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U S A Thursday November 20 2008

USA $2.00 Canada C$2.50

‘China’s belief in its own Great Power status is real. But so is its lack of
confidence’
David Pilling Comment Page 9
Newspaper of the year

Guru, schmuru We review the world’s worst business self­help book Business Life
Page 10
World Business Newspaper

News Briefing
Chrysler hoping to revive GM merger talks
Chrysler hopes to revive merger talks with General Motors should a government bail-out
package for Detroit’s carmakers be agreed, allowing the companies to face their
pressing liquidity problems. Page 13; Lex,
Page 12; www.ft.com/autoforum; www.ft.com/detroit

Daschle for health Obama wants focus on reform

Citi takes brunt of banking rout as it falls 23%
By Francesco Guerrera, Greg Farrell and Aline van Duyn in New York Citigroup came
under heavy selling pressure yesterday with its shares slumping to a 13-year low
amid fears over its ability to withstand expected writedowns on mortgage-backed assets.
Citi led a widespread retreat in the financial sector as share prices fell for most
banks and the cost of insuring their debt against default rose. Shares in Citi were
the worst hit, falling more than 23 per cent to $6.40, as investors continued to
worry about its capital and liquidity. Citi’s market value is now just $34.8bn,
less than its smaller rival US Bancorp. The stock is trading at about a third of
the bank’s book value – the difference between its assets and its liabilities.
The sharp fall in the stock is set to put more pressure on Vikram Pandit, chief executive,
who has failed to revitalise Citi’s shares and earnings. In a statement, Citi,
which yesterday announced it would buy back $17.4bn in off-balance sheet securities,
sought to reassure the market that its plan to sell assets, reduce costs and cull
employees would pay off. “Citi has strong capital and liquidity positions and a
unique global franchise,” it said. Shares in Goldman Sachs closed at $55.18, their
lowest since its 1999 public listing. Merrill Lynch, which is close to being acquired
by Bank of America, lost 15 per cent and Morgan Stanley fell 14 per cent. The combined
market value of Merrill, Morgan Stanley, Goldman and Citi is now lower than the capitalisation
of JPMorgan Chase. Analysts said the rout was driven by concerns that the havoc in
the residential mortgage market was spreading to commercial property assets. Citi
ends SIV, Page 16 www.ft.com/usdailyview

Junk bond yield jitters
Average yields on US junk bonds have topped more than 20 per cent for the first time
amid concerns about a protracted recession and corporate defaults. The spike in yields
could make new debt prohibitively expensive for companies with credit ratings below
investment grade. Page 13;
Insight, Page 24

Piracy set to fuel costs
The increase in piracy off Somalia looks likely to impose extra costs as ship owners
charge for diverting vessels to avoid the danger area. Page 5

Democrats near target
The defeat of Ted Stevens, Alaska’s Republican senator, chalked up one more seat
for a Democratic majority striving for the 60-seat threshold that would immunise
it from opposition filibuster. The Democrats have 58 seats, with races in Minnesota
and Georgia yet to be declared.
Page 4

Barack Obama has chosen Tom Daschle (above) as secretary for health and human services
to lead a push for universal healthcare reform, say Democratic officials close to
the president­elect. Eric Holder, a former justice department official, this week
emerged as favourite to become attorney­general Report, Page 4; www.ft.com/obama
AFP

Ex­premier faces trial
Dominique de Villepin, former French prime minister, is to be tried for alleged involvement
in a plot to blacken the name of his rival, Nicolas Sarkozy. Page 3

Fed set for def lation f ight
Comments reinforce expectations of rate cut Economy likely to contract into next
year
By Krishna Guha in Washington and Michael Mackenzie and Nicole Bullock in New York
The Federal Reserve will do whatever it takes to ensure the US does not fall into
a deflation trap, its vice-chairman said yesterday, as US stocks fell to the lowest
level of the financial crisis. The comments by Don Kohn will reinforce expectations
that the US central bank may cut interest rates again by as much as 50 basis points
from the current level of 1 per cent in December. The S&P 500 fell 6.1 per cent to
806.58, a five-and-a-half-year low, as bank stocks plunged and investors sought the
safety of government debt. The yield on the two-year Treasury note fell to its lowest
level since June 2003 – 1.06 per cent. Mr Kohn’s remarks came as minutes revealed
that the Fed believed the US economy was in the midst of an economic contraction
that would continue into next year. The minutes said “participants generally expected
the economy to contract moderately in the second half of 2008 and the first half
of 2009”. Fed officials sharply increased their unemployment forecasts for late
2009, taking the central range of their estimates to between 7.1 per cent and 7.6
per cent. The new figures are almost two percentage points higher than the officials
were expecting in June. The discussion in the minutes confirms the sense that the
US economy suffered a financial heart attack in September and October as the crisis
in the markets escalated. Growth was weaker across the board, with a “negative
spiral in which financial strains lead to weaker spending, which in turn lead to
higher loans losses and a further deterioration in financial conditions”. The minutes
show Fed officials expect inflation to decline to levels consistent with price stability
– but not too low, with most of them still seeing inflation next year in the range
of 1.3 per cent to 2 per cent. However, for the first time in many months, Fed officials
stopped worrying that inflation could turn out to be higher than they forecast, and
some worried that it could end up too low. These concerns were fuelled yesterday
by news that consumer prices fell 1 per cent in October, with core inflation down
0.1 per cent – its first decline since December 1982. The Fed vice-chairman stressed
he did not believe deflation was the most likely outcome for the US economy, but
was a “less remote” possibility than he previously thought. “Some people have
argued that we should save our ammunition, that interest rate cuts aren’t effective,’’
Mr Kohn said. “I think that were we to see this possibility, that we should be
very aggressive with our monetary policy, as aggressive as we can be.” Treasury
inflation-protected securities indicated that investors expected deflation, though
Fed officials expressed concerns that prices were being distorted by a lack of liquidity.
The five-year breakeven rate, which provides an expectation of future inflation,
suggested that investors were projecting annualised inflation to be minus 0.70 per
cent over the next five years. “The general thrust of the [consumer prices] report
supports our call that disinflation is now a reality and deflation will be the next
major risk to financial markets,” said Steven Ricchiuto, chief economist at Mizuho
Securities. German stimulus plans, Page 2 Editorial Comment, Page 8 Energising the
economy, Page 9 Insight, Page 24 Markets, Pages 24­26 www.ft.com/centralbanks

TPG faces China loss
TPG risks losing a substantial investment in a Chinese leasing venture after a dispute
in which the company’s local staff called in police to remove the private equity
firm’s representatives.
Page 13; Tough lessons, Page 16

Australia trades up
Australia plans to join a trade pact that spans the Pacific. Trade minister Simon
Crean said it would join Brunei, Chile, New Zealand, Singapore and the US in the
Trans Pacific Partnership. Page 6

US rethinks energy use
US oil demand has fallen 5 per cent this year, the biggest drop since 1981, say figures
that underline changing attitudes to energy use. Page 4; Commodities,
Page 24; www.ft.com/oil

Berlin package faulted
Germany should launch a more ambitious stimulus package and east European aid programmes
must be accelerated, a European Central Bank policymaker said.
Page 2

Food for Seoul

UN warns of Tehran’s progress in stockpiling enriched uranium
Material could be used to make atom bomb
By Daniel Dombey in Washington and James Blitz in London Iran is forging ahead with
its nuclear programme, the United Nations’ nuclear watchdog reported yesterday,
deepening the dilemma facing US presidentelect Barack Obama over his campaign promise
to engage with Tehran. The latest report by the International Atomic Energy Agency
reveals that Iran is rapidly increasing its stockpile of enriched uranium, which
could be rendered into weapons-grade material should Tehran decide to develop a nuclear
device. The agency says that, as of this month, Tehran had amassed 630kg of low enriched
uranium hexafluoride, up from 480kg in late August. Analysts say Iran is enriching
uranium at such a pace that, by early next year, it could reach break-out capacity
– one step away from producing enough fissile material for a crude nuclear bomb.
“They are moving forward, they are not making diplomatic overtures, they are accumulating
low enriched uranium,” said Cliff Kupchan, an analyst at the Eurasia Group, a risk
consultancy in Washington. “These guys are committed to their nuclear programme:
if we didn’t know that, they just told us again.” The IAEA report also says there
has been a breakdown of communication between the agency and Iran over alleged research
on an atomic weapon. “The Iranians are making good progress on enrichment but there
is absolute stone-walling on past military activities,” said Mark Fitzpatrick of
the International institute for Strategic Studies. “It’s very disappointing.”
The progress chalked up by Iran increases the difficulties for Mr Obama, who campaigned
on promises of talking to America’s enemies, although during the election he scaled
down his initial vow to meet Iran’s leaders to a more general commitment to consider
doing so if it advanced US interests. “Obama faces a real dilemma,” said the
Eurasia Group’s Mr Kupchan. “He must decide whether to pursue diplomacy quickly
in light of rapid Iranian progress or whether to wait in the hope of a more moderate
Iranian leadership after Iran’s June presidential election.” European diplomats
have responded favourably to Mr Obama’s suggestion of US engagement with Iran,
although they are keen to avoid unilateral US actions that would rip up the approach
fashioned by the permanent five members of the UN Security Council and Germany. www.ft.com/iran

Politkovskaya uproar
Colleagues of murdered Russian reporter Anna Politkovskaya accused the government
of a cover-up after a judge barred the public from the trial of three men accused
of helping kill her. Page 2

Kremlin courts Chávez
Russian president Dmitry Medvedev next week begins a tour of Latin America that has
raised eyebrows in Washington, mainly because of his visit to Venezuela, which under
president Hugo Chávez has been a hindrance to US influence in the region. Page 5

Oil fall jolts Syrians
The decline in crude prices has taken oil producers by surprise but few will be hurt
as much as Syria, which is grappling with rapidly falling supply. Page 6;
Editorial Comment, Page 8; Commodities, Page 24

Daewoo Logistics of South Korea said it expected to pay nothing to farm maize and
palm oil in an area of Madagascar half the size of Belgium. The Indian Ocean island
will simply gain employment opportunities from the 99­year lease of 1.3m hectares,
the company said. It emphasised that the aim of the investment was to boost Seoul’s
food security. Report, Page 3 Editorial Comment, Page 8

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World Markets
STOCK MARKETS
Nov 19 Dow Jones Ind Nasdaq Comp S&P 500 FTSEurofirst 300 DJ Euro Stoxx 50 7997.28
1386.42 806.58 811.99 2295.36 4005.7 1998.02 3087.89 4354.09 8273.22 12815.80 132.7
prev 8424.75 1483.27 859.12 845.37 2390.10 4208.6 2095.23 3217.40 4579.47 8328.41
12915.89 138.7 %chg -5.07 -6.53 -6.12 -3.95 -3.96 -4.82 -4.64 -4.03 -4.92 -0.66 -0.77
-4.3 Oil Brent $Jan Oil WTI $Dec Gold $ $ per Û $ per £ £ per Û ´ per $ ´ per
£ $ index

On FT.com today
CURRENCIES
Nov 19 1.260 1.508 0.837 96.8 146.4 92.3 prev 1.263 1.495 0.843 97.0 146.2 92.3 1.518
Û per $ £ per $ Û per £ ´ per Û £ index Û index Nov 19 0.794 0.663 1.194
122.6 82.8 97.4 prev 0.792 0.669 1.187 123.1 82.2 97.5 1.802 Fed Funds Eff Nov 19
51.72 53.62 748.25 prev 51.84 54.39 738.25 chg -0.12 -0.77 +10.00 US 3m Bills Euro
Libor 3m UK 3m US Gov 10 yr UK Gov 10 yr Ger Gov 10 yr Jpn Gov 10 yr US Gov 30 yr
Ger Gov 2 yr

INTEREST RATES
price 103.06 107.34 101.86 100.26 109.17 103.15 Nov 19 0.38 0.07 4.11 4.05 yield
3.39 4.04 3.53 1.47 3.97 2.19 prev 0.37 0.12 4.15 4.05 chg -0.15 -0.05 -0.13 -0.02
-0.18 +0.03 chg +0.01 -0.05 -0.04 -

John Gapper
Blog: Detroit realises it needs to shrink to survive
www.ft.com/gapperblog


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