Friday, November 30, 2007

It's not even the bottom of the first

November 30, 2007

Florida Freezes Its Fund as Governments Pull Out

Seeking to stem a multibillion-dollar run on an investment pool for local governments, top Florida officials voted yesterday to suspend withdrawals from the fund, leaving some towns and school districts worrying about how they would pay their bills.

Local governments in recent weeks have been withdrawing billions of dollars from the fund, fearing losses on investments in debt related to subprime mortgages. The rush to get out of the fund began even though a relatively small percentage of the fund is invested in subprime-related debt, and it is unclear what losses the fund may sustain.

Florida’s troubles were the latest episode in the running crisis in subprime lending that has been troubling the credit markets this fall, hitting homeowners, mortgage providers, hedge funds and Wall Street firms. It was the first time since the problems started that a large state investment pool has been forced to freeze withdrawals.

“If we don’t do something quickly, we’re not going to have an investment pool,” warned Coleman Stipanovich, executive director of the Florida State Board of Administration, which operates the investment fund. He spoke at a special board meeting yesterday, called to decide what to do about the flood of withdrawals.

The state-run fund pools money from local communities so they can get better returns on investments. The Florida fund, known as the Local Government Investment Pool, had about $27 billion in assets until this fall. Its value had fallen to just $15 billion this month because of withdrawals, Mr. Stipanovich told the three-member board, which consists of Governor Charlie Christ; the state attorney general, Bill McCollum; and the state chief financial officer, Alex Sink.

The fund gave back worried investors $3 billion just yesterday, before the window closed, Mr. Stipanovich said.

At the special meeting, the board also considered ways to shore up the investment fund and find emergency money to help cash-short local governments through the crisis. One idea under consideration was tapping into the $137 billion state pension fund for public employees in Florida, which is also controlled by the State Board of Administration.

Mr. Stipanovich called that idea “a wonderful diversifier,” but Ms. Sink said she thought it would transfer too much risk into the pension fund.

“We would be, in effect, bailing out one fund, over which we have no legal obligation, with the star fund of Florida, which is our pension fund,” Ms. Sink said.

The union that represents thousands of public workers in Florida also expressed dismay at the idea of using the pension fund. “When something’s that big, if problems happen it can take a long time to restore the health,” said Doug Martin, legislative director for the American Federation of State, County and Municipal Employees in Tallahassee. The union represents about 120,000 participants in the state pension fund.

Some local officials in Florida who did not get their money out of the fund in time expressed indignation yesterday.

“What the cabinet did was stupid,” said Maryanne Morse, Seminole County’s clerk of the circuit court, as county investment officers are known in Florida.

Ms. Morse said she had withdrawn $240 million of Seminole County’s money after learning the fund had exposure to a type of debt, known as commercial paper, backed by subprime loans — but left another $96 million in place. She said she was bracing herself for what might happen next week, if the board votes to resume withdrawals at a meeting scheduled for Tuesday.

“When they open it again, there is just going to be a tremendous run on the bank,” she predicted.

Ms. Morse said that Seminole County could lose a small amount of its principal and that it would in any case be forfeiting up to $3 million just by moving the $240 million, because the money is sitting in an account that pays less interest. She said the county could delay some capital improvements if it lost money.

But other local officials waved off such concerns. Ed Fry, the clerk of the circuit court in St. Lucie County, said that he had left $140 million — about half of the county’s assets — in the state investment fund and that he did not expect big problems.

“They came through Long-Term Capital Management,” he said, referring to a hedge fund whose collapse jarred Wall Street in 1998. “They came through Enron. They’ll come through this, too.”

Until now, local governments in Florida had considered the fund a safe account that happened to pay a little more interest than a bank would. They praised its convenience, saying that in normal times they could request a withdrawal at 11:00 a.m. and see it arrive in their bank accounts by 3 p.m.

Anyone requesting money after 11:00 yesterday, however, was turned away.

The trouble at the investment fund started at the end of October, and then it began to accelerate.

Leanne Evans, treasurer of the Palm Beach County school district, said that late in October she received a memo from the board’s outside investment adviser, pointing out that the investment pool always seemed to beat its benchmark and suggesting that she look into how it was achieving above-par results month after month. Normally, higher returns can be achieved only by bearing higher risks, and Ms. Evans wanted the district’s short-term money in instruments that were virtually risk-free.

When she made inquiries, she said, she learned that the fund held some commercial paper backed by subprime loans.

“Truthfully, it was a relatively small percentage of the portfolio,” she said. “But it scared a lot of people, because local governments would never invest in that.”

She said the state fund’s formal investment guidelines were far more relaxed than her own local rules. She whisked out the school district’s money on Nov. 2, but said she would put it back again if the state ever tightened its guidelines enough to satisfy Palm Beach school district’s requirements.

Who Didn't Know Rudy Was A Crook?

Rudy calls billing 'perfectly appropriate'
By: Ben Smith
November 29, 2007 10:05 PM EST

Former New York Mayor Rudy Giuliani and his senior aides Thursday blamed anonymous bookkeepers for his administration's practice of billing the travel expenses for his personal security detail to obscure city agencies.

But a top aide was unable to say why Giuliani’s administration and his successor's rebuffed questions from the city's top fiscal watchdog in 2001 and 2002. City Comptroller William Thompson said Thursday his auditors were “stonewalled” by the Giuliani administration when they inquired about the unusual billing procedures, which he called "disturbing."

Instead, Giuliani and his aides focused their attention on the issue of whether the unlikely divisions of the mayor's office had been reimbursed — not why the expenses were billed to out-of-the-way agencies such as the New York City Loft Board in the first place.

Politico reported that the bills included expenses incurred on 11 trips to Southampton, where the woman who would become Giuliani’s third wife had an apartment, as well as for campaign travel during his abortive 2000 Senate run.

Giuliani said that the "perfectly appropriate" practice of funneling his security detail's expenses through the mayor's office was begun in the mid-1990s to speed payments that had been delayed in police bureaucracy.

"The police department would sometimes ... be slow in payment," he told CBS' Katie Couric. "City Hall would pay it first, then the police department would reimburse every single penny of it."

A spokesman for Mayor Michael Bloomberg confirmed that the police department reimbursed the mayor's office for its expenses. The spokesman, Stu Loeser, declined to comment on Giuliani's claim that the billing practice was unremarkable, or that it predated the period examined by Politico, which coincided with Giuliani's affair with Judith Nathan.

Giuliani was not asked directly why payments went through offices like the Loft Board and the Assigned Counsel Administrative Office, rather than directly through the mayor's office.

A top campaign aide who was his City Hall chief of staff, Anthony Carbonetti, said he simply doesn't know the reason.

"It was a bookkeeping exercise," he said in an interview with Politico. "Why it was done this way, I don't know."

Carbonetti also said he was unaware that the city comptroller had sought explanations for some of the billing during Giuliani's last year and early in the term of his successor.

"I couldn't even tell you who that correspondence went to," he said.

”When [the auditors] tried to get answers to the questions, they were getting stonewalled by City Hall and this is in the previous administration, under the Giuliani administration. They were not giving answers," Thompson said Thursday. "This isn't the normal practice that we see now in other agencies. ... These are disturbing trends that we made the Bloomberg administration aware of, and it's clear that ... they haven't repeated the same mistakes, they haven't used the same processes of the former administration."

In 2001, Giuliani was on hostile terms with the former city comptroller, Alan Hevesi, and a Giuliani aide suggested the election-year climate may have contributed to the lack of cooperation.

In the interview with CBS, Giuliani referred to the Politico account as a "totally false story."

However, neither he nor his aides have questioned any of the facts reported by Politico.

Politico editor-in-chief John F. Harris said in a statement: “This was a fair and carefully reported story. We gave the Giuliani campaign ample opportunity to dispute the story or comment on our reporting before publishing and they did not do so. Since the story ran, we have not heard from the campaign disputing any substantive aspect of the story.”

Monday, November 05, 2007

Model won't accept dollars

With earnings of more than $30 million a year, she rarely wakes up for much less than $100,000 a day. Now Gisele Bundchen has decided to stay in bed unless she's paid in euros.

In a dispatch to dismay loyal fans of the greenback, Bloomberg news agency reported today that the Brazilian supermodel is telling prospective employers that she no longer accepts American dollars.

Ms Bundchen reportedly asked Proctor & Gamble to pay her in euros when she signed a deal to represent Pantene hair products back in August. The Brazilian weekly Vega reported that she will also get euros for a recent deal with Dolce & Gabbana to promote the designers' new perfume.

"Contracts starting now are more attractive in euros because we don't know what will happen to the dollar," Patricia Bundchen, the model's manager and twin sister, told Bloomberg.

Ms Bundchen is in good company. The US dollar has lost around one-third of its value since 2001 and is trading at record lows against the euro, Canadian dollar and Chinese yuan. It is at its cheapest for 26 years against the pound sterling.

Bloomberg put Ms Bundchen alongside the billionaire investors Warren Buffett and Bill Gross "at the top of a growing list of rich people who have concluded that the currency can only depreciate because Americans led by President George W. Bush are living beyond their means".

Citigroup's day of reckoning

Prince out as chairman and CEO as nation's largest bank discloses possible additional subprime mortgage writedowns of up to $11 billion.

NEW YORK ( -- The meltdown in the housing market hit Citigroup, the nation's No. 1 financial services company, Sunday as it announced the departure of chairman and chief executive Charles Prince and a possible $11 billion in additional subprime writedowns.

"It is my judgment that given the size of the recent losses in our mortgage- backed securities business, the only honorable course for me to take as chief executive officer is to step down," Prince said in a statement issued by Citigroup. "This is what I advised the board."

Former Treasury Secretary Robert Rubin, a board member and chairman of the executive committee for the nation's largest financial services firm, was named chairman of the board. Sir Win Bischoff, who heads Citigroup (Charts, Fortune 500)'s European unit, will serve as interim CEO until a permanent successor is named.

Citigroup also said it expects a reduction of between $8 billion and $11 billion in the fair value of its exposure to the subprime mortgage market. It said it expects to take a fourth-quarter writedown on the reduction, although the size of the writedown will depend on future market conditions.

The company said the decline in its subprime portfolio, which totals about $55 billion, came as the result of rating agency downgrades and other market developments since the end of September.

Citigroup said it will not cut its dividend and expects to regain its financial balance - meeting its capital ratio targets - by the second quarter of 2008.

The company also said that because of the uncertain nature of market conditions, it doesn't plan to issue any updates about its mortgage situation until fourth-quarter figures are released in January, and that it doesn't plan to issue forecasts for any future reporting periods.

Citigroup said Prince retired from the top positions. The weekend has been rife with talk of his departure as Citigroup's board met to consider his fate.

Prince's is the second high-profile Wall Street departure in the last week. Stanley O'Neal resigned as chairman and CEO of Merrill Lynch (Charts, Fortune 500), the nation's largest brokerage firm, last Tuesday.

The company said a committee will search for a successor as CEO. That committee will consist of Rubin and three other board members: Alcoa Inc. (Charts, Fortune 500) chairman and CEO Alain Belda, TFF Study Group consultant Franklin Thomas and Time Warner Inc. (Charts, Fortune 500) chairman and CEO Richard Parsons. Time Warner is the parent of

"We intend to complete our search for a new CEO as expeditiously as possible, reviewing qualified CEO candidates from outside as well as within our organization," Rubin said in a statement.

Among Rubin's first acts as the new chairman is the creation of a new unit aimed at managing the subprime situation.

"A new unit, the sole focus of which will be on managing the assets related to sub-prime mortgage securities and their resultant exposures, has been established," Rubin said in the Citigroup statement. "This unit will be separate from the other parts of our capital markets and banking business."

Rubin began his career with Goldman Sachs, rising to the position of co-chairman before leaving to join the administration of President Bill Clinton in 1992. After serving two years as the head of Clinton's National Economic Council, Rubin succeeded Lloyd Bentsen as Treasury Secretary in 1995.

He was given much of the credit for the economic growth of the Clinton years, and worked closely with then Federal Reserve Chairman Alan Greenspan.

Rubin left the White House in 1999, and joined Citigroup soon thereafter.

According to Citigroup, Bischoff rose through the ranks of the investment firm Schroders PLC. When it was taken over by Citi's Salomon Smith Barney unit in 2000, Bischoff became head of Citi Europe.

Citi reported a sharp drop in earnings on Oct. 15 that Prince at the time termed "disappointing." The firm had already announced $3 billion in writedowns because of bad investments in securities backed by subprime mortgages, as well as tighter credit market conditions. To date, Citi has reported subprime and trading losses totaling just under $6 billion.

The same day it reported results it joined with rivals JP Morgan Chase (Charts, Fortune 500) and Bank of America (Charts, Fortune 500) to set up a rescue fund to try to buy up to $100 billion in debt in an effort to prevent a fire sale of subprime assets. The U.S. Treasury Department helped facilitate the creation of the fund, popularly referred to as the Wall Street "superfund" after the EPA trust fund designed to clean up toxic waste sites. Citi was seen as leading the effort.

But the fund has been criticized by a wide range of economists, including former Federal Reserve Chairman Alan Greenspan, as a market-distorting structure that could add to, rather than answer, investors' doubts about the securities and end up making the problems worse.

Prince had seemed to have the support of the Citigroup board throughout the market turmoil. But investors were less confident in the firm. Shares have lost nearly one third of their value since the end of May, almost twice the drop seen in the KBW Bank Stock index over that time. The Dow Jones industrial average, of which Citigroup is a component, is down less than 1 percent during the same period.

Prince, 57, was paid just under $26 million in salary, bonus, stock and other benefits, according to Citi's filings. Information about any payments he may receive due to his departure was not immediately available.

He had 1.6 million shares of Citi stock as of Feb. 28, according to company filings, and options for another 1 million shares. If those options were all exercised, his holdings would be worth nearly $100 million based on Friday's closing price.

He had been named CEO of Citi in 2003 and assumed the chairman post in 2006 with the retirement of Sandy Weill, who created Citigroup when the financial services firm he created, Travelers, bought Citibank in 1998.

Prince came to Citi from the Travelers side of the merger. He had joined a predecessor of that firm in 1979 known as Commercial Credit Company, working his way up to executive vice president of the firm by 1996. In 2000, he was named chief administrative officer and by 2001 the chief operating officer of the financial services conglomerate.

He began his business career as an attorney at U.S. Steel (Charts, Fortune 500) in 1975.

These are our allies?

ISLAMABAD, Pakistan (CNN) -- Hours after declaring a state of emergency Saturday, Pakistani President Pervez Musharraf ordered troops to take a television station's equipment and put a popular opposition leader under house arrest.

Musharraf also suspended the constitution and dismissed the Pakistan Supreme Court's chief justice for the second time.

On Sunday, police arrested the Javed Hashmi, the acting president of ex-Prime Minister Nawaz Sharif's opposition party was arrested, along with 10 aides, The Associated Press reported. Hashimi was arrested when he stepped outside his house in the central city of Multan, AP reported.

The country is at a critical and dangerous juncture -- threatened by rising tensions and spreading terrorism, Musharraf said in a televised address to the nation after declaring martial law.

As Pakistani police patrolled the streets of the capital, Islamabad, Musharraf said his actions were "for the good of Pakistan."

There was quick condemnation from within and outside his country.

The Supreme Court declared the state of emergency illegal, claiming Musharraf -- who also is Pakistan's military chief -- had no power to suspend the constitution, Chief Justice Iftikhar Mohammed Chaudhry said.

Shortly afterward, government troops came to Chaudhry's office and told him the president had dismissed him from his job.

Justice Abdul Hameed Dogar was quickly appointed to replace him, according to state television.

It was the second time Chaudhry was removed from his post. His ousting by Musharraf in May prompted massive protests, and he was later reinstated. See a timeline of upheaval in Pakistan »

Musharraf complained in his speech that the media -- which he made independent -- have not been supportive, but have reported "negative" news.

Early Sunday, two dozen policemen raided the offices of AAJ-TV in Islamabad, saying they had orders to take the station's equipment.

The government also issued a directive warning the media that any criticism of the president or prime minister would be punishable by three years in jail and a fine of up to $70,000, said Talat Hussain, director of news and current affairs for AAJ.

U.S. Secretary of State Condoleezza Rice -- who is in Turkey for a conference with Iraq and neighboring nations -- said The United States doesn't support any extra-constitutional measures taken by Musharraf.

"The situation is just unfolding," Rice said. "But anything that takes Pakistan off the democratic path, off the path of civilian rule is a step backward, and it's highly regrettable."

A senior Pakistani official said the emergency declaration will be "short-lived," and will be followed by an interim government.

Martial law is only a way to restore law and order, he said.

Mahmud Ali Durrani, Pakistan's ambassador to the United States, agreed.

"I can assure you, he will move on the part of democracy that is promised ... and you will see that happen shortly."

Musharraf was re-elected president in October, but the election is not yet legally official, because the Supreme Court is hearing constitutional challenges to Musharraf's eligibility filed by the opposition.

Under the constitution, Musharraf couldn't run for another term while serving both as president and military leader.

The court allowed the election to go ahead, however, saying it would decide the issue later.

Some speculated that the declaration of emergency is tied to rumors the court was planning to rule against Musharraf.

Musharraf has said repeatedly he will step down as military leader before the next term begins on November 15 and has promised to hold parliamentary elections by January 15.

Meanwhile, popular opposition leader Imran Khan said early Sunday that police surrounded his house in Lahore, barged in and told him he was under house arrest.

Musharraf also had Khan placed under house arrest during a government crackdown in March 2006.

Asked about Musharraf's actions Saturday, Khan said, "We are going to oppose this in every way."

"None of us accept ... this whole drama about emergency."

Former Prime Minister Benazir Bhutto -- who arrived in Karachi Saturday from Dubai, where she had gone to visit her family -- described a "wave of disappointment" at Musharraf's actions.

Bhutto -- who returned to Pakistan last month after several years in exile -- wants to lift her Pakistan People's Party to victory in January's parliamentary election in the hope she can have a third term as prime minister.

The nation's political atmosphere has been tense for months, with Pakistani leaders in August considering a state of emergency because of the growing security threats in the country's lawless tribal regions. But Musharraf, influenced in part by Rice, held off on the move.

Musharraf, who led the 1999 coup as Pakistan's army chief, has seen his power erode since the failed effort to oust Chaudhry. His administration is also struggling to contain a surge in Islamic militancy.

Friday, November 02, 2007

Coming to Wall Street - a $10B hit

Deutsche Bank analyst sees mortgage fallout affecting earnings through end of year; Merrill, Citi to be hit hardest.

By Grace Wong, staff writer

LONDON ( -- Banks are likely to mark down another $10 billion of mortgage assets in the fourth quarter, according to one analyst's estimates.

Deutsche Bank analyst Michael Mayo said in a note Thursday that banks and brokerages are likely to see their earnings pressured through the rest of 2007.

Merrill Lynch & Co. Inc. (Charts, Fortune 500) and Citibank Inc. (Charts, Fortune 500) are expected to be hit the hardest. Mayo estimated each bank would write down $4 billion in the fourth quarter.

He said Bear Stearns Cos. Inc. (Charts, Fortune 500), Morgan Stanley (Charts, Fortune 500), Bank of America Corp. (Charts, Fortune 500) and Wachovia Corp. (Charts, Fortune 500) are also likely to take markdowns.

Banks have taken massive hits from risky mortgage securities in the third quarter. Merrill Lynch wrote down $7.9 billion, and Citi took a $2.2 billion markdown due to mortgage-backed securities and credit trading losses.

Fears of more writedowns have stoked credit worries and raised investor anxiety. The Dow Jones industrial average plummeted 362 points on Thursday - its fourth-biggest point decline of the year - and kept falling on Friday.

Stocks in the financial services sector led declines. Merrill stock sank 8 percent in morning trading on Friday. Citi shares fell about 2 percent and are at their lowest level in more than four years.

The pain from the subprime wipeout isn't likely to abate anytime soon. Mayo said mortgage problems could cut bank earnings by 10 to 25 percent over the next two to three years.

The crisis has turned up the heat on Wall Street CEOs. Merrill chief executive Stanley O'Neal stepped down earlier this week amid mounting criticism of the firm's risk management practices. Citi's Chuck Prince and Bear Stearns' James Cayne are also facing scrutiny.