Archive for November, 2010

Goldman on the Irish Bailout…European Contagion

Monday, November 22nd, 2010

The Irish bailout being unveiled this week will determine the performance of both the Euro and the global equity markets.  Irish and Portuguese bond spreads had been widening over the past four weeks, since Ireland again became the focus of bearish investors.  Sources claim that the current bailout will be less than 100 billion euros, and will cover the entire country’s budget needs for the next three years.  Ireland’s current budget deficit is about 19 billion euros/year. The problem is that the Irish banking system may need more help than analysts expect.  The system has more than half a trillion in assets.  According to Reuters, the hole in the commercial real estate sector is greater than 25 billion Euros alone.  This does not include potential residential losses.

To make matters worse, a Irish debt resolution could also simply shift bearish speculation to Portugal according to Citigroup and Nomura.  According to Bloomberg, “Portugal’s bonds currently yield 6.88%, compared to 8.26% for Ireland and 11.62 % for Greece.” Growth in Portugal may slow to 0.2% in 2011, which could make the deficit worse and increase worries about the country’s sovereign debt.

Zero Hedge recently provided Goldman’s perspective on the Irish bailout: “For what it’s worth, here is Goldman’s take on the Irish bailout. Since it was Goldman’s endless currency swaps that allowed Europe to lie about their deficits and true debt levels, this should be interesting…

From Francesco Garzarelli

Earlier tonight, Ireland applied for conditional funding assistance and will therefore be the first Eurozone sovereign accessing the EU-IMF support framework instituted in May. The latest European Economics Analyst provides background. There are still several uncertainties surrounding the deal, including the government’s political support (a by-election is due this Thursday), and negotiations on the banks. The yield spread between 5-yr Irish government bonds and their German counterparts has fallen by around 100bp from the 600bp highs reached on 11 November. At this point, we see scope only for a further 50bp tightening. That said, we think that this represents an important step towards a resolution of EMU sovereign woes, and a gradual relaxation of the risk premium that has built up in Italy and Spain, and in Eastern Europe.

Main Points

According to EU sources quoted by the newswires, the size of the package will be in the region of EUR 80-90bn. But this has still to be finalized, including the implications, if any for the Irish banks’ debt.  The amount is broadly in line with our estimates, and can easily be covered. Consider that the EFSM is endowed with EUR 60bn and EFSF has borrowing capacity of EUR 428bn (the portion guaranteed by Germany and France amounts to EUR 220bn). Additional IMF funding is available for up to 50% of the total amount drawn from the EFSM/EFSF with a ceiling of EUR 250bn. Both the UK and Sweden have announced they stand ready to provide bi-lateral loans.
Discussions on the cost of funds are also underway. We expect the EFSF (AAA-rated) to borrow in the region of 2.5% at the 5-yr maturity.  Assuming the terms are in line to those applied to Greece (which should represent a ceiling, given the different credit position of the two countries), the funding cost to Ireland would be along these lines:

  • EFSM/EFSF: Up to 3-yr maturity, Euribor or fixed swap + 300bp; Above 3-yr, Euribor or fixed swap +400bp; 50bp handling fee; (3-mth Euribor is currently 97bp)
  • IMF: Up to 3-yr maturity, SDR rate + 200bp; Above 3-yr, SDR rate + 300bp; Commitment fee, 50bp (est.) + 50bp service charge; (the Euro SDR rate is linked to 3-mth Euripo and is currently around 26bp)
    Using these figures and under a no IMF funding hypothesis, the savings for Ireland relative to the secondary market rates as of last Friday’s close would be in the region of 100bp (notice that the ECB has been intervening in this market, and that this is not indicative of primary access costs).
  • Ireland April 2013 yields 6.30% (bid); corresponding Eurozone funding 2.00%+300bp=5.00%
  • Ireland April 2016 yields 7.40% (mid), corresponding Eurozone funding  2.40%+400bp=6.40%

These, we stress, should be taken as ceilings. A ballpark of 60-30 from the EFSM/EFSF and IMF would result in funding cost closer to 3.5% on a 3-yr horizon.

Broader Market Implications

As discussed in our notes over the past fortnight, and in our latest Fixed Income Monthly, EMU Spreads: Navigating the Issues, we are of the view that the activation of external help should not lead to an escalation of systemic risk as seen in the aftermath of the Greek multi-lateral ‘bail-out’. A pre-agreed institutional framework is now in place, and the ‘stress tests’ have provided information on the distribution of risks across the Euro-zone banking sector.

Other than the evolution of the Irish discussions (size of the package and terms), the near term focus will also remain the Iberian peninsula. A workers strike in Portugal this Wednesday will re-kindle the debate on the much needed structural reforms. Spain unveiled a list of these last Friday, but investors remain uncomfortable about the contingent liabilities stemming from the non-listed cooperative banks.

Our opinion is that Portugal remains a possible candidate for external help, should market pressures remain high. But its systemic relevance is much smaller than that of Ireland’s or Greece’s (the largest foreign creditor is Spain). We remain of the view that Spain is in a different debt sustainability position, and the depth of its domestic market should allow it to withstand market pressures.

We continue to recommend holding 30-yr Greek paper, and would look for opportunities to re-establish long positions in intermediate maturity Italian and Spanish government bonds relative to the ‘core’ countries.

Finally, it is worth recalling that the EFSF will not pre-fund, and its funding instruments will have broadly the same profile as the related loans to Ireland. Its issuance program could lead to a marginal cheapening of bonds issued by supra-national institutions such as the European Investment Bank, the German-based KfW and the French CADES. Note, however, that these institutions have borrowing programs of EUR 60-70bn per annum, while the corresponding annual EFSF issuance would be likely quarter of that amount.”

M2 Reaches $8.8 Trillion in the U.S., a Record!

Friday, November 19th, 2010

Monetary stimulus has driven M2 to $8.8 trillion for the first time in history, an inflationary signal….In response, Silver is currently at $26.80 per ounce, down from the peak of $29.00.  Most don’t realize that the commodity was trading at only $$18 in August; a poor man’s play on inflation. Futures are also moving sharply to the downside, in anticipation of Bernanke’s speech in Frankfurt today, defending monetary easing.

According to Zero Hedge, seasonally adjusted M2 has just surpassed $8.8 trillion for the first time, hitting a record $8,802.2 billion, a jump of $16 billion on a SA basis. This is the 17th out of 18 consecutive weeks that M2 has increased. On a non-seasonally adjusted basis, M2 also jumped to a record high, hitting $8,765 billion, a jump of $56.9 billion W/W, and an increase if just over $100 billion in the past two weeks alone.

While the jump itself is not surprising as it comes in anticipation, and realization, of QE2 (we would love to have the semantic and highly theoretical debate of whether or not the Fed “prints money” but will focus on the practical for now), the last week’s components of the M2 change were odd to say the least. In the past week we saw both the biggest drop in commercial banks savings deposits in 2010 ($61.3 billion) and the biggest jump in demand deposits ($57.6 billion).

Whether or not this is due to the recently adopted unlimited guarantee by the FDIC on demand deposits is unclear, however as the chart below shows this is certainly a very odd move, and is indicative that there has been a notable readjustment in the bank deposit base. The surge in demand deposits brings the total to $536.2 billion, an increase of $94 billion from the beginning of the year. And despits the drop, savings deposits are also markedly higher compared to the start of the year: at $4,336.7 billion, $337.8 billion higher than at the end of 2009. Whether this is a pull driven transfer, as banks need to replenish their deposit basis is also unknown. We will keep a close eye on this, as such a major reallocation of bank deposit liquidity has not occured in over a year.

In other news, according to Zero Hedge, “Futures are currently experiencing a stunning moment of weakness, something not seen unless the entire Liberty 33 trading crew is at Scores. The culprit according to the three sober traders we could track down is the recently speech to be delivered by the Bernank tomorrow in Frankfurt. In it, not too surprisingly, Bernanke considers revealing details of his most recent DNA sequencing result to prove once and for all, that he is not the antichrist. More relevantly, what Bernanke has done to defend his reputation is to claim that QE will work, and that everything is really mercantilist China’s fault, and the Fed is just woefully misunderstood. In other words nothing that has not been said before many times, just another overture which will likely precipitate a prompt round of Chinese retaliation in the form of accelerating trade wars, to be followed by further commodity price inflation in the US, leading to another ramp in Chinese inflation, etc. As Albert Edwards summarized, the global game of chicken will continue until either China’s or America’s population decides it has had enough of being treated like a experimental gerbil in the endgame of failed economic chess.

Some choice quotes from Bernanke’s speech:

On how the US’s slower growth rate is threatening America compared to the rest of the world:

Since the second quarter of this year, GDP growth has moderated to around 2 percent at an annual rate, less than the Federal Reserve’s estimates of U.S. potential growth and insufficient to meaningfully reduce unemployment.  The U.S. unemployment rate (the solid black line) has stagnated for about eighteen months near 10 percent of the labor force, up from about 5 percent before the crisis; the increase of 5 percentage points in the U.S. unemployment rate is roughly double that seen in the euro area, the United Kingdom, Japan, or Canada.

Of particular concern is the substantial increase in the share of unemployed workers who have been without work for six months or more (the dashed red line in figure 4). Long-term unemployment not only imposes extreme hardship on jobless people and their families, but, by eroding these workers’ skills and weakening their attachment to the labor force, it may also convert what might otherwise be temporary cyclical unemployment into much more intractable long-term structural unemployment. In addition, persistently high unemployment, through its adverse effects on household income and confidence, could threaten the strength and sustainability of the recovery.

On the USD exchange rate:

The foreign exchange value of the dollar has fluctuated considerably during the course of the crisis, driven by a range of factors. A significant portion of these fluctuations has reflected changes in investor risk aversion, with the dollar tending to appreciate when risk aversion is high. In particular, much of the decline over the summer in the foreign exchange value of the dollar reflected an unwinding of the increase in the dollar’s value in the spring associated with the European sovereign debt crisis. The dollar’s role as a safe haven during periods of market stress stems in no small part from the underlying strength and stability that the U.S. economy has exhibited over the years.

On Bernanke’s view that despite hopes for decoupling, the US is still the most critical driving force and should be allowed to get whatever it desires. If that means an export-led boost (and a low USD) so be it.

Fully aware of the important role that the dollar plays in the international monetary and financial system, the Committee believes that the best way to continue to deliver the strong economic fundamentals that underpin the value of the dollar, as well as to support the global recovery, is through policies that lead to a resumption of robust growth in a context of price stability in the United States.

Bernanke’s direct attack on China:

Given these advantages of a system of market-determined exchange rates, why have officials in many emerging markets leaned against appreciation of their currencies toward levels more consistent with market fundamentals? The principal answer is that currency undervaluation on the part of some countries has been part of a long-term export-led strategy for growth and development. This strategy, which allows a country’s producers to operate at a greater scale and to produce a more diverse set of products than domestic demand alone might sustain, has been viewed as promoting economic growth and, more broadly, as making an important contribution to the development of a number of countries. However, increasingly over time, the strategy of currency undervaluation has demonstrated important drawbacks, both for the world system and for the countries using that strategy.

On Bernanke’s virtuoso performance on the the world’s smallest violin:

The current system leads to uneven burdens of adjustment among countries, with those countries that allow substantial flexibility in their exchange rates bearing the greatest burden (for example, in having to make potentially large and rapid adjustments in the scale of export-oriented industries) and those that resist appreciation bearing the least.

And a direct confirmation of Edwards’ assumption that by allowing commodity price super inflation, Bernanke is in essence forcing China to revalue as the chairman knows that while the US may be expericing surging food prices, China is getting that too, and then some.

Third, countries that maintain undervalued currencies may themselves face important costs at the national level, including a reduced ability to use independent monetary policies to stabilize their economies and the risks associated with excessive or volatile capital inflows. The latter can be managed to some extent with a variety of tools, including various forms of capital controls, but such approaches can be difficult to implement or lead to microeconomic distortions. The high levels of reserves associated with currency undervaluation may also imply significant fiscal costs if the liabilities issued to sterilize reserves bear interest rates that exceed those on the reserve assets themselves. Perhaps most important, the ultimate purpose of economic growth is to deliver higher living standards at home; thus, eventually, the benefits of shifting productive resources to satisfying domestic needs must outweigh the development benefits of continued reliance on export-led growth.

Bernanke’s conclusion for how to spank China:

it would be desirable for the global community, over time, to devise an international monetary system that more consistently aligns the interests of individual countries with the interests of the global economy as a whole. In particular, such a system would provide more effective checks on the tendency for countries to run large and persistent external imbalances, whether surpluses or deficits. Changes to accomplish these goals will take considerable time, effort, and coordination to implement. In the meantime, without such a system in place, the countries of the world must recognize their collective responsibility for bringing about the rebalancing required to preserve global economic stability and prosperity. I hope that policymakers in all countries can work together cooperatively to achieve a stronger, more sustainable, and more balanced global economy.

And by global economy, Bernanke of course means banker interests. Also, where he talks about other stuff, all Bernanke really means is that China should unpeg already goddamit, so that the $5 trillion in debt that has to be rolled in 2 years can start getting inflated already, cause we are cutting it close, and only China is staying in the way. Next up: China’s response. Might be time to stock up on Rare Earth Minerals again.”

Full Bernank speech.

Goldman Sachs Promotes Record # of Managing Directors!

Thursday, November 18th, 2010

Today, Goldman Sachs appointed 321 Managing Directors, all one level below Partner.  This number is sharply higher than the 272 in 2009 and 259 in 2008.  Yesterday, 110 MDs were appointed to Partner, a highly coveted role.  Twenty four percent of the MD promotions consisted of women, the highest percentage in Goldman’s history.  This is after the firm was sued in September by 3 former GS employees for discriminating against women in both pay and upward mobility.  Interestingly enough, 45% of the new partners were based in the Americas, while 26% were in Asia.  This pattern reflects the growth of the firm, now focusing on emerging markets.

According to Bloomberg, “Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, promoted a record number of employees to managing director, one level below the highest rank of partner.

The 321 appointments, up from 272 last year and 259 in 2008, were detailed in an internal memo obtained by Bloomberg News. The announcement came a day after the New York-based company selected 110 people to become partners, a designation that means they share in a special pool of compensation.

Goldman Sachs Chairman and Chief Executive Officer Lloyd Blankfein, 56, has presided over an expansion of the firm, with the total number of employees rising to 35,400 from about 24,000 when he took over in mid-2006. In promoting more employees this year, the company is rewarding people who stayed through the financial crisis, said Charles Peabody, an analyst at Portales Partners LLC.

“It’s a function of trying to regain loyalty after turbulent times,” said Peabody, who is based in New York and recommends investors buy Goldman Sachs stock.

Yesterday’s promotions include the largest group of women ever, making up 24 percent of the new class, said Lucas van Praag, a spokesman in New York. Women make up 19 percent of all managing directors, including the new class, he said. Van Praag said “over 10 percent” of this year’s new partners are women and declined to give a more specific figure.

Employee Lawsuit

Goldman Sachs was sued in September by three former employees who alleged that they faced discrimination in pay and fewer opportunities for promotion than men. Goldman Sachs has said the suit is without merit.

While half of the new managing directors are based in the Americas, 28 percent are in Europe, the Middle East and Africa and 22 percent are in Asia, van Praag said. He said the figures represent a marginal increase in the number outside the Americas.

About 45 percent of the new partners are based in the Americas, with 29 percent in Europe, the Middle East and Africa and 26 percent in Asia.

“That, I think, is reflective of where their growth is going to be,” Peabody said of the hires outside the Americas.

The following is a list of the new managing directors from the internal memo:

James B. Adams

Geoffrey P. Adamson

Yashar Aghababaie

Nicole Agnew

John F. Aiello

Ahmet Akarli

Ali A. Al-Ali

Jorge Alcover

Moazzam Ali

Paolo Aloe

Shawn M. Anderson

Gina M. Angelico

John J. Arege

Paula G. Arrojo

Richard J. Asbery

Scot M. Baldry

Gargi Banerjee

Amit Bansal

Thomas J. Barrett

Roger K. Bartlett

Renee Beaumont

Stephen E. Becker

Mick J. Beekhuizen

Stuart R. Bevan

Ron Bezoza

Nick Bhuta

Christopher Biasotti

David R. Binnion

James Black

Michael Bogdan

Charles P. Bouckaert

Marco Branca

Didier Breant

Kelly Reed Brennan

Craig T. Bricker

Nellie Bronner

Kimberley Burchett

Sara Burigo

James M. Busby

Elizabeth A. Byrnes

Alvaro Camara

Ramon Camina Mendizabal

Tavis C. Cannell

Michael J. Casabianca

Jacqueline M. Cassidy

Leor Ceder

Gaurang Chadha

Brian D. Chadwick

Eli W. Chamberlain

Gilbert Chan

Kevin M. Chan

Isaac J. Chang

Devin N. Chanmugam

Francis S. Chlapowski

Dongsuk Choi

Stephen L. Christian

Peter I. Chu

Vania Chu

Susan M. Ciccarone

Emmanuel D. Clair

Bracha Cohen

Darren W. Cohen

Antony Courtney

Christopher J. Creed

Timothy J. Crowhurst

Helen A. Crowley

Elie M. Cukierman

Matthew J. Curtis

Jason S. Cuttler

Sterling D. Daines

Kevin Daly

Rajashree Datta

Samantha Davidson

Adam E. Davis

Sally Pope Davis

Raymond E. de Castro

Gilles M. Dellaert

Wim Den Hartog

George J. Dennis

Sara V. Devereux

Diana R. Dieckman

Avi Dimor

Lisa A. Donnelly

Igor Donnio

Mark T. Drabkin

Tilo A. Dresig

Thomas K. Dunlap

Steven M. Durham

Michael S. DuVally

Masahiro Ehara

Grant M. Eldred

Manal I. Eldumiati

Charles W. Evans

Anne Fairchild

Craig R. Farber

John W. Fathers

Lev Finkelstein

Warren P. Finnerty

Elizabeth O. Fischer

John J. Flynn

Veronica Foo

Francesca Fornasari

Christian L. Fritsch

Andrew J. Fry

Charles M. Fuller

Ruth Gao

David M. Garofalo

Lisheng Geng*

Luke F. Gillam

Lisa M. Giuffra de Diaz

Matthew J. Glickman

Parameswaran Gopikrishnan

Luke G. Gordon

Pooja Grover (IBD)

Patricia R. Hall

Anna Hardwick

John L. Harrisingh

Peter M. Hartley

Taimur Hassan

Gerrit Heine

Caroline Heller

Richard I. Hempsell

Isabelle Hennebelle-Warner

Jeremy P. Herman

Matthias Hieber

Amanda Hindlian

Darren S. Hodges

Edward Y. Huang

Simon Hurst

Edward McKay Hyde

Nagisa Inoue

Marc Irizarry

Shintaro Isono

Benon Z. Janos

Ronald Jansen

Darren Jarvis

Mikhail Jirnov

Benjamin R. Johnson

Richard Jones (GIR)

Mariam Kamshad

Makiko Kawamura

Christina Kelerchian

Andre H. Kelleners

Sven H. Khatri

Sandip Khosla

David A. Killian

Melinda Kleehamer

Maxim B. Klimov

Adriano Koelle

Goohoon Kwon

Thymios Kyriakopoulos

Laurent-Olivier Labeis

David R. Land

Lambert M. Lau

Sandra G. Lawson

David H. Leach

Terence Leng

Deborah A. Lento

Gavin J. Leo-Rhynie

Leon Leung

Ke Li

Qunmei Li**

Xing Li*

Sabrina Y. Liak

Jason R. Lilien

Kirk L. Lindstrom

Amy M. Liu

Bernard C. Liu

Nelson Lo

Kyri Loupis

Yvonne Low

Joshua Lu

Yvonne Lung

John G. Macpherson

Premal Madhavji

Marcello Magaletti

Todd M. Malan

Uday Malhotra

Upacala Mapatuna

Kristerfor T. Mastronardi

Ikuo Matsuhashi

Francois Mauran

Brendan M. McCarthy

Patrick E. McCarthy

Michael J. McCreesh

Mathew R. McDermott

Charles M. McGarraugh

Sean B. Meeker

Christopher J. Millar

Vahagn Minasian

Matthew R. Mitchell

Ryan C. Mitchell (EQ)

Christine Miyagishima

Igor Modlin

Michael Moizant

Petra Monteiro

Heather L. Mulahasani

Eric Murciano

Colin D. Murphy

Paul M. Mutter

Balachandra L. Naidu

Arvind Narayanan

Mani Natarajan

Antti K. Niini

Tomoya Nishikawa

Daniel Nissenbaum

Kevin Ohn

Thomas A. Osmond

Diana Y. Pae

David C. Page

Elena Paitra

Chrisos Papavasiliou

James Park

Katherine J. Park

Kyung-Ah Park

Ian L. Parker

Karen M. Parry

Benjamin R. Payne

Thomas G. Pease

Andrew J. Pena

Stuart R. Pendell

Ricardo H. Penfold

Jerry Z. Peng

Andrew Philipp

Sasa Pilipovic

Giovanna Pomilio

Asahi M. Pompey

Ling C. Pong

Michael A. Pope

Raya Prabhu

Macario Prieto

Joshua Purvis

Xiao Qin

Philippe Quix

J Ram

Rajiv Ramachandran

Maximilliano Ramirez

Gary M. Rapp

Felicia J. Rector

Christopher C. Rollins

Colin J. Ryan

Maheshwar R. Saireddy

Ricardo F. Salgado

David Sancho

Ian P. Savage

Bennett J. Schachter

Bruce J. Schanzer

Martin L. Schmelkin

Laurie E. Schmidt

Alexander A. Schnieders

Joseph Schultz

Dirk Schumacher

Carsten Schwarting

Thomas Schweppe

Dmitri Sedov

Ram Seethepalli

Stacy D. Selig

Kunal Shah (FICC, EMEA)

Tejas A. Shah

Alasdair G. Share

Kevin C. Shea

William Q. Shelton

Jie Shen*

Jason E. Silvers

Ales Sladic

Howard D. Sloan

Michelle D. Smith

Stephanie P. Smith

Thomas J. Smith

Sangam Sogani

Robert A. Spencer

Thomas G. Stelmach

Thomas A. Stokes

Sinead M. Strain

Phillip B. Suh

Jamie Sutherland

Anton Sychev

Brian A. Tafaro

Hideaki Takada

Konnin Tam

Bong Loo Tan

Yasuko Taniguchi

Daniel W. Tapson

Richard M. Thomas (Finance)

Francis S. Todd

Christos Tomaras

Lale Topcuoglu

Thomas A. Tormey

Chi Keung Tse

Weidong Tu**

Reha Tutuncu

Mei Ling Tye

Allen Ukritnukun

Nicholas A. Valtz

Nicholas J. van den Arend

Emile F. Van Dijk

Dirk-Jan M. Vanderbroeck

Alexandra S. Vargas

Peter G. Vermette

Matthew P. Verrochi

Cynthia L. Walker

Sindy Wan

Freda Wang

Yi Wang**

Mitchell S. Weiss

Greg R. Wilson

Mark J. Wilson

Gudrun Wolff

Isaac W. Wong

David J. Woodhouse

Stuart J. Wrigley

Jerry Wu*

Jihong Xiang**

Ying Xu

Lan Xue

Yoshiyuki Yamamoto

C.T. Yip*

Eugene Yoon

Angel Young

Daniel M. Young

Raheel Zia

*Employee of Goldman Sachs Gao Hua Securities Company Limited

**Employee of Beijing Gao Hua Securities Limited”

Check out our intensive investment banking, private equity, and sales & trading courses! The discount code Merger34299 will be activated until April 15, 2011. Questions? Feel free to e-mail thomas.r[at] with your inquiries or call our corporate line.

Quantitative Easing II: A Video Tale of Mr. Ben Bernanke

Thursday, November 18th, 2010

Today, Ben Bernanke defended his second economic stimulus package, using monetary easing to lower interest rates and spur both spending and lending.  The first $2 trillion package apparently wasn’t enough, so now another avalanche of capital will flow into the United States economy and abroad.  When criticized by China and other East Asian economies now being flooded with excess capital flows, Bernanke claimed that both growth and trade are not balanced and that emerging market currency pegs were to blame.  Now begin the currency wars between the mature and emerging economies…can anyone actually win?  Bernanke claims that emerging market growth will be stimulated as the developed nations recover; therefore, a weaker U.S. currency could be better for everyone.  Only time, our inflation rate, and the price of gold will tell. (Paulson’s gold fund has certainly been on a tear…)

This video should provide some humor to the current situation.  The section on Mr. Dudley’s role at Goldman Sachs is pretty revealing…


According to Bloomberg, “Federal Reserve Chairman Ben Bernanke, took his defense of the U.S. central bank’s monetary stimulus abroad, saying it will aid the world economy, and implicitly criticized China for keeping its currency weak.

The best way to underpin the dollar and support the global recovery “is through policies that lead to a resumption of robust growth in a context of price stability in the United States,” Bernanke said in prepared remarks to a conference later today in Frankfurt. Countries that undervalue their currencies may eventually inhibit growth around the world and risk financial instability at home, he said.

The Fed chief is confronting criticism from officials in countries including China and Brazil who say the Nov. 3 decision to buy $600 billion in Treasury securities has weakened the dollar and contributed to flows of capital to emerging markets. The policy has also come under fire in the U.S., where critics including Republican members of Congress have said it risks fueling inflation and asset bubbles.

“Globally, both growth and trade are unbalanced,” Bernanke said, with economies growing at different rates. “Because a strong expansion in the emerging-market economies will ultimately depend on a recovery in the more advanced economies, this pattern of two-speed growth might very well be resolved in favor of slow growth for everyone if the recovery in the advanced economies falls short.”

Group of 20

While Bernanke didn’t identify China, he took aim at “large, systemically important countries with persistent current-account surpluses.” Bernanke’s comments come a week after leaders of the Group of 20 developed and emerging nations meeting in South Korea failed to agree on a remedy for trade and investment distortions. At the summit, President Obama attacked China’s policy of undervaluing its currency.

Bernanke said that the “sense of common purpose has waned” after officials around the world united to fight the financial crisis. “Tensions among nations over economic policies have emerged and intensified, potentially threatening our ability to find global solutions to global problems,” he said.

China has tied the yuan to the dollar to promote exports that helped produce the fastest gains in gross domestic product of any major economy. China, which surpassed Japan’s GDP to become world No. 2 in the second quarter, recorded 9.6 percent annual growth in the three months through September. It holds about $2.6 trillion in foreign reserves, the most in the world.

International Panel

The Fed released the text of Bernanke’s speech in Washington ahead of the address scheduled for at 11:15 a.m. Frankfurt time at a European Central Bank conference on monetary policy. He will then speak on a panel at 11:45 a.m. with ECB President Trichet, International Monetary Fund Managing Director Kahn and Brazil central bank President Meirelles.

In the panel discussion, Bernanke will say that “financial conditions eased notably in anticipation” of the Fed’s stimulus announcement, “suggesting that this policy will be effective in promoting recovery,” according to a text released by the Fed.

It’s Bernanke’s first trip abroad since the Federal Open Market Committee made the decision, dubbed QE2 by economists and investors, to implement a second round of so-called quantitative easing. Bernanke said the term is “inappropriate” because it usually refers to policies that change the quantity of bank reserves, “a channel which seems relatively weak, at least in the U.S. context.”

Global Call

In the speech, Bernanke called on policy makers around the world to “work together to achieve a mutually beneficial outcome — namely, a robust global economic expansion that is balanced, sustainable and less prone to crises.”

German Finance Minister Schaeuble said Nov. 5 he was “dumbfounded” at the Fed’s actions, which won’t aid growth and will instead contribute to imbalances by driving down the currency. U.S. monetary policy is creating “grave distortions” and causing “collateral effects” on faster-growing economies such as Brazil, Meirelles said in October.

Bernanke said that different economies “call for different policy settings.” In the U.S., inflation has slowed since the most recent recession began in December 2007, and “further disinflation could hinder the recovery,” he said.

“Insufficiently supportive policies in the advanced economies could undermine the recovery not only in those economies, but for the world as a whole,” he said.

Jobless Rate

America’s unemployment rate at 9.6 percent last month is currently “high and, given the slow pace of economic growth, likely to remain so for some time,” Bernanke said. He said that “we cannot rule out the possibility that unemployment might rise further in the near term, creating added risks for the recovery.”

The asset purchases will be used in a way that’s “measured and responsive to economic conditions,” Bernanke said. Fed officials are “unwaveringly committed to price stability” and don’t seek inflation higher than the level of “2 percent or a bit less” that most policy makers see as consistent with the Fed’s legislative mandate, he said.

Bernanke, 56, also appealed to human concerns to justify the Fed’s policy.

“On its current economic trajectory the United States runs the risk of seeing millions of workers unemployed or underemployed for many years,” he said. “As a society, we should find that outcome unacceptable.”

The former Princeton University economist devoted the majority of his speech to discussing global policy challenges and tensions.

China’s Criticism

China’s vice foreign minister, Mr. Tiankai, said Nov. 5 that “many countries are worried about the impact of the policy on their economies,” echoing concerns raised across Asia over stronger currencies and possible asset-price inflation.

Bernanke used one of nine charts to show how countries including China and Taiwan are intervening to prevent or slow appreciation in their currencies. Allowing stronger currencies would help result in “more balanced and sustainable global economic growth,” Bernanke said.

The comments echo views of Obama administration officials including Treasury Secretary Geithner, who said Oct. 6 that “it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange-rate systems.”

Depression Lesson

Bernanke, a scholar of the Great Depression, drew a comparison between the current period and events leading to the 1930s economic disaster. The U.S. and France maintained “persistently undervalued” exchange rates by preventing inflows of gold from feeding into money supplies, which created deflationary pressures in other countries and helped bring on the Depression, Bernanke said.

“Although the parallels are certainly far from perfect, and I am certainly not predicting a new Depression, some of the lessons from that grim period are applicable today,” Bernanke said. “In particular, for large, systemically important countries with persistent current-account surpluses, the pursuit of export-led growth cannot ultimately succeed if the implications of that strategy for global growth and stability are not taken into account.””

Yahoo! Jumps on Buyout Rumors from AOL, KKR, Silver Lake, Blackstone

Tuesday, November 9th, 2010

Two years after Microsoft tried to acquire Yahoo! for $33/share and the company lost half its market value, AOL and Silver Lake have separately lined up financial advisers to explore options for the company.  AOL is also exploring a scenario where Yahoo!’s Asian assets are spun off and the capital is returned to shareholders before the acquisition.  AOL has been extremely proactive in buying companies over the past two months, purchasing 5min Ltd., an Internet content provider and TechCrunch, a popular technology blog.

Bloomberg announced today that KKR is also interested in helping finance the transaction.  Silver Lake Partners and Blackstone are currently in buyout talks.  The sponsors are interested in Yahoo!’s 40% stake in Alibaba, a growing Chinese online business.  Yahoo! currently employs about 13,600 people and had revenues of about $1.6 billion last quarter. Shares in the company rose 9.5% on the rumors today, and the firm’s management team may have hired Goldman Sachs as a takeover defense advisor to ward off bids.

According to the WSJ, analysts say that a Yahoo!-AOL merger could create a strong competitor in the display ads market, which is estimated to be $20 billion this year.  This should be an interesting transaction, if it proceeds further, as Yahoo has a market capitalization of $21.85 billion and AOL has a market capitalization of $2.66 billion.  However, analysts value at between $15bn and $25bn, which means that Yahoo!’s 40% stake could be worth $10 billion. By selling those assets, Yahoo!’s market value would fall to about $11 billion, which would make the deal much more realistic.

On the other hand, Alexei Oreskovic and Sue Zeidler argue that the company will have hurdles even if it does get bought out.  Yahoo! made many desperate attempts to grow revenue this year, such as its attempts to purchase foursquare and Groupon.  According to one analyst, “making Yahoo! bigger or smaller will not accomplish anything.”  Yahoo! is the 2nd most popular search engine behind Google, but it has failed to find growth in page views or new business.  From a private equity investor’s point of view, Yahoo! may simply be attractive because of the steady cash flow it generates, if nothing else.

For more information, please visit