Countries with so-called managed floats, including Singapore, Malaysia, Indonesia, India and China, allow currency valuations to fluctuate somewhat but hold them in check through central-bank interventions. Those that keep their currencies far below market value—like China—invite high inflation; those that allow the most appreciation undermine export competitiveness even when the local economy has less-than-stellar growth prospects, as in Thailand. Everywhere, too much money is a problem that’s likely to get much worse now that U.S. Federal Reserve chairman Ben Bernanke has announced an aggressive plan to cut interest rates.
Already, central banks of the United States, Europe and Japan have pumped billions into the global financial system to counteract the subprime-mortgage mess, putting downward pressure on interest rates. From Singapore to China and India, technocrats are struggling to keep the subsequent flows of cheap capital in check and prevent economic meltdowns.
Their options: “Let currencies appreciate, interest rates come down or … impose some capital controls,” says David Carbon, chief economist at DBS Bank Group Research in Singapore. “In effect, what [some] Asian governments are saying to foreign investors is, ‘Thanks very much for your interest in our economy, but we just can’t absorb so much money, so don’t give so much’.”
Foreign reserves are piling up twice as fast as they did before the 1997-98 Asian financial crisis, and despite lower growth forecasts from groups like the Asian Development Bank and the IMF, most economists still expect that Asia will outperform the rest of the world in 2008, meaning that the tide of cheap money could rise higher before receding.
In Hong Kong, where the dollar peg mandates monetary policy that mimics the U.S. Fed’s, today’s ultralow interest rates, combined with huge infusions of outside funds into the city’s bubbly bourse, has some analysts predicting stock and real-estate rallies in spite of the U.S. slowdown. The downside: inflation in the price of just about everything else, too. Singapore and India have struggled to prevent capital inflows from driving up inflation, but the city-state largely abandoned the effort last year and now has interest rates hovering below 2.5 percent. New Delhi boosted lending costs significantly higher, set tough limits on corporate borrowing overseas and allowed the rupee to appreciate 11 percent in 2007. Still, “the overall dynamic seems to be a strong uptick in [inward] foreign-capital flows,” says Shankar Acharya of the Reserve Bank of India. The rising rupee, he adds, “does create problems, which are concentrated in labor-intensive [export] industries like textiles, garments and leather.”
China’s liquidity woes are the most vexing. A profusion of exports since 2003 ballooned the trade surplus to $260 billion last year and exploded foreign reserves to nearly $1.5 trillion, effectively undermining Beijing’s long-held strategy of keeping its currency undervalued to boost exports. In mid-2006 inflation spiked; it now runs at close to 6.5 percent for consumer prices as a whole and 18 percent for food. In recent months the government has since shifted to a “tight” monetary policy and allowed the yuan to appreciate. Stephen Green, head of research in China at Standard Chartered Bank, says the Chinese currency could strengthen by 9 percent in 2008 with “a sustained impact on exports.”
There are some positive effects from the liquidity glut. Local-currency appreciation has blunted the impact of $100-per-barrel oil. Asian spending power is on the rise like never before, which empowers Asia Inc. to grow more acquisitive. One risk is that inflation will surge as Asian economies slow, creating a complex set of problems. “It’s way, way too early to start talking seriously about stagflation,” says Green, “but that’s the environment we’re moving into.” Which is why, in the end, money isn’t always a blessing—even when it’s free.
title: “Money For Nothing” ShowToc: true date: “2023-01-11” author: “Herman Gillis”
Ron Howard’s glossy thriller delivers pretty much what the generic title implies: man and wife (Rene Russo) lose child and agonize over how to get him back. The ““twist’’ in the script by Richard Price and Alexander Ignon (loosely based on a 1955 Glenn Ford flick of the same name) is that Mel turns the tables on the bad guys, turning the $2 million ransom into a bounty on their heads. Will this risky turnabout succeed–or doom his son? You need to ask?
Slick and violent and reasonably tense, ““Ransom’’ holds your attention without being the least bit interesting. One expects more edge–or at least some tasty dialogue–from a Price script, but Howard opts for movie reality over urban grit, which makes it hard to take seriously the film’s pretense that it’s exploring the gulf between the haves and have-nots. The motley lowlife ““family’’ that constitutes the villains–led by Gary Sinise as a New York cop turned bad–never come to life. The only thing these implausible cohorts seem to have in common is the casting director who wasted such talents as Lili Taylor and Liev Schreiber in these parts. And having established that Gibson got to the top through dirty deeds, you might expect the movie to make something of it. It doesn’t.
It’s hard to see what intrigued Howard about this project, except as an academic exercise in wringing tension (something he did better in ““Apollo 13’’). You relish the rare moments of humor, desperate for some contrast to the film’s monotonous tone of anxiety. I guess most audiences will feel they’ve gotten their money’s worth, but only one scene, late in the story, really got my gut churning, when Gibson welcomes his son’s abductor into his home, mistaking him for his savior. The rest of the time Howard rolls out suspense by the yard, like someone laying industrial carpeting. It’s long and gray and utterly undistinctive.
title: “Money For Nothing” ShowToc: true date: “2023-01-31” author: “Margaret Burgess”
Well, this is Germany. Ten-year-old TBG (the complete mouthful is Technologie-Beteiligungs-Gesellschaft mbH der Deutschen Ausgleichsbank) is a 100 percent state-owned agency that’s become Europe’s single biggest investor in high-tech start-ups. An outgrowth of the Research and Technology Ministry, TBG has funneled more than 800 million euro into 700 German companies. Fifteen of those have gone public; dozens more IPOs are now in the pipeline. “TBG was a great help for us,” says Michael Janssen, CFO of Brokat, Europe’s leading producer of software for Internet and cell-phone banking. Janssen has every reason to be grateful. Founded in 1996 with 500,000 of TBG’s money–plus a matching amount from a private venture-capital firm–Brokat went public last year on Frankfurt’s Neuer Markt. As of last week, the Stuttgart-based company had a market value of 1.5 billion euro.
The secret ingredient in this surprisingly successful government program? Humility. When policymakers set TBG up in 1989, they left out the hubris that makes bureaucrats think they can target funds to deserving technologies. After all, generations of civil servants had sunk billions of taxpayer marks into things like magnetic-levitation trains and nuclear fusion, to little avail. The TBG innovation was to let the market decide. Only when a private lead investor–usually a venture capitalist, as in Brokat’s case–has decided to risk his own cash in a fledgling company does TBG jump in with cheap matching funds. (As a result, it cofinances virtually every start-up.) In effect, it’s a gigantic but utterly market-driven subsidy to the venture-capital industry. “When we began there was no venture-capital market in Germany worth speaking of,” says TBG chief Ernst Mayer. “We set out to change that.”
Mission accomplished: in 1998, Germany soared past Britain as Europe’s biggest market for high-tech investments, with venture-capital companies plowing almost half a billion euros into start-ups. “TBG has certainly attracted more private money to Germany,” says Peter Cullom, head of the Frankfurt office of 3i, the British venture-capital firm that came to Germany in 1996 and has since become TBG’s biggest cofinancing partner. How could a venture capitalist not love TBG’s terms? Companies are obliged to repay the investments, which are essentially low-interest loans, but the agency generally doesn’t participate in any IPO gains. Instead, it shows a return on its investment of about negative 10 percent, because some of its clients fail. Mayer says he gets more attention every year from the subsidy watchdogs in Brussels.
Meanwhile, though, TBG keeps sowing its seeds. Arnd Schwierholz, cofounder of Berlin-based Yoolia.com, got 2.5 million for his Internet-shopping start-up just last week. “They’re absolutely brilliant for entrepreneurs,” says Schwierholz. It’s true–just ask any millionaire.
title: “Money For Nothing” ShowToc: true date: “2023-01-03” author: “Kathleen Allen”
But the state pays a price, too. Sky-high tax rates (up to 55 percent) make evasion a national pastime. By some estimates, “black” accounting adds up to almost 20 percent of GDP. Even government bean counters sympathize. “The black market is almost justified by our tax rates,” says Marc Trifin of the Finance Ministry. “I can’t say we accept it, but we certainly understand it.”
Worst hit are middle-income workers, who can’t afford to play by the rules or dodge them. “And this is certainly no Nordic socialist paradise,” says a Brussels resident. Analysts say years of economic mismanagement are to blame: successive governments ran up weighty deficits in an attempt to meet rising social-security bills. Most tax revenues go to paying off debts rather than to public-welfare initiatives.
Belgium–like many other European states–is now striving to ease the burden. New fiscal reforms should eventually cut taxes to a top bracket of 50 percent. Still vertiginous for most of us, but maybe just low enough to get Belgians to pay up.
title: “Money For Nothing” ShowToc: true date: “2023-01-18” author: “Kevin Brown”
With so many high-profile bankruptcies like Kmart, USAir, WorldCom, Enron and Global Crossing the past few years, the spectacle of naive investors’ getting fleeced by buying the common stock of bankrupt companies has become distressingly commonplace.
On the surface, buying the stock of a company in Chapter 11 seems so logical. Take Enron, for example. The stock used to trade at 80 bucks a share. How can you go wrong buying it at its recent price of six cents? Easy. The stock of a bankrupt company can get cheaper. And it generally does, down to zero when the bankruptcy case ends, a new company emerges from the rubble and the old stock is canceled. “About 99 percent of the stocks of companies in Chapter 11 end up being worthless,” says George Putnam III, editor of The Turnaround Letter, and buying such stocks is “a snare and a delusion.”
Susan Wyderko, director of the SEC’s office of investor education, said that losing money in bankruptcy stocks ranked No. 8 on the commission’s complaint list last year, the first time it had cracked the top 10. The SEC has a lengthy (and excellent) warning about bankruptcy stocks on its Web site www.sec.gov/investor/pubs/bankrupt.htm)."In most instances, the company’s plan of re-organization will cancel the existing equity shares,” the SEC says.
To understand why, it helps to have a brief refresher in bankruptcy law. When a company goes Chapter 11, various creditors have claims on the company’s assets. Stockholders come last in line, after everyone else–including lenders and preferred stockholders–has been paid. Because the company’s assets are worth less than its obligations–that’s why it went into bankruptcy, remember?–there’s generally nothing left for the common stockholders.
The only significant exceptions are companies like A.H. Robins or Texaco, which went Chapter 11 to protect themselves from lawsuits, not because they were in financial distress. A handful of asbestos firms currently in Chapter 11 because of their legal liabilities might–repeat, might–emerge with significant value for their stock, especially if Congress passes legislation limiting asbestos liability.
But, you say, I’ve read about bankruptcy investors’ making fortunes. Yes, you have–but they do so by buying the company’s debt, not its common stock. The bankruptcy investors–known in the trade as vultures–make out when they exchange their debt for stock in the postbankruptcy company at what turns out to be a cheap price.
What’s confusing is that the new company generally has the same name as the company that went under. Global Crossing and Kmart, for instance, are now trading nicely. But they’re not the same companies that went Chapter 11. Those companies are defunct, and their stock was canceled.
You’ve got to pay attention to what corporations tell you. Take a situation with which I’m painfully familiar, RCN Corp., an up-start telecom company that announced last month that it would file for Chapter 11 with “extremely significant, if not complete, dilution” of its common stock. Translated into English, this means the stock will become worthless, or virtually worthless. RCN bonds trade well below face value. Its $2 billion of preferred stock, which, like the bonds, ranks ahead of the common stock, is underwater, too. One holder, Microsoft cofounder Paul Allen, recently sold about $650 million of it for a mere $2 million. Yet the common stock not only trades, but rallies. I invested in RCN’s predecessor company 10 years ago, and waited until the bankruptcy announcement to sell. I couldn’t believe someone paid me 41 cents a share, roughly 41 cents more than the stock is worth. (Don’t cry for me. I’m way ahead on my total investment because the other parts of RCN’s predecessor have done well.)
The only reason to buy stock of a company in Chapter 11 is a cynical one: you think you can dump fundamentally worthless shares onto someone else for more than you paid for them. We started with Pope; let’s end with Shakespeare: when it comes to buying stock of companies in Chapter 11, what fools these mortals be.
