Obama's economic stimulus plan

Nov 22 - U.S President-elect Barack Obama says his two year stimulus plan will create millions of jobs.



This was the first time that the U.S President- elect went into such detail about the status of the troubled U.S economy. His proposals for a two year plan indicate the large effort involved in reviving the ailing economy.

He said the plan would create around 2.5 million more jobs by 2010. The Labor Department announced that unemployment has reached its highest levels in 16 years.

- Reuters

Boom turns to gloom as crisis hits Dubai

DUBAI (Reuters) - The seaside emirate of Dubai shifted into crisis mode this week as its breakneck building boom stalled, its lending bonanza evaporated and the government pondered wider steps to rescue banks.

Dubai -- self-styled bling capital of the Middle East, nightclub hotspot for the teetotalling Gulf and home to the world's tallest building and biggest mall -- has gone pear-shaped.

"It's gotten pretty ugly out there," analysts at Nomura Investment Banking wrote in a note this week, describing Dubai's property market as "a full-scale frenzy in which speculation went largely unchecked until it was very late."

The result may be a new business model for the emirate, one based less on debt and speculation.

Dubai's response is now being hammered out by a committee of business and government leaders charged with steering the emirate through the crisis and perhaps throwing its high-debt business model out the window.

Big developers have started firing staff and paring projects, banks like Emirates NBD ENBD.DU have blocked consumer credit to employees of companies at risk, and at least one major mortgage company has stopped lending altogether.

"Lenders blinded by rising oil prices and borrowers spellbound by easy returns have helped build a mountain of private sector debt in parts of the region that has generated an illusion of excess and abundance," Nomura said.

Now, investors fear that individuals and corporations alike will have trouble paying back Dubai's non-bank foreign currency debt estimated at just under $70 billion, according to estimates by ratings agency Fitch.

Shares in the region have lost around $1 trillion since the beginning of the year as investors fled. The UAE finance ministry said last month it would inject 70 billion dirhams ($19 billion) into the banking system, and is already looking at doing more to keep interbank liquidity flowing.

Many had hoped that the six countries of the Gulf Cooperation Council (GCC) would escape the crisis due to their massive current account surpluses from energy exports.

"Dubai is the most vulnerable, as it has little oil and has been booming on the oil surpluses from the GCC, Iran and Russia," said analysts at Citibank this week.

DUBAI INC.

Dubai Inc. -- the name applied to the emirate because it is run more as a business than a state -- now faces a major overhaul and has taken on teams of consultants to advise on how it might reshape itself in an era of weaker credit, rising competition, falling speculation and narrower profit margins.

With barely any oil to call its own within the loose UAE confederation, Dubai made its bid for fame by housing banks, retail, media, shipping and logistics enterprises and by billing itself as a safe haven in a volatile region for investors.

Post-crisis, banks and property firms are likely to merge, developers retrench, and the wild culture of speculation grow tame.

"The solution is a comprehensive effort to consolidate the myriad of companies that make up Dubai Inc.," Citibank said.

In addition, some suggest that the monetary regimes in the Gulf -- all, except Kuwait, which peg their currencies to the dollar -- may need to restructure as floating regimes instead, a move likely to spur decades-old goals of monetary union.

Few anticipate default given the widespread view that Dubai is too big to fail and the implicit support provided by its neighbor Abu Dhabi -- home to the largest sovereign wealth fund in the world, ADIA.

"We believe Dubai will pull through with some help," Citibank said.

But with the cost of credit for the Gulf's top 22 financial firms rising from 30 basis points over LIBOR in early 2007 to around 200 now, many expect Dubai's spree to halt, plans to be swept from the drawing board, and existing projects to struggle.

The result, in the end, may be the sustainable growth model that Dubai has sought all along.

Fraud detected more often at bankrupt companies

NEW YORK (Reuters) - Bankrupt companies are three times more likely to have been cited for fraud by U.S. regulators, according to a study released on Monday.

The study from Deloitte Financial Advisory Services LLP DLTE.UL also showed that fraud incidents were much more likely to land a company in bankruptcy court.

"Many of the companies that commit financial statement fraud are dealing with adverse performance issues and committing fraud to cover those up," said Toby Bishop, director of the Deloitte Forensic Center. "A significant proportion of them -- 20 percent -- will end up filing for Chapter 11 (bankruptcy protection)."

Fraud-linked bankruptcies like Enron, WorldCom and Adelphia have kept U.S. courts busy for years, and the study revealed that companies that are cited for financial-statement fraud were twice as likely to file for bankruptcy as those that were not cited.

The study tracked companies with annual revenues of more than $100 million, comparing 519 bankrupt companies to a group of 2,919 non-bankrupt companies from about 2000 through 2007.

About 9 percent of the bankrupt companies were the subject of enforcement actions reported by the U.S. Securities and Exchange Commission, compared with 3 percent of the nonbankrupt companies.

"There are two distinct groups of people who are engaging in these frauds -- people who are attempting to prop up the company in the hopes that the bank gives them more liquidity ... and those that are doing it more for their own personal benefit," said Sheila Smith, head of reorganization services at Deloitte.

Smith said it was not clear whether employees at bankrupt companies are more likely to commit fraud or whether the microscope of bankruptcy makes it easier for regulators to detect it.

The most common type of fraud detected at both bankrupt and nonbankrupt companies was improper revenue recognition.

"Generally revenue is monitored closely by analysts and investors," Bishop said, "and achieving expectations in that area is a high priority to management."

Improper disclosures and manipulation of expenses also showed up frequently in both groups.

In the study, consumer companies received the most SEC enforcement actions, at about 30 percent, followed by telecommunications, media and technology at about 27 percent.

Of those companies that received enforcement actions, about 50 percent of the consumer group filed for Chapter 11 bankruptcy protection, compared with about 30 percent of those in the telecommunications, media and technology sector.

HISTORY OF FRAUD

A long history of fraud at a company also had a strong link with bankruptcy, according to the study. Bankrupt companies were twice as likely as nonbankrupt ones to have more than 10 fraud schemes in their corporate history.

That was particularly true for bigger companies. Bankrupt companies with annual revenues of more than $10 billion had about 10.8 fraud schemes on average, while those with annual revenues between $100 million and $10 billion averaged 4.3, the study showed.

In fact, WorldCom and Enron, where top company executives were convicted of fraud, are among the five largest U.S. bankruptcy cases ever filed in the United States, according to tracking firm Bankruptcydata.com. WorldCom held more than $100 billion in assets when it filed for bankruptcy in 2002, while Enron held more than $65 billion in assets at the time of its filing in 2001.

While it may be tempting for companies to cut back on support staff during tough economic times, Bishop said the link between fraud and bankruptcy showed that they could risk their whole business by loosening their focus on fraud detection efforts.

"This is the time when those efforts are more important than ever because of the heightened risk of people giving into the economic pressures and committing fraud," Bishop said. "Companies have to devote extra effort to that risk."

India business, politics confront global slowdown

NEW DELHI (Reuters) - India has seen 9 percent-plus economic growth for the past three years and many thought it would remain relatively immune to the global financial crisis and the subsequent slowdown.

Earlier self-assurance that India's domestic-driven economy would ride out a storm in global financial markets has dwindled as foreign investors rushed to pull out their money, credit markets ground to a halt and a business boom ran out of steam.

The stock market has tumbled by more than half this year, the rupee is at record lows and all the signs now point to a sharper slowdown than most were anticipating.

Highlighting the speed at which things have changed, Citigroup has twice cut its growth forecasts for India in the space of a month. It now sees growth in 2008/09 at 6.8 percent even with aggressive interest rates cuts.

"Unfortunately, over the past few weeks, incremental data both on the domestic and global front has been worse than anticipated. At this juncture, data points to a marked slowdown in consumption and investment," the bank's analysts said

Corporate expansion plans, capital raising and partial privatizations by the government have all had to go on hold as investors, foreign and domestic, have run scared before the storm which has ripped through financial markets worldwide.

Reuters is holding its third annual India Investment Summit on November 24-26 to examine what the slowdown means for outsourcing, mergers and acquisitions, and for national elections due by May of next year.

Prime Minister Manmohan Singh said on Friday the government would spare no policy tool to deal with the crisis, be it fiscal, monetary, exchange rate or public investment, to give industry confidence.

"All will be deployed to ensure an environment conducive to the growth of enterprise and encouragement of the spirit of adventure and enterprise," Singh said.

Politicians too face a tough year, with national elections due in early 2009 after a difficult 12 months, first of soaring inflation and then of global economic turmoil.

As part of the summit, opposition politician Arun Shourie has already told Reuters India needs to restore confidence by helping struggling industries, boosting infrastructure spending and dramatically improving the country's governance.

Shourie, privatization minister in the previous Bharatiya Janata Party-led government, said his party would not be as slow as the present administration to tackle the crisis.

Vedika Bhandarkar, head of investment banking at JP Morgan (JPM.N: Quote, Profile, Research, Stock Buzz) in India, and Manisha Girotra, her counterpart at UBS (UBSN.VX: Quote, Profile, Research, Stock Buzz), will give their views of the outlook for the country's banking industry as M&A activity turns from outbound to inbound, while a view on the prospects for private equity will come from Blackstone country head Akhil Gupta.

Genpact (G.N: Quote, Profile, Research, Stock Buzz) chief executive Pramod Bhasin and senior executives from IBM India (IBM.N: Quote, Profile, Research, Stock Buzz), Wipro (WIPR.BO: Quote, Profile, Research, Stock Buzz) and Infosys BPO, a unit of Infosys Technologies (INFY.BO: Quote, Profile, Research, Stock Buzz), will give the views of the software services and back-office industries as their customers confront the global slowdown.

U.S. bails out Citi with $20 billion capital, guarantees

NEW YORK (Reuters) - The U.S. government has bailed out Citigroup Inc, agreeing to shoulder most of the potential losses on $306 billion of high-risk assets and inject $20 billion of new capital in its biggest move yet to rescue a bank.

The action marks the latest government effort to contain a widening financial meltdown that has caused the disappearance or bankruptcies of companies including Bear Stearns Cos, Lehman Brothers Holdings Inc and Washington Mutual Inc.

Shares of Citi surged 55 percent to $5.83 in electronic trading before the opening bell in New York. The price of insuring $10 million of Citi bonds through credit-default swaps fell by about half to $257,000 per year.

"Clearly, this will stabilize the (banks) group near term, and the stocks this morning should reflect it," Oppenheimer & Co analyst Meredith Whitney said. "We are still cautious on the potential future dilution from further prospective capital raises for the group as well as continued higher losses related to credit and asset deflation."

Whitney, an early critic of the bank, rates the shares as "underperform." Citigroup's stock is still down from $8.90 a week ago and 87 percent this year.

SECOND EFFORT

The government's $20 billion of new capital comes on top of $25 billion it had put into the bank, and it will receive preferred shares with an 8 percent dividend in return.

Citigroup received the latest infusion after its shares plunged 60 percent last week to $3.77, amid worry it lacked enough capital to survive. The bank estimated $40 billion of capital benefits, partially from the government guarantee.

In return for the bailout, Citigroup's dividend will be effectively wiped out. The bank cannot pay out more than 1 cent per share per quarter over the next three years without government consent. The quarterly dividend is now 16 cents.

"It looks enormous in size and scope," said Tony Morriss, senior currency strategist at ANZ Bank in Sydney. "Does this mean support for other financial institutions will be this big? Does this mean there will be more problems around calculation of so-called toxic assets?"

Citigroup has the farthest international reach of any U.S. bank, with operations in more than 100 countries. The bank was widely perceived to be too big to be allowed to fail, because any collapse could cause financial havoc around the globe.

"To stabilize the equity, we had to put behind us the issue of Citigroup's ability to withstand whatever would come," Chief Financial Officer Gary Crittenden said in an interview.

The New York-based bank will try to modify troubled mortgages in the $306 billion portfolio as the government tries to keep homeowners out of foreclosure.

Chief Executive Vikram Pandit and other top management will keep their jobs, but the government will have the final say on executive pay. More details on compensation may come next week, government officials said.

Not all investors were pleased. "You're seeing an inept management team being rewarded by the U.S. government," said William Smith, chief executive of Smith Asset Management in New York, which owns Citigroup stock.

SPREADING THE EXPOSURE

If it works, the package may become a template for other U.S. banks expected to face growing losses as the economy sinks into recession. Credit losses, once concentrated in mortgages, are already bleeding into other areas such as credit cards and commercial real estate.

The rescue further magnifies the U.S. government's burden, following bailouts of American International Group Inc, Bear, Fannie Mae and Freddie Mac, and the injection of hundreds of billions of dollars into banks and other financial institutions.

Well over $1 trillion of taxpayer money is at risk, and the Big Three automakers in Detroit are seeking billions more to avert bankruptcy.

The administration of President-elect Barack Obama may also propose a $500 billion to $700 billion economic stimulus.

Citigroup agreed to absorb the first $29 billion of losses on the $306 billion portfolio, plus 10 percent of additional losses, for a maximum total exposure of $56.7 billion.

The Treasury Department could end up absorbing $5 billion of losses, the Federal Deposit Insurance Corp $10 billion, and the Federal Reserve the rest.

The Treasury Department will get $24 billion of preferred shares and the FDIC $3 billion. Of the combined amount, $7 billion constitutes a fee for the government guarantees. The government will also receive warrants to buy $2.7 billion of common stock, comprising about 254 million shares at $10.61 each.

Citigroup estimated the injection will give it a Tier-1 capital ratio of 14.8 percent, more than twice what the government requires. The bank said it will also get increased access to the Fed's discount window, adding liquidity.

The Fed, the Treasury Department and the FDIC called the actions "necessary to strengthen the financial system and protect U.S. taxpayers and the U.S. economy."

The government announced the package less than a week after Pandit set plans to reduce Citigroup's workforce to 300,000 by early next year from 375,000 at the end of 2007.

HIT HARD

Earlier this month, U.S. Treasury Secretary Henry Paulson said the $700 billion industry rescue package would instead be used as a means to provide direct capital injections to banks.

That decision hit Citigroup hard, and the bank's problems were compounded by the tens of billions of dollars of assets that it decided to buy back or move onto its balance sheet.

Citigroup's market value on Friday was just $20.5 billion, down from more than $270 billion two years ago -- and even below the $25 billion initial capital injection.

In Europe, Citi's shares soared on the news of the rescue. In Frankfurt, the bank's shares were up 41.89 percent at 4.2 euros at 0819 GMT.

FACTBOX: Five facts about Citigroup

NEW YORK (Reuters) - Citigroup Inc is looking at putting risky assets in a government-supported "bad bank" -- a step to reassure investors that the rest of its assets were safe, reports said on Sunday.

Following are five facts about Citigroup, whose shares have plummeted 87 percent so far this year.

* City Bank of New York opened for business in New York City on June 16, 1812 with $2 million in capital. Today, Citigroup is New York City's second largest private employer.

* Citicorp merged with financier Sanford Weill's Travelers Group -- itself a combination of insurer Travelers, brokerages Salomon Brothers and Smith Barney and financial planner Primerica -- in 1998.

* Citigroup has 200 million customers in more than 100 countries across six continents. It is the world's largest provider of credit cards.

* Citigroup was the world's largest bank by market value as recently as 2007, when it was worth more than $250 billion. At Friday's close it was worth just $20.5 billion, making it smaller than each of Canada's top three banks.

* Citigroup had been the top U.S. bank by assets until it was overtaken by JPMorgan Chase & Co in October. Citigroup ended September with $2.05 trillion in assets, compared with $2.25 trillion at JPMorgan.

Zimbabwe may soon collapse, say Annan, Carter

JOHANNESBURG (Reuters) - Zimbabwe could soon collapse due to a political and economic crisis, South Africa's ANC leader Jacob Zuma said on Monday, setting out the opinion of prominent figures including former U.N. Secretary-General Kofi Annan.

"They believe the situation is very bad. They believe things could collapse in a few months time in Zimbabwe," Zuma told reporters after meeting Annan, former U.S. President Jimmy Carter and other prominent figures.

Annan, Carter and human rights champion Graca Machel, who is Nelson Mandela's wife, are part of a group of prominent figures and former statesmen called The Elders. They were barred by Zimbabwe from visiting to assess a humanitarian crisis there this weekend.

A cholera outbreak that has killed at least 294 people has seen hundreds of Zimbabweans infected with the disease streaming across the South African border to seek treatment, South African media reported on Monday.

The power struggle between President Robert Mugabe and MDC leader Morgan Tsvangirai has overshadowed daily hardships including food and fuel shortages and hyperinflation that have driven millions of Zimbabweans out of the country and strained regional economies.

Mugabe's ruling ZANU-PF, the Movement for Democratic Change (MDC) and a smaller MDC faction will meet former South African President Thabo Mbeki on Tuesday to seek a breakthrough in stalled power-sharing talks, South African President Kgalema Motlanthe said.

"The agreement is they will meet as of tomorrow and the facilitation team is working on that basis," Motlanthe told reporters after meeting Annan and Carter.

ANC leader Zuma said it was clear that Zimbabwe's crisis had deteriorated to such an extent that there was an urgent need for action.

"The situation has gone (beyond) where we could say 'wait and see'," he said, adding the ANC will be sending a delegation to Zimbabwe to assess the situation in the country.

"We are pleading for the leadership (of the ruling party and opposition) for the sake of the people to find a solution that would help them move forward," Zuma said.

Doubts have grown over Zimbabwe's Sept. 15 power-sharing agreement and Mugabe is trying to push through a constitutional amendment allowing him to name a cabinet alone, which could lead to the unravelling of the deal with the opposition.

Tsvangirai has refused to enter the government, accusing Mugabe of trying to grab the powerful ministries. The main obstacle in talks is the issue of who runs the home affairs ministry, which oversees the police.