Conference notes

       Here is some bail-out gossip picked up at the FT Electric Markets conference yesterday.

   *Lehman was let go because its counterparties were largely outside the U.S.; Bear Stearns was saved because its counterparties were largely here. I do not understand why European banks do not complain (a securities lawyer);

   *The bailout was precipitated because of the fact that this is an election year. Otherwise it would never have come back again to Congress before the recess and the crisis might have died down a bit (a non-U.S. lawyer);

   *The advantage government funding is giving to AIG, a misbehaving insurance group, is hurting its competitors who had been behaving better (a New York insurance exec);

    *The banks are getting set to lobby as hard as the defense industry in the new year;

    *FNM was bailed out because China held $300 bn of its paper. Had Fannie Mae been allowed to default the next in line would have been the U.S. Treasury itself. So to keep China buying T-bills, they had to save Fannie;

    *What did Alan Greenspan do with his royalties to save them from the meltdown?;

    *A defense analyst: at least Russia, Venezuela, and Iran are being defanged by the price of oil falling below $79/bbl. Russia is not a threat to anyone except Georgia. Not even to Ukraine;

     *The dollar is going up because foreigners react to a crisis by buying dollars. They did this in 2000-1 and are doing it again;

     *The dollar is going up because hedge funds are deleveraging and going into their native cash. (I have my own theory below);

     *A Ukrainian MBA: after the Orange Revolution there was a period when we had no currency at all. We got little pieces of yellow paper with stamped on "coupons" which we cut out to buy things with;

     *An Electric Market expert: Walmart reports that they are selling vastly more safes for home-owners. Are they putting dollar bills in them or gold coins and bars?

         *Why the dollar is going up? Almost every solvent country is now financing banks within its borders and providing deposit insurance. This is to stop outflows generated by more attractive terms across borders. The U.S. hit first and hardest against the meltdown, and that is pulling money into our system.

     At some point currency flows will revert to normal triggers like inflation fears and balance of payments expectations. But not soom.

     *Canada cut interest rates by a modest 1/4 percent to 2 1/4%. Intervention in one country requires intervention in others. There are old rules about this. One is Gresham's Law which says bad money drives out good.

     *Barclays will pay the U.K. Treasury GBP 42.6 mn to sell GBP 1 bn ($1.7 bn) of 3-yr bonds with a guarantee after all. This is made up of a 50 basis points fixed amount and a fee related to the swaps rate in sterling. This offers two advantages: it gets BCS/BARC the cash need and also helps tighten sterling swap spreads. Initially, Barclays had said it would raise capital required from its existing shareholders, but like the U.S. banks summoned to the Treasury, it is now accepted state help it may not need.

     *Fitch Ratings statement today helps explain why we continue to pound the table in favor of Royal Bank of Scotland (and National Westminster which RBS owns) preferred shares listed on the NYSE. We recommend that readers who have taken losses in these shares (as we all have) switch into different series in order to mop up any taxes on capital gains they might otherwise owe Uncle Sam this year.

     Fitch wrote that it "continues to view recent UK government actions as positive developments for the RBS Group. Fitch also considers RBS' franchise and aggregate credit profile are consistent with a high investment grade rating. However, Fitch is concerned about increasing risks and worsening outlook for certain of the group's main businesses. Consequently, Fitch has downgraded the long-term Issuer Default Ratings (IDRs) of The Royal Bank of Scotland Group plc, The Royal Bank of Scotland plc, and National Westminster Bank Plc (NatWest) to 'AA-' from 'AA'. The group's short-term IDR has been affirmed at 'F1+'.

      "Fitch does however view positively the UK government's actions to underwrite a GBP15 billion ordinary share issue and inject a further GBP5 billion of preferred shares into RBS Group, in terms of restoring confidence to a group and sector that has suffered from heightened market uncertainty over recent weeks. By committing to these capital measures, RBS Group is eligible to participate in the UK government's broader funding programme, which will enable the group to issue government guaranteed debt up to three years term, within the next six months. Fitch expects RBS Group to use the guarantee and, together with ongoing deleveraging, this will have a positive impact on funding.

    "Fitch therefore believes that the group's ratings have upside potential in the medium term and key drivers will be how the group deals with deteriorating market environments, the successful integration of ABN Amro and deleveraging of the balance sheet and the implementation of a refocused, lower risk, strategy.

     "Fitch has also has downgraded the group's Individual rating to 'B/C' from 'A/B' to reflect the uncertainties facing the group. The economic outlook for RBS Group's main operating markets (particularly the UK and US) is negative over the short-medium term and there remains significant uncertainty over the depth and length of any recession. Management has indicated in its announcement on 13 October that all divisions of the RBS Group traded profitably in Q308, although results for H208 are likely to be below prior expectations. In the UK, RBS Group has a better quality consumer loan book than many market participants and has been less aggressive in building up residential mortgage assets in recent years which should offer some protection. Nevertheless, Fitch expects impairment charges across the group to rise in 2009 in line with deteriorating market conditions. Fitch does not believe the commitment to maintain the availability of credit to the UK's SME and housing sectors to be material to the group's ratings as the agency does not expect weaker credit standards to be imposed on the UK bank.

     "In response to the UK government's support package Fitch, on 13 October, raised its support floor for RBS (and the operating UK banks of other systemically important UK banking groups) to 'AA-('AA minus')' from 'A-('A minus')'. In a similar action, Fitch has today raised the support floor for NatWest to 'AA-('AA minus')'from 'A-('A minus')'.

   "These actions follow a review of the outlook for the group's main operating environments. The review also factored in the unique challenges the group faces in integrating ABN Amro in difficult market conditions, the potential for restricted operational flexibility as a result of conditions that could be imposed by HM Treasury should it become a controlling shareholder in the group, and changes to the group's senior management and board."

     *Defanged though it be, Russia (via OAO Gazprom) is creating a "Gas Troika" with Iran and Qatar to jointly explore and produce natural gas. The three countries account for half the world's gas supplies now. OGZPY.PK also set a modest $800 mn budget for development of its offshore Shtokman gasfield in cooperation with foreign partners including Total. Chrisophe de Margerie, CEO of TOT, says this is for 2008-9 pending finaly decision on going ahead with the costly Arctic field.

     *ASUR, the Mexican airport operator, bought a site in Huatulco for a new airport on the West Coast from a Mexican govt. agency developing the resort. ASR.

     *My theory that Veolia, a French water/sewerage firm, would be a haven in a downturn was wrong. VE cut its '08 cash flow forecasts because of a "clear slowdown" in waste management and lower water sales as global economies deteriorate. The stock was cut to add from buy by Dexia, and to reduce from add by Oddo, two French brokers. Sell VE.

     *GSK won a strong buy from Buckingham today. But it was removed from Goldman Sachs' European "conviction list". It bought from Laclede a set of dental and consumer products with annual sales of $170 mn marketed under the Biotene label for $50 mn. The company reports on Q3 tomorrow morning.

     *ICICI saw curious movements last week. Foreign investors in India cut their exposure to IBN by 2%, part of a 3% draw-down in their overall Indian exposure. However, the ADR won considerably more investment in the same week (that of Oct. 13) as those in local markets were selling off IBN. But in both cases, the international investors were buying while Indian short-selling was targetting IBN.

     *ING, the Dutch brokerage, raised Crucell to a 'buy' with a euros 10.30 target. CRXL.Q is doubling its production of Quincaxem (the 5-in-one shot for babies) and is moving its Korean poruduction to Incheon (a Special Economic Zone) to produce this and other vaccines.

      *CLP reported 9-mo revenues rose 6.9% over last year to HK$42.71 bn. The company did not reveal its profits. The dividend was kept unchanged at HK$52/sh. CLPHY.PK.

      *Cryptologic is focusing its business on selling branded games to Internet casinos, starting with a deal via its WagerLogic Ltd. sub with PatryGaming, an on-line operator. CRYP.Q, the formerly Canadian gaming software firm now operating out of Ireland expects to cut operating expenses 12-15% with the new strategy of licensing its popular brands to on-line casinos. PartyGaming works in China, Singapore, and South Korea.

      *Elbit Imaging, an Israeli property and royalty group, is buying back shares of its Plaza Centers sub which are listed in London as PLAZ. The buyback will take back nearly 7% of the PLAZ stock over the next half year. EMITF.Q.

      There is a lot of news today because it is from Monday and Tuesday. I attended a memorial service this morning which is why it is late.