East West Bank of Pasadena, California will assume all of the deposits and most of the assets of the failed bank, which had about $441.1 million in deposits and $520.9 million in assets as of March 31, the Federal Deposit Insurance Corporation said.

The community bank industry has been slower to bounce back from the deep recession than other parts of the economy.

While many big banks and other financial financial firms are back to reporting steady profits, small banks are still weighed down by slowly unraveling commercial real estate loans.

Bank failures are expected to peak in the third quarter of this year, the FDIC has said, and then start tapering off if the economic recovery continues to take hold.

Last year 140 banks closed, compared with 25 in 2008 and three in 2007.

Despite the steady pace of bank failures, the FDIC is seeing some reasons for hope.

The agency has said more interested buyers are coming to auctions for failed banks, meaning the troubled loans are becoming more desirable.

The FDIC has also scaled back its loss-share agreements, which it entered into with potential buyers of failed banks to hive off some of the risk.

Some members of Congress made risky bets with their own money that U.S. stocks or bonds would fall during the financial crisis, a Wall Street Journal analysis of congressional disclosures shows.

Senators have criticized Goldman Sachs Group Inc. (NYSE: GS – News) for profiting from the housing collapse. And Congress is considering legislation to curb Wall Street risk-taking, including the use of financial instruments known as derivatives and of leverage, or methods that amplify returns.

According to The Journal’s analysis of congressional disclosures, investment accounts of 13 members of Congress or their spouses show bearish bets made in 2008 via exchange-traded funds—portfolios that trade like stocks and mirror an index. These funds were leveraged; they used derivatives and other techniques to magnify the daily moves of the index they track.

There’s no evidence the legislators and their spouses used privileged information or failed to follow rules on disclosure. Congressional rules permit lawmakers and their families to invest in—or bet against—publicly held companies they oversee through committee assignments, as well as broader markets or indices. While some made money, others lost.

Some of these legislators have publicly criticized practices such as short-selling, or betting on a security to decline. In February, Sen. Johnny Isakson (R., Ga.) argued on the Senate floor that “we don’t need those speculating in the marketplace to take unfair advantage of the values of equities that are owned by Americans all over this country for the sake of making a buck on a short sale.”

On Oct. 8 and 9, 2008—as the Federal Reserve was bailing out American International Group Inc. (NYSE: AIG – News)—an account Sen. Isakson held invested more than $30,000 in ProShares UltraShort 7-10 Year Treasury and UltraShort 20+ Year Treasury, the records show. These are “leveraged short” funds, designed to gain $2 for each $1 drop in the daily value of U.S. Treasury bonds.

Sen. Isakson said his account is professionally managed by Morgan Stanley Smith Barney and he has no control over it. “They make those decisions and I report what they do,” Mr. Isakson said. “I put money away in my career so I can hopefully retire one day.”

Sen. Isakson said, “Short selling has a role to play in the market.” He said he supports legislation to limit it but wouldn’t prohibit it.

Such trading involving members of Congress or spouses “doesn’t look real great when the economy is tanking and people are blaming the government,” said former Rep. Joel Hefley (R., Colo.), once head of the House Ethics Committee. Still, he said, “You can’t have people not using their best judgment on their investment portfolio.”

According to The Journal’s analysis of the disclosures, collected by the Center for Responsive Politics, few members of Congress made more than a dozen securities trades in 2008. Typical trades were for a few hundred or a few thousand dollars.

While some lawmakers trade for their own accounts, others delegate trading to a spouse, stockbroker or financial adviser. A few legislators keep their money in blind trusts and don’t know how it’s invested.

Jonathan Gillibrand, husband of New York Democratic Sen. Kirsten Gillibrand, made more than 250 transactions in options in his E*Trade account in 2008, when his wife was in the House, according to disclosures.

Almost all the trades were in put options, which convey the right to sell a stock or other instrument at a given price until a given date. At least 34 times, Mr. Gillibrand bought puts on stocks of home builders, including Beazer Homes USA Inc. (NYSE: BZH – News, Hovnanian Enterprises Inc. (NYSE: HOV – News, Meritage Homes Corp. (NYSE: MTH – News and Ryland Group Inc. (NYSE: RYL – News. These were bets the builder stocks would fall; if they did, the puts’ value would rise.

Mr. Gillibrand also bought call options on ProShares UltraShort Real Estate. Although call options are bullish bets, this trade, too, was a bet against the property market, because the ProShares fund is designed to rise $2 for each $1 fall in real-estate stocks. His profit or loss couldn’t be determined.

Sen. Gillibrand, in an April 22 news release on White House financial-regulatory proposals, praised the effort to “rein in excessive risk and leverage in the pursuit of short-term profits.”

“The senator was referring to activity by some institutions that were leveraging in excess of 20 to one, using taxpayer money on extremely risky short-term bets rather than long-term strategies that benefit the broader economy,” said spokesman Matt Canter. Any comparison of those remarks with her husband’s trading “is wrong,” he said, adding that the senator “was not involved in his trading.” Her office declined to make Mr. Gillibrand available for comment.

As previously reported by The Journal, in 2008 Rep. Spencer Bachus (R., Ala.) made roughly four dozen trades in shares of ProShares UltraShort QQQ and its options, according to disclosure records. This fund is designed to go up twice as much as the Nasdaq 100 stock index goes down.

Rep. Bachus makes his own trades through a Fidelity account. He is the ranking Republican on the House Financial Services Committee, which has legislative oversight over the capital markets.

“I don’t trade on margin”—money borrowed from a broker to raise potential returns—Rep. Bachus said in an email, “and don’t consider my investments leveraged to any risky extent.” He added: “Never have I traded on nonpublic information, nor do I trade in financial stocks.”

Rep. Bachus made roughly $28,000 on his trades in options and leveraged ETFs in 2008, according to a Journal analysis, a figure he called “essentially correct.”

On July 14, 2008, Rep. Bachus said in a letter to Financial Services Committee Chairman Barney Frank that it was “quite apparent” the challenges facing mortgage companies Fannie Mae and Freddie Mac were caused partly by “short-seller activities.” A spokesman for Rep. Bachus didn’t respond to requests for comment on the letter.

Rep. Shelley Berkley (D., Nev.), a member of the House Ways and Means Committee, has been a critic of Wall Street. In a statement on the House floor Feb. 23, she said: “Representing Las Vegas, let me assure you, no casino on the planet behaves as irresponsibly and recklessly as Wall Street does. Wall Street ought to be ashamed, and take a lesson from the casino industry.”

An account held by her husband, Lawrence Lehrner, shows 57 trades in 2008 in ETFs designed to gain $2 for each $1 drop in the value of a market index, the disclosures show. Between July 25 and July 29, 2008—four months after Bear Stearns Cos. fell—records show four trades in and out of ProShares UltraShort Financial fund.

On Sept. 16, 2008, the day after Lehman Brothers filed for bankruptcy, the account added ProShares UltraShort S&P 500, a fund that thrives when blue-chip stocks tumble.

It was sold over the next two days at a 5% profit, according to disclosures. The account earned a modest net profit of a little over $700 on the trades in leveraged funds in 2008, based on The Journal’s analysis of trading records.

“All trades were done by a licensed money manager without any input from my husband or me,” Rep. Berkley said. “This is exactly the way many people handle whatever monies they may have in the stock market. I know in our case, he operated wholly within the existing regulations.” Her office declined to make her husband’s money manager available for comment.

Just a little over a week after issuing its annual earnings report featuring a full-throated defense of its role in the housing market collapse, Wall Street giant Goldman Sachs, along with one of the company’s vice presidents, has been accused by the Securities and Exchange Commission of securities fraud for its role in the housing market collapse.

The SEC is charging the financial firm with defrauding investors for failing to disclose conflicts of interest in its mortgage investments.

The civil suit filed Friday alleges that the one of the firm’s clients helped to create and then bet against subprime mortgage securities sold to investors.

Investors in those securities lost over $1 billion on their investments, according to the SEC. Meanwhile, the company made a record $4.79 billion last quarter. Goldman was reportedly paid $15 billion for structuring the deal in 2007.

The allegations come just nine days after Goldman vigorously defended its role in the housing crisis, saying that it did not bet against its own investors.

“The firm did not generate enormous net revenues or profits by betting against residential mortgage-related products, as some have speculated,” the company wrote in a letter sent to shareholders last week. “Rather, our relatively early risk reduction resulted in our losing less money than we otherwise would have when the residential housing market began to deteriorate rapidly.”

The SEC charges dispute that. Instead, the regulator says, the company knowingly bet against the mortgage securities its packaged and sold to other investors.

“The product was new and complex but the deception and conflicts are old and simple,” says Robert Khuzami, Director of the Division of Enforcement, in a statement. “Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

Goldman vice president Fabrice Tourre, who the SEC claims was responsible for devising and marketing the securities, was also charged.

The SEC is seeking to recoup an undisclosed amount of profit made off of the deals.

For its part, Goldman is still defiant, denying the charges and vowing to right them.

“The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” the company said in a statement.

The company’s shares have already fallen 13 percent since the allegations were announced early Friday.

The SEC, in a statement, indicated that it may not be done investigating and prosecuting those responsible for the housing crisis meltdown.

“The SEC continues to investigate the practices of investment banks and others involved in the securitization of complex financial products tied to the U.S. housing market as it was beginning to show signs of distress,” Kenneth Lench, Chief of the SEC’s Structured and New Products Unit.

The world’s top central bankers began arriving in Australia for high-level talks as renewed fears about the strength of the global economic recovery gripped world share markets.

Representatives from 24 central banks and monetary authorities, including the US Federal Reserve and European Central Bank, landed in Sydney to meet tomorrow at an undisclosed location.

Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with extensive security believed to have been invoked by law enforcement agencies.

Speculation that the chairman of the US Federal Reserve, Ben Bernanke, would make an appearance could not be confirmed last night.

The event will be dominated by Asian delegations and is expected to include governors of the People’s Bank of China, the Bank of Japan and the Reserve Bank of India.

The arrival of the high-powered gathering coincided with a fresh meltdown on world share markets, sparked by renewed concerns about global growth and sovereign debt.

Fears that countries including Greece, Portugal, Spain and Dubai could default on debt repayments combined with disappointing US jobs data to spook investors.

Australia’s ASX 200 slumped 2.4 per cent to its lowest close since November 5, echoing a sharp fall on Wall Street.

Asian share markets were also pummelled, with Japan’s Nikkei 225 down almost 3 per cent and Hong Kong’s Hang Seng off 3.3 per cent.

The damage was also being felt by European markets last night with London’s FTSE 100 down 1 per cent in early trade.

Sovereign debt fears rippled through to the Australian dollar, which was hammered to a four-month low of US86.43 and was trading close to that level last night.

This does feel like ‘08 and ‘07 all over again whereby we had these sorts of little fires pop up and they are supposedly contained but in reality they are not quite contained,” said H3 Global Advisers chief executive Andrew Kaleel.

“Dubai should have been an isolated incident and now we are seeing issues with Greece, Portugal and Spain.”

But it wasn’t all bad news with the RBA upping its Australian growth forecasts and flagging more interest rate rises this year.

The central bank estimates the economy grew 2 per cent in 2009, and will expand by 3.25 per cent in 2010, and by 3.5 per cent in 2011.

The outlook for global growth is likely to be a key theme of the high-level central bank talks.

The gathering also comes at an important time for the BIS as it initiates an overhaul of the global banking system, which will include new capital rules applying to banks and more stringent standards regulating executive pay.

A key part of the two-day talkfest will be a special meeting of Asian central bankers chaired by the governor of the Central Bank of Malaysia, Zeti Akhtar Aziz.

Influential BIS general manager Jaime Caruana is also expected to take a prominent role in the talks.

Federal Treasurer Wayne Swan will address the central bank officials at a dinner on Monday night.

About 5.1 million mortgage holders (or roughly 10% of Americans with mortgages) will own homes that are worth 75% or less than what they owe on their mortgages by mid-June. This is the conclusion of a new study by First American CoreLogic given exclusively to The New York Times. One of the firm’s senior economists, Sam Khater, told the paper, “People’s emotional attachment to their property is melting into the air.” The most astonishing number in the study is that it would take $745 billion to get mortgages to the point where no home loans in the U.S. were underwater.

This research is another example of why the housing problems in the U.S. are so intractable. Building permits rose 11% in December, but housing starts were down. RealtyTrac recently forecast that about 3 million homes will go into foreclosure this year, up slightly from the 2009 numbers. A large number of interest-rate only mortgages will reset higher in the next two years, raising monthly payments on those loans.

Despite low mortgage rates, which have in some cases fallen below 5%, and tax credits for some home buyers, people are reluctant to purchase new houses. Some fear that they could become unemployed like 10% of the full-time work force. Others are concerned that home prices will continue to fall and that even a home bought in 2010 could have an underwater mortgage of its own in 2011.

The likelihood that homeowners will reach a point of despair also increases as more homes drop below the value of the mortgages that their owners carry. That in turn makes it more likely that people will hand their keys over to the bank. And troubled banks, particularly regional and community banks, are often not in good enough financial shape to handle mass mortgage defaults, which then puts pressure on the FDIC’s resources.

The federal government is left with few options. Even if it saw fit to put $745 billion into programs that would reduce mortgages on homes with underwater loans, the cost is too high with the federal budget deficit for this fiscal year projected to be nearly $1.6 trillion.

Without a solution, and there are almost certainly no solutions forthcoming, home values will continue to drop this year and probably into next.

By Alan Beattie at ft.com

Put a jaguar, a bear, a tiger and a panda together and you might get a good show but you won’t get a quiet life.

The Bric grouping – Brazil, Russia, India and China – has become a shorthand for the rise of emerging markets in the global economy. And after a rather stellar decade, the Brics mainly had a good crisis from which they are now rapidly exiting.

Goldman Sachs, the financial group that invented the category, reckons that China may well become the world’s largest economy before 2030. Collectively, the Bric economies could well surpass output in the Group of Seven wealthy nations – which have dominated the management of the global economy – by 2032.

The Brics already have a bigger share of world trade than the US. China, probably the world’s biggest goods exporter last year, has been supplemented by India’s software and back-office exports, Russia’s oil and gas and the domination of a number of agricultural commodity markets by Brazil’s super-competitive farmers.

While equities in G7 countries were struggling to stay in positive territory during the past five or so years, the Bric share prices, albeit with a steep drop and rapid recovery during the global financial crisis, finished the decade more than twice as high as in 2005. Bric equity indices have emerged; Bric funds have sprung up for investors to pile into the sector.

So as the world emerges from recession, is this a transformational moment when the centre of gravity in the global economy and its governance decisively shifts? Is this a pivot point such as the second world war, where the confident, innovative US muscled aside the weakened, debt-laden economies of Europe and remade the global financial architecture? And, most immediately, are Bric consumers up to the task of rebalancing the world economy by supplanting their acquisitive American counterparts?

The most likely answer is: not yet. Not only are the Brics such a disparate group that almost any generalisation is problematic, but China, the dominant member of the quartet, still seems wedded to an economic model dependent on demand elsewhere.

“The so-called emerging economies, even some like Bangladesh, are undoubtedly players on the global stage,” said Jean-Pierre Lehmann, professor of political economy at the IMD management school in Lausanne, Switzerland. “But I don’t see any great cataclysm in the next 10 years, nor the centre of finance definitively moving east.”

Like a boy band or a street gang, the Brics might almost have been chosen for their disparate abilities rather than their similarities. China’s size and openness to trade give it as much economic clout as the rest put together: Markus Jäger, of Deutsche Bank, calls the hypercompetitive manufacturing exporter “the 800lb panda in the room”. India, similar in population but poorer and economically more insular, is chiefly notable to investors and trading partners for its software and business services. Brazil, despite a sprinkling of manufacturers, remains one of the world’s most efficient agro-exporters; Russia, after feebler attempts to diversify, essentially just sells oil and gas.

The story of their rapid progress is familiar but still dramatic. A decade ago, only one had an investment-grade credit rating; now all do. Only 12 years ago, a Russian debt default and Brazilian currency crisis rocked the world economy; today, they have accumulated vast foreign exchange reserves.

The Brics contributed about half of global growth between 2000 and 2008 – sharply higher than in the previous decade. Yet along with this growth has come an unbalancing of the global economy.

A Chinese growth model based on heavy investment and exports has accompanied vast current-account surpluses across east Asia, matched by a current-account deficit in the US. And despite doing its bit to keep economic growth going during the crisis, it is far from clear that the Middle Kingdom has effected a shift towards consumer demand that a true engine of world growth would achieve.

With a great flourish, Beijing announced a $585bn stimulus package in November 2008 and loosened bank credit. But its ability to create self-sustaining growth was suspect. Rather than handing out cash to consumers to get them spending – a move that might also have encouraged imports – a large chunk of the stimulus went into the old favourite, fixed investment. “If global demand does not recover in time or the stimulus measures fail to stir the animal spirits, China may end up creating overcapacity,” said Mr Jäger.

Razeen Sally, a trade expert at the London School of Economics, said: “The Chinese interventions had the effect of reinforcing existing problems and imbalances. We are going to see a lot of excess capacity in export-oriented industries like steel at exactly the wrong time.”

The repegging of the renminbi against the dollar in 2008, after three years when it was allowed to crawl higher, has also done nothing to shift the Chinese economy from exports to consumer demand. The effect of that decision is multiplied by the copycat actions of many emerging-market countries holding their own currencies down lest they lose competitiveness to China.

Indeed, although the worldwide reduction in consumer demand has cut the absolute level of China’s current-account surplus during the crisis, with fewer ships carrying toys and iPods out of Shenzhen and Shanghai, China continued to gain market share abroad. The International Monetary Fund and others reckon that the apparent rebalancing of the global economy over the past year is temporary. When demand picks up, so will Chinese exports, along with the old surpluses and deficits.

Despite pockets of profligacy, if anything, China’s has become less rather than more of a consumer economy in the past decade. Its overall savings rate grew over the decade. Although much of this rise reflected corporate savings, household savings rose, too, and a greater share of national income went to companies rather than consumers in the first place.

A survey last year by the McKinsey Global Institute backed up what many economists have long argued: that the lack of a social safety net is one of the main reasons that Chinese households save. The top three reasons given were: educational needs, security in case of illness and caring for parents. Changing deep-seated structural factors such as this will not be quick. Nor will it be achieved simply by letting the renminbi rise.

As for the other Brics, whose trend growth rate is slower than China’s, they are unlikely to have a noticeable effect on global demand for some time. Although growth in Brazil and India held up well during the crisis, the former is a relatively mature economy with less scope for rapid growth; the latter an underperformer with a chronic public finance problem and a household savings rate even higher than China’s. Meanwhile, Russia, whose economy contracted sharply during the global recession, still depends on oil prices.

A decade of rapid growth is not enough for the Brics to seize the baton of global economic leadership from the US and western Europe. The grouping, or some of them, may have astonished the world with their progress over the past 10 years. But it will require a qualitative improvement as well as more growth to consolidate that shift of power.

Japan Airlines today filed for bankruptcy in an attempt to reverse the fortunes of a once-revered corporate icon now saddled with billions of dollars of debt and a reputation for mismanagement and inefficiency.

The airline’s board decided to place the company at the mercy of a state-led restructuring plan that will require it to shed almost 15,700 jobs and cut more than 30 unprofitable routes.

JAL said its entire board would resign but added that the airline would continue flying even as it files for protection from creditors under Japan’s version of Chapter 11 in the US.

The airline will receive support from the state-backed Enterprise Turnaround Initiative Corporation [ETIC], which will provide ¥300bn (£2bn) in fresh capital and a ¥600bn credit line to cover payments for essentials such as fuel and parts.

Asia’s biggest airline cited combined debts of ¥2.3 trillion, making the bankruptcy one of the biggest in Japanese history. Its creditors, which include three Japanese “megabanks,” will forgive ¥730bn in debts, far higher than previously estimated.

The news ended weeks of speculation over JAL’s future after Japan’s new centre-left government ruled out an emergency bailout.

The airline will, however, stay in business while it attempts to repair its battered reputation and return to profitability by the end of the 2012 financial year.

The government said it would “provide the necessary support for JAL until the completion of its rehabilitation”.

JAL said it wished to “sincerely apologise to all of our shareholders, financial creditors, customers and suppliers and other parties concerned for the great inconvenience and concern this situation might cause”.

Earlier in the day the firm suffered the indignity of seeing its shares sink to a record low of ¥3. Those shares will soon be worth nothing now that the Tokyo stock exchange has confirmed they will be delisted tomorrow.

A rosy future for JAL?

In exchange for financial backing from ETIC, JAL will slash a third of its 47,000-strong workforce by March 2013 and cut 14 international and 17 domestic routes over the same period.

JAL is expecting operating losses of ¥265bn for the year to the end of March, having amassed losses of ¥51bn last year. It lost ¥131.2bn in the six months to September.

Its long-term future will be dependent on efforts to emerge as a leaner airline, probably with support through new partnerships with overseas carriers that could transform the airline business in Asia-Pacific.

Analysts were upbeat about JAL’s immediate future, but acknowledged that questions remain over its potential for growth.

“I am not worried about the future of the carrier as I believe the government will strongly support it,” said Yasuhiro Matsumoto, a credit analyst at Shinsei Securities. “But whether it will be able to grow as a business is unclear. I can’t see how JAL is going to build its network domestically and internationally.”

The company, which has received four government bailouts since 2001, has seen its market value decline 90% since the beginning of the month. With a market value of £90m – less than the price of a Boeing 747 – the airline is now trailing the likes of Croatia Airlines and Jazeera Airways.

JAL’s dramatic decline has proved a sobering experience for an airline that grew from a handful of leased planes in 1951 into a global fleet of 280 aircraft serving 220 airports in 35 countries.

In recent years it became a victim of its own success, making a series of risky investments while creaking under the weight of skyrocketing pension and salary costs.

It was subject to government pressure to serve unprofitable domestic airports, built for no other reason than to support the construction industry, in return for government bailouts during its periodic crises.

The airline will halve its subsidiaries, which include a hotel chain and credit card business, to give itself a fighting chance of recovery amid falling passenger numbers and volatile fuel prices.

Its first obvious break with the past was the appointment of Kazuo Inamori, the founder of the electrical components maker Kyocera, as chief executive.

A very different airline is expected to emerge under the stewardship of the 77-year-old Inamori, a trained Buddhist monk and self-confessed airline industry novice. Reports said it would have to retire 53 of its largest jets and replace them with smaller aircraft suited to domestic and regional flights.

JAL will also have to decide over rival offers of investment from two US airlines keen to boost their presence in east Asia,

American Airlines and its partners, including British Airways, say they are willing to invest $1.4bn (£850m) to keep JAL as part of their Oneworld alliance. But reports suggest JAL is preparing to accept a rival offer worth about $1bn from Delta and defect to its Sky Team group.

Delta estimates a switch to Sky Team would increase JAL’s revenues by $400m a year and give the two airlines a 43% share of the market between Japan and North America.

HONG KONG — For the first time, Chinese investment in U.S. companies has eclipsed U.S. purchases of Chinese entities, a trend analysts say is fueled partly by depressed American assets.
In 2009, Chinese buyers snapped up $3.9 billion of U.S. assets, nearly four times the level in 2008, says Dealogic, a data-tracking firm. By comparison, U.S. buyers plowed $3 billion into Chinese entities last year, down 80% from 2008.

It’s too early to tell whether this pattern will hold. Chinese buyers represented only 3% of the $118.7 billion in U.S. foreign investment last year. Yet China ranked as the ninth-largest foreign investor in the U.S., and among the minority that increased its stake amid a sputtering global mergers-and-acquisitions market.

The development comes at a time when China has overtaken the U.S. as the world’s top auto market and is expected to soon edge out Japan as the world’s second-largest economy behind the U.S. Analysts say that as China’s economy grows, so does its desire to expand its global presence through acquisitions.

“It’s a tremendous phenomenon that the Chinese are exporting capital aggressively,” says Lawrence Chia, head of Deloitte China M&A Services. “There’s a big push toward domestic consumption, so they’re going after brands for their market.”

U.S. companies are attractive targets because of slumping stock prices that make investment less expensive. By buying up U.S. assets, China is also hedging its currency risks, analysts say, since it holds a significant portion of its foreign reserves in U.S. dollar-denominated assets.

“The U.S. dollar has lost value, so it’s better to put it in hard assets,” says Greg Miao, a partner at Skadden Arps Slate Meagher & Flom law firm.

Globally, China has shown significant interest in acquiring natural resources and industrial firms in the engineering, auto and technology fields. Recent Chinese investment in the U.S., however, has favored the financial sector: The Chinese government took high-profile stakes in private equity firm Blackstone and financial giant Morgan Stanley a few years ago.

David Chin, UBS’ joint head of investment banking in Asia, says he doesn’t expect a “huge amount” of additional Chinese investment in the financial sector in the near term due to relatively onerous U.S. investment rules and the possibility of more asset write-downs by institutions.

Analysts believe some Chinese companies are wary of bidding on high-profile U.S. assets after state-owned oil company CNOOC’s unsuccessful 2005 bid to buy U.S. oil company Unocal, which drew political opposition in the U.S.

usatoday

It has long been obvious that the defeat of the incumbent, Viktor Yushchenko, who has painted himself into the anti-Russian nationalist corner, would produce a political rapprochement between Ukraine and Russia. Mr. Yanukovych is committed to non-alignment (meaning no application for NATO membership) while Ms. Tymoshenko promises to submit to popular referendum any decision to join a military alliance (in practice ruling out NATO membership, which, as revealed by a long series of opinion polls, is opposed by a solid majority of Ukrainians).

What seems much less widely appreciated is the prospect of this geopolitical shift being magnified by Ukraine’s imminent national bankruptcy—casting Russia in the role of “Abu Dhabi” to Ukraine’s “Dubai” in the sense of easing the financial distress of a closely related neighbor.

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The US Federal Reserve is no longer able, in reality, to continue its multi-decade combat against the « barbarous relic » in order to guarantee the supremacy of the US currency at the centre of the international monetary system. For LEAP/E2020 the decade which has just begun will be clearly marked by a complete collapse of the Dollar (and the fall of most major international currencies) by gold.

We have often reminded readers in different GEAB issues that gold constitutes both a medium/long term investment intended to protect one’s capital against the risk of a loss in value of paper currencies and financial assets, and an eventual means of payment in the event of a very serious monetary crisis. In these two cases the choice of placing a portion of one’s assets in gold is a response to anticipating events and risks in the coming years (and not the coming weeks or months). For this GEAB N°41, a special edition at the beginning of a new decade, it seems opportune to LEAP/E2020 to put forward its anticipations on gold’s progress for 2010 – 2020, completing what the team wrote in issue N°34 of the GEAB in April 2009. This view of the decade is even more legitimate since we consider our analysis constitutes an aid for both individual investors as well as for the heads of central banks and institutions in charge of maintaining the value of a large amount of assets in the medium and long term (for example, pension, sovereign and insurance funds). Indeed for the first time in almost 40 years (since the ending of Dollar convertibility to gold in 1971), the interests of the world’s central banks and individual investors, once again, converge on gold: value is no longer at all guaranteed by the Dollar as an international reserve currency and, as long as the latter has no globally recognised successor, gold remains the only asset capable of maintaining this value.

We already took a look at the paradox of the gold market in the GEAB N°34, showing that if the market for the yellow metal seemed to be well controlled by the Fed and the large central banks to prevent any significant appreciation in the gold price, nevertheless, because of the global systemic crisis, the structural collapse of United States’ influence (and thus the Fed) and the related breaking up of the international monetary system inherited from 1971, gold was a safe investment in times of great uncertainty. As a reminder, since the publication date of the GEAB N°34 gold has gained more than 30% in US Dollars and more than 23% in Euros. In addition it has gained more than 100% in US Dollars and more than 85% in Euros since our first recommendation to diversify out of other investments in favour of physical gold (up to a third of assets) given in 2006.

Decade 2000-2009: Gold’s gain against 17 currencies (in %)

Major world currency prices versus gold (1900-2009) (Euro = Deutsche Mark before 1999, the broken line is German inflation of 1922 and the breakdown after WW2) – Source: World Gold Council / Matterhorn, 12/07/2009