The Irish Independent reports that it has taken far longer to arrive at our shores than many other countries, but the dreaded credit crunch is now washing up on our beaches.
And like an unwanted oil spill from a damaged supertanker, the credit crunch is toxic and spreading fast.
For months now banks in Britain have been hiking interest rates and withdrawing homeloan products while in Ireland we had a string of small-scale rises either side of Christmas, but nothing since then.
Now the crunch is starting to bite here. In the past few days, one bank after another has been forced to increase the rates it charges for new mortgages. Most of the banks that have so far raised rates have huge British parents for whom the credit crisis has been severe.
Ulster Bank and its sister First Active are owned by Royal Bank of Scotland, while Bank of Scotland is part of HSBC.
But Irish lenders like Permanent TSB have not been immune to the current crisis.
How much longer the likes of AIB and Bank of Ireland will hold out before also increasing their rates remains to be seen. Existing customers with tracker rates should be safe from rate rises.
But pity the potential first-time buyer who will face borrowing costs of up to 0.55pc higher than last year.
And the switcher market, which has been the only growth area in an otherwise moribund mortgage market this year, is predicted to suffer next.
Already lenders have stopped advertising switcher offers, with the expectation that the shortage of bank funding will force banks to turn off the tap on this part of the market.
And expect the fallout for mortgage brokers to be severe.
Already half of all homeloans are arranged through brokers but the squeeze on lending is expected to see many brokers being forced to consolidate, while smaller brokerages will be forced to close.
The upshot of all of this is that house prices will have to fall further if new buyers, now restricted on what they can borrow, are to be tempted back into the market.
The Irish Independent also reports that British Airway has ousted two senior managers after the chaotic opening of Heathrow airport's Terminal 5.
Gareth Kirkwood, director of operations, and David Noyes, director of customer services, have already left, British Airways said in a statement yesterday.
"The departures follow the airline's move to Terminal 5,'' the company said. "The airline is looking to appoint a chief operations officer to combine both roles."
Pressure
Chief Executive Officer Willie Walsh is under pressure after 600 flights were cancelled over 12 days when Terminal 5's baggage system broke down.
The disruption cost at least £16m (€20m), according to the airline, the building's sole occupant, prompting Walsh to agree to meetings with investors and to delay moving a second wave of services.
"There's a feeling at BA that some of the managers did not fully communicate problems during the planning process of T5,'' said John Strickland, director of aviation specialist JLS Consulting Ltd.
"I don't think this takes the pressure off Walsh. He will know that people are still expecting him to deliver.''
British Airways, which had been relying on the £4.3bn (€5.3bn) Terminal 5 to win back customers disillusioned with Heathrow's overcrowding, fell 7 pence, or 3.3 percent, to 208.5 pence.
The stock is down 33pc this year, cutting the company's market value to £2.4bn (€3bn).
Kirkwood was responsible for the "operational readiness'' of Terminal 5, British Airways spokesman Tony Cane said yesterday. The executive began working in the purchasing division in 1986 and prior to becoming director of operations was managing director of the World Cargo unit.
Noyes joined in 1985 via the graduate training program. He became director of alliances, franchises and subsidiaries in 1999 and head of Heathrow in 2004 before taking over at customer services in October 2007.
On March 13 he said passengers using Terminal 5 would be able to enter the building, drop off their bags and clear security in "no more than 10 minutes".
The Irish Times reports that a British multinational has announced plans to shift its base to Dublin to avail of the Republic's favourable corporate tax regime.
Shire Pharmaceuticals, an English group with sales of close to $2 billion (€1.27 billion) a year, intends to locate its parent company in the Republic to benefit from low corporation tax and other incentives.
The State charges 12.5 per cent tax on corporate profits, which is among the lowest rates in the European Union. This is reckoned to be a key factor in attracting investment here. Britain recently cut its rate to 28 per cent.
Shire's plan is part of an overall restructuring programme under which it will be incorporated in Jersey and set up a holding company in the Republic.
In a statement, Shire said its directors "believe that the most appropriate structure is for the new group parent company to be tax-resident in the Republic of Ireland". A spokeswoman told The Irish Times yesterday that investors had broadly welcomed the news. Shire is quoted on stock markets in London and New York.
The British company employs 55 people at offices in Citywest Business Park in Dublin. Moving its parent to the Republic will not result in new jobs here, or any loss of staff in Britain, where its head office is in Basingstoke, Kent.
"Everything will be very much the same as before," the spokeswoman said. One of the differences will be that the company will hold its board meetings in this country.
According to its figures, Shire paid $107 million in corporate taxes to the British exchequer during the first nine months of last year. It is not possible to say how much it will save by moving here, or by how much Irish State coffers will benefit.
A number of tax advisers explained yesterday that, along with the Republic's 12.5 per cent charge, there are two other key incentives that apply to head office or holding company operations established here.
The first is that they pay no capital gains tax on the sale of subsidiaries. The second is a concession on dividends paid on profits earned abroad by subsidiaries that means they either pay no tax on these payments, or pay it at 12.5 per cent.
Former finance minister Charlie McCreevy introduced the extra incentives for multinational head-office activities in the Republic earlier in the decade. They are designed to make the State attractive for a range of activities, including research and development, sales and marketing and financing.
Shire's move is likely to add further fuel to a row in Britain over the Labour government's business tax policies.
Commenting on the decision yesterday, Richard Lambert, director general of the Confederation of British Industry, said the lobby group was worried that an uncompetitive corporate tax system is damaging the UK's attractiveness to businesses and that "other internationally mobile firms will follow Shire's path".
Shire manufactures treatments for stomach and kidney problems and for attention-deficit and hyperactivity disorder.
The Irish Times also reports that the world's biggest fund that invests in lawsuits will open an office in Dublin to finance litigation in Europe and benefit from an increase in lawsuits arising from the global credit crunch.
IMF Australia, which is based in Sydney, will back lawsuits against cartels in return for a percentage of any court award or settlement, according to the company's managing director John Walker.
Mr Walker is listed as a director of a new Irish public limited company called Claims Funding International, which was incorporated on April 2nd and has a registered address in Howth, Co Dublin.
IMF seeks up to 30 per cent of damages or settlement of a case in which it invests. Its income from litigation in 2007 was 23.2 million Australian dollars (€13.6 million), according to the company's data.
Lawyers expect growth in class action and shareholder lawsuits due to the EU's stance on antitrust cases and the credit crisis.
"It's a good time for IMF to set up," said Sonya Leydecker, head of litigation at London law firm Herbert Smith, whose clients have used third-party funds. "The market has changed and there's more appetite for litigation."
The European Union published a paper this month encouraging the public and businesses to sue illegal cartels. Shareholders of British bank Northern Rock are preparing to sue the UK government over the nationalised lender, which was the first bank to suffer a run on its deposits in 140 years.
While IMF's initial focus will be on antitrust cases, the credit crisis will provide ongoing opportunities, Mr Walker said. "We think the credit crunch and litigation arising from credit default swaps will rise," he said.
The Irish Examiner reports that consumers were warned yesterday that the proposed world trade deal being negotiated in Geneva poses a threat to food safety.
Fine Gael agriculture and food spokesman Michael Creed, TD, said Irish food producers have worked tirelessly and invested heavily to ensure that the food they produce is of the highest quality and fully traceable to source.
“The current trade deal on offer will mean that all their efforts will have been in vain as the European Union market will become fully exposed to imports from dollar-a-day economies, where hygiene, food safety and animal welfare are non-issues,” he said.
Mr Creed said Fine Gael will be calling on the Government in a Private Members Bill in the Dáil to mount a major political and diplomatic initiative to protect the Common Agricultural Policy and Irish agricultural interests.
It will also urge the Government to ensure that food safety and security, climate change, animal welfare, and human health interests are priorities in the context of any agreement and to signal its willingness to use all necessary measures to defeat the current proposals.
The Irish Farmers’ Association (IFA), Irish Creamery Milk Suppliers’ Association (ICMSA) and the Irish Cattle and Sheep Farmers’ Association addressed the issues at a meeting in Dublin yesterday of the European Peoples Party agricultural forum, headed by Fine Gael leader Enda Kenny.
Strong support is also emerging among local authorities for an IFA motion.
County councils in Cavan, Carlow, Donegal, Leitrim, Sligo, Waterford and Wexford have already passed the motion which states that the current proposals represent “a grave and unacceptable threat” to Irish farming, the food industry and employment.
IFA president Padraig Walshe said the outcome of the current negotiations would cost the Irish economy €4 billion and see 50,000 farmers put out of business, along with 50,000 job losses in the processing sector.
Plans are meanwhile going ahead for a farming and agri- business protest in Dublin tomorrow, organised by the IFA, ICMSA and Macra na Feirme.
It is to coincide with a visit by European Commission president Jose Manuel Barroso to the Forum on Europe. A three-hour industry and agri-business standstill is also being arranged countrywide.
The Financial Times reports that France reported the sharpest rise in annual inflation for 11 years on Tuesday while German businesses blamed inflationary pressures for a sharp fall in confidence.
After two months of increases, the German ZEW institute blamed the fall of its economic sentiment index to a level not seen since early 1993 on “extraordinarily high price pressure” and a fall in consumer spending power.
Higher fuel and food costs saw price increases in the eurozone’s largest economy hit an annual 3.2 per cent in March. This helped drive inflation across the 15-country single-currency region to 3.5 per cent last month, a 16-year high.
In France, the government said prices rose 3.5 per cent year on year in March, the fastest annual rate of increase for 11 years. The surge triggered a 2.3 per cent increase in the national minimum wage. That means 2m workers who receive a minimum wage – and several million others whose salaries are set in reference to it – could see two pay increases this year. The minimum wage rises when price gains since the last review top 2 per cent – the first time since 1997 that the automatic mechanism has taken effect before the usual annual review of the minimum wage level in May.
The data, reported on Tuesday, seem to support the European Central Bank’s policy of abstaining from interest rate cuts.
With eurozone prices in past months rising faster than the ECB’s target of “below but close to” 2 per cent, the bank has not followed the US Federal Reserve, which has cut rates to try to ease the credit crunch.
But the economic data might force the ECB to cut its main rate – steady at 4 per cent since June 2007 – this year as companies work off order backlogs and inflationary pressures wane.
Holger Schmieding, an economist at Bank of America, said the ZEW’s “plunge” from –32.0 index points mid-March to –40.7 in mid-April showed that access to cheap credit was not the main problem for business in Germany or the eurozone. “Inflation seems to be souring the mood of consumers and investors alike. A rate cut is not necessarily a remedy for such concerns.”
President Nicolas Sarkozy has so far held back from giving discretionary boosts to the minimum wage, in contrast with the populist practices of his predecessors, and is also considering an overhaul of the minimum-wage setting process.
Christine Lagarde, French finance minister, predicted a “stabilisation, even a slight decrease” in inflation in the latter half of 2008, in line with a European Commission forecast that eurozone price rises will average 2.9 per cent in 2008.
Andreas Rees of Unicredit said autumn could bring “signs of a slowdown” to the German economy as order books emptied. A number of economists believe the ECB will then reassess its interest rate stance.
The FT also reports that General Electric plans to invest up to $2bn in acquisitions and other deals in China over the next three years as part of a strategy to double its revenues in the country.
The world’s biggest industrial company, which stunned investors last week when it announced its worst quarter of financial results in five years, is looking to hire a team of 20 “in-house investment bankers” to conduct the deals in China.
“If we do not invest $2bn over the next three years, I would be disappointed,” said Steve Bertamini, chairman of GE’s greater China operations, in an interview with the Financial Times.
The aggressive investment plans, which will include acquisitions and joint ventures, underline GE’s intention to expand its China business rapidly at a time when its domestic operations face a slowing US economy.
Mr Bertamini said the team of deal specialists had already been expanded from two to eight and the recent sharp drop in the mainland stock market, which is down nearly a half from its peak, would make it easier to negotiate investments.
“One of the reasons we have not done much so far is because the prices have been so high,” Mr Bertamini said. “The risk...is that share prices take off again.”
GE said it would continue to enter into joint ventures with leading Chinese companies, in part because in several of the sectors where the group is active – such as infrastructure and power generation – there are foreign investment restrictions.
GE plans to increase its 2007 revenues in China of $4.4bn to $10bn by 2010, which would require the company to expand more than twice as fast as the economy’s double-digit rate of growth.
“The wider problems in the credit market and the signs of a slowing in the overall global economy have not entered the picture [in China],” said Mr Bertamini.
The comments come just days after GE slashed its full-year earnings forecast because of the effect of the credit crunch.
As part of its plans to expand manufacturing in China, the group intends to import fewer components to its plants and will increase both sourcing and design in China.
GE also plans to expand its presence in some of China’s rapidly expanding second-tier cities.
Mr Bertamini said GE was closely watching opportunities to expand in financial services. However, the regulatory and legal framework were not yet in place in many areas. “It will be five to 10 years before the financial services sector really begins to open up,” he said.
The New York Times reports that hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street’s rarefied realms.
One manager, John Paulson, made $3.7 billion last year. He reaped that bounty, probably the richest in Wall Street history, by betting against certain mortgages and complex financial products that held them.
Mr. Paulson, the founder of Paulson & Company, was not the only big winner. The hedge fund managers James H. Simons and George Soros each earned almost $3 billion last year, according to an annual ranking of top hedge fund earners by Institutional Investor’s Alpha magazine, which comes out Wednesday.
Hedge fund managers have redefined notions of wealth in recent years. And the richest among them are redefining those notions once again.
Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad. Such profits may also prompt more calls for regulation of the industry.
Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.”
The richest hedge fund managers keep getting richer — fast. To make it into the top 25 of Alpha’s list, the industry standard for hedge fund pay, a manager needed to earn at least $360 million last year, more than 18 times the amount in 2002. The median American family, by contrast, earned $60,500 last year.
Combined, the top 50 hedge fund managers last year earned $29 billion. That figure represents the managers’ own pay and excludes the compensation of their employees. Five of the top 10, including Mr. Simons and Mr. Soros, were also at the top of the list for 2006. To compile its ranking, Alpha examined the funds’ returns and the fees that they charge investors, and then calculated the managers’ pay.
Top hedge fund managers made money in many ways last year, from investing in overseas stock markets to betting that prices of commodities like oil, wheat and copper would rise. Some, like Mr. Paulson, profited handsomely from the turmoil in the mortgage market ripping through the economy.
As early as 2005, Mr. Paulson began betting that complex mortgage investments known as collateralized debt obligations would decline in value, much as Wall Street traders bet that shares will drop in price. In that case, known as shorting, they borrow shares and sell them, wait for the price to fall, buy the shares back at a lower price and return them, pocketing the profit.
Then, over the next two years, Mr. Paulson established two funds to focus on the credit markets. One of those funds returned 590 percent last year, and the other handed back 353 percent, according to Alpha. By the end of 2007, Mr. Paulson sat atop $28 billion in assets, up from $6 billion 12 months earlier.
Mr. Soros, one of the world’s most successful speculators and richest men, leapt out of retirement last summer as the market turmoil spread — and he won big. He made $2.9 billion for the year, when his flagship Quantum fund returned almost 32 percent, according to Alpha. Mr. Simon, a mathematician and former Defense Department code breaker who uses complex computer models to trade, earned $2.8 billion. His flagship Medallion fund returned 73 percent.
Like Mr. Paulson, Philip Falcone, who founded Harbinger Partners with $25 million in June 2001, cast a winning bet against the mortgage market. He pulled in returns of 117 percent after fees in 2007 and made $1.7 billion. The trade thrust him from relative obscurity to hedge fund heavyweight: he now manages $18 billion. Harbinger recently won agreement from The New York Times Company to add two members to its board.
Hedge fund managers share their success with their investors, which include wealthy individuals, pension funds and university endowments. They typically charge annual fees equal to 2 percent of their assets under management, and take a 20 percent cut of any profits.
With a combined $2 trillion under management, the hedge fund industry is coming off its richest year ever — a feat all the more remarkable given the billions of dollars of losses suffered by major Wall Street banks.
In recent months, however, scores of hedge funds have quietly died or spectacularly imploded, wracked by bad investments, excess borrowing or leverage, and client redemptions — or a combination of those events.
“To some degree it’s a very gigantic version of Las Vegas,” said Gary Burtless, an economist at the Brookings Institution.
As Alpha’s list shows, managers who reap big gains one year can lose the next.
Edward Lampert, the founder of ESL Investments and a member of the 2007 Alpha list, was absent this year. His fund fell 27 percent last year, according to Alpha. About 60 percent of ESL’s equity portfolio is invested in Sears, whose shares plunged 40 percent last year. ESL is also a major holder of Citigroup, whose abysmal performance matched that of Sears.
A manager who ranked high in the 2007 list and fell off in 2008 was James Pallotta of the Tudor Investment Corporation, who was 17th last year and earned $300 million. Mr. Pallotta’s $5.7 billion Raptor Global Fund fell almost 8 percent last year, according to Alpha.
A few who did not make the cut still made buckets of money. Bruce Kovner of Caxton Associates and Barry Rosenstein at Jana Partners didn’t make the top 50. But Mr. Kovner earned $100 million, and Mr. Rothstein earned $170 million, according to Alpha. Spokesmen for the hedge fund managers either declined to comment on Tuesday or could not be reached.
Since 1913, the United States witnessed only one other year of such unequal wealth distribution — 1928, the year before the stock market crashed, according to Jared Bernstein, a senior fellow at the Economic Policy Institute in Washington. Such inequality is likely to impede an economic recovery, he said.
“For a recovery to be robust and sustainable you can’t just have consumer demand at Nordstrom,” he said. “You need it at the little shop on the corner, too.”
Despite the explosive growth of the industry — about 10,000 hedge funds operate worldwide — it is relatively lightly regulated. On Tuesday, two panels appointed by Treasury Secretary Henry M. Paulson Jr. advised hedge funds to adopt guidelines to increase disclosure and risk management.
And Mr. Gross, the fund manager, warned that the widening divide among the richest and everyone else is cause for worry.
“Like at the end of the Gilded Age and the Roaring Twenties, we are going the other way,” Mr. Gross said. “We are clearly in a period of excess, and we have to swing back to the middle or the center cannot hold."
The NYT also reports that an e-mail scam aimed squarely at the nation’s top executives is raising new alarms about the ease with which people and companies can be deceived by online criminals.
Thousands of high-ranking executives across the country have been receiving e-mail messages this week that appear to be official subpoenas from the United States District Court in San Diego. Each message includes the executive’s name, company and phone number, and commands the recipient to appear before a grand jury in a civil case.
A link embedded in the message purports to offer a copy of the entire subpoena. But a recipient who tries to view the document unwittingly downloads and installs software that secretly records keystrokes and sends the data to a remote computer over the Internet. This lets the criminals capture passwords and other personal or corporate information.
Another piece of the software allows the computer to be controlled remotely. According to researchers who have analyzed the downloaded file, less than 40 percent of commercial antivirus programs were able to recognize and intercept the attack.
The tactic of aiming at the rich and powerful with an online scam is referred to by computer security experts as whaling. The term is a play on phishing, an approach that usually involves tricking e-mail users — in this case the big fish — into divulging personal information like credit card numbers. Phishing attacks that are directed at a particular person, rather than blasted out to millions, are also known as spear phishing.
The latest campaign has been widespread enough that two California federal courts and the administrative office of the United States Courts posted warnings about the fake messages on their Web sites. Federal officials said they stopped counting after getting hundreds of phone calls from corporations about the messages. At midday on Tuesday, one antispam company, MX Logic, said in a Web posting that its service was still seeing at least 30 of the messages an hour.
Security researchers at several firms indicated they believed there had been at least several thousand victims of the attack whose computers had been compromised.
“We have seen about 2,000 victims, more or less,” said John Bambenek, a security researcher at the University of Illinois at Urbana-Champaign and a volunteer at the Internet Storm Center, a network security organization.
Researchers were studying a list of the Internet addresses of infected computers that iDefense Labs, a research unit of VeriSign, had assembled by monitoring network traffic.
Personalized scam messages have been on the radar of security researchers and law enforcement officials for several years, but the latest variant is a fresh indication of the threat posed by such digital ruses.
“I think that it was well done in terms of something people would feel compelled to respond to,” said Steve Kirsch, the chief executive of Abaca, an antispam company based in San Jose, Calif.
Mr. Kirsch himself received a copy of the message and forwarded it to the company lawyer. “It had my name, phone number, company and correct e-mail address on it and looked pretty legitimate,” Mr. Kirsch said. “Even the U.R.L. to find out more looked legitimate at first glance.”
When the lawyer tried to download a copy of the subpoena and the computer restarted itself, they quickly realized that the file contained malicious software.
Several computer security researchers said that the attack was the work of a group that tried a similar assault in November 2007. In that case, the e-mail message appeared to come from the Justice Department and stated that a complaint had been filed against the recipient’s company.
The software used in the latest attack tries to communicate with a computer in Singapore. That system was still functioning on Tuesday evening, but security researchers said many Internet service providers had blocked access to it.
A number of clues, like misspellings, in the fake subpoena led several researchers to believe that the attackers were not familiar with the United States court system and that the group might be based in a place that used a British variant of English, such as Hong Kong.
“This is probably Chinese-based,” said Mr. Bambenek. “If all the key players are in China there is not much the F.B.I. can do.”
Several security researchers said that the real danger of the attack lay in a second level of deception, after the hidden software provided the attackers with digital credentials like passwords and electronic certificates.
“There are very subtle nuances to their attacks that are well known in the financial industry but are not well publicized,” said Matt Richard, director of the Rapid Response Team at iDefense.
Mr. Richard said the criminals were going after a particular area of the financial industry, but he would not elaborate. He said that law enforcement officials were investigating the fraudulent documents.
Calls to the Federal Bureau of Investigation for comment were not returned.
Although the software package used to deliver the eavesdropping program is well known, it was hidden in such a way that it avoided detection by commercial programs in many cases, researchers said.
“This is pretty well-known code,” said Don Jackson, a researcher at SecureWorks, a computer security firm. “The issue has to do with repacking it.”
Recipients of the e-mail messages are directed to a fraudulent Web site with a copy of the graphics from the real federal court site. They are then asked to download and install what is said to be a piece of software from Adobe that is used to view electronic documents.
“There are several layers of social engineering involved here,” said Mike Haro, a spokesman for Sophos, a company that sells software to protect against malicious software and spam.
