NATO and Russia
No more business as usual?
NATO foreign ministers issue a warning to Russia, telling it to withdraw troops from Georgia
NATO foreign ministers gathered in Brussels on Tuesday August 19th for an emergency summit, called by America, to discuss what to do next about Georgia and Russia. The military alliance gave warning that “we cannot continue with business as usual” until Russia withdraws troops from Georgia. NATO also pledged to deepen ties with Georgia by setting up a NATO-Georgia Commission. Russia and America have cancelled plans for joint military exercises.
The facts on the ground are changing only slowly. Despite a promise by Russia’s president, Dmitry Medvedev, that Russian troops now deep inside Georgia would this week withdraw (presumably to the breakaway regions of South Ossetia and Abkhazia), only by the middle of the day on Tuesday were the first reports issued that some Russian units were beginning to pull back from the town of Gori. However this was a small gesture compared with the steady flow of troops and armour heading in the opposition direction in previous days. Also on Tuesday Russian troops detained 21 Georgian soldiers in another town, Poti.
A ceasefire is in place and some prisoners have been exchanged, but Russia continues to flex its substantial military muscle. Claiming a right to take additional security measures, Russian troops had continued to destroy and loot Georgian military bases. One Russian colonel had crowed that looted American rations were particularly tasty. In addition there were reports that economic targets—such as a railway line that runs east to west across the country—had been attacked. In South Ossetia itself, ethnic Georgian villages have been burned and homes destroyed.
The longer that Russian forces remain in Georgia proper, the greater the demonstration by Russia that it intends to assert its will over the small neighbour. Although Russia has apparently stopped short of trying to topple the pro-Western president, Mikheil Saakashvili, it is stating that Georgia lies within its sphere of influence and that, for example, Georgian membership of NATO would not be tolerated. Despite the new commission, the prospect of further expansion of NATO has receded in the past two weeks.
Russia’s leaders are confident not only because of their local military superiority. They also know that Western leverage in Georgia and in the immediate region is hampered by sharp diplomatic divisions between NATO allies. On Tuesday at the summit Germany’s foreign minister, Frank-Walter Steinmeier, appeared to play down the importance of Georgia to the West, noting that NATO’s involvement in the region is “very limited”.
America, which has the biggest political interest in the region, had endorsed Mr Saakashvili and retrained the Georgian army. It has been the most outspoken in support of Georgia, threatening for example to scrap regular ministerial meetings between NATO countries and Russia. On Monday Condoleezza Rice, on her way to Brussels, told reporters that NATO must “deny Russian strategic objectives, which are clearly to undermine Georgia's democracy, to use its military capability to damage and in some cases destroy Georgian infrastructure and to try and weaken the Georgian state.” Eastern European countries have largely followed America’s line, fearing that a resurgent Russia is once again a direct threat to their interests.
In contrast a group of west European countries, notably France, Germany and Italy, is anxious to avoid greater confrontation with Russia. Angela Merkel, Germany’s chancellor, strongly criticised Russia’s actions this weekend, even as she stood beside Mr Medvedev in Sochi, a Russian coastal resort near to Georgia. She said that Russia’s response to Georgia’s (ill-considered) attack on South Ossetia was both “disproportionate” and “unreasonable.” But German dependence on energy from the east—roughly half of the 80 billion cubic metres of gas consumed in Germany each year are now piped from Russia—encourages others, such as her foreign minister and the former chancellor, Gerhard Schröder, to seek a more emollient line. Mr Schröder told Der Spiegel this week that Europe should “maintain a strong relationship with Russia”, adding that “there is not a single critical problem in world politics or the global economy that could be solved without Russia.”
Silvio Berlusconi, Italy’s prime minister who has a close relationship with Vladimir Putin (he once described himself as Mr Putin’s “defence lawyer”), has been similarly unwilling to confront Russia. Italy depends heavily, too, on Russian imports, which represent roughly a third of the gas that it consumes each year.
Attention may turn next to Ukraine, where another broadly pro-Western government that seeks membership of NATO faces domestic instability and fears of Russian intervention in some form. On Monday Ukraine’s president, Viktor Yushchenko, who has spoken out against Russia’s actions in Georgia, accused his ally-turned-rival, Yulia Tymoshenko, the prime minister, of seeking Russian support in a forthcoming presidential election. Ms Tymoshenko has, so far, remained silent on events in Georgia. Using a war in Georgia for narrow political ends will not help to solve the crisis.
Commentary by Joe Mysak
Aug. 19 (Bloomberg) -- The real numbers to look at in the auction-rate securities settlements are the ones in thousands, not billions.
By the time this is finished, and we're probably months away from that, it looks like securities firms will return money to more than 200,000 individual investors.
And prepare to kiss them goodbye.
The ultimate loser in the auction-rate market collapse is going to be the U.S. securities brokerage business.
It is hard to see how the dealers involved are going to retain the customers they treated so cavalierly in February, when they decided to stop supporting auctions and blew up the market.
That was their right, of course. The dealers weren't obliged to participate in auctions. Yet they did so for more than two decades, and everyone got used to it. It became a historical convention. When people look back at this epic collapse in years to come, they will probably conclude that the auction market was a victim of its own success. It got too big, and, evidently, too scary for its creators.
And so they decided to alienate all their customers.
Why they did so hasn't yet been adequately explained.
Did they, the top officers of the securities companies, really think their customers could be separated from their money for any length of time and not complain?
Or did they think they could pressure the issuers of the paper into refinancing, and so at least provide those stiffed customers with a timetable for the return of their cash?
Survival at Stake
Or did they just decide the survival of their firms was at stake, and that individual investors were expendable?
None of these possibilities quite makes sense.
This we know: The securities industry for years has had a divided relationship with individual investors. Some firms wanted nothing to do with ``retail.'' Others kept raising the obnoxious minimum amounts of cash their customers had to have on hand. Still others treated those customers like little fee machines, nickel-and-diming them at every turn.
At the same time, of course, the big securities firms advertised almost endlessly, emphasizing trust and reputation, and how they could take care of you if you were their client. Those ads showed a world of ease and comfort.
Not Pretty
It was a seductive picture, and now, we see, illusory. It turns out that the financial-services firms are all aiming at the same relatively tiny sliver of customers, those with a net worth of -- what? Is it $10 million? $20 million? Higher?
Now those illusions are shattered. The thousands of investors who will be reunited with their cash are now disabused of the notion that a brokerage account means they have arrived, and that they are about to participate in the democratization of capital that they had heard or read so much about.
And they all know that, no matter how the companies themselves spin it, none of them would see a single dollar if the states hadn't forced the firms to cough up the cash, and in the most humiliating way possible -- by pulling back the curtain and revealing what was going on backstage. It wasn't a pretty sight.
It is passing strange that this disaster occurred not with stocks or bonds, but with something called auction-rate securities, that were touted -- securities professionals hate the word, which connotes a gamble -- as safe cash-equivalents.
Or, as Merrill Lynch & Co. put it in December 2007, ``We remain convinced that auction market preferreds of closed-end funds are a conservatives' conservative security with respect to credit risk.''
The real question in the months ahead is where the wistful victims of the Great Auction Securities Freeze of 2008 are going to take their money. If I were a betting man, I'd bet that you are going to see a lot of that money going home to local banks, if not under mattresses.
Losing 100,000 or 200,000 customers or more is one thing. How are the major securities firms going to win new customers with this debacle behind them?
Aug. 19 (Bloomberg) -- Indiana Senator Evan Bayh, on a short list of Democrat Barack Obama's possible running mates, may face questions about potential conflicts of interest from his wife's work on seven corporate boards that paid her more than $837,000 last year.
Susan Bayh, a lawyer, is a director at Indianapolis-based WellPoint Inc., which is part of a medical research partnership awarded a $24.7 million federal grant in May after Evan Bayh and his Indiana colleagues in Congress recommended the group to the National Institutes of Health.
She's on the board of E*Trade Bank, a subsidiary of E*Trade Financial Corp., while her husband sits on the Senate Banking Committee. Susan Bayh is lead director at Emmis Communications Corp., an Indianapolis radio-station operator that published Evan Bayh's 2003 memoir.
``When you're vetting a vice president and his wife is on seven boards, that is a serious question of conflict of interest on a whole variety of issues,'' said James Thurber, director of American University's Center for Congressional and Presidential Studies in Washington.
Evan Bayh has gone ``above and beyond what is required under Senate ethics rules'' to prevent possible conflicts, forbidding his staff to communicate with lobbyists for companies where his wife is a director, Bayh's spokesman Eric Kleiman said.
No Lobbying Contact
``There is a wall preventing any and all lobbying contact,'' and Susan Bayh isn't a lobbyist, Kleiman said. ``Spouses of public servants deserve the opportunity to pursue success in their chosen fields of endeavor.''
Bayh, 52, the son of former Indiana Senator Birch Bayh, is considered a leading prospect to be Obama's running mate. After two terms as governor of traditionally Republican Indiana, he has been elected twice to the Senate.
Susan Bayh, 48, isn't the first spouse to face political questions about corporate boards. Michelle Obama, who made $101,000 in 2006 as a director of TreeHouse Foods Inc., quit the suburban Chicago company's board last year. TreeHouse's biggest customer is Wal-Mart Inc., a target of criticism from labor unions. New York Senator Hillary Clinton was on Wal-Mart's board when her husband, Bill Clinton, was governor of Arkansas.
`Smell Test'
While it isn't inherently unethical for Senate spouses to join corporate boards, concerns may arise if companies and lawmakers are in positions to benefit from the connections, said Bill Buzenberg, executive director of the Center for Public Integrity. ``It doesn't pass the ethical smell test,'' Buzenberg said.
WellPoint, which paid Susan Bayh almost $335,000 last year, is the biggest U.S. health-insurance company by membership as Obama's campaign promises to push for universal health-care coverage. WellPoint spent $890,000 lobbying Congress and the Bush administration in the three months ended June 30, according to disclosure forms.
A former lawyer for Eli Lilly & Co., Susan Bayh is a director at four publicly traded biopharmaceutical companies: Curis Inc., Dendreon Corp., Dyax Corp., and MDRNA Inc. Earlier this year, she left the board of closely held Golden State Foods, one of McDonald's Corp.'s biggest suppliers, and became a company adviser.
At Emmis, which owns almost two dozen radio stations, one of the company's biggest investors last month questioned Susan Bayh's effectiveness because of her family's friendship with Emmis founder and Chief Executive Officer Jeffrey Smulyan.
Independence Questions
``The well-chronicled personal relationship that Ms. Bayh and her husband have with the Emmis CEO might logically raise legitimate questions about the extent of Ms. Bayh's independence,'' Martin Capital senior partner Frank Martin wrote in a letter filed with the Securities and Exchange Commission. Martin's filing said his firm owns 9.7 percent of Emmis Class A stock, which has fallen 65 percent in the past year.
Susan Bayh's longest board tenure is at Emmis, where she became a director in 1994, when Evan Bayh was governor. Smulyan said he recruited her because she was well known in the business community and had corporate governance experience.
``I thought Susan would be helpful,'' Smulyan said. ``Independent of being the governor's wife, I think she had pretty good insights.'' Martin is the only shareholder who's complained about Bayh, Smulyan said.
Emmis lost money on Evan Bayh's 2003 autobiography, ``From Father to Son: A Private Life in the Public Eye,'' company spokeswoman Kate Snedeker said. Bayh gave the $4,105 of book royalties to the Evan and Susan Bayh Family Foundation.
Book Deal
The book deal creates the appearance of ``a favor being done for the candidate by the company that his wife is on the board of,'' Buzenberg said.
Smulyan said Emmis published the memoir with expectation of making a profit. Kleiman, Bayh's spokesman, said the deal involved ``a standard book contract that was approved by the Senate Ethics Committee.''
WellPoint is among six companies joining Indiana University and Purdue University in the Indiana Clinical and Translational Sciences Institute, which got a five-year NIH grant. When Bayh's office announced the grant on May 29, it said the senator wrote NIH to support the application.
Anantha Shekhar, the institute's director, said that while Evan Bayh ``certainly helped us,'' Susan Bayh had nothing to do with the grant. ``Until you brought it up, I wasn't even thinking about Susan Bayh and the WellPoint connection,'' Shekhar said.
Aug. 19 (Bloomberg) -- U.S. builders broke ground on the fewest new homes in 17 years and producer prices climbed the most since 1981, providing no sign of an economic recovery or easing inflation.
Housing starts fell 11 percent in July to an annual rate of 965,000, the Commerce Department said today in Washington. The Labor Department reported the producer price index jumped 9.8 percent from a year before.
``There's no doubt we're in a period of stagflation now,'' said Peter Kretzmer, a senior economist at Bank of America Corp. in New York who formerly worked at both the Federal Reserve Bank of New York and the Fed Board in Washington.
Stock indexes headed for their biggest two-day loss in more than a month. The Standard & Poor's 500 Stock Index dropped 0.7 percent to 1,269.11 at 10:40 a.m. in New York, with the S&P Supercomposite Homebuilding Index down 1.7 percent. Treasuries were little changed, with 10-year notes yielding 3.82 percent.
Compared with July 2007, work began on 30 percent fewer homes. Building permits, a sign of future construction, also fell in July, the Commerce Department reported. They were down 18 percent to a 937,000 annual pace.
Starts were projected to fall to a 960,000 annual pace, according to the median forecast of 77 economists polled by Bloomberg News. The median estimate for permits was 970,000.
`Pull Back'
``A recovery will not happen this year,'' said Russell Price, a senior economist at H&R Block Financial Advisors Inc. in Detroit. ``Not only are mortgage rates creeping up, but financing is becoming more difficult for a lot of people. Builders will continue to pull back.''
The 1.2 percent increase in producer prices from the previous month followed a 1.8 percent increase in June, the Labor Department said. So-called core prices that exclude fuel and food rose 0.7 percent after a 0.2 percent gain in June.
Prices paid to factories, farmers and other producers were forecast to rise 0.6 percent, according to the median of 77 forecasts. The core index was projected to advance 0.2 percent.
``The recent burst of cost-push inflation is giving the beast digestion problems that might manifest themselves in the form of a lingering inflationary fever,'' Dallas Fed President Richard Fisher said in a speech in Aspen, Colorado, today.
Fed Chairman Ben S. Bernanke told U.S. lawmakers last month that officials ``continue to expect inflation to moderate in 2009 and 2010, as slower global growth leads to a cooling of commodity markets,'' while viewing the outlook ``as unusually uncertain.''
Commodity Costs
The jump in the producer price index reflected a surge in commodity costs that has since waned. At the same time, the acceleration in costs excluding food and fuel raises concern about a pass-through to consumer prices.
Producer prices are one of three monthly inflation gauges reported by the Labor Department. Import prices rose 1.7 percent in July and consumer prices increased 0.8 percent for the same period, the Labor Department said last week. Both figures were higher than estimated.
Construction of single-family homes fell 2.9 percent to a 641,000 rate, the fewest since January 1991, today's report showed. Work on multifamily homes, such as townhouses and apartment buildings, dropped 24 percent from the prior month to an annual rate of 324,000.
``The news ahead for housing remains bad,'' Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York, said in a Bloomberg Radio interview. ``There's a corrective process we have to get through here.''
Northeast Sales
The decrease in starts was led by a 30 percent decline in the Northeast. Construction fell 8.2 percent in both the South and West. Starts in the West slumped to a 26-year low. The Midwest showed a 10 percent gain.
The magnitude of the July drop in the Northeast reflected, in part, a payback from an unexpected surge the prior month. Starts and permits jumped in June as builders hurried to break ground ahead of new regulations in New York City's building code that took effect July 1.
Underneath the gyrations, demand is weakening. Sales of existing homes fell to a 10-year low in the second quarter, according to the National Association of Realtors. A third of all sales were foreclosures or ``short sales,'' in which lenders take a loss on a property.
Financing is also becoming tougher, a quarterly survey of banks by the Federal Reserve showed. Compared with the April survey, more of the loan officers polled reported they tightened standards on prime mortgage loans and on non-traditional loans.
Toll on Retailers
The slumping U.S. economy is taking its toll on retailers from luxury chain Saks Inc. to discounter Target Corp., reports showed today. Saks reported its largest quarterly loss in two years, while profit dropped for a fourth straight quarter at Target. Home Depot Inc., the biggest home improvement chain, posted its seventh sales decline in eight quarters.
Falling retailer earnings may signal that the U.S. economy will deteriorate further as consumers rein in spending to cope with rising unemployment and inflation. Home Depot Chief Executive Officer Frank Blake told analysts today he was ``cautious'' about consumer spending through mid-2009.
The five largest U.S. homebuilders reported a combined $1.08 billion in losses in their most recent quarters.
Builders are pessimistic as losses mount. The National Association of Home Builders/Wells Fargo's sentiment index yesterday showed optimism held at a record low in August for a second month.
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