The price of oil continued its record rise, and the papers all give major play to stories on how much higher it’ll go.
The Financial Times on page one reports that a Goldman Sachs analyst, “who three years ago correctly predicted a price ‘super-spike’ above $100 a barrel,” says crude could hit $200 in the next six months to two years. The Wall Street Journal on A3 mentions the same report but headlines the analyst’s lower $150 number. The New York Times puts the estimate at the bottom of a Business Day cover story reporting that the government expects gas prices to peak next month at $3.73 a gallon, or twelve cents more than now—though it notes many nongovernment economists predict prices of more than $4 this summer.
Crude oil prices hit a record, settling at nearly $122 a barrel, about double from a year ago and 17 percent higher in real dollars than the previous peak in 1980, the WSJ says. The paper quotes a Federal Reserve economist saying $150-a-barrel oil would reduce U.S. economic output by 1.8 percentage points in the first year.
Why so high? The Journal notes that U.S. oil demand is falling because of the high prices and the slow economy, but that’s being more than matched by demand gains elsewhere, including in China, and supply isn’t growing fast enough. Also:
The world’s safety cushion—the amount of readily available oil that could be pumped in a moment of crisis—is now around two million barrels a day, according to most estimates. That’s just 2.3% of daily demand, and nearly all of the safety cushion is in one country, Saudi Arabia. Everyone else is pretty much pumping all they can, which makes the world vulnerable to political or other shocks.
The WSJ notes that oil is rising even as the dollar rallies, and in a separate A3 story writes that it has politicians fluttering to old standby measures like windfall-profits taxes, OPEC busting, and drilling in the Alaska National Wildlife Refuge—everything but reducing consumption.
Bloomberg drills a bit more into the reason for the most-recent spike—attacks on Nigerian pipelines that have disrupted supplies.
Myanmar’s rice harvest ruined
The Journal says on A1 that the disaster in Myanmar, which has killed at least 22,000 people, will likely worsen hunger across the region by exacerbating the food crisis and sending exorbitant rice prices still higher. The paper says the cyclone hit the harvest in Myanmar, “one of Asia’s richest rice-growing areas.”
While the country has more immediate issues—41,000 people are missing—the long-term effects could deepen its misery.
U.N. relief officials say many rice mills have been destroyed. Distribution networks are in tatters, they say, and large tracts of rice-growing land in the muddy Irrawaddy delta are still under water. Rice plants generally die if they remain submerged for about four days, researchers say.
Is the buck about to rebound?
The NYT says on C1 and the WSJ on C3 say that the dollar may finally be bottoming, as the risk of a big decline against the euro is reduced. The Times reports that the dollar has gained a nickel to $1.55 against the euro in the last two weeks as the Fed signaled it would pause in its aggressive (and inflationary) campaign of interest-rate cuts and officials from some of the world’s major economies started sounding off about shoring up the buck.
But the NYT makes as many arguments for a continuing decline as it does against, noting that investors could dump dollars if they fear a sharp decline and quoting the economist Martin Feldstein saying the huge trade deficit means “the dollar has substantially further to fall.” It also writes that the Bush administration says it is “anathema” for it to intervene in the currency markets to prop up the dollar.
Bloomberg reports this morning that the greenback rose on news that the Kansas City Fed president said the central bank may have to raise interest rates to combat “serious” inflation.
UBS exec detained
The FT scoops on page one that a top UBS executive was briefly picked up by U.S. authorities investigating whether the Swiss bank, which already has enough problems with $38 billion in write-offs and 5,500 job cuts, enabled tax evasion schemes by its clients. The senior banker is being held as a material witness and forced to stay in the U.S. for now.
People close to the situation said the detention was an aggressive tactic and may have been chosen by the authorities to put pressure on UBS and its employees to reveal its business practices. The bank in effect closed its Swiss-based US operation in November but said the move had not followed any specific US regulatory action.
Bloomberg credits the FT and notes that the UBS Web site for its U.S. private bank advertises “tax minimization” as one of its services and that the Germans are also weighing an investigation into the firm’s tax practices.
Separately, the Journal writes on C1 that the bank’s financial woes have “sharply scaled back its ambition to be one of the world’s leading investment banks.”
Bloomberg writes that the Securities and Exchange Commission’s “inability to avert the collapse of Bear Stearns” may have been due to the fact that the agency’s funding is being cut at the same time Wall Street’s financial machinations increase in complexity.
The wire service reports that the SEC’s outlays dropped 1.3 percent from 2005 to 2007 to a total of $876 million and cut 386 employees—10 percent of its total. Quote of the Day:
“This is akin to the fire department laying off people as the house burns down,” said Lynn Turner, a former SEC chief accountant.
But Bloomberg buries in the very last paragraph some key information contrary to its thesis: that the SEC’s budget nearly doubled after Congress passed the Sarbanes-Oxley Act six years ago. Here’s how it says the SEC explains itself:
As the investment banking industry’s main regulator, the SEC tries to ensure that firms have enough funds to meet expected obligations for at least one year during periods of market stress.
That test failed to account for the “unprecedented” situation at Bear Stearns, which couldn’t secure loans even when it offered “high-quality collateral,” (SEC Chairman Christopher) Cox said in April 3 testimony before the Senate Banking Committee. The SEC is reevaluating its approach, he said.
We reckon so.
Fannie Mae slashes dividend by a third
Fannie Mae, the quasi-governmental mortgage buyer that’s now almost single-handedly propping up home sales, reported a $2.2 billion loss in the first quarter and said its losses will get worse next year. It will shore up its weakened capital base by selling about $6 billion in new shares, partially diluting its existing shareholders’ equity, and it will cut its dividend by about a third.
The Washington Post on A1:
The government is relying on Fannie Mae to prop up the troubled real estate market, and the company is eager to expand its business. The challenge is to do both without making Fannie Mae the next bailout candidate.
The NYT reports that Fannie’s president is betting on a recovery, saying it will be a “feast” once prices turn around because of the deals it’s getting right now. Meanwhile, he’s buying those deals with money implicitly backed by taxpayers (Fannie has $3 trillionin mortgage assets). And his regulator loosened restrictions on purchases yesterday for the second time in two months, which the Post says “could” put Fannie at greater risk, but we’d just say “does” so.
The Post puts the capital-raising in nice perspective, noting that Fannie can buy $35 in mortgages or $193 in mortgage guarantees for every dollar in capital it gets. The WSJ on C2 notes that the new $6 billion would be additional to the $7 billion it raised just six months ago.
In other real estate news, homebuilder Beazer is in default with bondholders after failing to file earnings reports, the WSJ says. And the paper on C1 writes that one of the more egregious commercial real-estate lenders, Wachovia’s Robert “Large Loan” Verrone, is out at the bank, which has written down some $1.6 billion in commercial mortgages.
Steep discounts drive retail sales up
The WSJ on B1 writes that April retail sales are expected to look better in a report this morning than they have in months, but they’re being driven by steep discounting—even at above-the-fray luxury merchants like Neiman Marcus—that could end up hurting retailers. An analyst says a measure of promotions has increased by a third from last year.
Retailers generally try to maintain profits by selling as much as they can at full price. But sales have fallen more sharply than many anticipated since orders were sent to suppliers several months ago…
Faced with higher food and fuel bills and sagging home prices, consumers have cut back on discretionary spending. Overall, retailers are expected to report that April sales at stores open at least a year rose 2.2% from a year earlier, according to researcher Retail Metrics. But the numbers are deceptive: In addition to padding by heavy discounting, April sales this year were buoyed by an extra shopping day due to an early Easter holiday.
Wanted: Cayne and Greenberg cage match
The NYT has an interesting story on the eruption of high-level hostilities at what’s left of Bear Stearns. Seems old-timer Alan “Ace” Greenberg and Jimmy “Bridge Man” Cayne are fussing as their “fortunes have now sharply diverged.”
Mr. Greenberg, who cashed out the bulk of his Bear fortune through regular sales over the years, has just signed a lucrative agreement with JPMorgan to stay on as vice chairman emeritus. He will be paid 40 percent of the trading commissions he generates. And he recently began work on his memoirs.
Mr. Cayne, by contrast, has become a public piñata — blamed by Bear employees, a presidential candidate and others for the firm’s untimely end. His ties with Bear will be formally severed in June.
Although he still holds the title of chairman, he spends his days in relative seclusion, seeing few outside of the tight circle of his family, his two assistants and his lawyers. He personally lost about $900 million when Bear Stearns’s stock price collapsed.
Mr. Greenberg wonders about Mr. Cayne’s continued presence at Bear Stearns. “I don’t understand why he comes in,” Mr. Greenberg said. “He is not employed here anymore.”
Ouch.Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at email@example.com. Follow him on Twitter at @ryanchittum.