Bernanke Speaks @ the Council on Foreign Relations

Bernanke speaks about many reform issues that the Fed was supposed to recognize

WASHINGTON (Reuters) – Federal Reserve Chairman Ben Bernanke said on Tuesday regulators must find a way to safeguard the entire financial system and not just its parts to prevent future crises like the one currently engulfing economies around the globe.

“We must have a strategy that regulates the financial system as a whole, in a holistic way, not just its individual components,” he told the Council on Foreign Relations.

Bernanke said the current turmoil was the result of a flood of investment into the United States. Failure by regulators and executives to ensure that capital was carefully used lies behind the crisis, which has tipped economies around the world into recession, he said.

“Broadly speaking, the risk-management systems of the private sector and government oversight of the financial sector in the United States and some other industrialized countries failed to ensure that the inrush of capital was prudently invested,” he said.

Another report on his commentary

“I do not have any hope”

NEW YORK (Reuters) – Eli Broad, a former director and shareholder of AIG who joined other investors last year to hatch a plan to reclaim the insurer from federal ownership, said he has thrown in the towel.

American International Group Inc (AIG.N), once the world’s biggest insurer, had to be bailed out by the U.S. government last September after losses on bad mortgage bets. In exchange, taxpayers got roughly 80 percent ownership, heavily diluting the stake of shareholders.

“If you look at what has happened, I think it is too late,” said Broad, in an interview late on Monday.

“There were all these additional costs” from the federal bailout, which initially carried a heavy interest burden, said Broad. And, “a lot of good people left, and they were trying to sell units,” irking customers who did not like the uncertainty, he added.

AIG last week reported a record $61.7 billion fourth-quarter loss, and received new assistance from the U.S. government after a plan to sell assets to repay debts foundered.

The U.S. said it will keep pumping cash into AIG as needed because of the threat to trading partners from a collapse. It has already put up to $180 billion at AIG’s disposal.

AIG ran into a cash crunch after market declines and rating downgrades required it to post large amounts of collateral to counterparties of credit default swaps written by a financial products unit.

Broad said the government’s bailout of AIG had been “on the harshest of terms,” and at the worst possible time — in the wake of the collapse of Lehman Brothers.

“I think the situation if it occurred today would have been met with a different answer,” said Broad.

AIG, under the terms of its initial government rescue, had to pay 8.5 percentage points above the three-month London Interbank Offered Rate on the government loan, equal to more than 11 percent, plus other fees. Terms have been eased since.

A better approach, suggested Broad, would have been to offer government guarantees on toxic assets held by AIG, akin to what was done in the later rescue of Citigroup (C.N).

Broad and other shareholders including fund manager Shelby Davis of Davis Selected Advisors LP, money managers Dodge & Cox, Legg Mason (LM.N), and the New York state common fund, last year sought unsuccessfully to convince the government to allow private investors to reclaim ownership of AIG.

“The conversation was ‘why don’t you give us a chance to raise common equity, and if we do that you please give us the (government) equity back’,” said Broad.

Broad said he no longer was investing in insurance, and had more or less put AIG out of mind. “I don’t have any hope (for AIG), not now,” he said.

SENTIMENTAL VALUE Continued…

It appears they got the memo or a collective brain storm as of yesterday:

The world is in the grip of a “great recession” in which the global economy could shrink for the first time since the Second World War, the International Monetary Fund (IMF) warned today.

In his bleakest assessment yet, Dominique Strauss-Kahn, the head of the IMF, said that the global financial meltdown was set to be worse than even previous pessimistic forecasts.

“The IMF expects global growth to slow below zero this year, the worst performance in most of our lifetimes,” he said.

Speaking at a gathering of African finance ministers in Dar es Salaam, he said: “Continued deleveraging by world financial institutions, combined with a collapse in consumer and business confidence, is depressing domestic demand across the globe, while world trade is falling at an alarming rate and commodity prices have tumbled.”

The crisis, he added, was now best dubbed a “great recession”.

Mr Strauss-Kahn’s comments come amid a growing consenus that the meltdown, which is tipping global unemployment towards the 50 million mark, is set to be more prolonged and deeper than expected.

They also emerged ahead of a meeting in London, this weekend, of finance ministers from the G20 nations to devise measures to pull the global economy back from the edge.

On Sunday the World Bank predicted that the world economy would contract this year by at least 1 per cent. It also warned that global trade would contract for the first time since 1982.

Yesterday Warren Buffett, the revered investor, further underscored the bleakness of the situation, describing the meltdown as an “economic Pearl Harbor”.

The IMF had already revised down sharply its own predictions for economic growth, to 0.5 per cent from 2.2 per cent.

Most big economies are offically in recession.The UK is expected to be the worst hit of the major EU economies, with the British jobless total set to hit 2.55 million by the end of the year.

PricewaterhouseCoopers recently told its clients to ensure their business can bear a 5 per cent decline in the economy this year.

That would be the biggest peacetime fall in output since 1931.

An 18% fall is the largest in 30 years

British industrial output, which accounts for 18 per cent of the country’s economic output, slumped at the fastest rate in nearly 30 years in January, indicating that the recession is tightening its grip.

Output by British industry slumped by 2.6 per cent in January, compared with the previous month, double the expected fall. This pushed the annual rate of decline to 11.4 per cent, the worst fall since 1981.

Britain entered recession last year and GDP shrank at its fastest pace since 1980 in the last three months of 2008.

Manufacturing output, which accounts for about 14 per cent of the economy, fell by 2.9 per cent on the month against forecasts for a 1.4 per cent fall.
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This brought an annual fall of 12.8 per cent, also the steepest decline since January 1981.

Not even the weak pound was enough to bolster manufacturers’ business, analysts said.

Howard Archer, of IHS Global Insight, the economics consultancy, said: “The UK manufacturing sector is being battered by depressed domestic demand, very weak activity in key export markets, very tight credit conditions and intense competition.

“While the substantially weaker pound is helping UK manufacturers, this is being more than offset by sharply deteriorating domestic demand in key export markets, notably the eurozone and the US.”

The dire figures have heightened worries that the economy could shrink by a substantial margin again in the first three moths of this year.

“The extremely sharp decline in industrial production in January heightens fears that the UK economy is set to again endure contraction of 1.0 per cent quarter-on-quarter or more in the first quarter of 2008,” Dr Archer said.

Economists also warned that the downturn could result in the loss of skilled labour, which could slow down any recovery.

David Kern, chief economist for the British Chambers of Commerce, said: “The critical priority is to ensure that the vital skills base within manufacturing is not lost during this recession. Urgent measures are needed to help viable and well-managed firms hold on to their trained and skilled employees.

“A loss of this precious resource will cause immense long-term damage to the economy.”

“The stock price does not reflect the capital stregth or the earnings potential”

March 10 (Bloomberg) — Stocks in Europe and Asia advanced and U.S. futures gained, led by financial shares after Citigroup Inc. said the bank is having its best quarter since 2007, when it last posted a profit.

UniCredit SpA, Italy’s biggest bank, and Germany’s Deutsche Bank AG rose more than 8 percent. Citigroup rallied 21 percent in New York as Chief Executive Officer Vikram Pandit said the bank’s stock price doesn’t reflect its capital strength or earnings potential. Cnooc Ltd., China’s largest offshore oil producer, climbed 7.4 percent as crude traded above $47 a barrel.

Europe’s Dow Jones Stoxx 600 Index added 1.7 percent to 160.66 at 11:15 a.m. in London, rebounding from a 12-year low. The gauge has still declined 19 percent this year as companies from Anglo American Plc to Bayer AG posted disappointing results and credit-related losses at financial firms worldwide climbed to almost $1.2 trillion.

“We are seeing a little bit of exhaustion in the market from all the selling pressure,” said Mark Bon, a London-based fund manager who helps oversee about $750 million at Canada Life Ltd. “It’s encouraging that financials are making money. Citigroup’s a small comfort.”

Futures on the Standard & Poor’s 500 Index climbed 2.1 percent as Bank of America Corp. increased, while the MSCI Asia Pacific Index advanced 1 percent from a five-year low after HSBC Holdings Plc jumped in Hong Kong.

‘Off a Cliff’

The Stoxx 600 and the S&P 500 fell to the lowest levels since 1996 yesterday as billionaire Warren Buffett said the economy “has fallen off a cliff.” The U.S. jobless rate will reach 9.4 percent this year and remain elevated through at least 2011, a monthly Bloomberg News survey indicated.

Citigroup gained 21 percent to $1.27 after Pandit wrote in an internal memorandum obtained by Bloomberg that he’s “disappointed” at the bank’s stock price. Citigroup was profitable in both January and February, and had $19 billion in revenue before disclosed writedowns, he added.

Once the world’s biggest bank by market value, Citigroup dropped below $1 in New York trading last week for the first time as investors lost confidence that the shares can recover after more than $37.5 billion in losses and a government rescue.

European Banks

A gauge of European banks posted the biggest advance among 19 industry groups in the Stoxx 600, adding 5.8 percent. UniCredit increased 9.1 percent to 80 euro cents. Deutsche Bank, Germany’s largest bank, climbed 8.2 percent to 20.90 euros.

Bank of America rose 5.3 percent to $3.95 in Germany.

HSBC gained 7.2 percent to 374 pence in London after the shares jumped 14 percent in Hong Kong as the government probed a 24 percent tumble in the stock yesterday. Hong Kong’s Securities and Futures Commission is investigating trades put through at yesterday’s close, Financial Secretary John Tsang told reporters today in comments broadcast by local television.

Cnooc jumped 7.4 percent to HK$6.69. Woodside Petroleum Ltd., Australia’s second-largest oil producer, climbed 3.3 percent to A$37.09. Crude rose as high as $47.81 as Saudi Arabia told Asian refiners it will maintain supply cuts next month.

Exxon Mobil Corp., the world’s biggest oil producer, increased 1.1 percent to $65.25. ConocoPhillips, the second- largest U.S. refiner, added 1.7 percent to $37.15.

Daimler AG led a gauge of European automakers higher, gaining 6.6 percent to 19.79 euros. Morgan Stanley raised the world’s second-largest maker of luxury cars to “overweight” from “underweight.”

Volkswagen AG climbed 3 percent to 214.07 euros. Europe’s biggest carmaker was raised to “neutral” from “underweight” at HSBC, which said Porsche SE “might even accelerate its stake increase.” Porsche surged 7 percent to 33.09 euros.

Utilities Drop

Utilities posted the biggest decline in the Stoxx 600, falling 1.7 percent.

E.ON AG dropped 6.9 percent to 18.82 euros. Germany’s biggest utility said it expects 2009 profit before writedowns on assets and hedging derivatives will fall 10 percent. Full-year earnings before writedowns jumped 9 percent to 5.6 billion euros ($7.11 billion) after it added generation capacity abroad.

RWE, Germany’s second-largest utility, fell 1.5 percent to 47.59 euros, extending its 2009 drop to 25 percent.

D/S Norden A/S dropped 18 percent to 144 kroner. Europe’s largest commodities shipping line forecast no “significant” recovery in rental rates this year and said its second-biggest shareholder plans to sell about half its stake.

It will be an “extremely challenging” market this year and there is unlikely to be “any significant rate increases,” the company said.

The worst start to a year since the gauge was created in 1970 has left the MSCI World Index of 23 developed nations valued at 10.2 times the profit of its 1,680 companies. That’s about half this decade’s average ratio of 21.3, data compiled by Bloomberg show.

40 lashes for small talk

CAIRO (AP) – A 75-year-old widow in Saudi Arabia has been sentenced to 40 lashes and four months in jail for mingling with two young men who are not close relatives, drawing new criticism for the kingdom’s ultraconservative religious police and judiciary.

The woman’s lawyer told The Associated Press on Monday that he would appeal the verdict against Khamisa Sawadi, who is Syrian but was married to a Saudi. The attorney, Abdel Rahman al-Lahem, said the verdict issued March 3 also demands that Sawadi be deported after serving her sentence.