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business
Wednesday, April 21, 2010
Former Lehman boss to defend accounting moves WASHINGTON: The former chief executive of Lehman Brothers will tell House lawmakers that he has “absolutely no recollection whatsoever” about an accounting maneuver that a bankruptcy examiner says the company used to mask its perilous financial condition. Richard Fuld, Lehman’s former CEO, said he does not recall seeing any documents related to the so-called Repo 105 accounting gimmick, according to testimony prepared for a House hearing yesterday. Last month, an examiner appointed by the bankruptcy court to investigate the Lehman debacle issued a 2,200-page report. It found that the firm masked $50 billion in debt by using the so-called Repo 105 accounting maneuver since the report came out, interest has grown on Capitol Hill among lawmakers seeking to find out if the accounting gimmick was widely used by Wall Street firms to hide their debt. Yesterday’s hearing before the House Financial Services Committee is the latest attempt to probe the matter and comes as
Former Lehman Brothers Holdings Inc Chief Executive Richard S Fuld Jr. — AP
the Obama administration is urging passage of a sweeping financial regulatory overhaul. Fuld, who hasn’t appeared before Congress since October 2008, says in prepared remarks that the report “distorted the relevant facts” and that the accounting complied with standard practices. “The result is that Lehman and its people have been unfairly vilified,” he said. The examiner, Anton Valukas, discovered that Lehman put together complex transactions that allowed the firm to sell “toxic” securities — mainly those made up of mortgages - at the end of a quarter. That wiped them off its balance sheet, avoiding the scrutiny of regulators and shareholders. Then the bank quickly repurchased them — hence the term “repo.” Treasury Secretary Timothy Geithner will testify at the hearing that Lehman’s collapse highlights why the Obama administration’s proposal to reform the financial system is needed. “Lehman’s disorderly bankruptcy was profoundly disruptive,” Geithner said, according to prepared remarks. “It magni-
fied the dimensions of the financial crisis, requiring a greater commitment of government resources than might otherwise have been required. Without better tools to wind down firms in an orderly manner, we are left with no good options.” Geithner’s predecessor, Henry Paulson, is not appearing at yesterday’s hearing. In written remarks, he supported several pieces of the Obama administration’s proposed financial reforms, without mentioning the bill itself. “The government must have the authority to wind-down, and eventually liquidate, nonbank financial institutions in a manner that prevents harm to the system as a whole,” Paulson wrote. “We sorely felt the need for this authority at the time of Lehman’s failure, and, had we had it, I think the situation would have ended quite differently.” The chairman of the Securities and Exchange Commission, Mary Schapiro, also was scheduled to testify yesterday. She will say that after Lehman’s rival Bear Stearns nearly collapsed two years ago in a government-managed sale, the
SEC had little ability to prevent Lehman from going under. She did, however, concede that the SEC “did not do enough” to oversee the five largest investment banks, even though it had authority over them since 2004. That oversight program, she said, was “insufficiently resourced, staffed, and managed from its inception.” Lawmakers are also likely to question Schapiro about the SEC’s case against Goldman Sachs. The agency filed civil charges Friday against the venerable Wall Street firm, claiming the bank misled investors about mortgage-linked securities. Federal Reserve Chairman Ben Bernanke, also scheduled to testify, said the central bank wasn’t aware that Lehman used the accounting move. And even if the Fed did know, it wouldn’t have changed the Fed’s view that the company was in bad financial shape, according to Bernanke’s prepared remarks. Although the SEC was Lehman’s chief regulator, the Fed began to monitor the firm after trouble surfaced in the financial industry.
Two Fed employees were placed at Lehman to keep tabs of the company’s cash position and its general financial condition, Bernanke explained. Beyond information gathering, the employees had no authority to regulate Lehman’s disclosures, capital standards, risk-management practices or other business activity, Bernanke pointed out. The Fed and other government agencies were unable to engineer a private-sector rescue of the failing firm or come up with some other solution. Lehman was forced to declare bankruptcy — the biggest in US history — in the fall of 2008. That threw financial markets in the United States and around the globe into crisis. Bernanke said the case underscores the need for Congress to pass a sweeping financial overhaul. That legislation includes a mechanism to allow the government to safely wind down ailing financial companies whose collapse could take down the entire financial system and the broader economy. — AP
WPI inflation seen at 5.5% at end of fiscal year
India CB lifts rates by 25 bps points, more tightening seen MUMBAI: India’s central bank yesterday raised key interest rates by 25 basis points, as expected, to battle near double-digit inflation, signaling gradual tightening ahead to sustain growth and manage record government borrow-
ing. The Reserve Bank of India also raised its cash reserve ratio (CRR) requirement for banks by 25 basis points, as expected to drain further liquidity from the financial system.
MUMBAI: Duvvuri Subbarao (center), Governor of The Reserve Bank of India, arrives for the annual monetary policy in Mumbai yesterday. — AFP
Burberry’s profit to top hopes as rich spend again LONDON: British luxury goods group Burberry added to evidence the wealthy are spending again, forecasting 2009/10 profit slightly above market expectations after a stronger than anticipated finish to the year. The 154year-old maker of upmarket raincoats and handbags also said on Tuesday it was confident of further progress in 2010/11 despite uncertainty over the pace and level of the global economic recovery. Prior to the update, analysts were forecasting a consensus underlying pretax profit of 199 million pounds ($319 million) for the year to March 31, 2010, according to a company poll, versus 175 million pounds in the previous year. The group, known for its camel, red and black check, said underlying revenue increased 6 percent to 707 million pounds in the six months to March 31. That compared with analysts’ consensus forecast of a rise of 5 percent, a third-quarter increase of 12 percent and a first-half decline of 5 percent. Second-half retail sales increased an underlying 15 percent, driven by strong full-price sales of spring and summer ranges. Underlying wholesale revenue fell a better-than-expected 6 percent, while underlying licensing revenue was also down 6 percent, in line with guidance. Shares in Burberry, which have more than doubled over the last year, closed at 704.5 pence on Monday, valuing the business at 3.06 billion pounds.— Reuters
British retailer Tesco posts surging profits LONDON: Britain’s biggest retailer Tesco yesterday unveiled soaring annual net profits, aided by a strong performance in Asia, and said it will create 16,000 jobs after emerging strongly from the recession. Net profits jumped by 9.3 percent to 2.327 billion pounds (2.65 billion euros, $3.570 billion) in the group’s financial year which ran until the end of February, Tesco said in a results statement. That compared with 2.133 billion pounds in the previous year and beat market expectations of 2.32 billion, according to analysts polled by Dow Jones Newswires. Tesco added that underlying pre-tax profits leapt by 10.1 percent to strike a record 3.4 billion pounds. Revenues, meanwhile, grew 6.8 percent to 62.537 billion pounds. “By remaining focused on our strategy Tesco has weath-
ered the economic storm well,” chief executive Terry Leahy said in the earnings statement. “Our positions in international markets and non-food meant we faced strong headwinds when the downturn came but it will be these parts of our business which will grow fastest as the recovery strengthens.” He added: “Across all parts of our strategy-UK, international, non-food, services-our business is now stronger than it was before the recession. “With leaner operations, improved market shares, strategic acquisitions performing well and a strong organic development program, we’re well placed for sustained profitable growth.” The company also issued plans to create 16,000 jobs this year, including 9,000 new positions in Britain. Tesco currently employs more than 460,000 people in 14 countries around the world and has a major pres-
ence in Asia including in China, Japan, Malaysia and South Korea. “We have delivered a strong performance in Asia despite challenging economic conditions in the region,” Tesco said. “We have grown sales and profits well-driven by new space and the strong performance of the stores acquired in Korea in 2008, which are now profitable. “As economies generally in Asia start to recover we are seeing improving sales trends in all our businesses except Japan, where economic conditions remain subdued.” Tesco’s share price edged lower in early afternoon trade on the London Stock Exchange, dipping 0.73 percent to 434.25 pence. “Despite a broadly progressive performance, the results still leave room for doubt,” said Hargreaves Lansdown analyst Keith Bowman. — AFP
The benchmark 10-year bond yield fell to 7.98 percent immediately after the news as some players had bet on a bigger, 50 basis point rise, but bounced back later to 8.04 percent at 0630 GMT. The main 30-share BSE index extended gains to over 0.8 percent from 0.4 percent before the policy announcement. The rise follows a quarter-point hike in mid-March when India became the second Group of 20 economy after Australia to lift interest rates as the global economy recovers from its worst downturn in generations. “With the recovery now firmly in place, we need to move in a calibrated manner in the direction of normalizing our policy instruments,” RBI Governor Duvvuri Subbarao said in the policy statement. Some economists said that while the central bank’s 8 percent growth forecast for the current financial year was realistic, it might have been too optimistic in its prediction that inflation will come off current highs over the course of the year. “The policy statement is not hawkish enough to address the concerns on the inflation front,” said Rupa Rege Nitsure, chief economist at the Bank of Baroda in Mumbai. “I feel RBI at this juncture is more constrained by the management of the government’s record borrowing program.” A gradual approach to tightening could also benefit the government politically, which has traditionally been more concerned keeping up fast growth rather than clamping down on inflation despite rising protests over high food prices. Price pressures are spreading beyond food to costs of fuel and manufactured goods such as cars. March inflation reached 9.9 percent year-on-year, its fastest pace in 17 months. Only China is growing faster among major economies, and analysts expect the central bank to continue increasing interest rates throughout the year to bring them back towards pre-crisis levels. The central bank lifted the reverse repo rate, at which it absorbs excess cash from the banking system to 3.75 percent and raised the repo rate, at which it lends to banks, to 5.25 percent. — Reuters
MUMBAI: Women look at the display screen on the facade of the Bombay Stock Exchange (BSE) in Mumbai yesterday. India’s central bank yesterday hiked key interest rates a quarter of a percentage point as it tries to contain inflation without undermining an economic recovery. —AP
BOJ, govt at odds on inflation targeting TOKYO: The Bank of Japan said inflation targeting does not work, setting it on course for a clash with the finance minister, who said it was worth listening to ruling party lawmakers’ calls for a binding target to escape deflation. The Democratic Party-led government has influenced BOJ monetary policy before. Should Finance Minister Naoto Kan warm further to inflation targeting, that could lead to more monetary easing. Japanese retail investors are also worried that deflation and rising commodity prices will hamper growth, a Reuters survey showed, which would support the BOJ’s stance of keeping its easy policy for the time being. Democrat lawmakers are pushing the government to take drastic steps to boost economic growth as public support for Prime Minister Yukio Hatoyama’s cabinet crumbles before an election expected in July for parliament’s upper house. The group of Democrats calling for an inflation target doesn’t include senior party members, making it uncertain whether they can influence policy. But there is growing disquiet over the slump in the opinion polls, which may make the government more susceptible to bold statements it thinks will appeal to voters. “Given the declining popularity of the government, it is likely more out-of-the-box thinking will show up,” said Dariusz Kowalczyk, chief investment strategist at SJS Markets Ltd in Hong Kong. “I would look at this with hope and not with worry. Everything should be done to turn Japan around, which is suffering from long-term deflation.” BOJ board members’ understanding of longterm price stability centres on a 1 percent rise in consumer prices. BOJ Governor Masaaki Shirakawa said yesterday that this is better than an inflation target because it means the bank is not easily swayed by short-term price fluctuations. Under inflation targeting, a central bank guides interest rates to achieve a predetermined rise in consumer prices over a certain period. A central bank without a target also tries to control prices but its desired level of inflation is less explicit. The implications for the BOJ are significant because it could allow the government to hold the BOJ accountable for something economists say is likely unachievable due to a large output gap. “We’re at a stage where some are having second thoughts about inflation targeting,” Shirakawa said in the lower house financial affairs committee. “When the global economy was growing well in the
2000s, people focused too much on short-term prices. This led to an excessively long period of low rates, which created excess credit and led to increased leverage. When this was unwound, it had a big economic impact.” Finance Minister Naoto Kan reiterated his desire for a 1 to 2 percent gain in prices in the same committee. Speaking to reporters earlier, he said he wouldn’t discount a proposal from within his own party to target a 2 percent rise in consumer prices over two years. “It is not an outlandish target at all,” Kan said after a cabinet meeting. “I think it is worth listening to.” Kan has been careful to avoid explicitly saying he wants an inflation target, but his past comments have given that impression. A leading member of a panel of 130 ruling party lawmakers is trying to persuade the party to adopt its anti-deflation proposals in its campaign platform for the election expected in July, but it is far from certain whether this will happen. Deflation can hurt the economy as consumers tend to delay spending because they expect prices to fall more, which in turn depresses capital spending. Deflation can also hurt borrowing because real interest rates are higher than nominal rates. Japanese retail investors turned positive on Japanese stocks in April for the first time in almost three years, as the global economic recovery sparked a rally in major share markets that pushed the Nikkei stock average to an 18-month high. This optimism, tempered by lingering worries about deflation, is in line with the BOJ’s and the government’s assessment that Japan’s recovery will continue due to growing exports, but that consumption and corporate spending will remain lacklustre due to Japan’s large gap between supply and demand. The BOJ may lift its consumer price forecast for fiscal 2011/12 to zero change or slight positive growth from a forecast of a 0.2 percent decline when it updates its outlook on April 30, according to sources. That is still distant from the BOJ’s and Kan’s understanding of price stability. Japan’s core consumer prices fell 1.2 percent in February from a year earlier, marking a full year of deflation. In response, the BOJ has kept its benchmark rate at 0.1 percent. Last month it doubled the amount of low-interest funds it offers to banks in three-month loans, in response to prodding from the government. The funding scheme has brought down money market rates, but it hasn’t led to an increase in lending to companies. — Reuters
China curbs pre-sales for property prices
LONDON: People walk past a Tesco supermarket in London yesterday. Tesco PLC, the world’s third-largest retailer, reported yesterday that fullyear profit rose by 9 percent, in line with analysts’ forecasts. — AP
BEIJING: China yesterday tightened rules on advance sales of new property developments, in the third move of its kind in less than a week aimed at curbing rampant real estate speculation. The Ministry of Housing and UrbanRural Development said in a notice on its website that developers cannot receive down payments for unfinished properties without first obtaining government approval. Once the government gives developers the green light to pre-sell properties, they must publish the prices of each unit in the development within 10 days of receiving approval, the ministry said. The ministry said it was watching the real-estate market more closely after discovering some developers were hoarding properties to drive up prices illegally. Developers who violate the rules or con-
duct advance sales in a way to create false impressions that supply is lower than reality will be punished. China on Monday told banks they could refuse additional mortgages to buyers who own two or more properties, after it last week raised the minimum down payment for second-home purchases. UBS economist Wang Tao said the tightening measures should reduce the risk of asset bubbles and overheating in the sector. “The subdued property prices may also help ease inflation expectations,” Wang said in a note to clients. “On the negative side, there are concerns that a too aggressive property sector tightening could bring down growth substantially and trigger other unwanted effect such as a rise in non-performing loans at the local level.” The measures caused property compa-
nies to fall for a fifth consecutive session yesterday as developers and banks dragged the broader market, which closed down 0.03 percent, dealer said. “The pressure from the property curbs will still be evident, especially if the property market doesn’t show any signs of slowing down,” Xu Yinhui, an analyst from Guotai Junan Securities, told Dow Jones Newswires. China Vanke, the nation’s largest property developer by market share, fell 3.3 percent to 8.03 yuan and China Merchants Property Development declined 5.8 percent to 18.01 yuan. China is trying various ways to prevent the growth of asset bubbles and keep a lid on inflation as the nation’s economy surges. That has included a range of new measures to clamp down on bank lending blamed for fuelling speculative investment in the property sector. — AFP