Geithner's Financing Fiasco

Treasury's plan to finance asset sales may not be enough.

WASHINGTON, D.C.--Treasury Secretary Timothy Geithner says he wants to involve private investment in the next phase of the government's efforts to stabilize the financial system. Doing so might not be as easy as he thinks.

The creation of a so-called "Public-Private Investment Fund"--a way to remove toxic assets from banks' balance sheets--is one of the few kernels of new information that Geithner revealed Tuesday while unveiling the Treasury's plan to bolster the financial sector. Details are sketchy.

On the surface, it seems like a pretty slick idea. Since the government cannot figure out how to value these assets, they will entice private investors to do so. One way to avoid the valuation problem is to put it on somebody else's shoulders.

Of course, some incentive must be provided to encourage investors to take on the task of valuation. That's no small task.

"If the pricing were easy, someone would have done it," says Donald Ogilvie of the Deloitte Center for Banking Solutions and a former head of the American Bankers Association.

Treasury officials have indicated they'll provide only the financing for investors to buy these securities. What Uncle Sam won't offer: guarantees on those assets or a share in any losses.

That means that investors still face the enormous risk of mis-pricing the assets. Ogilvie worries that overpaying could lead to losses in the financing the government provides.

The Treasury wants to create a fund worth $500 billion to $1 trillion. To do that, it will need to provide relatively inexpensive financing so that investors won't quickly burn through most of their cash to buy the securities.

Financial Career Options

Believe it or not, there are still jobs in finance. Here's a look at some career paths.

For the business graduate, obtaining a degree is just the beginning. What's left is to take a closer look at available career options, measuring which industry sectors have the greatest need for new professionals. The finance industry is multifaceted, offering a variety of positions catering to a number of different skills and interests.

Financial services have multiple sub-industries encompassing niche opportunities. The key to individual success is to research, locate and land the financial job that has the greatest compatibility with your skills and interests. The same is true for professionals seeking a change in scenery and who want to give a new sector a shot.

Here are some common career paths you may pursue in the financial-services industry:

Corporate finance: These jobs involve working for a company in the capacity of finding and managing the capital necessary to run the enterprise. This is done while maximizing corporate value and reducing financial risk.

The functions you may implement while in such a position include: setting up the company's overall financial strategy; forecasting profits and losses; negotiating lines of credit; preparing financial statements and coordinating with outside auditors.
More sophisticated corporate finance jobs might involve mergers and acquisitions activity, such as calculating the value of an acquisition target or determining the value of a division for a spin-off.

Corporate finance positions can be found in companies of all sizes, from large, international entities to small start-ups. Additional corporate finance positions include financial analysts, treasurers and internal auditors. (Learn more about a career as an analyst in "Becoming A Financial Analyst," and as an internal auditor in "An Inside Look At Internal Auditors.")

Commercial banking: Commercial banks, from large entities to local institutions, offer a range of financial services, from checking and savings accounts to IRAs and loans. Career options available in this sector include bank tellers, loan officers, operations, marketing and branch managers. Talented professionals can advance from a local branch job to a position in corporate headquarters. Such a promotion would expose you to a number of other areas, such as international finance. (Learn more about a career in institutional marketing in "The Marketing Director's Pitch.")

Ministry of Finance allows NWF to invest half its portfolio in domestic funds.

Until the end of October, Russia's National Wealth Fund was invested solely in high-grade foreign government debt instruments. On Oct. 21, the Ministry of Finance released new guidelines on how the $76.4 billion fund should be invested, and allowed the NWF to invest up to half of its portfolio in domestic shares and investment funds.

New management. The changes signify a fundamental shift in the fund's investment strategy and underscore the priority the Kremlin places on bolstering domestic share prices, which have fallen by over 75% since May. While it is still unclear what the exact portfolio allocation of the NWF will be, investments into Russian securities have already begun:

-At the end of October, the NWF invested some $730 million into Russian equities.

--A further $180 million were invested in Russian corporate debt securities.

--The investments were made via state-controlled Vneshekombank (VEB), which currently acts as the NWF's agent in its domestic investments.

--It has not yet been revealed which companies the NWF invested in.

VEB representatives have also announced that the NWF has a further $5.5 billion on hand to invest in Russian shares. This corresponds to some 5% of the total market capitalization of the Russian equity market, meaning the NWF is in a position to significantly affect Russian share prices.

Ship Finance International is steaming full speed ahead, never mind the torpedoes. Although the tanker company said Friday it had missed third-quarter earnings estimates, it raised its dividend, pleasing investors who had their eyes on the horizon.

Ship Finance International upped its quarterly payout to 60 cents a share from 58 cents. That came on the same day that rival Frontline (nyse: FRO - news - people ) slashed its third-quarter dividend to 50 cents a share from $2.75 and $3.00 for the first two quarters of 2008. Tanker companies pay out dividends on the profits they earn from leasing their ships on the spot market. In June and July spot, or day rates, soared to record highs, but as oil prices began plummeting so did charter rates.

Ship Finance International (nyse: SFL - news - people ) shares soared 12.2%, or $1.29, to $11.89, on Friday. Its stock, however, has tumbled 57.1% since the beginning of the year. But the company was confident, saying the crude-oil shipping and deepwater drilling markets are strong. On an annualized basis, its new payout is 20.2% at Friday's closing stock price.

With light, sweet crude oil for January delivery sinking 4.4%, or $2.38, to $52.06 a barrel, on the New York Mercantile Exchange on Friday, a sharp decline from its record-high of $147 in July, it's clear that the turmoil in the global economy is pressuring oil demand. Investors are waiting to see if the Organization of Petroleum Exporting Countries will reduce production before its regularly scheduled meeting in December. The organization has cut output for three consecutive months.

Meanwhile, Ship Finance’s earnings for the third quarter soared 130.1%, to $47.4 million, or 65 cents per share, up from $20.6 million, or 28 cents per share, in the prior year. Sales shot up 22.0%, to $114.3 million, up from $93.4 million. But it missed analysts’ expectations of earnings of 88 cents per share on revenue of $134.9 million. The company attributed the shortfall to turmoil in the international credit markets and generally softer shipping markets.

Ship Finance’s main investments are in the crude-oil shipping and deepwater drilling markets, which have remained relatively strong, the company said, explaining its positive outlook.

Lawyers for both the Republican and Democratic parties have asked the Federal Election Commission to examine the issue, pointing to dozens of examples of what they say are lax screening procedures by the presidential campaigns that permitted donors using false names or stolen credit cards to make contributions.

"There is so much money coming in and yet very little ability to say with certainty that you know who is giving it," said Sean Cairncross, the Republican National Committee's chief counsel.

While the potentially fraudulent or excessive contributions represent about 1 percent of Obama's staggering haul, the security challenge is one of several major campaign-finance-related questions raised by the Democrat's fundraising juggernaut.

Concerns about anonymous donations seeping into the campaign began to surface last month, mainly on conservative blogs. Some bloggers described their own attempts to display the flaws in Obama's fundraising program, donating under such obviously phony names as Osama bin Laden and Saddam Hussein, and reported that the credit card transactions were permitted.

Obama officials said it should be obvious that it is as much in their campaign's interest as it is in the public's interest for fake contributions to be turned back, and said they have taken pains to establish a barrier to prevent them. Over the course of the campaign, they said, a number of additional safeguards have been added to bulk up the security of their system.

In a paper outlining those safeguards, provided to The Washington Post, the campaign said it runs twice-daily sweeps of new donations, looking for irregularities. Flagged contributions are manually reviewed by a team of lawyers, then cleared or refunded. Reports of misused credit cards lead to immediate refunds.

In September, according to the campaign, $1.8 million in online contributions was flagged, and $353,000 was refunded. Of the contributions flagged because a foreign address or bank account was involved, 94.1 percent were found to be proper. One-tenth of one percent were marked for refund, and 5.77 percent are still being vetted.

But clearly invented names have been used often enough to provoke an outcry from Republican critics. Donors to the Obama campaign using false names such as Doodad Pro and Good Will gave $17,375 through 1,000 separate donations, with no sign that they immediately tripped alarms at the campaign. Of more concern, Cairncross said, are reports that the campaign permitted money from 123 foreign nationals to enter its accounts.

Obama officials said they have identified similar irregularities in the finance records of their Republican rival, Sen. John McCain. "Every campaign faces these challenges -- John McCain's campaign has refunded more than $1.2 million in contributions from anonymous, excessive and fraudulent contributors -- and we have reviewed and strengthened our procedures to ensure that the contributions the campaign accepts are appropriate," said Ben LaBolt, an Obama spokesman.

McCain's contributor database shows at least 201 donations from individuals listing themselves as "anonymous" or "anonymous anonymous," according to Obama's campaign. In one particularly embarrassing episode, the McCain campaign mistakenly sent a fundraising solicitation to the Russian ambassador to the United Nations.

Rather than relying primarily on a network of wealthy and well-connected bundlers -- as candidates have since President Bush pioneered that technique in 2000 -- Obama also tapped a list of 3 million ordinary donors, many of whom who gave in increments of $25 and $50.

Finance guru Bodie (left), swaps ideas with Vanguard founder Bogle Illustration by Sean McCabe; (Bodie) Robert Spencer; (Bogle) Bill Cramer/Wonderful Machine

As of Oct. 7 retirement plans had lost as much as $2 trillion over 15 months, or some 20% of their value, according to the Congressional Budget Office. That has many workers wondering how they'll be able to retire and whether everything they thought they knew about investing has been turned on its head. Diversification across sectors and countries, for example, was supposed to protect investments, but few areas of the market have been spared. And what future returns can be expected from stocks and bonds? Have all of our rules of thumb gone out the window? We asked Jack Bogle, founder of fund giant Vanguard Group and a pioneer in the investment indexing business; and Zvi Bodie, a finance professor at Boston University School of Management, co-author of the leading finance textbook Investments and an expert on retirement security, to discuss issues facing savers and investors today. Christopher Farrell launched a discussion between the market veterans by asking if diversification remains a bedrock strategy. The conversation has been edited and condensed.

Jack Bogle: I am a believer in diversification. You buy index funds for stocks, and your bond portion should equal your age. This is how I invest, so I know how little it's hurt me to have a substantial position in U.S. bonds. I'm in half Treasuries, half corporates.

The most common diversification talked about is international. What's wrong is that as soon as people start really talking about it and believing in it, international stocks are overpriced. About 80% of money going into equity funds last year was going into international. If that isn't a warning sign! Here we are: The U.S. is one of the better-performing world markets. From the market peak in 2007, the S&P 500 is off 42.5%, international [measured by the MSCI EAFE Index of developed countries] is down 49.4%, and emerging markets [measured by the MSCI Emerging Markets Index] by 55.8%.

In recent years, international investing has had a higher correlation with the U.S. market than was traditional. If you invest internationally, you have to invest in foreign companies not as diversifiers but wealth producers. If you like international, get in gradually, maybe with 20% of your portfolio, half in developing markets and half in emerging markets. Europe looks a lot like us, so it's at least possible you might get a better return out of emerging markets. I don't invest internationally myself.

Zvi Bodie: I want to add something that strengthens your case. In markets like China, retail investors can invest only in the tiny fraction of equity investments traded on a stock exchange. So compared with the equity investments there that aren't traded on the exchange, those investments are way overpriced. A much better way to invest is to buy U.S. companies doing direct foreign investment in China.

I distinguish between diversification and hedging or insuring. When I use the term diversification, I use it in the sense that you have a bunch of risky assets, and instead of putting your money in one of them, you spread it across them by paying attention to whether those assets move in lockstep. Because if two risky assets are perfectly correlated, you're kidding yourself if you think you're diversifying.

And then there is insuring or hedging. That's when you've got a safe asset and to my mind that is Treasury Inflation-Protected Securities, or TIPS. One way to protect yourself is to combine a diversified portfolio of risky assets with the safe asset. We teach students that you only need two mutual funds—the risky assets and the safe asset—to generate the entire set of risk-and-reward trade-offs.

Bogle: Amen.

Bodie: And that could be provided at minimal cost. But then a lot of smart people working on Wall Street would be deprived of their high income. So they put all sorts of bells and whistles on these things, none of which has to do with improving the welfare of clients.

Bogle: If people would look at not just a percentage point in costs, but what 1% to 2% in lower returns costs you over a lifetime.

PARIS, Oct 4 (Reuters) - European leaders vowed after crisis talks on Saturday to do all they could to fend off the financial mayhem that snowballed out of Wall Street and is now hitting banks in Europe.

They made statements of principle rather than proposing new concrete measures to deal with the worst financial crisis since the 1930s.

"We jointly commit to ensure the soundness and stability of our banking and financial system and will take all the necessary measures to achieve this objective," said a joint statement issued from the meeting in Paris.

French President Nicolas Sarkozy, host, said that he and the leaders of Germany, Britain and Italy had agreed governments needed to act in a coordinated manner.

But he said he had never gone as far as to propose a pan-European crisis fund for banks -- something Berlin had balked at when talk of it surfaced a few days ago.

"We have taken a solemn undertaking as heads of states and government to support the banks and financial institutions in the face of this crisis," he told a joint news conference held with other leaders. German Chancellor Angela Merkel, keen not to become bankroller-in-chief as governments seek a joint response to the worst crisis since the 1930s, said those who caused the trouble must be made to help sort it out.

She stuck to that basic message at the news conference where leaders took turns to stress the need to restore confidence and work with other countries on short- and long-term strategy.

Sarkozy invited the three other leaders to the meeting in the hope of showing unity to restore confidence in the banking sector and an economy on the brink of recession in much of the developed world.

British Prime minister Gordon Brown said no sound and solvent bank would be allowed to fail for lack of liquidity and repeated the point at the news conference.

"We will continue to do whatever is necessary," he said.

The summit follows approval on Friday by the U.S. Congress of a $700-billion bank bailout plan to tackle a crisis sparked by a housing market collapse and a surge in bad mortgage debt.

"My administration will move as quickly as possible, but the benefits of this package will not all be felt immediately," U.S. President George W. Bush said in a radio address.

The fall-out from the crisis has redrawn the banking landscape on both sides of the Atlantic, paralysed wholesale money markets and caused huge volatility on stock markets.

As the leaders spoke, Belgium and Luxembourg were racing to find a buyer for what remained of bank and insurance group Fortis after the Netherlands government nationalised the bulk of the troubled Benelux outfit's Dutch businesses in a rush operation on Friday.

Officials said emergency meetings were taking place in Belgium about the rump left after the 16.8 billion euro nationalisation by the Dutch, which took place less than a week after a first rescue attempt in which the three governments injected 11.2 billion euros ($15.4 billion).

Luxembourg's economy minister said French bank BNP Paribas (other-otc: BNPQY.PK - news - people ) was one possible bidder for parts of Fortis and a solution had to be found by the end of the weekend.

IRISH PRECEDENT

The leaders in Paris highlighted several issues that needed to be addressed at a broader level, including a meeting of euro zone and EU finance ministers on Monday and Tuesday and, as soon as possible, a meeting of leaders of the G8 group of developed economic powers.

Among them was a call for restraints on executive pay and a pledge to work in the weeks ahead on the question of bank deposit insurance.

That is likely to focus on whether governments across the European Union should raise bank deposit protection levels to restore confidence.

Ireland annoyed some this week by promising to guarantee all bank deposits, a move that prompted some depositors in Britain to move savings to branches of Irish banks. In other countries, the protection level can be as low as 20,000 euros.

Merkel said that the European Central Bank and European Commission had been asked to discuss the matter with Dublin.

The four countries at the Paris summit are the four largest in Europe and also members of the G7 and G8 clubs of major industrial powers.

The G7 includes the United States, Japan and Canada as well and the G8 includes Russia as well.

European Central Bank President Jean-Claude Trichet and Jean-Claude Juncker, chairman and spokesman for the finance ministers of the euro currency zone, also attended the Paris summit, as did European Commission chief Jose Manuel Barroso.

The $700 billion bail-out approved by the U.S. Congress is earmarked to buy up assets that turned toxic when the U.S. housing market and sub-prime mortgage market collapsed.

Stocks, which had been higher before the vote, dropped, with the S&P 500 index closing at its lowest level in almost four years as investors focused less on recession risk rather than the hope of relief.

(Writing by Brian Love; Editing by Richard Balmforth) (reporting by Iain Rogers in Berlin, Matt Falloon in London, Philip Blenkinsop in Brussels, Michele Sinner in Luxembourg, Ilona Wissenbach, Tamora Vidaillet, Crispian Balmer in Paris)