Germany Officially in Recession As Oecd Expects Us to Lead Recovery

Developed countries across world in recession, says leading thinktank, but growth in consumption expected

Lehman Brothers Chief Executive Grilled By Congress Over Compensation

Oversight committee chairman Henry Waxman says Richard Fuld’s compensation is ‘unimaginable’ to the public

It was a showdown to cherish for critics of Wall Street’s culture of enrichment. The grim-faced boss of the bankrupt bank Lehman Brothers was left squirming with discomfort today as a veteran Democrat roasted him over his multi-million dollar pay.

With the startled look of a man unaccustomed to sharp examination, Lehman’s chief executive, Richard Fuld, clashed bluntly with the chairman of the House oversight committee, Henry Waxman, on Capitol Hill.

Called upon to explain why Lehman collapsed last month, Fuld began with a note of humility, saying he felt “horrible” over the demise of the 158-year-old institution. “I want to be very clear,” said Fuld. “I take full responsibility for the decisions I made and for the actions I took.”

In a brief speech that was heard in silence, Fuld told lawmakers that if he could turn back the clock, he would do many things differently. As soon as he finished speaking, sparks began to fly. The chairman of the committee held up a chart suggesting that Fuld’s personal remuneration totaled $480m over eight years ? including payouts of $91m in 2001 and $89m in 2005.

“Your company is now bankrupt and out country is in a state of crisis,” said Waxman, a liberal lawmaker from California. “You get to keep $480m. I have a very basic question ? is that fair?” After a long pause, Fuld demurred, saying the figure was exaggerated: “The majority of my compensation, sir, came in stock. The vast majority of the stock I got I still owned at the point of our [bankruptcy] filing.”

Waxman cut him off, saying that even if the figure was slightly lower, it was “unimaginable” to much of the public. “Is that fair, for a CEO of a company that’s now bankrupt, to make that kind of money? It’s just unimaginable to so many people.” Waxman asked. “I would say to you the $500m number is not accurate,” said Fuld. “I’d say to you, although it’s still a large number, for the years you’re talking about here, my cash compensation was close to $60m, which you’ve indicated here, and I took out closer to $250m [in shares].”

Interrupting again, Waxman listed Fuld’s collection of property ? including a $14m ocean-front villa in Florida and a home in the exclusive ski resort of Sun Valley, Idaho. “You and your wife have an art collection filled with million dollar paintings,” said Waxman. “Your former president, Joe Gregory used to travel to work in a helicopter.”The pugnacious Waxman warmed to his theme: “You made all this money taking risks with other peoples’ money.”

Refusing to give ground, Fuld said his pay had been set by an independent compensation committee which spent “a tremendous amount of time” making sure executives’ interests were aligned with those of shareholders.

“When the company did well, we did well,” said Fuld. “When the company did not do well, we didn’t do well.” Waxman disagreed: “Mr Fuld, there seems to be a breakdown, because you did very well when the company was doing well and you did well when the company was not doing well. And now your shareholders who owned your company have nothing. They’ve been wiped out.”

Fuld’s evidence on Capitol Hill was his first public appearance since Lehman failed, sparking a chain of events that have sent shock waves through the global financial system and has prompted the US government to begin a $700bn bail-out of the banking industry.

A lifelong Lehman employee who joined the firm as an intern in 1966, Fuld has been blamed for the debacle by many of the bank’s 28,000 staff ? including those in London who have accused senior management of filleting Lehman’s British operation of money in the bank’s final days.

Deadpan and emotionless, Fuld repeatedly frustrated congressmen by answering questions with lengthy, technical financial explanations. Frustrated by his demeanor, a Republican congressman, John Mica, tried humor. “If you haven’t discovered your role, you’re the villain today,” said Mica. “You’ve got to act like a villain.”

Fuld stared back wordlessly, without a shadow of a smile. Towards the end of his two hours of evidence, Fuld told Congress that until the final hours of the bank, he believed a takeover by Barclays would save Lehman Brothers from bankruptcy. In the event, Barclays waited until after Lehman had collapsed before buying the remnants of its US operations.

“Not that anyone on this committee cares about this but I wake up every single night wondering ‘what could I have done differently?’” Fuld said. “In certain conversations, what should I have said? What could I have done? I have searched myself every single night.” Raising his voice, Fuld continued: “This is a pain that will stay with me for the rest of my life.”

Iraq is ’safer Than Wall Street’

Investing in Iraq is safer than investing in the stock market, says the investment minister for Kurdistan.

The Kurdistan Regional Government is promoting the area as a haven for foreign companies wanting to set up business in Iraq.

The semi-autonomous region is relatively stable compared with the rest of the country. Herish Muharam Muhamad, head of the investment board for Kurdistan, joked to The Observer that investing in Erbil, the region’s capital, was now safer than Wall Street. ‘We are saying to companies, “Make your base in Kurdistan to invest in the rest of Iraq”. ‘ He said more than half the 5,000 or so firms registered in the region were foreign.

US Government to Limit Pay Packets for Wall Street Bankers in Bailout Package

The US government has yielded to an outcry over multi-million dollar Wall Street pay packets by agreeing to impose limits on the remuneration of senior bankers who benefit from a $700bn bail-out of financial institutions.

Treasury secretary Henry Paulson bowed to pressure after two days of tough negotiations with congressional lawmakers who are deeply reluctant to pass his program to buy up banks’ distressed assets without a crackdown on perceived boardroom excess.

“The American people are angry about executive compensation, and rightly so,” Paulson told the House financial services committee. “We must find a way to address this in legislation without undermining the effectiveness of the program.”

The concession, which is likely to fuel momentum for similar measures in Britain, came as the Bush administration battled to overcome skepticism about the biggest public intervention in the financial markets since the Great Depression.

Polls suggested that the US public are unenthusiastic about the bailout and Wall Street stocks slipped on doubts over the likelihood of an agreement this week. In an attempt to marshal support, the White House announced that President Bush would make a televised address about the financial crisis.

Measures to reduce pay packages are set to include severe restrictions on “golden parachutes” given to executives when they leave their jobs. Wall Street sources expect a claw back on bonuses if companies re-state their financial performance and legislation to prohibit performance-related incentives which encourage inappropriate risk.

Such changes are an about-turn for a laissez-faire Republican administration which last year rejected Congressional attempts to give shareholders a British-style “say on pay” vote at American companies. A crackdown poses a personal dilemma for Paulson who earned $38m as head of Goldman Sachs in 2005 before joining the government.

In heated exchanges on the issue, Democratic congressman Luis Guitterez told Paulson: “We are asking American taxpayers to sacrifice, to put $700bn out there when other people are lining their pockets.”

Paulson replied: “People in the country understand pay for performance for success - that’s the American dream. But nobody understands pay for failure.”

Critics of Wall Street point out that Lehman Brothers’ chief executive, Dick Fuld, received nearly $35m in pay last year. Merrill Lynch’s former boss Stan O’Neal left with $161m in stock and options when he was ousted due to huge losses on subprime mortgages in October.

A poll released by the Los Angeles Times and Bloomberg showed that 55% of Americans oppose government aid to failing financial firms, in a sign that treasury secretary Henry Paulson is struggling to sell the scheme successfully. Paulson is staying in Washington to continue defending the plan and has turned down an invitation to meet Gordon Brown in New York today.

The administration delivered increasingly dire warnings of the consequences of inactivity. The Federal Reserve chairman, Ben Bernanke, said global markets were under “extraordinary stress” and that action was “urgently required”. The White House press secretary, Dana Perino, said there was a risk of “financial calamity” as “the cold on Wall Street could affect main street”.

As concern mounted in the markets, the Dow Jones Industrial Average slipped 29 points to 10,825. Morgan Stanley’s shares slumped 11% as takeover talks with the commercial banking group Wachovia ended.Deutsche Bank analysts said the market was “skittish” on concerns that the Treasury may get less than the $700bn it wants, with the possibility of strings attached. Tobias Levkovich, chief US equity strategist at Citigroup, said “bailout fatigue” was setting in.

“A real sense of crisis has eluded many members [of Congress] who may not fully grasp the linkage between financial markets and their impact on the people of Main Street who elect their representatives in government,” said Levkovich in a note to clients.

The Los Angeles Times’ poll was not the only attempt to read the US public’s pulse on the financial crisis. CNN found that 62% of Americans support government involvement in the markets but 65% believe that any bailout would be unfair to taxpayers. Several tongue-in-cheek websites sprung up in which Americans offered junk for sale to the Treasury at inflated prices - on one, contributors offered a broken printer for $300 and a Bollywood poster for $4.76m.

Former president Jimmy Carter joined the chorus of criticism, describing Paulson’s plan as “extremely faulty” in lacking checks and balances: “It’s only three pages in outline. It gives him dictatorial power with no supervision.”

Senior Wall Street names have offered their services in helping the treasury to buy up investments. Bill Gross, who manages the world’s biggest bond fund, Pimco, said he would help the treasury manage the program free of charge.

A sense of anger over Wall Street’s role in sparking the meltdown was fueled by news that the FBI is investigating the possibility of fraud at four troubled firms caught up in financial turmoil - AIG, Fannie Mae, Freddie Mac and Lehman Brothers.

Doubts about the program cut across party lines. One-time Republican presidential hopeful Ron Paul summed up the tumult: “I don’t know who the conservatives are and who the liberals are.”

House Vetoes Wall Street Bailout

Wall Street plummeted on Monday as the House vetoed the $700 billion bailout.

By Pamela Mortimer

Wall Street continues to be in serious trouble. The Dow plummeted by 685 points at the same time the House of Representatives vetoed the proposed bailout to the tune of $700 billion. The final vote on the bill was 205 - 228, almost dividing the House in half. Only one member, Republican Rep. Jerry Weller, did not cast a vote.

Both sides cited a number of reasons for the opposition, including the expansion of the national debt. Others claimed the bailout was excessive government intervention. The final voting record was: Democrats 141-94; Republicans 132-77.

The bill was intended to ease congested credit lines for that financial market that has been bordering on collapse. Sellers continue to get rid of stocks even as the market plunges.

President Bush continues to insist that taxpayers receive benefits from the legislation, which contains various safeguards. Lawmakers worked through the weekend to come to a reasonable compromise.

Although many of the bill’s supporters didn’t like the proposition, the fear of economic collapse outweighed other concerns.

“I’m not willing to put that bullet in the revolver and spin it. I will take the political risk,” said Rep. Spencer Bachus, R-AL, the ranking member of the House Financial Services Committee.

A GOP source said that members opposed to the bill stated part of the reason for the negative vote was a partisan speech made by House Speaker Nancy Pelosi.

“Pelosi’s partisan speech has caused our members to go berserk and may cost us any remaining chance to pass the bill,” the source said.

Pelosi encouraged Congress to pass the bill, although the economic crisis was a result of “failed economic policies” during the Bush administration.

“When was the last time someone asked you for $700 billion?” she asked. “It is a number that is staggering, but tells us only the costs of the Bush administration’s failed economic policies policies built on budgetary recklessness, on an anything goes mentality, with no regulation, no supervision, and no discipline in the system.”

Bush made a four minute speech at the White House in an attempt to reassure Americans that the bill was the right move and would be beneficial to the country.

“I’m confident that this rescue plan along with other measures taken by the Treasury Department and the Federal Reserve will begin to restore strength and stability to America’s financial system and overall economy,” Bush said. “And I’m confident in that in long run, America will overcome these challenges and remain the most dynamic and productive economy in the world.”

Wall Street: Us Financial Regulator Failed to Provide Oversight, Reports Say

US securities and exchange was criticized in two official reports which probed the demise of Bear Stearns

America’s financial regulator ignored “numerous potential red flags” in the run-up to the collapse of Bear Stearns and failed to exercise adequate supervision over the investment banking industry, government auditors concluded today.

The US securities and exchange commission came in for intense criticism in two official reports which probed the demise of Bear Stearns ? a key event which was instrumental in triggering the banking crisis which has since spread to institutions across the world.

David Kotz, the inspector general who oversees the SEC, found “serious deficiencies” in the way the agency oversaw Bear Stearns, applying little or no pressure on the bank to comply with voluntary accounting rules.

He concluded that SEC investigators “became aware of numerous potential red flags prior to Bear Stearns’ collapse” concerning its mortgage-related assets, high leverage and failure to comply with the spirit of regulatory standards but they “did not take action to limit these risk factors”.

The SEC’s chairman, Christopher Cox, blamed a lack of legislative authority for his agency’s inaction. He pointed out that Wall Street broker-dealers without high-street banking networks are largely only liable to voluntary oversight.

This voluntary system has effectively ended with a decision this week by the last standalone Wall Street banks, Goldman Sachs and Morgan Stanley, to accept commercial banking licenses.

“The last six months have made it abundantly clear that voluntary regulation does not work,” said Cox.

Although Bear Stearns was rescued at the eleventh hour by JP Morgan in March, some 8,000 employees of its 14,000 staff lost their jobs including about half of the 1,500 people employed by the bank in London.

Bear Stearns’ chairman, Jimmy Cayne, faced criticism in the bank’s final days over his habit of leaving the office for bridge tournaments. The SEC’s inspector general said the regulator failed to address “very significant questions” about the “lack of involvement” of Bear’s senior executives.

Dramatic Swings on Wall Street Likely to Shred the Paper Fortunes of America’s Super-rich

Market turmoil leaves new Forbes 400 rich list already out of date as Bill Gates returns to top

The turmoil on Wall Street this week has played havoc with the wealth of the United States’ super-rich, threatening the position of the investment expert Warren Buffett as the country’s second-richest businessman and decimating the paper fortunes of financiers and investors.

The latest list of the US top 400, published by the business magazine Forbes this week, estimated American fortunes as of the end of August. Since then the market has experienced some of the most dramatic swings ever and the list now looks like a window into a bygone world.

Earlier this year Buffett, the legendary stock-picker dubbed the Sage of Omaha after his Nebraskan home, briefly overtook Microsoft co-founder Bill Gates as America’s richest man.

Since then the Dow Jones has been on a roller coaster ride, Lehman Brothers has become the world’s largest-ever bankruptcy, Merrill Lynch has been forced into a shotgun wedding with Bank of America, AIG has been bailed out by the US government and Morgan Stanley sent looking for its own saviour.

Worries about the credit crunch had already reduced Buffett’s fortune by $12bn (6.6bn) over the six months to the time the list was compiled on August 29, leaving Gates in the top spot with a net worth of $57bn. Buffett is worth $50bn. Although he has a reputation for making astute financial judgments, he would have needed to be on top form over the past five days to benefit from the dramatic swings on Wall Street.

AIG’s woes earlier in the year had already pushed one of the insurance group’s major shareholders, Eli Broad, down to No 48 on the list with an estimated wealth of $6.7bn. A well-known philanthropist, he sold his SunAmerica business to AIG and the proceeds have helped not only his adoptive city of Los Angeles but the nation’s art dealers. He owns the world’s largest collection of works by Jeff Koons and once bought a painting by Roy Lichtenstein for $2.5m using a credit card. The government bailout of AIG, however, will have significantly hit his wallet since the Forbes 400 list was compiled.

It is unlikely that art will retain its value in the current slump, despite the record-breaking Damien Hirst sale earlier this week. This will come as a shock to Donald and Doris Fisher, the founders of the Gap clothing chain, who returned to the list in joint 377th place - on $1.3bn - thanks to their $1bn art collection.

The pair share their spot with the former Citigroup boss Sandy Weill, who can expect the turmoil to have hit the value of the bank’s shares he still owns. The position of the Texan banker and fellow Citigroup shareholder Gerald J Ford, listed at No 355 with $1.4bn, also looks rocky.

Wall Street’s crash and the demise of Lehman Brothers will have hit the $15bn fortune of 15th-placed Abigail Johnson. Her family runs Fidelity Investments, which is understood to have funds with some of the highest exposure to both the collapsed investment bank and AIG. Her father Edward is placed at No 28 with $11bn, level with George Soros.

Soros ranks highest among those in the Fortune 400 whose wealth comes from hedge funds and private equity, and it is unlikely that all the other 23 in the list who have made their money the same way will be there in a year’s time.

The Bridgewater Associates boss, Ray Dalio, is ranked at No 78 with $4.5bn, while the Och-Ziff hedge fund co-founder Daniel Och is at No 95 on $3.9bn. Also at No 78 is John Paulson, who has made millions for his funds over the past year by betting against sub-prime assets. The firm’s Credit Opportunities fund was up 590%, net of fees, last year.

As well as wiping out billions in paper fortunes as share prices collapse, and perhaps raising billions more for shrewd investors, the impact of the turmoil in banking is likely to hit other industries.

Particularly vulnerable is Michael Bloomberg, who is in eighth place, with $20bn. The collapses and mergers in the financial industry are likely to significantly reduce demand for the news and trading terminals that bear his name.

Google’s Sergey Brin and Larry Page come in at 13 and 14 with $15.9bn and $15.8bn respectively. Lawrence Ellison, boss of Oracle, comes in third at $27bn, while spaces four, five and six are taken up with the Wal-Mart dynasty, who together control more than 39% of the grocery chain. Jim Walton comes in fourth at $23.4bn; his elder brother Robson Walton is in fifth on $23.3bn, and their sister Alice is joint sixth with $23.2bn.

Finally, the Facebook founder Mark Zuckerberg can afford a wry smile. At 24, he is the youngest member of the Forbes 400, thanks to the $15bn valuation placed on the social networking site when Microsoft took its 1.6% stake last year. His fortune puts him at number 321.

Bad Call From a Wall Street King

The US mortgage fiasco claims a top operator but will the Fed step in?

In Wall Street terms, it was a display of remarkable cool. As the investment bank Bear Stearns scrambled to deal with losses of $1.5bn (740m) at two of its hedge funds last month, its top two executives were competing in a week-long national bridge tournament in Nashville.

On the Tennessee card tables, Bear Stearns co-president Warren Spector did particularly well - he came 95th in a field of 4,822, justifying his reputation as the financial industry’s “king of bridge”. His boss, veteran chief executive Jimmy Cayne, was down the field, yet still respectable, in 347th position.

The pair were rising early to stay in touch with events at Bear Stearns by phone. Still, they may not have grasped the gravity of the situation. The bank’s two troubled hedge funds were victims of a collapse in America’s high-risk sub-prime mortgage market - and investors took fright, fearing Bear Stearns’ exposure could be far wider.

By Friday, Standard & Poor’s put Bear Stearns on a “negative” credit outlook. As its shares plummeted, the $15bn bank felt obliged to hold a conference call assuring investors that it remained solvent.

Mr Spector has paid the price. After 24 years at Bear Stearns, it emerged this weekend that the 49-year-old had been shown the door. The New York Post quoted an insider saying: “Warren never got out in front on this - in fact, it got worse on a daily basis and eventually put the firm at risk.”

There was some relief for the bank yesterday when a Standard & Poor’s analyst said that the reaction its statement on Friday had been overdone. Bear Stearns’ shares closed up 5% at $113.81 last night. Its stock has fallen, however, by more than 20% in a month.

The 84-year-old firm is facing its worst crisis for a generation. As a leading dealer in bonds backing American home loans, it is on the front line of the country’s lending meltdown.

America has been on a borrowing binge - and the consequences are kicking in. A dip in the housing market has left borrowers with millions of inappropriate loans sold to low-income consumers who cannot afford to keep up repayments. The Federal Reserve chairman, Ben Bernanke, has suggested defaults could reach $100bn. Merrill Lynch puts them even higher, possibly $170bn.

William Wheaton, an economics professor at the MIT Center for Real Estate, forecasts that the housing market could drop by an unprecedented 10% to 20% - which, he says, would slow America’s annual economic growth to 1%.

“Investors in the sub-prime market, to be perfectly honest, deserve everything they get,” he says. “If they couldn’t see that these loans were abusive, that the risk cover was pathetic, then they deserve to take a bath.”

Prof Wheaton says that at one point between 25% and 30% of all new mortgages being issued were sub-prime. The losers from a housing slump will include the construction industry, low-income homeowners who could lose their houses - and the financial sector.

The stock market is rattled. The Dow Jones industrial average has fallen 4% from its mid-June record high, although it rallied strongly yesterday, rising 286 points to 13,468. The Standard & Poor’s 500 benchmark is on track for its worst quarter since autumn 2002. European stock markets have also suffered from the fallout in the US.

A New York lender, American Home Mortgage, yesterday filed for bankruptcy a week after warning that it had defaulted on its loan covenants. The firm, which has shed 90% of its 7,000 employees, has had to borrow $50m from a business recovery fund in order to go into Chapter 11 protection.

Although it was not a sub-prime specialist, AHM has suffered from a dramatic credit crunch. For economists, the question is how big the knock-on effect on the economy may become. Some are hoping for intervention from the Federal Reserve, which meets to set interest rates today.

Richard Iley, senior US economist at BNP Paribas, says the economic jitters are yet to reach the “pressure point” for the Fed to intervene - and he adds that the situation is yet to match the crisis of 1998, when the Fed bailed out hedge fund Long-Term Capital Management to ease alarm of a wider market collapse. “The Fed is clearly watching developments very closely. But there’s no clear evidence of the markets really seizing up.” He says consumers are yet to feel the pinch on the high street, with spending still “exceptionally high” relative to incomes. But a sustained, nationwide drop in house prices would change that. “If we see nationwide falls in housing prices, which we haven’t quite seen yet, and we get no offset from rising equities, then the stage is set for much, much more sluggish growth in consumers’ spending.”

At Bear Stearns, the former Whitewater special prosecutor Robert Fiske is leading an internal inquiry into how its funds got into such disastrous positions. Chief executive Mr Cayne admitted to CNBC that the next 72 hours would be crucial in rebuilding confidence in his firm - but the 73-year-old scorned suggestions of his own departure, saying: “In 2018, I’ll be calling it a day.”

Federal case

Ben Bernanke, who replaced the legendary Alan Greenspan as chairman of the US Federal Reserve in February last year, has had a fairly easy run until now. He continued Mr Greenspan’s long run of interest rate rises with a few of his own, taking US rates up to 5.25% in June 2006, since when the Fed has left them steady. Although the housing market has weakened since last autumn, Mr Bernanke has rejected the idea of cutting rates because he argues that the Fed’s main job is keeping inflation low and steady. Although the turmoil in the sub-prime mortgage market is nothing new, the most recent signs of stress at investment bank Bear Stearns have increased speculation that the Fed may soon have to cut rates. But most analysts say Mr Bernanke and his Fed colleagues will want to see real signs of economic damage before they respond with cheaper money. For now, they think, the main danger to the US economy remains inflation. There are also signs that the housing market is bottoming out, so rate cuts would not be needed.In the past, analysts coined the phrase the “Greenspan put”, meaning they could bet that if markets turned sour, Mr Greenspan would respond by cutting interest rates, making speculation almost a one-way bet. Mr Bernanke may soon have to decide whether to create a “Bernanke put”. But he may simply judge that a few rich bankers losing money in the financial markets is not his problem. Ashley Seager