'Let some big banks fail'

Gauging the costs, and opportunities, of a greener world

The ECO:nomics conference in Santa Barbara last week was all about the free market's collision with sustainability.  Times staff writer Edward Silver filed this report from the meeting:

At a conference sponsored by the Wall Street Journal, it’s fitting that green strategies and renewable energy were held to account for their costs and competitiveness vis-à-vis the carbon economy.

To some extent, the views aired fell into place along a timeline. The market as we know it is a bit baffled when it comes to addressing long-term needs and is allergic to the extra costs. Environmentalists, frustrated with the rampant short-sightedness, habitually ask, "Where’s this company/industry/way of life going after the next quarterly earnings report is filed?"

In their professional lives, many of the accomplished presenters at the gathering see it as their mission to extend the market’s attention span and make it work for the environment. A greener world could well cost more, they may say lightly, but think of it as trading up to a sturdier home.

Ignoring the ruin of the Earth’s assets amounts to a "massive market failure," Al Gore declared shortly after his introduction. To take one example offered by the ex-veep, Nobel laureate, Oscar winner and venture capitalist, no one is paying for the use of the atmosphere to dump carbon, which is melting Greenland and other ice bodies. Sea levels will rise, he warned, and newly uncovered water will release methane, an especially menacing greenhouse gas.

At least a partial antidote is attaching a price to carbon. That could take the form of the cap-and-trade system contemplated by the Obama administration, which would impose charges on, and create a market in, the right to emit. Such commercial logic could, for instance, speed coal plants’ efforts to capture and inject emissions underground, an unwieldy, unproven blueprint that by some estimates could raise the cost of burning the stuff 40%.

As these economic blows against fossil fuels land, both producers and consumers could get bruised. In fact, the bills could widen the gulf between energy haves and have-nots. Nevertheless, the cause of energy innovation is likely to prosper, and the planet may curb its quickly mounting losses.

Likewise, fixing the way the market sets prices is the only thing that can prevent a national water calamity, said Disque Deane Jr., chief investment officer at Water Asset Management. Americans still gulp, wash, spray and irrigate with abandon, he lamented, warning that a tsunami of scarcity is ready to hit.  . . .

It's old news in drought-stricken-but-still-complacent California. Across the country, though, the pipe network built in spurts at the turn of the last century and after World War II is in the twilight of its useful life, Deane said. Furthermore, the dream of energy independence calls for serious water management. Homegrown North American energy is a powerful water siphon, whether it’s coal and nuclear plants, oil extraction from tar sands, ethanol, or producing the electronics to manage a sprawling, smarter grid.

High-quality H2O isn’t priced to reflect its value and dampen consumption, the investor argued. "We need water price signals. . . . The only way people will be aware of watershed issues is if they are told about it and they have to pay for it."

He also mentioned the population shift from the well-hydrated Great Lakes region to the parched Southwest. The demand-supply imbalance, made all the worse by migration, is abetted by the free market -- job seeking, among other motives. Higher costs might be a better outcome than dry taps.

Along with the money to be made in solutions and the money to be lost in the carbon economy, there’s money to be saved. Peter Darbee and Amory Lovins touted the financial rewards of conservation and efficiency. Darbee, the CEO of Pacific Gas & Electric parent PG&E Corp., said experience showed that efficiency programs were the most lucrative investments California utilities had made. Electric rates here tend to be higher than the U.S. average, but bills are lower because we use less, he explained.

Lovins, chief scientist at the Rocky Mountain Institute, is the well-known originator of the term "negawatts" -- a way to quantify energy saved. After a video feature on his hyperefficient though abundantly comfortable home, Lovins pointed to the Saudi Arabia under Detroit: It’s in the oil to be saved in designing cars with conservation in mind. And the secret is not just in the powertrain but the materials that form the vehicle.

Indeed, efficiency is the claim to fame of SunPower Inc., the largest U.S. solar company by 2008 sales. Its cells are considered the industry’s most productive at converting light into electricity. Standard solar cells and computer microprocessors share the same raw material -- silicon -- which lends credibility to SunPower chief Tom Werner’s assertion that Moore’s law is happening in solar.

What’s that mean? Remember when puny desktops cost $2,000? It means solar could see something like the crash in costs paired with leaps in power demonstrated by silicon chips.

Compared with the economics of coal and natural gas, solar has been found wanting. Fossil sources, though, have a long industrial history and are deployed, of course, in vast scale. Solar, a rooftop feature here and there, is just now becoming a building block for power plants. Coal generates energy, and emissions, at bargain rates. But to contrast the costs of a mature industry to one coming into broad use is an apples-to-oranges exercise, Werner said, raising the rhetorical point: "How much did the first coal plant cost per kilowatt-hour?"

Obviously, the cost of the dirty fuel came down, way down. "Scale equals cost reduction," Werner intoned. Combine that with continuing gains in technical efficiency, and "we will be competitive."

Renewables, inevitably, will get cheaper. If environmentalists in Washington use their new levers of power, and if the spreading oil and gas shutdowns bring back the bad old days of the supply squeeze, fossil fuels will get dearer. That will alter the assumptions of the cost debate yet again.

Top photo: Al Gore. Credit: Frederick M. Brown / Getty Images

Middle photo:  Low water levels at Hemet's Diamond Valley Lake, a key reservoir for Southern California. Credit: Allen J. Schaben / Los Angeles Times

Bottom photo: Solar panels near Boulder, Colo. Credit: John Moore / Getty Images

'Let some big banks fail'

WASHINGTONTHE United States should let some big troubled banks fail rather than commit more federal funds to prop them up, two key congressional Republicans said on Sunday.

Senator Richard Shelby, top Republican on the banking committee, said the United States should not mimic Japan, which in the 1990s propped up failing banks and prolonged its economic downturn.
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Loving horse racing too much -- with other people's money

Loving horse racing too much -- with other people's money

The story behind the financial failure of the owner of Santa Anita Park and other major U.S. racetracks is that it's possible to love your industry too much, Washington Post Sports Columnist Andrew Beyer writes today.

Magna Entertainment Corp., which filed for bankruptcy protection on Thursday, "was not another case of a company ruined by executive greed," Beyer says:

"On the contrary. Magna's all-powerful chairman, Frank Stronach, loves horses and racing. He has invested countless millions of his own dollars in his personal breeding and racing operation, and his passion for the game led him to buy racetracks from Gulfstream Park to Santa Anita. He wasn't motivated by the desire to install slot machines or any other hidden agenda. He genuinely thought he could make horse racing more enjoyable and more popular. Yet the man who loves racing has plunged the sport into a crisis.

"It is a crisis because of an economic fact that has always been the equivalent of a ticking time bomb for U.S. horse racing. Many of the country's most important tracks were built decades ago and occupy large tracts of prime urban real estate. Any developer could find better uses for them than operating a four- or five-month race meeting. Such tracks have continued to exist because of their owners' commitment to the sport."

Despite Beyer's defense of the 76-year-old Stronach, I'm sure Magna shareholders have some other thoughts at the moment. They must be wondering why they went along for the ride as he took the company heavily into debt to fund his empire-building.

Over the years, Stronach -- who made his fortune in auto parts -- has repeatedly been accused of ignoring corporate governance rules and engaging in inside dealing with other entities he controlled. In 2004 his MI Developments, Magna's largest shareholder, offered to buy the rest of Magna's shares. The deal was scuttled because MI Developments' public shareholders thought they'd be screwed. Too bad for Magna's holders who chose to hold on after that, and now are effectively wiped out.

As for Magna's future, Beyer points out:

"Creditors have no interest in reviving a company that brought on its own demise with a series of disastrous financial moves. It bought Gulfstream Park for $90 million, then demolished it and spent $240 million to build a new facility that most fans regard as inferior to the old one. Because Gulfstream needed stabling for more horses, Stronach decided to build the Taj Mahal of stable areas, Palm Meadows, at a cost in the vicinity of $100 million -- an investment that returns no revenue.

"Magna bought Laurel and Pimlico for an inflated price of $171.5 million -- and yet ceded a larger portion of future slot machine revenues to the seller. With its debts mounting, Magna stayed afloat by borrowing money from another Stronach company, MI Developments, infuriating shareholders who didn't want their money squandered on unprofitable racetrack projects."

As for Santa Anita Park and Magna's other holdings, Beyer suggests that "there are few potential buyers who would want these properties as racetracks. Churchill Downs Inc. is the other major owner of U.S. tracks, but it now appears more interested in online wagering and slot machines than live racing. Perhaps it would want Gulfstream or Santa Anita because it needs good betting products to offer in the winter months."

-- Tom Petruno

Top photo: Frank Stronach. Credit: Norm Betts / Bloomberg News; Bottom photo: Lining up for a race at Florida's Gulfstream Park earlier this year. Credit: Mark Zerof / US Presswire

AIG counterparties named

NEW YORKTHE federal bailout of insurance giant American International Group Inc. has benefited at least two dozen US and foreign financial institutions who collected some US$50 billion (S$77 billion), according to media reports on Saturday.

AIGonce the world's largest insureris paying money to its counterparties because it had agreed to guarantee them against losses from credit default swaps they had invested in.
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House bill would create panel to OK accounting rules

House bill would create panel to OK accounting rules

Get ready for another push to suspend "mark-to-market" accounting rules.

A bill introduced late Thursday by Rep. Ed Perlmutter (D-Colo.) and Rep. Frank Lucas (R-Okla.) would create a federal board to "review the application" of accounting principles -- including controversial mark-to-market rules.

The new board would oversee decisions of the Financial Accounting Standards Board, the independent body that dictates accounting standards.

The new federal board's members would be the heads of the Securities and Exchange Commission, the Federal Reserve, the Treasury Department, the Federal Deposit Insurance Corp. and the Public Company Accounting Oversight Board.

The panel, taking authority the SEC now has, would "give discretion to the regulators to consider the overall condition of the financial market," Leslie Oliver, a spokeswoman for Perlmutter, told Bloomberg News.

The FASB, which now sets accounting rules under SEC supervision, takes a "narrower approach," she said.

The banking industry has asserted that mark-to-market, or fair-value, accounting worsened the financial crisis. The FASB's rules require financial institutions to value securities on their books at current market prices, even if the securities don't mature for many years.

Bankers say that has unfairly ravaged their balance sheets because, they say, market values of mortgage-related securities have been unrealistically depressed, reflecting the massive uncertainty over the housing market.

"As we work to stabilize financial markets and rebuild the economy, we must look closely at the regulatory structure to see what is helping and what is making things worse,” Perlmutter said in a statement.

The industry didn’t hide its enthusiasm for the panel that Perlmutter and Lucas propose.

The bill "represents much-needed reform that will help address systemic risks that accounting standards can have on the economy," Edward L. Yingling, president of the American Bankers Assn., said in a statement.

"Mark-to-market rules have clearly exacerbated the financial crisis as institutions have been forced to report market losses rather than economic losses, resulting in a continuous downward spiral of market prices and further losses," Yingling said. "The current framework for accounting oversight, though well intentioned, has proved inadequate and must be fundamentally revised in order to provide transparent information for the benefit of investors, customers, and the public."

-- Tom Petruno

Photo: Rep. Ed Perlmutter

Merrill suspends trader

LONDONUS BANK Merrill Lynch has suspended a currency trader in its London office after he ran up suspected losses of more than US$400 million (S$600 milllion), the Financial Times reported.

Quoting 'people familiar with the situation', the newspaper's Saturday edition said the trader had been suspended after trades on Norwegian and Swedish currencies went wrong.
Obama touts economic stimulus plan in Ohio visit
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Geithner's pick for top Treasury post withdraws

Annette Nazareth, who had been Treasury Secretary Timothy Geithner's pick to be his top deputy, has withdrawn her name from consideration, reports say.

Her change of heart is another blow to Geithner, who is overseeing the financial-system rescue without a support team at Treasury because of delays in the nomination process.

Nazareth’s decision was reported this afternoon by the Wall Street Journal and Bloomberg News.

"People familiar with the decision say Nazareth withdrew in large part because of the long vetting process, which had taken weeks and included two rounds of intense questioning," the Journal reported. "Nazareth was not found to have any tax or nanny problems, these people say."

Nazareth, a partner at the law firm of Davis, Polk & Wardwell, was an SEC commissioner from July 2005 to January 2008.

The Journal reported that Geithner's pick for undersecretary for international affairs, Caroline Atkinson, also has withdrawn.

Paul Volcker, the former Federal Reserve chairman who now is one of President Obama’s top economic advisors, told Congress on Feb. 26 that it was "shameful" that Geithner still lacked critical support staff.

"The secretary of the Treasury is sitting there without a deputy, without any undersecretaries, without any, as far as I know, assistant secretaries responsible in substantive areas at a time of very severe crisis. He shouldn't be sitting there alone," Volcker said.

"Now various things have contributed to this, I guess, including vetting procedures, but it really is an unfortunate situation," he said.

The Obama administration’s tough ethics rules are said to be limiting potential candidates for Treasury jobs and lengthening the vetting process.

Geithner told the Senate Finance Committee on Wednesday that the administration was proceeding as "carefully as you would expect, and you know we’re trying to make sure that we have the best talent in the country, frankly."

-- Tom Petruno

Photo: Annette Nazareth. Credit: Jamie Rose / Bloomberg News

Nikkei down 3%

TOKYOJapan's Nikkei stock index lost three per cent in early trade on Friday after Wall Street tumbled overnight amid a wave of bad corporate news and silence from China on new economic stimulus measures.
Magna files for bankruptcy
Company faced a loan payment today on $40 million credit line Magna Entertainment Corp., the financially troubled owner of Laurel Park and Pimlico Race Course, filed for bankruptcy protection this afternoon in federal court in Delaware, as it faced a crucial loan deadline.

Obama prompts Indian politicians to become tech-savvy
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China gets a rise out of markets, where U.S. failed

Wall Street has seemed wholly unimpressed with U.S. economic stimulus plans. But the idea of China spending more money lit up markets today.

Investors, or at least traders, snapped up commodities and stocks worldwide on expectations that China will announce new steps to reenergize its economy.

Crude oil futures jumped $3.73 to $45.38 a barrel, the highest closing price in five weeks. Copper futures shot up to nearly a four-month high. Grain prices also rallied.

The Reuters/Jefferies CRB index of 19 major commodities rose 3.8%, its biggest one-day gain since Dec. 31.

From Bloomberg News:

"There are signs of optimism about the economy after weeks of very bleak news," said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Mass.

"China is key," said Bill O’Grady, chief markets strategist at Confluence Investment Management in St. Louis. "They are talking about doing the right things to boost growth. An additional stimulus program will be good for commodities such as oil and copper."

Yet as my colleague Don Lee reported from Shanghai today, China's next stimulus program is "likely to focus on increasing spending for healthcare and basic needs as opposed to infrastructure projects" that dominated the first spending package announced in November.

In the markets, the bears may just be getting fearful of betting on another big drop with prices already so depressed. The CRB index had closed at a 6 1/2-year low Monday. In the stock market, U.S. blue-chip indexes fell to 12-year lows this week.

Veteran money manager Steve Leuthold of Leuthold Group in Minneapolis had been telling clients earlier this year that he expected the U.S. market to hold above its 2008 lows reached Nov. 20.

He was wrong, but he's still bullish, Leuthold said in a Bloomberg TV interview today.

"These comparisons people make with the Great Depression are totally out of touch with reality, and pretty stupid," he told Bloomberg. "We’ve been in much worse, much more panicked and more scary situations in the U.S."

For today, at least, buyers ruled for most of the trading session on Wall Street. Stocks were broadly higher, with the Dow Jones industrial average rising 149.82 points, or 2.2%, to 6,875.84. Energy stocks and other commodity-related issues led the way.

Still, the market couldn’t hold on to its highs for the session. The Dow had been up as much as 252 points, or 3.7%, before a wave of selling hit in the final half hour.

There was no such second-guessing in China today, where stock markets resumed their 2009 rally. The Shanghai composite index jumped 6.1% to 2,198.11, closing just under its high for the day.

The Shanghai market had been up 31% for the year through Feb. 16, before profit-takers swarmed. With today’s advance the year-to-date gain is 20.7% -- which still ranks Shanghai shares as the world’s best performers this year, by far.

-- Tom Petruno

Photo: Oil traders at the New York Mercantile Exchange today. Credit: Jonathan Fickies / Bloomberg News

Nikkei opens higher

TOKYOJANESE share prices opened higher on Thursday, with the benchmark Nikkei-225 index rising 45.06 points, or 0.62 per cent, to 7,336.02 in the first minute of trading.
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Cal State system to sell $450 million in tax-free bonds

Investor demand for California tax-free municipal bonds will be tested beginning Wednesday, when state Treasurer Bill Lockyer attempts to sell $450 million of bonds for the California State University system.

The bonds, to be sold in maturities of one to 30 years, will finance building projects on the 23 Cal State campuses.

These are revenue bonds, meaning they’re backed by revenue from the system, including student housing fees and parking fees. To credit-rating firms, that makes the bonds less risky than California general obligation bonds, which are backed by the state’s taxing power.

Moody’s Investors Service rates the Cal State bonds Aa3. By contrast, Moody’s rating on the state’s general obligation bonds is A1, which ties with Louisiana for the lowest rating among the 50 states.

Under Lockyer’s "Buy California Bonds" program, the state takes orders from individual investors ahead of orders from institutional investors. Individuals can put in orders on Wednesday; on Thursday, after institutions bid for the bonds, the state will set final interest rates on the securities. Individuals then can accept those final rates, or cancel their orders.

Muni bond yields have been rising in the last two weeks amid a back-up in bond interest rates in general, as investors’ appetite for muni and corporate IOUs has cooled. That could make the Cal State issues more appealing for yield-hungry investors.

Ross Berger, a bond fund manager at Wells Fargo Bank, estimated that Cal State bonds maturing in five years might pay an annualized tax-free yield of about 3.3%; the 10-year bonds might pay around 4.3%, he said.

California muni bond interest is exempt from federal and state income tax.

To order the bonds, investors must go through a brokerage; the state doesn’t take orders directly. The minimum order is $5,000.

Go here for more on the Buy California Bonds program.

-- Tom Petruno

AIA gets Pru, Manulife offers

LONDON/NEW YORKPRUDENTIAL Plc and Manulife Financial Corp made preliminary offers for American International Group Inc's Asian unit, but Prudential's offer fell short for what AIG wants for the business, sources familiar with the matter said.

Chinese insurer China Life Insurance Co Ltd, which was seen as another large potential bidder, pulled out of the auction for the unit, American International Assurance Co (AIA), on worries about the quality of the business, a company official said on Tuesday.
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AIG: The Mother of All Bailouts

Panic vs. holding on: Guess which strategy is winning

"Never sell into a panic" is a standard piece of advice on Wall Street.

Since August, it has been fine advice to ignore.

Today we had yet another panic in the market, amid the continuing erosion of confidence in virtually everything -- the U.S. economy, the global economy, the financial system, the political leadership, the market itself, etc.

The Standard & Poor’s 500 index slumped 34.27 points, or 4.7%, to 700.82, its lowest close since Oct. 1996. The index now is down 55.2% from its peak in October 2007.

Was it a mistake to sell today? Let’s review recent market history:

-- The first major panic of the financial-system meltdown was the selling wave that took the S&P 500 down 23% from Sept. 30 to Oct. 10. The close Oct. 10 was 899.22. If you would have sold at that level, you would have saved yourself from a further 22% loss through today.

-- The second major panic, from Oct. 20 to Oct. 27, took the S&P index down 13.8%, to 848.92. Selling at that point would have saved you from a further 17.4% drop.

-- The third major panic saw the S&P lose 25.2% from Nov. 4 to Nov. 20, when it ended at 752.44. Bad time to sell? Those who held tight are down a further 6.9%.

CNBC’s Jim Cramer was bashed by some Wall Street pros for telling listeners on Oct. 6 to sell any stock holdings that they couldn’t afford to hold for at least five years.

The S&P 500 closed at 1,056.89 on Oct. 6. Investors who took Cramer’s advice that day have been saved from a further 34% loss of capital.

On Oct. 17, billionaire investor Warren E. Buffett wrote an op-ed piece for the New York Times encouraging people to buy high-quality stocks. He cited his cardinal rule of investing, which was to "be greedy when others are fearful." Since then, the S&P index is down 25.5%.

Isn't the market dirt-cheap by now? The problem is, it’s pointless to talk about fundamentals, such as corporate earnings. As S&P chief investment strategist Sam Stovall concedes, "Earnings don’t matter," because no one will believe any earnings estimates as long as the economy continues to slide.

In the absence of fundamentals, Stovall says, "All we can really go on is the technicals" -- chart-watching -- to try to guess where the market might bottom.

He believes the market decline should stop somewhere between 625 and 675 on the S&P 500. If the index goes to 625, that would be an additional 10.8% drop from here.

Bill Strazzullo, a partner at Bell Curve Trading in Freehold, N.J., says investors may have to ponder "the unthinkable" -- the S&P back to around 500, which was near the jumping-off point for the spectacular market surge that began in 1995 and continued through 1999.

"You have to ask yourself, what is the real risk here?" Strazzullo says. "The thing we are least concerned about is the market running away on the upside." In other words, even if the decline stops, he says, he can't identify a single catalyst that could spark a wild new bull market any time soon.

"On the other hand," Strazzullo says, "I am worried about another 25% to 30% move down," if panic feeds on itself as it did last fall.

Cramer had it right in October, even if all he did was tell people something they already should have known: The stock market is no place for money you will need in the next five years.

That's as true with the S&P at 700 as it was at 1,056.

-- Tom Petruno

Photo: Panicked investors on Wall Street on Oct. 24, 1929 -- amid the first selling wave of the 1929-32 crash. Credit: Associated Press

AIG: The Mother of All Bailouts

ABC News’ Betsy Stark reports: Before this is over, AIG may earn the dubious distinction of being the mother of all bailouts.

The U.S. taxpayer was on the hook for $150 billion before today's $30 billion lifeline from the Troubled Assets Relief Program’s round four of government efforts to save AIG. What taxpayers have gotten in exchange is an 80 percent stake in a monstrous global insurance company now trading on the open market as a penny stock, i.e., worth well less than a dollar a share.

AIG has lots of good businesses that still make money but not nearly enough money to cover the cost of AIG's disastrous bets on "credit default swaps." In the simplest terms, AIG sold insurance policies on the trillions of dollars of mortgage-backed securities that made financial firms a fortune as housing prices went up. And for a time it made AIG a fortune, too.

But now that the tide has gone out, to borrow Warren Buffett's metaphor, we see that while AIG insured approximately $450 billion of these securities, incredibly, it failed to set aside any funds to cover potential losses. Why? Credit default swaps were not considered a traditional insurance product, so they were not regulated. So AIG was not required to set aside money for potential losses. And here's the kicker (as explained so well by Joe Nocera in his Feb. 28 column this weekend in the New York Times): The customers who bought these products all felt safe  because these securities carried the coveted AAA rating, conferred because AIG was, once upon a time, so well run that its default swaps deserved a AAA rating.

OK, but why does the federal government -- i.e., American taxpayers with plenty of problems of their own -- continue to bail out this company that behaved so irresponsibly? Isn't this is a classic example of the government throwing good money after bad?

Today the Treasury Department conceded this $30 billion bailout may not be the last. "This will take time and possibly further government support if markets do not stabilize and improve," Treasury warned in a press release. But it went on to explain its belief that AIG's long tentacles have the government in a choke hold: "Given the systemic risk AIG continues to pose and the fragility of markets today, the potential cost to the economy and the taxpayer of government inaction would be extremely high. AIG provides insurance protection to more than 100,000 entities, including small businesses, municipalities, 401(k) plans and Fortune 500 companies that together employ over 100 million Americans. AIG has over 30 million policyholders in the U.S. and is a major source of retirement insurance for, among others, teachers and nonprofit organizations. The company is also a significant counterparty to a number of major financial institutions."

In other words, the government believes it faces a terrible choice: Bail out AIG or risk bailing out all the businesses, cities, retirement funds and individual Americans AIG still insures.

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