21st Century: A Middle Way Between West and East.
Berggruen would like to test his ideas in California, which is famous for political paralysis. Governors of both parties come and go, but the state legislature remains in the hands of the Democratic Party, which answers to public employees’ unions. Meanwhile, voters approve mandates that largely dictate the budget process. Since the real estate market crashed in 2008, California has been plagued by deficits.
Berggruen was hardly a household name in California; he wasn’t even a resident. (He pays taxes in Florida.) The only thing he was known for was his yearly soiree at the Chateau Marmont. That didn’t seem to hurt him. He persuaded 15 prominent Californians to help draft a reform package. He wooed former Democratic Governor Gray Davis over lunch at the Peninsula. He won over Bob Hertzberg, a former California Assembly Speaker, at an airport in faraway Panama. He enlisted former Republican U.S. Secretaries of State Condoleezza Rice and George Shultz. Berggruen also recruited business leaders such as former Yahoo! (YHOO) Chief Executive Officer Terry Semel and Google (GOOG) Executive Chairman Eric Schmidt. He assembled them in a group he called the Think Long Committee for California.
In a series of meetings, some of which Berggruen hosted at Google’s headquarters in Mountain View, Calif., the committee came up with a plan released in November 2011. The members embraced his idea that the California legislature be policed by a “citizens council for government accountability” comprised of ex-politicians, university presidents, and business leaders. It would have the power to subpoena witnesses and place its own initiatives directly on the ballot.
Naturally, there are Californians who find the notion of an unelected advisory board in Sacramento questionable. “Berggruen assembled a blue-ribbon panel of notable Californians to come up with their vision for fixing California,” says Thad Kousser, an associate political science professor at the University of California at San Diego. “Lo and behold, the first big idea was California needs a big blue-ribbon panel that bypasses all the existing political processes.”
Others are more charitable. “You know, when you have those kinds of resources at your disposal, you can buy a football team, you can buy an island, or you can try to make government and politics work better,” says Dan Schnur, director of the Jesse M. Unruh Institute of Politics at the University of Southern California. “I give him a lot of credit for trying.” Schnur, who was the communications director for John McCain’s 2000 presidential campaign, says Berggruen’s biggest challenge may be keeping the electorate awake when he pitches them his governance reform ideas. “It’s not the most scintillating stuff,” Schnur warns. Berggruen says Schnur has a point. Nevertheless, he hopes to begin putting his proposals on the state ballot next year, starting with the tax-reform plan.
He is concerned about Europe, too. Considering the Greek debt crisis and the euro area, Berggruen believes that more democracy is needed, not less. “In theory, Europe should be quite democratic,” he says. “It’s actually run by the heads of two countries, Germany and France. It’s incredibly dysfunctional.”
In 2010, Berggruen flew to the North Sea island of Boken to visit former German Chancellor Gerhard Schroder at his vacation home. Schroder was eager to help him. “We talk quite often,” says Berggruen. “He calls up with ideas.” Berggruen was also able to persuade ex-British Prime Minister Tony Blair and economist Nouriel Roubini to join the Berggruen Institute’s 27-member Future of Europe Committee. The Future of Europe Committee champions the establishment of a stronger Continental government. That way, economically powerful countries such as Germany and France might be more inclined to assist their weaker southern neighbors than they are now. Berggruen says he’s aware of how difficult it will be to prevent the dissolution of the European Union, but believes it’s worth fighting for. In the meantime, he gets to hang out with interesting people.
Over lunch in Beverly Hills in late July, Berggruen says he’s never enjoyed himself more. He finishes his grilled fish. He’s in no hurry to leave. He has nothing planned until dinner. Is he rushing off to a party after that? He shakes his head. “I don’t go to that many parties anymore,” he insists. “I’m really spending almost all my time on this.”
He checks his iPhone. “Oh, look,” he says. “It’s an invitation to a party later tonight.” It’s an awkward moment for a guy who wants to be taken seriously. “Well, I won’t go,” he says. “I can’t go.”
Bid & Ask: The Deals of the Week
1. Europe’s No. 3 oil company, Total (TOT), plans to sell as much as $20 billion in assets to raise cash for oil and gas projects as it tries to increase output by 3 percent a year through 2015.
2. Itau Unibanco Holding (ITUB) paid $5.2 billion for the outstanding shares of Redecard, completing a plan to take the credit-card processor private.
3. John Malone’s Liberty Global (LBTYA) bid $2.5 billion for the 49.6 percent of Belgium’s Telenet Group Holding (TNET) it doesn’t own to increase its presence in Europe’s pay-TV market.
4. Germany’s Schaeffler, a family-owned manufacturer of auto and aviation parts, is selling a 10.38 percent stake in tire and parts maker for $2 billion to reduce debt.
5. ExxonMobil (XOM) will pay about $2 billion in cash and assets to Denbury Resources (DNR) for drilling rights on 196,000 acres in the Bakken Shale fields in North Dakota and Montana.
6. The world’s No. 1 surveyor of oil fields, Paris-based CGGVeritas (CGV), is buying the seismic division of geological data company Fugro for $1.6 billion.
7. Canada Pension Plan Investment Board will pay $1.1 billion to acquire full ownership of a unit of Tomkins, the company it jointly owns with buyout firm Onex (OCX). The unit makes products for distributing, recycling, and venting air.
8. Europe’s No. 2 carmaker, Peugeot Citroen (UG), is selling 75 percent of its Gefco trucking unit to Russian Railways for $1 billion to reduce debt.
9. Dave & Buster’s, operator of 59 dining and entertainment outlets, filed to raise as much as $107.1 million in an IPO. The chain, founded in 1982, was acquired by Oak Hill Capital Partners in 2010.
10. An estate auction of items from philanthropist Brooke Astor’s homes, including John Frederick Lewis’s A Memlook Bey, Egypt canvas, raised $18.8 million.
Photographs by Joe Belanger/Alamy (vent); S.H. Free Photos/Flickr (GEFCO)Helena Morrissey on Founding the 30% Club
When I became chief executive officer of Newton in 2001, I’d been there seven years. My husband had quit to stay home. I wanted to continue my career. It’s a big part of my fulfillment in life. I cared about advancing women, but I didn’t want to be marginalized as doing only that. As CEO, you want to create a culture that’s better for everybody. In 2009, I was at a lunch at Goldman Sachs (GS). Everyone was talking about diversity, and I realized we were all stuck. There were maybe 10 or 15 percent women in the senior ranks, and the numbers were just as low on boards. After the financial crisis, there was a feeling we needed better governance. I’d seen what having women there can do. That said, I find quotas somewhat condescending. I don’t support the [European Union] plan to force a 40 percent female quota on boards. I wouldn’t want to be part of a board because I’m filling a quota.
In March 2010, I got together a small group of women and threw out the idea of the 30% Club. That day, we approached Sir Win Bischoff, the chairman of Lloyds (LYG), and Sir Roger Carr of Centrica (CPYYY) about the idea. They immediately offered support. Others were dismissive. This was a big threat to the status quo. I went to see a guy who was chairman of a few companies. No matter what I said, he was convinced there weren’t enough women of any merit to sit on boards. I had another say he’d love more women but couldn’t convince the rest of the board.
We didn’t launch until that fall. In the initial stages, I got quite a lot of hate mail. There’s a particularly unsavory character in the U.K. who had a countercampaign. There were times when I came home and thought, “Why am I doing this?” But we made progress. When we started, women made up 12.2 percent of directors in FTSE 100 companies; now it’s 17.3 percent.
This matters to me. A lot of things have gone wrong in the last few years. I think the onus of proof should be on those who say we shouldn’t have change. I also have an important day job. My kids are between 3 and 20 now. I have three boys and six girls. I’m standing outside as I say this, waiting to pick up two of them from dance lessons. I try to do the best I can by everybody. If it doesn’t always happen, I can’t beat myself up. — As told to Diane Brady
For Sale, Cheap: The Cranes in Spain
When Spain had Europe’s third-biggest construction market, Angel Fernandez used to travel to the Netherlands to buy equipment for Spanish homebuilders. Now he watches as buyers come to Spain to take diggers, excavators, and trucks to countries where they won’t just gather dust. Standing in a sunburned field in Ocana, a 90-minute drive south of Madrid, Fernandez looks on as Ritchie Bros. Auctioneers (RBA) sells never-used construction equipment at discounts of as much as 20 percent. “My business is being made obsolete,” says Fernandez, who is there to look for bargains for Spanish clients that are still operating. “When the crisis began in 2008, we all thought that it would be over in two or three years, but we got to 2011 and realized we were in worse shape.”
Photograph by Angel Navarrete/Bloomberg
Spain was slow to come to grips with its housing crisis. Almost half of Spain’s 67,000 developers are insolvent but have avoided bankruptcy because banks kept permitting them to refinance their loans, according to R.R. de Acuna & Asociados, a property consulting firm. Now banks have begun to turn off the spigot in response to government demands that they set aside more money to cover losses on real estate loans. “Construction in Spain ground to a halt four years ago, but banks chose to refinance initially, which is a slow death,” says Jeroen Rijk, vice president of sales for Europe at Ritchie Bros. “They aren’t doing that anymore, which is why there is so much product on the market now. Spain definitely ranks top of the class for overdoing it.”
Spain is still looking for solutions to its financial crisis. On Sept. 6, European Central Bank President Mario Draghi announced a new program to buy unlimited amounts of government bonds of nations that meet certain conditions, including submitting their economic policies for vetting by the International Monetary Fund. Spanish Prime Minister Mariano Rajoy hasn’t yet said whether the country will take part, frustrating German leaders. “He must spell out what the situation is,” Michael Meister, finance spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said on Sept. 24. The fact that he’s not doing so shows “Rajoy evidently has a communications problem. If he needs help, he must say so,” Meister said. A spokeswoman for Rajoy said the prime minister is following the road map for economic recovery agreed upon with his European partners.
Home prices have fallen 32 percent since the peak in 2007, according to Tasaciones Inmobiliarias, Spain’s largest home value appraiser. Building permits plummeted 87 percent last year from the 2004 peak, according to data compiled by the Ministry of Public Works. There’s no sign of the decline abating, with construction output down 16 percent in July compared with a year earlier, according to Eurostat, the European Union’s statistics agency.
The government ordered banks to set aside loss provisions equal to 80 percent of the value of loans made for land purchases and 65 percent for unfinished developments. In May, lenders were told they must set aside about €30 billion more to cover potential losses on €123 billion of real estate-linked loans on which borrowers are still making timely payments. In August, Spain said it would create a so-called bad bank, in which it will place soured real estate assets from troubled lenders so they can resume lending. Rajoy agreed to create the institution because it is among the conditions for the country’s banks to receive €100 billion in aid authorized by the European Union in July.
As the bad bank disposes of its assets, completed projects are likely to be the first things it will sell. That could push down the value of similar properties an additional 10 percent to 20 percent, Alvaro Serrano and Sara Minelli, London-based analysts at Morgan Stanley (MS), said in a September report. Lower property prices would mean Spanish banks might have to set aside an additional €7 billion to €14 billion against bad debts, they said, which would be enough to wipe out their domestic earnings for 2013.
Banco Popular Espanol (POP) has the highest exposure to real estate developers at about 20 percent of its balance sheet and hasn’t yet made adequate provisions for potential losses on those loans, Serrano and Minelli wrote. Unpaid arrears from troubled developers will help push the bank to a loss of €847 million this year, the analysts estimated. “The bank is still in the process of provisioning, but we have already provisioned what is required of us and more,” a spokesman for the bank says.
Photograph by Angel Navarrete/Bloomberg
Ibrahim Arrejehi, a buyer for Saudi Arabia’s Arabian Contractor Co., was at the Ocana auction to bid for equipment to sell in his home country as well as Pakistan, Afghanistan, and India. “New machinery in Spain is selling at around a 20 percent discount from the peak, and used items are going for around 40 percent lower,” says Arrejehi. He was among 1,370 bidders from 74 countries who bought 2,086 items, according to figures compiled by Ritchie Bros. The Canadian company opened the 60-acre Ocana location three years ago to augment a site in Moncofa, in eastern Spain, that reached full capacity a year after it began operations. Globally, as much as 10 percent of the equipment Ritchie Bros. handles comes from distressed sellers, according to Rijk. “That percentage is higher in Spain,” he says. “There was too much of everything, and there is still too much of everything.”
The bottom line: With almost half of Spain’s 67,000 developers insolvent, banks are cutting off loans as the nation comes to grips with its housing bust.
Callanan is a reporter for Bloomberg News in London. Smyth is a reporter for Bloomberg News in Madrid.Book Review: 'Volcker,' by William Silber
Volcker: The Triumph of Persistance
By William Silber
Bloomsbury Press
464 pp; $30
Some statesmen blossom late in life; others bloom early and disappear. Paul Volcker did both. The young Volcker was an influential Nixon administration official during the 1971 crisis when America ditched the gold standard. Volcker later ran the Federal Reserve Board for eight years, where he had the guts to raise interest rates and brook a recession, thereby subduing inflation. When he retired in 1987 he was an international hero, having acquired a reputation for unflinching rectitude. He retreated from public view and became a partner for a spell at Wolfensohn, an investment bank. Then, as Wall Street began to lose its head with mortgages, Volcker, like a curmudgeonly deity on Olympus, began to toss thunderbolt warnings about the frothiness of America’s financial system. President Barack Obama, capitalizing on Volcker’s wise man rep, brought the banker back to public service and—briefly—to center stage.
William Silber, a financial historian and professor at the Stern School of Business at New York University, has the challenge of fitting this lopsided story—his subject, who turned 85 last month, enjoyed his most fruitful years before age 60—into a coherent narrative. He succeeds admirably in Volcker: The Triumph of Persistence. Silber, who had Volcker’s cooperation, emphasizes the former Fed chief’s independence and willingness to take unpopular stances, a trait as laudable in public life as it is uncommon. Silber all but ignores the 20 years following Volcker’s Fed chairmanship; even his recent service is an afterthought.
As an Obama adviser, he fought for adoption of the “Volcker Rule,” which forbids proprietary trading by banks. The reason his star doesn’t shine as brightly in this section is that Volcker himself admits the rule wouldn’t have prevented the failures at Lehman Brothers or American International Group (AIG), or much else that went wrong in 2008. One has the sense that Volcker’s motivation for promoting the reform was partly emotional—that the banks had gotten too big and too risky and something had to be done.
Yet this episode underlines a little-noted facet to his character. Contemporary bankers loathe the Volcker Rule and tend to see its creator as a flame-throwing radical. As Silber deftly brings out, he’s anything but. The son of the town manager of Teaneck, N.J., Volcker “learned integrity at home.” Modest despite his towering, 6-foot-7 height, he was a throwback to the era of less-moneyed officials who endured personal sacrifice to work in government. His son was born with cerebral palsy and his wife suffered a variety of ailments; as Fed chief, Volcker lived in virtual student quarters in a one-bedroom apartment furnished with a bridge table and a 10-inch black-and-white TV, commuting to his family in New York on weekends.
On the job as a public official, he was a quintessential pragmatist committed to finding workable solutions. As Silber says of Volcker’s perception of an early boss, “he knew that politics, not economics, dominated Nixon’s mind and heart.” Moderation also ran in Volcker’s blood. To the extent that any ideology had a hold on him, it was the ideology of hard work, of earnestness, and old-fashioned virtues. He harbored a visceral dislike for traders of modern collateralized-debt obligations because they upended the traditional, more stable banking culture centered on lending to clients.
Volcker’s a conservative in the true sense of resisting change. Even in the early 1970s, as undersecretary of the Treasury for monetary affairs, he evidenced a profound reluctance to abandon Bretton Woods, the postwar framework under which every currency was pegged to the dollar and the dollar pegged to gold. As Americans bought more products overseas, the dollar came under fierce pressure and the system collapsed. Volcker jetted around the world trying to patch together a new set of fixed rates. Free-floating rates were inevitable, but he wanted no part of it. He likewise abhorred inflation because it can destabilize the economy.
Silber devotes most of the book to the first two of Volcker’s “crises”—the collapse of the gold standard and the battle against inflation (the third crisis being the meltdown of 2008). These sections are extraordinarily well researched; readers come to realize that the crises were joined, and that Volcker was engaged in one sustained battle. Once gold was no longer relevant, the dollar had no anchor, and inflation became unavoidable—at least until the Fed developed the will to combat it. This required the sort of gruff resolve that was Volcker’s forte. As Silber says, Volcker “showed that a determined central banker can behave like a surrogate for gold.”
It was Jimmy Carter who in 1979 nominated Volcker as Fed chairman. The president later complained when Volcker’s policies of high interest rates threatened to tip the economy into recession and thus jeopardize Carter’s reelection. Volcker never blinked and proceeded to stare down Ronald Reagan as well. He hiked the overnight rate (also known as the fed funds rate) by two percentage points, to 14 percent, in the midst of a major recession—and he made clear that such tight money policies would continue until Reagan got serious about cutting the deficit. When Reagan (or his underlings) tried to undercut the Fed chief, Volcker demanded a solo meeting with the president. Afterward, Reagan issued a conciliatory statement and months later signed a bill raising taxes and moderating the deficit. It’s hard to think of a Fed chief acting so independently since, what with Alan Greenspan cozying up to then Treasury Secretary Robert Rubin and Ben Bernanke clinging to Secretaries Hank Paulson and Tim Geithner. As Silber sums up, Volcker “refused to accommodate increases in government debt as the economy expanded.” Not for nothing is he missed today.
From left, photographs by Joshua Roberts/Bloomberg; Dennis Brack/Bloomberg; Andrew Harrer/Bloomberg
The Oil Hub Where Traders Are Making Millions
Tugboat pilot Barry Meredith hauls barges of oil as big as football fields for a living. He calls his route “the loop,” which starts with him guiding his boat and two empty 300-foot barges into the Port of Catoosa, outside Tulsa, Okla. Meredith steers toward a cluster of seven storage tanks brimming with crude that’s been trucked in from wells in Oklahoma and Kansas.
Moving 43,000 barrels of oil from the tanks into the barges is a 12-hour process, and one mistake can mean disaster. “You get 4,000 barrels going through that hose every hour, and you let something ass up. … Man, it makes a big mess,” Meredith says in his Florida drawl, his face deeply tanned from 19 years on a tugboat. At dawn the next day he’ll leave for Mobile, Ala. The route of winding rivers is more than 1,300 miles long and takes about a week.
“It’s a haul, man,” says Meredith. “You leave here and go back out the Arkansas River. Then you hit the Mississippi and take it down to New Orleans and into some industrial locks. Once you’re through those, you scoot across Mississippi Sound and on over to Mobile Bay and into the Mobile harbor.” Next stop is a storage facility in Mobile leased by Hunt Oil. Meredith says Hunt will take this domestic crude and mix it with lower-grade oil from Venezuela. He’ll then barge the blend up to Hunt’s refinery in Tuscaloosa, where it’ll be turned into gasoline, diesel fuel, jet fuel, and asphalt. Meredith then will head back to Catoosa and start all over again.
These are 24/7 days for oil production in the U.S. North Dakota now produces more oil than Alaska—and more than Ecuador, too. Geologists estimate that Oklahoma still has 80 percent of its reserves in the ground. The majority of this oil is of the highest quality: light, sweet crude that’s low in sulphur, lighter than water, and cheaper to refine into gasoline than the heavier sour (high in sulphur) crude from Venezuela and the Canadian tar sands. Goldman Sachs (GS) predicts that by 2017 the U.S. will be the world’s biggest oil producer.
Photograph by Daniel Shea for Bloomberg BusinessweekIn one tank, 500,000-plus barrels of oil
All this oil needs to get stored somewhere, and the largest facility in the country is 60 miles west of Catoosa in the small town of Cushing (pop. 7,890). Each day some 900,000 oil futures and options contracts are traded on the New York Mercantile Exchange (CME). The oil at Cushing is what’s bought and sold. The town’s hundreds of storage tanks are the country’s biggest bank vault of oil. And it’s getting bigger. In September 2008 there were fewer than 15 million barrels of oil parked there. Today there are 44 million, 16 million more than in January. And that’s a problem. Oil is flowing into Cushing faster than it’s getting piped out.
The giant pool of crude stuck in the middle of the country has done strange things to the oil market. The light, sweet crude that Meredith transports is priced against the domestic benchmark West Texas Intermediate. It’s so plentiful right now that for the past year it has traded at an average $95 a barrel, $16 below the price of its international equivalent, Brent crude. At its peak last October, the spread—the price differential between WTI and Brent—was $27. That’s the biggest gap in the history of those two oil contracts, which for most of the last 20 years have moved within $1 of each other. What’s helped push down the price of WTI? The fact that it’s stuck in Cushing. Oil that can’t be moved to where it needs to go quickly drops in price. The result has been one of the biggest arbitrage opportunities in recent memory: Buy oil low in Cushing, and sell it high—just under the price of Brent—to refineries along the Gulf Coast. The trouble is getting it there.
The race is on to get the oil out of Cushing. Pipeline companies are pushing to build new pipes and, in some cases, reversing the flow of existing ones. For 17 years, the 500-mile-long Seaway Pipeline pumped imported crude from the Gulf Coast into Cushing. In May it was reversed, and now Seaway pumps 150,000 barrels a day south to the refiners on the Gulf Coast. TransCanada (TRP), based in Calgary, is spending $2.3 billion to extend its Keystone Pipeline south of Cushing. (Its Keystone XL pipeline still awaits approval.) When completed next year, it’ll move 700,000 barrels a day.
Analysts quibble over how long this price spread between WTI and Brent will stay open; many thought it’d be closed by now. According to the futures markets, the price of a barrel of WTI will still be $14 cheaper than Brent in March 2013, a gap that’s about $4 smaller than it is right now.
Given the uncertainty, and just how unprecedented this window of opportunity is, oil-trading companies are trying to find creative ways to move cheap oil out of Cushing by any means necessary, using barges like Meredith’s, fleets of commandeered trucks, and trains, where they can find them. The companies that can pull it off can expect to make money—a lot of it.
Driving down Cushing’s Main Street, you’d have little idea you were visiting the capital of the American oil kingdom. Small, one-story businesses line the worn-out road: Mo Money Pawn, Andy’s Used Cars, the Steer Inn Family Restaurant with an all-you-can-eat buffet. Cushing’s slogan offers a hint: “The Pipeline Crossroads of the World” is emblazoned on two white pipes sticking out of the ground on either side of town. Those pipes, however, are only props. Beneath Cushing and hidden from view is a vast network pulling oil in from all over North America, from the Canadian tar sands 1,500 miles away to newly drilled wells just east of town.
Photograph by Daniel Shea for Bloomberg BusinessweekDowntown Cushing
From 300 feet above Cushing, clusters of crude oil storage tanks look like giant cupcakes surrounding the little town—white frosted roofs atop round chocolate cakes. These are the oldest tanks, built in the 1920s when Cushing was still flush with wells that produced almost 20 percent of all the oil in the U.S. As the town went from producing its own oil to storing everyone else’s, the tanks grew. The old cupcake tanks, capable of holding 80,000 barrels, are now dwarfed by ones that can hold 600,000 barrels. These new tanks are 57 feet tall and 271 feet in diameter—a Boeing 747 could fit within the walls with room to spare. Hundreds dot the rolling pastures around Cushing, their neat clusters interspersed by patches of bare earth and pieces of construction equipment erecting new ones.
Twice a week a small helicopter circles over Cushing’s tank farms on an oil industry spying mission. A photographer sitting next to the pilot in the two-man cockpit snaps pictures of the tanks below to gauge how full they are. Most tanks have floating roofs that move up and down inside their cylindrical walls depending on how much oil is inside. The length of the shadows cast across these roofs indicates the amount of oil stored within (the longer the shadow, the emptier the tank). Recently, photographers have started using infrared cameras to peer inside the tanks. The difference in heat can often show where the oil line is.
The company funding this espionage is Genscape, a private energy intelligence firm based in Louisville. Genscape also places electromagnetic monitors beneath the power lines running into the Cushing tank farms to measure their power usage. This gives them an idea of how much oil is being pumped into and out of Cushing. Analysts then crunch this data into weekly status reports that Genscape sells to major banks and hedge funds with large oil-trading operations.
The companies that own the tanks aren’t happy about the surveillance. Some have trading operations and closely guard their information about what goes on in Cushing. Eight-foot-tall barbed-wire fences surround their facilities. Signs warn drivers that they’re on private property and are liable to be stopped and searched. High-definition remote-control cameras mounted inside the complexes monitor every square foot. At times, armed guards are posted at the gates.
But the companies can’t control the airspace. And while they may not like the choppers, most storage companies are also Genscape clients. “They have a philosophy that while they may not like what we’re doing, they love to know what their neighbor is up to,” says Jill Sampson, managing director of North American operations for Genscape. Still, it’s a fraught relationship: “Let’s just say that on most days we are not their favorite people.” Demand for information about what’s going on in Cushing is so high that a Colorado-based firm called DigitalGlobe (DGI) (in partnership with Bloomberg LP, which owns Bloomberg Businessweek) has started flying one of its three satellites overhead twice a week to snap high-resolution pictures from space. They also do this over Libya. And Iran.
The photos don’t reveal the steady commotion of oil moving in and out beneath the placid oil tank roofs. Inside the Plains All American Pipeline (PAA) tank farm, the atmosphere is like an efficient airport. Batches of oil arrive from the field and get piped out to refineries all over the country. The 18.5 million-barrel tank complex is run by the equivalent of an air traffic control center. Small teams of dispatchers gaze at banks of computers and flat-screen TVs showing detailed schematics of the underground network of pipes. Valves are opened and shut with the click of a mouse. Tank icons colored red or green indicate whether they’re being emptied or filled. Arrows show the direction the oil is flowing.
Photograph by Daniel Shea for Bloomberg BusinessweekThe Plains All American Pipeline system
Oil doesn’t just move in and out of the tank farms, it gets shuffled around inside them, too, from tank to tank. One of the main ways oil traders make money at Cushing is by blending together the thousands of types of crude that show up there, from light, sweet stuff that looks like Mountain Dew to heavy, sour goo that looks like molasses. A Cushing tank farm is not only a storage hub but also a giant blender—there are rotating blades at the bottom of each tank—mixing oil into an infinite number of specifications. A refinery making asphalt may want a heavier blend of crude while one that creates jet fuel wants extra light and sweet.
Companies that lease space at Cushing (from banks to big integrated oil companies to small, private outfits) have schedulers who move it around, serving up a variety of crude cocktails. “I’m like a crude bartender,” says Robert Westover, a scheduler for the Swiss company Mercuria Energy Trading, the fourth-largest private oil-trading firm in the world. Mercuria leases 2.5 million barrels of storage at Cushing from a company called Deeprock Energy Resources and another 500,000 from a firm called Sem Group.
Refineries can be very particular about the kind of oil they’ll take. “These folks are picky,” says Walter Kahanek, vice president of sales at 4K Fuel Supply, a Houston-based oil-trading firm. He’s been barging about 50,000 barrels a month out of Catoosa. “If you don’t have the exact specification of what they want, then you’re just loping your chicken taking it all the way down there.”
Every June, Cushing hosts a barbecue and bluegrass festival for the oil and pipeline industry. Each of the nine storage tank companies pitches tents in a field outside of town and cooks up hundreds of pounds of barbecue and brisket in custom-made grills designed to look like crude trailer trucks, storage tanks, derricks, and oil tankers. The event draws people from all over the world, from banks such as Morgan Stanley (MS) to small trading outfits in Houston and parts of Texas. Traders and schedulers who deal with each other on the phone get a chance to meet face-to-face over pulled pork and cold beer. Some snicker at Cushing’s size and reputation as a hot spot for meth labs. (In January the city considered a proposal to make landlords pay to clean up meth labs found on their properties.)
Photograph by Daniel Shea for Bloomberg BusinessweekA picnic in town
In March, President Barack Obama visited Cushing to celebrate the increase in domestic oil production that happened during his first term. He was not met with universal enthusiasm. Cushing is largely Republican and doesn’t like sharing credit for the boom. “He had nothing to do with it,” Brent Thompson, head of the Cushing Chamber of Commerce, says while sitting in a golf cart and waving people toward parking spaces for the barbecue festival. Still, it was the first time a sitting president came to Cushing, underscoring the town’s growing importance.
More tanks are being built every day, and some estimate that by the end of the year, Cushing will have 80 million barrels of storage capacity, 14 million barrels more than it had in September 2011. Those are likely to be used soon after they’re built: No one in Cushing builds anything on spec. “The production picture has changed so dramatically, so quickly, and so unexpectedly, the logistics haven’t caught up,” says Daniel Yergin, author of The Prize: The Epic Quest for Oil, Money and Power and chairman of IHS Cambridge Energy Research (IHS).
Taking advantage of this logistics gap isn’t easy. You need trucks, drivers with hazmat licenses, storage tanks, and access to a rail or a river terminal. These challenges have rewarded locals and foiled many traditional traders. Hedge funds in New York have tried and failed to line up the necessary pieces. One New York-based fund manager, who requested anonymity because he didn’t want people to know his investment strategies, says he spent three or four months last year trying to make a deal work. Back then he figured the spread would only be open for a few months. But he couldn’t recruit enough truck drivers, or get access to unloading terminals at Cushing, so he gave up. In retrospect, he says, he wishes he’d pursued the trade harder. Given how long the price spread has stayed open, if he’d kept at it, he probably would have made a killing. It would’ve worked like butter, he says.
The brains behind the deal propelling Meredith’s tugboat run is Brian Swearingen, who oversees crude oil operations for High Sierra, an energy-logistics company based in Denver. A bearded, burly man in his early 60s from Bartlesville, Okla., Swearingen has spent more than 30 years buying and selling oil. Last year he persuaded his bosses at High Sierra to let him start barging crude out of the port of Catoosa and selling it to refineries like Hunt along the Gulf. High Sierra had the perfect combination: a fleet of trucks, storage tanks, and access to a terminal at the head of the port.
Swearingen barged his first oil out of Catoosa in July 2011. In the 14 months since, he’s sent a steady stream of three or four barges a month to the Gulf, each loaded with 40,000 to 45,000 barrels. Over that time the price of light, sweet crude on the Gulf Coast has cost an average of $16 more than a barrel of WTI. At about 150,000 barrels a month, that’s more than $30 million of gross margin since last summer. Certainly, the costs of barging and trucking eat into that, but the trade’s clearly been profitable for Swearingen and High Sierra. In June, Tulsa-based NGL Energy Partners merged with High Sierra in a $693 million deal.
Photographs by Daniel Shea for Bloomberg BusinessweekOil stored at Plains All American includes light, sweet crude from Oklahoma (left and middle) and heavier grades from Canada
Moving crude around isn’t without risk. The smaller the spread, the less money Swearingen makes. Since last summer, the price differential between WTI and Gulf Coast light, sweet crude, known as Louisiana Light Sweet, has fluctuated from $8.50 a barrel to nearly $30. “That differential can vanish in a heartbeat,” says Swearingen. “But my risk nature throughout my career has always been to make hay while the sun shines.”
There’s another way to make money from Cushing. Since the crash of 2008, WTI has mostly been in what’s called contango—a commodities term that means prices are expected to rise in the future. During contango, a contract to buy oil a month from today costs more than the current price. The further into the future you go, the more expensive it becomes. As long as the price of oil is expected to rise in the future, there’s an incentive to store it and sell it for a higher price down the road. This means an oil trader with access to space in Cushing can sell a futures contract to lock in that higher price a month or two down the road and then just sit on it. Some call that hedging. “I call that printing money,” says Westover, the “crude bartender” for Mercuria.
Domestic oil trading hasn’t always been this hot. In the last five years, a small oil trading and logistics firm out of Houston called Musket has nearly doubled the size of its trading floor, from 55 seats to 95. In June it moved into a trading floor with nearly twice the space. “Everyone’s hiring right now,” says Musket’s managing director and vice president of trading, J.P. Fjeld-Hansen. “My trading floor is a sea of two demographics: 50-year-olds and 25-year-olds. There’s no one in between because for the last 25 years the domestic oil market was the least exciting business to be in.”
While the giant pool of oil has been a boon for Cushing, there are signs the glut is reaching a point of diminishing returns. As the surplus grows, the smart money is starting to circumvent Cushing by taking oil straight from the well to the refinery and cutting out the storage middleman. “Cushing is no longer the premier market,” says Fjeld-Hansen.
Since 2008, Musket has been buying oil from the wellhead in North Dakota and railing it straight to the Gulf Coast refiners. “We were probably one of the very first people to make that move,” says Fjeld-Hansen. Initially, Musket sold its North Dakota barrels into Cushing. But Fjeld-Hansen says he hasn’t sold a drop of oil at Cushing in more than a year. Recently he’s also been sending it to the East Coast by rail, where refiners are stuck taking more expensive imported oil. He’s up to about 40,000 barrels per day. “Why would I sell into Cushing when the price is so depressed there?” he says. “Let’s say it costs me $9 to rail from North Dakota to Cushing, but it costs me $12 to go all the way to the Gulf Coast. If I can get an extra $10 to $15 at the Gulf Coast than what I would get at Cushing, why in the world wouldn’t I just keep going?”
In an odd step back in time, railroads are moving more crude these days than they have since the early part of the 20th century. In 2009 railroads moved a total of about 7.5 million barrels. In the second quarter of 2012 alone they moved more than 36 million barrels. The trend has given a boost to railroad companies such as BNSF (BRK/A) and Union Pacific (UNP). Rather than sign long-term contracts with pipeline companies, big oil producers such as Phillips 66 (PSX), Statoil (STO), and Hess (HES) are starting to lease and purchase their own rail cars. In a September note to clients, Goldman Sachs Energy analyst David Greely wrote that rail is starting to overtake the reversed Seaway as the biggest means of clearing out the Midwestern oil supply.
Still, there’s a reason companies built all those pipes half a century ago. Moving oil by pipeline costs about one-third what it does to move it by railroad. Using trucks and barges is even more expensive than trains. Eventually new pipeline projects will be completed, and America’s infrastructure will reorient itself around all this new domestic oil. Yergin sees this as part of a much larger “geographic pivot” that will further decrease U.S. dependence on overseas oil and make for a much more integrated North American oil market with Cushing at its heart.
Until then, as long as oil remains stuck in the middle of the country, unable to efficiently find an economic home, West Texas Intermediate prices are likely to remain depressed. As long as that price spread is there, creative oil traders will take advantage of it and make big profits. Barry Meredith and his tugboat will keep working the loop, helicopters will keep circling over Cushing on their spy missions, and Brian Swearingen of High Sierra will keep trading. “I’ve been in this business for 30 years,” says Swearingen, “and I’m having more fun than I’ve ever had.”
Apple Radio Might Put Pandora in Play
In early September, reports began surfacing that Apple (AAPL) might get into the Internet radio business. That would put it in direct competition with Pandora Media (P), the dominant online radio service, and might put Pandora on the takeover wish lists of Amazon.com (AMZN), Google (GOOG), and Clear Channel Communications (CCMO). “Because Apple is doing something,” says Richard Tullo, an analyst at Albert Fried, “that makes everybody else want to counter their move.”
Tullo estimates that within a year Apple could win as many as 20 million users for an online service that streams music based on customers’ tastes. Pandora has 150 million users, many of whom use the service on their phones—making it appealing to Google and Amazon. Radio station owner Clear Channel may also be interested as listeners shift to online media.
Online and mobile radio companies are winning market share from traditional broadcasters. Pandora represents 74 percent of online radio listening; its share of all U.S. radio use has climbed to 6.3 percent from 3 percent a year ago, Dominic Paschel, the company’s vice president of corporate finance and investor relations, said on Sept. 12 at an investor conference. “That essentially makes us the largest station in most of the top 10” markets, he said. “We anticipate being the No. 1 radio station in pretty much all of the top 180 markets by the end of the year.”
Google may want to counter Apple’s efforts because a new service might make its mobile devices more attractive than tablets and smartphones based on Google’s Android. Google could use Pandora to expand its offerings—and advertising—on computers, smartphones, and tablets. Google is “trying to offer all the content and services to eke out more revenue per user,” says Tom Taulli, who analyzes acquisitions and initial public offerings for website IPOPlaybook.com. “The people at Pandora know how to make compelling services that people like and love. That kind of expertise is extremely valuable.”
For Amazon, owning Pandora could make its recently updated Kindle Fire tablet more attractive to consumers, Taulli says. Buying Pandora would give Amazon “critical mass overnight” in online radio listeners, says Laura Martin, an analyst at Needham.
Broadcasters like Clear Channel may consider Pandora a way to reignite growth, according to Martin Pyykkonen, an analyst at Wedge. Online and mobile radio revenue is projected to more than double to $1.63 billion in 2015 from $622 million in 2011, according to the Pew Research Center’s Project for Excellence in Journalism. Conventional AM/FM radio’s sales will rise 12 percent over the same period, while satellite will gain 34 percent, according to Pew. Clear Channel’s Internet service, iHeartRadio—started in 2008 and overhauled last October to better compete with Pandora—has 17 million registered users.
More Americans also are using mobile devices to play Internet radio in their cars. The proportion of cell phone owners who have used their phones to stream audio in a car rose to 11 percent last year from 6 percent in 2010, according to Pew. Because Pandora offers advertisers detailed metrics showing who was exposed to their pitches, it has an advantage over terrestrial radio companies, Pyykkonen says. A company like Clear Channel, he says, might “look at Pandora and say, ‘This is to replace the revenue that I lost.’?”
Pandora’s stock fell 17 percent to $10.47 on Sept. 7 amid the Apple speculation. It closed at $10.89 on Sept. 24. Needham says Pandora could fetch $14 a share in a takeover, a 29 percent premium, while Albert Fried sees the potential for a deal at about $20 a share. Mollie Starr, a spokeswoman for Oakland (Calif.)-based Pandora, declined to comment on a possible takeover. So did spokesmen for Amazon, Apple, Google, and Clear Channel.
While Pandora isn’t profitable, it is projected to increase revenue to $861 million in the fiscal year ending in January 2015, up 214 percent from $274.3 million in fiscal 2012, according to analysts’ estimates compiled by Bloomberg. Offering both paid and advertising-supported services, Pandora generates more revenue from mobile-device ads in the U.S. than any company except Google, according to data compiled by EMarketer. Pandora’s strength is in “the infrastructure they have created, it’s the advertising business, the success with mobile,” says John Rudolph, a senior adviser at investment bank Siemer & Associates. “Pandora has such a big installed base and such a huge number of users, there’s value in that.”
The bottom line: Pandora’s 150 million registered users and projected 214 percent revenue growth through 2014 make it attractive to media companies.
Kharif is a reporter for Bloomberg News and Bloomberg Businessweek in Portland, Ore. Fixmer is a reporter for Bloomberg News in Los Angeles.2012年9月28日 星期五
IPOs Are the Latest Sign of Real Estate's Rebirth
For several months, we’ve been reporting—cross your fingers—that the housing market may finally be on the upswing. Today’s news that the private equity firm Apollo Global Management is about to take its realty brokerage arm, Realogy, public (as RLGY) is just the latest sign of optimism. Apollo hopes to raise as much as $1.08 billion in the deal for Realogy, which counts Century 21, Coldwell Banker, and Sotheby’s International Realty among its brands.
Apollo’s deal comes on the heels of several other real estate initial public offerings. When the house-hunting website Trulia (TRLA) made its debut on Sept. 20, it climbed 41 percent in its first day of trading. Trulia got an additional boost because it went public a few weeks after the Case Schiller 20 City Home Price Index showed the first year-over-year growth since 2010. And last month Lehman Brothers announced plans to take public Archstone, the apartment real estate investment trust that Lehman originally bought at the height of the bubble for $22 billion. It could be the largest REIT public offering on record.
Still, the deals are a stark reminder of how far the fragile housing market has to go. Apollo bought Realogy in late 2006 for about about $6.8 billion. If the IPO is priced at the midpoint of Apollo’s estimated range, Realogy will now be valued at less than half that—about $3.25 billion. Trulia’s stock has fallen about 11 percent in its first week of trading—in part because of a short seller’s scathing report about Trulia’s competitor, Zillow (Z). (The report mostly attacked Zillow’s business model, rather than housing-market dynamics.)
Clues to the housing market’s future remain mixed. Existing home contracts fell 2.6 percent in August. Mortgage interest rates are yet again setting record lows. The average rate for a 30-year fixed-rate mortgage is now 3.4 percent. These low rates come even before the Federal Reserve buys up mortgage securities, which could drop rates even farther. Just how low, though, will depend on lenders, who so far have been keeping a growing share of the Fed’s low rates to themselves, Bloomberg News reported earlier this week. With such jumbled housing news, it will take time to see if these newly public companies are riding a fleeting surge of optimism or marking the start of a sustained recovery.
2012年9月27日 星期四
The Spanish Crisis Deepens
Has a Spanish bailout become inevitable? Yields on the country’s 10-year bonds spiked above 6 percent on Sept. 26, after Madrid was convulsed by anti-austerity demonstrations and the head of its largest region, Catalonia, called for “self-determination” elections. Adding to the pressure, newly released data showed the economy contracting and budget deficits rising, while the finance ministers of Germany and other “donor” countries suggested Spain might need to pump more money into its troubled banks before getting help from the European bailout fund.
Prime Minister Mariano Rajoy until now has played coy about the question of a sovereign rescue, since in return for a rescue the Spanish would have to accept even harsher austerity measures than they already have. But Rajoy’s office, confirming remarks made in a Wall Street Journal interview, said Rajoy was “100 percent” ready to ask for a bailout if the country’s borrowing costs remained “too high for too long.” Those comments were “like a red rag to a bull in terms of the market needing to strong-arm Spain into accepting aid,” Richard McGuire, a fixed-income strategist at Rabobank International in London, told Bloomberg News.
Rajoy’s options appear to have narrowed sharply. The Bank of Spain reported on Sept. 26 that the economy contracted at a “significant pace” in the third quarter. The budget deficit during the period was almost 4.8 percent of gross domestic product, up from 3.8 percent last year. And on Sept. 25, the finance ministers of Germany, the Netherlands, and Finland said that the European Stability Mechanism—which Spain has been counting on to help recapitalize its banks—might not do so unless the Spanish government kicked in more money.
Violent protests in the capital and the self-determination push by Catalonia, Spain’s richest region, undermine the central government’s efforts to reassure investors. Catalan President Artur Mas has called early elections for Nov. 25.
The malaise in Spain is also weighing on the euro, which fell to $1.28, its lowest level in two weeks. “Markets are reacting to the negative news flow we’ve seen out of Spain,” Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London, told Bloomberg News.
Rajoy, who is spending the week at the United Nations in New York, also has been hit by a report that he and his staff drink heavily during flights on his official jets. The Spanish magazine Interviu reported that Rajoy and five staff members consumed seven bottles of wine and 10 beers with dinner on a flight back from a European championship soccer match, the day after Spain asked its European neighbors for €100 billion to recapitalize Spanish banks. A spokeswoman for Rajoy declined to comment on the report.
2012年9月26日 星期三
A Lost Decade for Savers
The 1990s were a lost decade for Japan. The 2000s delivered a lost decade to U.S. investors. Now, five years into the onset of the financial crisis, with stock and bond markets booming, housing resurgent, and even Detroit redeemed, it’s savers who find themselves in a lost decade.
This runs counter to the lessons of the credit bubble. We were urged to spend less, save more, tell fewer lies on our mortgage applications. Problem is, the jumbo monetary response to that era’s excesses—0 percent interest rates, followed by trillions in quantitative easing and a vow to keep rates this low until at least 2015—is bent on getting people and companies spending and investing (and out of cash) at pretty much any cost.
Five years ago, the average money-market fund yielded 0.93 percent, while a one- and five-year certificate of deposit yielded 3.75 percent and 4 percent, respectively, according to Bankrate. So $10,000 parked in a CD would earn approximately $400 a year. After taxes and inflation, that might leave just enough for date night at Ruth’s Chris.
Today, with the Fed having done everything in its power (and then some) to jackhammer down the Treasury curve, the average money-market fund yields 0.12 percent, which is bank boilerplate for nothing. A one-year CD offers 0.30 percent, and a 5-year certificate pays 1 percent. Your aforementioned 10 grand—no doubt dearer to you in this era of chronically high unemployment and uncertainty about retirement—huffs and puffs to produce a mere $100 in annual income. Back out taxes and inflation, and you’re losing money in a bank account—however FDIC-insured it may be.
“Policymakers had to pick between saving the system and punishing the savers, or letting the market fail and punishing everybody,” says Michael Livian, a Manhattan money manager who has written (PDF) on what’s increasingly being called the financial repression exacted by negative real interest rates. “They went for the first one.”
Policymakers call this recapitalizing the banking system. That’s so much euphemism for transferring wealth from depositors to taxpayer-rescued banks (and, at least theoretically, their borrowers). The banks are not exactly being bashful about the great deal they’re enjoying at the expense of cheap or free customer deposits. Consider: Only 39 percent of non-interest checking accounts are now free to all customers, compared with 76 percent in 2009, according to Bankrate. It says the average monthly service fee on checking accounts is at a record $5.48, up 25 percent in a year. It should thus come as little surprise that, subprime lessons be damned, the nation’s personal saving rate is declining (PDF). In desirable, heal-thyself-consumer fashion, saving spiked at the onset of the Great Recession after hitting a generational low at the peak of the housing boom.
Lest you feel the urge to cry bloody foul, first realize that there’s a global epidemic of actually negative-yielding government bonds. And the Fed only exerts so much control over the U.S. yield curve; chronically low rates have been enabled in large part by the seemingly insatiable appetite foreign institutions have shown for Treasuries, especially during Europe’s econo-purgatory. But when the Federal Reserve comes out and commits to buying hundreds of billions in mortgage-backed securities, it is explicitly prioritizing the interests of borrowers—borrowers who keep seeing record-low mortgage rates.
Where does this leave an elderly couple that was banking on income from their ladder of CDs? Or a soon-to-retire baby boomer who pulled money out of stocks ahead of and after the crash on the assumption that some modicum of bank yield would help tide them over to age 65?
And this is hardly just about widows, orphans, and retirees. What of the owner of a business or home who was planning to sell and draw income from the proceeds of the cash? In the desperate search for yield, these and other forgotten cash constituencies have been forced deeper into the yield curve, where obliging corporations have been issuing 30-year debt on record-low terms.
“I guess I’m old fashioned, but I continue to find it astonishing that the Bernanke Federal Reserve believes it is within its mandate to incite risk-taking from our savers,” says Doug Noland of Federated Investors, one of the authors behind the Credit Bubble Bulletin that for years warned of the hazards of an over-indebted economy. He fears that just as risk was mispriced when too many Americans bought homes and consumed past their means, the Fed-induced hunt for yield is pushing people to bid up all manner of debt instruments past their true value. Stay on the sidelines with your savings, and you lose.
James Grant of Grant’s Interest Rate Observer puts this all in a critical political context. In the latest fiscal year, the interest cost on the government’s debt was clocked at $225 billion. While that sum was only a hair less than the interest cost of 2006, the debt was then 58 percent smaller than today’s. Here’s the rub: In 2006, the government’s average interest rate on its debt was 4.8 percent. Today it’s at 2.1 percent.
At that current low rate, Grant calculates that Uncle Sam’s net interest expense represents 9 percent of its total receipts. But an interest rate of 4 percent today would mean fessing up to the reality that interest outlays represent 18 percent of what’s taken in. Take that interest rate up a notch to 5 percent (close to what it averaged last decade), and you’re talking net interest cost on the debt suddenly representing 22 percent of total net receipts. Plug in 6.7 percent, the prevailing net interest rate of the 1990s, and interest costs on the debt would now exceed defense spending. That proposition just wouldn’t fly anywhere within a 1,000-mile radius of Washington.
“Ultra low rates,” writes Grant, “flatter the nation’s credit profile.”
And flatten the nation’s savers.
Farzad is a Bloomberg Businessweek contributor.A Year After Durbin, Swipe Fee Battles Still Rage
Sunday, Oct. 1, marks the one-year anniversary of the Durbin Amendment, which capped the swipe fees that banks and card networks such as Visa and MasterCard could charge merchants to process debit-card transactions. The amendment set off a fierce lobbying battle between retailers and banks; efforts to repeal the law failed last year.
If you thought the fight was over, think again. A year later, the battle over how much banks can charge to process transactions is still raging.
The Durbin Amendment, named after the Democratic senator from Illinois, would at first glance seem a clear victory for merchants. After all, the Federal Reserve capped the average fee at 21? per swipe, less than half what banks had been charging. While retailers are happy with the victory, they have insisted they are due more. “We’re halfway there,” says Mallory Duncan, general council for the National Retail Federation. Last year NRF and other merchants sued the Federal Reserve in U.S. district court, saying that the Federal Reserve itself had found that banks spend only 4? processing each transaction and had initially proposed a 12? cap. The case is still working its way though court.
Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which represents banks and payment networks, says the Durbin caps are already too low and should not go lower. “From our perspective, the retailers got this legislation by promising consumers will save all this money,” she says. “To date, they are still not passing along savings.” Wexler says any idea that retailers are using the savings to offset potential price increases, as Moody’s (MCO) has suggested, “sounds like a convenient excuse.”
This legal battle is just for processing debit-card transactions. Things have also heated up with credit cards, which cost retailers far more. In July, Visa (V), MasterCard (MA), and a number of major banks agreed to pay more than $6 billion in a proposed settlement over price-fixing claims brought by merchants in a case that started back in 2005.
Since July, many large merchant groups have disavowed the proposed settlement, one by one. First convenience store owners, then large retailers, and finally, on Sept. 24, the National Restaurant Association joined the groups vowing to object to the settlement in court. The merchants say the settlement doesn’t change the market structure and still allows card networks to set prices. They also object to portions of the settlement that limit future legal challenges to the networks, even by merchants who don’t yet exist. “Our members are incredulous,” Duncan says. “It would be better if we went to trial and lost,” he says, because merchants would then be able to challenge the networks on different grounds.
Wexler says the merchants are merely rehashing old concerns. “They are acting like this is new information,” she says. “If they had strength with the arguments, then clearly this would have been part of the agreement. What does that tell you?”
Both sides expect a January court ruling to determine whether the credit-card settlement will gain preliminary approval. Either way, the issue is not likely to be resolved at that time. There may be additional legal objections—not to mention the prospect that interested parties will turn again to Congress for help, as with the Durbin Amendment. Rinse. Repeat.
2012年9月25日 星期二
Romney's Housing Plan Looks a Lot Like Obama's
Amid a Friday afternoon focused squarely on the details of Mitt Romney’s 2011 tax returns, the Republican candidate also quietly released a white paper on the candidate’s housing policy. As I’ve written before, the campaigns have remained quite silent on housing and foreclosures, even though the housing market’s struggles are arguably the biggest impediment to a broader recovery and more than one in five homeowners owe more than their houses are worth. The new Romney plan document is all of seven pages long—one of those pages is the cover, and three pages lay out the current situation and bash Obama’s policies. That leaves a one-page executive summary that recaps the two pages that actually outline the “plan.”
That part of the plan is, shall we say, light on details. So much so that Business Insider’s Joe Weisenthal wrote (in his headline no less) that the paper “has got to be a joke.” He pointed to how Romney addressed Fannie Mae and Freddie Mac, the government sponsored enterprises that guarantee mortgages and got a nearly $190 billion bailout. The white paper says: “The Romney-Ryan plan will completely end ‘too-big-to-fail’ by reforming the GSEs. … Rather than just talk about reform, a Romney-Ryan Administration will protect taxpayers from additional risk in the future by reforming Fannie Mae and Freddie Mac and provide a long-term, sustainable solution for the future of housing finance reform in our country.” Got that? So Romney will reform them and do something new. How Romney will “reform” them and what will replace them isn’t specified. Republicans typically talk about ending the GSEs, so if reforming them involves something different, it could be a departure from the views of many in the party.
Other parts of the Romney plan look an awful lot like what Obama’s plan has done—much of which has had only a limited impact. Romney wants to “responsibly” sell the 200,000 vacant homes that the GSEs picked up when borrowers defaulted and faced foreclosure. He explains that the government can do this by “returning these homes to private hands and renting them out.” The GSEs already began in February with a pilot to sell 2,500 homes and recently sold the first part of that portfolio.
Romney also wants to make it easier for struggling borrowers to get foreclosure alternatives such as short sales, deeds in lieu of foreclosure, and modifications. As we’ve reported before, promoting these alternatives has been the Obama administration’s primary anti foreclosure tool—and that approach has had limited success. For example, a recent academic analysis found the administrations’ efforts will increase the number of loan modifications that banks make by only about 0.7 percent. That’s because the big banks that service mortgages have done a lousy job of implementing the program. Interestingly, the Romney plan briefly mentions support for “shared appreciation” modifications, in which servicers write down the principal of a mortgage and then get a cut of any price increase when a homeowner eventually sells the home. The Obama administration started supporting principal reduction this summer, but this would be quite a departure from the stance of many Republicans, who say that principal reduction encourages people to default purposely on their loans.
In perhaps the most marked difference from Obama, Romney calls for the repeal of Dodd-Frank and to replace it with “sensible” regulation that will “eliminate the regulatory uncertainty that is paralyzing lenders.” What those regulations will be, or how they’ll protect consumers while opening up more private lending, isn’t clear.
Taken together, perhaps it’s not surprising Romney buried the release on a Friday afternoon after posting the headline-grabbing tax documents.
2012年9月24日 星期一
2012年9月22日 星期六
The Frontier Markets’ Resurgence
As far as investing goes, the economic battlefronts of Europe, China, and the U.S. seem like the only concern.
Meanwhile, as if it could not care less about all that, Sierra Leone, the West African nation still shellshocked from years of truly horrific bloodshed, is building a stock market. Sitting on the corner of the edge of what they call the investing frontier—tiny, illiquid markets aspiring to graduate to emerging-market status and someday developed markets—the fledgling bourse in the capital of Freetown trades a single ticker for a total of four hours across two days every week. It wants to add another pair of listings and perhaps increase its hours as the economy grows a continent-leading 35 percent.
Southeast Asia’s Myanmar, long a rogue state that still ranks No. 180 of 183 nations in Transparency International’s corruption index, is suddenly open for business and maybe even democracy. Everyone, including Coca-Cola (KO) and Royal Dutch Shell (RDS.A), wants in. Dubbed Asia’s “next economic frontier” by the International Monetary Fund, the former Burma expects foreign direct investment to surge 40 percent this year to $4 billion. There’s a rush to build jetsetter-grade hotels in Rangoon.
Zambia just debuted a $750 million Eurobond. While the developed likes of Spain and Greece can’t find private takers for their debt, “around $15 billion of orders were apparently received for the [Zambian] issue,” analysts at Rand Merchant Bank wrote in a Sept. 14 report. “We expected the large interest due to investors eyeing riskier assets and the scarcity of Eurobonds in frontier Africa.”
And who better to bring it all back to your living room than BlackRock’s (BLK) iShares, which is launching what promises to be the go-to frontier markets exchange-traded fund. The mainstream-exotic experiment is essentially tantamount to McDonald’s (MCD) serving durian.
This boomlet defies traditional thinking: Frontier markets, it is widely believed, have no hope if emerging markets writ large are struggling—especially if China isn’t growing at full tilt. After all, who else would bid up all that newly mined Peruvian copper? And dictatorial Central Africa’s fossil fuels? Would there be much in the way of overflow labor demand in Vietnam if idled factory workers in Guangdong headed back to rural life? Recall how Asia’s late 1990s financial contagion hastened collapses in Russia and Latin America.
Of course, that largely forgotten emerging-market meltdown set the stage for the great decade of the BRICs—and their offshoots, the CIVETs and the N-11. The mid-to-late 2000s would have been a fine time to launch a ready-for-big-inflows frontier ETF. But for two years now, the U.S. has resumed an outperformance to emerging markets that it hadn’t enjoyed since the Clinton years.
There’s also confusion and impending dislocation in the space: In 2009, Argentina, once a darling among emerging-market investors, suffered a demotion to frontier status; perhaps the same ignominy ultimately awaits Greece, which is flirting with a downgrade from developed market to emerging market. Meanwhile, why hasn’t South Korea, home to such world-class brands as Samsung Electronics (005930) and Hyundai Motor (005380), yet been declared a developed market?
Cold-eyed investors might forgive these shortcomings in order to take advantage of frontier markets’ chief selling point: their offer of better diversification. Frontiersmen like Croatia and Bangladesh show a penchant for zagging when the rest of the planet is zigging in lockstep. In an increasingly risk-on/risk-off world, the MSCI Frontier Markets 100 Index correlated 65 percent with the movements of the Standard & Poor’s 500-stock index—well shy of emerging markets’ 84 percent correlation. Ten years ago emerging markets bought you a lot more diversification, when they correlated at just 57 percent.
Ten years ago was also the unlikely start to one of the great success stories in developing-markets history. That’s when a Marxist guerrilla group was at the gates of Bogota, firing shells into the Colombian capital. But the new government and rule of law ultimately prevailed, and foreign direct investment slowly returned—then exploded as a normalcy took hold. Colombia’s stock market has since surged twelvefold. Its Medellin(!)-listed companies are the envy of Latin American investment bankers, and it enjoys affordable debt terms thanks to its investment-grade credit rating. Within a short decade, Colombia has gone from near-failed state to frontier curiosity to thriving official emerging market.
So keep hope alive—and the market open (longer)—in Sierra Leone.
Farzad is a Bloomberg Businessweek contributor.Stung by Losses, Main Street Investors Fail to Notice Market's Rebound
Although the memory of Lehman Brothers’ 2008 collapse may be fading on Wall Street, the shock still lingers on Main Street—and may again be hurting ordinary investors. A new survey of individual investors is a reminder of just how much we are primal creatures that remember the pain of loss more than the joy of gains.
As my colleague Roben Farzad recently reminded us, the Standard & Poor’s 500-stock index is on a tear, rallying on rising corporate profits (including Apple’s (AAPL) earnings bonanza) and optimism about further help from the Federal Reserve. Since its nadir in March 2009, the S&P 500 has more than doubled and is now at 1,463, not that far from the all-time high of 1,526 it reached in September 2007.
But ask Main Street investors, and you find that the market isn’t all roses: Memories of the steep losses from 2008 and 2009 still haunt, causing them to underestimate the market’s performance.
Franklin Templeton (BEN) surveys individual investors annually, asking how they perceive the market’s performance in the previous year. In 2010, 66 percent of investors said the S&P had fallen in 2009, when it actually had gained 26.5 percent—in a year following a steep 37 percent plunge. In 2011, 48 percent of investors said the markets were down over the course of 2010, when the S&P had risen more than 15 percent. And data just released on Sept. 18 shows that 53 percent of investors think the S&P declined in 2011, when the index actually rose 2 percent.
It’s fair to wonder if investors who don’t know whether the S&P made or lost money the prior year are sufficiently attuned to the market to risk cash in it. However, Franklin Templeton’s survey is also a marketing exercise—the company is a major mutual fund seller that would like to help guide you into investing.
The S&P has gained more than 16 percent so far this year, but that’s no reason to to think investors have suddenly overcome their post-crash trauma. They have continued pulling out of equities, taking more than $66 billion (XLS) out of the U.S. stock market in 2012.
This fear of getting burned again—“loss aversion,” in financial psychology lingo—means that Main Street is being hit by a double whammy. Not only did individual investors take a beating when the market tanked, they’re not benefiting from its rebound, either.
Welcome to Lehman Brothers. We're Open for Business
Of the many debts that John Suckow would like to unwind from Lehman Brothers Holdings, the first might be shame.
Stigma, baggage, jokes about zombie banks back from the dead—Suckow would like to jettison all that, just as Lehman is liquidating what remains of its assets, four years after the bank’s failure sent the financial crisis into overdrive. There are deals to do, and creditors impatient to get pennies on the dollars owed them. Dwelling on the strangeness of Lehman’s ongoing existence isn’t going to get the work done faster.
“What might surprise you here a little bit,” says Suckow, Lehman’s president and chief executive officer, sitting in shirtsleeves in a conference room on the 40th floor of the Time & Life Building, “is that if you walked in and walked around these floors, this is an operating company.”
A tour of the place confirms that. What might seem bizarre to outsiders—Wait, didn’t Lehman go bust?—long ago became ordinary for the 340 or so employees who work here. Lehman exited bankruptcy in March, after three and a half years, and now exists solely to return money to creditors. The estate still controls tens of billions in assets, and if you would like to purchase any of it—a real estate property, say, or part of a private equity deal—its lawyers and traders will gladly take your business. Each transaction they complete moves the firm one step closer to shutting its doors for good, sometime around 2017. If Lehman Brothers is alive, then it is living on borrowed time.
“They’re working hard every day, even though they know they’re working themselves out of a job,” Suckow says. “That’s just a fact. But as long as we communicate properly, they know what the deal is.”
Lehman occupies one-and-a-half nondescript floors of the skyscraper, looking more or less like any other investment bank, minus some of the polish and most of the bustle. Employees work in Excel spreadsheets on dual monitors. Cubicles and offices are decorated with sports memorabilia, children’s artwork, and the odd bit of gallows humor. (Including, ahem, one magazine’s Frankenstein’s monster illustration.) The hours are kinder here than on the rest of Wall Street, with fewer all-nighters, and no one is yoked to the opening and closing bells of the stock market.
On a Tuesday morning, the phones aren’t ringing and the space is silent. Private equity staffers, seen huddling in a conference room, have a portfolio of 200 investments to manage. The real estate team tracks Lehman’s $10 billion worth of properties around the world. On Wednesday, Bloomberg reported that the company sold its interest in eight Texas office buildings. In August, it filed papers to take its largest asset, the apartment building colossus Archstone, public. The derivatives group works at unpacking a tangle of 8,000 contracts with 6,500 counterparties—a collection that once held a notional value of $39 trillion. The work is so complicated that at its peak, this was the bankrupt bank’s largest division, with 250 employees.
“From a recruiting perspective, we were building a startup company, which is pretty unique,” says Suckow. “Let me put it this way: We were not competing with Goldman or Morgan Stanley for these positions. We were actually building a whole different model here. We were not entering into new trades; we were trying to mitigate terminated trades.”
For the workers sitting in Lehman’s finance bullpen, conspicuously visible just a few hundred feet to the southwest is the former Lehman Brothers tower, at 745 Seventh Avenue. It now sports a gigantic Barclays sign and houses the investment banking division the British bank snapped up the day after Lehman’s bankruptcy. To the naked eye, it appears that if you strung a wire between the old workspace and the new, the single closest office just might be the corner unit on the 31st floor, the one that was once occupied by Lehman CEO Dick Fuld.
By the end of this year, total headcount is set to shrink to 280 and to keep falling from there. There are also 50 full-time bankruptcy consultants (including Suckow) from Alvarez & Marsal, which has so far pocketed more than half a billion dollars in fees on the case. Another $400 million has gone to the law firm Weil Gotshal.
Lehman employees live less large. With popular sentiment still running against Wall Street in general and Lehman Brothers in particular, standard banker perks such as a nice holiday party are a nonstarter. Last December, Lehman’s people rented an auditorium inside the building, on the second floor, and performed skits set in a fantasy world of Lehman’s ubercomplicated (and uberlitigated) derivatives contracts.
“It really is spending the creditors’ money, so we are very sensitive to that,” Suckow says. “There have been, I assure you, no lavish, fun things put on by this estate since it filed bankruptcy.”
How was Sept. 15, the fourth anniversary of Lehman’s bankruptcy, marked?
“It wasn’t,” Suckow says. “No fanfare. No party.” His view: that Sept. 15 is just a filing date, one that has a special resonance for the few dozen Lehman employees that have worked uninterrupted since before the bankruptcy—and likely had their net worth trashed—but is less important to those that have been hired since.
“I think this work experience, for a lot of these folks, is going to truly be additive,” Suckow says. “I’ve been through a lot of troubled companies in my life, and I may be kind of off-the-reservation because I am a restructuring guy, but I think everybody in their lifetime ought to go through a restructuring. They’re going to appreciate what they learn. It’s good to see the difficult side of a business.”
He knows from experience: Earlier in his career, he worked at Arthur Andersen when the accounting firm imploded in 2002. “There were employees who stayed behind at Andersen to wind down its affairs, and a lot of it was loyalty,” Suckow says. “They wanted it to be buried properly.”
For now, Lehman lives, rolling off deals, churning out fees, and returning to creditors an average of 18? on the dollar. At some point, the last asset will be unwound, and in the meantime, its dwindling staff has a simple request: If the outside world could just go easy on the zombie thing.
Summers covers Wall Street and finance for Bloomberg Businessweek.