Complete Property Market Updates of Singapore

Housing woes seen hurting bank results for a couple of years

Warren Buffett, the world’s richest person, said on Sunday that the US economy is in recession, putting him at odds with a government report that showed weak growth.

 
Mr Buffett offered his assessment during a wide-ranging news conference, a day after a record 31,000 shareholders of Berkshire Hathaway Inc attended the insurance and investment company’s annual meeting in Omaha.

Last Wednesday, the Commerce Department said that the US economy grew at a 0.6 per cent annual rate in the first quarter. But Mr Buffett said that the nation’s population also grew, making the real growth rate lower.

He also said that even if the data did not show the economy retracting, people felt as though it was.

‘The US is in recession as I define it,’ he said. ‘I would define that as a situation where people are doing less well than they were three months, six months or eight months earlier and most businesses find themselves in that position too.’

Housing remains a critical problem, he said, as hundreds of thousands of US homeowners find their mortgage payments heading higher, or that their homes are worth less than they owe.

While Mr Buffett said that the government could help borrowers who were misled on what they would owe, he opposed helping people simply because their home values had dropped, or investors who bought mortgage securities without understanding the risks.

Borrowers, he said, ’shouldn’t be penalised for being misled, but shouldn’t be protected against mistakes’. He estimated that more than 80 per cent of borrowers with ‘option’ or ‘pick-a-payment’ mortgages that let them pay less than the principal due, in fact did so, and that many now owe more than their homes’ values.

Mr Buffett said that housing problems would weigh down bank results for ‘a couple of years’ and the industry’s large losses and write-downs due to bad debts were not over ‘by a long shot’.

‘There’s going to be more pain, sure,’ he said.

Alluding to a large stock offering last week by Citigroup Inc, which lost close to US$15 billion over the last two quarters, he said: ‘Citigroup is replenishing its stock at US$25 when it was buying it back not too long ago at US$50. Many institutions not only grew the Kool-Aid, but drank it … They paid a price, but the price was really paid by shareholders.’

He said that banks needed better risk management.

He also said that he recently considered the prospects of a large investment bank, which he did not identify, by reading its 270-page annual report. He highlighted 25 pages where he did not understand what he had read.

‘I decided not to pick that one,’ he added. — Reuters

Source : Business Times - 6 May 2008

Continued stagnation this year may be the best the US can hope for

Former Federal Reserve chairman Alan Greenspan said the US has slipped into an ‘awfully pale recession’ and may continue to languish for the rest of the year.

Mr Greenspan: Recovery won’t begin until US home prices show signs of stabilising

‘We are clearly receding’, with economic growth now at about zero per cent, he said in an interview with Bloomberg News.

Mr Greenspan, who now consults for clients including Deutsche Bank AG, also said it was too soon to declare the end to the credit crisis stemming from the collapse in the US sub- prime mortgage market.

The former Fed chief’s assessment echoes figures in the past month that show declines in the manufacturing and housing industries, though fewer job losses than economists forecast.

Mr Greenspan’s successor, Ben Bernanke, and his colleagues indicated last week that they are ready for a pause in interest-rate cuts after seven reductions since September.

Mr Greenspan spoke the day before the Federal Open Market Committee’s April 30 statement, where it dropped a previous reference to ‘downside’ risks to growth and noted ‘uncertainty’ about the outlook for inflation.

While declining to comment on monetary policy, Mr Greenspan said the US economy is returning to a more inflation-prone period. Import prices are rising, as are wages overseas, adding to pressures already caused by soaring costs of food, energy and other commodities.

Mr Bernanke was scheduled to speak on mortgage markets yesterday at 8.30pm in New York.

Mr Greenspan, 82, portrayed the US economy as being caught in a ‘tug-of-war’ between cash-rich businesses on the one hand and money-losing financial institutions on the other.

‘This is a very unusual situation,’ he said. ‘Neither side is obviously winning the battle.’

The US economy grew at a 0.6 per cent annual rate over the last two quarters, the slowest pace since the 2001 recession.

Mr Greenspan said that continued stagnation for the rest of this year may be the best the US can hope for and might even be the most likely outcome. ‘That’s certainly the most benevolent scenario,’ he said. ‘It’s not all that far from being the most probable.’

‘We’re in a recession,’ he said. ‘But this is an awfully pale recession at the moment. The declines in employment have not been as big as you’d expect to see.’

The former Fed chief said a recovery won’t begin until home prices show signs of stabilising, relieving pressure on financial firms to write off mortgage-related losses.

‘Until there are stabilised prices of homes - and I think they have a good way to go down - you still have prospective losses’ for financial companies and investors. ‘It’s too soon to tell’ if the worst of the credit crunch is over, he added.

‘It is possible, not probable, that prices could bottom out’ towards the end of the year, Mr Greenspan said.

He saw the US economy reverting to the period prior to the 1990s, when inflation was more of a threat.

‘The trade-off between inflation and growth is clearly turning adverse,’ he said. ‘We’re going back to where we were before the end of the Cold War.’

Mr Greenspan in the past had argued that the expansion of the global labour force brought on by the collapse of the Soviet Union and the rise of China was a powerful force bringing down global inflation. That trend is now fading as workers in the emerging markets obtain higher wages. — Bloomberg

Source : Business Times - 6 May 2008

THE man in one of the hottest seats in international banking was in Singapore yesterday and reading the last rites over the United States sub-prime mortgage crisis.

Merrill Lynch chief executive John Thain believes the global financial sector has put the worst of the credit market debacle behind it, although dangers still lurk for the real economy.

Mr Thain, whose bank took a huge hit from the US sub-prime crisis, warned that a combination of falling house prices, rising energy costs and flagging consumer demand are likely to lead to a US slowdown for six to 12 months.

While Asian markets are likely to be affected by the US woes to varying degrees, he pointed out that the region is still the ‘perfect match’ for Merrill’s strategy to become a top global wealth management and investment banking player.

Singapore, China, India and Russia are among the key fast-growing markets where he sees ‘great opportunities’.

The upbeat sentiment is reflected in Merrill’s own share price of late.

Mr Thain, who has been in the job since December last year, has presided over a moderate recovery after Merrill was almost brought to its knees by huge US sub-prime-related body blows.

It recorded three consecutive quarters of red ink due to US$31.7 billion (S$43.5 billion) in write-downs and credit losses on investments.

The shares were at a five-year low of US$39.93 in mid-March but have since recovered to about US$53. This is lower than the US$59 level when Mr Thain took over, but above the US$48 per share that Temasek Holdings paid for its US$5 billion stake in Merrill.

Temasek does not have any paper losses now, he pointed out, adding that the Singapore company is a ‘great long-term investor’.

Mr Thain, who is in Singapore to meet the local banking regulator as well as clients and Merrill bank executives, added that the bank is focused intently on Asia.

It is preparing to get a licence to run a wealth management business in China and was recently given the green light to start a similar operation in South Korea.

The importance of Asia to Merrill is underscored by the time Mr Thain has spent in the Republic. His Singapore visit is the second trip to Asia in a month and follows trips to India and China three weeks ago.

Mr Thain yesterday met the Monetary Authority of Singapore’s financial advisory council, of which he is a member. The council consists of the heads of all major financial institutions in Singapore. It meets from time to time to bring everyone up to speed on new developments and regulations.

Merrill employs about 1,500 people in Singapore, which Mr Thain said was ‘one of the group’s major hubs in Asia’.

The bank is also on track to move its global services centre for its private banking and global markets to a new building in the Republic, which has a capacity for 2,000 employees, by next year.

Mr Thain said the 4,000 job cuts taking place across the group will occur mainly in the US, and offices in Asia are unlikely to be affected.

He has unveiled a new senior management team in the US and is breaking down divisions, which he called ’silos’, in Merrill’s trading units, as he attempts to turn the bank around.

While emphasising that there will be little change in the bank’s fundamental strategy, Mr Thain said Merrill needs to work on one area - building ‘more teamwork…and operating as a single company’.

Source : Straits Times - 6 May 2008

Institutions with consumer-related exposures at risk

THE sub-prime mortgage-related problems that have roiled the credit markets for several months are mostly over, according to Merrill Lynch CEO John Thain, but US financial institutions with large consumer-related exposures will be ‘the next problem area’ as the US economy weakens.

In an interview with BT, Mr Thain pointed out that Merrill Lynch - the world’s largest brokerage firm and a major investment bank - would not need to raise any additional capital and is in the process of revamping its risk management and employee compensation systems.

And with 60 per cent of its investment banking and sales and trading business outside the US, Merrill remains bullish, particularly on Asia, which ‘has some of the best opportunities in the world’.

Mr Thain, formerly the head of the New York Stock Exchange, who took over as CEO of Merrill Lynch last November, said that although the sub-prime-related credit woes had largely passed, the US economy ‘will go through a difficult period’ because of falling home prices, rising food and energy prices, and rising unemployment.

‘We’re going to go through at least a couple of difficult quarters, more related to a slowdown driven by the consumer rather than the sub-prime-related problems,’ he said.

This slowdown ‘won’t impact Merrill so much’, he added. ‘The next problem area will be those financial institutions who have large exposures to consumer-related debt - home equity loans, auto-loan receivables, credit-card receivables. And they would be primarily regional US banks.’

Merrill Lynch, which was badly hit by the US sub-prime crisis in the second half of 2007, has raised a total of US$15.5 billion in new capital since the beginning of this year. Singapore’s Temasek Holdings was among the investors in Merrill, and holds a 9.4 per cent stake.

Mr Thain said he did not foresee Merrill having to raise any further capital. ‘Right now, our equity capital is US$44 billion, which is just a little under its record high,’ he said.

Merrill’s stock price - which had been pummelled down from US$94 on May 18 last year to a low of just under US$40 on March 28 this year - has since recovered to US$52.71 at the close of trading last Friday.

Mr Thain indicated that among the changes he is making at Merrill since taking over the helm is a revamp of both the risk management and compensation systems. ‘We will change the risk management culture,’ he said. ‘Risk now reports directly to me.’

In the area of compensation, he pointed out: ‘There were too many silos, where each of the trading desks was focused only on their own P&L (profit and loss) and in many cases were paid only on the basis of their own P&L. We’re going to move towards a more company-wide focus. And so compensation will be based on how well the company as a whole does.’

Equity will also make up a higher proportion of employee compensation, he said. ‘When you give people stock, they participate on both the upside and the downside. And that’s a very important element in aligning the interests of management and shareholders.’

Mr Thain, who is in Singapore en route to India, was bullish on Merrill’s Asian business. ‘The Asian part of our business is the fastest growing and has some of the best opportunities in the world,’ he said.

He cited Singapore, India and China as the three Asian countries on which Merrill is most focused.

Source : Business Times - 6 May 2008

Warren Buffett, the world’s richest person, said on Sunday the US economy is in recession, putting him at odds with a government report that showed weak growth.

Mr Buffett offered his assessment during a wide-ranging news conference, a day after a record 31,000 shareholders of Berkshire Hathaway attended the insurance and investment company’s annual meeting in Omaha.

Mr Buffett said housing problems will weigh down bank results for ‘a couple of years’ and the industry’s large losses and write-downs due to bad debts are not over ‘by a long shot’

Last Wednesday, the Commerce Department said the economy grew at a 0.6 per cent annual rate in the first quarter. But Mr Buffett said the nation’s population also grew, making the real growth rate lower. He also said that, even if the data do not show the economy retracting, people feel as though it is.

‘The US is in recession as I define it,’ he said. ‘I would define that as a situation where people are doing less well than they were three months, six months or eight months earlier and most businesses find themselves in that position too.

‘If we are in a non-recession, I don’t think people want to see it going in the same direction as it is and saying it’s wonderful.’ Weakness at Berkshire units that sell bricks, carpets and other products dependent on a healthy housing market contributed to a 64 per cent decline in overall first-quarter profit.

Housing remains a critical problem, he said, as hundreds of thousands of homeowners find their mortgage payments heading higher, or that their homes are worth less than they owe.

Mr Buffett said he wrote US Treasury Secretary Henry Paulson a letter in which he favoured giving people taking out mortgages one-page statements, headlined ‘WARNING’ in red, describing the maximum rates they could face.

While Mr Buffett said the government could help borrowers who were misled on what they would owe, he opposed helping people simply because their home values have dropped, or investors who bought mortgage securities without understanding the risks.

Borrowers, he said, ’shouldn’t be penalised for being misled, but shouldn’t be protected against mistakes.’ He estimated that more than 80 per cent of borrowers with ‘option’ or ‘pick-a-payment’ mortgages that let them pay less than the principal due, in fact did so, and that many now owe more than their homes’ values.

‘Surprise, surprise,’ he added.

Bear Stearns a ‘watershed’

Mr Buffett said housing problems will weigh down bank results for ‘a couple of years’ and the industry’s large losses and write-downs due to bad debts are not over ‘by a long shot’. ‘There’s going to be more pain, sure,’ he said.

Yet Mr Buffett said the US Federal Reserve’s brokering in March of JPMorgan Chase & Co’s purchase of the nearly bankrupt investment bank Bear Stearns Cos averted a ‘contagion’, including possible runs on other investment banks.

‘The idea of a financial panic … has been pretty well taken care of,’ he said. ‘That was a watershed event.’

But shareholders could still be hurt.

Alluding to a large stock offering last week by Citigroup, which lost close to US$15 billion over the last two quarters, Mr Buffett said: ‘Citigroup is replenishing its stock at US$25 when it was buying it back not too long ago at US$50. Many institutions not only grew the Kool-Aid, but drank it … They paid a price, but the price was really paid by shareholders.’

And Mr Buffett said banks need better risk management. He said he recently considered the prospects of a large investment bank, which he did not identify, by reading its 270-page annual report. He said he highlighted 25 pages where he did not understand what he had read.

‘I decided not to pick that one, Mr Buffett added.

Heightened risk may also affect government-sponsored enterprises Fannie Mae and Freddie Mac. He said the government ‘is asking (them) to take on more risk per mortgage and more (risk in) their portfolio. By any other standard of government operation, they wouldn’t be able to borrow another dime.’

Buying in Britain

Mr Buffett, 77, said Berkshire still has three internal candidates to replace him eventually as chief executive officer, including one who would step in immediately, and four candidates to succeed him as chief investment officer. He has not publicly identified any of the candidates.

Since taking it over in 1965, Mr Buffett has built Berkshire into a US$207 billion conglomerate of about 76 operating units, and about US$147 billion of stocks, bonds and cash.

On Sunday, Mr Buffett said Berkshire may be ‘close’ to buying a medium-sized British company and ‘will look’ at Royal Bank of Scotland’s (RBS) insurance operations, including its Direct Line home and car insurance business. RBS said last month it may sell all or some insurance operations.

Mr Buffett also said some bond insurers that rival his new Berkshire Hathaway Assurance Corp do not deserve their ‘triple-A’ credit ratings. He said this may be one reason Berkshire, also rated triple-A, was able to capture US$400 million of business in its first full quarter.

‘The US$400 million we wrote in the first quarter were entirely secondary market transactions,’ he said. ‘We see every day that people are coming to us and paying us more than they paid to the original bond insurer.’ — REUTERS

Source : Business Times - 5 May 2008

The United States has fallen into an ‘awfully pale recession’ and may remain stagnant for the rest of the year, former Federal Reserve chairman Alan Greenspan was quoted on Monday saying.
 
‘We’re in a recession,’ Bloomberg news agency reported Mr Greenspan had said in a television interview. ‘But this is an awfully pale recession at the moment. The declines in employment have not been as big as you’d expect to see.’

Last week a government report showed employers shed jobs in April at a slower rate than had been feared, providing some relief about the slowing economy.

Mr Greenspan doubted there would be an immediate recovery, saying stagnation for the rest of the year was the most likely outcome. ‘That’s certainly the most benevolent scenario,’ he said. ‘It’s not all that far from being the most probable.’

The economy would not start turning around until home prices started settling and eased pressure on finance companies to write off mortgage-related losses, Mr Greenspan said.

He has said before that the economy is in a recession, although he also said at that time that it was too soon to say how deep or prolonged the downturn would be. His office could not be reached immediately for comment. — REUTERS

Source : Business Times - 5 May 2008