Beijing Seen Vacant for 50% as Chanos Predicts Crash (Update1)

Feb. 12 (Bloomberg) -- Jack Rodman, who has made a career of selling soured property loans from Los Angeles to Tokyo, sees a crash looming in China. He keeps a slide show on his computer of empty office buildings in Beijing, his home since 2002. The tally: 55, with another dozen candidates.
“I took these pictures to try to impress upon these people the massive amount of oversupply,” said Rodman, 63, president of Global Distressed Solutions LLC, which advises private equity and hedge funds on Chinese property and banking. Rodman figures about half of the city’s commercial space is vacant, more than was leased in Germany’s five biggest office markets in 2009.
Beijing’s office vacancy rate of 22.4 percent in the third quarter of last year was the ninth-highest of 103 markets tracked by CB Richard Ellis Group Inc., a real estate broker. Those figures don’t include many buildings about to open, such as the city’s tallest, the 6.6-billion yuan ($966 million) 74- story China World Tower 3.
Empty buildings are sprouting across China as companies with access to some of the $1.4 trillion in new loans last year build skyscrapers. Former Morgan Stanley chief Asia economist Andy Xie and hedge fund manager James Chanos say the country’s property market is in a bubble.
“There’s a monumental property bubble and fixed-asset investment bubble that China has underway right now,” Chanos said in a Jan. 25 Bloomberg Television interview. “And deflating that gently will be difficult at best.”
Third Costliest
Investor concerns have spread beyond real estate. Among 15 major Asian markets, the benchmark Shanghai Composite Index is valued third-highest relative to estimates for this year’s earnings, after Japan and India, even after falling 8 percent this year.
A glut of factories in China is “wreaking far-reaching damage on the global economy,” stoking trade tensions and raising the risk of bad loans, the European Union Chamber of Commerce in China said in November.
More than 60 percent of investors surveyed by Bloomberg on Jan. 19 said they viewed China as a bubble, and three in 10 said it posed the greatest downside risk. The quarterly poll interviewed a random sample of 873 Bloomberg subscribers and had a margin of error of 3.3 percentage points.
Digesting the debt from a popped property bubble may slash bank lending and drag growth lower for years in an economy that Nomura Holdings Inc., Japan’s biggest brokerage, says will provide more than a third of world growth in 2010.
Japanese Comparison
The risks are so great that a decade of little or no growth, as Japan experienced in the 1990s, can’t be dismissed, said Patrick Chovanec, an associate professor in the School of Economics and Management at Beijing’s Tsinghua University, ranked China’s top university by the Times newspaper in London.
The Nikkei 225 Stock Average surged sixfold and commercial property prices in metropolitan Tokyo rose fourfold before the bubble burst in 1990. The Nikkei trades at about a quarter of its December 1989 peak.
“You have state-owned enterprises using borrowed funds from the stimulus bidding up the price of land -- not even desirable plots of land -- in Beijing to astronomical rates,” Chovanec said. “At the same time you have 30 percent-plus vacancy rates and slumping rents in commercial property so it’s just a case of when you recognize the losses -- or don’t.”
China’s lending surged to 1.39 trillion yuan in January, more than in the previous three months combined. Property prices in 70 cities climbed 9.5 percent from a year earlier, the most in 21 months.
Reasonable Control
Policy makers are starting to rein in the loans that helped fuel the property boom. Banks should “strictly” follow real estate lending policies, the China Banking Regulatory Commission said on its Web site on Jan. 27. It called for banks to “reasonably control” lending growth.
The People’s Bank of China today ordered banks to set aside more deposits as reserves for the second time in a month to help cool expansion in lending. The requirement will increase 50 basis points effective Feb. 25, the central bank said on its Web site. The current level is 16 percent for big banks and 14 percent for smaller ones.
“The liquidity bubble last year went to the property market,” said Taizo Ishida, San Francisco-based lead manager for the $212-million Matthews Asia Pacific Fund, in a phone interview. “I was in Shanghai and Shenzhen three weeks ago and the prices were just eye-popping, just really amazing. Generally I’m not buying Chinese stocks.”
‘Dubai Times 1,000’
Chanos, founder of New York-based Kynikos Associates Ltd., predicted that China could be “Dubai times 100 or 1,000.” Real estate prices there have fallen almost 50 percent from their 2008 peak as the emirate struggles under at least $80 billion of debt. The economy may shrink 0.4 percent this year, Shuaa Capital, the biggest U.A.E. investment bank, says.
The commercial property space under construction in China at the end of November was the equivalent of 6,800 Burj Khalifas -- the 160-story Dubai skyscraper that’s the world’s tallest.
It’s difficult to determine how exposed Chinese banks are to real estate debt because loans booked to some state-owned companies as industrial lending may have been used to invest in property, say Xie and Charlene Chu, who analyzes Chinese banks for London-based Fitch Ratings Ltd. in Beijing.
A drop in the property market may be accompanied by a surge in nonperforming loans. The Shanghai office of the banking regulatory commission said on Feb. 4 that a 10 percent fall in property values would triple the ratio of delinquent mortgages there.
Bank Shares
Hong Kong-listed Industrial & Commercial Bank of China Ltd., the world’s largest bank by market capitalization, has dropped 13 percent this year. China Construction Bank Corp., the second-largest, has fallen 11 percent. Both are based in Beijing. Hong Kong’s benchmark Hang Seng Index has declined 7.3 percent over the same period.
Fund manager Joseph Zeng says he has a contrarian view on China’s banks, on the grounds that rising interest rates this year will benefit their net interest margins.
“For us, non-performing loans are not expected to be a big issue until 2013, the peak of the current economic cycle,” said Zeng, head of Greenwoods Asset Management Ltd.’s Hong Kong office, in a phone interview. He declined to say what he is buying. Greenwoods has more than $500 million under management.
China has firepower to deal with a crisis. The nation has the world’s largest foreign exchange reserves, at $2.4 trillion, and government debt of only about 20 percent of GDP last year, according to the International Monetary Fund. That compares with 85 percent in India and the U.S. and 219 percent in Japan.
Own-Use Excluded
CB Richard Ellis doesn’t count empty office buildings bought by banks and insurance companies when calculating vacancy rates, since some of the space is for the owners’ use. The Los Angeles-based company said in a report that vacancy rates are starting to fall and rents to rise for the best office buildings as China’s fast economic growth buoys demand.
Gross domestic product expanded 10.7 percent in the fourth quarter from a year before, a two-year-high, after the government introduced a $586-billion stimulus package.
“In many cases when you look at these buildings and say, that’s never going to be fully occupied, somehow 12 to 18 months later the building is full,” said Chris Brooke, CB Richard Ellis’s Beijing-based president and chief executive officer for Asia.
Overcapacity may be looming in manufacturing as well. China’s investments in new factories and properties surged 67 percent last year to 15.2 trillion yuan, more than Russia’s gross domestic product. Excess steel capacity may have reached about 132 million tons in 2009, more than the 87.5 million tons from Japan, the world’s second-biggest producer. The Beijing- based EU Chamber of Commerce report said a “looming deluge” of extra cement capacity is being built.
Balance Sheet Deterioration
While neither Xie nor Chu see nonperforming loan ratios reaching the level of a decade ago, when they made up 40 percent of total lending, they say banks will see deterioration in their balance sheets.
“A lot of people will lose a lot of money, but the banks will probably not go down like in the 1990s,” Xie said in a phone interview. “Of course there will be a lot of bad debts. There will be a lot of mortgages gone bad I think.”
Rodman displays the slide show to private equity and hedge fund clients brought in by banks such as Goldman Sachs Group Inc. at his office in eastern Beijing.
“China is the only place in the world that despite having more empty buildings than the rest of the world has yet to reflect those valuations on their balance sheet,” Rodman said.
Empty Buildings
Gazing south from the building that houses the Beijing headquarters of Goldman Sachs, UBS AG and JPMorgan Chase & Co., one of the first structures in the field of vision is a 17-story office tower at No. 9 Financial Street. Empty.
Farther along are the two 18-story towers of the Bank of Communications Co. complex. Dirt is gathering at the doors and the lobby is now a bicycle parking lot. A spokeswoman for the Shanghai-based lender didn’t return phone calls and e-mails.
The supply of office buildings will continue to grow. Jones Lang LaSalle Inc., a Chicago-based real-estate company, estimates that about 1.2 million square meters (12.9 million square feet) of office space in Beijing will come on line this year, adding to the total stock of 9.2 million square meters.
The city government is driving growth regardless of the market. Financial Street Holding Co., whose biggest shareholder is the local municipal district, plans to build 1 million square meters of additional office space starting this year, and is talking to potential clients such as JPMorgan, said Lydia Wang, the company’s head of investor relations.
Doubling the CBD
Across town, the district government is seeking to double the size of the city’s Central Business District, which already has the highest vacancy rate ever recorded in Beijing. It was 35 percent at the end of 2009, according to Jones Lang LaSalle.
For its part, Beijing-based Financial Street Holdings has “100 percent” of its properties, which include the Ritz Carlton hotel and a shopping mall, rented out, Wang said. The empty buildings along Finance Street don’t belong to the company, which is 26.6 percent owned by the district government.
Zhong Rongming, deputy general manager of the Beijing- based China World Trade Center Co., which built China World Tower 3, said the company is “optimistic about 2010 prospects” given China’s accelerating economic growth. He said the new tower will include tenants such as Mitsui & Co. and the Asian Development Bank.
One new addition to Finance Street may give real estate boosters cause for concern. No. 8 Finance Street will be the headquarters for China Huarong Asset Management Corp.
The company’s mission: selling bad debt from banks.

UPDATE 1-Euro zone GDP recovery falters, bumpy road ahead

* Euro zone Q4 GDP up 0.1 pct q/q, down 2.1 pct yr/yr
* Germany stagnates, France grows; Italy, Spain shrink
* Dec industrial production -1.7 pct m/m, -5.0 y/y
* Consumer spending tight as unemployment grows
By Marcin Grajewski
BRUSSELS, Feb 12 (Reuters) - The euro zone's economic recovery lost steam in the final quarter of last year as gross domestic product barely expanded, with France the only one of the currency area's four biggest economies to post growth.
The 16-country area's GDP edged up 0.1 percent in the October-December period compared with the previous quarter, and contracted by 2.1 percent from the last quarter of 2008, EU data office Eurostat said in a flash estimate. [ID:nBRQ009717]
Analysts polled by Reuters had expected quarterly growth of 0.3 percent and a year-on-year decline of 1.9 percent.
Over the full year 2009, euro zone GDP fell 4.0 percent.
"It is disappointing -- only a few countries delivered, mainly France," said Juergen Michels, economist at Citigroup.
The bleak figures could help deter the European Central Bank from raising interest rates and press governments to maintain fiscal stimulus programmes that bolster their economies.
The euro zone figure was dragged down by Germany, the area's biggest economy, which registered quarter-on-quarter stagnation.
In France, the zone's second-biggest economy, GDP grew by a better-than-expected 0.6 percent on the back of robust consumer spending. The other largest economies, Italy and Spain, contracted by 0.2 and 0.1 percent respectively.
Recession continued in Ireland, Greece and Cyprus, while Portugal stagnated. Austria and the Netherlands expanded.
By comparison, the United States economy grew by 1.4 percent quarter-on-quarter in the same period and by 0.1 percent in yearly terms.
In the third quarter, the euro zone economy expanded by 0.4 percent quarter-on-quarter.
An uncertain growth outlook is expected to keep the European Central Bank's main interest rate at a record low of 1.0 percent until at least the fourth quarter of 2010, economists say.
But the bank has already started to pull back its emergency lending measures introduced during the financial crisis.
"The likely fragility of the recovery means that both governments and the ECB need to be wary about withdrawing stimulus measures too soon or too aggressively," said Howard Archer, chief European economist at IHS Global insight.
"This underpins our view that the ECB will keep interest rates down at 1.0 percent until at least late 2010 and the bank could very well delay lifting them until 2011," he added.
SNAIL-PACED RECOVERY
Analysts say any recovery from the biggest economic crisis since World War Two is likely to be limited as growing unemployment forces consumers to rein in spending.
The euro zone's jobless rate rose to 10 percent of the workforce in December, its highest since August 1998.
"It seems likely consumer and fixed investment spending continued to contract, while this was offset by positive contributions from net exports, inventories and government consumption," said Nick Kounis, economist at Fortis.
"Recovery in the euro zone is continuing, but at a snail's pace," he added.
While GDP growth depends largely on government spending as tens of billions of euros are pumped into the economy, bond investors are growing increasingly nervous over deteriorating public finances in many countries.
Financial problems in Greece have sparked talk about a bailout for the country and raised doubts about stability in the currency area.
Industrial production figures compounded the gloomy picture.
Eurostat said euro zone production tumbled 1.7 percent in December from the previous month, defying expectations of growth, and sank 5.0 percent annually. [ID:nBRQ009716]
It was the biggest monthly decline since February 2009, when production nose-dived 3.8 percent.
Some analysts cautioned that bad weather had played a role in December's poor performance. (Editing by Dale Hudson)

Marc Faber talks Greece Bailouts, Market Correction

Click this link ....... http://eclipptv.com/viewVideo.php?video_id=10030

Obama Signs Bill Lifting Federal Debt Limit to $14.3 Trillion

AP
President Obama has signed legislation lifting the cap on government borrowing to $14.3 trillion.


President Obama has signed legislation lifting the cap on government borrowing to $14.3 trillion.
The new law also puts in place new budget rules to curb growing annual deficits. Known as "paygo" -- for "pay as you go" -- the rules require future spending increases or tax cuts to be paid for with tax increases or other spending cuts.
If the rules are broken, the White House budget office would force automatic cuts in programs like Medicare and farm subsidies. Most other benefit programs, including Medicaid, Social Security and food stamps, would be exempt.
The debt limit was increased from $12.4 trillion to keep the U.S. from going into default.
Obama signed the bill privately Friday at the White House.

30 Year Auction: A Solid "F"

There's no other way to describe this:

Bad. Actually, let's go worse than bad and call it what it is - by any definition this is just one step off from "Failed."

Yield was way over where it was trading at the time, as you can see here:

The more-worrying factor here is that we've got this "mystery" direct buyers out here again taking nearly 25% of the offered amount (who is bidding for that undisclosed?) and another 11% taken down by The Fed for the SOMA account.

Yet even with this Treasury had to pay up to get it to go and the bid-to-cover was anemic at best.

Given the Primary Dealer system we have in this country, any BTC under 2.0 is an effective fail. To get an auction that behaves in this sort of fashion, complete with mystery direct bidders and heavy SOMA (Fed) participation, yet Treasury has to pay up in the form of a significantly higher coupon is not a good sign at all.

Remember folks, this sort of issuance isn't a local event. It will continue through the year, as we are on track to run record budget deficits, so the premise that "it will all be ok and this won't start a ratchet up of rates on the long end" is perhaps more than a bit fanciful.

Rick Santelli gave the auction an "F" and I agree - there's simply no possible way to read this as anything positive at all, and that the equity market is ignoring it (other than a quick, small spike downward on the release) likely has more to do with how tightly equities have become coupled to the dollar in the last couple of weeks than anything else.

Counties seek long-term solution to declining tax revenue

Gov. Ed Rendell, state legislators and county officials are all wrestling with the same question: How do they balance the budget with declining revenue from tax collections.

In 2009 all 50 states revealed the sharpest revenue drop in 46 years, according to a state finances report by the Nelson A. Rockefeller Institute of Government in New York.

Earlier this week, Rendell proposed reducing the state sales tax from 6 percent to 4 percent and lifting the exemption status of 74 items to raise $531 million as part of his $29 billion budget proposal for 2010-11.

The County Commissioners Association of Pennsylvania is trying to determine what the governor’s budget proposal means to county employees and residents in terms of services and programs.

“Counties are calling on the General Assembly to adopt a fair and timely budget,” association Executive Director Douglas E. Hill said in a statement.

The association is a nonprofit organization representing all of the state’s 67 counties. Its membership includes county commissioners, council members, county executives, administrators, chief clerks and solicitors.

“A fair budget will maintain state funding to support services that benefit the health of local communities, including particularly human services, environmental programs and funding for courts and corrections,” he said.

According to Gary Tuma, press secretary for the governor’s office, Rendell’s 2010-11 budget holds down spending, but includes “fairly modest increases in education, public safety, health care and services for seniors and children.”

The bulk of the overall spending increase of 4.1 percent is for medical assistance, education and prisons, he said.

He said the governor’s proposal for 2010-11 will not require any new taxes, partly because of $2.7 billion in stimulus funds that will not be available the following fiscal year.

The change in sales tax is to address an anticipated state revenue crunch in 2011-12 with the loss of stimulus funds and an increase in pension costs in 2012, Tuma said.

County officials said the plan does not address the trend of declining revenues.

“If revenue is declining, how do we pay for state and county services?” said Commissioner Pamela Tokar-Ickes.

The counties’ perspective is a broad view.

“We have mandated services we must provide,” Tokar-Ickes said.

To provide those services the counties need to have adequate funding from the state and federal governments, she said.

“We still are not where we were in 2003,” she said.

State funding has fallen short even in better economic times, according to Hill.

“The result has been an erosion of the state’s commitment to fund mandated and necessary core government services, and a greater burden passed to local taxpayers,” he said.

There is only one way for the county to fill in the financial gaps created by the state’s lack of funding for these services, and that is through property taxes.

“Raising property taxes is the only way we have to make up for the state’s five-year trend of reducing funds to counties,” Tokar-Ickes said.

One proposal to change the taxing system is to broaden the sales tax base and eliminate or at least reduce the counties’ dependency on property taxes.

“I’d love to lower the sales tax and broaden it to eliminate the property tax,” said state Rep. Carl Walker Metzgar, R-Somerset.

“But if we do this for a way for government to get more money for spending, then it would foreclose on that possibility of using it to eliminate property tax,” he said.

The association and its members are calling on the state for a complete reform of the current tax structure.

“Until then we will constantly, constantly, have these issues,” Tokar-Ickes said.

Did Goldman Sachs rig the bank-tax vote? Foul play suspected in Richard Curtis internet campaign

When actor Bill Nighy joined director Richard Curtis to launch a campaign for a 'Robin Hood tax' on banks, they were confident it would easily gain public support.

After all, the banks' behaviour had been blamed for bringing the economy to its knees - and this was a chance to raise money for worthy causes such as tackling poverty and climate change.

So when an online vote asking if people supported the idea suddenly began receiving 'No' votes at a rate of six per second, foul play was suspected.

Even more so when many of the votes were traced to banking giant Goldman Sachs.

The Robin Hood tax campaign was launched with a three-minute advert directed by Vicar of Dibley writer Curtis and starring Nighy - whose films include Love, Actually and the Pirates of the Caribbean sequels.

The online vote was then set up to ask the public if they supported the tax, which would impose a small levy on all bank-to-bank transactions.

In the first few hours of the poll on Wednesday, organisers watched as votes flooded in for the 'Yes' camp.

But then an astonishing flurry of votes saw the 'No' tally rocket from 1,500 to 6,000 in just a few minutes. A quick analysis traced the votes to two internet protocol-addresses - one private and yet to be identified and the other registered to investment bank Goldman Sachs, which last night launched an investigation.

Curtis said: 'I think it's quite funny. I'm glad they are watching the film and hope they change their vote from No to Yes soon.'

Goldman Sachs (London office pictured) launched an investigation into the campaign last night

A source at the campaign said: 'Within four hours of the vote beginning we had 6,000 Yes votes and 1,000 No votes.

'But from 3.41pm on we noticed that six No votes were coming through per second.

'At 3.57 we re-tightened security, reset the count to remove fake votes, reassured our users and then began to analyse the data to see where the votes were coming from.'

The Robin Hood tax has already received support from 50 organisations including Oxfam, the TUC, Barnardo's, ActionAid and the Salvation Army.

Campaign: Actor Bill Nighy admits in the Robin Hood Tax video that taxing the banks would help the poor across the world

It would apply only to trading between financial institutions, such as for shares and derivatives.

While different rates of tax would apply to different types of transaction, the campaign says they could start at 5p for every £1,000 traded.

UK campaigners are working with an international movement which hopes the measure could raise up to £250billion a year to fight global poverty and tackle climate change.

A slick advertising campaign features slogans such as, 'Small change for the banks, huge changes for the world'.

Grilled: Bill Nighy admits that banks would lose only 0.05% of each deal but raise about £2bn for good causes

Launching the idea, Curtis said: 'I understand it is complicated and contentious and there are other ideas on the table, but what we are trying to create is an instinctive link between fixing banks and the huge challenges facing people on this planet.

'Do we drop promises on child poverty or do we tax the British public? Or do we work with banks to find a solution?'

Gordon Brown, German chancellor Angela Merkel and French president Nicolas Sarkozy have all spoken in recent months to support a form of transaction tax.

Last night, Goldman Sachs said of the voting claim: 'We have just received this information and we are investigating fully.'

View the Robin Hood Tax Campaign video here...

HOUSING MINISTER: IT'S OK TO LOSE YOUR HOME

LABOUR’S housing minister yesterday insulted millions struggling to survive the recession by claiming that having their homes repossessed might be their “best option”.

John Healey, who has banked more than £129,000 in expenses on his second home since 2001, was accused of losing touch with reality.

His comments came on the day figures showed repossessions hit a 14-year high, with 126 families a day losing their homes in 2009. The figure is the highest since 1995 and a significant 15 per cent increase on 2008, said the Council of Mortgage Lenders.

People now homeless will find it particularly galling that Mr Healey made an £88,000 profit last July when he sold his taxpayer-subsidised flat in Lambeth, south London, for £198,000.

He bought the property in 2000 for £110,000 and over five years spent thousands on renovations that were paid for by the public through his Commons expenses.

Mr Healey was doing a radio interview when he shocked listeners by saying: “For some people it can be the only, and it can in fact be the best, option for them to allow their home to be repossessed. Sometimes it is impossible for people to maintain the mortgage commitments they’ve got. It may be the best thing in those circumstances.”

It is the second time Mr Healey, who owns his Wentworth constituency home in South Yorkshire, could be accused of insensitivity. In December he said those who could not afford to buy their own home should resign themselves to renting. Of falling home ownership figures, he said: “I’m not sure that’s such a bad thing.”

Critics yesterday demanded an apology from him as the BBC Radio Five Live programme was inundated with complaints. One listener said: “Having your home taken back by the lender is the worst thing that could possibly happen – and I speak through experience.”

Grant Shapps, shadow housing minister, said: “John Healey’s remarks are crass and insensitive. It proves Labour ministers have lost touch with reality and I’m calling on him to apologise to the tens of thousands of families who have lost the roof over their heads.”

Liberal Democrat Sarah Teather said: “If this is Mr Healey’s best response to record repossessions he should shut up. These comments are grossly insensitive to families booted out of their home.”

In addition to repossessions, a further 188,300 home owners fell behind with their mortgage payments last year. Lenders predict even more will get into difficulty this year. Economic uncertainty and possible interest rate rises could lead to 53,000 repossessions, they warned.

After his interview an unrepentant Mr Healey said: “If families are deep in debt and there is no way they can keep paying their mortgage, repossession might be the only way they can get their lives back on track."

“The wide range of Government support, together with lower interest rates and greater lender forbearance, has helped keep repossessions around half the rate of the last recession and stopped thousands of families from losing their homes."

“Obviously, Grant Shapps needs reminding of the record repossessions that took place during the early 1990s recession. Families were left to sink or swim as the Tories left the recovery to the market. This Labour government has put support for home owners at the heart of our response to the downturn.”

Report: Feds probe Madoff’s brother and sons

Lawyer: Fraudster’s kids ‘continue to cooperate fully with the authorities’

The brother and sons of imprisoned swindler Bernard Madoff are the subject of criminal tax-fraud cases by federal prosecutors in Manhattan, the Wall Street Journal reported, citing people familiar with the matter.

Peter Madoff, the brother, was the compliance officer for Bernard L. Madoff Investment Securities LLC in New York and held an executive post with Madoff Securities International Ltd in London.

Bernard Madoff's sons, Mark and Andrew, helped run the firm's market-making division, which was separate from the investment arm where Madoff perpetrated his multibillion-dollar Ponzi scheme, the WSJ said

Lawyers for Peter Madoff didn't respond to requests for comment, while Martin Flumenbaum, a lawyer for Mark and Andrew Madoff, said in a statement they had no prior knowledge of Bernard Madoff's crimes and contacted authorities immediately after their father told them of his fraud, the paper said.

The sons "continue to cooperate fully with the authorities in their ongoing investigations," the paper quoted Flumenbaum as saying.

Peter Madoff's lawyer Charles Spada said in a letter to U.S. District Court Judge Madeline Cox Arleo last month that his client was the subject of a criminal investigation by U.S. prosecutors.

Bernard Madoff, 71, is serving a 150-year prison sentence in North Carolina after pleading guilty in March last year to a worldwide investment fraud of as much as $65 billion.

Thousands of investors and charities lost money in the Ponzi scheme — in which early investors are paid with the money of new clients.

The exact nature of the potential tax violations isn't clear, the WSJ added.

Madoff's trustee could not be reached outside business hours by Reuters for comment.

Don't Be Fooled By The Calm, Banks Will Be Rocked By 2011's $300 Billion Commercial Real Estate Time Bomb

Today's latest report from the Congressional Oversight Panel makes it very clear that while things may feel relative lty stable right now on the commercial real estate front, the real bomb hits in 2011. Banks could lose $200 - $300 billion, and 'every American' could be affected:

The full force of the commercial real estate problem will be felt over the next three years and beyond, according to the panel's February assessment, which means it starts to get worse starting today.

Cop 021110 Report

Will Obama Destroy Any Hope of U.S. Energy Independence?

Will Obama Destroy Any Hope of U.S. Energy Independence?

February 12, 2010 – 8:18 am

By Charles S. Brant, Energy Correspondent, Casey Research

The U.S. consumes nearly three times the amount of oil that it produces domestically on a daily basis. How can this statistic get any worse, you might ask?

Imagine in 2010 the Obama administration persuades Congress to pass a budget that results in a reduction of domestic oil production by 10% – 20%, making the supply/demand imbalance even more lopsided. Foreign oil companies will gain a distinct advantage over American domestic operators as an unintended consequence of these proposals.

Sound farfetched? It’s closer to reality than you may think… If it comes to pass, it will likely be the biggest structural change in the U.S. domestic oil and gas industry in decades and have far-reaching implications for investors and for the entire country.

In early 2009, the Obama administration proposed to eliminate significant tax incentives for the oil and gas industry. These tax benefits were put in place decades ago to incentivize oil and gas producers to develop domestic sources of energy, while recognizing that oil and gas exploration entailed special risks. Two of the proposed repeals with the most potential impact relate to what the industry refers to as “percentage depletion” as well as “intangible drilling costs” (IDC).

Tax incentives explained

The first proposal involves eliminating the deduction for percentage depletion. Currently, the tax code allows small oil and gas producers to choose between two different tax deductions, percentage depletion or cost depletion (Big Oil’s ability to use percentage depletion was severely limited years ago).

Percentage depletion allows a tax deduction of 15% of the annual gross revenue of a well, continuing as long as the well produces and even after 100% of the costs have been recovered. On the other hand, cost depletion is calculated as the amount of oil or gas produced annually as a percentage of the total reserves of the reservoir. This deduction ceases when 100% of costs have been recovered (after which the producer may switch to percentage depletion).

From a practical standpoint, this means many small stakeholders, including investors and lessors who are not directly involved in the operations of the wells, will lose their ability to deduct depletion altogether, putting them at a significant disadvantage to their larger competitors.

And cost depletion is pretty much out of the question for most small stakeholders, as it’s extremely difficult for them to calculate. Small stakeholders in wells often aren’t entitled to the proprietary reservoir data developed by the operator of the well, which is necessary to calculate cost depletion. While the operators do disclose reservoir data in their annual reports, they rarely contain enough detail for a small stakeholder to locate information relating to a small field or well in which the stakeholder has an interest. Oil and gas stakeholders – such as individual royalty owners, royalty trust investors, and landowners, who all benefit from leasing land to oil and gas explorers – will immediately see the value of their investment decrease while simultaneously paying more in taxes every year.

The other proposal relates to drilling costs. Under current rules, oil and gas producers can elect to deduct certain intangible costs related to the drilling and workover of wells, including labor, drilling fluids, and drilling rig time. By electing to deduct instead of capitalizing and amortizing expenses, explorers recoup their costs faster. If the Obama administration does away with intangible drilling costs, oil and gas producers will no longer be incentivized to reinvest in new drilling projects, and new exploration will decline.

Small oil and gas producers will also rethink their decisions to pursue riskier prospects if drilling incentives are reduced. The only projects that will be worthwhile to undertake will be the “sure win deals.” And if they do decide to drill, they won’t recoup their costs as quickly, which means they’ll be slower to start new projects. Without the tax incentives, marginal producing wells, which might otherwise be reworked and continue to produce for years, will be more likely to be plugged and abandoned.

So what if marginal wells are no longer subsidized? Taxpayers shouldn’t be supporting bad assets and small oil and gas companies that operate them.

That’s a fair point. But it’s significant to note that 85% of the total oil wells in the U.S. are marginal producers, and these wells account for approximately 10% of total oil production from the lower 48 states. For natural gas, marginal wells produce nearly 9% of the total. And it’s not just small companies operating these wells. These subsidies are deeply embedded in the economics of the U.S. independent oil and gas industry. Cutting the tax incentives will drastically change the industry. The chairman of the Independent Petroleum Association of America thinks these proposals will cost independent oil and gas producers over $30 billion.

Back in May 2009, when it came time to include the president’s proposals limiting oil and gas tax incentives in the FY2010 budget, cooler heads prevailed in Congress and the proposals were not enacted. However, you can bet that similar policies affecting the industry will be enacted sooner rather than later.

Profiting from the mayhem

All independent, non-integrated U.S. explorers and producers will be affected if these proposals become a reality. At first, profits of oil and gas producers across the board will decline precipitously, impacting companies’ bottom lines and hammering investor returns. Producers that primarily operate marginal wells will be forced to plug and abandon newly uneconomical wells as a result of the policy changes. Without cash flow to support high fixed costs and precarious balances sheets, these companies will quickly become distressed.

Next, oil services companies will suffer as their small and medium-sized customer bases shrivel up. Regardless of size, all exploration and production companies with significant exposure to U.S. oil and gas assets will get hurt.

It’s also almost guaranteed the market will overreact and punish any U.S. company that has anything to do with oil and gas, whether or not it’s fundamentally justified. However, once the initial panic subsides, expect to find some screaming bargains among the surviving companies.

Oil and gas companies with conservative balance sheets, diversified assets outside of the U.S., spare cash, and opportunistic management will have a heyday picking up quality assets at fire sale prices. The trick is to identify the companies that will survive the turmoil and be able to capitalize on their competitors’ misfortune. Initially these strong companies will suffer stock declines along with every other oil and gas company. But they will recover quickly, and as they acquire new assets at attractive prices, their growth and profitability will be better than before. The window of opportunity to get into these stocks at bargain prices will be brief, as the market will quickly correct and the value will disappear.

Big Oil identified the United States as a hostile political environment years ago and has moved most of its production overseas, so they’re less likely to be negatively affected by these changes. However, bargain prices will be too tempting for these giants to stay on the sidelines. They’ll wade into the fray in a big way, picking up great assets even though it means they’ll be subjected to the stifling regulatory environment that comes with doing business in America.

Energy prices across the board will explode upwards and stay high until the production void left by oil and gas can be replaced by renewable energies, nuclear, or coal. The coming energy crisis will present you with plenty of opportunities to profit if your portfolio is correctly positioned.

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