Buffett held Brazilian real on current account surplus

Buffett Avoids Bear Stearns, Countrywide Financial (Update3)
By Josh P. Hamilton

Oct. 18 (Bloomberg) -- Billionaire Warren Buffett said his Berkshire Hathaway Inc. won't buy a stake in Bear Stearns Cos. and that he ``never came close'' to acquiring shares of mortgage lender Countrywide Financial Corp., which fell 61 percent this year.

Buffett also said Berkshire sold all its stock in PetroChina Co., a company that has been the target of a divestment campaign by human rights groups.

Buffett denied a New York Times report published last month that said he might buy as much as 20 percent of New York-based Bear Stearns, the fifth-largest U.S. securities firm, during an interview on News Corp.'s Fox Business Network.

``That was an incorrect story,'' he said. ``We were not taking a stake. That one had no basis.''

Shares of Bear Stearns fell as much as 37 percent this year after the collapse of the subprime mortgage market pushed two of its hedge funds into bankruptcy and eroded fixed-income revenue. The stock remains the worst performer this year among the five biggest U.S. investment banks, even after rallying 7.7 percent on Sept. 26 when the New York Times story was published.

Buffett, 77, over four decades transformed Omaha, Nebraska- based Berkshire from a failing textile maker into a $200 billion investment and holding company with businesses ranging from ice cream to insurance and corporate jet leasing. His investment decisions are followed worldwide.

Didn't Buy Hovnanian

The Berkshire chairman said he was in contact with Calabasas, California-based Countrywide as the company's stock fell in August amid a cash shortage brought on by the worst housing slump in 16 years. The company lacked a comprehensive plan that might have interested Berkshire, Buffett said.

He never bought any shares of Countrywide or Hovnanian Enterprises Inc., the largest U.S. luxury homebuilder and the subject of takeover speculation. The Red Bank, New Jersey-based company has dropped 70 percent this year. Neither stock is undervalued, he said.

Buffett said he was skeptical about the U.S. Treasury's plan to create an $80 billion fund to buy distressed assets from structured investment vehicles linked to home lending.

``I don't see any way that pooling a bunch of mortgages, changing the ownership, is going to change the viability of the mortgage instrument itself -- whether people can make the payments,'' he said. ``It would be better to have them on the balance sheets so everyone would know what's going on''

PetroChina Stake

Buffett's decision to sell PetroChina was ``100 percent'' based on the share price, he told anchor Liz Claman. Human rights groups have been calling on him to sell the stake.

The company's Chinese parent is the largest foreign developer of oil fields in Sudan, accused by the U.S. of supporting genocide in the African nation's western Darfur region. Buffett rejected a Berkshire shareholder's proposal calling for divestment, and it was voted down at the annual meeting in May.

The most recent disclosures showed Berkshire's PetroChina investment was down to 3.1 percent of the publicly held shares as of Sept. 30, from 5.44 percent five days earlier and more than 10 percent at the end of last year. Berkshire paid $488 million for the stake, valued at $3.3 billion at the end of 2006, according to Berkshire's annual report.

Buffett identified the Brazilian real as the unnamed currency he said in May that he owned, noting it has doubled against the U.S. dollar in the past five years.

``During much of that time, the Brazilian government has in effect been supporting the U.S. dollar,'' Buffett said. ``They have been buying dollars in the market, they have been building up their own reserves. Their current account has turned into a good surplus,'' while the U.S. is behaving like ``the Brazilians or the Argentinians 10 or 20 years ago.''

Buffett said he wasn't suggesting anyone buy reais. ``We may be cashing out. This is not a huge position. We'll make $100 million,'' he said.

Rising reserves of Asian economies may be contributing to excess liquidity

Another Asian Contagion May Be Only a Bad Currency Trade Away
By Matthew Benjamin and Shamim Adam

June 18 (Bloomberg) -- The next Asian contagion may be only a bad currency trade away.

Ten years after the collapse of Asian governments' overvalued currencies in 1997, the remedies they embraced to prevent a recurrence may have only traded one set of risks for another. Their ``never again'' determination has led them to new extremes: artificially low currencies, a record $3.4 trillion in reserves and export-dependent economies.

``The currency and financial policies in Asia today risk planting the seeds of a new and different financial crisis,'' says Nouriel Roubini, 49, chairman of Roubini Global Economics and a professor at New York University's Stern School of Business. ``It's a dangerous system both for these countries and for the global economy.''

In emerging markets, central banks and governments are grappling with risks including inflation, asset bubbles and vulnerability to a U.S. slowdown. For investors, meanwhile, ``risk has been underpriced,'' Roubini says, with the result that ``this can have negative effects on bonds, currencies and equity markets.''

Thailand sparked the Asian crisis in July 1997 when it devalued the baht in an effort to shore up its faltering economy, abandoning a costly policy of pegging the currency to the U.S. dollar.

Stampede
That set off a chain reaction that turned Asia's investment and real-estate boom into a bust, leading to a stampede by foreign investors rushing to pull money out. The crisis worsened as foreign-exchange reserves proved insufficient to prevent the region's currencies from plummeting.

Emerging markets have made some progress toward avoiding a similar catastrophe. Central banks are more independent, government debt has declined, financial systems are stronger and current-account balances are generally in surplus.

Economies from Russia to Brazil are booming while Indonesia, Thailand and Malaysia have earned higher credit ratings. South Korea, on the brink of default 10 years ago, recorded its 16th consecutive quarter of growth in the first three months of this year.

``A lot of lessons have been learned,'' says financier George Soros, whom Malaysia's then-Prime Minister Mahathir Mohamad blamed for worsening the 1997 crisis through currency speculation. Soros, 76, told reporters June 5 in Sao Paulo that many economies ``are incomparably better than they were 10 years ago.'' Still, he said, some governments have learned ``the wrong lesson,'' citing price controls in Argentina and ``very substantial reserves'' in Brazil.

`State of Denial'
Anwar Ibrahim, Malaysia's finance minister during the crisis, says ``fundamental flaws have not been corrected.'' Currencies are still inflexible, showing that ``we are still in a state of denial,'' he says.

As investors fled Asia after Thailand's 1997 devaluation, they set off a plunge in other currencies that had previously been propped up through fixed exchange-rate regimes. Indonesia's rupiah fell 57 percent against the U.S. dollar, causing companies to buckle under $80 billion in foreign debt and leading to riots in Jakarta.

Thailand's baht dropped 45 percent, and its stock market fell 75 percent. South Korea's won lost half its value, and its economy collapsed. Malaysia's ringgit fell 35 percent.

Hong Kong, China, Singapore, Taiwan and the Philippines also suffered. The crisis eventually spread to South America and to Russia, which defaulted on $40 billion of debt.

The IMF's Advice
Malaysia's Anwar says many governments still haven't followed the International Monetary Fund's advice to adopt flexible exchange rates that can help dissipate financial pressures.

``Fixed currencies are still a problem in the region, and they're always politically motivated,'' says Anwar, 59, who was fired in 1998 when Mahathir imposed capital controls.

China, Hong Kong, Taiwan, Malaysia, Singapore, Thailand, India, Russia and Argentina still manage their currencies, generally maintaining artificially low levels. South Korea and Indonesia allow more flexibility.

``They're all managed floats,'' says Stephen Jen, global head of currency research for Morgan Stanley in London. ``For the most part, they're more managed than float.''

Cheap currencies have led to excessive monetary and credit growth worldwide, creating asset bubbles in South Korea and China and inflating consumer prices in India, Russia and Argentina.

Credit Restrictions
Policy makers in Asia are adding restrictions on lending and increasing taxes on share trades to combat bubbles that have made Hong Kong rents the world's costliest and Chinese stocks twice as expensive as others in the region.

In December the Bank of Thailand imposed penalties on investments from overseas held less than a year in an effort to keep speculators from driving up the baht. This triggered the biggest one-day drop in 16 years for Thailand's SET stock index, which plunged 15 percent on Dec. 19.

Undervalued currencies have also helped make Asia's emerging economies almost twice as reliant on exports as the rest of the world. ``A sharp slowdown in global demand would have major ripple effects,'' says Robert Subbaraman, Lehman Brothers' Hong Kong-based chief economist for Asia excluding Japan.

Meanwhile, the build-up of foreign-exchange reserves, part of the IMF's prescription for avoiding a repeat of the 1997 crisis, has exceeded all expectations.

`Overlearned'
``Some lessons were overlearned,'' says Ted Truman, 66, a senior fellow at the Peterson Institute for International Economics in Washington.

South Korea's reserves, depleted in its unsuccessful defense of the won during the crisis, are now the world's fifth- largest, burgeoning to $250 billion from $7 billion in November 1997. China added $1 million a minute to its reserves in the first quarter of this year and now holds $1.2 trillion. India, Japan, Taiwan and Russia hold more than $200 billion each.

Truman and other economists say the massive reserves contribute to excess liquidity.

``It may no longer be appropriate to view rising reserves as a source of increasing strength against future volatility,'' New York Federal Reserve Bank President Timothy Geithner said in Singapore last week. Geithner, 45, was the U.S. Treasury Department's assistant secretary for international affairs during the crisis.

Opportunity Costs
There are opportunity costs to holding excess reserves that might otherwise be invested in infrastructure improvements, health care or higher-yielding assets, economists say.

``They're paying an enormous price in terms of standards of living,'' says Harvard University's Kenneth Rogoff, who was chief IMF economist from 2001 to 2003. ``It's as if you bought a $1 million home sitting on the San Andreas Fault and a $3 million insurance policy for it.''

What's more, by focusing on exchange rates, governments in emerging economies may overlook other risks, says Stephen Roach, chief global economist at Morgan Stanley, who becomes the firm's Asia chairman this month.

``The next crisis is never the same as the last,'' he says. ``By fixating on the problems that foreshadowed the last crisis, the risk is Asia gets blindsided by another problem.''

Capital Account Outflow from Japan pushing the Yen lower?

Yen Trades at 4 1/2-Year Low Against Dollar on Yield Disparity
By Agnes Lovasz and David McIntyre

June 14 (Bloomberg) -- The yen traded at the weakest against the dollar since December 2002 as investors were enticed by the yield advantage on U.S. Treasuries over Japanese debt.

The yen has dropped 3 percent this year as traders reduced bets on lower U.S. interest rates, causing the 10-year yield spread with Japan to widen to a four-year high. Traders also expect the Bank of Japan to keep its key interest rate at the lowest among major economies tomorrow. Low Japanese rates have encouraged purchases of higher-yielding assets financed by borrowing in yen, the so-called carry trade.

``We're highlighting outflows by retail investors as the primary driver for yen weakness,'' said Adam Cole, senior currency strategist at Royal Bank of Canada Europe Ltd. in London. ``And the market still has appetite for borrowing yen and buying high-yielding assets. The yen will keep going down.''

The yen fell to a low of 122.97 per dollar, the weakest since Dec. 12, 2002, before trading at 122.89 at 9:13 a.m. in London from 122.72 late in New York yesterday. Cole expects the yen to be at 126 by year-end. It fell to 163.58 per euro, from 163.36. The euro was little changed at $1.3312, bouncing up from $1.3290 earlier.

The Japanese currency's descent may accelerate should it weaken beyond 123, where there are sell orders, said Michiyoshi Kato, a senior vice president of currency sales in Tokyo at Mizuho Corporate Bank Ltd., a unit of Japan's second-largest lender by assets.

``The yen's downward momentum is strong,'' said Kato. ``Yen- selling is likely to continue'' to 123.20 per dollar today.

Japan's currency fell to the weakest in 15 years against the Australian dollar, reaching 103.19 yen, before recovering to 103.01 as Reserve Bank of Australia Governor Glenn Stevens said in a speech today he would have ``time'' to respond to inflation pressures, adding to signs he won't raise rates any time soon.

Interest-Rate Differentials
The yen has fallen 2.7 percent versus the New Zealand dollar and 2.1 percent against Australia's this month as investors took advantage of Japan's borrowing costs to buy assets in those countries. The benchmark rate is 6.25 percent in Australia.

The Reserve Bank of New Zealand raised its key rate to 8 percent on June 7. New Zealand's dollar has rebounded 1.6 percent against the yen to 92.32, after slumping 2.2 percent from a 17- year high of 93.11 on June 11, when the central bank sold the currency to stem gains.
``Investors are focusing on interest-rate differentials,'' said Mizuho's Kato.

The difference in yield between a 10-year Japanese and U.S. note was 3.26 percentage points, near the widest since March 2005.
The BOJ will hold its target rate at 0.5 percent tomorrow, according to all 43 economists surveyed by Bloomberg. That compares to 5.25 percent in the U.S.

Barrier Options
Gains in the dollar against the yen may stall around 123, because of sell orders to protect barrier options, said Nobuaki Tani, a senior currency dealer at Resona Bank Ltd. in Tokyo.

``There seem to be a lot of offers between 122.80 and 123, some of which are to defend options,'' Tani said.

A barrier has a knock-out that renders an option worthless should it be triggered. Options give holders the right to buy or sell a currency at a set price on a fixed date. An investor who buys an option can only lose the premium paid.

The euro may be supported by speculation a report today will show inflation in the 13-nation region remained close to the European Central Bank's 2 percent ceiling for a third month.

ECB Rate Hikes
Europe's single currency yesterday rebounded from an 11-week low against the dollar after ECB President Jean-Claude Trichet said the central bank will deliver price stability, suggesting higher borrowing costs.

``We're likely to see more ECB rate hikes,'' said Lee Wai Tuck, currency strategist at Forecast Singapore Ltd. ``This will be positive for the euro,'' which may advance to $1.3380 and 164 yen today.

The euro may trim a 1.1 percent decline versus the dollar this month as consumer prices probably increased 1.9 percent in May from a year earlier, according to a Bloomberg News survey.

Interest-rate futures show traders are betting on at least one more quarter-point rate increase from 4 percent, and have increased wagers on a second one by year-end.

The implied yield on the December Euribor contract was 4.545 percent, up from 4.515 percent a week earlier. The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points more than the key rate since 1999.
The Swiss franc erased gains against the euro and fell against the dollar after the central bank raised its target interest rate a quarter point to 2.5 percent today.

Against the euro, the franc traded at 1.6574, from 1.6550 shortly before the rate decision, and 1.6566 late yesterday. It was also at 1.2450 to the dollar, from 1.2446.