Thursday, January 29, 2009

Vive la Révolution!


Tonight we begin in France where huge crowds took to the streets to protest over the handling of the economic crisis:

Unions said 2.5m workers had rallied to demand action to protect wages and jobs. Police put the total at 1m.

President Nicolas Sarkozy said concerns over the crisis were legitimate and the government had to listen and act.

He will meet union and business leaders next month to discuss what programme of reforms to follow this year, he said.

Overall, the government estimated that a quarter of the country's public sector workers had joined the action, which was called by eight major French unions. The unions put the figure higher.

A spokesman for the CGT union told AFP that 2.5m people across the country had taken part in the day's protests. French police put the number at just over 1m.

CGT leader Bernard Thibault called on Mr Sarkozy to recognise the gravity of the situation and "reassess his measures" to deal with the economic crisis.

In Paris, police said some 65,000 demonstrators had joined a march from the Place de la Bastille towards the centre of the city.

There were reports of violent outbreaks on the outskirts of the protest as it reached central Paris, with dozens of youths throwing bottles and lighting fires in a main shopping street.

Police in riot gear charged the youths, pushing them back on to the Place de l'Opera where the crowds were gathering, but the situation remained volatile.

There were repeated baton charges, and after fires were lit on some of Paris' best-known boulevards, police used tear gas on the minority of protesters who were violent.

Earlier, some 25,000 to 30,000 people rallied in the city of Lyon, according to organisers and police.

In Marseille, organizers and the authorities disagreed, with the former putting the number of demonstrators at 300,000 but the police estimating 24,000 had taken part.

The protests are against the worsening economic climate in France and at what people believe to be the government's poor handling of the crisis.

Opposition Socialist Party leader Martine Aubry said people were out in the streets "to express what worries them: the fact that they work and yet cannot make ends meet, retired people who just can't make it [financially], the fear of redundancies, and a president of the Republic and a government that just don't want to change policy".

French President Nicolas Sarkozy faces his biggest challenge yet:

The nation’s eight largest unions joined forces in the strike, saying Sarkozy’s 26 billion-euro ($34.4 billion) economic-stimulus package is inadequate. They want the government do more to counter rising unemployment and weakening purchasing power as the French economy enters its first recession in 16 years.

“The target is won, thanks to the massive presence of private sector workers,” Francois Chereque, head of Confederation Francaise Democratique du Travail, France’s biggest union, said at the end of the Paris demonstration, adding that today “is the biggest workers’ action day in about 20 years,” according to his press office.

The strike resulted in train delays, closed schools and jammed roads as more than a million public sector workers and thousands of others from companies including France Telecom SA and Renault SA took part in the work stoppage.

Bank of France

Participation in the strike today ranged from 25 percent at the Bank of France to more than 60 percent in primary schools. The Public Service Ministry reported that 26 percent of its staff walked out, or about 900,000 people. That’s more than the 20 percent strikers in November 2007.

“This crisis imposes the government a duty to listen, to engage in dialogue,” Sarkozy said in an e-mailed statement in response to the day’s events. “The concern is legitimate” as citizens “are losing their jobs” he said, adding that he plans to meet with labor unions and employers next month to discuss reforms planned for 2009.

The Paris march ended with violence at the Garnier opera square. Riot police fired tear gas as protesters burned trash bins. CGT said 300,000 walked in the capital city and authorities reported 65,000 demonstrators.

While France has a history of street protests, the global financial crisis has sparked similar demonstrations and unrest in countries from China and Greece to Iceland. France’s most disruptive transport strike in over a decade in November 2007 cost as much as 400 million euros a day, according to finance ministry estimates.

Other protests are already being organized in Europe. Spanish unions on Thursday called for regional protests against layoffs at big firms and lending restrictions by banks after the global crisis sent Spain's unemployment rate to the highest in the European Union.

Meanwhile, throughout Europe the pension crisis is growing. In France, the Fonds de réserve pour les retraites (FRR) reported its preliminary results today:

At the Supervisory Board meeting on January 29, 2009, the preliminary results of the financial management of the FRR for the year just ended were presented and analyzed. In addition, the overall situation was subject to a thorough review.

On December 31, 2008, the assets of the FRR were valued at 27.7 billion euros. The annualized performance2 of the FRR since inception (June 2004) remains slightly positive (+0.3%). At year-end 2007, it was +8.8%. This sudden deterioration is the direct consequence of the global crisis in the capital markets, in particular that of the world’s equity markets which declined by 42% over the last year. With this background, the performance of the FRR’s portfolio for the year 2008 was -24.8%.

These results do not reflect any losses related to securitized vehicles, structured products or hedge funds, in which the Fund has made no investments. The losses are attributable to the strategic asset allocation, which led to a predominance of equity investments in the portfolio (60%), made in 2003 and in 2006, consistent with the usual level of exposure to the markets for a very long-term investor with no liquidity constraint prior to 2020 and therefore able to benefit from the outperformance of equities over a sufficiently long time frame. This position is one shared by all of the FRR’s foreign counterparts.

In light of the turn for the worse that the crisis took in late September, and following the guidelines decided on as of October, the exposure of the FRR’s portfolio to equities was substantially cut back (to 49% from 64.5% at year end 2007). Correlatively, the percentage of assets held in treasury (14%, versus 1.2% at year end 2007) and invested in bonds (36%, versus 33.5%) was increased.

The Supervisory Board unanimously considered that, in light of the current market environment, this conservative management strategy had to be maintained for the foreseeable future.

As indicated in October 2008, the task of reviewing the strategic asset allocation has begun and should be completed by May 2009.

By the way, it isn't just the FRR that has decided to scale back on equities. ABP and two other top Dutch pension funds lost an average of 11.6 percent of their value in the last three months of 2008 due to the credit crisis and for now are sticking to a lower weighting for stock investments:

ABP, the world's third-biggest state pension fund after Japan's and Norway's, said in a statement on Thursday the value of its assets fell to 173 billion euros ($226 billion) from 195 billion euros in the fourth quarter last year.

ABP and the number three and four Dutch funds PMT and PME said the relative weight of stock investments had fallen due to share price declines, and ABP and PME said they had not increased those weightings again in order to cut investment risks.

Dutch pension funds, which in total managed 736 billion euros in September, usually buy extra stocks when equity markets go down to keep up the weight of share investments relative to other asset classes, Dutch central bank data has shown.

But metal workers fund PME, which managed 18.7 billion euros at the end of December, will keep its weight for stocks at 20 percent of total assets for 2009 from a 38 percent target in 2008.

"This means that there will be more investments in fixed-interest rate assets in 2009. Due to the change from stocks to fixed-income assets the risks of our investments is lowered," metal workers fund PME said in a statement.

ABP, which is closely watched by investors worldwide for its investment policy, let the relative weight of non-fixed income assets, which include stocks, private equity, property and other assets, fall to 55.2 percent from 59.6 end-September.

An ABP spokesman declined to say whether the civil servants fund would buy stocks again this year because it was working on a plan to recover from a deficit as the value of assets had fallen below the fund's liabilities based on net present value.

In May, ABP said it had bought stocks for nearly 10 billion euros on the view the worst of the global financial crisis was over and said in July it planned to cut down on debt investments to switch to assets that offered a better inflation hedge.

Over the fourth quarter, ABP reported a 23 percent negative return on investments in non-fixed income assets, due primarily to sharp declines in the value of its investments in stocks, real estate and private equity.

Due to the fall in oil prices, ABP also reported a 47.5 percent negative return on commodities, which it includes among its non-fixed income assets.

The Dutch pension fund said its investments in fixed-income assets showed a positive return of 1 percent.

Dutch PFZW, the second largest Dutch fund and Europe's third-largest pension fund with 71.5 billion euros in assets, continues to add stocks to its portfolio to have about 40 percent of assets invested in listed shares, a PFZW spokesman said.

"PFZW rebalances, meaning we keep a certain part invested in stocks. Share price declines result in buying additional stocks to maintain holdings at a certain weight," the spokesman said.

PFZW said in a statement it booked a negative return of 13.1 percent in the fourth quarter, making it the largest negative return among the four Dutch funds.

Many Dutch pension funds have fallen into deficits due to the credit crisis and are working to file recovery plans with the regulator, the Dutch central bank (DNB), which gives them three years time to reach a surplus again.

The Dutch organisation for sector pension funds, VB, asked for flexibility from the DNB so funds would not have to take far-reaching measures such as sell off assets, cut pension payments or raise pension premiums because such actions could exacerbate the economic downturn.
Three years to reach surplus? There is no way that they will be able to recover in three years now that there is nowhere to hide. Also, ABP was a big proponent of commodities, investing billions into the Goldman Sachs Commodities Index (GSCI) which has taken a huge hit this past year as oil prices plummeted.

ABP also invests billions in alternative investments like hedge funds, private equity and real estate. If you've been reading my blog, you know the hot air has come out of these alternative investments.

The bloodbath in hedge funds will continue in 2009 except perhaps in distressed debt and global macro. One thing is for sure, the days of 2 and 20 are over and as hedgies stick their heads in the noose, they'd better get used to tougher regulations.

In private equity, leveraged buyout firms that use debt to pay for takeovers face a lending drought as governments bail out banks and bolster lending oversight. Moreover, I agree with Sam Jones, mark to myth has been exposed:

In recognition of the extreme volatility in the markets, the Group has undertaken a special exercise to value its largest investments at 31 December 2008… For those assets valued on an earnings basis at both 30 September 2008 and 31 December 2008, there was a negative total value movement of £(214)

That par from 3i’s trading statement, out yesterday. A negative revaluation of a couple hundred million is not much really, considering 3i has a portfolio of more than £5bn. Still, the private equity group’s share price has taken a hammering today. It was down 24 per cent at one point this morning on rumours that the group was going to have to go to the market for a cash call.

3i share price

How long can the private equity delusion last? Surely these businesses are not performing this well. 3i’s somnolent shareholders seem to have woken up to that today anyway.

[My note: It isn't just 3i. Allied Capital (ALD) shares slumped 47% on Wednesday after the small-business lender warned that it may default on its debt.]

Given the performance of stock markets as a whole (down 40-50% +), is it really much of a stretch to imagine big writedowns for private equity’s formerly public holdings?

In the current climate, with unemployment beginning to spike and a true macroeconomic downturn only just beginning to bite, modeling companies’ worth based on (inflated) projected earnings is a fools game.

Here’s Nassim Nicholas Taleb’s take anyway:

Banks are being bailed out, and private-equity firms are going to go next. These people in a bull market look like geniuses. And now they don’t look that intelligent, and it’s going to get a lot worse for them. If the S&P goes down 20 percent from here, what will happen to private equity firms? They’re all under water.

Private equity is probably the ultimate leverage-based operation: everyone “looked like geniuses” in the bull market as Taleb says, because there was so much leverage around: any company that private equity touched escalated in value. Private equity giants know the power of leverage, too:

[Davos] Mr. Schwarzman is already making a splash. At a discussion panel on Wednesday, he hopped off his stool during a debate moderated by CNBC’s Maria Bartiromo, grabbed the microphone, and boldly called for what private equity loves: More leverage!

More leverage? Someone please tell Mr. Schwarzman that the good years are over and that it's R.I.P. Good Times.

There is no more leverage - the oxygen that fueled alternative investments - and it's going to be a very tough slug ahead for private equity. Nonetheless, public and corporate pension fund executives are unfazed as they expect private equity to be the best performer among asset classes over the next five years. Holy smokes! And I thought Blago was delusional!

That leaves commercial real estate. This is going to be the Mother of all alternative bloodbaths as the slaughter in commercial real estate continues in 2009. And now we have Pimco's Bill Gross telling us that the government needs to prop up other sectors of the credit markets such as commercial mortgage-backed securities and municipal debt. Thanks but no thanks Bill. At least we know where you placed your bets in 2009.

Back to the revolution. While some are openly asking whether it's the end of capitalism, I am telling you it is the end of capitalism as we know it. And if you think you always have your pension to fall back on, think again:

As bad as the economy gets, people can at least say they’ve got their pensions to fall back on. Well, not so fast.

Some employers are able to opt out of their pension promises, and there’s nothing stopping them, according to the final report of the province’s Pension Review Panel.

“We have an odd framework where some employers don’t have to fully fund their promises. To us, that doesn’t make any sense whatsoever,” said report co-author Bill Black.

“If you get down to the regulatory nitty-gritty, I could show you all kinds of things that are just dumb.”

He said employers can cancel employee benefits if plans go into debt, and they don’t have to tie pension benefits to inflation, even if they said they would.

The report calls for a new, consistent regulatory system to be put in place as quickly as possible.

“If we go through to the end of the year 2009 and nothing has been done, then there will be some very great difficulties for pension plans,” said Black, former president of Maritime Life.

“It’s going to be just impossible for employers to maintain their required funding.”

Whether that happens, though, is still up in the air. Labour and Workforce Development Minister Mark Parent said fall is the soonest government could prepare legislation.

Employers funding their pension promises should be mandatory, according to the report. To get to that point, there would be some “transitional relief.” The plan also offers employers more flexibility. Currently, plans that are in debt need to be fixed within five years. The report suggests extending that to 10, to help cope with the recession.

The government will take some time to study the plan before a deciding on a course of action.

Finally, President Obama issued a withering critique Thursday of Wall Street corporate behavior, calling it "the height of irresponsibility" for employees to be paid more than $18 billion in bonuses last year while their crumbling financial sector received a bailout from taxpayers.

The President is right and his tough stance will assuage the masses, for now. But as unemployment rises and pension deficits soar to unprecedented levels, I can't help wondering that in the not too distant future unions will be calling upon their brothers and sisters to protest the financial and pension fiasco on this side of the Atlantic.

Vive la Révolution!

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