Saturday, September 20, 2008

"You want to build a $2 billion toll road? You are going to have to finance it the old-fashioned way, and very conservatively at that."

Wall St dead end with big road

September 20, 2008

Terry McCrann
The Australian
Copyright 2008

THIS was the week that Wall Street died. In a broader sense it arguably spells the end of American exceptionalism.

Not in the cultural and geopolitical sense in which the term is normally used. That's America not so much the great and powerful, but America the special.

Instead, that America as the home of the world's reserve currency is "excepted" from those normal rules and limitations of international commerce and financial dealing that bind everyone else.

For Wall Street's excesses were really just America's in microcosm. An America that was living beyond its means because it could always "settle the bill" in greenbacks.

And now that Wall Street will arguably be in decline as the world's financial intermediation crossroads, so the US overall will slip as well.

If correct, this week -- perhaps that really should be, this month -- will become the defining end point of the American century. The real entry point to the "21st century"; presumably, China's century.

If so, there'll be an exquisite footnote. The final big event of a week of extraordinary events was the co-ordinated injection by the six major central banks of $US180 billion into global financial markets.

Why co-ordinated? Because it had to be US dollars, provided by the Fed, fed out by the other central banks. And why US dollars? Because as the crisis peaked, everyone wanted greenbacks.

Now this might be seen as proof of that American exceptionalism continuing. I would suggest that it's more its last gasp.

The reason is the interplay between the Wall Street microcosm and the bigger, broader picture you get when you pan back.

Clearly, just at the "Wall Street level", life can't and won't go back to where it was before. After a period of "cleansing", the passage of time and the dimming of memory, the inevitable revival of greed and its sating via sophisticated financial engineering.

This time it really is different. For starters, there are going to be very few players in that future to "go back to". Three of the big five investment banks have gone, Morgan Stanley might follow, to possibly leave only Goldman Sachs.

An investment bank inside a commercial bank won't be able to operate the same way the big five did in the recent past. The precise reason they got into trouble was that they weren't bound by either the bank operating rules in general or bank capital limitations in particular.

The big banks like Citigroup and Morgan had of course followed to some greedy extent. But they were restrained -- saved -- by those rules; and the losses they suffered were survivable. With a little bit of help from sovereign investment funds and the ultimate backstop of Uncle Sam.

So the Wall Street of the immediate to foreseeable future simply won't have the operational structure to go back to a noughties future.

In conjunction, the appetite for -- exotic -- risk is going to be zero, from intermediators and savers alike.

You want to build a $2 billion toll road? You are going to have to finance it the old-fashioned way, and very conservatively at that. Raise $1 billion of real equity and $1 billion of debt secured from banks or a bond issue. No fancy infrastructure trusts with opaque leveraged financing and management contracts.

Or do it in the public sector, financed by government borrowing. Either way, having to accept much lower rates of return, much lower growth trajectories. And much lower fees and bonuses to tomorrow's much fewer "masters of the universe".

The same applies across the whole range of exotic structured investments and back into the balance sheets of all financial institutions. Out goes "any three exotic flavours". Back comes plain vanilla.

The broader story is the way Wall Street waxed rich over the last decade -- I would suggest its last great hurrah -- intermediating the dollars earned by the surplus countries back into US investments.

In particular, into US treasuries, funding housing from Fannie and Freddie -- seen by investors as de facto treasuries -- to sub-prime and on to all the exotic structured products.

With some of those dollars dropping also to us down under; and mostly into our housing via the banks and the non-bank securitisers.

It was a not exactly virtuous circle, and perhaps more the mother of all free lunches. The US consumers got cheap Chinese goods, and the Chinese money as well, back to buy or build their houses. And the "masters of the universe" on Wall Street got their ever rising bonuses.

Underwritten ultimately by Alan Greenspan's cheap money policy. Which not only helped feed the appetite for high-yield exotic risk, but also to fund the supply of dollars.

Why did the Government move so quickly to bail out Freddie and Fannie? Sure, because they sat at the centre of the US housing market. Sure, because any major disruption to their activities would have made the last week look calm. And the same applied to AIG.

But a huge factor in the decision was the reality that a very big chunk of their $US5 trillion of securities was held by the Chinese.

That said I somehow doubt they will be quite as willing to go back to "business as usual". This is why this shake-out is going to be very different to all the previous ones. From Enron, the dotcom meltdown, the collapse of Long Term Capital Management, and back to the 1987 crash. Why the end of the great Wall Street investment banks very graphically illustrates the more fundamental termination of Wall Street as the world's financial intermediation and innovation capital.

This will have real and sustained consequences for the US economy. Like Coyote and Road Runner, it's been running on air for some years now.

The most obvious manifestation of that, the sub-prime loans that were underwriting economic activity at the margin; and the easy access by consumers and business alike to borrowing via entities like Fannie and Freddie.

We've had most of the same mix. Cheap Chinese consumer goods. Easy access to -- someone's else's -- money so the household sector didn't have to, and until recently didn't, save. And minor versions of Wall Street's exoticism in Babcock & Brown and Macquarie Bank.

But we also have an economy feeding China's, not just supping on its dollars; a budget in surplus and an official interest rate at 7 per cent against the US's 2 per cent.

All three, much better starting points to face the new world that will continue to emerge. Although that won't help our minor version of Wall Street much.

Although fortunately we didn't breed quite so many investment bankers. Sydney doesn't face quite the terminal future of its bigger cousin.

© 2008 The

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It was a disaster here. They could have helped."

State to pay Spanish - Australian consortium for waived fees on Toll Road


The Associated Press
Copyright 2008

Munster - Indiana will reimburse the private operator of the Indiana Toll Road for the state's decision to temporarily waive fees along the tollway to alleviate congestion during floods that closed northwestern Indiana freeways for days.

Jane Jankowski, a spokeswoman for Gov. Mitch Daniels, said Friday that the state will reimburse Macquarie-Cintra - a Spanish and Australian consortium - for its lost revenue. She said she doesn't know how much it will cost the state to make good on the lost tolls.

The state's decision upsets Margie Stewart, an Indiana Toll Road employee and Teamsters Union representative.

"Why should the taxpayers pay for this? The company is making plenty of money. It was a disaster here. They could have helped," Stewart said Friday.

Jankowski said the funds will come from the $3.8 billion the state received from the foreign consortium for the 75-year lease agreement to operate and profit from the toll road.

The private operator, called the Indiana Toll Road Concession Co., and the Indiana Department of Transportation announced Tuesday that tolls would be temporarily suspended on Interstate 90 on a 25-mile section from Portage west to the Indiana-Illinois border after Interstate 80/94 was closed by flooding. A portion of Interstate 65 was also closed.

The closures caused large traffic jams from traffic that had to be detoured. State Rep. Dan Stevenson, D-Highland, called on Daniels to suspend tolls to ease traffic. Tolls went back into effect Thursday, the same day the freeways reopened.

© 2008 The Associated

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"Constituents remain concerned about political pressure to invest in deals such as toll road projects favored by state leaders."

Pension fund hires Perry aide as deputy director

Board splits 5-4 on choice as some trustees voice fears of political influence.


By Robert Elder
Austin American Statesman
Copyright 2008

A divided Teacher Retirement System board hired a longtime aide to Gov. Rick Perry as the $107 billion pension fund's new deputy executive director, a position that had been vacant for three years.

The board voted 5-4 to hire Brian Guthrie, a budget and policy aide to Perry. Guthrie, who was one of three finalists for the job, also worked for Perry and the late Bob Bullock when they were in the lieutenant governor's office.

The possible hiring of Guthrie alarmed some educator groups, which expressed concern about the degree of control Perry has over the pension fund, one of the nation's largest. The governor directly appoints three trustees and selects the other six trustees from a list of the top vote-getters in retirement system elections.

After his selection, Guthrie told the board he is "proud of my service to the governor and the lieutenant governor" then added, "My life changed today."

"I've been given the opportunity to serve the members of the Teacher Retirement System and the board, and I am firmly committed to doing so," he said. "I do not have a personal agenda."

After the meeting, Guthrie said the governor had not asked him to apply for the retirement system job and has not spoken with him about the system or any strategies it should employ.

The system serves 1.3 million active and retired public school workers and some state higher education employees. It pays out about $6 billion in benefits a year.

Before the vote, Ann Fickel, legislative director of the 50,000-member Texas Classroom Teachers Association, urged the board "to defer these controversial kinds of decisions until after the legislative session and work on strengthening the relationship you have with your members."

Trustee Charlotte Clifton, a high school teacher in Snyder, voted against Guthrie's hiring, as did the other active educator on the board, Houston-area school superintendent Mark Henry.

Clifton, a former president of the Classroom Teachers Association, said, "I don't think this is the best time to hire this position when a number of other changes are going on." She said she has spoken with a number of educators who are worried about possible political influence on the fund.

Fickel and representatives of other educator groups said the constituents of the retirement system remain concerned about the system's push into more private equity and alternative investments, bonus pay for investment staff, and possible political pressure to invest in deals such as toll roads and other infrastructure projects favored by state leaders.

Ted Melina Raab, a representative of the Texas American Federation of Teachers union, said told the board that Guthrie's hiring would add another layer of controversy to the retirement system and "could detract from the goal of securing maximum state contributions for the pension and retiree health care funds."

The retirement system has already drawn the attention of the Senate State Affairs Committee. Committee members last month questioned system officials about the board's decision to replace its longtime fiduciary counsel and about the system's push into private equity and other alternative investments.

Separately, system trustees said the fund would start to sell its holdings in nine foreign companies that do business in Sudan or Iran. The board didn't provide an estimate of how much it will cost to sell its holdings or what expected returns it might forego.

Last year, Perry directed the state pension funds to unload their holdings in companies with ties to Iran, and the Legislature passed a law requiring state pension funds to sell their holdings of companies that do business with Sudan, whose government has been accused of genocide.; 445-3671

© 2008 Austin

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Friday, September 19, 2008

"The direction of Macquarie's share price is telling us Macquarie is irrevocably broken."

Pucker up and wear it

September 19, 2008

Brisbane Times (Australia)
Copyright 2008

THINK of it as Nightmare On Martin Place, Breaking Point At Point Piper, or Wipeout On Wolseley Road.

But as investors ponder the future of the Millionaires Factory as the Millionaires Graveyard, it's worth maintaining perspective.

And as fearless leader Nicholas Moore'n'more gets accustomed to life as Nicholas Less-is-more, it's about hunkering down and surviving.

Moore-for-less may have hoped the 9 per cent share price fall on the day he was appointed boss may have been the worst of it. Sadly, nearly 40 per cent this week suggests otherwise. There may even be more'n'more.

Still, it doesn't do much for the ashen faces in the corridors of the GPO to realise Macquarie's gently easing share price has seen the company slip below underperforming local insurer IAG on market capitalisation.

It remains unclear, however, if Macquarie's charitable foundation will start handing out food parcels in Vaucluse, Mosman and Castlecrag.

With the market turmoil leading to a round of mergers, bailouts and collapses as the foundations of listed investment banks crumble - a fact we're sure Moore hasn't failed to notice - all manner of suggestions are emerging about renaming banks. Macquarie Tanked. Merrilly Lynched, aka, the Thundering Herd, or latterly the Steaming, um, Turd.

UBS, already battered by suggestions that it Used to Be Smart, is now wearing the tag of Ugly Balance Sheet.

We suspect readers are familiar with at least one word that rhymes with Citi.
A bit, er, tight

Spare a thought for long-time Macquarie chief pom-pom waver, JPMorgan's Brian "Eat My Shorts" Johnson, who once famously noted how painful it can be to wear Macquarie rugby "shorts". Johnson is discovering Macquarie longs are equally uncomfortable in a credit meltdown. He said yesterday: "The direction of Macquarie's share price is telling us Macquarie is irrevocably broken."

Taking a big gulp

At times like these a good distraction helps.

For Macquarie chairman David Clarke there's his part-time hobby, chairman of Australian Vintage Wines, formerly known as McGuigan Simeon Wines.

Clarke didn't have much of a day yesterday. As Macquarie tanked, he also had to deal with Australian Vintage fessing it had been unable to complete the sale of its mammoth Loxton winery, necessary to ease hefty debts.

But at least Clarke, who for months has insisted the wine group has turned the corner, will have something positive to ponder. If not for the $3 million deposit taken from the Indian wine group Indage, Australian Vintage would have reported a full-year loss.

Frocking up

Australia has a proud tradition involving commercial television, men and dresses. So we were delighted to hear that Seven Network commercial director Bruce McWilliam had bought a dress for boss David Leckie.

Perhaps we should explain.

At a charity function this week, Leckie found himself bidding on a dress being modelled by his wife, Skye. Leckie, chivalrously, offered $4000. But trouble struck when he realised he didn't have his credit card. At least, that's the line we hear was offered.

Quick to the rescue was McWilliam, who handed over his credit card.

We can only wonder if McWilliam tried to claim it as a work expense. We're unsure how he'd go explaining to the bean-counters that he'd bought a dress for the boss.

Psst! Got a tip? Use our online tips box

© 2008 Brisbane

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Thursday, September 18, 2008

“It would set a dangerous precedent for a career politician to tell them how to invest educators’ retirements.”

Educators’ association: Put brakes on toll road investments


By Robert Elder
Austin American-Statesman
Copyright 2008

The Association of Texas Professional Educators put out a statement today on possible teacher pension fund investments in toll roads and other infrastructure projects. The statement is an apparent response to a recent proposal by the state’s political leadership to establish a state infrastructure investment fund to help pay for Texas roads and infrastructure.

Here’s the ATPE statement:

The state’s largest educators’ group will urge the trustees of the Teacher Retirement System of Texas tomorrow to maintain their independence from state budget matters and not to invest the pension fund in politically influenced toll road projects across Texas.

The 112,000-member Association of Texas Professional Educators opposes the use of the multibillion-dollar fund as a potential tool for furthering political ventures.

The committee of TRS board members discussed the issue today during a broader discussion on future investments in infrastructure.

“The TRS investment staff has done a good job managing the fund so far,” said Brock Gregg, ATPE governmental relations director. “It would set a dangerous precedent for a career politician to tell them how to invest educators’ retirements.”

The TRS board has a very successful investment history based on prudent decisions and the long-term interests of the retired teachers who rely on the TRS pension fund. The fickle nature of investing in politically motivated funds and projects, however, won’t benefit the long-term investment strategy that has made TRS successful.

“In such a volatile market environment, educators are more worried about their financial future than ever before,” said Gregg. “Our concern is that these suggestions are politically motivated and focused on solving a state budget problem as opposed to maintaining the fiduciary principle of the TRS fund-serving the long-term interests of Texas’ retired educators.”

While not bound to investment recommendations by other governmental entities, the TRS board can approve the use of retirement funds to invest in state-sponsored projects. In 2006, the governor’s office suggested that the TRS Board invest up to $600 million in start-up technology companies receiving money from the Emerging Technology Fund; however, ATPE urged the board not to invest in the highly speculative, politically based investments.

© 2008 Austin

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Phil Gramm and his pack of whiners

Phil Gramm's fingerprints are all over market mess



Houston Chronicle
Copyright 2008

"The fundamentals of our economy are strong," John McCain said as Wall Street went into white-knuckle panic over diving investor confidence. Does he believe that? It doesn't really matter, because the Republican has outsourced his economic policy to the ideologues whose opposition to regulations brought the financial markets to their knees.

McCain's former economic adviser is ex-Texas Sen. Phil Gramm. On Dec. 15, 2000, hours before Congress was to leave for Christmas recess, Gramm had a 262-page amendment slipped into the appropriations bill. It forbade federal agencies to regulate the financial derivatives that greased the skids for passing along risky mortgage-backed securities to investors.

And that, my friends, is why everything's falling apart. That is why the taxpayers are now on the hook for the follies of Fannie Mae, Freddie Mac, Bear Stearns and now the insurance giant AIG to the tune of $85 billion.

On Monday, McCain issued a tough-talk statement that he was "glad" that the feds "have said no to using taxpayer money to bail out Lehman Brothers, a position I have spoken about throughout this campaign." On Tuesday, the government did the daddy of all bailouts. It took over AIG, fearing its bankruptcy could set off a cataclysmic chain of events.

And do you know where the problems lay at AIG? They weren't in its main insurance business. They were in its derivatives-trading unit.

Last February, Fortune Magazine called Gramm "McCain's Econ Brain." Gramm lost the official title of economic adviser for making an impolitic remark about this being "a nation of whiners." But Gramm's belief in letting speculators do as they please was never an issue. And even after he left the campaign, Gramm had been mentioned as a possible Treasury secretary in a McCain administration.

Another Gramm contribution was the "Enron loophole," which prevented federal oversight of Enron's electronic energy trading. Such favors proved very expensive to consumers but profitable to the Gramms. Enron CEO Ken Lay chaired Gramm's 1992 re-election campaign, and wife Wendy Gramm spent years on the Enron board, earning as much as $1.8 million, according to Public Citizen, a consumer advocate.

So McCain's reassurances to the little people that he won't let what's happening to them happen again is rather unconvincing. McCain now talks about the need for more regulations, but he's been highly stingy with the for-instances. He wants a commission to look into it.

(Too bad he didn't name Mitt Romney as his running mate. A former venture capitalist, Romney knows something about Wall Street.)

The Bush economy was built on baloney. It was built on keeping interest rates low so that people could borrow lots of money to spend on real estate and at the mall. The resulting housing bubble left middle-class people feeling prosperous, even as their earnings stagnated or fell.

The Democrats weren't exactly tigers on containing the housing bubble, but they did try to put the brakes on some of the lending outrages that are the root of the current crisis. For example, Barack Obama sponsored a bill that would have prevented lenders from pressing abusive loan terms onto unsophisticated, subprime borrowers. That went nowhere.

"I certainly don't fault Sen. McCain for these problems," Obama said early in the crisis, "but I do fault the economic philosophy he subscribes to."

Obama need not be so mild-mannered. McCain's economic philosophy is McCain's fault. He doesn't know much about economics — and has admitted as much — so his philosophy became a simple-minded faith in the opinion of others. And look whom he listens to.

Americans will be paying for this philosophy well into the 21st century.

© 2008 Houston

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Wednesday, September 17, 2008

"We are witnessing a rather unique event in the history of the United States."

Fed rescues AIG with $85 billion loan for 80% stake


By Edmund L. Andrews
International Herald-Tribune
Copyright 2008

WASHINGTON: Acting to avert a possible financial crisis worldwide, the U.S. Federal Reserve Board reversed course Tuesday and agreed to an $85 billion bailout that would give the U.S. government an ownership stake in the troubled insurance giant American International Group.

The decision, announced by the Fed only two weeks after the Treasury Department took over the quasi-government mortgage finance companies Fannie Mae and Freddie Mac, is the most radical intervention in private business in the central bank's history.

With time running out after AIG failed to get a bank loan to avoid bankruptcy, Treasury Secterary Henry Paulson Jr. and the Fed chairman, Ben Bernanke convened a meeting with House and Senate leaders on Capitol Hill at about 6:30 p.m. Tuesday to explain the rescue plan.

They emerged just after 7:30 p.m. with Paulson and Bernanke looking grim but top lawmakers generally expressing support for the plan. But the bailout is likely to prove controversial, because it effectively puts taxpayer money at risk while protecting bad investments made by AIG and other institutions does business with.

What frightened Fed and Treasury officials was not simply the prospect of another giant corporate bankruptcy, but AIG's role as an enormous provider of financial insurance, which effectively requires it cover losses suffered by other institutions in the instance of defaults of securities that they have purchased. That means AIG is potentially on the hook for securities that were once considered safe.

If AIG had collapsed — and been unable to pay all of its insurance claims — institutional investors around the world would have been instantly forced to reappraise the value of billions of dollars in debt securities, which in turn would have reduced their own capital and the value of their own debt.

"It would have been a chain reaction," said Uwe Reinhardt, a professor of economics at Princeton University. "The spillover effects could have been incredible."

Financial markets, which on Monday had plunged over worries about AIG's possible collapse, reacted with relief to the news of the bailout. In anticipation of a deal, stocks about 1 percent in the United States on Tuesday and were up about 2 percent in early trading in Asian markets Wednesday.

Still, the move will likely start an intense political debate during the presidential election campaign over who is to blame for the financial crisis that prompted the rescue.

Representative Barney Frank, Democrat of Massachusetts and chairman of the House Financial Services Committee, said Paulson and Bernanke had not requested any new legislative authority for the bailout at the meeting Tuesday.

"The secretary and the chairman of the Fed, two Bush appointees, came down here and said, 'We're from the government, we're here to help them,' " Frank said. "I mean this is one more affirmation that the lack of regulation has caused serious problems. That the private market screwed itself up and they need the government to come help them unscrew it."

The decision was a remarkable turnabout by the Bush administration and Paulson, who had flatly refused over the weekend to risk taxpayer money to prevent the collapse of Lehman Brothers or the distressed sale of Merrill Lynch to Bank of America. Earlier this year, the government bailed out another investment bank, Bear Stearns, by engineering a sale to JPMorgan Chase that left taxpayers on the hook for up to $29 billion of bad investments by Bear Stearns. The government hoped at the time that this unusual step would both calm markets and lead to a recovery by the financial system. But critics warned at the time that it would only encourage others to seek bailouts, and the eventual costs to the government would be staggering.

The decision to rescue AIG came on the same day that the Fed decided to leave its benchmark interest rate unchanged at 2 percent, turning aside hopes by many on Wall Street that the Fed would try to shore up confidence by cutting rates once again.

Fed and Treasury officials initially had turned a cold shoulder to AIG, when company executives pleaded on Sunday night for the Fed to provide a $40 billion bridge loan to stave off a crippling downgrade of its credit ratings as a result of tens of billions of dollars of losses related to insurance investments that have turned sour.

But government officials reluctantly backed away from their tough-minded approach after a failed attempt to line up private financing with help from JPMorgan Chase and Goldman Sachs, which told U.S. government officials that they simply could not raise the money given both the general angst in credit markets and the specific fears of problems with AIG.

Another reason that AIG posed systemic risk is that it might have been forced to liquidate real estate and other assets at fire sale prices — a move that could drive property prices lowers and force countless other companies to mark down the value of their own holdings.

The complexity of AIG's business, and the fact that it does business with thousands of companies around the globe, make its survival critical at a time when there is stress throughout the financial system worldwide.

"It's the interconnectedness and the fear of the unknown, meaning the impact of a failure," said Roger Altman, a former Treasury official under President Bill Clinton. "But size is a factor, you can't ignore that. The prospect of world's largest insurer failing, together with the interconnectedness and the uncertainty about the collateral damage – that's why it's scaring people so much."

AIG is a sprawling empire built by Maurice "Hank" Greenberg who acquired hundreds of businesses all over the world until he was ousted amid an accounting scandal in 2005. Many of AIG's subsidiaries wrote insurance of various types. Others made home loans and leased aircraft. The diverse array of companies were more valuable under a single corporate parent like AIG, because business cycles offset other, giving AIG a relatively smooth stream of revenue and income.

After Greenberg's departure, AIG restated its books over a five-year period and instituted conservative new accounting policies. But before the company could really rebuild itself, it became embroiled in the mortgage crisis. Some of its insurance companies ended up with mortgage-backed securities on their books, for example. But AIG's downfall involved a new kind of insurance its financial products unit offered investors in complex debt securities.

Its stock tumbled faster this year as first the debt securities lost value, and then the derivatives-based insurance contracts came under a cloud.

The Fed's extraordinary rescue of AIG underscores how much fear remains about the destructive potential of the complex financial instruments, like credit default swaps, that brought AIG to its knees. The market for such instruments has exploded in recent years, but it is almost entirely unregulated. When AIG began to teeter in the last few days, it became clear that if it defaulted on its commitments under the swaps, it could set off a devastating chain reaction through the financial system.

"We are witnessing a rather unique event in the history of the United States," said Suresh Sundaresan, the Chase Manhattan Bank professor of economics and finance at Columbia University, in New York. He thought the near brush with catastrophe would bring about an acceleration of efforts within the Treasury and the Fed to put safety controls on the use of credit default swaps.

Most of AIG's subsidiaries are considered healthy and stable, and there is little question about who regulates them. AIG's crisis grew primarily out of its financial products unit, which dealt in complex debt securities and credit default swaps.

The swaps are not securities and are not regulated by the SEC And while they perform the same function as an insurance policy they are not insurance in the conventional sense, so insurance regulators do not monitor them either.

AIG's complex debt securities had already lost billions of dollars in value in the months before the crisis began, because their value depends on home values. But in the last two days, the swaps AIG's financial products unit had sold began eating up billions of dollars of AIG's cash and liquid assets. That ultimately paralyzed AIG because it could not find a way to keep up with the fast-growing need to provide cash under the terms of its swap contracts.

This article was reported by Edmund L. Andrews, Michael J. de la Merced and Mary Williams Walsh and written by Andrews.

© 2008 International

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Credit crunch buckles Trinity Park Toll Road plans

Financial upheaval puts highways on hold


Copyright 2008

DALLAS — The financial headlines don't look good, and the news is having an impact on North Texas highways.

The North Texas Tollway Authority has tabled a decision to expand State Highway 161 as a toll road. Why?

It's too hard to borrow money needed to fund construction.

NTTA Chairman Paul Wageman says this is not the time to test the market.

"We've been in a turbulent credit market really since July and August of last year," Wageman said. "The compaction of these significant activites in the last four days have really caused every issuer ... to really evaluate where we're at."

SMU professor Mike Davis said if the NTTA takes a risk to build Highway 161 now and the market doesn't improve, tolls could be forced higher to get them out of debt.

"You should care, because it may mean the roads get delayed," Davis said. "It may mean when the roads get built, the financing could get expensive — which could mean higher tolls."

The NTTA says Highway 161 could be a big money-maker, and that revenue would directly fund other projects in the region, like the Trinity Toll Road.

So if the NTTA doesn't build 161, they don't get your toll money — and those tolls, along with Highway 121 — will pay in large part for the Trinity project.

"We do need that so we can leverage the system — so we can go build the Trinity and others like it around the region that will need subsidy from the NTTA," Wageman said.

The NTTA has until October to decide if the Highway 161 project is worth the risk. Only then can Wageman literally afford to look ahead.

"We'll consider Trinity when it's appropriate," he said. "Right now, it's just not right."

But Trinity backers, like Dallas District 3 Councilman David Neumann, aren't worried.

"It's a natural thing to have concern," he said, "but in the end, you go back to reality. Do we have the building blocks to keep the Trinity Parkway on schedule? And we do."

So while the Trinity Toll Road group shoots to beat a 2014 completion date, the NTTA is waiting out a market that could potentially put an end to some projects.


© 2008

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Cintra on NTTA: "They mortgaged every room in the house."

Credit crunch puts SH 161 toll road in jeopardy


The Dallas Morning News
Copyright 2008

Radically shifting fortunes on Wall Street have left the North Texas Tollway Authority scrambling to keep a key promise it made last year when it won the right to pay $3.2 billion for the State Highway 121 toll road.

On Wednesday, NTTA made clear that its ability to keep that promise has been compromised by the nation's financial uncertainties.

NTTA chairman Paul Wageman again delayed a decision on whether to build the highly anticipated State Highway 161 toll road. Just months ago, the toll contract was seen as a lucrative sure bet and had been the subject of months of acrimonious negotiations between NTTA and state transportation officials.

"Needless to say, the financial markets are in high stress," Mr. Wageman told a packed room of more than 150 contractors, consultants and engineers eager to hear which direction the agency is moving. Another delay is "the prudent thing to do," he said.

The pause gives NTTA another month to seek hundreds of millions of dollars in loans on the terms it needs, which include deferred payments until after construction is complete.

That the agency would be struggling to borrow money for SH 161 is surprising on a number of fronts, not least because that road, like the larger SH 121 deal, is one of the few toll projects NTTA has promised to deliver that is expected to be profitable.

Some critics, including the executives at the Spanish firm NTTA beat out last year for the SH 121 project, allege the authority is simply overextended. To the firm, NTTA's delays on SH 161 foreshadow problems it will have with finding money to pay for many of the projects it has promised to build.

"They mortgaged every room in the house," said Jose Lopez, North American president for Cintra. "They don't have the leverage left to borrow the money they need for the long list of projects they have promised. Sure, there may be value there in 10 or 20 years, but does Dallas-Fort Worth want to wait that long for those roadways?"

Temporary crunch

NTTA says it's not overextended. Instead, the NTTA is facing a temporary credit crunch that will ease once the credit market rights itself, officials there said.

But NTTA president Jorge Figueredo has said that the agency's ability to keep promises made a year ago will probably depend on how soon the credit markets stabilize.

"We have been looking at all the projects on our list, and looking at when will these projects be ready to go, when will we actually need the money to get started?" he said. "But if the markets continue to go sour and TxDOT and RTC and ourselves don't have ability to leverage each other, then what we thought was possible a year ago will likely not be possible."

What NTTA promised is that in addition to paying for SH 121, the agency would borrow another $7 billion to pay for six additional toll roads that would open by 2015.

But almost immediately after winning the SH 121 contract, the credit markets began to act unexpectedly. And as some companies stopped dealing in municipal bonds, others began trimming back the kinds of loans they offer.

NTTA has scrambled to not only find money for new projects, but also to retire short-term debt it took out for SH 121.

Relief for 360

Wednesday's delay won't immediately slow the completion of SH 161, which is under construction, news that will probably reassure Grand Prairie commuters anxious for an alternative to jammed State Highway 360.

But NTTA is looking hard at other projects, including the big Southwest Parkway Corridor toll project in Fort Worth. Delays to that project will cost $10 million a month. But on Wednesday, NTTA opted to study again the finances for that project, given that costs have gone up as available tax dollars for the project have gone down.

Michael Morris, transportation director for the North Central Texas Council of Governments, said NTTA's delays are worrisome, especially because other sources of road funds – including the state – are also under increasing strain.

"This is very important," Mr. Morris said, noting that NTTA's original plan included paying billions for SH 121, while still having enough available for additional projects. "If you go back to last summer, when the vote for 121 was held, I think the regional transportation council said, 'We know there are some risks out there, but we want to vote for our partner. And NTTA is our partner.' "

Now it's time for NTTA to figure out a way to reward that faith, said Mr. Morris, who was among the fiercest advocates for letting Cintra build SH 121.

He has since supported NTTA in its negotiations with the state and says the region has no choice but to work together.

That's what NTTA vice chairman Victor Vandergriff had in mind Wednesday. Looking at the billions of dollars the agency will need to borrow to make good on its promises, he suggested it may need help from the state or regional partners.

"That's a lot of money, and while we can expect profits to flow, they aren't going to be seen for maybe 40 or 50 years," Mr. Vandergriff said Wednesday. "I urge us as we are proceeding forward to talk with our regional partners and with TxDOT, to think through how we do these projects."

© 2008 Dallas Morning

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NTTA's proposed toll road binge chokes on Wall Street credit crunch

NTTA may vote today whether to build State Highway 161 toll road

The Dallas Morning News

After nearly a year of debate over the State Highway 161 toll road, area residents may soon learn who is going to build the thing.

Paul Wageman has been re-elected chairman of the North Texas Tollway Authority, surviving a leadership test created by a recently enlarged board that now includes nine members.
Mr. Wageman, a Plano attorney, has led the agency during a period dominated by enormous change, hard-fought and public clashes with the state department of transportation and huge expansion. He's been credited as a fierce trench fighter and criticized by some as reluctant to compromise.
In selecting Mr. Wageman, the board signaled its desire to keep a strong fighting stance as the agency considers its involvement on some of the most controversial toll projects in North Texas.

Wednesday's meeting, held at 9 a.m at NTTA headquarters in Plano, provides a good window into the enormously expanded role NTTA now plays in the region's transportation solutions. The board will debate whether to build the state Highway 161 tollway, whether to step aside on an enormous $3.2 billion Denton HOV project along 28 miles of IH 35E and whether to accept a request by regional planners who want NTTA to add a managed HOV lane to its toll road. In addition, The agency will award its largest contract in its history - a $220 million design contract for Phase 4 of State Highway 121 toll road.

After a contentious series of negotiations that began last fall, the North Texas Tollway Authority won the right earlier this year to build the road — but only if it wants to. It has the right to pass on the project, and instead let state transportation officials seek a private company to build and operate the toll road.

When competing for the right of first refusal for the job, NTTA promised it would make a speedy decision — initially promised by early summer — but continued problems in the credit market have made securing financing for the approximately $1.1 billion project difficult.

Today’s meeting includes an agenda item for the board to discuss, and vote, on whether it will build the road, but some board members who spoke in advance of the meeting say it’s just as likely the NTTA will put off the decision to next month. Just this week, the financial markets took another spin with the collapse of the Lehman Brothers investment firm.

Victor Vandergriff, a relatively new member of the now-nine-member board of directors, said whether the board votes to accept the project today or decides to delay the decision, the issue will get a full hearing at the meeting.
The stakes are high for NTTA, and for the region. When the tollway authority paid $3.2 billion for the rights to State Highway 121, many critics questioned whether it would be left in a position to build the many other high-priority toll roads the region wants to see on the ground by 2015.

In response, NTTA and its chairman, Paul Wageman, repeatedly assured members of the Regional Transportation Council that the agency would not be over-extended as a result of the Highway 121 payment. In fact, Mr. Wageman and others have argued, that only by giving the NTTA the lucrative toll contracts for high-volume roads like Highway 121 and Highway 161, would the agency be able to generate sufficient revenue to be able to afford the heavy borrowing that will be required for it to build the other, less lucrative toll roads. Those roads include the costly Trinity Parkway.
But promises made in the summer of 2007 looked a lot different then than they do now, in the midst of one of the worst credit crunches in contemporary Wall Street history. Hanging above all these decisions is a starkly changed financial world, where even the most basic assumptions about the availability and cost of credit have been upended as Wall Street undergoes historic shifts. Some of the very financial tools NTTA has relied on in the past — certain types of deferred-payment loans, for example — have simply evaporated with the rapidly changing world of municipal finance.

Meanwhile, the importance of toll roads has only increased as gas tax funds traditionally used to pay for roads has dried up. Now, to finance the construction and other costs for the first couple of years of the Highway 161 project, years when revenues will either be zero or just starting to grow, the authority will likely have to borrow some $400 million against its own reserve funds, a costly choice that had not been part of its financial modeling for the project.

If the authority decides against building the road, the project should remain on schedule. Construction crews are already at work on the highway. But those workers are being paid by money fronted by the Regional Transportation Council, and the funds are loans only. Whoever gets the ultimate contract to finish building and operating the toll road will have to repay those upfront construction costs. But while TxDOT has long preferred a private firm to build Highway 161, it’s by no means clear that private companies remain as interested as they were just months ago in investing their own money in road projects. The private credit market has been turned at least as upside down as the public market.

© 2008 Dallas Morning

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