Bernard Hickey suggests walking school buses and budget airlines to beat the recession.

1. Vernon Small at the DomPost (Stuff) reports the government is looking at its options for funding Kiwibank’s growth. One way to put more pressure on the banks is to back Kiwibank with more capital to boost lending. Good idea?

Finance Minister Bill English said yesterday: “Preliminary discussions have been held about the next phase of Kiwibank’s growth that’s as far as it’s gone at this stage.”

2. Bruce Sheppard is Stirring the Pot again over at Stuff (BusinessDay) over the issue of the NZX’s many perceived conflicts of interest and the performance of CEO Mark Weldon. It is a long post but well worth reading for NZX watchers. Bruce compares Weldon to a King (and Ivan the Teribble) and describes the NZX as his Kingdom of Weldonia. Here’s a taste.

Fiscally King Mark has managed his kingdom well.

The lords of Weldonia (the shareholders of NZX) are happy and contented with the rewards that King Mark has shared with them for their loyalty. (Dividends). The Privy Council (the board) live in awe of his splendour and power. They must marvel at his involvement with government on all sorts of issues outside of his core knowledge and competence, and revel in the thought that his influence makes him impervious to any United Nations (government and Securities Commission) intervention in his management of Weldonia.

The great industrial enterprises of Weldonia (big listed companies). They are contented with their share of Weldonia’s economic output, and are happy to pay their taxes as they have light handed or non-existent regulation and a free hand to behave as they wish. When they wish to stretch the limits, they simply must appeal for an audience with King Mark, cross his palm and it will be done.

The small industrial enterprises are less happy (small listed companies) they are easy targets to be relentlessly hounded and feel vulnerable in Weldonia. There only choice is to migrate (to another exchange, unlisted for example). Rumour has it that NZX is looking to buy unlisted…

The serfs, (the small investors) still think the kingdom is just, and believe that the justice system of Weldonia is there to protect them. (Regulation is there to protect investors?)

Weldonia operates justice on a profit model, sharing those profits among themselves and the great industrial enterprises. The democratic process of Weldonia has been corrupted to ensure that the Privy Council and King Mark are beyond reproach. Weldonia is run by an absolute monarch, with a sense of justice akin to Ivan the Terrible and with the commercial mind of Elisabeth 1.

The serfs and small enterprises should be very wary of NZX and remain so until a judiciary independent of NZX is established.

Now clearly the serfs union, the Shareholders Association, has been concerned about this lack of independent regulation for some time. In order to convince government to act it is about numbers. So do two things, if you agree with this, send me an email in support, bruce@gilshep.co.nz, and join the NZSA.

3. This is amusing in an Australian sort of way. Citigroup has appointed Ned Kelly as its vice-president for strategy, the WSJ.com reported. Is it surprising some Americans call these bank executives banksters?

4. Property investors are returning to the market in Australia, The Age reported. HT Rob

INVESTORS are taking their first tentative steps back into the housing market after more than a year’s hiatus and could be further spurred on by a change to superannuation laws.

Bureau of Statistics figures out yesterday showed investor finance rose 2.4 per cent in May, the third straight month of growth. In annual terms, it was the first time investor finance had reached positive territory — 1.3 per cent year on year — since the property boom began to cool in January last year.

5. Babcock and Brown has written off its entire investment in Israel’s Yellow Pages, the Australian reported. Yellow Pages was bought from Telecom by CCMP Capital Asia and Canada’s Teachers’ Private Equity for NZ$2.24 billion in March 2007. How much might it be worth now?

6. The US Labour Department has produced a study showing retraining may be a waste of time, the New York Times reported.

A little-noticed study the Labor Department released several months ago found that the benefits of the biggest federal job training program were “small or nonexistent” for laid-off workers. It showed little difference in earnings and the chances of being rehired between laid-off people who had been retrained and those who had not.

In interviews, the authors of the study and other economists cited several reasons that retraining might not be effective. Many workers who have lost their jobs are older and had spent their lives working in one industry. In need of a job right away, many pick relatively short training programs, which often have marginal benefits. Job retraining is also ineffective without job creation, a point made by several economists who have long cautioned against placing too much stock in it. Finally, workers trying to pick a new field cannot predict the future of the labor market, especially in a time of economic upheaval.

7. Mish at Global Economic Analysis picks up on the latest talk around the United States of a second stimulus plan. It seems Washington is of many minds generally. Mish has made his mind up. It would be a bad idea.

Unfortunately, no matter how senseless a second stimulus would be (and it truly would be senseless), if Obama decides “Son of Stimulus” is needed, Congressional democrats will most likely all start sounding like “Bah-Bah” Durbin.

However, no one will want to call it “Economic Stimulus Two” so the bill will end up with a name like the “Economic Stabilization And Putting The Country Back To Work Program.”

It will do nothing but waste money.

8. Nevil Gibson at NBR has a nice summary of where the climate change debate is now and highlights growing scientific and political scepticism about paying the high costs of carbon taxes and emissions trading.

Did you stop worrying about climate change when the credit crunch and global recession got serious? Then listen up, things have changed for the better. In the past year or so since you last worried about it, the climate change debate has moved on. In fact, it is in danger of extinction as the scientific “consensus” disappears and international agencies and governments backpedal on draconian measures to stamp out use of carbon.

In New Zealand and Australia, the political climate has turned decidedly frosty against moves to impose heavy costs on business or consumers.

9. Last night’s auction of 10 year Treasury bonds did not go well with a lower bid cover ratio and yields rising, Bloomberg reported. People are now wondering a bit about the rally seen in the last couple of weeks which pushed bond yields down. Quantitative Easing is the elephant in the room.

Yields on Treasuries are being artificially suppressed by the central bank; otherwise bonds would yield more than 10 percent, according to Lee Quaintance and Paul Brodsky of QB Asset Management in New York.

“There are powerful structural forces blocking any fundamental reconciliation of value,” Quaintance and Brodsky wrote. “These forces include bond markets comprised mostly of domestic and foreign investors with incentives that place them at odds with rational credit pricing, as well as central banks with unlimited spending capacity threatening, and being encouraged by all, to intervene when necessary to provide a ceiling on yields.”

10. Arnold Schwarzenegger is issuing his own form of money to get the bankrupt state of California through a budget crisis. For the last couple of weeks California’s state government has been issuing IOUs to contractors and some suppliers, who have then been trying to bank them.

Now the banks are refusing to accept them and recipients are trading them (at a discount) for cash and goods on Craigslist and Ebay. This has forced the Securities and Exchange commission to look at regulating their trading. Mish at Global Economic Analysis has the good oil on this rolling Clusterf**k to the Poorhouse. He’s grumpy with the banks for not accepting the IOUs.

It is the California legislature, primarily Democrats, who simply refuse to balance the budget. Contractors and state employees are legitimately owed that money for services rendered. I am all in favor of axing jobs, whatever it takes to balance the budget. I am not in favor of holding businesses and consumers hostage for services already rendered while it is done.

To the extent that banks’ refusal to cash IOUs pressures the legislature to act, the refusal may appear to be a good thing. However, two wrongs do not make a right, and if I had a bank account at any of those places and they refused to honor IOUs from the state I would move my account to someplace who would. So should any thinking person.

Is this what an American default on its debt going to look like. A rolling series of state and municipal bankruptcies where states create their own currency? Just amazing. So much for green shoots.

Bernard Hickey details the key news overnight in 90 seconds at 9 am in association with ASB, including Bill English putting all options for tax reform on the table in an interview with us at interest.co.nz, US retailers reporting poor sales results and Citigroup appointing Ned Kelly as its new vice chair. Meanwhile, ANZ has raised A$2.2 billion of fresh equity from small shareholders, taking the amount raised from shareholders in the last six weeks to A$4.7 billion. In Italy at the G8 meeting, China raised the sensitive issue of the US dollar’s status as the global reserve currency and why it wants a change.

Here in this video interview with Bernard Hickey from interest.co.nz Finance Minister Bill English says nothing is off the table in a current review of New Zealand’s tax structure. New Zealand’s structural fiscal deficit means the government needs to restrict spending growth and look at constructing a more efficient tax system, he says.

He says he will be watching a similar review of taxes being carried out in Australia by Treasury Secretary Ken Henry and wants New Zealand to avoid being caught flat footed in comparison. English notes that the Henry review was looking at consumption taxes, capital gains tax and land taxes. He also says any restructure of the New Zealand tax system would take longer than one term of government. He pointed to a recent speech by New Zealand’s Treasury John Whitehead as a pointer to the types of debate necessary.

Elsewhere he declined to give a time-frame for any extension or change to the Government’s deposit guarantee due to expire in October next year, saying instead that any changes had to be considered as part of the current introduction of Reserve Bank regulation of non bank deposit takers by the end of March next year. English says an industry restructure may be needed as part of that process of reassessing the guarantee.

Also, he says banks will be under general regulatory and political pressure to become more like utilities and make less profits over time. English says credit card and business rates are too high, as are floating mortgage rates.

1. Nick Smith at The Independent has the inside story on why Treasury withdrew its government guarantee from Viaduct Capital, citing a Treasury memo. In particular, the memo highlights the shadowy role in the background of Hunter Capital’s Paul Bublitz.

The Treasury memo alleges Viaduct breached rules regarding related party lending and general business conduct. It (Viaduct) initially launched its prospectus on March 3 seeking $50 million, but on April 20 Treasury withdrew its guarantee, citing the likelihood of the guarantee extending the benefit to people “who are not intended to receive that benefit”. One such person, according to the Treasury memo, is Paul Bublitz, managing director of Hunter Capital Group, which provided Wevers with the funding to buy Viaduct.

Bublitz told The Independent in April that his sole involvement was providing funding for purchase. But Treasury sees it differently. ”We consider that it is reasonable to take the view that the transactions surrounding the purchase of Viaduct appear to have been designed primarily to advance the interests of Mr Bublitz.”

Viaduct contends it did conduct proper due diligence on loans involving Phoenix Finance (Wever’s holding company), Hunter Capital Property Trust and Hunter Capital Group.

2. Nick Chris Hutching at NBR has an interesting piece on how the Dunedin City Council-owned electricity contractor Delta has bought 100 sections at Jack’s Point that were earmarked for Hanover Finance, which has been unable to settle.

One interesting byproduct of the story is that section prices at Jack’s Point have been halved, but that somehow residential property investment is still better than other investment choices, according to the developer John Darby. Also, Delta appears to have bought a half share in the Luggate development from Jim Boult. What on earth is a council owned contractor doing buying undeveloped blocks from property developers?

Hanover had recently re-launched the Highland sections at prices between $280,000 to $325,000 for 1000sq m compared with $550,000 to $650,000 two years ago.

Mr Darby said Hanover was probably “a little ambitious” in its original pricing. He said the re-pricing of real estate at Jacks Point made for attractive buying. The word he was hearing from local realtors was that inquiry levels were building but actual sales were still slow.

He noted that residential property as an asset class continues to outperform other investment classes. Commentators often failed to appreciate that different sectors of the property market were performing better than other sectors and averages and medians tended to over generalise what was occurring.

3. The FBI has arrested 6 brokers and the CEO of Sky Capital Holdings in New York and charged them with fraud. It seems they operated a ‘Boiler Room’ type operation that marketed to investors in Britain and New Zealand. Here is the link to the full Securities and Exchange Commission complaint. It seems the CEO Ross Mandell was a ‘colourful racing identity’ involved with cocaine and alcohol, FTAlphaville points out.

Here’s more from an FT article on Mandell’s past.

In an interview with the New York Sun in 2005, Mr Mandell said he had been an alcoholic and addicted to cocaine. “I lived hard and played hard,” he told the Sun. “I treated my friends, business associates and clients quite badly.”

He blamed his erratic behaviour in the preceding decades on his drug and alcohol abuse but insisted he was clean and sober. That same year, he told Forbes that his record since his sobriety “[compared] favourably with the most reputable brokers and bankers on Wall Street”.

4. More green shoots? The IMF has upgraded its forecast for economic growth in 2010 to 2.5% from 1.9%, the WSJ.com reported. Here’s the full IMF World Economic Outlook Update document.

The global economy is beginning to pull out of a recession unprecedented in the post–World War II era, but stabilization is uneven and the recovery is expected to be sluggish. Economic growth during 2009–10 is now projected to be about ½ percentage points higher than projected in the April 2009 World Economic Outlook (WEO), reaching 2.5 percent in 2010.

Financial conditions have improved more than expected, owing mainly to public intervention, and recent data suggest that the rate of decline in economic activity is moderating, although to varying degrees among regions.

Despite these positive signs, the global recession is not over, and the recovery is still expected to be slow, as financial systems remain impaired, support from public policies will gradually diminish, and households in countries that suffered asset price busts will rebuild savings.

5. The government is picking up on idea re-floated at the jobs summit. Bill English said in a release yesterday the government was considering a local body ‘bond bank’. Local government New Zealand reckons the ‘bond bank’ could cut borrowing costs by 10 basis points.

A study will look at whether combining councils’ borrowing needs would result in lower interest rates and transaction costs. This arrangement is common overseas. The study will also investigate options for how such an organisation could be run.

6. Barry Ritholz at the Big Picture points out that investors would have been better off putting their money in the bank since 1994 than putting their money into the S&P 500.

7. Bloomberg is reporting that Morgan Stanley is planning to repackage a downgraded Collateralized Debt Obligation (toxic debt) into new securities with AAA ratings. OMG. ROFLOL. Yikes. Read this and weep, and then rant, and then kick the cat, and then slump back in your chair. HT Kevin.

Morgan Stanley is selling $87.1 million of securities that it expects to receive top AAA ratings and $42.9 million of notes graded Baa2, the second-lowest investment grade by Moody’s Investors Service, according to marketing documents obtained by Bloomberg News. The bonds were created from Greywolf CLO I Ltd., a CDO arranged in January 2007 by Goldman Sachs Group Inc. and managed by Greywolf Capital Management LP, an investment firm based in Purchase, New York.

Two years after the credit markets began to seize up, costing the world’s biggest financial institutions $1.47 trillion in writedowns and losses, banks are again taking so- called structured finance securities and turning them into new debt investments with top credit ratings. While the Morgan Stanley deal is the first to involve CDOs of loans, banks have been doing the same with commercial mortgage-backed securities in recent weeks.

8. Here’s a great new phrase from Paul Collier at The Guardian’s Comment is free: ‘Bankslaughter’. HT Felix Salmon

The key problem with using the law against bankers has been the difficulty of getting a conviction: surely, the managers of Northern Rockdid not intend to profit at our expense. We do not need to set the burden of proof that high. Intention misses the point. Faced with a corpse and a killer, police do not need to prove ill intent: manslaughter sets the hurdle lower than murder. It is enough to show the killer was irresponsible. That is the standard we need; we need a crime of managing a bank irresponsibly: in other words, bankslaughter.

And he points out that restricting bonuses is no solution to the problem of containing irresponsible bankers.

The inherent problem facing shareholders is that incentive payments cannot go negative. However much damage a manager inflicts, wiping out both shareholders and depositors, the consequences cannot be remotely commensurate. As a result, even bonuses with a three-year lag bias the system towards risk-taking. If you thought big bonuses were history you have missed BAB, the new banking mnemonic: yes, Bonuses Are Back.

9. Here’s what the end of the US dollar hegemony could look like. Chinese exporters, often state owned, will simply stop accepting US dollars for exports. Slow but effective. Here’s a Bloomberg story looking at one example.

Sales using the greenback at Guangxi Jinbei Group, where Huang is vice president, dropped to 30 percent of contracts in 2008 from 87 percent in 2007. The yuan, which has gained 21 percent since it was allowed to strengthen against the dollar starting in 2005, offers greater stability, he said.

“In recent years, the dollar has gone in only one direction and that is down,” said Huang, 45, in his second- floor office in Pingxiang, a town set amongst karst limestone hills and sugar-cane fields in China’s southwest Guangxi Zhuang Autonomous Region, three kilometers (1.9 miles) from Vietnam. “Settling our orders in yuan removes a major risk.”

China expanded yuan settlement agreements last week from border zones to its largest financial centers, including Shanghai, Guangzhou and Hong Kong. The program is being rolled out across Malaysia, Indonesia, Brazil and Russia, all nations seeking to reduce the dollar’s role as the linchpin of world finance and trade.

10. Rolfe Winkler at Reuters points out that John Meriwether of Long Term Capital Management fame (remember that debacle?) is closing his fund after losing 44%.